Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark one)

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

For the quarterly period ended June 30, 2015

 

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

For the transition period from                      to                     .

Commission File Number 0-22759

 

 

BANK OF THE OZARKS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

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

 

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

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

 

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  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 July 31, 2015
Common Stock, $0.01 par value per share		86,813,057

 

 

 

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Table of Contents

BANK OF THE OZARKS, INC.

FORM 10-Q

June 30, 2015

INDEX

 

PART I.		Financial Information
Item 1.		Financial Statements
		Consolidated Balance Sheets as of June 30, 2015 and 2014 and December 31, 2014			1
		Consolidated Statements of Income for the Three Months Ended June 30, 2015 and 2014 and for the Six Months Ended June 30, 2015 and 2014			2
		Consolidated Statements of Comprehensive Income for the Three Months Ended June 30, 2015 and 2014 and for the Six Months Ended June 30, 2015 and 2014			3
		Consolidated Statements of Stockholders’ Equity for the Six Months Ended June 30, 2015 and 2014			4
		Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014			5
		Notes to Consolidated Financial Statements			6
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			33
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			65
Item 4.		Controls and Procedures			66
PART II.		Other Information
Item 1.		Legal Proceedings			67
Item 1A.		Risk Factors			68
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			68
Item 3.		Defaults Upon Senior Securities			68
Item 4.		Mine Safety Disclosures			68
Item 5.		Other Information			68
Item 6.		Exhibits			68
Signature					69
Exhibit Index					70

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PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements

BANK OF THE OZARKS, INC.

CONSOLIDATED BALANCE SHEETS

 

		Unaudited
		June 30,								December 31, 2014
		2015				2014
		(Dollars in thousands, except per share amounts)
ASSETS
Cash and due from banks		$	512,908			$	107,240			$	147,751
Interest earning deposits			1,982				3,448				2,452
Cash and cash equivalents			514,890				110,688				150,203
Investment securities - available for sale (“AFS”)			782,277				892,129				839,321
Non-purchased loans and leases			4,767,123				3,171,585				3,979,870
Purchased loans			1,826,848				1,404,069				1,147,947
Total loans and leases			6,593,971				4,575,654				5,127,817
Allowance for loan and lease losses			(56,749	)			(46,958	)			(52,918	)
Net loans and leases			6,537,222				4,528,696				5,074,899
Federal Deposit Insurance Corporation (“FDIC”) loss share receivable			0				50,679				0
Premises and equipment, net			285,087				265,061				273,591
Foreclosed assets			25,973				56,356				37,775
Accrued interest receivable			26,345				21,143				20,192
Bank owned life insurance (“BOLI”)			269,311				179,277				182,052
Intangible assets, net			151,150				108,640				105,576
Other, net			118,180				85,306				82,890
Total assets		$	8,710,435			$	6,297,975			$	6,766,499
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Demand non-interest bearing		$	1,320,779			$	1,058,210			$	1,145,454
Savings and interest bearing transaction			3,645,551				2,748,929				2,892,989
Time			2,120,969				1,176,758				1,457,939
Total deposits			7,087,299				4,983,897				5,496,382
Repurchase agreements with customers			70,011				55,999				65,578
Other borrowings			161,931				280,875				190,855
Subordinated debentures			117,403				64,950				64,950
FDIC clawback payable			0				26,533				0
Accrued interest payable and other liabilities			61,033				32,063				36,892
Total liabilities			7,497,677				5,444,317				5,854,657
Commitments and contingencies
Stockholders’ equity:
Preferred stock; $0.01 par value; 1,000,000 shares authorized; no shares outstanding at June 30, 2015 and 2014 or at December 31, 2014			0				0				0
Common stock; $0.01 par value; 125,000,000 shares authorized; 86,811,457, 79,662,150 and 79,924,350 shares issued at June 30, 2015, June 30, 2014 and December 31, 2014, respectively			868				797				799
Additional paid-in capital			566,320				315,267				324,354
Retained earnings			633,998				524,134				571,454
Accumulated other comprehensive income			8,068				10,006				14,132
Treasury stock, at cost, none at June 30, 2015 or June 30, 2014, 72,268 shares at December 31, 2014			0				0				(2,349	)
Total stockholders’ equity before noncontrolling interest			1,209,254				850,204				908,390
Noncontrolling interest			3,504				3,454				3,452
Total stockholders’ equity			1,212,758				853,658				911,842
Total liabilities and stockholders’ equity		$	8,710,435			$	6,297,975			$	6,766,499

See accompanying notes to consolidated financial statements.

 

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BANK OF THE OZARKS, INC.

CONSOLIDATED STATEMENTS OF INCOME

Unaudited

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2015				2014				2015				2014
		(Dollars in thousands, except per share amounts)
Interest income:
Non-purchased loans and leases		$	56,637			$	36,833			$	107,069			$	70,247
Purchased loans			35,762				25,128				68,622				42,013
Investment securities:
Taxable			3,230				2,790				6,715				5,149
Tax-exempt			4,456				4,974				9,125				9,371
Deposits with banks and federal funds sold			18				35				27				38
Total interest income			100,103				69,760				191,558				126,818
Interest expense:
Deposits			3,917				1,827				7,454				3,408
Repurchase agreements with customers			19				13				36				25
Other borrowings			1,443				2,692				3,146				5,347
Subordinated debentures			968				427				1,676				840
Total interest expense			6,347				4,959				12,312				9,620
Net interest income			93,756				64,801				179,246				117,198
Provision for loan and lease losses			(4,308	)			(5,582	)			(10,623	)			(6,887	)
Net interest income after provision for loan and lease losses			89,448				59,219				168,623				110,311
Non-interest income:
Service charges on deposit accounts			7,088				6,605				13,715				12,244
Mortgage lending income			1,772				1,126				3,279				2,080
Trust income			1,463				1,364				2,895				2,681
BOLI income			1,785				1,278				5,407				2,408
Net amortization of FDIC loss share receivable and FDIC clawback payable			0				(741	)			0				(49	)
Other income from purchased loans, net			6,971				3,629				15,879				6,940
Net gains on investment securities			85				18				2,618				23
Gains on sales of other assets			2,557				1,448				5,385				2,422
Gain on merger and acquisition transaction			0				0				0				4,667
Other			1,549				2,661				3,159				4,333
Total non-interest income			23,270				17,388				52,337				37,749
Non-interest expense:
Salaries and employee benefits			22,646				18,831				45,243				36,520
Net occupancy and equipment			7,344				5,707				14,635				10,751
Other operating expenses			13,734				13,340				34,030				28,062
Total non-interest expense			43,724				37,878				93,908				75,333
Income before taxes			68,994				38,729				127,052				72,727
Provision for income taxes			24,190				12,251				42,330				20,981
Net income			44,804				26,478				84,722				51,746
Earnings attributable to noncontrolling interest			(28	)			8				(52	)			16
Net income available to common stockholders		$	44,776			$	26,486			$	84,670			$	51,762
Basic earnings per common share		$	0.52			$	0.35			$	0.99			$	0.69
Diluted earnings per common share		$	0.51			$	0.34			$	0.98			$	0.68
Dividends declared per common share		$	0.135			$	0.115			$	0.265			$	0.225

See accompanying notes to consolidated financial statements.

 

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BANK OF THE OZARKS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Unaudited

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2015				2014				2015				2014
		(Dollars in thousands)
Net income		$	44,804			$	26,478			$	84,722			$	51,746
Other comprehensive income (loss):
Unrealized gains and losses on investment securities AFS			(10,091	)			11,199				(7,600	)			22,529
Tax effect of unrealized gains and losses on investment securities AFS			3,844				(4,393	)			3,157				(8,837	)
Reclassification of gains and losses on investment securities AFS included in net income			(85	)			(18	)			(2,618	)			(23	)
Tax effect of reclassification of gains and losses on investment securities AFS included in net income			33				7				997				9
Total other comprehensive income (loss)			(6,299	)			6,795				(6,064	)			13,678
Total comprehensive income		$	38,505			$	33,273			$	78,658			$	65,424

See accompanying notes to consolidated financial statements.

 

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BANK OF THE OZARKS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Unaudited

 

		Common Stock				Additional Paid-In Capital				Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Treasury Stock				Non- Controlling Interest				Total
		(Dollars in thousands)
Balances – January 1, 2014		$	737			$	143,017			$	488,978			$	(3,672	)		$	0			$	3,470			$	632,530
Net income			0				0				51,746				0				0				0				51,746
Earnings attributable to noncontrolling interest			0				0				16				0				0				(16	)			0
Total other comprehensive income			0				0				0				13,678				0				0				13,678
Common stock dividends paid			0				0				(16,606	)			0				0				0				(16,606	)
Issuance of 185,000 shares of common stock for exercise of stock options			2				1,570				0				0				0				0				1,572
Forfeiture of 400 shares of unvested restricted common stock			0				0				0				0				0				0				0
Excess tax benefit on stock-based compensation			0				1,373				0				0				0				0				1,373
Stock-based compensation expense			0				3,050				0				0				0				0				3,050
Issuance of 5,765,846 shares of common stock for acquisition of Summit Bancorp, Inc., net of issuance costs of $88,000			58				166,257				0				0				0				0				166,315
Balances – June 30, 2014		$	797			$	315,267			$	524,134			$	10,006			$	0			$	3,454			$	853,658
Balances – January 1, 2015		$	799			$	324,354			$	571,454			$	14,132			$	(2,349	)		$	3,452			$	911,842
Net income			0				0				84,722				0				0				0				84,722
Earnings attributable to noncontrolling interest			0				0				(52	)			0				0				52				0
Total other comprehensive income (loss)			0				0				0				(6,064	)			0				0				(6,064	)
Common stock dividends paid			0				0				(22,126	)			0				0				0				(22,126	)
Issuance of 99,050 shares of common stock for exercise of stock options			1				996				0				0				0				0				997
Issuance of 245,300 shares of unvested restricted common stock			2				(2,351	)			0				0				2,349				0				0
Excess tax benefit on stock-based compensation			0				791				0				0				0				0				791
Stock-based compensation expense			0				4,220				0				0				0				0				4,220
Forfeiture of 29,875 shares of unvested restricted common stock			0				0				0				0				0				0				0
Issuance of 7,657 shares of common stock to non-employee directors			0				0				0				0				0				0				0
Issuance of 6,637,243 shares of common stock for acquisition of Intervest Bancshares Corporation, net of issuance costs of $100,000			66				238,310				0				0				0				0				238,376
Balances – June 30, 2015		$	868			$	566,320			$	633,998			$	8,068			$	0			$	3,504			$	1,212,758

See accompanying notes to consolidated financial statements

 

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BANK OF THE OZARKS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited

 

		Six Months Ended
		June 30,
		2015				2014
		(Dollars in thousands)
Cash flows from operating activities:
Net income		$	84,722			$	51,746
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			4,575				3,816
Amortization			3,236				1,932
Earnings attributable to noncontrolling interest			(52	)			16
Provision for loan and lease losses			10,623				6,887
Provision for losses on foreclosed assets			2,427				863
Net (accretion) amortization of investment securities AFS			(51	)			301
Net gains on investment securities AFS			(2,618	)			(23	)
Originations of mortgage loans held for sale			(136,267	)			(90,110	)
Proceeds from sales of mortgage loans held for sale			127,302				83,337
Accretion of purchased loans			(68,622	)			(42,013	)
Net amortization of FDIC loss share receivable and FDIC clawback payable			0				49
Gains on sales of other assets			(5,385	)			(2,422	)
Gain on merger and acquisition transaction			0				(4,667	)
Prepayment penalty on Federal Home Loan Bank of Dallas advances			2,480				0
Deferred income tax expense (benefit)			2,252				(3,407	)
Increase in cash surrender value of BOLI			(3,119	)			(2,408	)
BOLI death benefits in excess of cash surrender value			(2,289	)			0
Stock-based compensation expense			4,220				3,050
Excess tax benefit on stock-based compensation			(791	)			(1,373	)
Changes in assets and liabilities:
Accrued interest receivable			(4,420	)			(2,049	)
Other assets, net			28,658				3,449
Accrued interest payable and other liabilities			(1,951	)			13,094
Net cash provided by operating activities			44,930				20,068
Cash flows from investing activities:
Proceeds from sales of investment securities AFS			32,777				48,394
Proceeds from maturities/calls/paydowns of investment securities AFS			81,532				29,706
Purchases of investment securities AFS			(37,522	)			(35,109	)
Net increase of non-purchased loans and leases			(800,061	)			(539,695	)
Payments received on purchased loans			462,027				207,403
Payments received from FDIC under loss share agreements			0				16,076
Other net decreases in assets covered by FDIC loss share agreements and FDIC loss share receivable			0				9,246
Purchases of premises and equipment			(9,720	)			(4,586	)
Purchase of BOLI			(85,000	)			0
Proceeds from BOLI death benefits			3,149				0
Proceeds from sales of other assets			40,018				30,166
Cash invested in unconsolidated investments			(639	)			(2,320	)
Net cash received in merger and acquisition transactions			274,235				121,918
Net cash used by investing activities			(39,204	)			(118,801	)
Cash flows from financing activities:
Net increase in deposits			406,269				41,190
Net repayments of other borrowings			(31,404	)			(464	)
Net increase (decrease) in repurchase agreements with customers			4,434				(13,619	)
Proceeds from exercise of stock options			997				1,572
Excess tax benefit on stock-based compensation			791				1,373
Cash dividends paid on common stock			(22,126	)			(16,606	)
Net cash provided by financing activities			358,961				13,446
Net increase (decrease) in cash and cash equivalents			364,687				(85,287	)
Cash and cash equivalents – beginning of period			150,203				195,975
Cash and cash equivalents – end of period		$	514,890			$	110,688

See accompanying notes to consolidated financial statements.

 

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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”), eight 100%-owned finance subsidiary business trusts – Ozark Capital Statutory Trust II (“Ozark II”), Ozark Capital Statutory Trust III (“Ozark III”), Ozark Capital Statutory Trust IV (“Ozark IV”), Ozark Capital Statutory Trust V (“Ozark V”) (collectively, the “Ozark Trusts”), Intervest Statutory Trust II (“Intervest II”), Intervest Statutory Trust III (“Intervest III”), Intervest Statutory Trust IV (“Intervest IV”) and Intervest Statutory Trust V (“Intervest V”), (collectively, the “Intervest Trusts”; and together with Ozark Trusts, the “Trusts”) and, indirectly through the Bank, a subsidiary engaged in the development of real estate, a subsidiary that owns private aircraft and various other entities that hold foreclosed assets or tax credits or engage in other activities. The Company and Bank are subject to the regulation of certain federal and state agencies and undergo periodic examinations by those regulatory authorities. The consolidated financial statements include the accounts of the Company, the Bank, the real estate subsidiary, the aircraft subsidiary and certain of those various other entities in accordance with accounting principles generally accepted in the United States (“GAAP”). Significant intercompany transactions and amounts have been eliminated in consolidation.

At June 30, 2015, the Company had 164 offices, including 80 in Arkansas, 28 in Georgia, 21 in Texas, 16 in North Carolina, 11 in Florida, three in Alabama, two offices each in South Carolina and New York and one office in 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, 2014.

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 three months or six months ended June 30, 2015 are not necessarily indicative of the results that may be expected for the full year or future periods.

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

During the fourth quarter of 2014, the Bank and the Federal Deposit Insurance Corporation (“FDIC”) entered into agreements terminating the loss share agreements for all seven of its FDIC-assisted acquisitions. As a result of entering these termination agreements, the Company reclassified its loans previously reported as covered by FDIC loss share to purchased loans for all periods presented, and it has reclassified all interest income on loans previously reported as covered by FDIC loss share to interest income on purchased loans for all periods presented.

During the second quarter of 2015, the Company revised its initial estimates and assumptions regarding the recovery of certain acquired loans and acquired deferred tax assets from its acquisition of Intervest Bancshares Corporation (“Intervest”). As a result, certain amounts previously reported in the Company’s consolidated financial statements have been recast.

 

3.	Acquisitions

Intervest

On February 10, 2015, the Company completed its previously announced acquisition of Intervest and its wholly-owned bank subsidiary Intervest National Bank, for an aggregate of 6,637,243 shares of its common stock (plus cash in lieu of fractional shares) in a transaction valued at approximately $238.5 million. The acquisition of Intervest provided the Company with a banking office in New York City and expanded its service area in Florida by adding five banking offices in Clearwater, Florida and one office in South Pasadena, Florida.

 

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During the second quarter of 2015, management revised its initial estimates and assumptions regarding the recovery of certain acquired loans and acquired deferred tax assets. Because such revision occurred during the first 12 months following the date of acquisition and was not the result of a change in circumstances, management has recast the first quarter 2015 consolidated financial statements to decrease the goodwill recorded in the Intervest acquisition by $2.7 million to reflect this change in estimate.

The following table provides a summary of the assets acquired and liabilities assumed as recorded by Intervest, the estimates of the fair value adjustments necessary to adjust those acquired assets and assumed liabilities to estimated fair value, the recast adjustment described above and the estimates of 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. 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”). 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.

 

		February 10, 2015
		As Recorded by Intervest				Fair Value Adjustments(1)				Recast Adjustment				As Recorded by the Company(1)
		(Dollars in thousands)
Assets acquired:
Cash, due from banks and interest earning deposits		$	274,343			$	0			$	0			$	274,343
Investment securities			21,495				321	a			0				21,816
Loans			1,108,439				(33,868	) b			4,393				1,078,964
Allowance for loan losses			(25,208	)			25,208	b			0				0
Premises and equipment			4,357				2,256	c			0				6,613
Foreclosed assets			2,350				(1,710	) d			0				640
Accrued interest receivable and other assets			34,076				(4,091	) e			(689	)			29,296
Core deposit intangible asset			0				4,595	f			0				4,595
Deferred income taxes			11,758				8,082	g			(985	)			18,855
Total assets acquired			1,431,610				793				2,719				1,435,122
Liabilities assumed:
Deposits			1,162,437				22,211	h			0				1,184,648
Subordinated debentures			56,702				(4,463	) i			0				52,239
Accrued interest payable and other liabilities			3,608				358	j			0				3,966
Total liabilities assumed			1,222,747				18,106				0				1,240,853
Net assets acquired		$	208,863			$	(17,313	)		$	2,719				194,269
Consideration paid:
Cash in lieu of fractional shares															(7	)
Stock															(238,476	)
Total consideration paid															(238,483	)
Goodwill														$	44,214

 

(1)

Management is continuing to evaluate each of these fair value adjustments and may revise one or more of such fair value adjustments in future periods. To the extent that any of these fair value adjustments are revised in future periods, the resultant fair values and the amount of goodwill may be subject to further adjustment.

Explanation of preliminary fair value adjustments

 

a-	Adjustment reflects the fair value adjustment based on the pricing of the acquired investment securities portfolio.

b-	Adjustment reflects the fair value adjustment based on the 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 evaluation of the premises and equipment acquired.

d-	Adjustment reflects the fair value adjustment based on the evaluation of the acquired foreclosed assets.

e-	Adjustment reflects the fair value adjustment based on the 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.

h-	Adjustment reflects the fair value adjustment based on the evaluation of the acquired deposits.

i-	Adjustment reflects the fair value adjustment of these assumed liabilities based on a valuation of such instruments by an independent, third party valuation firm.

j-	Adjustment reflects the amount needed to adjust other liabilities to estimated fair value and to record certain liabilities directly attributable to the Intervest acquisition.

 

 

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As a result of the recast adjustment described above, certain amounts previously reported in the Company’s consolidated financial statements as of March 31, 2015 have been recast. The following is a summary of those financial statement captions that have been impacted by the recast adjustment.

 

		As Previously Reported				Recast Adjustment				As Recast
		(Dollars in thousands)
Purchased loans		$	2,042,164			$	4,393			$	2,046,557
Net deferred tax asset			63,483				(985	)			62,498
Goodwill			125,603				(2,719	)			122,884
Income taxes receivable			689				(689	)			0

Goodwill of $44.2 million, which is the excess of the merger consideration over the fair value of net assets acquired, was recorded in the Intervest acquisition and is the result of expected operational synergies, expansion of full service banking in New York City and other factors. This goodwill is not expected to be deductible for tax purposes. To the extent that management further revises any of the above fair value adjustments as a result of its continuing evaluation, the amount of goodwill recorded in the Intervest acquisition may be subject to further adjustment.

The Company’s consolidated results of operations include the operating results of Intervest beginning February 11, 2015 through the end of the reporting period. For the three months ended June 30, 2015, Intervest contributed $14.9 million of net interest income and $8.6 million of net income to the Company’s operating results. For the six months ended June 30, 2015, Intervest contributed $23.8 million of net interest income and $13.5 million of net income to the Company’s operating results.

The following unaudited supplemental pro forma information is presented to show the estimated results assuming Intervest was acquired as of the beginning of the earliest 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, 2014 or 2015 and should not be considered as representative of future operating results.

 

		Six Months Ended
		June 30,
		2015				2014
		(Dollars in thousands, except per share amounts)
Net interest income – pro forma (unaudited)		$	186,428			$	143,484
Net income – pro forma (unaudited)		$	88,745			$	62,949
Diluted earnings per common share – pro forma (unaudited)		$	1.01			$	0.76

Summit Bancorp, Inc.

On May 16, 2014, the Company completed the 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 shares of its common stock. The acquisition of Summit expanded its 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. During the fourth quarter of 2014 and the second quarter of 2015, the Company closed eight additional banking offices, including six that were acquired from Summit, in markets where the Company had excess branches as a result of the Summit acquisition. 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.

Bancshares, Inc.

On March 5, 2014, the Company completed its acquisition of Bancshares, Inc. (“Bancshares”) and OMNIBANK, N.A., its wholly-owned bank subsidiary, for an aggregate of $21.5 million in cash. The Company recognized a bargain purchase gain of $4.7 million during the first quarter of 2014 as a result of the Bancshares acquisition. 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.

 

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 outstanding common stock options using the treasury stock method. No options to purchase shares of common stock for the three months ended June 30, 2015 and 2014 or the six

 

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months ended June 30, 2014 were excluded from the diluted EPS calculations as all options were dilutive. Options to purchase 531,500 shares of the Company’s common stock at a weighted-average exercise price of $40.34 were outstanding but not included in the computation of diluted EPS for the six months ended June 30, 2015 because the options exercise price was greater than the average market price of the common shares and inclusion would have been antidilutive.

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

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2015				2014				2015				2014
		(In thousands, except per share amounts)
Numerator:
Distributed earnings allocated to common stockholders		$	11,713			$	8,497			$	22,126			$	16,606
Undistributed earnings allocated to common stockholders			33,063				17,989				62,544				35,156
Net income available to common stockholders		$	44,776			$	26,486			$	84,670			$	51,762
Denominator:
Denominator for basic EPS – weighted-average common shares			86,786				76,743				85,251				75,281
Effect of dilutive securities – stock options			729				723				750				700
Denominator for diluted EPS – weighted-average common shares and assumed conversions			87,515				77,466				86,001				75,981
Basic EPS		$	0.52			$	0.35			$	0.99			$	0.69
Diluted EPS		$	0.51			$	0.34			$	0.98			$	0.68

 

5.	Investment Securities

At June 30, 2015 and 2014 and at December 31, 2014, the Company classified all of its investment securities portfolio as AFS. Accordingly, investment securities are stated at estimated fair value in the consolidated financial statements with unrealized gains and losses, net of related income tax, reported as a separate component of stockholders’ equity and included in accumulated other comprehensive income (loss).

The following table presents the amortized cost and estimated fair value of investment securities AFS as of the dates indicated. The Company’s investment in the “CRA qualified investment fund” includes shares held in a mutual fund that qualifies under the Community Reinvestment Act of 1977 for community reinvestment purposes. The Company’s holdings of equity securities in Federal Home Loan Bank of Dallas (“FHLB”) and First National Banker’s Bankshares, Inc. (“FNBB”) do not have readily determinable fair values and are carried at cost.

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
		(Dollars in thousands)
June 30, 2015:
Obligations of state and political subdivisions		$	496,777			$	11,768			$	(1,630	)		$	506,915
U.S. Government agency securities			257,849				4,627				(1,723	)			260,753
Corporate obligations			3,574				0				0				3,574
CRA qualified investment fund			1,028				0				(8	)			1,020
FHLB and FNBB equity securities			10,015				0				0				10,015
Total		$	769,243			$	16,395			$	(3,361	)		$	782,277
December 31, 2014:
Obligations of state and political subdivisions		$	555,335			$	18,267			$	(393	)		$	573,209
U.S. Government agency securities			245,854				6,144				(765	)			251,233
Corporate obligations			654				0				0				654
FHLB and FNBB equity securities			14,225				0				0				14,225
Total		$	816,068			$	24,411			$	(1,158	)		$	839,321
June 30, 2014:
Obligations of state and political subdivisions		$	603,533			$	15,536			$	(2,504	)		$	616,565
U.S. Government agency securities			254,878				5,613				(2,180	)			258,311
Corporate obligations			685				0				0				685
FHLB and FNBB equity securities			16,568				0				0				16,568
Total		$	875,664			$	21,149			$	(4,684	)		$	892,129

 

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

 

		Less than 12 Months								12 Months or More								Total
		Estimated Fair Value				Unrealized Losses				Estimated Fair Value				Unrealized Losses				Estimated Fair Value				Unrealized Losses
		(Dollars in thousands)
June 30, 2015:
Obligations of state and political subdivisions		$	104,621			$	1,532			$	7,515			$	98			$	112,136			$	1,630
U.S. Government agency securities			76,252				1,534				7,181				189				83,433				1,723
CRA qualified investment fund			1,020				8				0				0				1,020				8
Total temporarily impaired securities		$	181,893			$	3,074			$	14,696			$	287			$	196,589			$	3,361
December 31, 2014:
Obligations of state and political subdivisions		$	29,174			$	75			$	34,414			$	318			$	63,588			$	393
U.S. Government agency securities			9,630				25				47,626				740				57,256				765
Total temporarily impaired securities		$	38,804			$	100			$	82,040			$	1,058			$	120,844			$	1,158
June 30, 2014:
Obligations of state and political subdivisions		$	60,769			$	386			$	79,000			$	2,118			$	139,769			$	2,504
U.S. Government agency securities			15,227				67				58,608				2,113				73,835				2,180
Total temporarily impaired securities		$	75,996			$	453			$	137,608			$	4,231			$	213,604			$	4,684

In evaluating the Company’s unrealized loss positions for other-than-temporary impairment of its investment securities portfolio, management considers the credit quality of the issuer, the nature and cause of the unrealized loss, the severity and duration of the impairments and other factors. At June 30, 2015 management determined the unrealized losses were the result of fluctuations in interest rates and did not reflect deteriorations of the credit quality of the investments. Accordingly, management considers these unrealized losses to be temporary in nature. The Company does not have the intent to sell these investment securities with unrealized losses and, more likely than not, will not be required to sell these investment securities before fair value recovers to amortized cost.

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

 

		June 30, 2015
Maturity or Estimated Repayment		Amortized Cost				Estimated Fair Value
		(Dollars in thousands)
One year or less		$	36,133			$	36,619
After one year to five years			139,079				140,690
After five years to ten years			189,702				192,251
After ten years			404,329				412,717
Total		$	769,243			$	782,277

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 and FNBB equity securities and the CRA qualified investment fund 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.

 

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

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2015				2014				2015				2014
		(Dollars in thousands)
Sales proceeds		$	2,660			$	47,170			$	32,777			$	48,394
Gross realized gains		$	85			$	18			$	2,619			$	23
Gross realized losses			0				0				(1	)			0
Net gains on investment securities		$	85			$	18			$	2,618			$	23

 

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

Allowance for Loan and Lease Losses

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

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2015				2014				2015				2014
		(Dollars in thousands)
Beginning balance		$	54,147			$	43,861			$	52,918			$	42,945
Non-purchased loans and leases charged off			(1,496	)			(1,650	)			(5,575	)			(2,569	)
Recoveries of non-purchased loans and leases previously charged off			198				247				506				982
Net non-purchased loans and leases charged off			(1,298	)			(1,403	)			(5,069	)			(1,587	)
Purchased loans charged off, net			(408	)			(1,082	)			(1,723	)			(1,287	)
Net charge-offs – total loans and leases			(1,706	)			(2,485	)			(6,792	)			(2,874	)
Provision for loan and lease losses:
Non-purchased loans and leases			3,900				4,500				8,900				5,600
Purchased loans			408				1,082				1,723				1,287
Total provision			4,308				5,582				10,623				6,887
Ending balance		$	56,749			$	46,958			$	56,749			$	46,958

As of June 30, 2015, the Company had identified purchased loans where it had determined it was probable that the Company would be unable to collect all amounts according to the contractual terms thereof (for purchased loans without evidence of credit deterioration at date of acquisition) or the expected performance of such loans had deteriorated from its performance expectations established in conjunction with the determination of the Day 1 Fair Values or since our most recent review of such portfolio’s performance (for purchased loans with evidence of credit deterioration at date of acquisition). As a result, the Company recorded partial charge-offs totaling $0.4 million and $1.1 million during the second quarter of 2015 and 2014, respectively, and $1.7 million and $1.3 million during the first six months of 2015 and 2014, respectively. The Company also recorded provision for loan and lease losses of $0.4 million and $1.1 million during the second quarter of 2015 and 2014, respectively, and $1.7 million and $1.3 million during the first six months of 2015 and 2014, respectively. At June 30, 2015, the Company had $12.3 million of impaired purchased loans compared to $21.2 million at June 30, 2014 and $14.0 million at December 31, 2014.

 

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The following tables are a summary of the Company’s ALLL for the periods indicated.

 

		Beginning Balance				Charge-offs				Recoveries				Provision				Ending Balance
		(Dollars in thousands)
Three months ended June 30, 2015:
Real estate:
Residential 1-4 family		$	5,657			$	(92	)		$	10			$	26			$	5,601
Non-farm/non-residential			17,766				(119	)			5				580				18,232
Construction/land development			17,580				(469	)			0				2,037				19,148
Agricultural			2,526				0				0				(66	)			2,460
Multifamily residential			2,423				(208	)			0				671				2,886
Commercial and industrial			3,301				(93	)			23				18				3,249
Consumer			824				(24	)			21				4				825
Direct financing leases			3,258				(155	)			7				444				3,554
Other			812				(336	)			132				186				794
Purchased loans			0				(408	)			0				408				0
Total		$	54,147			$	(1,904	)		$	198			$	4,308			$	56,749
Six months ended June 30, 2015:
Real estate:
Residential 1-4 family		$	5,482			$	(621	)		$	21			$	719			$	5,601
Non-farm/non-residential			17,190				(324	)			17				1,349				18,232
Construction/land development			15,960				(771	)			37				3,922				19,148
Agricultural			2,558				(13	)			0				(85	)			2,460
Multifamily residential			2,147				(208	)			0				947				2,886
Commercial and industrial			4,873				(2,540	)			39				877				3,249
Consumer			818				(69	)			42				34				825
Direct financing leases			2,989				(341	)			13				893				3,554
Other			901				(688	)			337				244				794
Purchased loans			0				(1,723	)			0				1,723				0
Total		$	52,918			$	(7,298	)		$	506			$	10,623			$	56,749
Year ended December 31, 2014:
Real estate:
Residential 1-4 family		$	4,701			$	(577	)		$	135			$	1,223			$	5,482
Non-farm/non-residential			13,633				(1,357	)			33				4,881				17,190
Construction/land development			12,306				(638	)			11				4,281				15,960
Agricultural			3,000				(214	)			14				(242	)			2,558
Multifamily residential			2,504				0				0				(357	)			2,147
Commercial and industrial			2,855				(720	)			808				1,930				4,873
Consumer			917				(222	)			80				43				818
Direct financing leases			2,266				(602	)			49				1,276				2,989
Other			763				(793	)			266				665				901
Purchased loans			0				(3,215	)			0				3,215				0
Total		$	42,945			$	(8,338	)		$	1,396			$	16,915			$	52,918

 

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		Beginning Balance				Charge-offs				Recoveries				Provision				Ending Balance
		(Dollars in thousands)
Three months ended June 30, 2014:
Real estate:
Residential 1-4 family		$	4,622			$	(142	)		$	49			$	231			$	4,760
Non-farm/non-residential			14,013				(1,181	)			1				2,003				14,836
Construction/land development			12,828				(14	)			0				2,650				15,464
Agricultural			3,018				0				6				(116	)			2,908
Multifamily residential			2,429				0				0				(657	)			1,772
Commercial and industrial			2,738				(48	)			135				23				2,848
Consumer			831				(56	)			18				133				926
Direct financing leases			2,438				(121	)			8				247				2,572
Other			944				(88	)			30				(14	)			872
Purchased loans			0				(1,082	)			0				1,082				0
Total		$	43,861			$	(2,732	)		$	247			$	5,582			$	46,958
Six months ended June 30, 2014:
Real estate:
Residential 1-4 family		$	4,701			$	(341	)		$	71			$	329			$	4,760
Non-farm/non-residential			13,633				(1,254	)			4				2,453				14,836
Construction/land development			12,306				(14	)			8				3,164				15,464
Agricultural			3,000				(15	)			11				(88	)			2,908
Multifamily residential			2,504				0				0				(732	)			1,772
Commercial and industrial			2,855				(422	)			763				(348	)			2,848
Consumer			917				(97	)			36				70				926
Direct financing leases			2,266				(267	)			14				559				2,572
Other			763				(159	)			75				193				872
Purchased loans			0				(1,287	)			0				1,287				0
Total		$	42,945			$	(3,856	)		$	982			$	6,887			$	46,958

 

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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.

 

		ALLL												Non-Purchased Loans and Leases
		ALLL for Individually Evaluated Impaired Loans and Leases				ALLL for All Other Loans and Leases				Total ALLL				Individually Evaluated Impaired Loans and Leases				All Other Loans and Leases				Total Loans and Leases
		(Dollars in thousands)
June 30, 2015:
Real estate:
Residential 1-4 family		$	345			$	5,256			$	5,601			$	1,908			$	316,328			$	318,236
Non-farm/non-residential			3				18,229				18,232				809				1,687,994				1,688,803
Construction/land development			49				19,099				19,148				9,065				1,890,960				1,900,025
Agricultural			470				1,990				2,460				1,450				49,333				50,783
Multifamily residential			0				2,886				2,886				345				296,529				296,874
Commercial and industrial			487				2,762				3,249				547				259,073				259,620
Consumer			3				822				825				33				25,499				25,532
Direct financing leases			0				3,554				3,554				0				137,146				137,146
Other			0				794				794				7				90,097				90,104
Total		$	1,357			$	55,392			$	56,749			$	14,164			$	4,752,959			$	4,767,123
December 31, 2014:
Real estate:
Residential 1-4 family		$	356			$	5,126			$	5,482			$	2,734			$	280,519			$	283,253
Non-farm/non-residential			18				17,172				17,190				2,507				1,501,034				1,503,541
Construction/land development			68				15,892				15,960				14,304				1,397,534				1,411,838
Agricultural			6				2,552				2,558				365				46,870				47,235
Multifamily residential			0				2,147				2,147				0				211,156				211,156
Commercial and industrial			644				4,229				4,873				623				287,084				287,707
Consumer			3				815				818				34				25,635				25,669
Direct financing leases			0				2,989				2,989				0				115,475				115,475
Other			0				901				901				8				93,988				93,996
Total		$	1,095			$	51,823			$	52,918			$	20,575			$	3,959,295			$	3,979,870
June 30, 2014:
Real estate:
Residential 1-4 family		$	411			$	4,349			$	4,760			$	3,245			$	263,252			$	266,497
Non-farm/non-residential			13				14,823				14,836				2,363				1,287,811				1,290,174
Construction/land development			2				15,462				15,464				9,738				1,039,420				1,049,158
Agricultural			200				2,708				2,908				845				44,696				45,541
Multifamily residential			0				1,772				1,772				491				136,462				136,953
Commercial and industrial			553				2,295				2,848				689				166,195				166,884
Consumer			3				923				926				42				28,632				28,674
Direct financing leases			0				2,572				2,572				0				98,768				98,768
Other			0				872				872				9				88,927				88,936
Total		$	1,182			$	45,776			$	46,958			$	17,422			$	3,154,163			$	3,171,585

 

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The following table is a summary of impaired non-purchased loans and leases as of and for the three months and six months ended June 30, 2015.

 

		Principal Balance				Net Charge-offs to Date				Principal Balance, Net of Charge-offs				Specific ALLL				Weighted Average Carrying Value – Three Months Ended June 30, 2015				Weighted Average Carrying Value – Six Months Ended June 30, 2015
		(Dollars in thousands)
Impaired loans and leases for which there is a related ALLL:
Real estate:
Residential 1-4 family		$	3,147			$	(1,859	)		$	1,288			$	345			$	1,299			$	1,362
Non-farm/non-residential			145				(142	)			3				3				22				196
Construction/land development			115				0				115				49				66				1,414
Agricultural			1,148				0				1,148				470				574				413
Commercial and industrial			672				(185	)			487				487				244				343
Consumer			40				(23	)			17				3				18				18
Total impaired loans and leases with a related ALLL			5,267				(2,209	)			3,058				1,357				2,223				3,746
Impaired loans and leases for which there is not a related ALLL:
Real estate:
Residential 1-4 family			731				(111	)			620				0				910				1,022
Non-farm/non-residential			999				(193	)			806				0				651				1,089
Construction/land development			9,440				(490	)			8,950				0				9,174				9,514
Agricultural			518				(215	)			303				0				304				293
Multifamily residential			686				(341	)			345				0				173				115
Commercial and industrial			158				(98	)			60				0				95				90
Consumer			19				(5	)			14				0				15				15
Other			8				0				8				0				8				8
Total impaired loans and leases without a related ALLL			12,559				(1,453	)			11,106				0				11,330				12,146
Total impaired loans and leases		$	17,826			$	(3,662	)		$	14,164			$	1,357			$	13,553			$	15,892

 

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The following table is a summary of impaired non-purchased loans and leases as of and for the year ended December 31, 2014.

 

		Principal Balance				Net Charge-offs to Date				Principal Balance, Net of Charge-offs				Specific ALLL				Weighted Average Carrying Value – Year Ended December 31, 2014
		(Dollars in thousands)
Impaired loans and leases for which there is a related ALLL:
Real estate:
Residential 1-4 family		$	3,163			$	(1,674	)		$	1,489			$	356			$	1,457
Non-farm/non-residential			762				(220	)			542				18				211
Construction/land development			4,656				(545	)			4,111				68				1,040
Agricultural			105				(12	)			93				6				217
Commercial and industrial			1,233				(691	)			542				644				554
Consumer			41				(23	)			18				3				20
Total impaired loans and leases with a related ALLL			9,960				(3,165	)			6,795				1,095				3,499
Impaired loans and leases for which there is not a related ALLL:
Real estate:
Residential 1-4 family			1,373				(128	)			1,245				0				1,581
Non-farm/non-residential			2,676				(711	)			1,965				0				1,988
Construction/land development			10,378				(185	)			10,193				0				7,600
Agricultural			474				(202	)			272				0				383
Multifamily residential			133				(133	)			0				0				123
Commercial and industrial			264				(183	)			81				0				75
Consumer			81				(65	)			16				0				18
Other			8				0				8				0				8
Total impaired loans and leases without a related ALLL			15,387				(1,607	)			13,780				0				11,776
Total impaired loans and leases		$	25,347			$	(4,772	)		$	20,575			$	1,095			$	15,275

 

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

 

		Principal Balance				Net Charge-offs to Date				Principal Balance, Net of Charge-offs				Specific ALLL				Weighted Average Carrying Value – Three Months Ended June 30, 2014				Weighted Average Carrying Value – Six Months Ended June 30, 2014
		(Dollars in thousands)
Impaired loans and leases for which there is a related ALLL:
Real estate:
Residential 1-4 family		$	3,294			$	(1,721	)		$	1,573			$	411			$	1,505			$	1,642
Non-farm/non-residential			186				(142	)			44				13				52				50
Construction/land development			38				(22	)			16				2				16				16
Agricultural			336				(12	)			324				200				336				380
Commercial and industrial			838				(278	)			560				553				562				579
Consumer			102				(79	)			23				3				23				23
Other			0				0				0				0				0				5
Total impaired loans and leases with a related ALLL			4,794				(2,254	)			2,540				1,182				2,494				2,695
Impaired loans and leases for which there is not a related ALLL:
Real estate:
Residential 1-4 family			2,094				(421	)			1,673				0				2,023				2,059
Non-farm/non-residential			3,444				(1,125	)			2,319				0				1,942				1,999
Construction/land development			9,803				(81	)			9,722				0				5,015				3,417
Agricultural			554				(33	)			521				0				494				468
Multifamily residential			624				(133	)			491				0				246				164
Commercial and industrial			288				(159	)			129				0				95				88
Consumer			33				(14	)			19				0				22				24
Other			8				0				8				0				9				9
Total impaired loans and leases without a related ALLL			16,848				(1,966	)			14,882				0				9,846				8,228
Total impaired loans and leases		$	21,642			$	(4,220	)		$	17,422			$	1,182			$	12,340			$	10,923

Management has determined that certain of the Company’s impaired non-purchased loans and leases do not require any specific allowance at June 30, 2015 and 2014 or at December 31, 2014 because (i) management’s analysis of such individual loans and leases resulted in no impairment or (ii) all identified impairment on such loans and leases has previously been charged off.

Interest income on impaired non-purchased loans and leases is recognized on a cash basis when and if actually collected. Total interest income recognized on impaired non-purchased loans and leases for the three months and six months ended June 30, 2015 and 2014 and for the year ended December 31, 2014 was not material.

 

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Credit Quality Indicators

Non-Purchased Loans and Leases

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

 

		Satisfactory				Moderate				Watch				Substandard				Total
		(Dollars in thousands)
June 30, 2015:
Real estate:
Residential 1-4 family (1)		$	308,914			$	0			$	3,830			$	5,492			$	318,236
Non-farm/non-residential			1,442,958				169,776				67,722				8,347				1,688,803
Construction/land development			1,653,991				223,812				10,207				12,015				1,900,025
Agricultural			24,997				14,457				9,088				2,241				50,783
Multifamily residential			252,433				40,802				1,646				1,993				296,874
Commercial and industrial			185,737				70,305				2,092				1,486				259,620
Consumer (1)			25,022				0				214				296				25,532
Direct financing leases			136,605				297				100				144				137,146
Other (1)			84,271				5,648				93				92				90,104
Total		$	4,114,928			$	525,097			$	94,992			$	32,106			$	4,767,123
December 31, 2014:
Real estate:
Residential 1-4 family (1)		$	271,576			$	0			$	4,082			$	7,595			$	283,253
Non-farm/non-residential			1,300,582				142,688				53,863				6,408				1,503,541
Construction/land development			1,190,005				192,046				11,135				18,652				1,411,838
Agricultural			22,446				12,375				10,226				2,188				47,235
Multifamily residential			171,806				37,886				713				751				211,156
Commercial and industrial			208,054				59,967				18,310				1,376				287,707
Consumer (1)			25,267				0				141				261				25,669
Direct financing leases			114,586				715				117				57				115,475
Other (1)			89,364				4,312				286				34				93,996
Total		$	3,393,686			$	449,989			$	98,873			$	37,322			$	3,979,870
June 30, 2014:
Real estate:
Residential 1-4 family(1)		$	258,098			$	0			$	2,620			$	5,779			$	266,497
Non-farm/non-residential			1,090,525				139,080				53,478				7,091				1,290,174
Construction/land development			846,365				176,977				12,078				13,738				1,049,158
Agricultural			22,766				9,785				10,388				2,602				45,541
Multifamily residential			105,366				29,954				385				1,248				136,953
Commercial and industrial			127,935				35,769				1,768				1,412				166,884
Consumer(1)			28,244				0				132				298				28,674
Direct financing leases			97,967				727				34				40				98,768
Other(1)			85,684				3,036				189				27				88,936
Total		$	2,662,950			$	395,328			$	81,072			$	32,235			$	3,171,585

 

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

 

		30-89 Days Past Due (1)				90 Days or More (2)				Total Past Due				Current (3)				Total
		(Dollars in thousands)
June 30, 2015:
Real estate:
Residential 1-4 family		$	4,642			$	1,031			$	5,673			$	312,563			$	318,236
Non-farm/non-residential			2,672				1,180				3,852				1,684,951				1,688,803
Construction/land development			906				9,119				10,025				1,890,000				1,900,025
Agricultural			516				1,426				1,942				48,841				50,783
Multifamily residential			1,042				0				1,042				295,832				296,874
Commercial and industrial			737				115				852				258,768				259,620
Consumer			225				35				260				25,272				25,532
Direct financing leases			140				106				246				136,900				137,146
Other			98				85				183				89,921				90,104
Total		$	10,978			$	13,097			$	24,075			$	4,743,048			$	4,767,123
December 31, 2014:
Real estate:
Residential 1-4 family		$	6,352			$	1,536			$	7,888			$	275,365			$	283,253
Non-farm/non-residential			2,708				1,445				4,153				1,499,388				1,503,541
Construction/land development			3,520				12,881				16,401				1,395,437				1,411,838
Agricultural			1,680				304				1,984				45,251				47,235
Multifamily residential			0				0				0				211,156				211,156
Commercial and industrial			586				94				680				287,027				287,707
Consumer			161				55				216				25,453				25,669
Direct financing leases			39				54				93				115,382				115,475
Other			58				12				70				93,926				93,996
Total		$	15,104			$	16,381			$	31,485			$	3,948,385			$	3,979,870
June 30, 2014:
Real estate:
Residential 1-4 family		$	2,890			$	1,521			$	4,411			$	262,086			$	266,497
Non-farm/non-residential			1,714				1,693				3,407				1,286,767				1,290,174
Construction/land development			49				10,060				10,109				1,039,049				1,049,158
Agricultural			269				436				705				44,836				45,541
Multifamily residential			491				0				491				136,462				136,953
Commercial and industrial			674				0				674				166,210				166,884
Consumer			139				54				193				28,481				28,674
Direct financing leases			10				30				40				98,728				98,768
Other			0				0				0				88,936				88,936
Total		$	6,236			$	13,794			$	20,030			$	3,151,555			$	3,171,585

 

(1)	Includes $0.7 million, $0.9 million and $1.8 million at June 30, 2015, December 31, 2014 and June 30, 2014, respectively, of loans and leases on nonaccrual status.

(2)	All loans and leases greater than 90 days past due were on nonaccrual status at June 30, 2015 and 2014 and December 31, 2014.

(3)	Includes $2.5 million, $0.4 million and $2.8 million of loans and leases on nonaccrual status at June 30, 2015, December 31, 2014 and June 30, 2014, respectively.

 

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Purchased Loans

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

 

		Purchased Loans Without Evidence of Credit Deterioration at Acquisition																				Purchased Loans With Evidence of Credit Deterioration at Acquisition								Total Purchased Loans
		FV 33				FV 44				FV 55				FV 36				FV 77				FV 66				FV 88
		(Dollars in thousands)
June 30, 2015:
Real estate:
Residential 1-4 family		$	61,886			$	88,824			$	30,228			$	58,905			$	83			$	85,917			$	1,888			$	327,731
Non-farm/non-residential			209,433				702,962				119,491				3,780				255				119,406				6,778				1,162,105
Construction/land development			18,084				9,638				3,397				8,724				0				19,420				2,695				61,958
Agricultural			6,903				13,465				1,901				865				108				6,377				0				29,619
Multifamily residential			23,260				117,586				25,968				706				65				12,555				0				180,140
Total real estate			319,566				932,475				180,985				72,980				511				243,675				11,361				1,761,553
Commercial and industrial			10,126				17,812				4,316				5,722				20				8,179				449				46,624
Consumer			793				261				213				7,775				2				310				4				9,358
Other			4,247				3,558				288				462				0				758				0				9,313
Total		$	334,732			$	954,106			$	185,802			$	86,939			$	533			$	252,922			$	11,814			$	1,826,848
December 31, 2014:
Real estate:
Residential 1-4 family		$	73,196			$	81,840			$	30,180			$	71,687			$	151			$	96,752			$	1,899			$	355,705
Non-farm/non-residential			166,754				180,522				32,157				4,906				505				114,217				5,828				504,889
Construction/land development			21,803				26,858				4,312				13,708				0				28,497				4,598				99,776
Agricultural			10,444				25,187				2,409				1,525				0				8,331				92				47,988
Multifamily residential			22,731				11,646				1,971				884				67				4,823				312				42,434
Total real estate			294,928				326,053				71,029				92,710				723				252,620				12,729				1,050,792
Commercial and industrial			20,340				23,048				4,900				10,659				22				9,297				559				68,825
Consumer			1,605				272				420				12,538				3				426				4				15,268
Other			4,845				5,830				597				945				0				845				0				13,062
Total		$	321,718			$	355,203			$	76,946			$	116,852			$	748			$	263,188			$	13,292			$	1,147,947
June 30, 2014:
Real estate:
Residential 1-4 family		$	81,102			$	84,839			$	32,286			$	79,449			$	10			$	111,106			$	2,306			$	391,098
Non-farm/non-residential			211,896				198,937				40,193				3,704				0				148,491				10,249				613,470
Construction/land development			32,850				37,840				12,447				10,878				9				36,031				6,032				136,087
Agricultural			15,058				29,337				3,185				1,744				0				10,984				323				60,631
Multifamily residential			10,505				13,418				7,453				1,030				67				8,754				1,090				42,317
Total real estate			351,411				364,371				95,564				96,805				86				315,366				20,000				1,243,603
Commercial and industrial			27,269				49,175				9,702				14,637				0				11,371				1,119				113,273
Consumer			3,215				1,165				670				20,204				0				615				0				25,869
Other			5,762				9,292				935				4,391				0				944				0				21,324
Total		$	387,657			$	424,003			$	106,871			$	136,037			$	86			$	328,296			$	21,119			$	1,404,069

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

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

FV 44 – Loans in this category are considered to be marginally satisfactory with 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 loans with evidence of credit deterioration at the date of acquisition.

 

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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 at June 30, 2015 and 2014 or December 31, 2014 for its (i) purchased loans without evidence of credit deterioration at the date of acquisition as management’s analysis of such individual loans resulted in no impairment or all identified impairment on such loans had been charged off, or (ii) purchased loans with evidence of credit deterioration at the date of acquisition as all such loans were performing in accordance with management’s expectations established in conjunction with the determination of the Day 1 Fair Values or 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 following table is an aging analysis of past due purchased loans as of the dates indicated.

 

		30-89 Days Past Due				90 Days or More				Total Past Due				Current				Total Purchased Loans
		(Dollars in thousands)
June 30, 2015:
Real estate:
Residential 1-4 family		$	6,476			$	5,975			$	12,451			$	315,280			$	327,731
Non-farm/non-residential			16,737				9,191				25,928				1,136,177				1,162,105
Construction/land development			1,045				2,715				3,760				58,198				61,958
Agriculture			291				166				457				29,162				29,619
Multifamily residential			408				709				1,117				179,023				180,140
Commercial and industrial			936				611				1,547				45,077				46,624
Consumer			111				68				179				9,179				9,358
Other			40				11				51				9,262				9,313
Total		$	26,044			$	19,446			$	45,490			$	1,781,358			$	1,826,848
December 31, 2014:
Real estate:
Residential 1-4 family		$	8,088			$	9,043			$	17,131			$	338,574			$	355,705
Non-farm/non-residential			8,907				12,439				21,346				483,543				504,889
Construction/land development			1,197				5,464				6,661				93,115				99,776
Agriculture			237				875				1,112				46,876				47,988
Multifamily residential			515				67				582				41,852				42,434
Commercial and industrial			863				751				1,614				67,211				68,825
Consumer			199				103				302				14,966				15,268
Other			0				31				31				13,031				13,062
Total		$	20,006			$	28,773			$	48,779			$	1,099,168			$	1,147,947
June 30, 2014:
Real estate:
Residential 1-4 family		$	10,866			$	14,074			$	24,940			$	366,158			$	391,098
Non-farm/non-residential			4,929				25,570				30,499				582,971				613,470
Construction/land development			1,146				9,766				10,912				125,175				136,087
Agriculture			165				2,260				2,425				58,206				60,631
Multifamily residential			0				2,594				2,594				39,723				42,317
Commercial and industrial			392				1,733				2,125				111,148				113,273
Consumer			170				183				353				25,516				25,869
Other			16				19				35				21,289				21,324
Total		$	17,684			$	56,199			$	73,883			$	1,330,186			$	1,404,069

 

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At June 30, 2015 and 2014 and December 31, 2014, a portion of the Company’s purchased loans with evidence of credit deterioration at the date of acquisition were past due, including many that were 90 days or more past due. Such delinquencies were included in the Company’s performance expectations in determining the Day 1 Fair Values. Additionally, in accordance with GAAP, the Company continues to accrete into earnings income on such loans.

 

7.	Income Taxes

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

 

		June 30,								December 31,
		2015				2014				2014
		(Dollars in thousands)
Deferred tax assets:
Allowance for loan and lease losses		$	21,617			$	18,116			$	20,324
Differences in amounts reflected in the financial statements and income tax basis of purchased loans not previously covered by FDIC loss share agreements			28,605				26,024				20,444
Differences in amounts reflected in the financial statements and income tax basis for deposits assumed in acquisitions			7,703				2,405				1,337
Stock-based compensation			4,477				3,364				3,268
Deferred compensation			2,092				1,890				1,991
Foreclosed assets			3,111				5,624				3,503
Deferred fees and costs on loans and leases			6,405				2,059				4,785
Differences in amounts reflected in the financial statements and income tax basis of assets acquired and liabilities assumed in FDIC-assisted acquisitions			8,032				7,397				8,098
Acquired net operating losses			13,456				13,662				13,332
Other, net			1,949				1,486				2,568
Total gross deferred tax assets			97,447				82,027				79,650
Less valuation allowance			(474	)			(474	)			(474	)
Net deferred tax asset			96,973				81,553				79,176
Deferred tax liabilities:
Accelerated depreciation on premises and equipment			18,921				18,028				18,653
Investment securities AFS			3,798				5,022				7,692
Acquired intangible assets			10,407				10,847				9,743
Total gross deferred tax liabilities			33,126				33,897				36,088
Net deferred tax assets		$	63,847			$	47,656			$	43,088

Net operating losses were acquired in the Bancshares, Summit and Intervest acquisitions and the Company’s 2013 acquisition of The First National Bank of Shelby (“FNB Shelby”). The net operating losses from the Bancshares transaction total $15.7 million at June 30, 2015 and will expire at various dates from 2030 through 2034. The net operating losses acquired from the Summit transaction were utilized during 2014. The net operating losses acquired in the Intervest transaction totaled $6.3 million at June 30, 2015 and will expire at various dates from 2030 through 2035. The net operating losses from the FNB Shelby transaction totaled $20.0 million at June 30, 2015, of which $12.5 million will expire in 2032 and $7.5 million will expire in 2033.

At June 30, 2015 and 2014 and December 31, 2014, the Company had a deferred tax valuation allowance of approximately $0.5 million to reflect its assessment that the realization of the benefits from the recovery of certain acquired net operating losses are expected to be subject to limitations under section 382 of the Internal Revenue Code.

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 any of the Company’s previous acquisitions, management may be required to make adjustments to its deferred tax asset valuation allowance, which adjustments could affect goodwill or deferred income tax expense (benefit).

 

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8.	Supplemental Data for Cash Flows

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

 

		Six Months Ended
		June 30,
		2015				2014
		(Dollars in thousands)
Cash paid during the period for:
Interest		$	13,031			$	9,808
Taxes			34,024				17,690
Supplemental schedule of non-cash investing and financing activities:
Net change in unrealized gains/losses on investment securities AFS			(10,218	)			22,506
Loans and premises and equipment transferred to foreclosed assets			9,797				31,013
Loans advanced for sales of foreclosed assets			0				258
Unsettled AFS investment security purchases			4,453				1,465
Unsettled AFS investment security sales			0				1,815
Unsettled loan sales			14,361				0
Unsettled loan purchases			18,269				0
Common stock issued in merger and acquisition transactions			238,476				166,315

 

9.	Guarantees and Commitments

Outstanding standby letters of credit are contingent commitments issued by the Company generally to guarantee the performance of a customer in third party arrangements. The maximum amount of future payments the Company could be required to make under these guarantees at June 30, 2015 was $13.3 million. The Company holds collateral to support guarantees when deemed necessary. Collateralized commitments at June 30, 2015 totaled $13.2 million.

At June 30, 2015, the Company had outstanding commitments to extend credit, excluding mortgage interest rate lock commitments, totaling $4.0 billion. The following table shows the contractual maturities of outstanding commitments to extend credit as of the date indicated.

 

Contractual Maturities at June 30, 2015
Maturity		Amount
(Dollars in thousands)
2015		$	91,624
2016			358,317
2017			1,715,962
2018			1,356,777
2019			170,419
Thereafter			312,844
Total		$	4,005,943

 

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10.	Subordinated Debentures

At June 30, 2015, the Company had the following issues of trust preferred securities and subordinated debentures owed to the Trusts.

 

		Subordinated Debentures Owed to Trust				Unamortized Discount at June 30, 2015				Carrying Value of Subordinated Debentures at June 30, 2015				Trust Preferred Securities of the Trusts				Contractual Interest Rate at June 30, 2015
		(Dollars in thousands)
Ozark II		$	14,433			$	0			$	14,433			$	14,000				3.18	%
Ozark III			14,434				0				14,434				14,000				3.24
Ozark IV			15,464				0				15,464				15,000				2.50
Ozark V			20,619				0				20,619				20,000				1.89
Intervest II			15,464				(678	)			14,786				15,000				3.23
Intervest III			15,464				(785	)			14,679				15,000				3.07
Intervest IV			15,464				(1,428	)			14,036				15,000				2.68
Intervest V			10,310				(1,358	)			8,952				10,000				1.94
		$	121,652			$	(4,249	)		$	117,403			$	118,000

On February 10, 2015, in conjunction with the Intervest acquisition, the Company acquired the Intervest Trusts with outstanding subordinated debentures totaling $56.7 million and related trust preferred securities totaling $55.0 million. On the date of such acquisition, the Company recorded the assumed subordinated debentures owed to the Intervest Trusts at estimated fair value of $52.2 million, based on an independent third party valuation, to reflect a current market interest rate for comparable obligations. The fair value adjustment of $4.5 million is being amortized, using a level-yield methodology over the estimated holding period of approximately eight years, as an increase in interest expense of the subordinated debentures owed to the Intervest Trusts. In addition to the subordinated debentures of the Intervest Trusts, the Company also acquired $1.7 million of trust common equity issued by the Intervest Trusts.

The trust preferred securities issued by Intervest Trust II and the related subordinated debentures bear interest, adjustable quarterly, at 90-day London Interbank Offered Rates (“LIBOR”) plus 2.95% and contain a final maturity of September 17, 2033. The trust preferred securities issued by Intervest Trust III and the related subordinated debentures bear interest, adjustable quarterly, at 90-day LIBOR plus 2.79% and contain a final maturity of March 17, 2034. The trust preferred securities issued by Intervest Trust IV and the related subordinated debentures bear interest, adjustable quarterly, at 90-day LIBOR plus 2.40% and contain a final maturity of September 20, 2034. The trust preferred securities issued by Intervest Trust V and the related subordinated debentures bear interest, adjustable quarterly, at 90-day LIBOR plus 1.65% and contain a final maturity of December 15, 2036.

At June 30, 2015, the Company had an aggregate of $121.7 million of subordinated debentures outstanding (with an aggregate carrying value of $117.4 million) and had an asset of $3.7 million representing its investment in the common equity issued by the Trusts. The sole assets of the Trusts are the adjustable rate debentures and the liabilities of the Trusts are the trust preferred securities. At June 30, 2015 and 2014, the Trusts had aggregate common equity of $3.7 million and $1.9 million, respectively, and did not have any restricted net assets. The Company has, through various contractual arrangements or by operation of law, fully and unconditionally guaranteed all obligations of the Trusts with respect to the trust preferred securities. Additionally, there are no restrictions on the ability of the Trusts to transfer funds to the Company in the form of cash dividends, loans or advances. The Company has the option to defer interest payments on the subordinated debentures from time to time for a period not to exceed five consecutive years. These trust preferred securities generally mature at or near the 30th anniversary date of each issuance. However, the trust preferred securities and related subordinated debentures may be prepaid at par, subject to regulatory approval.

 

11.	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 personnel and compensation committee of the Company’s board of directors. While the vesting period and the termination date for the employee plan options are determined when options are granted, all such employee options outstanding at June 30, 2015 were issued with a vesting date three years after issuance and an expiration date seven years after issuance.

 

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During the second quarter of 2015, the Company adopted the Bank of the Ozarks, Inc. Non-Employee Director Stock Plan (the “Director Plan”) that provides for awards of common stock to eligible non-employee directors. The Director Plan grants to each director who is not otherwise an employee of the Company, or any subsidiary, shares of common stock on the day of his or her election as director of the Company at each annual shareholders meeting, or any special meeting called for the purpose of electing a director or directors of the Company, and upon appointment for the first time as director of the Company. The number of shares of common stock to be awarded will be the equivalent of $25,000 worth of shares of common stock based on the average of the highest reported asked price and lowest reported bid price on the grant date. The common stock awarded under this plan is fully vested on the grant date. The aggregate number of shares of common stock which may be issued as awards under this plan will not exceed 50,000 shares, subject to certain adjustments. For the three months ended June 30, 2015, the Company issued 7,657 shares of common stock and incurred $0.3 million in stock-based compensation expense related to common-stock awards issued under the Director Plan.

Prior to the adoption of the Director Plan, the Company had a nonqualified stock option plan for non-employee directors. No options were granted under this plan during the six months ended June 30, 2015. All options previously granted under this plan were 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 were in the form of newly issued shares.

The following table summarizes stock option activity for both the employee and non-employee director stock option plans for the period indicated.

 

		Options				Weighted- Average Exercise Price/Share				Weighted-Average Remaining Contractual Life (in years)				Aggregate Intrinsic Value (in thousands)
Six Months Ended June 30, 2015:
Outstanding – January 1, 2015			1,859,350			$	23.49
Granted			2,000				40.82
Exercised			(99,050	)			10.06
Forfeited			(74,350	)			26.13
Outstanding – June 30, 2015			1,687,950				24.18				5.3			$	36,400	(1)
Fully vested and exercisable – June 30, 2015			315,550			$	14.17				4.6			$	9,966	(1)
Expected to vest in future periods			1,248,680
Fully vested and expected to vest – June 30, 2015(2)			1,564,230			$	23.58				5.2			$	34,676	(1)

 

(1)	Based on closing price of $45.75 per share on June 30, 2015.

(2)	At June 30, 2015, the Company estimated that outstanding options to purchase 123,720 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 three months ended June 30, 2015 and 2014 was $1.4 million and $0.2 million, respectively. The total intrinsic value of options exercised during the six months ended June 30, 2015 and 2014 was $2.8 million and $4.1 million, respectively.

Options to purchase 2,000 shares and 52,000 split-adjusted shares of the Company’s stock were issued during the six months ended June 30, 2015 and 2014, respectively. Stock-based compensation expense for stock options included in non-interest expense was $0.6 million and $0.8 million for the three months ended June 30, 2015 and 2014, respectively, and $1.2 million for both six month periods ended June 30, 2015 and 2014. Total unrecognized compensation cost related to non-vested stock option grants was $3.7 million at June 30, 2015 and is expected to be recognized over a weighted-average period of 2.0 years.

The Company has a restricted stock and incentive plan whereby all officers and employees of the Company are eligible to receive awards of restricted stock, restricted stock units or performance awards. 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. Shares of common stock issued under the plan may be shares of original issuance or shares held in treasury that have been reacquired by the Company. While the vesting period for awards under the plan is determined by the personnel and compensation committee at the time of grant, all restricted stock awards granted under the plan have a vesting date of three years after issuance.

 

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

 

		Six Months Ended June 30, 2015
Outstanding – January 1, 2015			444,700
Granted			245,300
Forfeited			(29,875	)
Vested			0
Outstanding – June 30, 2015			660,125
Weighted-average grant date fair value		$	25.27

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 $1.4 million and $0.9 million for the quarters ended June 30, 2015 and 2014, respectively, and $2.7 million and $1.8 million for the six months ended June 30, 2015 and 2014, respectively. Unrecognized compensation expense for non-vested restricted stock awards was $9.5 million at June 30, 2015 and is expected to be recognized over a weighted-average period of 2.2 years.

 

12.	Fair Value Measurements

The Company measures certain of its assets and liabilities on a fair value basis using various valuation techniques and assumptions, depending on the nature of the asset or liability. Fair value is defined 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 had no liabilities that were accounted for at fair value at June 30, 2015 or 2014 or at December 31, 2014.

The Company applies the following fair value hierarchy.

 

 

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

 

		Level 1				Level 2				Level 3				Total
		(Dollars in thousands)
June 30, 2015:
Investment securities AFS(1):
Obligations of state and political subdivisions		$	0			$	488,158			$	18,757			$	506,915
U.S. Government agency securities			0				260,753				0				260,753
Corporate obligations			0				3,574				0				3,574
CRA qualified investment fund			1,020				0				0				1,020
Total investment securities AFS			1,020				752,485				18,757				772,262
Impaired non-purchased loans and leases			0				0				12,807				12,807
Impaired purchased loans			0				0				12,347				12,347
Foreclosed assets			0				0				25,973				25,973
Total assets at fair value		$	1,020			$	752,485			$	69,884			$	823,389
December 31, 2014:
Investment securities AFS(1):
Obligations of state and political subdivisions		$	0			$	553,808			$	19,401			$	573,209
U.S. Government agency securities			0				251,233				0				251,233
Corporate obligations			0				654				0				654
Total investment securities AFS			0				805,695				19,401				825,096
Impaired non-purchased loans and leases			0				0				19,480				19,480
Impaired purchased loans			0				0				14,040				14,040
Foreclosed assets			0				0				37,775				37,775
Total assets at fair value		$	0			$	805,695			$	90,696			$	896,391
June 30, 2014:
Investment securities AFS(1):
Obligations of state and political subdivisions		$	0			$	595,965			$	20,600			$	616,565
U.S. Government agency securities			0				258,311				0				258,311
Corporate obligations			0				685				0				685
Total investment securities AFS			0				854,961				20,600				875,561
Impaired non-purchased loans and leases			0				0				16,240				16,240
Impaired purchased loans			0				0				21,205				21,205
Foreclosed assets			0				0				56,356				56,356
Total assets at fair value		$	0			$	854,961			$	114,401			$	969,362

 

(1)	Does not include $10.0 million at June 30, 2015; $14.2 million at December 31, 2014 and $16.6 million at June 30, 2014 of FHLB and FNBB equity securities that do not have readily determinable fair values and are carried at cost.

 

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

 

Description		Fair Value at June 30, 2015				Technique		Unobservable Inputs
(Dollars in thousands)
Impaired non-purchased loans and leases		$	12,807			Third party appraisal(1) or discounted cash flows		1.		Management discount based on underlying collateral characteristics and market conditions
								2.		Life of loan
Impaired purchased loans		$	12,347			Third party appraisal(1) and/or discounted cash flows		1.		Management discount based on underlying collateral characteristics and market conditions
								2.		Life of loan
Foreclosed assets		$	25,973			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 its Investment Portfolio Manager and its Chief Financial Officer.

The Company has determined that certain of its investment securities had a limited to non-existent trading market at June 30, 2015. 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 $18.8 million at June 30, 2015 were calculated using Level 3 hierarchy inputs and assumptions as the trading market for such securities was determined to be “not active.” This determination was based on the limited number of trades or, in certain cases, the existence of no reported trades for the private placement bonds. The private placement bonds are generally prepayable at par value at the option of the issuer. As a result, management believes the private placement bonds should be individually valued at the lower of (i) the matrix pricing provided by the Company’s third party pricing services for comparable unrated municipal securities or (ii) par value. At June 30, 2015, the third parties’ pricing matrices valued the Company’s portfolio of private placement bonds at $18.8 million which was equal to the aggregate par value of the private placement bonds. Accordingly, at June 30, 2015, the Company reported the private placement bonds at $18.8 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 June 30, 2015 the Company had reduced the carrying value of its impaired loans and leases (all of which are included in nonaccrual loans and leases) by $5.0 million to the estimated fair value of $12.8 million. The $5.0 million adjustment to reduce the carrying value of impaired loans and leases to estimated fair value consisted of $3.6 million of partial charge-offs and $1.4 million of specific loan and lease loss allocations.

Impaired purchased loans – Impaired purchased loans are measured at fair value on a non-recurring basis. As of June 30, 2015, the Company had identified purchased 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 thereof (for purchased loans without evidence of credit deterioration at date of acquisition) or the expected performance of such loans had deteriorated from management’s performance expectations established in conjunction with the determination of the Day 1 Fair Values or since management’s most recent review of such portfolio’s performance (for purchased loans with

 

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evidence of credit deterioration at date of acquisition). As a result, the Company recorded partial charge-offs totaling $0.4 million and $1.1 million during the second quarter of 2015 and 2014, respectively, and $1.7 million and $1.3 million during the first six months of 2015 and 2014, respectively. The Company also recorded provision for loan and lease losses of $0.4 million and $1.1 million during the second quarter of 2015 and 2014, respectively, and $1.7 million and $1.3 million during the first six months of 2015 and 2014, respectively, to cover such charge-offs. In addition to these charge-offs, the Company transferred certain of these purchased loans to foreclosed assets. As a result of these actions, at June 30, 2015, the Company had $12.3 million of impaired purchased loans.

Foreclosed assets – 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. Purchased foreclosed assets are initially recorded at Day 1 Fair Values. In estimating such Day 1 Fair Values, management considered a number of factors including, among others, appraised value, estimated selling price, estimated holding periods and net present value (calculated using discount rates ranging from 8.0% to 9.5% per annum) of cash flows expected to be received. 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.

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, 2015		$	19,401
Total realized gains (losses) included in earnings			0
Total unrealized gains (losses) included in comprehensive income			(271	)
Paydowns and maturities			(373	)
Sales			0
Transfers in and/or out of Level 3			0
Balance – June 30, 2015		$	18,757
Balance – January 1, 2014		$	18,682
Total realized gains (losses) included in earnings			0
Total unrealized gains (losses) included in comprehensive income			403
Acquired			1,907
Paydowns and maturities			(392	)
Sales			0
Transfers in and/or out of Level 3			0
Balance – June 30, 2014		$	20,600

 

13.	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 its Investment Portfolio Manager and its Chief Financial Officer. The Company’s investments in FHLB and FNBB equity securities totaling $10.0 million at June 30, 2015, $14.2 million at December 31, 2014 and $16.6 million at June 30, 2014, do not have readily determinable fair values and are carried at cost.

Loans and leases – The fair value of loans and leases, including purchased 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.

 

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

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

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

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

Off-balance sheet instruments – The fair values of commercial loan commitments and letters of credit are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, and were not material at June 30, 2015 and 2014 or at December 31, 2014.

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 did 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.

 

				June 30,
				2015								2014								December 31, 2014
		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		$	514,890			$	514,890			$	110,688			$	110,688			$	150,203			$	150,203
Investment securities AFS		Levels 1, 2 and 3			782,277				782,277				892,129				892,129				839,321				839,321
Loans and leases, net of ALLL		Level 3			6,537,222				6,469,690				4,528,696				4,480,221				5,074,899				5,042,831
FDIC loss share receivable		Level 3			0				0				50,679				50,600				0				0
Financial liabilities:
Demand, savings and interest bearing transaction deposits		Level 1		$	4,966,330			$	4,966,330			$	3,807,139			$	3,807,139			$	4,038,443			$	4,038,443
Time deposits		Level 2			2,120,969				2,142,807				1,176,758				1,177,108				1,457,939				1,463,590
Repurchase agreements with customers		Level 1			70,011				70,011				55,999				55,999				65,578				65,578
Other borrowings		Level 2			161,931				171,614				280,875				304,381				190,855				203,493
FDIC clawback payable		Level 3			0				0				26,533				26,533				0				0
Subordinated debentures		Level 2			117,403				66,679				64,950				32,554				64,950				39,103

 

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14.	Repurchase Agreements With Customers

At June 30, 2015 and 2014 and December 31, 2014, securities sold under agreements to repurchase (“repurchase agreements”) totaled $70.0 million, $56.0 million and $65.6 million, respectively. Securities utilized as collateral for repurchase agreements are primarily U.S. Government agency mortgage-backed securities and are maintained by the Company’s safekeeping agents. These securities are reviewed by the Company on a daily basis, and the Company may be required to provide additional collateral due to changes in the fair market value of these securities. The terms of the Company’s repurchase agreements are continuous but may be cancelled at any time by the Company or the customer.

 

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

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

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2015				2014				2015				2014
		(Dollars in thousands)
Beginning balance of AOCI – unrealized gains and losses on investment securities AFS		$	14,367			$	3,211			$	14,132			$	(3,672	)
Other comprehensive income (loss):
Unrealized gains and losses on investment securities AFS			(10,091	)			11,199				(7,600	)			22,529
Tax effect of unrealized gains and losses on investment securities AFS			3,844				(4,393	)			3,157				(8,837	)
Amounts reclassified from AOCI			(84	)			(18	)			(2,618	)			(23	)
Tax effect of amounts reclassified from AOCI			32				7				997				9
Total other comprehensive income (loss)			(6,299	)			6,795				(6,064	)			13,678
Ending balance of AOCI – unrealized gains and losses on investment securities AFS		$	8,068			$	10,006			$	8,068			$	10,006

Amounts reclassified from AOCI are included in net gains on investment securities and the tax effect of amounts reclassified from AOCI are included in provision for income tax in the consolidated statements of income. The amounts reclassified from AOCI relate entirely to unrealized gains/losses on investment securities AFS.

 

16.	Other Operating Expenses

The following table is a summary of other operating expenses for the periods indicated.

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2015				2014				2015				2014
		(Dollars in thousands)
Salaries and employee benefits		$	22,646			$	18,831			$	45,243			$	36,520
Net occupancy and equipment			7,344				5,707				14,635				10,751
Other operating expenses:
Postage and supplies			1,014				852				1,929				1,623
Advertising and public relations			586				636				1,169				1,036
Telecommunication services			1,616				1,191				2,964				2,207
Professional and outside services			2,526				2,353				6,912				4,526
Software and data processing			766				1,662				1,515				2,799
Travel and meals			821				629				1,617				1,169
FDIC insurance			900				555				1,650				1,105
FDIC and state assessments			331				218				641				431
ATM expense			543				307				1,251				516
Loan collection and repossession expense			1,020				1,528				2,753				1,987
Writedowns of foreclosed and other assets			235				798				2,427				877
Amortization of intangibles			1,640				1,119				3,236				1,932
FHLB prepayment penalty			0				0				2,480				0
Other			1,736				1,492				3,486				7,854
Total non-interest expense		$	43,724			$	37,878			$	93,908			$	75,333

 

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17.	Subsequent Event

On August 5, 2015, the Company completed the acquisition of Bank of the Carolinas Corporation (“BCAR”) and its wholly-owned subsidiary Bank of the Carolinas for an aggregate of approximately 1.4 million shares of common stock (plus cash in lieu of fractional shares) in a transaction valued at approximately $65.4 million. The acquisition of BCAR expands the Company’s operations in North Carolina by adding eight full service branch locations in Advance, Asheboro, Concord, Harrisburg, Landis, Lexington, Mocksville and Winston-Salem. At June 30, 2015, BCAR had approximately $345 million of total assets, $277 million of loans, $296 million of deposits and $48 million of total common stockholders’ equity.

 

18.	Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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, 2017. 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.

In June 2014, the FASB issued ASU 2014-11 “Transfers and Servicing (Topic 860).”ASU 2014-11 amends the accounting guidance for repo-to-maturity transactions and requires such transactions to be accounted for as secured borrowings. In addition, ASU 2014-11 requires enhanced disclosures related to the collateral pledged, maturity and risk associated with repurchase agreements. The Company adopted the provision of ASU 2014-11 beginning April 1, 2015. The adoption of ASU 2014-11 had no significant impact on the Company’s financial position or results of operations; however, the additional disclosures required by ASU 2014-11 are included in Note 14-Repurchase Agreement with Customers.

In January 2015, the FASB issued ASU 2015-01, “Income Statement – Extraordinary and Unusual Items (Subtopic 225-20) – Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items.” ASU 2015-01 eliminates from GAAP the concept of extraordinary items, which, among other things, required an entity to segregate extraordinary items considered to be unusual and infrequent from the results of ordinary operations and show the item separately in the income statement, net of tax, after income from continuing operations. ASU 2015-01 is effective for interim and annual periods beginning after December 15, 2015. ASU 2015-01 is not expected to have a significant impact on the Company’s financial position, results of operations and its financial statement disclosures.

In February 2015, FASB issued ASU 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis” which amends the consolidation requirements of ASU 810 by changing the consolidation analysis required under GAAP. The revised guidance amends the consolidation analysis based on certain fee arrangements or relationships to the reporting entity and, for limited partnerships, requires entities to consider the limited partner’s rights relative to the general partner. ASU 2015-02 is effective for annual and interim periods beginning after December 15, 2015. The Company is currently evaluating the impact, if any, ASU 2015-02 will have on its financial position, results of operations, and its financial statement disclosures.

In April 2015, the FASB issued ASU 2015-03, “Interest – Imputation of Interest (Subtopic 835-30) – Simplifying the Presentation of Debt Issuance Costs.” ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in ASU 2015-03. ASU 2015-03 is effective for interim and annual periods beginning after December 15, 2015. ASU 2015-03 is not expected to have a significant impact on the Company’s 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

Unless this quarterly report on Form 10-Q indicates otherwise, or the context otherwise requires, the terms “we,” “our,” “us,” and “the Company,” as used herein refer to Bank of the Ozarks, Inc. and its subsidiaries, including Bank of the Ozarks, which we sometimes refer to as “Bank of the Ozarks,” “our bank subsidiary,” or “the Bank.”

FORWARD-LOOKING INFORMATION

This quarterly report on Form 10-Q, including Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), other filings made by us with the Securities and Exchange Commission (“SEC”) and other oral and written statements or reports by us and our management include certain forward-looking statements that are intended to be covered by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on management’s expectations as well as certain assumptions and estimates made by, and information available to, management at the time. Forward-looking statements include, without limitation, statements about economic, real estate market, competitive, employment, credit market and interest rate conditions and our plans, goals, beliefs, expectations, thoughts, estimates and outlook for the future with respect to our revenue growth; net income and earnings per common share; net interest margin; net interest income; non-interest income, including service charges on deposit accounts, mortgage lending and trust income, gains (losses) on investment securities and sales of other assets; gains on merger and acquisition transactions; other income from purchased 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; the impact from termination of the loss share agreement; net charge-offs and net charge-off ratios; 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 the volume, yield and value of our investment securities portfolio; 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 us or our management, identify forward-looking statements.

Actual future performance, outcomes and results may differ materially from those expressed in forward-looking statements made by us and our management due to certain risks, uncertainties and assumptions. Certain factors that may affect our future results include, but are not limited to, potential delays or other problems in implementing our growth 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 availability of capital; 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 our 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; changes in legal and regulatory requirements; recently enacted and potential legislation and regulatory actions, and the costs and expenses to comply with new 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 our bank subsidiary or our 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 the other reports we file with the SEC, including those factors included in the disclosures under the heading “Forward-Looking Information” and “Item 1A. Risk Factors” in our most recent Annual Report on Form 10-K for the year ended December 31, 2014. 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. We disclaim any obligation to update or revise any forward-looking statement based on the occurrence of future events, the receipt of new information or otherwise.

 

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SELECTED AND SUPPLEMENTAL FINANCIAL DATA

The following tables set forth selected unaudited consolidated financial data as of and for the three months and six months ended June 30, 2015 and 2014 and supplemental unaudited quarterly financial data for each of the most recent eight quarters beginning with the third quarter of 2013 through the second quarter of 2015. These tables are qualified in their entirety by our consolidated financial statements and related notes presented elsewhere in this quarterly report on Form 10-Q. The calculations of our tangible book value per common share and our annualized returns on average tangible common stockholders’ equity and the reconciliations to generally accepted accounting principles (“GAAP”) are included in this MD&A under “Capital Resources and Liquidity” in this quarterly report on Form 10-Q.

Selected Consolidated Financial Data - Unaudited

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2015				2014				2015				2014
		(Dollars in thousands, except per share amounts)
Income statement data:
Interest income		$	100,103			$	69,760			$	191,558			$	126,818
Interest expense			6,347				4,959				12,312				9,620
Net interest income			93,756				64,801				179,246				117,198
Provision for loan and lease losses			4,308				5,582				10,623				6,887
Non-interest income			23,270				17,388				52,337				37,749
Non-interest expense			43,724				37,878				93,908				75,333
Net income available to common stockholders			44,776				26,486				84,670				51,762
Common share and per common share data:
Earnings – diluted		$	0.51			$	0.34			$	0.98			$	0.68
Book value			13.93				10.67				13.93				10.67
Tangible book value			12.19				9.31				12.19				9.31
Dividends			0.135				0.115				0.265				0.225
Weighted-average diluted shares outstanding (thousands)			87,515				77,466				86,001				75,981
End of period shares outstanding (thousands)			86,811				79,662				86,811				79,662
Balance sheet data at period end:
Total assets		$	8,710,435			$	6,297,975			$	8,710,435			$	6,297,975
Non-purchased loans and leases			4,767,123				3,171,585				4,767,123				3,171,585
Purchased loans(1)			1,826,848				1,404,069				1,826,848				1,404,069
Allowance for loan and lease losses			56,749				46,958				56,749				46,958
Foreclosed assets(1)			25,973				56,356				25,973				56,356
Investment securities			782,277				892,129				782,277				892,129
Deposits			7,087,299				4,983,897				7,087,299				4,983,897
Repurchase agreements with customers			70,011				55,999				70,011				55,999
Other borrowings			161,931				280,875				161,931				280,875
Subordinated debentures			117,403				64,950				117,403				64,950
Total common stockholders’ equity			1,209,254				850,204				1,209,254				850,204
Loan and lease (including purchased loans) to deposit ratio			93.04	%			91.81	%			93.04	%			91.81	%
Average balance sheet data:
Total average assets		$	8,283,023			$	5,660,136			$	7,945,178			$	5,247,221
Total average common stockholders’ equity			1,191,798				749,692				1,121,225				696,360
Average common equity to average assets			14.39	%			13.25	%			14.11	%			13.27	%
Performance ratios:
Return on average assets(2)			2.17	%			1.88	%			2.15	%			1.99	%
Return on average common stockholders’ equity(2)			15.07				14.17				15.23				14.99
Return on average tangible common stockholders’ equity(2)			17.27				15.41				17.43				15.90
Net interest margin – FTE(2)			5.37				5.62				5.39				5.55
Efficiency ratio			36.56				44.60				39.67				47.05
Common stock dividend payout ratio			26.20				33.82				26.10				33.09
Asset quality ratios:
Net charge-offs to average total loans and leases(2) (3)			0.12	%			0.19	%			0.24	%			0.11	%
Nonperforming loans and leases to total loans and leases(4)			0.34				0.58				0.34				0.58
Nonperforming assets to total assets(4)			0.49				0.62				0.49				0.62
Allowance for loan and lease losses as a percentage of:
Total loans and leases(4)			1.19	%			1.48	%			1.19	%			1.48	%
Nonperforming loans and leases(4)			349	%			255	%			349	%			255	%
Capital ratios at period end:
Tier 1 leverage			14.41	%			14.31	%			14.41	%			14.31	%
Common equity tier 1			11.18				N/A				11.18				N/A
Tier 1 capital			12.43				13.40				12.43				13.40
Total capital			13.03				14.19				13.03				14.19

 

(1)	Prior periods have been adjusted to include loans and/or foreclosed assets previously covered by Federal Deposit Insurance Corporation (“FDIC”) loss share.

(2)	Ratios annualized based on actual days.

(3)	Excludes purchased loans and net charge-offs related to such loans.

(4)	Excludes purchased loans, except for their inclusion in total assets.

N/A – Ratio not applicable for period indicated.

 

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Supplemental Quarterly Financial Data - Unaudited

(Dollars in thousands, except per share amounts)

 

		9/30/13				12/31/13				3/31/14				6/30/14				9/30/14				12/31/14				3/31/15				6/30/15
Earnings Summary:
Net interest income		$	50,633			$	55,282			$	52,396			$	64,801			$	74,621			$	78,675			$	85,489			$	93,756
Federal tax (FTE) adjustment			2,161				2,372				2,424				2,737				2,892				2,690				2,570				2,552
Net interest income (FTE)			52,794				57,654				54,820				67,538				77,513				81,365				88,059				96,308
Provision for loan and lease losses			(3,818	)			(2,863	)			(1,304	)			(5,582	)			(3,687	)			(6,341	)			(6,315	)			(4,308	)
Non-interest income			22,102				18,592				20,360				17,388				19,248				27,887				29,067				23,270
Non-interest expense			(32,208	)			(34,728	)			(37,454	)			(37,878	)			(42,523	)			(48,158	)			(50,184	)			(43,724	)
Pretax income (FTE)			38,870				38,655				36,422				41,466				50,551				54,753				60,627				71,546
FTE adjustment			(2,161	)			(2,372	)			(2,424	)			(2,737	)			(2,892	)			(2,690	)			(2,570	)			(2,552	)
Provision for income taxes			(10,224	)			(11,893	)			(8,730	)			(12,251	)			(15,579	)			(17,300	)			(18,139	)			(24,190	)
Noncontrolling interest			(33	)			8				8				8				13				(11	)			(24	)			(28	)
Net income available to common stockholders		$	26,452			$	24,398			$	25,276			$	26,486			$	32,093			$	34,752			$	39,894			$	44,776
Earnings per common share – diluted(1)		$	0.36			$	0.33			$	0.34			$	0.34			$	0.40			$	0.43			$	0.47			$	0.51
Non-interest Income:
Service charges on deposit accounts		$	5,817			$	6,031			$	5,639			$	6,605			$	7,356			$	7,009			$	6,627			$	7,088
Mortgage lending income			1,276				967				954				1,126				1,728				1,379				1,507				1,772
Trust income			1,060				1,289				1,316				1,364				1,419				1,493				1,432				1,463
BOLI income			1,179				1,164				1,130				1,278				1,390				1,385				3,623				1,785
Net accretion (amortization) of FDIC loss share receivable and FDIC clawback payable			1,396				901				692				(741	)			(562	)			—				—				—
Other income from purchased loans			2,484				4,825				3,311				3,629				3,369				4,494				8,908				6,971
Gains on investment securities			—				4				5				18				43				78				2,534				85
Gains on sales of other assets			2,501				1,801				974				1,448				1,688				1,912				2,829				2,557
Gains on merger and acquisition transactions			5,163				—				4,667				—				—				—				—				—
Gain on termination of FDIC loss share agreements			—				—				—				—				—				7,996				—				—
Other			1,226				1,610				1,672				2,661				2,817				2,141				1,607				1,549
Total non-interest income		$	22,102			$	18,592			$	20,360			$	17,388			$	19,248			$	27,887			$	29,067			$	23,270
Non-interest Expense:
Salaries and employee benefits		$	16,456			$	17,381			$	17,689			$	18,831			$	20,876			$	19,488			$	22,597			$	22,646
Net occupancy expense			4,786				5,039				5,044				5,707				6,823				6,528				7,291				7,344
Other operating expenses			10,178				11,427				13,908				12,221				13,292				20,610				18,700				12,094
Amortization of intangibles			788				881				813				1,119				1,532				1,532				1,596				1,640
Total non-interest expense		$	32,208			$	34,728			$	37,454			$	37,878			$	42,523			$	48,158			$	50,184			$	43,724
Allowance for Loan and Lease Losses:
Balance at beginning of period		$	39,372			$	41,660			$	42,945			$	43,861			$	46,958			$	49,606			$	52,918			$	54,147
Net charge-offs			(1,530	)			(1,578	)			(388	)			(2,485	)			(1,039	)			(3,029	)			(5,086	)			(1,706	)
Provision for loan and lease losses			3,818				2,863				1,304				5,582				3,687				6,341				6,315				4,308
Balance at end of period		$	41,660			$	42,945			$	43,861			$	46,958			$	49,606			$	52,918			$	54,147			$	56,749
Selected Ratios:
Net interest margin – FTE(2)			5.55	%			5.63	%			5.46	%			5.62	%			5.49	%			5.53	%			5.42	%			5.37	%
Efficiency ratio			43.00				45.55				49.82				44.60				43.95				44.08				42.85				36.56
Net charge-offs to average loans and leases(2)(3)			0.10				0.14				0.03				0.19				0.06				0.17				0.37				0.12
Nonperforming loans and leases to total loans and leases(4)			0.41				0.33				0.42				0.58				0.49				0.53				0.33				0.34
Nonperforming assets to total assets(4)(5)			1.33				1.22				1.44				1.19				0.92				0.87				0.56				0.49
Allowance for loan and lease losses to total loans and leases(4)			1.65				1.63				1.58				1.48				1.36				1.33				1.26				1.19
Loans and leases past due 30 days or more, including past due non-accrual loans and leases, to total loans and leases(4)			0.54				0.45				0.75				0.63				0.63				0.79				0.57				0.50

 

(1)	Adjusted to give effect to 2-for-1 stock split on June 23, 2014.

(2)	Ratios annualized based on actual days.

(3)	Excludes purchased loans and net charge-offs related to such loans.

(4)	Excludes purchased loans, except for their inclusion in total assets.

(5)	Ratios for prior periods have been recalculated to include foreclosed assets previously covered by FDIC loss share agreements as nonperforming assets.

 

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OVERVIEW

The following discussion explains our financial condition and results of operations as of and for the three months and six months ended June 30, 2015. The purpose of this discussion is to focus on information about our 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 our Annual Report on Form 10-K for the year ended December 31, 2014 previously filed with the SEC. Annualized results for these interim periods may not be indicative of results for the full year or future periods.

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

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

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with GAAP requires management to make estimates, assumptions and judgments that affect the amounts reported in the consolidated financial statements. Our determination of (i) the provisions to and the adequacy of the allowance for loan and lease losses (“ALLL”), (ii) the fair value of our investment securities portfolio, (iii) the fair value of foreclosed assets 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 our other significant accounting policies. Accordingly, we consider the determination of (i) provisions to and the adequacy of the ALLL, (ii) the fair value of our investment securities portfolio, (iii) the fair value of foreclosed assets and (iv) the fair value of the assets acquired and liabilities assumed pursuant to business combination transactions to be critical accounting policies. A detailed discussion of each of these critical accounting policies is included in our Annual Report on Form 10-K for the year ended December 31, 2014. There has been no change in our critical accounting policies and no material change in the application of critical accounting policies as presented in our Annual Report on Form 10-K for the year ended December 31, 2014.

ANALYSIS OF RESULTS OF OPERATIONS

General

During the fourth quarter of 2014, we entered into agreements with the Federal Deposit Insurance Corporation (“FDIC”) terminating the loss share agreements for all seven of our FDIC-assisted acquisitions. As a result of entering these termination agreements, we reclassified loans previously reported as covered by FDIC loss share to purchased loans for all periods presented. Additionally, we reclassified all interest income on loans previously reported as covered by FDIC loss share to interest income on purchased loans for all periods presented.

Net income available to our common stockholders was $44.8 million for the second quarter of 2015, a 69.1% increase from $26.5 million for the second quarter of 2014. Diluted earnings per common share were $0.51 for the second quarter of 2015, a 50.0% increase from $0.34 for the second quarter of 2014. For the first six months of 2015, net income available to common stockholders was $84.7 million, a 63.6% increase from $51.8 million for the first six months of 2014. Diluted earnings per common share for the first six months of 2015 were $0.98, a 44.1% increase from $0.68 for the first six months of 2014.

Our annualized return on average assets was 2.17% for the second quarter of 2015 compared to 1.88% for the second quarter of 2014. Our annualized return on average common stockholders’ equity was 15.07% for the second quarter of 2015 compared to 14.17% for the second quarter of 2014. Our annualized return on average tangible common stockholders’ equity was 17.27% for the second quarter of 2015 compared to 15.41% for the second quarter of 2014. Our annualized return on average assets was 2.15% for the first six months of 2015 compared to 1.99% for the first six months of 2014. Our annualized return on average common stockholders’ equity was 15.23% for the first six months of 2015 compared to 14.99% for the first six months of 2014. Our annualized return on average tangible common stockholders’ equity was 17.43% for the first six months of 2015 compared to 15.90% for the first six months of 2014. The calculation of our return on average tangible common stockholders’ equity and the reconciliation to GAAP is included elsewhere in this MD&A.

Total assets were $8.71 billion at June 30, 2015 compared to $6.77 billion at December 31, 2014. Non-purchased loans and leases were $4.77 billion at June 30, 2015 compared to $3.98 billion at December 31, 2014. Purchased loans were $1.83 billion at June 30, 2015 compared to $1.15 billion at December 31, 2015. Total loans and leases were $6.59 billion at June 30, 2015 compared to $5.13 billion at December 31, 2014. Deposits were $7.09 billion at June 30, 2015 compared to $5.50 billion at December 31, 2014.

 

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Common stockholders’ equity was $1.21 billion at June 30, 2015 compared to $908 million at December 31, 2014. Tangible common stockholders’ equity was $1.06 billion at June 20, 2015 compared to $803 million at December 31, 2014. Book value per common share was $13.93 at June 30, 2015 compared to $11.37 at December 31, 2014. Tangible book value per common share was $12.19 at June 30, 2015 compared to $10.04 at December 31, 2014. The calculation of our tangible common stockholders’ equity and tangible book value per common share and the reconciliation to GAAP is included elsewhere in this MD&A.

On March 5, 2014, we completed our acquisition of Bancshares, Inc. (“Bancshares”). Our consolidated results of operations include the acquired operations of Bancshares beginning March 6, 2014.

On May 16, 2014, we completed our acquisition of Summit Bancorp, Inc. (“Summit”). Our consolidated results of operations include the acquired operations of Summit beginning May 17, 2014.

On February 10, 2015, we completed our acquisition of Intervest Bancshares Corporation (“Intervest”). Our consolidated results of operations include the acquired operations of Intervest beginning February 11, 2015. During the second quarter of 2015, we revised our initial estimates regarding the recovery of certain acquired loans and acquired deferred tax assets in the Intervest acquisition. Because such revision occurred during the first 12 months following the date of acquisition and was not the result of a change in circumstances, management has recast the consolidated financial statements as of and for the three months ended March 31, 2015 to decrease the goodwill recorded in the Intervest acquisition by $2.7 million to reflect this change in estimate. The fair value adjustments and resultant fair values recorded in the Intervest acquisition continue to be evaluated and may be subject to further adjustments.

A summary of the Bancshares, Summit and Intervest acquisitions is included in Note 3 to the Consolidated Financial Statements included elsewhere in this quarterly report on Form 10-Q.

On August 5, 2015, we completed our acquisition of Bank of the Carolinas Corporation (“BCAR”) and its wholly-owned subsidiary, Bank of the Carolinas. The acquired operations of BCAR will be included in our operating results beginning August 6, 2015.

Net Interest Income

Net interest income is a significant source of our 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 and net interest margin are 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 our statutory federal income tax rate of 35%. The FTE adjustments to net interest income were $2.6 million and $2.7 million for the quarters ended June 30, 2015 and 2014, respectively, and $5.1 million and $5.2 million for the six months ended June 30, 2015 and 2014, respectively. No adjustments have been made in this analysis for income exempt from state income taxes or for interest expense deductions disallowed under the provisions of the Internal Revenue Code (the “Code”) as a result of investment in certain tax-exempt securities.

Net interest income for the second quarter of 2015 increased 42.6% to $96.3 million compared to $67.5 million for the second quarter of 2014. Net interest income for the first six months of 2015 increased 50.7% to $184.4 million compared to $122.4 million for the first six months of 2014. This increase in net interest income for the second quarter and first six months of 2015 compared to the same periods in 2014 was primarily due to the increase in average earning assets, which increased 49.2% to $7.20 billion for the second quarter of 2015, and 55.0% to $6.89 billion for the first six months of 2015, compared to $4.82 billion for the second quarter and $4.45 billion for the first six months of 2014, partially offset by decreases in our net interest margin. Our net interest margin for the second quarter of 2015 decreased 25 basis points (“bps”) to 5.37% compared to 5.62% for the second quarter in 2014. This decrease was primarily due to a 31 bps decrease in the yield on earning assets, partially offset by a seven bps reduction in rates paid on interest bearing liabilities. Our net interest margin for the first six months of 2015 decreased 16 bps to 5.39% compared to 5.55% for the first six months of 2014. This decrease was primarily due to a 23 bps decrease in the yield on earning assets, partially offset by a nine bps reduction in the rates paid on interest bearing liabilities.

Yields on earning assets decreased to 5.72% for the second quarter and 5.75% for the first six months of 2015 compared to 6.03% for the second quarter and 5.98% for the first six months of 2014 primarily due to the decrease in yields on our purchased loan portfolio and decreases in the yield on our aggregate investment securities portfolio. The yield on our purchased loan portfolio decreased 173 bps for the second quarter and 156 bps for the first six months of 2015 compared to the same periods in 2014. These decreases were partially offset by the increase in the average balance of purchased loans which comprised 27.0% and 26.2%, respectively, of average earning assets for the second quarter and six months ended June 30, 2015, compared to 22.9% and 20.7%, respectively, of average earnings assets for the same periods in 2014. The decreases in yield on purchased loans were primarily attributable to the loans acquired in the Summit and Intervest transactions, 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 then existing yield on our purchased loan portfolio. This decrease in yield on purchased loans was partially offset by the increase in the yield on certain purchased loans with evidence of credit deterioration on the date of acquisition due to upward revisions of estimated cash flows as a result of recent evaluations of the expected performance of such loans. The yield on our aggregate investment securities portfolio decreased 13 bps for

 

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the second quarter and 15 bps for the first six months of 2015 compared to the same periods in 2014. This decrease was primarily the result of (i) a change in the composition of our investment securities portfolio to include a larger percentage of lower yielding taxable investment securities, which comprised 45.8% of total average investment securities for the second quarter of 2015 and 44.6% for the first six months of 2015 compared to 40.5% for the second quarter in 2014 and 40.6% for the first six months of 2014 and (ii) the current 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 current low interest rate environment continues, we expect 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 our tax-exempt investment securities portfolio.

The overall decrease in rates on average interest bearing liabilities was primarily due to a shift in the composition of total interest bearing liabilities to include a larger percentage of lower rate interest bearing deposits, which comprised 94.0% of total average interest bearing liabilities for the second quarter and 93.6% for the first six months of 2015 compared to 89.6% for the second quarter and 88.7% for the first six months of 2014, partially offset by an increase in rates on interest bearing time deposits. The increase in interest bearing deposits as a percentage of total interest bearing liabilities is primarily due to interest bearing deposits assumed in the Summit and Intervest transactions, growth in interest bearing deposits as a result of increased deposit pricing in several target markets and the prepayment of $120 million of other borrowings, partially offset by the assumption of $52.2 million of subordinated debentures assumed in the Intervest transaction. The eight bps increase in rates on interest bearing time deposits for the second quarter of 2015 and first six months of 2015 compared to the second quarter of 2014 and first six months of 2014 is primarily due to a shift in the composition of interest bearing deposits to a larger percentage of higher rate time deposits as a result of the Intervest acquisition. The average balance of time deposits increased from 28.6% of total average interest bearing deposits for the second quarter of 2014 to 39.8% for the second quarter of 2015 and 28.6% for the first six months of 2014 to 38.8% for the first six months of 2015. Additionally, throughout much of 2014, we increased deposit pricing in several target markets to fund growth in loans and leases. To the extent we have future growth in loans and leases, we would expect to increase deposit pricing in certain target markets to fund such growth. Any such increase in deposit pricing is expected to result in increased deposit costs in future periods.

Our other borrowing sources include (i) repurchase agreements with customers (“repos”), (ii) other borrowings comprised primarily of Federal Home Loan Bank of Dallas (“FHLB”) advances, and, to a lesser extent, Federal Reserve Bank (“FRB”) borrowings and federal funds purchased and (iii) subordinated debentures. The rates on repos increased two bps for the second quarter and the first six months of 2015 compared to the same periods of 2014. The rates on our other borrowing sources, which consist primarily of fixed rate callable FHLB advances, decreased 26 bps in the second quarter and 22 bps for the first six months of 2015 compared to the same periods of 2014. This decrease in rates on other borrowings is primarily the result of our prepaying $90 million of fixed rate callable FHLB advances with a weighted average interest rate of 4.13% during the fourth quarter of 2014, and our prepaying $30 million of fixed rate callable FHLB advances with a weighted average interest rate of 4.07% during the first quarter of 2015. The weighted average interest rate on our remaining $160 million of fixed rate callable FHLB advances is approximately 3.54%. The rates paid on our subordinated debentures, which are tied to a spread over the 90-day London Interbank Offered Rate (“LIBOR”) and reset periodically, increased 67 bps in the second quarter and 60 bps for the first six months of 2015 compared to the same periods of 2014. This increase in rates on our subordinated debentures is primarily due to the $52.2 million of subordinated debentures assumed in the Intervest transaction, which, net of amortization of the discount of the purchase accounting adjustments, had a weighted average interest rate of 4.13% at June 30, 2015.

The increase in average earning assets for the second quarter and first six months of 2015 compared to the same periods in 2014 was due to an increase in the average balances of non-purchased loans and leases of $1.56 billion for the second quarter and $1.49 billion for the first six months of 2015 compared to the same periods in 2014. Additionally, the average balance of purchased loans increased $0.84 billion for the second quarter and $0.89 billion during the first six months of 2015 compared to the second quarter and first six months of 2014, primarily as a result of the Intervest acquisition.

The following table sets forth certain information relating to our 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 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 investment securities include amortization of premiums and accretion of discounts. The average balance of non-purchased loans and leases includes non-purchased loans and leases on which we have discontinued accruing interest. The yields on non-purchased loans and leases and purchased loans without evidence of credit deterioration at date of acquisition include late fees and amortization of certain deferred fees, origination costs and, for such purchased loans, accretion or amortization of any purchase accounting yield adjustment, which are considered adjustments to yields. The yields on purchased loans with evidence of credit deterioration at date of acquisition consist of 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. The interest expense on the subordinated debentures assumed in the Intervest transaction includes the amortization of purchase accounting adjustments, using the level yield method, over the estimated holding period of eight years.

 

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Average Consolidated Balance Sheets and Net Interest Analysis – FTE

 

		Three Months Ended June 30,																								Six Months Ended June 30,
		2015												2014												2015												2014
		Average Balance				Income/ Expense				Yield/ Rate				Average Balance				Income/ Expense				Yield/ Rate				Average Balance				Income/ Expense				Yield/ Rate				Average Balance				Income/ Expense				Yield/ Rate
		(Dollars in thousands)
ASSETS
Earning assets:
Interest earning deposits and federal funds sold		$	2,898			$	18				2.51	%		$	12,398			$	35				1.14	%		$	2,716			$	27				2.01	%		$	6,770			$	38				1.14	%
Investment securities:
Taxable			358,907				3,230				3.61				320,298				2,790				3.49				358,163				6,715				3.78				298,551				5,149				3.48
Tax-exempt – FTE			424,553				6,856				6.48				471,001				7,652				6.52				444,781				14,038				6.36				437,364				14,416				6.65
Non-purchased loans and leases – FTE			4,468,971				56,789				5.10				2,913,816				36,892				5.08				4,280,175				107,278				5.05				2,785,645				70,358				5.09
Purchased loans			1,941,271				35,762				7.39				1,105,244				25,128				9.12				1,809,016				68,622				7.65				919,404				42,013				9.21
Total earning assets – FTE			7,196,600				102,655				5.72				4,822,757				72,497				6.03				6,894,851				196,680				5.75				4,447,734				131,974				5.98
Non-interest earning assets			1,086,423												837,379												1,050,327												799,487
Total assets		$	8,283,023											$	5,660,136											$	7,945,178											$	5,247,221
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest bearing liabilities:
Deposits:
Savings and interest bearing transaction		$	3,261,928			$	1,638				0.20	%		$	2,484,649			$	1,271				0.21	%		$	3,182,841			$	3,188				0.20	%		$	2,291,407			$	2,337				0.21	%
Time deposits of $100,00 or more			1,254,844				1,373				0.44				488,265				281				0.23				1,181,143				2,671				0.46				435,850				516				0.24
Other time deposits			900,283				906				0.40				505,260				275				0.22				835,968				1,595				0.38				481,887				555				0.23
Total interest bearing deposits			5,417,055				3,917				0.29				3,478,174				1,827				0.21				5,199,952				7,454				0.29				3,209,144				3,408				0.21
Repurchase agreements with customers			68,656				19				0.11				58,607				13				0.09				73,091				36				0.10				61,808				25				0.08
Other borrowings			161,652				1,443				3.58				281,009				2,692				3.84				175,148				3,146				3.62				280,968				5,347				3.84
Subordinated debentures			117,325				968				3.31				64,950				427				2.64				105,431				1,676				3.21				64,950				840				2.61
Total interest bearing liabilities			5,764,688				6,347				0.44				3,882,740				4,959				0.51				5,553,622				12,312				0.45				3,616,870				9,620				0.54
Non-interest bearing liabilities:
Non-interest bearing deposits			1,279,202												964,935												1,225,379												878,349
Other non-interest bearing liabilities			43,837												59,311												41,471												52,180
Total liabilities			7,087,727												4,906,986												6,820,472												4,547,399
Common stockholders’ equity			1,191,798												749,692												1,121,225												696,360
Noncontrolling interest			3,498												3,458												3,481												3,462
Total liabilities and stockholders’ equity		$	8,283,023											$	5,660,136											$	7,945,178											$	5,247,221
Net interest income – FTE						$	96,308											$	67,538											$	184,368											$	122,354
Net interest margin – FTE											5.37	%											5.62	%											5.39	%											5.55	%

 

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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 our interest income - FTE, interest expense and net interest income - FTE for the periods indicated. Information is provided in each category with respect to changes attributable to (1) changes in volume (changes in volume multiplied by prior yield/rate); (2) changes in yield/rate (changes in yield/rate multiplied by prior volume); and (3) changes in both yield/rate and volume (changes in yield/rate multiplied by changes in volume). The changes attributable to the combined impact of volume and yield/rate have all been allocated to the changes due to volume.

Analysis of Changes in Net Interest Income – FTE

 

		Three Months Ended June 30, 2015 Over Three Months Ended June 30, 2014												Six Months Ended June 30, 2015 Over Six Months Ended June 30, 2014
						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		$	(59	)		$	42			$	(17	)		$	(40	)		$	29			$	(11	)
Investment securities:
Taxable			347				93				440				1,118				448				1,566
Tax-exempt – FTE			(750	)			(46	)			(796	)			235				(613	)			(378	)
Non-purchased loans and leases – FTE			19,762				135				19,897				37,458				(538	)			36,920
Purchased loans			15,401				(4,767	)			10,634				33,745				(7,136	)			26,609
Total interest income – FTE			34,701				(4,543	)			30,158				72,516				(7,810	)			64,706
Interest expense:
Savings and interest bearing transaction			390				(23	)			367				893				(42	)			851
Time deposits of $100,000 or more			839				253				1,092				1,686				469				2,155
Other time deposits			398				233				631				675				365				1,040
Repurchase agreements with customers			3				4				7				6				5				11
Other borrowings			(1,065	)			(185	)			(1,250	)			(1,900	)			(301	)			(2,201	)
Subordinated debentures			432				109				541				642				194				836
Total interest expense			997				391				1,388				2,002				690				2,692
Increase (decrease) in net interest income – FTE		$	33,704			$	(4,934	)		$	28,770			$	70,514			$	(8,500	)		$	62,014

Non-Interest Income

Our non-interest income consists primarily of, among others, service charges on deposit accounts, mortgage lending income, trust income, BOLI income, other income from purchased loans, gains on investment securities and on sales of other assets and gains on merger and acquisition transactions.

Non-interest income for the second quarter of 2015 increased 33.8% to $23.3 million compared to $17.4 million for the second quarter of 2014. Non-interest income for the first six months of 2015 increased 38.6% to $52.3 million compared to $37.7 million for the first six months of 2014. Non-interest income for the first six months of 2014 included $4.7 million of tax-exempt bargain purchase gain from the acquisition of Bancshares. There were no bargain purchase gains during the first six months of 2015.

Service charges on deposit accounts increased 7.3% to $7.1 million for the second quarter of 2015 compared to $6.6 million for the second quarter of 2014. Service charges on deposit accounts increased 12.0% to $13.7 million in the first six months of 2015 compared to $12.2 million in the first six months of 2014. 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 our Summit acquisition, and, to a lesser extent, our Intervest acquisition.

Mortgage lending income increased 57.4% to $1.8 million for the second quarter of 2015 compared to $1.1 million for the second quarter of 2014. Mortgage lending income increased 57.6% to $3.3 million in the first six months of 2015 compared to $2.1 million in the first six months of 2014. The volume of originations of mortgage loans available for sale increased 43.5% to $73.8 million for the second quarter of 2015 compared to $51.4 million for the second quarter of 2014. The volume of originations of mortgage loans available for sale increased 51.2% to $136.3 million for the first six months of 2015 compared to $90.1 million for the first six months of 2014.

Trust income increased 7.3% to $1.5 million for the second quarter of 2015 compared to $1.4 million for the second quarter of 2014. Trust income increased 8.0% to $2.9 million for the first six months of 2015, compared to $2.7 million for the first six months of 2014.

 

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BOLI income increased 39.7% to $1.8 million for the second quarter of 2015 compared to $1.3 million for the second quarter of 2014, primarily due to $85 million of BOLI purchased in May 2015. BOLI income increased 124.5% to $5.4 million for the first six months of 2015 compared to $2.4 million for the first six months of 2014, primarily due to $2.3 million in BOLI death benefits received in the first quarter of 2015 and $85 million of BOLI purchased in May 2015.

During the fourth quarter of 2014, we entered into agreements with the FDIC terminating the loss share agreements for all seven of our FDIC-assisted acquisitions. As a result, we had no net accretion (amortization) of the FDIC loss share receivable and FDIC clawback payable in the second quarter and first six months of 2015 compared to ($0.7) million of net amortization expense in the second quarter of 2014 and ($49,000) of net amortization expense for the first six months of 2014.

Other income from purchased loans was $7.0 million in the second quarter of 2015 compared to $3.6 million in the second quarter of 2014 and $15.9 million during the first six months of 2015 compared to $6.9 million during the first six months of 2014. Net gains on sales of other assets were $2.6 million in the second quarter of 2015 compared to $1.4 million in the second quarter of 2014 and $5.4 million during the first six months of 2015 compared to $2.4 million during the first six months of 2014. The increases in other income from purchased loans and net gains on sales of other assets are, in part, attributable to our having terminated the loss share agreements with the FDIC. Subsequent to the termination of such loss share agreements, all recoveries, gains, charge-offs, losses and expenses related to the previously covered assets are recognized entirely by us, since the FDIC no longer shares in such items. Accordingly, our earnings are positively impacted to the extent we recognize recoveries in excess of the carrying value of such assets and gains on any sales. Conversely, our earnings are negatively impacted to the extent we recognize charge-offs, losses on any sales and expenses related to such assets.

Net gains on investment securities were $85,000 in the second quarter of 2015 compared to $18,000 in the second quarter of 2014 and $2.6 million during the first six months of 2015 compared to $23,000 during the first six months of 2014. During the first quarter of 2015, we sold certain of our longer term municipal bonds resulting in proceeds of $30.1 million and the net gains of $2.5 million. We utilized such proceeds to prepay $30.0 million of our highest rate callable FHLB advances resulting in prepayment penalties of $2.5 million. These transactions were executed for various reasons, including reducing interest rate risk, increasing secondary sources of liquidity and more efficiently allocating capital.

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

Non-Interest Income

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2015				2014				2015				2014
		(Dollars in thousands)
Service charges on deposit accounts		$	7,088			$	6,605			$	13,715			$	12,244
Mortgage lending income			1,772				1,126				3,279				2,080
Trust income			1,463				1,364				2,895				2,681
BOLI income			1,785				1,278				5,407				2,408
Net accretion of FDIC loss share receivable and FDIC clawback payable			—				(741	)			—				(49	)
Other income from purchased loans, net			6,971				3,629				15,879				6,940
Gains on investment securities			85				18				2,618				23
Gains on sales of other assets			2,557				1,448				5,385				2,422
Gain on merger and acquisition transaction			—				—				—				4,667
Other			1,549				2,661				3,159				4,333
Total non-interest income		$	23,270			$	17,388			$	52,337			$	37,749

Non-Interest Expense

Our non-interest expense consists of salaries and employee benefits, net occupancy and equipment and other operating expenses. Non-interest expense increased 15.4% to $43.7 million for the second quarter of 2015 compared to $37.9 million for the second quarter of 2014. Non-interest expense increased 24.7% to $93.9 million for the first six months of 2015 compared to $75.3 million for the first six months of 2014. During the second quarter of 2015, our non-interest expense included approximately $1.6 million of acquisition-related and systems conversion expenses. During the second quarter of 2014, our non-interest expense included approximately $0.8 million of acquisition-related and systems conversion expenses. During the first six months of 2015, our non-interest expense included $2.5 million in FHLB advance prepayment penalties, $2.8 million of acquisition-related and systems conversion expenses and $0.7 million of software and contract termination charges. During the first six months of 2014, our non-interest expense included $1.5 million of acquisition-related and systems conversion expenses and $5.0 million of software and contract termination charges. The software and contract termination charges are included in other non-interest expense in the table below.

 

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Salaries and employee benefits, our largest component of non-interest expense, increased 20.3% to $22.6 million in the second quarter of 2015 compared to $18.8 million in the second quarter of 2014. Salaries and employee benefits increased 23.9% to $45.2 million for the first six months of 2015 compared to $36.5 million for the first six months of 2014. We had 1,572 full-time equivalent employees at June 30, 2015 compared to 1,528 full-time equivalent employees at June 30, 2014. The increase in our salaries and employee benefits for both the second quarter and first six months of 2015 compared to the same periods in 2014, despite the decrease in number of full-time equivalent employees at June 30, 2015 compared to June 30, 2014, is primarily attributable to the timing of acquisitions and subsequent reductions or eliminations of personnel upon completion of acquired systems conversions.

Net occupancy and equipment expense for the second quarter of 2015 increased 28.7% to $7.3 million compared to $5.7 million for the second quarter of 2014. Net occupancy and equipment expense for the first six months of 2015 increased 36.1% to $14.6 million compared to $10.8 million for the first six months of 2014. At June 30, 2015 and 2014, we had 164 offices. The increase in net occupancy and equipment expense for the second quarter and first six months of 2015 compared to the same periods in 2014, despite having the same number of offices at both June 30, 2015 and 2014, is primarily attributable to the timing of acquisitions, any subsequent office closures and the effect of such on net occupancy and equipment expense.

Our efficiency ratio (non-interest expense divided by the sum of net interest income – FTE and non-interest income) was 36.6% for the second quarter and 39.7% for the first six months of 2015 compared to 44.6% for the second quarter and 47.1% for the first six months of 2014.

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

Non-Interest Expense

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2015				2014				2015				2014
		(Dollars in thousands)
Salaries and employee benefits		$	22,646			$	18,831			$	45,243			$	36,520
Net occupancy and equipment			7,344				5,707				14,635				10,751
Other operating expenses:
Postage and supplies			1,014				852				1,929				1,623
Advertising and public relations			586				636				1,169				1,036
Telecommunication services			1,616				1,191				2,964				2,207
Professional and outside services			2,526				2,353				6,912				4,526
Software and data processing			766				1,662				1,515				2,799
Travel and meals			821				629				1,617				1,169
FDIC insurance			900				555				1,650				1,105
FDIC and state assessments			331				218				641				431
ATM expense			543				307				1,251				516
Loan collection and repossession expense			1,020				1,528				2,753				1,987
Writedowns of foreclosed and other assets			235				798				2,427				877
Amortization of intangibles			1,640				1,119				3,236				1,932
FHLB prepayment penalties			—				—				2,480				—
Other			1,736				1,492				3,486				7,854
Total non-interest expense		$	43,724			$	37,878			$	93,908			$	75,333

Income Taxes

The provision for income taxes was $24.2 million for the second quarter and $42.3 million for the first six months of 2015 compared to $12.3 million for the second quarter and $21.0 million for the first six months of 2014. The effective income tax rate was 35.1% for the second quarter and 33.3% for the first six months of 2015 compared to 31.6% for the second quarter and 28.8% for the first six months of 2014. The increase in the effective tax rate for the second quarter and first six months of 2015 compared to the second quarter and first six months of 2014 was due primarily to the growth in income that is subject to federal and/or state income taxes. 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

Loan and Lease Portfolio

At June 30, 2015, our total loan and lease portfolio was $6.59 billion, including $4.76 billion of non-purchased loans and leases and $1.83 billion of purchased loans, compared to $5.13 billion of total loans and leases at December 31, 2014, including $3.98 billion of non-purchased loans and leases and $1.15 billion of purchased loans, and $4.57 billion of total loans and leases at June 30, 2014, including $3.17 billion of non-purchased loans and leases and $1.40 billion of purchased loans. Real estate loans, our 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 $6.02 billion at June 30, 2015 compared to $4.51 billion at December 31, 2014 and $4.03 billion at June 30, 2014. The amount and type of loans and leases outstanding as of the dates indicated, and their respective percentage of the total loan and lease portfolio are reflected in the following table.

Total Loan and Lease Portfolio

 

		June 30,																December 31,
		2015								2014								2014
		(Dollars in thousands)
Real estate:
Residential 1-4 family		$	645,967				9.8	%		$	657,595				14.4	%		$	638,958				12.5	%
Non-farm/non-residential			2,850,908				43.2				1,903,644				41.6				2,008,430				39.2
Construction/land development			1,961,983				29.8				1,185,245				25.9				1,511,614				29.5
Agricultural			80,402				1.2				106,172				2.3				95,223				1.9
Multifamily residential			477,014				7.2				179,270				3.9				253,590				4.9
Total real estate			6,016,274				91.2				4,031,926				88.1				4,507,815				88.0
Commercial and industrial			306,244				4.6				280,157				6.1				356,532				7.0
Consumer			34,890				0.5				54,543				1.2				40,937				0.8
Direct financing leases			137,146				2.1				98,768				2.2				115,475				2.2
Other			99,417				1.6				110,260				2.4				107,058				2.0
Total loans and leases		$	6,593,971				100.0	%		$	4,575,654				100.0	%		$	5,127,817				100.0	%

 

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The amount and type of our total real estate loans at June 30, 2015, based on the metropolitan statistical area (“MSA”) and other geographic areas in which the principal collateral is located, are reflected in the following table. Data for individual states and MSAs is separately presented when aggregate real estate loans in that state or MSA exceed $10.0 million.

Geographic Distribution of Total 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		$	162,692			$	284,226			$	99,893			$	9,895			$	27,005			$	583,711
Hot Springs, AR MSA			55,239				99,121				21,355				536				15,923				192,174
Fayetteville–Springdale–Rogers, AR–MO MSA			12,448				65,258				16,962				3,932				3,219				101,819
Fort Smith, AR–OK MSA			21,860				50,694				8,308				1,786				6,864				89,512
Southern Arkansas (1)			35,714				32,340				3,901				10,750				2,180				84,885
Western Arkansas (2)			22,555				36,230				13,714				7,015				1,356				80,870
Northern Arkansas (3)			35,397				19,909				4,864				13,546				964				74,680
All other Arkansas (4)			17,309				20,371				7,996				15,932				2,877				64,485
Total Arkansas			363,214				608,149				176,993				63,392				60,388				1,272,136
New York:
New York–Newark–Jersey City, NY–NJ–PA MSA			2,742				589,518				343,962				—				147,943				1,084,165
All other New York(4)			102				3,882				—				—				1,796				5,780
Total New York			2,844				593,400				343,962				—				149,739				1,089,945
Texas:
Dallas–Fort Worth–Arlington, TX MSA			21,565				110,632				271,080				—				10,529				413,806
Houston–The Woodlands–Sugar Land, TX MSA			6,572				49,740				129,790				—				16,501				202,603
Austin–Round Rock, TX MSA			8,988				18,974				85,901				—				—				113,863
San Antonio–New Braunfels, TX MSA			1,620				5,814				27,614				—				1,209				36,257
Texarkana, TX–AR MSA			9,486				10,599				995				878				1,028				22,986
College Station–Bryan, TX MSA			169				—				—				—				17,350				17,519
Beaumont–Port Arthur, TX MSA			—				—				—				—				15,200				15,200
Corpus Christi, TX MSA			—				5,813				9,345				—				—				15,158
All other Texas (4)			1,212				20,401				3,210				—				658				25,481
Total Texas			49,612				221,973				527,935				878				62,475				862,873
California:
Los Angeles–Long Beach–Anaheim, CA MSA			—				207,563				50,549				—				—				258,112
San Francisco–Oakland–Hayward, CA MSA			—				135,169				112,171				—				—				247,340
Sacramento–Roseville– Arden–Arcade, CA MSA			—				—				52,935				—				—				52,935
Riverside–San Bernardino–Ontario, CA MSA			—				12,416				25,780				—				—				38,196
San Jose–Sunnyvale–Santa Clara, CA MSA			—				—				27,991				—				—				27,991
All other California(4)			414				4,969				15,276				—				—				20,659
Total California			414				360,117				284,702				—				—				645,233

 

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Geographic Distribution of Total Real Estate Loans (continued)

 

		Residential 1-4 Family				Non- Farm/Non- Residential				Construction /Land Development				Agricultural				Multifamily Residential				Total
		(Dollars in thousands)
Florida:
Miami–Fort Lauderdale–West Palm Beach, FL MSA			300				94,339				85,775				—				16,930				197,344
Tampa–St. Petersburg–Clearwater, FL MSA			9,661				37,418				5,615				—				18,110				70,804
North Port–Sarasota–Bradenton, FL MSA			9,800				16,227				5,549				—				240				31,816
Orlando–Kissimmee–Sanford, FL MSA			4,715				23,110				3,797				—				58				31,680
Tallahassee, FL MSA			—				—				25,130				—				—				25,130
Jacksonville, FL MSA			555				20,839				1,761				19				1,902				25,076
Sebring, FL MSA			—				22,347				—				—				17				22,364
Lakeland–Winter Haven, FL MSA			—				12,909				6,602				—				95				19,606
Deltona–Daytona Beach–Ormond Beach, FL MSA			2,575				15,868				505				—				—				18,948
Crestview–Fort Walton Beach–Destin, FL MSA			1,096				2,595				14,434				476				—				18,601
Palm Bay–Melbourne–Titusville, FL MSA			4,704				4,505				—				—				4,428				13,637
All other Florida(4)			10,136				93,337				10,897				1,082				5,882				121,334
Total Florida			43,542				343,494				160,065				1,577				47,662				596,340
North Carolina/South Carolina:
Charlotte–Concord–Gastonia, NC–SC MSA			44,260				102,095				42,886				315				8,978				198,534
North Carolina Foothills(5)			48,736				32,036				6,741				4,157				2,827				94,497
Wilmington, NC MSA			4,905				21,942				5,503				447				273				33,070
Myrtle Beach–North Myrtle Beach–Conway, SC–NC MSA			2,167				6,705				22,504				—				24				31,400
Charleston–North Charleston, SC MSA			1,680				4,757				4,846				—				5,585				16,868
Columbia, SC MSA			—				2,993				12,135				—				—				15,128
Florence, SC MSA			—				3,203				8,853				—				—				12,056
Hilton Head Island–Bluffton–Beaufort, SC MSA			4,428				5,082				1,584				—				—				11,094
All other N. Carolina (4)			4,372				40,672				35,151				—				923				81,118
All other S. Carolina (4)			1,133				15,105				141				—				7,273				23,652
Total N. Carolina/S. Carolina			111,681				234,590				140,344				4,919				25,883				517,417
Georgia:
Atlanta–Sandy Springs–Roswell, GA MSA			20,918				117,743				25,293				3,864				28,263				196,081
Savannah, GA MSA			5,865				24,849				1,406				—				—				32,120
Brunswick, GA MSA			10,500				3,701				727				—				—				14,928
Valdosta, GA MSA			7,110				1,650				622				490				727				10,599
All other Georgia (4)			11,688				34,074				5,405				3,108				222				54,497
Total Georgia			56,081				182,017				33,453				7,462				29,212				308,225
Tennessee:
Nashville–Davidson–Murfreesboro–Franklin, TN MSA			429				65,231				10,829				—				—				76,489
Memphis, TN–MS–AR MSA			281				9,225				—				370				11,052				20,928
All other Tennessee(4)			96				4,144				93				—				—				4,333
Total Tennessee			806				78,600				10,922				370				11,052				101,750

 

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Geographic Distribution of Total Real Estate Loans (continued)

 

		Residential 1-4 Family				Non- Farm/Non- Residential				Construction /Land Development				Agricultural				Multifamily Residential				Total
		(Dollars in thousands)
Arizona:
Phoenix–Mesa–Scottsdale, AZ MSA			—				87,535				3				—				—				87,538
All other Arizona(4)			—				2,676				—				—				—				2,676
Total Arizona			—				90,211				3				—				—				90,214
Pennsylvania:
Philadelphia–Camden–Wilmington, PA–NJ–DE–MD MSA			—				—				—				—				57,731				57,731
All other Pennsylvania(4)			—				7,299				—				—				—				7,299
Total Pennsylvania			—				7,299				—				—				57,731				65,030
Colorado:
Denver–Aurora–Lakewood, CO MSA			13				12,111				17,153				—				1				29,278
All other Colorado(4)			1,405				—				22,644				—				—				24,049
Total Colorado			1,418				12,111				39,797				—				1				53,327
Las Vegas–Henderson–Paradise, NV MSA			—				—				52,621				—				—				52,621
Illinois:
Chicago–Naperville–Elgin, IL–IN–WI MSA			2,251				1,931				42,424				—				—				46,606
All other Illinois(4)			—				—				5,233				—				—				5,233
Total Illinois			2,251				1,931				47,657				—				—				51,839
Washington–Arlington–Alexandria, DC–VA–MD–WV			—				4,332				41,635				—				—				45,967
Missouri:
St. Louis, MO–IL MSA			242				425				6,511				—				19,333				26,511
All other Missouri (4)			524				6,567				7,163				979				—				15,233
Total Missouri			766				6,992				13,674				979				19,333				41,744
Alabama:
Mobile, AL MSA			3,133				13,372				735				—				1,907				19,147
All other Alabama(4)			8,689				4,498				4,793				825				3,558				22,363
Total Alabama			11,822				17,870				5,528				825				5,465				41,510
Seattle–Tacoma–Bellevue, WA MSA			—				—				40,451				—				—				40,451
Providence–Warwick, RI–MA MSA			—				26,669				—				—				—				26,669
Oklahoma			677				2,175				13,706				—				4,053				20,611
Portland–Vancouver–Hillsboro, OR–WA MSA			—				—				16,166				—				1				16,167
Kentucky			—				16,086				—				—				—				16,086
Ohio			—				6,655				6,729				—				—				13,384
Connecticut			—				12,397				—				—				728				13,125
All other states (6)			839				23,840				5,640				—				3,291				33,610
Total real estate loans		$	645,967			$	2,850,908			$	1,961,983			$	80,402			$	477,014			$	6,016,274

 

(1)	This geographic area includes the following counties in southern Arkansas: Clark, Columbia, Hempstead and Hot Spring.

(2)	This geographic area includes the following counties in western Arkansas: Johnson, Logan, Pope and Yell.

(3)	This geographic area includes the following counties in northern Arkansas: Baxter, Boone, Marion, Newton, Searcy and Van Buren.

(4)	These geographic areas include all MSA and non-MSA areas that are not separately reported.

(5)	This geographic area includes the following counties in the North Carolina foothills: Cleveland, Rutherford and Lincoln.

(6)	Includes all states not separately presented above.

 

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

Total Non-Farm/Non-Residential Loans

 

		June 30,																December 31,
		2015								2014								2014
		(Dollars in thousands)
Retail, including shopping centers and strip centers		$	527,343				18.5	%		$	386,362				20.3	%		$	346,925				17.3	%
Churches and schools			117,913				4.1				130,751				6.9				104,746				5.2
Office, including medical offices			788,346				27.7				484,970				25.5				621,729				31.0
Office warehouse, warehouse and mini-storage			215,629				7.6				172,283				9.1				169,176				8.4
Gasoline stations and convenience stores			46,076				1.6				55,528				2.9				47,465				2.4
Hotels and motels			379,285				13.3				290,184				15.2				328,507				16.4
Restaurants and bars			50,398				1.8				54,404				2.9				43,084				2.1
Manufacturing and industrial facilities			58,929				2.1				65,996				3.5				76,897				3.8
Nursing homes and assisted living centers			59,465				2.1				54,221				2.8				52,409				2.6
Hospitals, surgery centers and other medical			72,355				2.5				54,954				2.9				54,469				2.7
Golf courses, entertainment and recreational facilities			14,614				0.5				17,883				0.9				16,729				0.8
Other non-farm/non residential			520,555				18.2				136,108				7.1				146,294				7.3
Total		$	2,850,908				100.0	%		$	1,903,644				100.0	%		$	2,008,430				100.0	%

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

Total Construction/Land Development Loans

 

		June 30,																December 31,
		2015								2014								2014
		(Dollars in thousands)
Unimproved land		$	303,901				15.5	%		$	194,816				16.4	%		$	272,197				18.0	%
Land development and lots:
1-4 family residential and multifamily			387,568				19.8				277,195				23.4				322,698				21.3
Non-residential			143,197				7.3				102,799				8.7				133,137				8.8
Construction:
1-4 family residential:
Owner occupied			30,163				1.5				21,006				1.8				25,482				1.7
Non-owner occupied:
Pre-sold			35,946				1.8				13,908				1.2				19,664				1.3
Speculative			70,698				3.6				69,781				5.9				75,252				5.0
Multifamily			503,826				25.7				304,637				25.6				354,966				23.5
Industrial, commercial and other			486,684				24.8				201,103				17.0				308,218				20.4
Total		$	1,961,983				100.0	%		$	1,185,245				100.0	%		$	1,511,614				100.0	%

 

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Many of our construction and development loans provide for the use of interest reserves. When we underwrite construction and development loans, we consider the expected total project costs, including hard costs such as land, site work and construction costs and soft costs such as architectural and engineering fees, closing costs, leasing commissions and construction period interest. Based on the total project costs and other factors, we determine the required borrower cash equity contribution and the maximum amount we are willing to loan. In the vast majority of cases, we require 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 us funding the loan later as the project progresses, and accordingly, we typically fund the majority of the construction period interest through loan advances. However, when we initially determine the borrower’s cash equity requirement, we typically require 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. We advanced construction period interest on construction and development loans totaling $12.2 million in the second quarter and $22.2 in the first six months of 2015. While we advanced these sums as part of the funding process, we believe that the borrowers in effect had in most cases already provided for these sums as part of their initial equity contribution. Specifically, the maximum committed balance of all construction and development loans which provide for the use of interest reserves at June 30, 2015 was approximately $4.9 billion, of which $1.7 billion was outstanding at June 30, 2015 and $3.2 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%, which means that the weighted average cash equity contributed on such loans, assuming such loans are ultimately fully advanced, will be approximately 46%. 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%.

The following table reflects total loans and leases as of June 30, 2015 grouped by expected amortizations, expected paydowns or the earliest repricing opportunity for floating rate loans. This cash flow or repricing schedule approximates our ability to reprice the outstanding principal of total loans and leases either by adjusting rates on existing loans and leases or reinvesting principal cash flow in new loans and leases. For non-purchased loans and leases and purchased loans without evidence of credit deterioration on the date of purchase, the table below reflects the earliest contractual repricing period. For purchased loans with evidence of credit deterioration at the date of purchase, the table below reflects estimated cash flows based on the most recent evaluation of each individual loan. Because income on purchased loans with evidence of credit deterioration on the date of acquisition is recognized by accretion of the discount of estimated cash flows, such loans are not considered to be floating or adjustable rate loans and are reported below as fixed rate loans.

Loan and Lease Cash Flows or Repricing

 

						Over 1				Over 2
		1 Year				Through				Through				Over
		or Less				2 Years				3 Years				3 Years				Total
		(Dollars in thousands)
Fixed rate		$	397,973			$	389,435			$	506,604			$	1,456,184			$	2,750,196
Floating rate (not at a floor or ceiling rate)			830,196				6,816				1,916				3,721				842,649
Floating rate (at floor rate)(1)			2,940,503				12,617				9,073				38,933				3,001,126
Floating rate (at ceiling rate)			—				—				—				—				—
Total		$	4,168,672			$	408,868			$	517,593			$	1,498,838			$	6,593,971
Percentage of total			63.2	%			6.2	%			7.8	%			22.8	%			100.0	%
Cumulative percentage of total			63.2				69.4				77.2				100.0

 

(1)

We have included a floor rate in many of our 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 elsewhere in this MD&A include consideration of the impact of all interest rate floors and ceilings in loans and leases.

 

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Purchased Loans

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

Purchased Loans

 

		June 30,								December 31,
		2015				2014				2014
		(Dollars in thousands)
Loans without evidence of credit deterioration at date of purchase:
Unpaid principal balance		$	1,586,661			$	1,079,330			$	889,218
Valuation discount			(24,549	)			(24,676	)			(17,751	)
Carrying value			1,562,112				1,054,654				871,467
Loans with evidence of credit deterioration at date of purchase:
Unpaid principal balance			355,028				482,272				374,001
Valuation discount			(90,292	)			(132,857	)			(97,521	)
Carrying value			264,736				349,415				276,480
Total carrying value		$	1,826,848			$	1,404,069			$	1,147,947

On February 10, 2015, the date we closed our Intervest acquisition, each outstanding loan in Intervest’s loan portfolio was categorized into (i) a loan without evidence of credit deterioration or (ii) a loan 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 loans without evidence of credit deterioration in the Intervest acquisition.

Fair Value Adjustments for Purchased

Loans Without Evidence of Credit Deterioration

at Date of Intervest Acquisition

 

Risk Category		Unpaid Principal Balance				Fair Value Adjustment				Day 1 Fair Value				Weighted Average Fair Value Adjustment (in bps)
		(Dollars in thousands)
FV 33		$	83,210			$	(690	)		$	82,520				83
FV 44			804,604				(10,961	)			793,643				136
FV 55			144,195				(3,109	)			141,086				216
FV 36			—				—				—				—
Total		$	1,032,009			$	(14,760	)		$	1,017,249				143

The following grades are used for purchased 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, if any, 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.

 

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The following table is a summary of the loans acquired in the Intervest acquisition with evidence of credit deterioration at the date of acquisition.

Fair Value Adjustments for

Purchased Loans With Evidence of

Credit Deterioration at Date of Intervest Acquisition

 

		As of February 10, 2015
		(Dollars in thousands)
Contractually required principal and interest		$	88,490
Nonaccretable difference			(16,649	)
Cash flows expected to be collected			71,841
Accretable difference			(10,126	)
Day 1 Fair Value		$	61,715

The following table presents a summary, for the periods indicated, of the activity of our purchased loans with evidence of credit deterioration at the date of acquisition.

Activity in Purchased Loans

With Evidence of Credit Deterioration

 

		Six Months Ended June 30,
		2015				2014
		(Dollars in thousands)
Balance – beginning of period		$	276,480			$	392,421
Accretion			21,496				22,650
Purchased loans acquired			61,715				40,035
Transfer to foreclosed assets			(4,395	)			(25,325	)
Payments received			(89,289	)			(75,600	)
Charge-offs			(1,497	)			(5,237	)
Other activity, net			226				471
Balance – end of period		$	264,736			$	349,415

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

Accretable Difference on Purchased Loans

With Evidence of Credit Deterioration

 

		Six Months Ended June 30,
		2015				2014
		(Dollars in thousands)
Accretable difference at January 1		$	74,167			$	83,455
Transfer to foreclosed assets			(308	)			(771	)
Purchased loans paid off			(12,423	)			(8,479	)
Cash flow revisions as a result of renewals and/or modifications			19,212				31,125
Accretable difference acquired			10,126				6,732
Accretion			(21,496	)			(22,650	)
Other, net			—				(508	)
Accretable difference at June 30		$	69,278			$	88,904

 

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Nonperforming Assets

Non-Purchased Loans and Leases and Foreclosed Assets

Our 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 us 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 loans are not included in the following table as nonperforming assets, except for their inclusion in total assets, but are analyzed and discussed separately elsewhere in this MD&A.

The accrual of interest on non-purchased loans and leases is discontinued when, in management’s opinion, the borrower or lessee may be unable to meet payments as they become due. We generally place a loan or lease on nonaccrual status when such loan or lease is (i) deemed impaired or (ii) 90 days or more past due, or earlier when doubt exists as to the ultimate collection of payments. We 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 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 we reasonably expect 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) we have granted a concession to the borrower 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.

The following table presents a summary of nonperforming assets, excluding purchased loans, as of the dates indicated.

Nonperforming Assets

 

		June 30,								December 31,
		2015				2014				2014
		(Dollars in thousands)
Nonaccrual non-purchased loans and leases		$	16,281			$	18,393			$	21,085
Accruing non-purchased loans and leases 90 days or more past due			—				—				—
TDRs			—				—				—
Total nonperforming non-purchased loans and leases			16,281				18,393				21,085
Foreclosed assets(1) (2)			25,973				20,581				37,775
Total nonperforming assets(2)		$	42,254			$	38,974			$	58,860
Nonperforming loans and leases to total loans and leases(3)			0.34	%			0.58	%			0.53	%
Nonperforming assets to total assets(2) (3)			0.49				1.19				0.87

 

(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)

As a result of terminating our loss share agreements with the FDIC during the fourth quarter of 2014, we reclassified foreclosed assets previously reported as covered by FDIC loss share to foreclosed assets for all prior periods. All prior period ratios of nonperforming assets to total assets have been recalculated to include foreclosed assets previously covered by FDIC loss share as nonperforming assets.

(3)	Excludes purchased loans 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, we seek to establish an appropriate value for the collateral. This assessment may include (i) obtaining an updated appraisal, (ii) obtaining one or more broker price opinions or comprehensive market analyses, (iii) internal evaluations or (iv) other methods deemed appropriate considering the size and complexity of the loan and the underlying collateral. On an ongoing basis, typically at least quarterly, we evaluate the underlying collateral on all impaired loans and leases and, if needed, due to changes in market or property conditions, the underlying collateral is reassessed and the estimated fair value is revised. The determination of collateral value includes any adjustments considered necessary related to estimated holding periods and estimated selling costs.

At June 30, 2015, we had reduced the carrying value of our non-purchased loans and leases deemed impaired (all of which were included in nonaccrual loans and leases) by $5.0 million to the estimated fair value of such loans and leases of $12.8 million. The adjustment to reduce the carrying value of such impaired loans and leases to estimated fair value consisted of $3.6 million of partial charge-offs and $1.4 million of specific loan and lease loss allocations. These amounts do not include our $12.3 million of impaired purchased loans at June 30, 2015.

 

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The following table is a summary of the amount and type of foreclosed assets as of the dates indicated.

Foreclosed Assets

 

		June 30,								December 31,
		2015				2014				2014
		(Dollars in thousands)
Real estate:
Residential 1-4 family		$	4,597			$	9,109			$	7,909
Non-farm/non-residential			10,984				25,401				17,305
Construction/land development			9,857				21,280				10,998
Agricultural			405				452				728
Multifamily residential			—				—				772
Total real estate			25,843				56,242				37,712
Commercial and industrial			130				103				56
Consumer			—				11				7
Total foreclosed assets		$	25,973			$	56,356			$	37,775

The following table presents information concerning the geographic location of nonperforming assets, excluding purchased loans, at June 30, 2015. Nonaccrual loans and leases are reported in the physical location of the principal collateral. Foreclosed assets are reported in the physical location of the asset. Repossessions are reported at the physical location where the borrower resided or had its principal place of business at the time of repossession.

Geographic Distribution of Nonperforming Assets

 

		Nonperforming Loans and Leases				Foreclosed Assets and Repossessions				Total Nonperforming Assets
		(Dollars in thousands)
Arkansas		$	12,893			$	10,095			$	22,988
Georgia			334				7,322				7,656
North Carolina			1,067				4,641				5,708
Florida			1,653				1,664				3,317
Texas			231				1,143				1,374
Alabama			20				778				798
South Carolina			—				310				310
All other			83				20				103
Total		$	16,281			$	25,973			$	42,254

Purchased Loans

Purchased loans without evidence of credit deterioration at the date of acquisition are reviewed subsequent to the date of acquisition any time a loan is renewed or extended or at any time information becomes available to us 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 we 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 we will not be able to collect all amounts according to the contractual terms thereon, such loan is considered impaired and is considered in the determination of the required level of ALLL.

Purchased loans with evidence of credit deterioration on the date of purchase are reviewed (i) any time a loan is renewed or extended, (ii) at any other time additional information becomes available to us that provides material additional insight regarding a loan’s performance, the status of the borrower, or the quality or value of the underlying collateral, or (iii) in conjunction with the annual review of projected cash flows of each acquired portfolio. We separately review the performance of the portfolio of purchased 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 our initial expectations established in conjunction with the determination of the Day 1 Fair Values or since our most recent review of such portfolio’s performance. To the extent that a purchased loan with evidence of credit deterioration on the date of purchase is performing in accordance with or exceeding our 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, nonperforming or impaired loan, and is not considered in the determination of the required ALLL. To the extent that the performance of a purchased loan with evidence of credit deterioration on the date of purchase has deteriorated from our expectation established in conjunction with the determination of the Day 1 Fair Values, such loan is rated FV88, is included in certain of our credit quality metrics, is considered an impaired loan, and is considered in the determination of the required level of ALLL.

 

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The following table presents a summary of our impaired purchased loans as of the dates indicated.

Impaired Purchased Loans

 

		June 30,								December 31,
		2015				2014				2014
		(Dollars in thousands)
Impaired purchased loans without evidence of credit deterioration (rated FV 77)		$	533			$	86			$	748
Impaired purchased loans with evidence of credit deterioration (rated FV 88)			11,814				21,119				13,292
Total impaired purchased loans		$	12,347			$	21,205			$	14,040
Impaired purchased loans to total purchased loans			0.68	%			1.51	%			1.22	%

As of June 30, 2015 and 2014 and December 31, 2014, we had identified purchased loans where we had determined it was probable that we would be unable to collect all amounts according to the contractual terms thereof (for purchased loans without evidence of credit deterioration at date of acquisition) or the expected performance of such loans had deteriorated from our performance expectations established in conjunction with the determination of the Day 1 Fair Values or since our most recent review of such portfolio’s performance (for purchased loans with evidence of credit deterioration at date of acquisition). As a result, we recorded partial charge-offs totaling $0.4 million for such loans during the second quarter and $1.7 million for the first six months of 2015 compared to $1.1 million during the second quarter and $1.3 for the first six months of 2014. We also recorded provision for loan and lease losses of $0.4 million during the second quarter and $1.7 million during the first six months of 2015 compared to $1.1 million during the second quarter and $1.3 million during the first six months of 2014 to cover such charge-offs. In addition to these charge-offs, we transferred certain of these purchased loans to foreclosed assets. As a result of these actions, we had $12.3 million of impaired purchased loans at June 30, 2015, compared to $21.2 million at June 30, 2014 and $14.0 million at December 31, 2014.

Allowance and Provision for Loan and Lease Losses

Our ALLL was $56.7 million, or 1.19% of total non-purchased loans and leases at June 30, 2015, compared to $52.9 million, or 1.33% of total non-purchased loans and leases at December 31, 2014 and $47.0 million, or 1.48% of total non-purchased loans and leases at June 30, 2014. We had no ALLL at June 30, 2015 and 2014 or December 31, 2014 for our (i) purchased loans without evidence of credit deterioration at the date of acquisition as management’s analysis of such individual loans resulted in no impairment or all identified impairment on such loans had been charged off, or (ii) purchased loans with evidence of credit deterioration at the date of acquisition as all such loans were performing in accordance with management’s expectations established in conjunction with the determination of the Day 1 Fair Values or 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. Our ALLL was equal to 349% of our total nonperforming non-purchased loans and leases at June 30, 2015, compared to 251% at December 31, 2014 and 255% at June 30, 2014.

The amount of provision to the ALLL is based on our analysis of the adequacy of the ALLL utilizing the criteria discussed in the Critical Accounting Policies section of our Annual Report on Form 10-K for the year ended December 31, 2014. The provision for loan and lease losses for the second quarter of 2015 was $4.3 million, including $3.9 million for non-purchased loans and leases and $0.4 million for purchased loans, compared to $5.6 million for the second quarter of 2014, including $4.5 million for non-purchased loans and leases and $1.1 million for purchased loans. The provision for loan and lease losses for the first six months of 2015 was $10.6 million, including $8.9 million for non-purchased loans and $1.7 million for purchased loans, compared to $6.9 million for the first six months of 2014, including $5.6 million for non-purchased loans and $1.3 million for purchased loans. The decrease in the provision for loan and lease loss during the second quarter of 2015 compared to the second quarter of 2014 was primarily due to a decrease in charge-offs associated with our non-purchased and purchased loans. The increase in the provision for loan and lease loss during the first six months of 2015 compared to the first six months of 2014 was due to an increase in charge-offs experienced during the first quarter of 2015 as well as the provision necessary to cover the growth of our non-purchased loan and lease portfolio.

Our provision to the ALLL for non-purchased loans and leases for the second quarter of 2015 is primarily the result of provision necessary to cover the growth of our non-purchased loan and lease portfolio, which increased $456.0 million during the second quarter of 2015. Our practice is to charge off any estimated loss as soon as we are able to identify and reasonably quantify such potential loss. Accordingly, only a small portion of our ALLL is needed for potential losses on non-performing loans. Our ALLL to non-purchased loans and leases has decreased to 1.19% at June 30, 2015, compared to 1.33% at December 31, 2014 and 1.48% at June 30, 2014 primarily as a result of the low level of net charge-offs in recent quarters and due to generally improving economic conditions in many of our markets. While we believe the ALLL at June 30, 2015 and related provision for the second quarter of 2015 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

 

		Six Months Ended June 30,								Year Ended December 31,
		2015				2014				2014
		(Dollars in thousands)
Balance, beginning of period		$	52,918			$	42,945			$	42,945
Non-purchased loans and leases charged off:
Real estate:
Residential 1-4 family			(621	)			(341	)			(577	)
Non-farm/non-residential			(324	)			(1,254	)			(1,357	)
Construction/land development			(771	)			(14	)			(638	)
Agricultural			(13	)			(15	)			(214	)
Multifamily residential			(208	)			—				—
Total real estate			(1,937	)			(1,624	)			(2,786	)
Commercial and industrial			(2,540	)			(422	)			(720	)
Consumer			(69	)			(97	)			(222	)
Direct financing leases			(341	)			(267	)			(602	)
Other			(688	)			(159	)			(793	)
Total non-purchased loans and leases charged off			(5,575	)			(2,569	)			(5,123	)
Recoveries of non-purchased loans and leases previously charged off:
Real estate:
Residential 1-4 family			21				71				135
Non-farm/non-residential			17				4				33
Construction/land development			37				8				11
Agricultural			—				11				14
Total real estate			75				94				193
Commercial and industrial			39				763				808
Consumer			42				36				80
Direct financing leases			13				14				49
Other			337				75				266
Total recoveries of non-purchased loans and leases previously charged off			506				982				1,396
Net non-purchased loans and leases charged off			(5,069	)			(1,587	)			(3,727	)
Purchased loans charged off, net			(1,723	)			(1,287	)			(3,215	)
Net charge-offs – total loans and leases			(6,792	)			(2,874	)			(6,942	)
Provision for loan and lease losses:
Non-purchased loans and leases			8,900				5,600				13,700
Purchased loans			1,723				1,287				3,215
Total provision			10,623				6,887				16,915
Balance, end of period		$	56,749			$	46,958			$	52,918
Net charge-offs of non-purchased loans and leases to average non-purchased loans and leases (1)			0.24	%(2)			0.11	%(2)			0.12	%
Net charge-offs of purchased loans to average purchased loans			0.19	%(2)			0.28	%(2)			0.29	%
Net charge-offs of total loans and leases to average loans and leases			0.22	%(2)			0.16	%(2)			0.16	%
ALLL to non-purchased loans and leases (3)			1.19	%			1.48	%			1.33	%
ALLL to nonperforming loans and leases (3)			349	%			255	%			251	%

 

(1)	Excludes purchased loans and net charge-offs related to purchased loans.

(2)	Annualized.

(3)	Excludes purchased loans.

Our net charge-offs increased to $6.8 million for the first six months of 2015, including $5.1 million for non-purchased loans and leases and $1.7 million for purchased loans, compared to $2.9 million for the first six months of 2014, including $1.6 million for non-purchased loans and leases and $1.3 million for purchased loans. The increase in our net charge-offs for non-purchased loans and leases was primarily due to our sale during the first quarter of 2015 of $15.9 million of performing loans, with deteriorating credit trends, from our Corporate Loan Specialty Group resulting in net charge-offs of $2.4 million. Our net charge-offs for purchased loans increased during the first six months of 2015, in part, due to our having previously terminated the loss share agreements on our FDIC-assisted acquisitions.

 

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Investment Securities

At June 30, 2015 and 2014 and at December 31, 2014, we classified all of our investment securities portfolio as AFS. Accordingly, our 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 investment in the CRA qualified investment fund includes shares held in a mutual fund that qualifies under the Community Reinvestment Act of 1977 for community reinvestment purposes. Our holdings of equity securities in FHLB and First National Banker’s Bankshares, Inc. (“FNBB”) do not have readily determinable fair values and are carried at cost.

Investment Securities

 

		June 30,																December 31,
		2015								2014								2014
		Amortized				Fair				Amortized				Fair				Amortized				Fair
		Cost				Value				Cost				Value				Cost				Value
		(Dollars in thousands)
Obligations of state and political subdivisions		$	496,777			$	506,915			$	603,533			$	616,565			$	555,335			$	573,209
U.S. Government agency securities			257,849				260,753				254,878				258,311				245,854				251,233
Corporate obligations			3,574				3,574				685				685				654				654
CRA qualified investment fund			1,028				1,020				—				—				—				—
FHLB and FNBB equity securities			10,015				10,015				16,568				16,568				14,225				14,225
Total		$	769,243			$	782,277			$	875,664			$	892,129			$	816,068			$	839,321

Our investment securities portfolio is reported at estimated fair value, which included gross unrealized gains of $16.4 million and gross unrealized losses of $3.4 million at June 30, 2015; gross unrealized gains of $21.1 million and gross unrealized losses of $4.7 million at June 30, 2014; and gross unrealized gains of $24.4 million and gross unrealized losses of $1.2 million at December 31, 2014. Management believes that all of its unrealized losses on individual investment securities at June 30, 2015 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. We do not have the intent to sell these investment securities with unrealized losses and, more likely than not, will not be required to sell these investment securities before fair value recovers to amortized cost.

The following table presents unaccreted discounts and unamortized premiums of our investment securities as of the dates indicated.

Unaccreted Discounts and Unamortized Premiums

 

		Amortized Cost				Unaccreted Discount				Unamortized Premium				Par Value
		(Dollars in thousands)
June 30, 2015:
Obligations of states and political subdivisions		$	496,777			$	6,912			$	(6,539	)		$	497,150
U.S. Government agency securities			257,849				3,177				(5,582	)			255,444
Corporate obligations			3,574				48				(11	)			3,611
CRA qualified investment fund			1,028				—				—				1,028
FHLB and FNBB equity securities			10,015				—				—				10,015
Total		$	769,243			$	10,137			$	(12,132	)		$	767,248
December 31, 2014:
Obligations of states and political subdivisions		$	555,335			$	7,976			$	(7,662	)		$	555,649
U.S. Government agency securities			245,854				3,916				(3,953	)			245,817
Corporate obligations			654				—				(13	)			641
FHLB and FNBB equity securities			14,225				—				—				14,225
Total		$	816,068			$	11,892			$	(11,628	)		$	816,332
June 30, 2014:
Obligations of states and political subdivisions		$	603,533			$	8,625			$	(8,762	)		$	603,396
U.S. Government agency securities			254,878				4,561				(4,191	)			255,248
Corporate obligations			685				—				(15	)			670
FHLB and FNBB equity securities			16,568				—				—				16,568
Total		$	875,664			$	13,186			$	(12,968	)		$	875,882

 

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We had net gains of $0.1 million from the sale of $2.6 million of investment securities in the second quarter of 2015 compared to net gains of $18,000 from the sale of $47.0 million of investment securities in the second quarter of 2014. We had net gains of $2.6 million from the sale of $30.2 million of investment securities in the first six months of 2015 compared with net gains of $23,000 from the sale of $48.0 million of investment securities in the first six months of 2014. During the second quarter of 2015 and 2014, respectively, investment securities totaling $31.3 million and $16.0 million matured, were called or were paid down by the issuer. During the first six months of 2015 and 2014, respectively, investment securities totaling $81.5 million and $29.7 million matured, were called or paid down by the issuer. We purchased $37.5 million in investment securities during the second quarter of 2015 and first six months of 2015 compared to $16.8 million of investment securities purchased during the second quarter of 2014 and $35.1 million of investment securities during the first six months of 2014. On February 10, 2015, we acquired $21.8 million of investment securities as a result of our Intervest acquisition.

We invest in securities we believe offer good relative value at the time of purchase, and we will, from time to time, reposition our investment securities portfolio. In making decisions to sell or purchase securities, we consider credit quality, call features, maturity dates, relative yields, current market factors, interest rate risk and other relevant factors.

The following table presents the types and estimated fair values of our investment securities at June 30, 2015 based on credit ratings by one or more nationally-recognized credit rating agency.

Credit Ratings of Investment Securities

 

		AAA(1)				AA(2)				A(3)				BBB(4)				Non- Rated(5)				Total
		(Dollars in thousands)
Obligations of states and political subdivisions		$	10,218			$	172,453			$	116,583			$	22,214			$	185,447			$	506,915
U.S. Government agency securities			—				260,753				—				—				—				260,753
Corporate obligations			—				—				621				—				2,953				3,574
CRA qualified investment fund			—				—				—				—				1,020				1,020
FHLB and FNBB equity securities			—				—				—				—				10,015				10,015
Total		$	10,218			$	433,206			$	117,204			$	22,214			$	199,435			$	782,277
Percentage of total			1.3	%			55.4	%			15.0	%			2.8	%			25.5	%			100.0	%
Cumulative percentage of total			1.3	%			56.7	%			71.7	%			74.5	%			100.0	%

 

(1)	Includes securities rated Aaa by Moody’s, AAA by Standard & Poor’s (“S&P”) or a comparable rating by other nationally-recognized credit rating agencies.

(2)	Includes securities rated Aa1 to Aa3 by Moody’s, AA+ to AA- by S&P or a comparable rating by other nationally-recognized credit rating agencies.

(3)	Includes securities rated A1 to A3 by Moody’s, A+ to A- by S&P or a comparable rating by other nationally-recognized credit rating agencies.

(4)	Includes securities rated Baa1 to Baa3 by Moody’s, BBB+ to BBB- by S&P or a comparable rating by other nationally-recognized credit rating agencies.

(5)

Includes all securities that are not rated or securities that are not rated but that have a rated credit enhancement where we have ignored such credit enhancement. For these securities, we have performed our own evaluation of the security and/or the underlying issuer and believe that such security or its issuer has credit characteristics equivalent to those which would warrant 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

Our 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 February 10, 2015, we assumed $1.18 billion of deposits as a result of our acquisition of Intervest. On May 16, 2014, we assumed $970 million of deposits as a result of our acquisition of Summit. Additionally, we continued to grow our existing deposit base including growth in deposits of $406 million during the first six months of 2015, of which, $28 million and $378 million were added during the first and second quarters of 2015, respectively.

Deposits

 

		June 30,																December 31,
		2015								2014								2014
		(Dollars in thousands)
Non-interest bearing		$	1,320,779				18.6	%		$	1,058,210				21.2	%		$	1,145,454				20.8	%
Interest bearing:
Transaction (NOW)			1,240,787				17.5				1,173,404				23.6				1,031,255				18.8
Savings and money market			2,404,764				33.9				1,575,525				31.6				1,861,734				33.9
Time deposits less than $100,000			930,640				13.1				557,632				11.2				660,711				12.0
Time deposits of $100,000 or more			1,190,329				16.9				619,126				12.4				797,228				14.5
Total deposits		$	7,087,299				100.0	%		$	4,983,897				100.0	%		$	5,496,382				100.0	%

 

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The amount and percentage of our deposits attributable to offices, by state, as of the dates indicated, are reflected in the following table.

Deposits by State

 

Deposits Attributable to Offices In		June 30,																December 31, 2014
		2015								2014
		(Dollars in thousands)
Arkansas		$	3,335,900				47.1	%		$	2,736,653				54.9	%		$	2,912,291				53.0	%
Texas			1,151,556				16.3				728,073				14.6				996,908				18.1
Florida			738,494				10.4				120,677				2.4				124,469				2.3
Georgia			692,837				9.8				636,950				12.8				675,801				12.3
North Carolina			582,449				8.2				596,180				12.0				599,184				10.9
New York			419,037				5.9				—				—				—				—
Alabama			116,031				1.6				132,271				2.6				141,266				2.6
South Carolina			50,995				0.7				33,093				0.7				46,463				0.8
Total		$	7,087,299				100.0	%		$	4,983,897				100.0	%		$	5,496,382				100.0	%

Other Interest Bearing Liabilities

We rely on other interest bearing liabilities to supplement the funding of our lending and investing activities. Such liabilities consist of repurchase agreements with customers, other borrowings (FHLB advances and, to a lesser extent, FRB borrowings and federal funds purchased) and subordinated debentures.

The following table reflects the average balance and rate paid for each category of other interest bearing liabilities for the periods indicated.

Average Balances and Rates of Other Interest Bearing Liabilities

 

		Three Months Ended June 30,																Six Months Ended June 30,
		2015								2014								2015								2014
		Average Balance				Rate Paid				Average Balance				Rate Paid				Average Balance				Rate Paid				Average Balance				Rate Paid
		(Dollars in thousands)
Repurchase agreements with customers		$	68,656				0.11	%		$	58,607				0.09	%		$	73,091				0.10	%		$	61,808				0.08	%
Other borrowings (1)			161,652				3.58				281,009				3.84				175,148				3.62				280,968				3.84
Subordinated debentures			117,325				3.31				64,950				2.64				105,431				3.21				64,950				2.61
Total other interest bearing liabilities		$	347,633				2.80	%		$	404,566				3.11	%		$	353,670				2.77	%		$	407,726				3.10	%

 

(1)	Included in other borrowings at June 30, 2015 are FHLB advances that contain quarterly call features and mature as follows: 2017, $140.0 million at 3.70% weighted-average interest rate and 2018, $20.0 million at 2.52% weighted-average interest rate.

The decrease in other borrowings for the three and six months ended June 30, 2015 compared to the same period in 2014 is due to our prepaying $90 million of fixed rate callable FHLB advances during the fourth quarter of 2014 and prepaying $30 million of fixed rate callable FHLB advances during the first quarter of 2015. The increase in subordinated debentures is primarily due to the $52.2 million (net of purchase accounting adjustments) of subordinated debentures assumed in the Intervest transaction.

 

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CAPITAL RESOURCES AND LIQUIDITY

Capital Resources

Subordinated Debentures. We own eight 100%-owned finance subsidiary business trusts – Ozark Capital Statutory Trust II (“Ozark II”), Ozark Capital Statutory Trust III (“Ozark III”), Ozark Capital Statutory Trust IV (“Ozark IV”), Ozark Capital Statutory Trust V (“Ozark V”) (collectively, the “Ozark Trusts”), Intervest Statutory Trust II (“Intervest II”), Intervest Statutory Trust III (“Intervest III”), Intervest Statutory Trust IV (“Intervest IV”) and Intervest Statutory Trust V (“Intervest V”), (collectively, the “Intervest Trusts”; and together with Ozark Trusts, the “Trusts”). At June 30, 2015, we had the following issues of trust preferred securities and subordinated debentures owed to the Trusts.

 

		Subordinated Debentures Owed to Trust				Unamortized Discount at June 30, 2015				Carrying Value of Subordinated Debentures at June 30, 2015				Trust Preferred Securities of the Trusts				Contractual Interest Rate at June 30, 2015
		(Dollars in thousands)
Ozark II		$	14,433			$	—			$	14,433			$	14,000				3.18	%
Ozark III			14,434				—				14,434				14,000				3.24
Ozark IV			15,464				—				15,464				15,000				2.50
Ozark V			20,619				—				20,619				20,000				1.89
Intervest II			15,464				(678	)			14,786				15,000				3.23
Intervest III			15,464				(785	)			14,679				15,000				3.07
Intervest IV			15,464				(1,428	)			14,036				15,000				2.68
Intervest V			10,310				(1,358	)			8,952				10,000				1.94
		$	121,652			$	(4,249	)		$	117,403			$	118,000

On February 10, 2015, in conjunction with the Intervest acquisition, the Company acquired the Intervest Trusts with outstanding subordinated debentures totaling $56.7 million and related trust preferred securities totaling $55.0 million. On the date of such acquisition, the Company recorded the assumed subordinated debentures owed to the Intervest Trusts at estimated fair value of $52.2 million, based on an independent third party valuation, to reflect a current market interest rate for comparable obligations. The fair value adjustment of $4.5 million is being amortized, using a level-yield methodology over the estimated holding period of approximately eight years, as an increase in interest expense of the subordinated debentures owed to the Intervest Trusts.

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 us additional regulatory capital to support our expected future growth and expansion.

We may need to raise additional capital in the future to provide us with sufficient capital resources and liquidity to meet our commitments and business needs. As a publicly traded company, a likely source of additional funds is the capital markets, which can provide us with funds through the public issuance of equity, both common and preferred stock, and the issuance of senior debt and/or subordinated debentures. We have an effective shelf registration statement on file with the SEC which provides us increased flexibility and more efficient access to the public debt and equity markets if needed. Our ability to raise additional capital, if needed, will depend on, among other things, conditions in the capital markets at that time, which are outside of our control, and our financial performance.

Common Stockholders’ Equity and Reconciliation of Non-GAAP Financial Measures. We use non-GAAP financial measures, specifically tangible common stockholders’ equity to total tangible assets, tangible book value per common share and return on average tangible common stockholders’ equity as important measures of the strength of our capital and our ability to generate earnings on tangible common equity invested by our shareholders. We believe presentation of these non-GAAP financial measures provides useful supplemental information that contributes to a proper understanding of our financial results and capital levels. These non-GAAP disclosures should not be viewed as a substitute for financial results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in the following tables.

 

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Calculation of the Ratio of Total Tangible Common

Stockholders’ Equity to Total Tangible Assets

 

		June 30,								December 31, 2014
		2015				2014
		(Dollars in thousands)
Total common stockholders’ equity before noncontrolling interest		$	1,209,254			$	850,204			$	908,390
Less intangible assets:
Goodwill			(122,884	)			(78,669	)			(78,669	)
Core deposit and bank charter intangibles, net of accumulated amortization			(28,266	)			(29,971	)			(26,907	)
Total intangibles			(151,150	)			(108,640	)			(105,576	)
Total tangible common stockholders’ equity		$	1,058,104			$	741,564			$	802,814
Total assets		$	8,710,435			$	6,297,975			$	6,766,499
Less intangible assets:
Goodwill			(122,884	)			(78,669	)			(78,669	)
Core deposit and bank charter intangibles, net of accumulated amortization			(28,266	)			(29,971	)			(26,907	)
Total intangibles			(151,150	)			(108,640	)			(105,576	)
Total tangible assets		$	8,559,285			$	6,189,335			$	6,660,923
Ratio of total common stockholders’ equity to total assets			13.88	%			13.50	%			13.42	%
Ratio of total tangible common stockholders’ equity to total tangible assets			12.36	%			11.98	%			12.05	%

Calculation of the Ratio of Tangible Book Value Per Common Share

 

		June 30,								December 31, 2014
		2015				2014
		(In thousands, except per share amounts)
Total common stockholders’ equity before noncontrolling interest		$	1,209,254			$	850,204			$	908,390
Less intangible assets:
Goodwill			(122,884	)			(78,669	)			(78,669	)
Core deposit and bank charter intangibles, net of accumulated amortization			(28,266	)			(29,971	)			(26,907	)
Total intangibles			(151,150	)			(108,640	)			(105,576	)
Total tangible common stockholders’ equity		$	1,058,104			$	741,564			$	802,814
Shares of common stock outstanding			86,811				79,662				79,924
Book value per common share		$	13.93			$	10.67			$	11.37
Tangible book value per common share		$	12.19			$	9.31			$	10.04

 

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Calculation of Return on Average Tangible Common Stockholders’ Equity

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2015				2014				2015				2014
		(Dollars in thousands)
Net income available to common stockholders		$	44,776			$	26,486			$	84,670			$	51,762
Average common stockholders’ equity before noncontrolling interest		$	1,191,798			$	749,692			$	1,121,225			$	696,360
Less average intangible assets:
Goodwill			(122,884	)			(44,083	)			(112,883	)			(24,770	)
Core deposit and bank charter intangibles, net of accumulated amortization			(29,161	)			(16,033	)			(28,996	)			(14,973	)
Total average intangibles			(152,045	)			(60,116	)			(141,879	)			(39,743	)
Average tangible common stockholders’ equity		$	1,039,753			$	689,576			$	979,346			$	656,617
Return on average common stockholders’ equity			15.07	%			14.17	%			15.23	%			14.99	%
Return on average tangible common stockholders’ equity			17.27	%			15.41	%			17.43	%			15.90	%

Common Stock Dividend Policy. During the quarter ended June 30, 2015, we paid a dividend of $0.135 per common share compared to $0.115 per common share in the quarter ended June 30, 2014. On July 1, 2015, our board of directors approved a dividend of $0.14 per common share that was paid on July 24, 2015. The determination of future dividends on our common stock will depend on conditions existing at that time and approval of our board of directors.

Regulatory Capital Compliance

Bank and bank holding company regulatory authorities in the United States impose certain capital standards on all bank holding companies and banks. These capital standards require compliance with capital adequacy guidelines and prompt corrective action regulations and involve quantitative measures of assets, liabilities and certain off-balance-sheet items, which are subject to risk weightings and various other factors.

On July 9, 2013, the FDIC and other federal banking regulators issued a final rule that substantially revised 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 “Basel III Rules”). The Basel III Rules became effective for the Company and the Bank on January 1, 2015 (subject to a phase-in period for certain provisions). The Basel III Rules require the maintenance of minimum amounts and ratios (set forth in the table below) of common equity tier 1 capital, tier 1 capital and total capital (as defined in the regulations) to risk-weighted assets (as defined), and of tier 1 capital to adjusted quarterly average assets (as defined).

Under the new Basel III Rules, common equity tier 1 capital consists of common stock and paid-in capital (net of treasury stock) and retained earnings. Common equity tier 1 capital is reduced by goodwill, certain intangible assets, net of associated deferred tax liabilities, deferred tax assets that arise from tax credit and net operating loss carryforwards, net of any valuation allowance, and certain other items as specified by the Basel III Rules.

Tier 1 capital includes common equity tier 1 capital and certain additional tier 1 items as provided under the Basel III Rules. The tier 1 capital for our holding company consists of common equity tier 1 capital and $118 million of trust preferred securities issued by the Trusts. The Basel III Rules include certain provisions that would require trust preferred securities to be phased out of qualifying tier 1 capital. Currently, our trust preferred securities are grandfathered under the Basel III Rules and will continue to be included as tier 1 capital. However, should we continue to grow and exceed $15 billion in total assets, the grandfather provisions applicable to our trust preferred securities may no longer apply, depending on whether we cross the $15 billion threshold through organic growth or by acquisition. The common equity tier 1 capital and the tier 1 capital are the same for our bank subsidiary.

Basel III 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

 

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other comprehensive income opt-out election in the first Consolidated Reports of Condition and Income (“Call Report”), Consolidated Financial Statements for Bank Holding Companies (“FR Y-9C”) and Parent Company Only Financial Statements for Large Bank Holding Companies (“FR Y-9LP”) reports that are filed for the first quarter of 2015. We made this opt-out election in our Call Report, FR Y-9C and FR Y-9LP filed for the first quarter of 2015 to avoid significant variations in the level of capital depending upon the impact of interest rate fluctuations on the fair value of our investments securities portfolio.

Total capital includes tier 1 capital and tier 2 capital. Tier 2 capital includes, among other things, the allowable portion of the ALLL and any trust preferred securities that are excluded from tier 1 capital.

The Basel III Rules also changed 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.

The common equity tier 1 capital, tier 1 capital and total capital ratios are calculated by dividing the respective capital amounts by risk-weighted assets. The leverage ratio is calculated by dividing tier 1 capital by adjusted quarterly average total assets.

The Basel III Rules limit capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity tier 1 capital, tier 1 capital and total capital to risk-weighted assets in addition to the amount necessary to meet minimum risk-based capital requirements. The capital conservation buffer 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. When fully phased in on January 1, 2019, the Basel III Rules will require us to maintain (i) a minimum ratio of common equity tier 1 capital to risk-weighted assets of at least 4.5%, plus a 2.5% capital conservation buffer, which effectively results in a minimum ratio of 7.0% upon full implementation, (ii) a minimum ratio of tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer, which effectively results in a minimum ratio of 8.50% upon full implementation, (iii) a minimum ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer, which effectively results in a minimum ratio of 10.5% upon full implementation and (iv) a minimum leverage ratio of 4.0%.

 

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The following table presents actual and required capital ratios as of June 30, 2015 for the Company and the Bank under the Basel III Rules. The minimum required capital amounts presented include the minimum required capital levels as of June 30, 2015 based on the phase-in provisions of the Basel III Rules and the minimum required capital levels as of January 1, 2019 when the Basel III Rules have been fully phased-in. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Rules.

 

		Actual								Minimum Capital Required – Basel III Phase-In Schedule								Minimum Capital Required – Basel III Fully Phased-In								Required to be Considered Well Capitalized
		Capital Amount				Ratio				Capital Amount				Ratio				Capital Amount				Ratio				Capital Amount				Ratio
		(Dollars in thousands)
June 30, 2015:
Common equity tier 1 to risk-weighted assets:
Company		$	1,054,014				11.18				424,366			$	4.50	%		$	660,124				7.00	%			N/A				N/A
Bank			1,148,610				12.20				423,547				4.50				658,850				7.00			$	611,789				6.50	%
Tier 1 capital to risk-weighted assets:
Company			1,172,014				12.43				565,821				6.00				801,579				8.50				N/A				N/A
Bank			1,148,610				12.20				564,729				6.00				800,032				8.50				752,972				8.00
Total capital to risk-weighted assets:
Company			1,228,763				13.03				754,428				8.00				990,186				10.50				N/A				N/A
Bank			1,205,359				12.81				752,972				8.00				988,275				10.50				941,215				10.00
Tier 1 leverage to average assets:
Company			1,172,014				14.41				325,434				4.00				325,434				4.00				N/A				N/A
Bank			1,148,310				14.13				325,111				4.00				325,111				4.00				406,389				5.00

The following table presents actual and required capital ratios as of December 31, 2014 for the Company and the Bank under the regulatory capital rules then in effect.

 

										Required
		Actual								For Capital Adequacy Purposes								To Be Well Capitalized Under Prompt Corrective Action Provisions
		Amount				Ratio				Amount				Ratio				Amount				Ratio
		(Dollars in thousands)
December 31, 2014:
Tier 1 capital to risk-weighted assets:
Company		$	851,682				11.74	%		$	290,213				4.00	%		$	435,319				6.00	%
Bank			824,120				11.37				290,130				4.00				435,194				6.00
Total capital to risk-weighted assets:
Company			904,600				12.47				580,425				8.00				725,532				10.00
Bank			877,038				12.10				580,259				8.00				725,324				10.00
Tier 1 leverage to average assets:
Company			851,681				12.92				197,711				3.00				329,518				5.00
Bank			824,120				12.52				197,465				3.00				329,108				5.00

As of June 30, 2015, capital levels at both the Company and the Bank exceed all capital adequacy requirements under the Basel III Rules on a fully phased-in basis. Based on the ratios presented above, capital levels as of June 30, 2015 exceed the minimum levels necessary to be considered “well capitalized.”

 

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Liquidity

Bank Liquidity. Liquidity represents an institution’s ability to provide funds to satisfy demands from depositors, borrowers and other creditors by either converting assets into cash or accessing new or existing sources of incremental funds. Liquidity risk arises from the possibility we 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 our 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. We maintain 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 we rely on deposits, repayments of loans and leases, and repayments of our investment securities as our primary sources of funds. Our principal deposit sources include consumer, commercial and public funds customers in our markets. We have used these funds, together with wholesale deposit sources such as brokered deposits, along with FHLB advances, federal funds purchased and other sources of short-term borrowings, to make loans and leases, acquire investment securities and other assets and to fund continuing operations.

Deposit levels may be affected by a number of factors, including rates paid by competitors, general interest rate levels, returns available to customers on alternative investments, general economic and market conditions and other factors. Loan and lease repayments are 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, we 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 wholesale deposit sources, FHLB advances, secured and unsecured federal funds lines of credit from correspondent banks, FRB borrowings and/or accessing the capital markets.

At June 30, 2015, we had substantial unused borrowing availability. This availability was primarily comprised of the following four options: (1) $1.66 billion of available blanket borrowing capacity with the FHLB, (2) $137 million of investment securities available to pledge for federal funds or other borrowings, (3) $170 million of available unsecured federal funds borrowing lines and (4) up to $149 million of available borrowing capacity from borrowing programs of the FRB.

We anticipate we will continue to rely primarily on deposits, repayments of loans and leases and repayments of our 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 our primary funding sources.

Sources and Uses of Funds. Operating activities provided net cash of $44.9 million for the first six months of 2015 and $20.1 million for the first six months of 2014. Net cash used or provided by operating activities is comprised primarily of net income, adjusted for non-cash items and for changes in various operating assets and liabilities.

Investing activities used net cash of $39.2 million in the first six months of 2015 and used $118.8 million in the first six months of 2014. The decrease in net cash used by investing activities of $79.6 million was primarily the result of the net cash of $274.3 million received in the Intervest acquisition. Additionally, the net activity in our investment securities portfolio provided $76.8 million during the first six months of 2015 compared to $43.0 million during the first six months of 2014. The current low interest rate environment has resulted in many issuers of investment securities, particularly tax-exempt municipal securities, to call higher rate securities and refinance such securities at lower interest rates. The investing cash flow provided by our Intervest transaction and investment securities portfolio was partially offset by investing activities cash flow used to purchase $85.0 million in BOLI policies during the first six months of 2015 compared to no BOLI purchases during the first six months of 2014 and investing activities cash flow used to fund the continued growth in our loan and lease portfolio, which used $338.0 million in the first six months of 2015 compared to $332.3 million in the first six months of 2014.

Financing activities provided $359.0 million and $13.4 million in the first six months of 2015 and 2014, respectively. The increase in net cash provided by financing activities was primarily the result of an increase in net cash provided by our deposit activities, which provided $406.3 million during the first six months of 2015 to help fund our loan and lease growth compared to $41.2 million of net cash provided during the first six months of 2014. This increase in financing activities cash flows provided by our deposit activities was partially offset by our repayment of other borrowings, which used $31.4 million during the first six months of 2015.

 

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Off-Balance Sheet Commitments. We are party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments primarily include commitments to extend credit and standby letters of credit. See Note 9 to the Consolidated Financial Statements for more information about our outstanding guarantees and commitments as of June 30, 2015.

Growth and Expansion

De Novo Growth. In 2014 we opened loan production offices for our Real Estate Specialties Group, or RESG, in Houston, Texas and in Los Angeles, California. We also opened a third retail banking office in Bradenton, Florida, a retail banking office in Cornelius, North Carolina and a retail banking office in Hilton Head Island, South Carolina. In the second half of 2015, we expect to open our fourth retail banking office in Houston, Texas and a loan production office in Greensboro, North Carolina. During 2016, we expect to open our first retail banking office in Siloam Springs in northwest Arkansas, our second retail banking office in Springdale, Arkansas, our third retail banking office in Fayetteville, Arkansas and our first retail banking office in McKinney, Texas.

We intend to continue our growth and de novo branching strategy in the future years through the opening of additional branches and loan production offices. 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 we cannot predict with certainty. We may increase or decrease our expected number of new office openings as a result of a variety of factors including our financial results, changes in economic or competitive conditions, strategic opportunities or other factors.

During the first six months of 2015, we spent $9.7 million on capital expenditures for premises and equipment. Our capital expenditures for 2015 are expected to be in the range of $15 million to $25 million, including progress payments on construction projects expected to be completed in 2015 and 2016, furniture and equipment costs and acquisition of sites for future development. Actual expenditures may vary significantly from those expected, depending on the number and cost of additional branch offices acquired or constructed and sites acquired for future development, progress or delays encountered on ongoing and new construction projects, delays in or inability to obtain required approvals, potential premises and equipment expenditures associated with acquisitions, if any, and other factors.

Acquisitions. We have shown substantial growth through a combination of organic growth and acquisitions. Since 2010, we have completed 13 acquisitions, including seven FDIC-assisted transactions.

On February 10, 2015, we completed our acquisition of Intervest and its wholly-owned bank subsidiary Intervest National Bank, headquartered in New York, New York. The acquisition of Intervest added seven full service banking offices including one in New York City, five in Clearwater, Florida and one in Pasadena, Florida.

On August 5, 2015, we completed our acquisition of Bank of the Carolinas Corporation (“BCAR”) and its wholly-owned bank subsidiary Bank of the Carolinas, headquartered in Mocksville, North Carolina. The acquisition of BCAR added eight full service banking offices in North Carolina, including one each in Advance, Asheboro, Concord, Harrisburg, Landis, Lexington, Mocksville and Winston-Salem.

We expect to continue growing through both our de novo branching strategy and traditional acquisitions. With respect to our de novo branching strategy, future de novo branches are expected to be focused in states where we currently have banking offices and we expect to begin focusing on larger markets and MSAs across the U.S. where we currently do not have offices. Future RESG loan production offices are expected to be focused in strategically important markets (most likely Washington, D.C., Seattle, Boston and Chicago). With respect to traditional acquisitions, we are seeking acquisitions that are either immediately accretive to book value, tangible book value, and diluted earnings per share, or strategic in location, or both.

RECENTLY ISSUED ACCOUNTING STANDARDS

See Note 18 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. Our interest rate risk management is the responsibility of ALCO, which reports to the board of directors.

We regularly review our exposure to changes in interest rates. Among the factors considered are changes in the mix of interest earning assets and interest bearing liabilities, interest rate spreads and repricing periods. Typically, ALCO reviews on at least a quarterly basis our 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 our 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. We rely primarily on the results of this model in evaluating our interest rate risk. This model incorporates a number of additional factors including: (1) the expected exercise of call features on various assets and liabilities, (2) the expected rates at which various 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 purchased loans and (8) other relevant factors. Inclusion of these factors in the model is intended to more accurately project our expected changes in net interest income resulting from interest rate changes. We typically model our change in net interest income assuming interest rates go up 100 bps, up 200 bps, up 300 bps, up 400 bps, down 100 bps, down 200 bps, down 300 bps and down 400 bps. Based on current conditions, we believe that modeling our 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, we have assumed that the change in interest rates phases in over a 12-month period. While we believe this model provides a reasonably accurate projection of our interest rate risk, the model includes a number of assumptions and predictions which may or may not be correct and may impact the model results. These assumptions and predictions include inputs to compute baseline net interest income, growth rates, expected changes in administered rates on interest bearing deposit accounts, competition and a variety of other factors that are difficult to accurately predict. Accordingly, there can be no assurance the earnings simulation model will accurately reflect future results.

The following table presents the earnings simulation model’s projected impact of a change in interest rates on the projected baseline net interest income for the 12-month period commencing July 1, 2015. 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		11.6%
+300		8.3
+200		5.0
+100		2.2
-100		Not meaningful
-200		Not meaningful
-300		Not meaningful
-400		Not meaningful

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

 

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Item 4.

Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures.

An evaluation as of the end of the period covered by this quarterly report was carried out under the supervision and with the participation of our management, including our Chairman and Chief Executive Officer and our Chief Financial Officer and Chief Accounting Officer, of the effectiveness of the design and operation of our “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, our Chairman and Chief Executive Officer and our Chief Financial Officer and Chief Accounting Officer concluded that our disclosure controls and procedures were effective.

(b) Changes in Internal Control over Financial Reporting.

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

An evidentiary hearing was conducted by the trial court on the arbitration issue on October 1, 2014, and the trial court took the matter under advisement. On October 30, 2014, the trial court issued an order once again denying the Company and Bank’s motion to dismiss and to compel arbitration. The trial court ruled that the Consumer Deposit Account Agreement containing the arbitration provision was not enforceable because of a lack of mutual agreement and lack of mutual obligation. The Company and Bank have appealed the trial court’s ruling to the Arkansas Supreme Court on an interlocutory basis. The Company and Bank filed their initial appellate brief on April 14, 2015. The plaintiffs filed their appellate brief on May 14, 2015, and the Company and the Bank filed their reply brief on May 29, 2015. The Arkansas Supreme Court has determined that oral arguments are unnecessary. A ruling from the Arkansas Supreme Court is expected in September or October of 2015.

The Plaintiff in the Muzingo case has agreed to stay the proceedings in that case pending the outcome of the appeal in the Walker case. The Company and the Bank believe the Plaintiffs’ claims in each of these cases are unfounded and subject to meritorious defenses and intend to vigorously defend against these claims.

The Company is party to various other legal proceedings, as both plaintiff and defendant, arising in the ordinary course of business, including claims of lender liability, 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.

 

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Item 1A.

Risk Factors

There were no material changes from the risk factors set forth under Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

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

 

Item 3.

Defaults Upon Senior Securities

Not Applicable.

 

Item 4.

Mine Safety Disclosures

Not Applicable.

 

Item 5.

Other Information

None.

 

Item 6.

Exhibits

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

 

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SIGNATURE

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

 

				Bank of the Ozarks, Inc.
DATE: August 7, 2015				/s/ Greg McKinney
				Greg McKinney
				Chief Financial Officer and
				Chief Accounting Officer
				(Principal Financial Officer and Authorized 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, 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).
2.2		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 Bank of the Ozarks, Inc., 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 Bank of the Ozarks, Inc. 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 Bank of the Ozarks, Inc. 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 Bank of the Ozarks, Inc. 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 Bank of the Ozarks, Inc., dated November 18, 2014 (previously filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Commission on November 21, 2014, and incorporated herein by this reference).
10.1*		Bank of the Ozarks, Inc. Amended and Restated Stock Option Plan, effective May 18, 2015 (previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on May 18, 2015 and incorporated herein by this reference).
10.2*		Form of Stock Option Grant Agreement, effective May 18, 2015, for employees under the Amended and Restated Stock Option Plan (previously filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Commission on May 18, 2015 and incorporated herein by this reference)
10.3*		Bank of the Ozarks, Inc. Non-Employee Director Stock Plan, effective May 18, 2015 (previously filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the Commission on May 18, 2015 and incorporated herein by this reference).
11.1		Earnings Per Share Computation (included in Note 4 to the Consolidated Financial Statements).
12.1		Computation of Ratios of Earnings to Fixed Charges, filed herewith.
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

 

*	Management contract or a compensatory plan or arrangement.

 

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