10-Q 1 d242092d10q.htm FORM 10-Q FORM 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark one)

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

For the quarterly period ended September 30, 2011

 

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

For the transition period from              to             .

Commission File Number 0-22759

 

 

BANK OF THE OZARKS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

ARKANSAS   71-0556208
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification Number)
17901 CHENAL PARKWAY, LITTLE ROCK, ARKANSAS   72223
(Address of principal executive offices)   (Zip Code)

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

None

(Title of Class)

 

 

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

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

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

 

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

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

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

 

Class

 

Outstanding at September 30, 2011

Common Stock, $0.01 par value per share   34,277,280

 

 

 


Table of Contents

BANK OF THE OZARKS, INC.

FORM 10-Q

September 30, 2011

INDEX

 

PART I.

   Financial Information   
Item 1.    Financial Statements   
     

Consolidated Balance Sheets as of September 30, 2011 and 2010 and December 31, 2010

     1   
     

Consolidated Statements of Income for the Three Months Ended September 30, 2011 and 2010 and the Nine Months Ended September 30, 2011 and 2010

     2   
     

Consolidated Statements of Stockholders’ Equity for the Nine Months Ended September 30, 2011 and 2010

     3   
     

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and 2010

     4   
     

Notes to Consolidated Financial Statements

     5   
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      32   
   Selected and Supplemental Financial Data      70   
Item 3.    Quantitative and Qualitative Disclosures About Market Risk      72   
Item 4.    Controls and Procedures      73   

PART II.

   Other Information   
Item 1.    Legal Proceedings      74   
Item 1A.    Risk Factors      74   
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds      74   
Item 3.    Defaults Upon Senior Securities      74   
Item 4.    Reserved      74   
Item 5.    Other Information      74   
Item 6.    Exhibits      74   
Signature      75   
Exhibit Index      76   


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1.     Financial Statements

BANK OF THE OZARKS, INC.

CONSOLIDATED BALANCE SHEETS

 

     Unaudited
September 30,
    December  31,
2010
 
     2011     2010    
     (Dollars in thousands, except per share amounts)  
ASSETS       

Cash and due from banks

   $ 68,832      $ 53,838      $ 48,024   

Interest earning deposits

     665        524        1,005   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents

     69,497        54,362        49,029   

Investment securities - available for sale (“AFS”)

     439,596        412,443        398,698   

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

     1,863,114        1,888,936        1,856,429   

Loans covered by FDIC loss share agreements

     865,096        391,014        494,895   

Allowance for loan and lease losses

     (39,136     (40,250     (40,230
  

 

 

   

 

 

   

 

 

 

Net loans and leases

     2,689,074        2,239,700        2,311,094   

FDIC loss share receivable

     318,730        123,702        154,150   

Premises and equipment, net

     183,644        164,834        170,497   

Foreclosed assets not covered by FDIC loss share agreements

     34,338        41,868        42,216   

Foreclosed assets covered by FDIC loss share agreements

     73,249        17,540        31,145   

Accrued interest receivable

     11,641        15,055        13,899   

Bank owned life insurance

     61,499        59,198        59,771   

Intangible assets, net

     12,716        7,536        7,925   

Other, net

     36,663        39,572        35,146   
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 3,930,647      $ 3,175,810      $ 3,273,570   
  

 

 

   

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY       

Deposits:

      

Demand non-interest bearing

   $ 466,938      $ 271,407      $ 298,585   

Savings and interest bearing transaction

     1,609,632        1,271,374        1,299,058   

Time

     969,899        872,933        943,110   
  

 

 

   

 

 

   

 

 

 

Total deposits

     3,046,469        2,415,714        2,540,753   

Repurchase agreements with customers

     46,334        55,750        43,324   

Other borrowings

     289,353        294,502        282,139   

Subordinated debentures

     64,950        64,950        64,950   

FDIC clawback payable

     24,475        6,036        7,203   

Accrued interest payable and other liabilities

     48,715        19,354        11,431   
  

 

 

   

 

 

   

 

 

 

Total liabilities

     3,520,296        2,856,306        2,949,800   
  

 

 

   

 

 

   

 

 

 

Commitments and contingencies

      

Stockholders’ equity:

      

Preferred stock; $0.01 par value; 1,000,000 shares authorized; no shares outstanding at September 30, 2011 and 2010 or at December 31, 2010

     0        0        0   

Common stock; $0.01 par value; 50,000,000 shares authorized; 34,277,280, 33,980,980, and 34,107,280 shares issued and outstanding at September 30, 2011, September 30, 2010 and December 31, 2010, respectively

     343        340        341   

Additional paid-in capital

     49,080        44,246        45,107   

Retained earnings

     349,592        260,862        275,074   

Accumulated other comprehensive income (loss)

     7,930        10,624        (167
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity before noncontrolling interest

     406,945        316,072        320,355   

Noncontrolling interest

     3,406        3,432        3,415   
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     410,351        319,504        323,770   
  

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 3,930,647      $ 3,175,810      $ 3,273,570   
  

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

1


Table of Contents

BANK OF THE OZARKS, INC.

CONSOLIDATED STATEMENTS OF INCOME

Unaudited

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011     2010     2011     2010  
     (Dollars in thousands, except per share amounts)  

Interest income:

        

Loans and leases not covered by FDIC loss share agreements

   $ 27,793      $ 29,707      $ 83,715      $ 89,035   

Loans covered by FDIC loss share agreements

     19,089        6,205        48,119        8,942   

Investment securities:

        

Taxable

     838        636        2,324        3,701   

Tax-exempt

     4,177        4,540        12,610        14,191   

Deposits with banks and federal funds sold

     5        4        31        16   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     51,902        41,092        146,799        115,885   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

        

Deposits

     4,389        5,028        14,367        15,137   

Repurchase agreements with customers

     35        92        153        302   

Other borrowings

     2,712        2,734        8,096        9,433   

Subordinated debentures

     430        470        1,288        1,323   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     7,566        8,324        23,904        26,195   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     44,336        32,768        122,895        89,690   

Provision for loan and lease losses

     (1,500     (4,300     (7,500     (11,900
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan and lease losses

     42,836        28,468        115,395        77,790   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest income:

        

Service charges on deposit accounts

     4,734        4,002        13,158        11,137   

Mortgage lending income

     815        1,024        2,130        2,367   

Trust income

     810        802        2,395        2,518   

Bank owned life insurance income

     585        580        1,728        1,577   

Gains on investment securities

     638        570        989        4,318   

Gains on sales of other assets

     1,727        267        2,839        232   

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

     2,861        906        7,783        1,177   

Other loss share income, net

     2,976        295        4,931        295   

Gains on FDIC-assisted acquisitions

     0        16,122        65,708        26,160   

Other

     925        615        2,458        1,895   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

     16,071        25,183        104,119        51,676   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest expense:

        

Salaries and employee benefits

     14,597        10,539        41,061        27,810   

Net occupancy and equipment

     4,301        2,782        11,182        7,619   

Other operating expenses

     12,902        10,244        40,948        26,717   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expense

     31,800        23,565        93,191        62,146   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before taxes

     27,107        30,086        126,323        67,320   

Provision for income taxes

     8,220        9,878        42,605        20,310   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     18,887        20,208        83,718        47,010   

Net loss attributable to noncontrolling interest

     17        17        33        60   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common stockholders

   $ 18,904      $ 20,225      $ 83,751      $ 47,070   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per common share

   $ 0.55      $ 0.60      $ 2.45      $ 1.39   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per common share

   $ 0.55      $ 0.59      $ 2.43      $ 1.38   
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared per common share

   $ 0.095      $ 0.075      $ 0.27      $ 0.22   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

2


Table of Contents

BANK OF THE OZARKS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Unaudited

 

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

Balances – January 1, 2010

   $ 338       $ 41,415       $ 221,243      $ 6,032      $ 3,442      $ 272,470   

Comprehensive income:

              

Net income

     0         0         47,010        0        0        47,010   

Net loss attributable to noncontrolling interest

     0         0         60        0        (60     0   

Other comprehensive income (loss):

              

Unrealized gains/losses on investment securities AFS, net of $4,657 tax effect

     0         0         0        7,216        0        7,216   

Reclassification of gains/losses included in net income, net of $1,694 tax effect

     0         0         0        (2,624     0        (2,624
              

 

 

 

Total comprehensive income

                 51,602   
              

 

 

 

Common stock dividends

     0         0         (7,451     0        0        (7,451

Issuance of 171,900 split adjusted shares of common stock for exercise of stock options

     2         1,962         0        0        0        1,964   

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

     0         271         0        0        0        271   

Stock-based compensation expense

     0         598         0        0        0        598   

Noncontrolling interest cash contribution

     0         0         0        0        50        50   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balances – September 30, 2010

   $ 340       $ 44,246       $ 260,862      $ 10,624      $ 3,432      $ 319,504   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balances – January 1, 2011

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

Comprehensive income:

              

Net income

     0         0         83,718        0        0        83,718   

Net loss attributable to noncontrolling interest

     0         0         33        0        (33     0   

Other comprehensive income (loss):

              

Unrealized gains/losses on investment securities AFS, net of $5,614 tax effect

     0         0         0        8,698        0        8,698   

Reclassification of gains/losses included in net income, net of $388 tax effect

     0         0         0        (601     0        (601
              

 

 

 

Total comprehensive income

                 91,815   
              

 

 

 

Common stock dividends

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

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

     2         2,665         0        0        0        2,667   

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

     0         285         0        0        0        285   

Stock-based compensation expense

     0         1,023         0        0        0        1,023   

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

     0         0         0        0        0        0   

Noncontrolling interest cash contribution

     0         0         0        0        24        24   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balances – September 30, 2011

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

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

3


Table of Contents

BANK OF THE OZARKS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited

 

     Nine Months Ended  
     September 30,  
     2011     2010  
     (Dollars in thousands)  

Cash flows from operating activities:

    

Net income

   $ 83,718      $ 47,010   

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

    

Depreciation

     3,902        3,290   

Amortization

     1,168        270   

Net loss attributable to noncontrolling interest

     33        60   

Provision for loan and lease losses

     7,500        11,900   

Provision for losses on foreclosed assets not covered by FDIC loss share agreements

     8,877        7,128   

Writedown of other assets

     1,250        0   

Net amortization (accretion) of investment securities AFS

     264        (510

Net gains on investment securities AFS

     (989     (4,318

Originations and purchases of mortgage loans for sale

     (99,529     (123,974

Proceeds from sales of mortgage loans for sale

     99,840        113,554   

Accretion of loans covered by FDIC loss share agreements

     (48,119     (8,942

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

     (7,783     (1,177

Gains on dispositions of premises and equipment, foreclosed and other assets

     (2,839     (232

Gains on FDIC-assisted acquisitions

     (65,708     (26,160

Deferred income tax expense

     28,875        10,280   

Increase in cash surrender value of bank owned life insurance (“BOLI”)

     (1,728     (1,577

Current tax benefit on exercise of stock options

     (488     (639

Compensation expense under stock-based compensation plans

     1,023        598   

Changes in assets and liabilities:

    

Accrued interest receivable

     2,779        244   

Other assets, net

     (303     (1,348

Accrued interest payable and other liabilities

     2,489        1,896   
  

 

 

   

 

 

 

Net cash provided by operating activities

     14,232        27,353   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Proceeds from sales of investment securities AFS

     96,743        251,528   

Proceeds from maturities/calls/paydowns of investment securities AFS

     20,349        42,874   

Purchases of investment securities AFS

     (7,586     (103,817

Net (increase) paydowns of portfolio loans and leases not covered by FDIC loss share agreements

     (2,853     14,773   

Cash flows from assets covered by FDIC loss share agreements

     244,040        39,057   

Purchases of premises and equipment

     (16,845     (9,961

Proceeds from disposition of premises and equipment, foreclosed and other assets

     7,168        13,564   

Cash paid for interest in unconsolidated investments and noncontrolling interest

     (1,735     (4,104

Purchase of BOLI

     0        (10,200

Net cash proceeds received in FDIC-assisted acquisitions

     365,394        141,085   
  

 

 

   

 

 

 

Net cash provided by investing activities

     704,675        374,799   
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net decrease in deposits

     (609,017     (331,196

Net repayments of other borrowings

     (85,605     (101,521

Net increase in repurchase agreements with customers

     2,261        11,481   

Proceeds from exercise of stock options

     2,667        1,964   

Current tax benefit on exercise of stock options

     488        639   

Cash dividends paid on common stock

     (9,233     (7,451
  

 

 

   

 

 

 

Net cash used by financing activities

     (698,439     (426,084
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     20,468        (23,932

Cash and cash equivalents – beginning of period

     49,029        78,294   
  

 

 

   

 

 

 

Cash and cash equivalents – end of period

   $ 69,497      $ 54,362   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

4


Table of Contents

BANK OF THE OZARKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

 

1. Organization and Principles of Consolidation

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

 

2. Basis of Presentation

The accompanying consolidated financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) in Article 10 of Regulation S-X and in accordance with the instructions to Form 10-Q and accounting principles generally accepted in the United States (“GAAP”) for interim financial information. Certain information, accounting policies and footnote disclosures normally included in complete financial statements prepared in accordance with GAAP have been condensed or omitted in accordance with such rules and regulations. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2010.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. In the opinion of management, all adjustments considered necessary, consisting of normal recurring items, have been included for a fair presentation of the accompanying consolidated financial statements. Operating results for the three and nine months ended September 30, 2011 are not necessarily indicative of the results that may be expected for the full year or future periods.

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

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

 

3. Acquisitions

2011 Acquisitions

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

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

On April 29, 2011, the Company, through the Bank, entered into a purchase and assumption agreement with loss share agreements with the FDIC pursuant to which it acquired substantially all of the assets and assumed substantially all of the deposits and certain other liabilities of the former The Park Avenue Bank (“Park Avenue”) with 11 offices in Georgia, including Valdosta (3), Bainbridge (2), Cairo, Lake Park, Stockbridge, McDonough, Oakwood and Athens and one office in Ocala, Florida. On October 21, 2011, the Company closed the office in Stockbridge, Georgia.

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Table of Contents

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

 

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

Assets acquired:

         

Cash and cash equivalents

   $ 14,710      $ —           $ 14,710   

Loans not covered by FDIC loss share agreements

     6,532        (3,447   b      3,085   

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

     154,018        (73,342   b      80,676   

FDIC loss share receivable

     —          52,395      c      52,395   

Foreclosed assets covered by FDIC loss share agreements

     16,554        (9,410   d      7,144   

Core deposit intangible

     —          401      e      401   

Other assets

     1,054        (621   f      433   
  

 

 

   

 

 

      

 

 

 

Total assets acquired

     192,868        (34,024        158,844   
  

 

 

   

 

 

      

 

 

 

Liabilities assumed:

         

Deposits

     195,067        —        i      195,067   

FDIC clawback payable

     —          924      h      924   

Other liabilities

     333        100      f      433   
  

 

 

   

 

 

      

 

 

 

Total liabilities assumed

     195,400        1,024           196,424   
  

 

 

   

 

 

      

 

 

 

Net assets acquired

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

 

 

      

Asset discount bid

     (38,000       
  

 

 

        

Cash received from FDIC

   $ 40,532             40,532   
  

 

 

        

 

 

 

Pre-tax gain

          $ 2,952   
         

 

 

 

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

 

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

Assets acquired:

         

Cash and cash equivalents

   $ 38,018      $ —           $ 38,018   

Investment securities AFS

     4,588        (20   a      4,568   

Loans not covered by FDIC loss share agreements

     1,973        (419   b      1,554   

Loans covered by FDIC loss share agreements

     246,451        (96,557   b      149,894   

FDIC loss share receivable

     —          59,544      c      59,544   

Foreclosed assets covered by FDIC loss share agreements

     2,773        (1,102   d      1,671   

Core deposit intangible

     —          495      e      495   

Other assets

     931        (861   f      70   
  

 

 

   

 

 

      

 

 

 

Total assets acquired

     294,734        (38,920        255,814   
  

 

 

   

 

 

      

 

 

 

Liabilities assumed:

         

Deposits

     293,344        —        i      293,344   

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

     4,000        —        g      4,000   

FDIC clawback payable

     —          930      h      930   

Other liabilities

     478        100      f      578   
  

 

 

   

 

 

      

 

 

 

Total liabilities assumed

     297,822        1,030           298,852   
  

 

 

   

 

 

      

 

 

 

Net assets acquired

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

 

 

      

Asset discount bid

     (42,900       
  

 

 

        

Cash received from FDIC

   $ 45,988             45,988   
  

 

 

        

 

 

 

Pre-tax gain

          $ 2,950   
         

 

 

 

 

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

 

     April 29, 2011  
     As Recorded
by

Park  Avenue
    Fair Value
Adjustments
         As Recorded
by the
Company
 
     (Dollars in thousands)  

Assets acquired:

         

Cash and cash equivalents

   $ 66,825      $ —           $ 66,825   

Investment securities AFS

     132,737        (947   a      131,790   

Loans not covered by FDIC loss share agreements

     23,664        (5,968   b      17,696   

Loans covered by FDIC loss share agreements

     408,069        (145,152   b      262,917   

FDIC loss share receivable

     —          113,683      c      113,683   

Foreclosed assets covered by FDIC loss share agreements

     91,442        (59,812   d      31,630   

Core deposit intangible

     —          5,063      e      5,063   

Other assets

     5,012        (2,035   f      2,977   
  

 

 

   

 

 

      

 

 

 

Total assets acquired

     727,749        (95,168        632,581   
  

 

 

   

 

 

      

 

 

 

Liabilities assumed:

         

Deposits

     626,321        —        i      626,321   

FHLB-Atlanta advances

     84,260        4,559      g      88,819   

FDIC clawback payable

     —          14,868      h      14,868   

Other liabilities

     1,588        500      f      2,088   
  

 

 

   

 

 

      

 

 

 

Total liabilities assumed

     712,169        19,927           732,096   
  

 

 

   

 

 

      

 

 

 

Net assets acquired

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

 

 

      

Asset discount bid

     (174,900       
  

 

 

        

Cash received from FDIC

   $ 159,320             159,320   
  

 

 

        

 

 

 

Pre-tax gain

          $ 59,805   
         

 

 

 

Explanation of fair value adjustments

 

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

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

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Table of Contents

2010 Acquisitions

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

On July 16, 2010 the Company, through the Bank, entered into a purchase and assumption agreement with loss share agreements with the FDIC pursuant to which it acquired substantially all of the assets and assumed substantially all of the deposits and certain other liabilities of the former Woodlands Bank (“Woodlands”) with eight offices, including two in South Carolina; two in North Carolina; one in Georgia and three in Alabama. On October 26, 2010, the Company closed four of the Woodlands offices, and in December 2010 the Company relocated two offices. The Company also renegotiated the leases on the remaining two offices. As a result, the Company now operates one office each in Bluffton, South Carolina; Wilmington, North Carolina; Savannah, Georgia; and Mobile, Alabama.

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

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

Purchase Accounting and Purchase Accounting Adjustments

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

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

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

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

 

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Table of Contents

The accretable difference on purchased loans is the difference between the expected cash flows and the net present value of expected cash flows. Such difference is accreted into earnings using the effective yield method over the term of the loans. In determining the net present value of the expected cash flows, the Company used discount rates ranging from 6.0% to 9.5% per annum depending on the risk characteristics of each individual loan. The weighted average period during which management expects to receive the estimated cash flows for its covered loan portfolio (not considering any payment under the FDIC loss share agreements) is 2.4 years.

Management separately monitors the purchased loan portfolio and periodically reviews loans contained within this portfolio against the factors and assumptions used in determining the Day 1 Fair Values. A loan is reviewed (i) any time it is renewed or extended, (ii) at any other time additional information becomes available to the Company that provides material additional insight regarding the loan’s performance, the status of the borrower, or the quality or value of the underlying collateral, or (iii) in conjunction with the annual review of projected cash flows of each acquired portfolio. Management separately reviews, on an annual basis, the performance of a substantial portion of each acquired loan portfolio, or more frequently to the extent that material information becomes available regarding the performance of an individual loan, to make determinations of the constituent loans’ performance and to consider whether there has been any significant change in performance since management’s initial expectations established in conjunction with the determination of the Day 1 Fair Values. To the extent that a loan is performing in accordance with management’s performance expectation established in conjunction with the determination of the Day 1 Fair Values, such loan is not included in any of the credit quality ratios, is not considered to be a nonaccrual or impaired loan, is not risk rated in a similar manner as are the Company’s non-purchased loans and is not considered in the determination of the required allowance for loan and lease losses. To the extent that a loan’s performance has deteriorated from management’s expectation established in conjunction with the determination of the Day 1 Fair Values, such loan will be included in the Company’s credit quality metrics, may be considered a nonaccrual or impaired loan, and is considered in the determination of the required level of allowance for loan and lease losses. To the extent that deterioration in the credit quality of the loan would result in some portion or all of such loan being included in the calculation of the allowance for loan and lease losses, there would be an increase of the FDIC loss share receivable balance for the portion of such additional loss expected to be collected from the FDIC. Currently, the expected losses on covered assets for each of the Company’s loss share agreements would result in expected recovery of approximately 80% of incurred losses. Any improvement in the expected performance of a purchased loan would result in (i) a reversal of the provision for loan and lease losses to the extent of prior charges and then an adjustment to accretable yield, which would have a positive impact on interest income and (ii) a decrease in the FDIC loss share receivable balance for the applicable percentage of the portion of such loss no longer expected to be incurred by the Company.

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

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

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

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

 

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Table of Contents

Subsequent to the reporting of the assets acquired and the liabilities assumed in the Unity, Woodlands and Horizon acquisitions, the Company made certain adjustments to these values in order to establish the Day 1 Fair Values. As a result of those adjustments, the Company has “recast” the assets acquired and liabilities assumed in the Unity, Woodlands and Horizon acquisitions to reflect the Day 1 Fair Values. The following tables provide a summary of the Day 1 Fair Values of assets acquired and liabilities assumed, including any such recast adjustments, for the Company’s 2010 FDIC-assisted acquisitions.

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

 

     March 26, 2010  
     As  Recorded
by

Unity
    Fair Value
Adjustments
           Recast
Adjustments
    As Recorded
by the
Company(1)
 
     (Dollars in thousands)  

Assets acquired:

           

Cash and cash equivalents

   $ 45,401      $ —           $ —        $ 45,401   

Investment securities AFS

     5,580        —          a         —          5,580   

Loans covered by FDIC loss share agreements

     185,213        (42,038     b         (8,723     134,452   

FDIC loss share receivable

     —          35,683        c         8,464        44,147   

Foreclosed assets covered by FDIC loss share agreements

     20,304        (10,890     d         (555     8,859   

Core deposit intangible

     —          1,657        e         —          1,657   

Other assets

     1,137        (954     f         —          183   
  

 

 

   

 

 

      

 

 

   

 

 

 

Total assets acquired

     257,635        (16,542        (814     240,279   
  

 

 

   

 

 

      

 

 

   

 

 

 

Liabilities assumed:

           

Deposits

     220,806        —          i         —          220,806   

FHLB-Atlanta advances

     23,000        1,078        g         —          24,078   

FDIC clawback payable

     —          2,265        h         (699     1,566   

Other liabilities

     629        (22     f         (115     492   
  

 

 

   

 

 

      

 

 

   

 

 

 

Total liabilities assumed

     244,435        3,321           (814     246,942   
  

 

 

   

 

 

      

 

 

   

 

 

 

Net assets acquired

     13,200      $ (19,863      $ —          (6,663
    

 

 

      

 

 

   

Asset discount bid

     (29,900         
  

 

 

          

Cash received from FDIC

   $ 16,700               16,700   
  

 

 

          

 

 

 

Pre-tax gain

            $ 10,037   
           

 

 

 

 

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

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Table of Contents

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

 

     July 16, 2010  
     As  Recorded
by

Woodlands
    Fair Value
Adjustments
           Recast
Adjustments
    As Recorded
by the
Company(1)
 
     (Dollars in thousands)  

Assets acquired:

           

Cash and cash equivalents

   $ 13,447      $ —           $ —        $ 13,447   

Investment securities AFS

     85,017        (525     a         —          84,492   

Loans not covered by FDIC loss share agreements

     1,500        (387     b         —          1,113   

Loans covered by FDIC loss share agreements

     270,335        (82,337     b         (1,520     186,478   

FDIC loss share receivable

     —          54,827        c         1,039        55,866   

Foreclosed assets covered by FDIC loss share agreements

     12,258        (7,229     d         —          5,029   

Core deposit intangible

     —          200        e         —          200   

Other assets

     2,556        (1,411     f         327        1,472   
  

 

 

   

 

 

      

 

 

   

 

 

 

Total assets acquired

     385,113        (36,862        (154     348,097   
  

 

 

   

 

 

      

 

 

   

 

 

 

Liabilities assumed:

           

Deposits

     344,723        —          i         —          344,723   

FHLB-Atlanta advances

     10,000        142        g         —          10,142   

FDIC clawback payable

     —          3,030        h         (89     2,941   

Other liabilities

     258        —          f         (65     193   
  

 

 

   

 

 

      

 

 

   

 

 

 

Total liabilities assumed

     354,981        3,172           (154     357,999   
  

 

 

   

 

 

      

 

 

   

 

 

 

Net assets acquired

     30,132      $ (40,034      $ —          (9,902
    

 

 

      

 

 

   

Asset discount bid

     (54,392         
  

 

 

          

Cash received from FDIC

   $ 24,260               24,260   
  

 

 

          

 

 

 

Pre-tax gain

            $ 14,358   
           

 

 

 

 

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

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

 

     September 10, 2010  
     As  Recorded
by

Horizon
    Fair Value
Adjustments
           Recast
Adjustments
    As Recorded
by the
Company(1)
 
     (Dollars in thousands)  

Assets acquired:

           

Cash and cash equivalents

   $ 11,775      $ —           $ —        $ 11,775   

Investment securities AFS

     5,312        (207     a         —          5,105   

Loans not covered by FDIC loss share agreements

     1,323        (431     b         —          892   

Loans covered by FDIC loss share agreements

     138,778        (45,775     b         (1,195     91,808   

FDIC loss share receivable

     —          29,089        c         —          29,089   

Foreclosed assets covered by FDIC loss share agreements

     8,391        (4,708     d         —          3,683   

Core deposit intangible

     —          396        e         —          396   

Other assets

     2,868        (887     f         1,195        3,176   
  

 

 

   

 

 

      

 

 

   

 

 

 

Total assets acquired

     168,447        (22,523        —          145,924   
  

 

 

   

 

 

      

 

 

   

 

 

 

Liabilities assumed:

           

Deposits

     152,387        —          i         —          152,387   

FHLB-Atlanta advances

     18,000        1,251        g         —          19,251   

FDIC clawback payable

     —          1,461        h         —          1,461   

Other liabilities

     562        —          f         —          562   
  

 

 

   

 

 

      

 

 

   

 

 

 

Total liabilities assumed

     170,949        2,712           —          173,661   
  

 

 

   

 

 

      

 

 

   

 

 

 

Net assets acquired

     (2,502   $ (25,235      $ —          (27,737
    

 

 

      

 

 

   

Asset discount bid

     (27,000         
  

 

 

          

Cash received from FDIC

   $ 29,502               29,502   
  

 

 

          

 

 

 

Pre-tax gain

            $ 1,765   
           

 

 

 

 

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

 

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Table of Contents

A summary of the assets acquired and liabilities assumed in the Chestatee acquisition is as follows:

 

     December 17, 2010  
     As  Recorded
by

Chestatee
    Fair Value
Adjustments
           As Recorded
by the
Company(1)
 
     (Dollars in thousands)  

Assets acquired:

         

Cash and cash equivalents

   $ 21,964      $ —           $ 21,964   

Investment securities AFS

     7,204        (47     a         7,157   

Loans not covered by FDIC loss share agreements

     5,269        (1,693     b         3,576   

Loans covered by FDIC loss share agreements

     163,428        (46,620     b         116,808   

FDIC loss share receivable

     —          42,072        c         42,072   

Foreclosed and repossessed assets covered by loss share agreements

     31,647        (18,241     d         13,406   

Core deposit intangible

     —          550        e         550   

Other assets

     1,722        (621     f         1,101   
  

 

 

   

 

 

      

 

 

 

Total assets acquired

     231,234        (24,600        206,634   
  

 

 

   

 

 

      

 

 

 

Liabilities assumed:

         

Deposits

     234,468        —          i         234,468   

FDIC clawback payable

     —          1,091        h         1,091   

Other liabilities

     440        200        f         640   
  

 

 

   

 

 

      

 

 

 

Total liabilities assumed

     234,908        1,291           236,199   
  

 

 

   

 

 

      

 

 

 

Net assets acquired

     (3,674   $ (25,891        (29,565
    

 

 

      

Asset discount bid

     (34,750       
  

 

 

        

Cash received from FDIC

   $ 38,424             38,424   
  

 

 

        

 

 

 

Pre-tax gain

          $ 8,859   
         

 

 

 

 

(1) The Day 1 Fair Values of assets and liabilities assumed in the Chestatee acquisition are not yet finalized as of September 30, 2011. Management expects such Day 1 Fair Values will be finalized during the fourth quarter of 2011.

Explanation of fair value adjustments

 

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

The recast adjustments to the acquired assets and assumed liabilities for Unity, Woodlands and Horizon were made subsequent to the acquisition, but prior to their one year anniversaries and, as provided for under GAAP, were considered to be purchase accounting adjustments in deriving the Day 1 Fair Values for the acquired assets and assumed liabilities. These adjustments impacted the net assets acquired and the resulting pre-tax gains on these acquisitions. However, because the net effect on net assets acquired and resulting pre-tax gains was not material, management recorded the impact of such adjustments as an increase or decrease to non-interest income during the quarter in which the adjustments were determined. The net increase or decrease to non-interest income is included as an adjustment to “other liabilities” and/or to “other assets” in the above tables.

 

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

As a result of the recast adjustments recorded on the Unity, Woodlands and Horizon acquisitions and used by management in its determination of Day 1 Fair Values, certain amounts previously reported in the Company’s consolidated financial statements have been recast. The following is a summary of those financial statement captions that have been impacted by these recast adjustments.

 

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

September 30, 2010:

       

Loans covered by FDIC loss share agreements

   $ 394,482       $ (3,468   $ 391,014   

FDIC loss share receivable

     122,098         1,604        123,702   

Other assets

     38,050         1,522        39,572   

FDIC clawback payable

     6,163         (127     6,036   

Accrued interest and other liabilities

     19,569         (215     19,354   

December 31, 2010:

       

Loans covered by FDIC loss share agreements

   $ 497,545       $ (2,650   $ 494,895   

FDIC loss share receivable

     153,111         1,039        154,150   

Other assets

     33,624         1,522        35,146   

FDIC clawback payable

     7,292         (89     7,203   

Loss Share Agreements and Other Acquisition Matters

In conjunction with these FDIC-assisted acquisitions, the Bank entered into loss share agreements with the FDIC such that the Bank and the FDIC will share in the losses on assets covered under the loss share agreements. Pursuant to the terms of the loss share agreements for the Unity acquisition, on losses up to $65.0 million, the FDIC will reimburse the Bank for 80% of losses. On losses exceeding $65.0 million, the FDIC will reimburse the Bank for 95% of losses. Pursuant to the terms of the loss share agreements for the Woodlands acquisition, the Chestatee acquisition, the Oglethorpe acquisition and the First Choice acquisition, the FDIC will reimburse the Bank for 80% of losses. Pursuant to the terms of the loss share agreements for the Horizon acquisition, the FDIC will reimburse the Bank on single family residential loans and related foreclosed real estate for (i) 80% of losses up to $11.8 million, (ii) 30% of losses between $11.8 million and $17.9 million and (iii) 80% of losses in excess of $17.9 million. For non-single family residential loans and related foreclosed real estate, the FDIC will reimburse the Bank for (i) 80% of losses up to $32.3 million, (ii) 0% of losses between $32.3 million and $42.8 million and (iii) 80% of losses in excess of $42.8 million. Pursuant to the terms of the loss share agreements for the Park Avenue acquisition, the FDIC will reimburse the Bank for (i) 80% of losses up to $218.2 million, (ii) 0% of losses between $218.2 million and $267.5 million and (iii) 80% of losses in excess of $267.5 million.

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

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

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

 

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4. Earnings Per Common Share (“EPS”)

Basic EPS is computed by dividing reported earnings available to common stockholders by the weighted-average number of common shares outstanding. Diluted EPS is computed by dividing reported earnings available to common stockholders by the weighted-average number of common shares outstanding after consideration of the dilutive effect, if any, of the Company’s outstanding common stock options using the treasury stock method. No options to purchase shares of the Company’s common stock for the three-month and nine-month periods ended September 30, 2011 and September 30, 2010 were excluded from the diluted EPS calculation as all options were dilutive for the respective periods.

Basic and diluted EPS are computed as follows:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2011      2010      2011      2010  
     (In thousands, except per share amounts)  

Common shares – weighted-average (basic)

     34,264         33,962         34,211         33,892   

Common share equivalents – weighted-average

     246         172         223         138   
  

 

 

    

 

 

    

 

 

    

 

 

 

Common shares – diluted

     34,510         34,134         34,434         34,030   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income available to common stockholders (in thousands)

   $ 18,904       $ 20,225       $ 83,751       $ 47,070   

Basic EPS

   $ 0.55       $ 0.60       $ 2.45       $ 1.39   

Diluted EPS

     0.55         0.59         2.43         1.38   

 

5. Investment Securities

At September 30, 2011 and 2010 and at December 31, 2010, the Company classified all of its investment securities portfolio as available for sale (“AFS”). Accordingly, its investment securities are stated at estimated fair value in the consolidated financial statements with 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 at September 30, 2011 and 2010 and at December 31, 2010. The Company’s holdings of “other equity securities” include Federal Home Loan Bank of Dallas (“FHLB – Dallas”), FHLB – Atlanta and First National Banker’s Bankshares, Inc. (“FNBB”) shares, which do not have readily determinable fair values and are carried at cost.

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair
Value (1)
 
     (Dollars in thousands)  

September 30, 2011:

          

Obligations of state and political subdivisions

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

U.S. Government agency residential mortgage-backed securities

     48,749         1,769         —          50,518   

Other equity securities

     20,311         —           —          20,311   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

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

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2010:

          

Obligations of state and political subdivisions

   $ 378,822       $ 6,431       $ (6,706   $ 378,547   

U.S. Government agency residential mortgage-backed securities

     1,269         —           —          1,269   

Other equity securities

     18,882         —           —          18,882   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 398,973       $ 6,431       $ (6,706   $ 398,698   
  

 

 

    

 

 

    

 

 

   

 

 

 

September 30, 2010:

          

Obligations of state and political subdivisions

   $ 376,347       $ 18,941       $ (1,460   $ 393,828   

U.S. Government agency residential mortgage-backed securities

     193         —           —          193   

Other equity securities

     18,422         —           —          18,422   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 394,962       $ 18,941       $ (1,460   $ 412,443   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) 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. For investment securities traded in an active market, the fair values are obtained from independent pricing services and based on quoted market prices if available. If quoted market prices are not available, fair values are based on market prices for comparable securities, broker quotes or comprehensive interest rate tables and pricing matrices or a combination thereof. For investment securities traded in a market that is not active, fair value is determined using unobservable inputs.

 

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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, at September 30, 2011 and 2010 and at December 31, 2010.

 

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

September 30, 2011:

                 

Obligations of state and political subdivisions

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2010:

                 

Obligations of states and political subdivisions

   $ 174,356       $ 6,153       $ 5,387       $ 553       $ 179,743       $ 6,706   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 174,356       $ 6,153       $ 5,387       $ 553       $ 179,743       $ 6,706   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

September 30, 2010:

                 

Obligations of state and political subdivisions

   $ 37,529       $ 1,213       $ 5,718       $ 248       $ 43,246       $ 1,460   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 37,529       $ 1,213       $ 5,718       $ 248       $ 43,246       $ 1,460   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

In evaluating the Company’s unrealized loss positions for other-than-temporary impairment for the investment securities portfolio, management considers the credit quality of the issuer, the nature and cause of the unrealized loss, the severity and duration of the impairments and other factors. At September 30, 2011 and 2010 and December 31, 2010 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 at September 30, 2011 and December 31, 2010.

 

     September 30, 2011      December 31, 2010  

Maturity or

Estimated Repayment

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

One year or less

   $ 2,891       $ 2,896       $ 4,773       $ 4,808   

After one year to five years

     13,984         14,114         17,635         17,893   

After five years to ten years

     22,776         23,355         21,134         21,592   

After ten years

     386,898         399,231         355,431         354,405   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 426,549       $ 439,596       $ 398,973       $ 398,698   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

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Table of Contents

Sales activities in the Company’s investment securities AFS were as follows:

 

     Nine Months Ended
September 30,
 
     2011     2010  
     (Dollars in thousands)  

Sales proceeds

   $ 96,743      $ 251,528   
  

 

 

   

 

 

 

Gross realized gains

   $ 1,044      $ 4,881   

Gross realized losses

     (55     (402

Other-than-temporary impairment charges

     —          (161
  

 

 

   

 

 

 

Net gains on investment securities

   $ 989      $ 4,318   
  

 

 

   

 

 

 

 

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

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

 

     Nine Months Ended
September 30,
 
     2011     2010  
     (Dollars in thousands)  

Beginning balance

   $ 40,230      $ 39,619   

Loans and leases charged off

     (8,913     (12,213

Recoveries of loans and leases previously charged off

     319        944   
  

 

 

   

 

 

 

Net loans and leases charged off

     (8,594     (11,269

Provision charged to operating expense

     7,500        11,900   
  

 

 

   

 

 

 

Ending balance

   $ 39,136      $ 40,250   
  

 

 

   

 

 

 

The following table is a summary of the Company’s ALLL as of and for the three months ended September 30, 2011.

 

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

Real estate:

            

Residential 1-4 family

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

Non-farm/non-residential

     8,694         (117     7         (618     7,966   

Construction/land development

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

Agricultural

     2,169         (4     —           684        2,849   

Multifamily residential

     1,563         —          —           388        1,951   

Commercial and industrial

     3,645         (77     15         249        3,832   

Consumer

     1,381         (231     66         108        1,324   

Direct financing leases

     1,538         (98     5         153        1,598   

Other

     185         (1     1         (25     160   

Unallocated

     8,218         —          —           434        8,652   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

The following table is a summary of the Company’s ALLL as of and for the nine months ended September 30, 2011.

 

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

Real estate:

            

Residential 1-4 family

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

Non-farm/non-residential

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

Construction/land development

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

Agricultural

     2,569         (617     —           897        2,849   

Multifamily residential

     1,320         —          —           631        1,951   

Commercial and industrial

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

Consumer

     2,051         (657     150         (220     1,324   

Direct financing leases

     1,726         (324     5         191        1,598   

Other

     201         (74     3         30        160   

Unallocated

     6,344         —          —           2,308        8,652   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

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Table of Contents

The following table is a summary of the Company’s ALLL and recorded investment in loans and leases, excluding loans covered by FDIC loss share agreements, as of September 30, 2011.

 

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

Real estate:

                 

Residential 1-4 family

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

Non-farm/non-residential

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

Construction/land development

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

Agricultural

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

Multifamily residential

     —           1,951         1,951         —           162,807         162,807   

Commercial and industrial

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

Consumer

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

Direct financing leases

     —           1,598         1,598         —           52,957         52,957   

Other

     3         157         160         17         10,224         10,241   

Unallocated

     —           8,652         8,652         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table is a summary of the Company’s ALLL and recorded investment in loans and leases, excluding loans covered by FDIC loss share agreements, as of December 31, 2010.

 

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

Real estate:

                 

Residential 1-4 family

   $ 33       $ 2,966       $ 2,999       $ 945       $ 265,069       $ 266,014   

Non-farm/non-residential

     71         8,242         8,313         3,096         675,369         678,465   

Construction/land development

     508         10,057         10,565         4,086         492,651         496,737   

Agricultural

     403         2,166         2,569         2,456         79,280         81,736   

Multifamily residential

     —           1,320         1,320         —           103,875         103,875   

Commercial and industrial

     928         3,214         4,142         947         119,091         120,038   

Consumer

     33         2,018         2,051         182         54,219         54,401   

Direct financing leases

     —           1,726         1,726         —           42,754         42,754   

Other

     44         157         201         115         12,294         12,409   

Unallocated

     —           6,344         6,344         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,020       $ 38,210       $ 40,230       $ 11,827       $ 1,844,602       $ 1,856,429   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At September 30, 2011 and December 31, 2010, the Company’s acquired covered loans were performing in accordance with management’s performance expectations established in conjunction with the determination of the Day 1 Fair Values. Accordingly, none of the ALLL at September 30, 2011 or December 30, 2010 was allocated to covered loans.

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Table of Contents

The following table is a summary of credit quality indicators for the Company’s loans and leases as of September 30, 2011.

 

     Risk Rated Loans and Leases                              
     Satisfactory      Moderate      Watch      Substandard      Total      Loans and
Leases not

Risk Rated
     Total
Non-covered
Loans

and Leases
     Covered
Loans
     Total
Loans
and
Leases
 
     (Dollars in thousands)  

Real estate:

                          

Residential 1-4 family

   $ —         $ —         $ —         $ —         $ —         $ 260,705       $ 260,705       $ 210,858       $ 471,563   

Non-farm/non-residential

     521,758         97,288         52,404         17,674         689,124         —           689,124         390,099         1,079,223   

Construction/land development

     228,266         165,235         20,263         23,020         436,784         —           436,784         177,029         613,813   

Agricultural

     48,904         10,739         7,492         7,000         74,135         —           74,135         28,960         103,095   

Multifamily residential

     109,628         48,701         3,687         791         162,807         —           162,807         17,620         180,427   

Commercial and industrial

     93,040         32,812         1,594         4,511         131,957         —           131,957         33,756         165,713   

Consumer

     —           —           —           —           —           44,404         44,404         1,028         45,432   

Direct financing leases

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

Other

     6,392         1,816         406         149         8,763         1,478         10,241         5,746         15,987   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,058,147       $ 359,010       $ 85,875       $ 53,495       $ 1,556,527       $ 306,587       $ 1,863,114       $ 865,096       $ 2,728,210   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table is a summary of credit quality indicators for the Company’s loans and leases as of December 31, 2010.

 

     Risk Rated Loans and Leases                              
     Satisfactory      Moderate      Watch      Substandard      Total      Loans and
Leases not

Risk
Rated
     Total
Non-covered
Loans

and Leases
     Covered
Loans
     Total
Loans
and
Leases
 
     (Dollars in thousands)  

Real estate:

                          

Residential 1-4 family

   $ —         $ —         $ —         $ —         $ —         $ 266,014       $ 266,014       $ 132,494       $ 398,508   

Non-farm/non-residential

     504,923         122,883         32,476         18,183         678,465         —           678,465         213,327         891,792   

Construction/land development

     258,933         201,038         21,135         15,631         496,737         —           496,737         108,548         605,285   

Agricultural

     58,879         10,489         3,609         8,759         81,736         —           81,736         9,643         91,379   

Multifamily residential

     90,700         8,579         3,699         897         103,875         —           103,875         10,709         114,584   

Commercial and industrial

     79,926         34,274         1,659         4,179         120,038         —           120,038         17,646         137,684   

Consumer

     —           —           —           —           —           54,401         54,401         1,301         55,702   

Direct financing leases

     38,666         3,328         676         84         42,754         —           42,754         —           42,754   

Other

     9,484         1,836         157         242         11,719         690         12,409         1,227         13,636   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,041,511       $ 382,427       $ 63,411       $ 47,975       $ 1,535,324       $ 321,105       $ 1,856,429       $ 494,895       $ 2,351,324   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company’s credit quality indicators consist of an internal grading system analysis used to assign grades to all loans and leases except residential 1-4 family loans, consumer loans and acquired covered loans. The grade for each individual loan or lease is determined by the account officer and other approving officers at the time the loan or lease is made and changed from time to time to reflect an ongoing assessment of loan or lease risk. Grades are reviewed on specific loans and leases monthly for all past due loans and leases as a part of past due meetings held by senior management, quarterly for all nonaccrual and special reserve loans and leases, and annually as part of the Company’s internal loan review process. In addition, individual loan grades are reviewed in connection with all renewals, extensions and modifications. 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.

 

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

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

The Company does not use these same credit quality indicators in its grading of covered loans. Instead, the Company grades covered loans as either “performing in accordance with management’s performance expectations established in conjunction with the determination of the Day 1 Fair Value” or “not performing in accordance with management’s performance expectations established in conjunction with the determination of the Day 1 Fair Values.” At September 30, 2011 and December 31, 2010, the Company concluded that all covered loans were peforming in accordance with management’s performance expectations established in conjunction with the determination of the Day 1 Fair Values.

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

 

     Principal
Balance
     Net
Charge-offs
to Date
    Principal
Balance,
Net of

Charge-
offs
     Specific
Allowance
     Average
Carrying
Value – Three
Months Ended
September 30,
2011
     Average
Carrying
Value – Nine
Months Ended
September 30,
2011
 
     (Dollars in thousands)         

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

                

Real estate:

                

Residential 1-4 family

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

Non-farm/non-residential

     308         (132     176         1         176         879   

Construction/land development

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

Agricultural

     9         (9     —           —           286         558   

Commercial and industrial

     1,693         (931     762         798         754         740   

Consumer

     89         (70     19         3         44         63   

Other

     39         (22     17         2         17         17   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans and leases with a related ALLL

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

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

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

                

Real estate:

                

Residential 1-4 family

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

Non-farm/non-residential

     728         (122     606         —           1,714         1,487   

Construction/land development

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

Agricultural

     933         (55     878         —           972         1,004   

Multifamily residential

     133         (133     —           —           —           26   

Commercial and industrial

     372         (213     159         —           217         211   

Consumer

     47         (33     14         —           7         7   

Other

     —           —          —           —           —           —     
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans and leases without a related ALLL

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

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans and leases

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

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

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Table of Contents

The following table is a summary of impaired loans and leases, excluding loans covered by FDIC loss share agreements, as of and for the year ended December 31, 2010.

 

     Principal
Balance
     Net
Charge-
offs to
Date
    Principal
Balance,
Net of

Charge-
offs
     Specific
Allowance
     Average
Carrying
Value –

Year Ended
December 31,
2010
 
     (Dollars in thousands)  

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

             

Real estate:

             

Residential 1-4 family

   $ 305       $ (84   $ 221       $ 33       $ 457   

Non-farm/non-residential

     654         (210     444         71         298   

Construction/land development

     1,835         (92     1,743         508         854   

Agricultural

     1,336         (131     1,205         403         912   

Commercial and industrial

     1,490         (786     704         928         317   

Consumer

     176         (30     146         33         195   

Other

     364         (277     87         44         101   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total impaired loans and leases with a related ALLL

     6,160         (1,610     4,550         2,020         3,134   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

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

             

Real estate:

             

Residential 1-4 family

     851         (127     724         —           1,333   

Non-farm/non-residential

     3,481         (829     2,652         —           4,490   

Construction/land development

     6,139         (3,796     2,343         —           3,603   

Agricultural

     1,392         (141     1,251         —           1,229   

Multifamily residential

     133         (133     —           —           —     

Commercial and industrial

     764         (521     243         —           1,554   

Consumer

     93         (56     37         —           53   

Other

     45         (18     27         —           56   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total impaired loans and leases without a related ALLL

     12,898         (5,621     7,277         —           12,318   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total impaired loans and leases

   $ 19,058       $ (7,231   $ 11,827       $ 2,020       $ 15,452   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Interest income on impaired loans and leases is recognized on a cash basis when and if actually collected. Total interest income recognized on impaired loans and leases for the three months and nine months ended September 30, 2011 and 2010 and the year ended December 31, 2010 was not material.

The following table is an aging analysis of past due loans and leases, excluding loans covered by FDIC loss share agreements, at September 30, 2011.

 

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

Real estate:

              

Residential 1-4 family

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

Non-farm/non-residential

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

Construction/land development

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

Agricultural

     61         878         939         73,196         74,135   

Multifamily residential

     —           —           —           162,807         162,807   

Commercial and industrial

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

Consumer

     667         249         916         43,488         44,404   

Direct financing leases

     21         335         356         52,601         52,957   

Other

     60         —           60         10,181         10,241   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes $1.0 million of loans and leases, excluding loans covered by FDIC loss share agreements, on nonaccrual status at September 30, 2011.
(2) All loans and leases greater than 90 days past due, excluding loans covered by FDIC loss share agreements, were on nonaccrual status at September 30, 2011.
(3) Includes $2.0 million of loans and leases, excluding loans covered by FDIC loss share agreements, on nonaccrual status at September 30, 2011.

 

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Table of Contents

The following table is an aging analysis of past due loans and leases, excluding loans covered by FDIC loss share agreements, at December 31, 2010.

 

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

Real estate:

              

Residential 1-4 family

   $ 3,809       $ 726       $ 4,535       $ 261,479       $ 266,014   

Non-farm/non–residential

     6,261         3,337         9,598         668,867         678,465   

Construction/land development

     11,104         4,249         15,353         481,384         496,737   

Agricultural

     956         2,108         3,064         78,672         81,736   

Multifamily residential

     881         —           881         102,994         103,875   

Commercial and industrial

     1,639         881         2,520         117,518         120,038   

Consumer

     1,187         146         1,333         53,068         54,401   

Direct financing leases

     —           84         84         42,670         42,754   

Other

     201         —           201         12,208         12,409   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 26,038       $ 11,531       $ 37,569       $ 1,818,860       $ 1,856,429   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes $1.2 million of loans and leases, excluding loans covered by FDIC loss share agreements, on nonaccrual status at December 31, 2010.
(2) All loans and leases greater than 90 days past due, excluding loans covered by FDIC loss share agreements, were on nonaccrual status at December 31, 2010.
(3) Includes $1.3 million of loans and leases, excluding loans covered by FDIC loss share agreements, on nonaccrual status at December 31, 2010.

The following table is an aging analysis of past due loans covered by FDIC loss share agreements at September 30, 2011.

 

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

Real estate:

              

Residential 1-4 family

   $ 13,213       $ 31,630       $ 44,843       $ 166,015       $ 210,858   

Non-farm/non-residential

     28,119         60,322         88,441         301,658         390,099   

Construction/land development

     10,167         63,295         73,462         103,567         177,029   

Agricultural

     897         5,567         6,464         22,496         28,960   

Multifamily residential

     826         3,388         4,214         13,406         17,620   

Commercial and industrial

     1,254         4,723         5,977         27,779         33,756   

Consumer

     81         21         102         926         1,028   

Other

     —           40         40         5,706         5,746   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 54,557       $ 168,986       $ 223,543       $ 641,553       $ 865,096   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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21


Table of Contents

The following table is an aging analysis of past due loans covered by FDIC loss share agreement at December 31, 2010.

 

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

Real estate:

              

Residential 1-4 family

   $ 9,663       $ 17,130       $ 26,793       $ 105,701       $ 132,494   

Non-farm/non-residential

     11,070         14,478         25,548         187,779         213,327   

Construction/land development

     18,948         26,487         45,435         63,113         108,548   

Agricultural

     98         602         700         8,943         9,643   

Multifamily residential

     892         1,808         2,700         8,009         10,709   

Commercial and industrial

     507         798         1,305         16,341         17,646   

Consumer

     356         25         381         920         1,301   

Other

     643         —           643         584         1,227   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 42,177       $ 61,328       $ 103,505       $ 391,390       $ 494,895   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At September 30, 2011 and December 31, 2010, a significant portion of the Company’s covered loans were past due, including many that were 90 days or more past due. However, such delinquencies were included in the Company’s performance expectations in determining the Day 1 Fair Values. Accordingly, these covered loans continue to accrete interest income and continue to be performing in accordance with management’s performance expectations established in conjunction with the determination of the Day 1 Fair Values.

 

7. Foreclosed Assets

The amount and type of foreclosed assets not covered by FDIC loss share agreements are as follows:

 

     September 30,
2011
     December 31,
2010
 
     (Dollars in thousands)  

Real estate:

     

Residential 1-4 family

   $ 2,439       $ 4,018   

Non-farm/non-residential

     3,298         3,866   

Construction/land development

     28,113         33,701   

Agricultural

     239         459   
  

 

 

    

 

 

 

Total real estate

     34,089         42,044   

Repossessions

     249         172   
  

 

 

    

 

 

 

Foreclosed assets not covered by FDIC loss share agreements

   $ 34,338       $ 42,216   
  

 

 

    

 

 

 

The amount and type of foreclosed assets covered by FDIC loss share agreements are as follows:

 

     September 30,
2011
     December 31,
2010
 
     (Dollars in thousands)  

Real estate:

     

Residential 1-4 family

   $ 15,219       $ 10,624   

Non-farm/non-residential

     12,314         3,755   

Construction/land development

     43,038         16,366   

Multifamily residential

     2,649         —     
  

 

 

    

 

 

 

Total real estate

     73,220         30,745   

Repossessions

     29         400   
  

 

 

    

 

 

 

Foreclosed assets covered by FDIC loss share agreements

   $ 73,249       $ 31,145   
  

 

 

    

 

 

 

 

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Table of Contents
8. FHLB Advances

FHLB advances, all of which are from FHLB – Dallas, with original maturities exceeding one year totaled $280.8 million at September 30, 2011. Interest rates on these advances ranged from 1.34% to 5.12% at September 30, 2011 with a weighted-average interest rate of 3.80%. At September 30, 2011 aggregate annual maturities and weighted-average interest rates of FHLB advances with an original maturity of over one year were as follows:

 

Maturity

   Amount      Weighted-Average
Interest Rate
 
     (Dollars in thousands)  

2011

   $ 11         3.80

2012

     34         3.40   

2013

     31         3.22   

2014

     32         3.24   

2015

     33         3.27   

Thereafter

     280,667         3.80   
  

 

 

    
   $ 280,808         3.80   
  

 

 

    

At September 30, 2011, $280 million of FHLB advances contained quarterly call features and are callable as follows:

 

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

Callable quarterly

   $ 260,000         3.90     2017   

Callable quarterly

     20,000         2.53        2018   
  

 

 

      
   $ 280,000         3.80     
  

 

 

      

 

9. Subordinated Debentures

The Company had the following issues of trust preferred securities outstanding and subordinated debentures owed to the Trusts at September 30, 2011.

 

Description

   Subordinated
Debentures
Owed to Trusts
     Trust Preferred
Securities
of the Trusts
     Interest Rate
Spread to
90-day LIBOR
    Interest Rate at
September 30, 2011
    Final Maturity Date  
     (Dollars in thousands)  

Ozark III

   $ 14,434       $ 14,000         2.95     3.20     September 25, 2033   

Ozark II

     14,433         14,000         2.90        3.27        September 29, 2033   

Ozark IV

     15,464         15,000         2.22        2.52        September 28, 2034   

Ozark V

     20,619         20,000         1.60        1.95        December 15, 2036   
  

 

 

    

 

 

        
   $ 64,950       $ 63,000          
  

 

 

    

 

 

        

At September 30, 2011 the Company had $64.9 million of subordinated debentures outstanding and had an asset of $1.9 million representing its investment in the common equity issued by the Trusts. The interest rates on the subordinated debentures and related trust preferred securities are based on a spread over the 90-day London Interbank Offered Rate (“LIBOR”) and reset periodically. The sole assets of the Trusts are the adjustable rate debentures and the liabilities of the Trusts are the trust preferred securities. At September 30, 2011 the Trusts did not have any restricted net assets. The Company has, through various contractual arrangements, unconditionally guaranteed payment of all obligations of the Trusts with respect to the trust preferred securities. There are no restrictions on the ability of the Trusts to transfer funds to the Company in the form of cash dividends, loans or advances.

The trust preferred securities and the subordinated debentures mature at or near the 30th anniversary date of their issuance. However, these securities and debentures may be prepaid at par, subject to regulatory approval, prior to maturity at any time on or after September 25 and 29, 2008, respectively, for the Ozark III and Ozark II securities and debentures; on or after September 28, 2009 for the Ozark IV securities and debentures; and on or after December 15, 2011 for the Ozark V securities or debentures, or at an earlier date upon certain changes in tax laws, investment company laws or regulatory capital requirements.

 

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Table of Contents
10. Supplemental Data for Cash Flows

Supplemental cash flow information is as follows:

 

     Nine Months Ended
September 30,
 
     2011      2010  
     (Dollars in thousands)  

Cash paid during the period for:

     

Interest

   $ 25,777       $ 27,113   

Taxes

     12,656         10,279   

Supplemental schedule of non-cash investing and financing activities:

     

Net change in unrealized gains/losses on investment securities AFS

     13,323         7,555   

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

     8,613         10,952   

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

     482         9,476   

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

     20,665         1,881   

 

11. Guarantees and Commitments

Outstanding standby letters of credit are contingent commitments issued by the Company generally to guarantee the performance of a customer in third party arrangements. The maximum amount of future payments the Company could be required to make under these guarantees at September 30, 2011 was $14.7 million. The Company holds collateral to support guarantees when deemed necessary. Collateralized commitments at September 30, 2011 totaled $14.0 million.

At September 30, 2011 the Company had outstanding commitments to extend credit, excluding commitments to extend credit on loans covered by FDIC loss share agreements, totaling $220 million. These commitments extend over varying periods of time with the majority to be disbursed or to expire within a one-year period.

 

12. Stock-Based Compensation

The Company has a nonqualified stock option plan for certain employees of the Company. This plan provides for the granting of nonqualified options to purchase shares of common stock in the Company. No option may be granted under this plan for less than the fair market value of the common stock, defined by the plan as the average of the highest reported asked price and the lowest reported bid price, on the date of the grant. The benefits or amounts that may be received by or allocated to any particular officer or employee of the Company under this plan will be determined in the sole discretion of the Company’s board of directors or its personnel and compensation committee. While the vesting period and the termination date for the employee plan options are determined when options are granted, all such employee options outstanding at September 30, 2011 were issued with a vesting date of three years after issuance and an expiration date seven years after issuance.

The Company also has a nonqualified stock option plan for non-employee directors. This plan permits each director who is not otherwise an employee of the Company, or any subsidiary, to receive options to purchase 1,000 shares of the Company’s common stock on the day following his or her election as a director of the Company at each annual meeting of stockholders and up to 1,000 shares upon election or appointment for the first time as a director of the Company. No option may be granted under this plan for less than the fair market value of the common stock, defined by the plan as the average of the highest reported asked price and the lowest reported bid price, on the date of the grant. These options are exercisable immediately and expire ten years after issuance.

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

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The following table summarizes stock option activity for both the employee and non-employee director stock option plans for the nine months ended September 30, 2011.

 

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

Value
(in thousands)(1)
 

Outstanding – January 1, 2011

    1,053,600      $ 15.53       

Granted

    19,800        22.33       

Exercised

    (171,600     15.54       

Forfeited

    (22,800     14.38       
 

 

 

       

Outstanding – September 30, 2011

    879,000      $ 15.67        4.2      $ 4,653   
 

 

 

   

 

 

   

 

 

   

 

 

 

Fully vested and exercisable – September 30, 2011

    569,100      $ 15.27        3.3      $ 3,248   
   

 

 

   

 

 

   

 

 

 

Expected to vest in future periods

    263,685         
 

 

 

       

Fully vested and expected to vest – September 30, 2011(2)

    832,785      $ 15.63        4.1      $ 4,442   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Based on closing price of $20.93 per share on September 30, 2011.
(2) At September 30, 2011 the Company estimates that outstanding options to purchase 46,215 shares of its common stock will not vest and will be forfeited prior to their vesting date.

Intrinsic value for stock options is defined as the amount by which the current market price of the underlying stock exceeds the exercise price. For those stock options where the exercise price exceeds the current market price of the underlying stock, the intrinsic value is zero. The total intrinsic value of options exercised during the nine months ended September 30, 2011 and 2010 was $1.2 million and $1.6 million, respectively.

Options to purchase 19,800 shares and 20,000 shares of the Company’s common stock were issued during the nine months ended September 30, 2011 and 2010, respectively. Stock-based compensation expense for stock options included in non-interest expense was $0.1 million and $0.1 million for the quarters ended September 30, 2011 and 2010, respectively, and $0.6 million and $0.5 million for the nine-month periods ended September 30, 2011 and 2010, respectively. Total unrecognized compensation cost related to nonvested stock-based compensation was $0.8 million at September 30, 2011 and is expected to be recognized over a weighted-average period of 1.9 years.

The Company has a restricted stock plan that permits issuance of up to 400,000 shares of restricted stock or restricted stock units. All officers and employees of the Company are eligible to receive awards under the restricted stock plan. The benefits or amounts that may be received by or allocated to any particular officer or employee of the Company under the restricted stock plan will be determined in the sole discretion of the Company’s board of directors or its personnel and compensation committee. Shares of common stock issued under the restricted stock plan may be shares of original issuance, shares held in treasury or shares that have been reacquired by the Company. All restricted stock awards outstanding at September 30, 2011 were issued with a vesting date of three years after issuance.

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

 

     Nine Months Ended
September 30, 2011
 

Outstanding – January 1, 2011

     107,800   

Granted

     —     

Forfeited

     (1,600

Vested

     —     
  

 

 

 

Outstanding – September 30, 2011

     106,200   
  

 

 

 

Weighted-average grant date fair value

   $ 16.72   
  

 

 

 

The fair value of the restricted stock awards is amortized to compensation expense over the vesting period (generally three years) and is based on the market price of the Company’s common stock at the date of grant multiplied by the number of shares granted that are expected to vest. Stock-based compensation expense for restricted stock included in non-interest expense was $0.1 million and $38,000 for the quarters ended September 30, 2011 and 2010, respectively, and $0.4 million and $0.1 million for the nine months ended September 30, 2011 and 2010, respectively. Unrecognized compensation expense for nonvested restricted stock awards was $1.1 million at September 30, 2011 and is expected to be recognized over a weighted-average period of 1.9 years.

 

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On October 18, 2011 the Company’s Personnel and Compensation Committee approved the issuance of (i) options to purchase 215,400 shares of the Company’s common stock and (ii) restricted stock awards for 95,700 shares of restricted stock. Both the option grants and restricted stock awards were issued with terms similar to the Company’s existing grants and awards. Total compensation expense for these option grants and restricted stock awards is expected to be $3.5 million and is expected to be recognized ratably over the three-year vesting period.

 

13. Comprehensive Income

Total comprehensive income consists of net income, net income or loss attributable to noncontrolling interest, unrealized gains and losses on investment securities AFS, net of income taxes, and reclassification adjustments for unrealized gains and losses on investment securities AFS sold, net of income taxes. Total comprehensive income was $23.5 million and $25.1 million for the three months ended September 30, 2011 and 2010, respectively, and $91.8 million and $51.6 million for the nine months ended September 30, 2011 and 2010, respectively.

 

14. Fair Value Measurements

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

The Company applies the following fair value hierarchy.

 

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

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

 

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

September 30, 2011:

  

Assets:

           

Investment securities AFS(1):

           

Obligations of state and political subdivisions

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

U.S. Government agency residential mortgage-backed securities

     —           50,518         —           50,518   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities AFS

     —           400,371         18,914         419,285   

Impaired loans and leases

     —           —           19,590         19,590   

Foreclosed assets not covered by FDIC loss share agreements

     —           —           34,338         34,338   

Foreclosed assets covered by FDIC loss share agreements

     —           —           73,249         73,249   

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

     —           —           223         223   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ —         $ 400,371       $ 146,314       $ 546,685   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Derivative liabilities – IRLC and FSC

   $ —         $ —         $ 223       $ 223   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ —         $ —         $ 223       $ 223   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2010:

           

Assets:

           

Investment securities AFS(1):

           

Obligations of state and political subdivisions

   $ —         $ 358,511       $ 20,036       $ 378,547   

U.S. Government agency residential mortgage-backed securities

     —           1,269         —           1,269   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities AFS

     —           359,780         20,036         379,816   

Impaired loans and leases

     —           —           9,807         9,807   

Foreclosed assets not covered by FDIC loss share agreements

     —           —           42,216         42,216   

Foreclosed assets covered by FDIC loss share agreements

     —           —           31,145         31,145   

Derivative assets – IRLC and FSC

     —           —           55         55   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ —         $ 359,780       $ 103,259       $ 463,039   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Derivative liabilities – IRLC and FSC

   $ —         $ —         $ 55       $ 55   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ —         $ —         $ 55       $ 55   
  

 

 

    

 

 

    

 

 

    

 

 

 

September 30, 2010:

           

Assets:

           

Investment securities AFS(1):

           

Obligations of state and political subdivisions

   $ —         $ 373,412       $ 20,416       $ 393,828   

U.S. Government agency residential mortgage-backed securities

     —           193         —           193   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities AFS

     —           373,605         20,416         394,021   

Impaired loans and leases

     —           —           15,977         15,977   

Foreclosed assets not covered by FDIC loss share agreements

     —           —           41,868         41,868   

Foreclosed assets covered by FDIC loss share agreements

     —           —           17,540         17,540   

Derivative assets – IRLC and FSC

     —           —           136         136   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ —         $ 373,605       $ 95,937       $ 469,542   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Derivative liabilities – IRLC and FSC

   $ —         $ —         $ 136       $ 136   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ —         $ —         $ 136       $ 136   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Does not include $20.3 million at September 30, 2011, $18.9 million at December 31, 2010 and $18.4 million at September 30, 2010 of FHLB – Dallas, FHLB – Atlanta and FNBB stock that do not have readily determinable fair values and are carried at cost.

 

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

Investment securities – The Company utilizes independent third parties as its principal pricing sources for determining fair value of investment securities which are measured on a recurring basis. For investment securities traded in an active market, fair values are based on quoted market prices if available. If quoted market prices are not available, fair values are based on quoted market prices of comparable securities, broker quotes or comprehensive interest rate tables and pricing matrices or a combination thereof. For investment securities traded in a market that is not active, fair value is determined using unobservable inputs.

The Company has determined that certain of its investment securities had a limited to non-existent trading market at September 30, 2011. 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 $18.9 million at September 30, 2011 were calculated using Level 3 hierarchy inputs and assumptions as the trading market for such securities was determined to be “not active”. This determination was based on the limited number of trades or, in certain cases, the existence of no reported trades for the private placement bonds. The private placement bonds are generally prepayable at par value at the option of the issuer. As a result, management believes the private placement bonds should be individually valued at the lower of (i) the matrix pricing provided by the Company’s third party pricing services for comparable unrated municipal securities or (ii) par value. At September 30, 2011, the third parties pricing matrices valued the Company’s portfolio of private placement bonds at $19.0 million which exceeded the aggregate of the lower of the matrix pricing or par value of the private placement bonds by $0.1 million. Accordingly, at September 30, 2011 the Company reported the private placement bonds at $18.9 million which was the lower of the matrix pricing or par value.

Impaired loans and leases – Fair values are measured on a nonrecurring basis and are based on the underlying collateral value of the impaired loan or lease, net of selling costs, or the estimated discounted cash flows for such loan or lease. At September 30, 2011 the Company has reduced the carrying value of its impaired loans and leases (all of which are included in nonaccrual loans and leases) by $10.1 million to the estimated fair value of $19.6 million for such loans and leases. The $10.1 million adjustment to reduce the carrying value of impaired loans and leases to estimated fair value consisted of $9.1 million of partial charge-offs and $1.0 million of specific loan and lease loss allocations.

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

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

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

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

 

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

Balances – January 1, 2011

   $ 20,036      $ 55      $ (55

Total realized gains (losses) included in earnings

     —          168        (168

Total unrealized gains (losses) included in comprehensive income

     (1,122     —          —     

Sales

     —          —          —     

Transfers in and/or out of Level 3

     —          —          —     
  

 

 

   

 

 

   

 

 

 

Balances – September 30, 2011

   $ 18,914      $ 223      $ (223
  

 

 

   

 

 

   

 

 

 

Balances – January 1, 2010

   $ 16,590      $ 210      $ (210

Total realized gains (losses) included in earnings

     —          (74     74   

Total unrealized gains (losses) included in comprehensive income

     (472     —          —     

Sales

     252        —          —     

Transfers in and/or out of Level 3

     4,046        —          —     
  

 

 

   

 

 

   

 

 

 

Balances – September 30, 2010

   $ 20,416      $ 136      $ (136
  

 

 

   

 

 

   

 

 

 

 

15. 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. For investment securities traded in an active market, fair values are based on quoted market prices if available. If quoted market prices are not available, fair values are based on quoted market prices of comparable securities, broker quotes or comprehensive interest rate tables, pricing matrices or a combination thereof. For investment securities traded in a market that is not active, fair value is determined using unobservable inputs. The Company’s investments in the common stock of the FHLB – Dallas, FHLB – Atlanta and FNBB totaling $20.3 million at September 30, 2011, $18.9 million at December 31, 2010 and $18.4 million at September 30, 2010 do not have readily determinable fair values and are carried at cost.

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

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

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

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

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

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

 

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

Off-balance sheet instruments The fair values of commercial loan commitments and letters of credit were not material at September 30, 2011 and 2010 or at December 31, 2010 and are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements.

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

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

 

     September 30,         
     2011      2010      December 31, 2010  
     Carrying
Amount
     Estimated
Fair

Value
     Carrying
Amount
     Estimated
Fair

Value
     Carrying
Amount
     Estimated
Fair

Value
 
     (Dollars in thousands)  

Financial assets:

                 

Cash and cash equivalents

   $ 69,497       $ 69,497       $ 54,362       $ 54,362       $ 49,029       $ 49,029   

Investment securities AFS

     439,596         439,596         412,443         412,443         398,698         398,698   

Loans and leases, net of ALLL

     2,689,074         2,679,924         2,239,700         2,222,048         2,311,094         2,293,339   

FDIC loss share receivable

     318,730         318,219         123,702         123,319         154,150         154,422   

Derivative assets – IRLC and FSC

     223         223         136         136         55         55   

Financial liabilities:

                 

Demand, savings and interest bearing transaction deposits

   $ 2,076,570       $ 2,076,570       $ 1,542,781       $ 1,542,781       $ 1,597,643       $ 1,597,643   

Time deposits

     969,899         978,442         872,933         878,571         943,110         947,447   

Repurchase agreements with customers

     46,334         46,334         55,750         55,750         43,324         43,324   

Other borrowings

     289,353         351,403         294,502         365,374         282,139         349,964   

Subordinated debentures

     64,950         30,036         64,950         29,251         64,950         29,377   

Derivative liabilities – IRLC and FSC

     223         223         136         136         55         55   

 

16. Recent Accounting Pronouncements

In April 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-02, “A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring.” The provisions of ASU No. 2011-02 amend and clarify GAAP related to the accounting for debt restructurings. Specifically, ASU No. 2011-02 requires that, when evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both (i) the restructuring constitutes a concession and (ii) the debtor is experiencing financial difficulties. In evaluating whether a concession has been granted, a creditor must evaluate whether (i) a debtor has access to funds at a market rate for debt with similar risk characteristics as the restructured debt in order to determine if the restructuring would be considered to be at a below-market rate, indicating that the creditor has granted a concession, (ii) a temporary or permanent increase in the contractual interest rate as a result of a restructuring may be considered a concession because the new contractual interest rate on the restructured debt is still below the market interest rate for new debt with similar risk characteristics, and (iii) a restructuring that results in a delay in payment is either significant and is a concession or is insignificant and is not a concession. In evaluating whether a debtor is experiencing financial difficulties, a creditor may conclude that a debtor is experiencing financial difficulties, even though the debtor is not currently in payment default.

 

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A creditor should evaluate whether it is probable that the debtor would be in payment default on any of its debt in the foreseeable future without a modification of the debt. The provisions of ASU No. 2011-02 were effective July 1, 2011 and were applied retroactively to modifications occurring on or after January 1, 2011. The Company reassessed significant modifications and loan restructurings occurring between January 1, 2011 and September 30, 2011 noting no such modifications and loan restructurings that were considered troubled debt restructurings under the provisions of ASU No. 2011-02. For the nine months ended September 30, 2011, there were no defaults on any loans that were considered troubled debt restructurings during the preceding 12 months.

In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income,” which revises the manner in which entities present comprehensive income in their financial statements. The provisions of ASU 2011-05 require reporting the components of comprehensive income in either (i) a continuous statement of comprehensive income or (ii) two separate but consecutive statements. ASU 2011-05 does not change the items that must be reported in other comprehensive income but rather removes the presentation options available under ASC 220, “Comprehensive Income.” The new presentation disclosures required by ASU 2011-05 are effective for interim and annual periods beginning after December 15, 2011. As this ASU amends only the presentation of comprehensive income, the adoption will have no impact on the Company’s financial position, results of operations, or liquidity.

In September 2011, the FASB issued ASU 2011-08, “Testing Goodwill for Impairment.” The provisions of ASU 2011-08 provide the option of performing a qualitative assessment before calculating the fair value of a reporting unit in Step 1 of the goodwill impairment test. If based on qualitative factors, the fair value of the reporting unit is more likely than not less than the carrying amount, the two step impairment test would be required. This ASU is effective beginning January 1, 2012; however, early adoption is permitted. The Company does not expect the provisions of ASU 2011-08 will have a material impact on its financial position, results of operations, or liquidity.

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

GENERAL

Net income available to common stockholders for Bank of the Ozarks, Inc. (the “Company”) was $18.9 million for the third quarter of 2011, a 6.5% decrease from $20.2 million for the third quarter of 2010. Diluted earnings per common share were $0.55 for the third quarter of 2011, a 6.8% decrease from $0.59 for the third quarter of 2010. For the first nine months of 2011, net income available to common stockholders totaled $83.8 million, a 77.9% increase from $47.1 million for the first nine months of 2010. Diluted earnings per common share for the first nine months of 2011 were $2.43, a 76.1% increase from $1.38 for the first nine months of 2010.

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

The Company’s annualized return on average assets was 1.91% for the third quarter of 2011 compared to 2.60% for the third quarter of 2010. Its annualized return on average common stockholders’ equity was 18.97% for the third quarter of 2011 compared to 26.28% for the third quarter of 2010. The Company’s annualized return on average assets was 3.01% for the first nine months of 2011 compared to 2.15% for the first nine months of 2010. Its annualized return on average common stockholders’ equity was 31.01% for the first nine months of 2011 compared to 21.79% for the first nine months of 2010.

Total assets were $3.93 billion at September 30, 2011 compared to $3.27 billion at December 31, 2010. Loans and leases, excluding those covered by Federal Deposit Insurance Corporation (“FDIC”) loss share agreements, were $1.86 billion at both September 30, 2011 and December 31, 2010. Loans covered by FDIC loss share agreements (“covered loans”) were $865 million at September 30, 2011 compared to $495 million at December 31, 2010. Deposits were $3.05 billion at September 30, 2011 compared to $2.54 billion at December 31, 2010.

Common stockholders’ equity was $407 million at September 30, 2011 compared to $320 million at December 31, 2010. Book value per common share was $11.87 at September 30, 2011 compared to $9.39 at December 31, 2010. Changes in common stockholders’ equity and book value per common share reflect earnings, dividends paid, stock option and stock grant transactions and changes in unrealized gains and losses on investment securities available for sale (“AFS”).

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

ANALYSIS OF RESULTS OF OPERATIONS

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

The Company’s non-interest expense consists of employee compensation and benefits, net occupancy and equipment and other operating expenses. The Company’s results of operations are significantly impacted by its provision for loan and lease losses and its provision for income taxes. The following discussion provides a comparative summary of the Company’s operations for the three and nine months ended September 30, 2011 and 2010 and should be read in conjunction with the consolidated financial statements and related notes presented elsewhere in this report.

Net Interest Income

Net interest income is analyzed in this discussion and the following tables on a fully taxable equivalent (“FTE”) basis. The adjustment to convert certain income to a FTE basis consists of dividing federal tax-exempt income by one minus the Company’s statutory federal income tax rate of 35%. The FTE adjustments to net interest income were $2.3 million and $2.4 million for the quarters ended September 30, 2011 and 2010, respectively, and $6.8 million and $7.7 million for the nine months ended September 30, 2011 and 2010, respectively. No adjustments have been made in this analysis for income exempt from state income taxes or for interest expense deductions disallowed under the provisions of the Internal Revenue Code as a result of investment in certain tax-exempt securities.

 

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Net interest income for the third quarter of 2011 increased 32.3% to $46.6 million compared to $35.2 million for the third quarter of 2010. Net interest income for the nine months ended September 30, 2011 increased 33.2% to $129.7 million compared to $97.3 million for the nine months ended September 30, 2010. Net interest margin was 5.90% for the third quarter and 5.77% for the first nine months of 2011 compared to 5.31% for the third quarter and 5.14% for the first nine months of 2010. The growth in net interest income was a result of the improvement in net interest margin, which increased 59 basis points (“bps”) for the third quarter and 63 bps for the first nine months of 2011 compared to the same periods in 2010, and growth in average earning assets which increased 19.2% for the third quarter and 18.7% for the first nine months of 2011 compared to the same periods in 2010.

The Company’s improvement in net interest margin for the third quarter and first nine months of 2011 compared to the same periods in 2010 resulted from a combination of factors including, among others, an increase in the volume of the Company’s covered loan portfolio, which is higher yielding than the Company’s non-covered loan and lease portfolio, and reductions in rates paid on most categories of interest bearing liabilities, partially offset by decreases in yield on the Company’s loan and lease portfolio not covered by FDIC loss share agreements and the Company’s aggregate investment securities portfolio.

Yields on earning assets increased 28 bps for the third quarter and 31 bps for the first nine months of 2011 compared to the same periods in 2010. These increases were primarily the result of an increase in the yield on covered loans of 30 bps for the third quarter and 63 bps for the first nine months of 2011 compared to the same periods in 2010, partially offset by decreases in yields on non-covered loans and leases of eight bps for the third quarter and 12 bps for the first nine months of 2011 and decreases in the aggregate yield on the Company’s investment securities portfolio of 58 bps for the third quarter and 49 bps for the first nine months of 2011 compared to the same periods in 2010.

The decline in rates on average interest bearing liabilities was primarily due to the declines in rates on interest bearing deposits, the largest component of the Company’s interest bearing liabilities. Rates on interest bearing deposits decreased 32 bps for the third quarter and 29 bps for the first nine months of 2011 compared to the same periods in 2010. This decrease in the rate on interest bearing deposits was principally due to (i) a change in mix of the Company’s interest bearing deposits as a result of growth in the volume of savings and interest bearing transaction accounts resulting in an increase in these deposits to 61.2% of total interest bearing deposits for the third quarter and 59.3% for the first nine months of 2011 compared to 58.3% for the third quarter and 55.7% for the first nine months of 2010 and (ii) effectively managing the repricing of both time deposits and savings and interest bearing transaction deposits which resulted in lower rates paid on deposits as they were renewed or otherwise repriced.

The Company’s other borrowing sources include (i) repurchase agreements with customers (“repos”), (ii) other borrowings comprised primarily of Federal Home Loan Bank of Dallas (“FHLB – Dallas”) advances, and, to a lesser extent, Federal Reserve Bank (“FRB”) borrowings and federal funds purchased, and (iii) subordinated debentures. The rates on repos decreased 34 bps for the third quarter and 30 bps for the first nine months of 2011 compared to the same periods in 2010 primarily as a result of the Company’s efforts to effectively manage the rates on its interest bearing liabilities, including repos. The rates on the Company’s other borrowings, which consist primarily of fixed rate callable FHLB – Dallas advances, increased 27 bps in the third quarter and decreased 17 bps for the first nine months of 2011 compared to the same periods in 2010. The increase in rates for other borrowings for the third quarter of 2011 compared to the same period in 2010 was primarily due to decreased utilization of lower rate short-term federal funds purchased and short-term FHLB – Dallas borrowings. The decrease in rates for other borrowings for the first nine months of 2011 compared to the same period in 2010 was due primarily to the repayment of $60.0 million of fixed rate, callable FHLB – Dallas advances with a weighted-average interest rate of 6.25% that were repaid on their maturity dates in May 2010. The rates paid on the Company’s subordinated debentures, which are tied to a spread over the 90-day London Interbank Offered Rate (“LIBOR”) and reset periodically, decreased 25 bps for the third quarter and seven bps for the first nine months of 2011 compared to the same periods in 2010 primarily as a result of the decrease in the 90-day LIBOR on the applicable reset dates during 2011.

The increase in average earning assets was due primarily to increases in the Company’s average balance of covered loans from $298 million for the third quarter and $149 million for the first nine months of 2010 to $885 million for the third quarter and $744 million for the first nine months of 2011. The Company made seven FDIC-assisted acquisitions during 2010 and the first nine months of 2011, resulting in significant increases in its covered loan portfolio over the last seven quarters. These increases were partially offset by decreases in the Company’s average non-covered loans and leases of $100 million for the third quarter and $79 million for the first nine months of 2011 compared to the same periods in 2010. The declines in the average balances of non-covered loans and leases is due primarily to paydowns and payoffs of existing loans and leases throughout the quarter and nine months ended September 30, 2011 more than offsetting loan and lease originations, the majority of which were funded during September 2011. The Company’s average earnings assets were also affected by changes in its average investment securities portfolio, which increased $17 million for the third quarter and decreased $42 million for the first nine months of 2011 compared to the same periods in 2010. In recent years, the Company has generally been a net seller of investment securities as a result of ongoing evaluations of interest rate risk and to free up capital for FDIC-assisted acquisitions.

 

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Average Consolidated Balance Sheets and Net Interest Analysis – FTE

 

    Three Months Ended September 30,     Nine Months Ended September 30,  
    2011     2010     2011     2010  
    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                        

Interest earning assets:

                       

Interest earning deposits and federal funds sold

  $ 1,405      $ 5        1.60   $ 1,180      $ 4        1.46   $ 1,865      $ 31        2.21   $ 1,298      $ 16        1.64

Investment securities:

                       

Taxable

    109,782        838        3.03        57,056        636        4.42        101,646        2,324        3.06        99,705        3,701        4.96   

Tax-exempt – FTE

    342,368        6,427        7.45        378,096        6,982        7.33        344,845        19,399        7.52        388,650        21,832        7.51   

Loans and leases – FTE

    1,796,113        27,799        6.14        1,896,203        29,712        6.22        1,815,004        83,734        6.17        1,893,971        89,044        6.29   

Covered loans*

    884,864        19,089        8.56        297,941        6,205        8.26        744,069        48,119        8.65        149,035        8,942        8.02   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total interest earning assets – FTE

    3,134,532        54,158        6.85        2,630,476        43,539        6.57        3,007,429        153,607        6.83        2,532,659        123,535        6.52   

Non interest earning assets

    800,269            453,313            706,952            398,025       
 

 

 

       

 

 

       

 

 

       

 

 

     

Total assets

  $ 3,934,801          $ 3,083,789          $ 3,714,381          $ 2,930,684       
 

 

 

       

 

 

       

 

 

       

 

 

     
LIABILITIES AND STOCKHOLDERS’ EQUITY                        

Interest bearing liabilities:

                       

Deposits:

                       

Savings and interest bearing transaction

  $ 1,632,593      $ 2,071        0.50   $ 1,200,779      $ 2,279        0.75   $ 1,500,892      $ 6,854        0.61   $ 1,079,036      $ 6,543        0.81

Time deposits of $100,000 or more

    403,394        888        0.87        443,209        1,365        1.22        446,737        3,219        0.96        479,853        4,466        1.24   

Other time deposits

    631,347        1,430        0.90        417,080        1,384        1.32        582,906        4,294        0.99        376,975        4,128        1.46   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total interest bearing deposits

    2,667,334        4,389        0.65        2,061,068        5,028        0.97        2,530,535        14,367        0.76        1,935,864        15,137        1.05   

Repurchase agreements with customers

    37,082        35        0.37        51,618        92        0.71        39,944        153        0.51        50,009        302        0.81   

Other borrowings

    283,176        2,712        3.80        307,264        2,734        3.53        291,484        8,096        3.71        325,175        9,433        3.88   

Subordinated debentures

    64,950        430        2.63        64,950        470        2.87        64,950        1,288        2.65        64,950        1,323        2.72   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total interest bearing liabilities

    3,052,542        7,566        0.98        2,484,900        8,324        1.33        2,926,913        23,904        1.09        2,375,998        26,195        1.47   

Non-interest bearing liabilities:

                       

Non-interest bearing deposits

    419,349            267,605            377,278            245,223       

Other non-interest bearing liabilities

    64,069            22,468            45,642            17,214       
 

 

 

       

 

 

       

 

 

       

 

 

     

Total liabilities

    3,535,960            2,774,973            3,349,833            2,638,435       

Common stockholders’ equity

    395,430            305,378            361,123            288,800       

Noncontrolling interest

    3,411            3,438            3,425            3,449       
 

 

 

       

 

 

       

 

 

       

 

 

     

Total liabilities and stockholders’ equity

  $ 3,934,801          $ 3,083,789          $ 3,714,381          $ 2,930,684       
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Net interest income – FTE

    $ 46,592          $ 35,215          $ 129,703          $ 97,340     
   

 

 

       

 

 

       

 

 

       

 

 

   

Net interest margin – FTE

        5.90         5.31         5.77         5.14

 

* Covered loans are loans covered by FDIC loss share agreements

 

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

Analysis of Changes in Net Interest Income – FTE

 

     Three Months Ended
September 30, 2011
Over
Three Months Ended
September 30, 2010
    Nine Months Ended
September 30, 2011
Over
Nine Months Ended
September 30, 2010
 
     Volume     Yield/
Rate
    Net
Change
    Volume     Yield/
Rate
    Net
Change
 
     (Dollars in thousands)  

Increase (decrease) in:

            

Interest income – FTE:

            

Interest earning deposits and federal funds sold

   $ 1      $ —        $ 1      $ 9      $ 6      $ 15   

Investment securities:

            

Taxable

     402        (200     202        44        (1,421     (1,377

Tax-exempt – FTE

     (671     116        (555     (2,464     31        (2,433

Loans and leases – FTE

     (1,549     (364     (1,913     (3,643     (1,667     (5,310

Covered loans

     12,661        223        12,884        38,481        696        39,177   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income – FTE

     10,844        (225     10,619        32,427        (2,355     30,072   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

            

Savings and interest bearing transaction

     548        (756     (208     1,926        (1,615     311   

Time deposits of $100,000 or more

     (88     (389     (477     (239     (1,008     (1,247

Other time deposits

     485        (439     46        1,517        (1,351     166   

Repurchase agreements with customers

     (14     (43     (57     (38     (111     (149

Other borrowings

     (230     208        (22     (936     (401     (1,337

Subordinated debentures

     —          (40     (40     —          (35     (35
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     701        (1,459     (758     2,230        (4,521     (2,291
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase in net interest income – FTE

   $ 10,143      $ 1,234      $ 11,377      $ 30,197      $ 2,166      $ 32,363   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-Interest Income

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

Non-interest income for the third quarter of 2011 decreased 36.2% to $16.1 million compared to $25.2 million for the third quarter of 2010. Non-interest income for the nine months ended September 30, 2011 increased 101.5% to $104.1 million compared to $51.7 million for the nine months ended September 30, 2010. These results include pre-tax bargain purchase gains on FDIC-assisted acquisitions of none for the third quarter and $65.7 million for the first nine months of 2011 compared to $16.1 million for the third quarter and $26.2 million for the first nine months of 2010.

Service charges on deposit accounts, traditionally the Company’s largest source of non-interest income, increased 18.3% to $4.7 million for the third quarter of 2011 compared to $4.0 million for the third quarter of 2010. Service charges on deposit accounts increased 18.1% to $13.2 million for the nine months ended September 30, 2011 compared to $11.1 million for the same period in 2010. The increase in service charges on deposit accounts is due to a number of factors including, primarily, growth in the number of transaction accounts, increased utilization of fee-based services by customers, selectively increasing certain fees, and the addition of deposit customers from the Company’s seven FDIC-assisted acquisitions during the last seven quarters.

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Mortgage lending income decreased 20.4% to $0.8 million for the third quarter of 2011 compared to $1.0 million for the third quarter of 2010. Mortgage lending income decreased 10.0% to $2.1 million for the nine months ended September 30, 2011 compared to $2.4 million for the same period in 2010. The volume of originations of mortgage loans available for sale decreased 23.6% and 19.7%, respectively, for the third quarter and first nine months of 2011 compared to the same periods in 2010. During the third quarter of 2011, approximately 54% of the Company’s originations of mortgage loans available for sale were related to mortgage refinancings and 46% were related to new home purchases, compared to approximately 64% for refinancings and approximately 36% for new home purchases in the third quarter of 2010.

Trust income was $0.81 million in the quarter ended September 30, 2011, an increase of 1.0% from $0.80 million for the same period in 2010. Trust income was $2.4 million for the nine months ended September 30, 2011, a decrease of 4.9% from $2.5 million for the same period in 2010. The decrease in trust income for the nine months ended September 30, 2011 was primarily due to a decline in corporate trust income earned for services provided in connection with new municipal bond issues.

Net gains on investment securities were $0.64 million in the third quarter of 2011 compared to $0.57 million in the third quarter of 2010. For the first nine months of 2011, net gains on investment securities were $1.0 million compared to $4.3 million in the first nine months of 2010.

Net gains on sales of other assets were $1.7 million in the third quarter of 2011 compared to $0.3 million in the third quarter of 2010. Net gains on sales of other assets were $2.8 million in the first nine months of 2011 compared to $0.2 million in the first nine months of 2010. The increases in net gains on sales of other assets in the third quarter and first nine months of 2011 compared to the same periods in 2010 are primarily due to net gains on sales of foreclosed assets covered by FDIC loss share agreements, or covered foreclosed assets. Because the estimated fair value of acquired covered foreclosed assets includes a net present value component, which is not accreted into income over the expected holding period of the covered foreclosed assets, the sale of a majority of the Company’s covered foreclosed assets has resulted in gains on such sales.

The Company recognized $2.9 million of income from the accretion of the FDIC loss share receivable, net of amortization of the FDIC clawback payable, during the third quarter of 2011 and $7.8 million of such income during the first nine months of 2011, compared to $0.9 million for the third quarter and $1.2 million for the first nine months of 2010. The FDIC loss share receivable reflects the indemnification provided by the FDIC in FDIC-assisted acquisitions, and the FDIC clawback payable represents the obligation of the Company to reimburse the FDIC should actual losses be less than certain thresholds established in each loss share agreement. The FDIC loss share receivable and the FDIC clawback payable are both carried at net present value.

The accretion of the FDIC loss share receivable, net of amortization of the FDIC clawback payable, increased in the third quarter and first nine months of 2011 compared to the same periods in 2010 primarily due to the Company having entered into seven FDIC-assisted acquisitions at September 30, 2011 compared to three FDIC-assisted acquisitions at September 30, 2010, resulting in the significant increase in the balance of the FDIC loss share receivable.

As the Company collects payments in future periods from the FDIC under the loss share agreements, the balance of the FDIC loss share receivable, absent any significant revisions of the amounts expected to be collected under the loss share agreements, will decline, resulting in a corresponding decrease in the accretion of the FDIC loss share receivable. Because any amounts due under the FDIC clawback payable are due at the conclusion of the loss share agreements, absent any significant revision of the amounts expected to be paid to the FDIC under the clawback provisions of the loss share agreements, the amortization of this liability is not expected to change significantly over the next several quarters. Further analysis of the FDIC loss share receivable and the FDIC clawback payable is presented on pages 51 through 53 of this Management’s Discussion and Analysis.

Other loss share income, net, consisting primarily of income recognized on covered loan prepayments and payoffs that are not considered yield adjustments, was $3.0 million in the third quarter and $4.9 million in the first nine months of 2011 compared to $0.3 million in both the third quarter and first nine months of 2010.

During the first nine months of 2011, the Company made three FDIC-assisted acquisitions which resulted in bargain purchase gains totaling $65.7 million. Specifically, on January 14, 2011 the Company, through the Bank, entered into a purchase and assumption agreement with loss share agreements with the FDIC pursuant to which it acquired substantially all of the assets and assumed substantially all of the deposits and certain other liabilities of the former Oglethorpe Bank (“Oglethorpe”). This FDIC-assisted acquisition resulted in the Company recognizing a pre-tax bargain purchase gain of $3.0 million in the first quarter of 2011. On April 29, 2011 the Company, through the Bank, entered into a purchase and assumption agreement with loss share agreements with the FDIC pursuant to which it acquired substantially all of the assets

 

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and assumed substantially all of the deposits and certain other liabilities of the former First Choice Community Bank (“First Choice”). This FDIC-assisted acquisition resulted in the Company recognizing a pre-tax bargain purchase gain of $2.9 million in the second quarter of 2011. On April 29, 2011 the Company, through the Bank, entered into a purchase and assumption agreement with loss share agreements with the FDIC pursuant to which it acquired substantially all of the assets and assumed substantially all of the deposits and certain other liabilities of the former The Park Avenue Bank (“Park Avenue”). This FDIC-assisted acquisition resulted in the Company recognizing a pre-tax bargain purchase gain of $59.8 million in the second quarter of 2011.

During the first nine months of 2010, the Company made three FDIC-assisted acquisitions. Specifically, on March 26, 2010 the Company, through the Bank, entered into a purchase and assumption agreement with loss share agreements with the FDIC pursuant to which it acquired substantially all of the assets and assumed substantially all of the deposits and certain other liabilities of the former Unity National Bank (“Unity”). This FDIC-assisted acquisition resulted in the Company recognizing a pre-tax bargain purchase gain of $10.0 million in the first quarter of 2010. On July 16, 2010 the Company, through the Bank, entered into a purchase and assumption agreement with loss share agreements with the FDIC pursuant to which it acquired substantially all of the assets and assumed substantially all of the deposits and certain other liabilities of the former Woodlands Bank (“Woodlands”). This FDIC-assisted acquisition resulted in the Company recognizing a pre-tax bargain purchase gain of $14.3 million in the third quarter of 2010. On September 10, 2010 the Company, through the Bank, entered into a purchase and assumption agreement with loss share agreements with the FDIC pursuant to which it acquired substantially all of the assets and assumed substantially all of the deposits and certain other liabilities of the former Horizon Bank (“Horizon”). This FDIC-assisted acquisition resulted in the Company recognizing a pre-tax bargain purchase gain of $1.8 million in the third quarter of 2010.

Additionally, on December 17, 2010 the Company, through the Bank, entered into a purchase and assumption agreement with loss share agreements with the FDIC pursuant to which it acquired substantially all of the assets and assumed substantially all of the deposits and certain other liabilities of the former Chestatee State Bank (“Chestatee”).

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

The following table presents non-interest income for the three and nine months ended September 30, 2011 and 2010.

Non-Interest Income

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2011      2010      2011      2010  
     (Dollars in thousands)  

Service charges on deposit accounts

   $ 4,734       $ 4,002       $ 13,158       $ 11,137   

Mortgage lending income

     815         1,024         2,130         2,367   

Trust income

     810         802         2,395         2,518   

BOLI income

     585         580         1,728         1,577   

Gains on investment securities

     638         570         989         4,318   

Gains on sales of other assets

     1,727         267         2,839         232   

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

     2,861         906         7,783         1,177   

Other loss share income, net

     2,976         295         4,931         295   

Gains on FDIC-assisted acquisitions

     —           16,122         65,708         26,160   

Other

     925         615         2,458         1,895   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest income

   $ 16,071       $ 25,183       $ 104,119       $ 51,676   
  

 

 

    

 

 

    

 

 

    

 

 

 

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Non-Interest Expense

Non-interest expense increased 34.9% to $31.8 million for the third quarter of 2011 compared to $23.6 million for the third quarter of 2010. Non-interest expense increased 50.0% to $93.2 million for the nine months ended September 30, 2011 compared to $62.1 million for the same period in 2010. This increase in non-interest expense was primarily due to the fact that the Company made seven FDIC-assisted acquisitions over the last seven quarters. There were five factors significantly affecting non-interest expense. First, at September 30, 2011 the Company had 113 offices compared to 90 offices at September 30, 2010. Second, the Company had 1,102 full-time equivalent employees at September 30, 2011 compared to 838 full-time equivalent employees at September 30, 2010. Third, the Company incurred acquisition and conversion costs of $1.2 million in the third quarter of 2011 compared to $1.7 million in the third quarter of 2010, and $5.5 million in the first nine months of 2011 compared to $2.5 million in the first nine months of 2010. Fourth, loan collection and repossession expense totaled $2.5 million in the third quarter and $5.8 million in the first nine months of 2011 compared to $1.0 million in the third quarter and $2.9 million in the first nine months of 2010. Fifth, the Company recorded a $1.25 million impairment charge related to its only equity investment in a real estate development project during the second quarter of 2011. There was no impairment charge related to this investment during 2010.

The Company’s efficiency ratio (non-interest expense divided by the sum of net interest income – FTE and non-interest income) was 50.8% for the quarter ended September 30, 2011 compared to 39.0% for the quarter ended September 30, 2010. The Company’s efficiency ratio was 39.9% for the nine months ended September 30, 2011 compared to 41.7% for the nine months ended September 30, 2010.

The following table presents non-interest expense for the three and nine months ended September 30, 2011 and 2010.

Non-Interest Expense

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2011      2010      2011      2010  
     (Dollars in thousands)  

Salaries and employee benefits

   $ 14,597       $ 10,539       $ 41,060       $ 27,810   

Net occupancy and equipment

     4,301         2,782         11,183         7,619   

Other operating expenses:

           

Postage and supplies

     939         555         2,430         1,411   

Advertising and public relations

     1,079         684         2,579         1,570   

Telephone and data lines

     913         405         2,247         1,312   

Professional and outside services

     1,082         1,330         3,784         2,665   

ATM expense

     283         280         731         604   

Software expense

     939         519         2,345         1,484   

FDIC insurance

     350         840         1,805         2,538   

FDIC and state assessments

     285         119         540         560   

Loan collection and repossession expense

     2,450         1,039         5,776         2,884   

Write down of other real estate owned

     1,435         2,736         8,877         7,128   

Write down of other assets

     —           —           1,250         —     

Amortization of intangibles

     504         133         1,168         270   

Other

     2,643         1,604         7,416         4,291   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest expense

   $ 31,800       $ 23,565       $ 93,191       $ 62,146   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income Taxes

The provision for income taxes was $8.2 million for the third quarter and $42.6 million for the first nine months of 2011 compared to $9.9 million for the third quarter and $20.3 million for the first nine months of 2010. The effective income tax rate was 30.3% for the third quarter and 33.7% for the first nine months of 2011 compared to 32.8% for the third quarter and 30.2% for the first nine months of 2010. The effective tax rates for the periods were affected by various factors including non-taxable income and non-deductible expenses and the timing of FDIC-assisted acquisitions which resulted in gains in certain periods affecting the Company’s mix of taxable and tax-exempt income.

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Table of Contents

ANALYSIS OF FINANCIAL CONDITION

Loan and Lease Portfolio

At September 30, 2011 the Company’s loan and lease portfolio, excluding loans covered by FDIC loss share agreements, was $1.86 billion, compared to $1.86 billion at December 31, 2010 and $1.89 billion at September 30, 2010. Real estate loans, the Company’s largest category of loans, consist of all loans secured by real estate as evidenced by mortgages or other liens, including all loans made to finance the development of real property construction projects, provided such loans are secured by real estate. Total real estate loans were $1.62 billion at September 30, 2011, compared to $1.63 billion at December 31, 2010 and $1.65 billion at September 30, 2010. The amount and type of loans and leases outstanding, excluding loans covered by FDIC loss share agreements, at September 30, 2011 and 2010 and at December 31, 2010 and their respective percentage of the total loan and lease portfolio are reflected in the following table.

Loan and Lease Portfolio

 

     September 30,     December 31,  
     2011     2010     2010  
     (Dollars in thousands)  

Real estate:

               

Residential 1-4 family

   $ 260,705         14.0   $ 276,090         14.6   $ 266,014         14.3

Non-farm/non-residential

     689,124         37.0        686,340         36.3        678,465         36.5   

Construction/land development

     436,784         23.4        498,258         26.4        496,737         26.8   

Agricultural

     74,135         4.0        87,363         4.6        81,736         4.4   

Multifamily residential

     162,807         8.7        103,230         5.5        103,875         5.6   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total real estate

     1,623,555         87.1        1,651,281         87.4        1,626,827         87.6   

Commercial and industrial

     131,957         7.1        126,678         6.7        120,038         6.5   

Consumer

     44,404         2.4        55,200         2.9        54,401         2.9   

Direct financing leases

     52,957         2.8        41,571         2.2        42,754         2.3   

Agricultural (non-real estate)

     7,257         0.4        11,949         0.7        9,962         0.6   

Other

     2,984         0.2        2,257         0.1        2,447         0.1   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total loans and leases

   $ 1,863,114         100.0   $ 1,888,936         100.0   $ 1,856,429         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Included in the Company’s loan and lease portfolio are certain loans acquired in FDIC-assisted acquisitions, primarily consumer loans, that are not covered by loss share. The amount of unpaid principal balance, the valuation discount and the carrying value of these non-covered acquired loans at September 30, 2011 and 2010 and at December 31, 2010 are reflected in the following table.

Non-Covered Loans Acquired in FDIC-Assisted Acquisitions

 

     September 30,     December 31,  
     2011     2010     2010  
     (Dollars in thousands)  

Unpaid principal balance

   $ 12,368      $ 2,738      $ 7,689   

Valuation discount

     (5,399     (781     (2,373
  

 

 

   

 

 

   

 

 

 

Carrying value

   $ 6,969      $ 1,957      $ 5,316   
  

 

 

   

 

 

   

 

 

 

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Table of Contents

The amount and type of non-farm/non-residential loans, excluding loans covered by FDIC loss share agreements, at September 30, 2011 and 2010 and at December 31, 2010, and their respective percentage of the total non-farm/non-residential loan portfolio are reflected in the following table.

Non-Farm/Non-Residential Loans

 

     September 30,     December 31,  
     2011     2010     2010  
     (Dollars in thousands)  

Retail, including shopping centers and strip centers

   $ 252,970         36.7   $ 225,172         32.8   $ 225,701         33.3

Churches and schools

     40,085         5.8        56,243         8.2        56,670         8.3   

Office, including medical offices

     104,775         15.2        94,003         13.7        90,924         13.4   

Office warehouse, warehouse and mini-storage

     59,030         8.6        65,716         9.6        64,137         9.5   

Gasoline stations and convenience stores

     10,448         1.5        15,659         2.3        14,452         2.1   

Hotels and motels

     54,514         7.9        45,152         6.6        45,078         6.6   

Restaurants and bars

     34,363         5.0        39,757         5.8        39,069         5.8   

Manufacturing and industrial facilities

     9,580         1.4        11,424         1.6        10,215         1.5   

Nursing homes and assisted living centers

     28,931         4.2        29,978         4.4        29,711         4.4   

Hospitals, surgery centers and other medical

     58,009         8.4        62,230         9.0        63,157         9.3   

Golf courses, entertainment and recreational facilities

     12,885         1.9        13,516         2.0        13,457         2.0   

Other non-farm/non residential

     23,534         3.4        27,490         4.0        25,894         3.8   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 689,124         100.0   $ 686,340         100.0   $ 678,465         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

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Table of Contents

The amount and type of construction/land development loans, excluding loans covered by FDIC loss share agreements, at September 30, 2011 and 2010 and at December 31, 2010, and their respective percentage of the total construction/land development loan portfolio are reflected in the following table.

Construction/Land Development Loans

 

     September 30,     December 31,  
     2011     2010     2010  
     (Dollars in thousands)  

Unimproved land

   $ 92,367         21.1   $ 97,306         19.5   $ 99,084         20.0

Land development and lots:

               

1-4 family residential and multifamily

     150,948         34.6        179,047         35.9        168,080         33.8   

Non-residential

     67,365         15.4        74,444         15.0        74,745         15.1   

Construction:

               

1-4 family residential:

               

Owner occupied

     11,727         2.7        14,144         2.8        13,505         2.7   

Non-owner occupied:

               

Pre-sold

     5,830         1.3        4,549         0.9        4,153         0.8   

Speculative

     36,602         8.4        44,817         9.0        43,899         8.8   

Multifamily

     8,356         1.9        58,138         11.7        60,536         12.2   

Industrial, commercial and other

     63,589         14.6        25,813         5.2        32,735         6.6   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 436,784         100.0   $ 498,258         100.0   $ 496,737         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The establishment of interest reserves for construction and development loans is an established banking practice, and many of the Company’s construction and development loans provide for the use of interest reserves. When the Company underwrites construction and development loans, it considers the expected total project costs, including hard costs such as land, site work and construction costs and soft costs such as architectural and engineering fees, closing costs, leasing commissions and construction period interest. Based on the total project costs and other factors, the Company determines the required borrower cash equity contribution and the maximum amount the Company is willing to loan. In the vast majority of cases, the Company requires that all of the borrower’s cash equity contribution be contributed prior to any material loan advances. This ensures that the borrower’s cash equity required to complete the project will in fact be available for such purposes. As a result of this practice, the borrower’s cash equity typically goes toward the purchase of the land and early stage hard costs and soft costs. This results in the Company funding the loan later as the project progresses, and accordingly the Company typically funds the majority of the construction period interest through loan advances. However, when the Company initially determines the borrower’s cash equity requirement, the Company typically requires borrower’s cash equity in an amount to cover a majority, or all, of the soft costs, including an amount equal to construction period interest, and an appropriate portion of the hard costs. In the third quarter of 2011, the Company advanced construction period interest totaling approximately $0.7 million on construction and development loans. While the Company advanced these sums as part of the funding process, the Company believes that the borrowers in effect had in most cases already provided for these sums as part of their initial equity contribution. Specifically, the maximum committed balance of all construction and development loans which provide for the use of interest reserves at September 30, 2011 was approximately $405 million, of which $275 million was outstanding at September 30, 2011 and $130 million remained to be advanced. The weighted average loan to cost on such loans, assuming such loans are ultimately fully advanced, will be approximately 61%, which means that the weighted average cash equity contributed on such loans, assuming such loans are ultimately fully advanced, will be approximately 39%. 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 56%.

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The amount and type of the Company’s real estate loans, excluding loans covered by FDIC loss share agreements, at September 30, 2011 based on the metropolitan statistical area (“MSA”) and other geographic areas in which the principal collateral is located are reflected in the following table. Data for individual states and MSAs is separately presented when aggregate real estate loans, excluding loans covered by FDIC loss share agreements, in that state or MSA exceed $10.0 million.

Geographic Distribution of Real Estate Loans

 

     Residential
1-4

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

Arkansas:

  

Little Rock – North Little Rock – Conway, AR MSA

   $ 87,156       $ 213,092       $ 81,599       $ 10,249       $ 8,264       $ 400,360   

Fayetteville – Springdale – Rogers, AR – MO MSA

     7,875         15,301         18,019         6,087         1,297         48,579   

Fort Smith, AR – OK MSA

     35,015         37,774         6,836         4,353         2,417         86,395   

Hot Springs, AR MSA

     7,252         8,671         7,559         —           1,446         24,928   

Western Arkansas (1)

     24,861         36,117         5,370         8,789         1,511         76,648   

Northern Arkansas (2)

     65,029         27,831         11,428         30,379         447         135,114   

All other Arkansas (3)

     6,960         11,283         3,491         2,659         81         24,474   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Arkansas

     234,148         350,069         134,302         62,516         15,463         796,498   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Texas:

                 

Dallas – Fort Worth – Arlington, TX MSA

     5,792         162,229         137,197         —           57,863         363,081   

Houston – Sugar Land – Baytown, TX MSA

     —           21,661         30,847         —           12,963         65,471   

San Antonio – New Braunfels, TX MSA

     —           9,421         17,031         —           —           26,452   

Austin – Round Rock – San Marcos, TX MSA

     —           —           1,830         —           17,623         19,453   

Texarkana, TX – Texarkana, AR MSA

     11,316         9,616         4,086         254         1,132         26,404   

Beaumont – Port Arthur, TX MSA

     —           —           —           —           17,154         17,154   

All other Texas (3)

     1,220         13,914         1,027         —           3,094         19,225   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Texas

     18,328         216,841         192,018         254         109,829         537,270   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

North Carolina/South Carolina:

                 

Charlotte – Gastonia – Rock Hill, NC – SC MSA

     722         27,306         15,480         —           26,968         70,476   

Wilson, NC MSA

     —           16,707         —           —           —           16,707   

All other North Carolina (3)

     —           15,535         29,701         —           —           45,236   

All other South Carolina (3)

     3,410         11,641         5,301         —           6,443         26,795   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total North Carolina/ South Carolina

     4,132         71,189         50,482         —           33,411         159,214   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Oklahoma:

                 

Tulsa, OK MSA

     —           10,079         —           —           —           10,079   

All other Oklahoma (4)

     800         4,373         2,760         —           —           7,933   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Oklahoma

     800         14,452         2,760         —           —           18,012   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Truckee – Grass Valley, CA MSA

     —           —           26,483         —           —           26,483   

All other California (3)

     —           2,516         —           —           —           2,516   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total California

     —           2,516         26,483         —           —           28,999   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

     —           —           18,092         —           —           18,092   

Louisiana

     —           1,565         621         10,617         —           12,803   

All other states (3) (5)

     3,297         32,492         12,026         748         4,104         52,667   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

   $ 260,705       $ 689,124       $ 436,784       $ 74,135       $ 162,807       $ 1,623,555   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) This geographic area includes the following counties in Western Arkansas: Johnson, Logan, Pope and Yell counties.
(2) This geographic area includes the following counties in Northern Arkansas: Baxter, Boone, Marion, Newton, Searcy and Van Buren counties.
(3) These geographic areas include all MSA and non-MSA areas that are not separately reported.
(4) This geographic area includes all loans in Oklahoma except loans in the Tulsa, OK MSA, which are reported separately, and loans in Le Flore and Sequoyah counties which are included in the Fort Smith, AR-OK MSA above.
(5) Includes all states not separately presented above.

 

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The amount and percentage of the Company’s loan and lease portfolio, excluding loans covered by FDIC loss share agreements, by office of origination are reflected in the following table.

Loan and Lease Portfolio by State of Originating Office

 

Loans and Leases Attributable to Offices In

   September 30,     December 31,  
   2011     2010     2010  
     (Dollars in thousands)  

Arkansas

   $ 1,040,926         55.9   $ 1,101,948         58.3   $ 1,064,558         57.3

Texas

     719,164         38.6        677,470         35.9        685,317         36.9   

North Carolina

     89,467         4.8        106,596         5.6        101,165         5.5   

Georgia

     12,041         0.6        1,420         0.1        3,944         0.2   

Florida

     885         0.1        892         0.1        890         0.1   

Alabama

     598         —          563         —          513         —     

South Carolina

     33         —          47         —          42         —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,863,114         100.0   $ 1,888,936         100.0   $ 1,856,429         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The following table reflects loans and leases, excluding loans covered by FDIC loss share agreements, as of September 30, 2011 grouped by expected amortizations, expected paydowns or the earliest repricing opportunity for floating rate loans. This cash flow or repricing schedule approximates the Company’s ability to reprice the outstanding principal of loans and leases either by adjusting rates on existing loans and leases or reinvesting principal cash flow in new loans and leases.

Loan and Lease Cash Flows or Repricing

 

     1 Year
or Less
    Over 1
Through
2 Years
    Over 2
Through
3 Years
    Over
3 Years
    Total  
     (Dollars in thousands)  

Fixed rate

   $ 298,360      $ 200,895      $ 154,115      $ 153,264      $ 806,634   

Floating rate (not at a floor or ceiling rate)

     20,248        325        941        91        21,605   

Floating rate (at floor rate)

     1,033,896        —          979        —          1,034,875   

Floating rate (at ceiling rate)

     —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 1,352,504      $ 201,220      $ 156,035      $ 153,355      $ 1,863,114   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of total

     72.6     10.8     8.4     8.2     100.0

Cumulative percentage of total

     72.6        83.4        91.8        100.0     

Covered Assets, FDIC Loss Share Receivable and FDIC Clawback Payable

On March 26, 2010, the Company, through the Bank, acquired substantially all of the assets and assumed substantially all of the deposits and certain other liabilities of Unity in a FDIC-assisted acquisition. Loans comprise the majority of the assets acquired and are subject to loss share agreements with the FDIC whereby the Bank is indemnified against a portion of the losses on covered loans and covered foreclosed assets. The loans acquired from Unity, as well as the covered foreclosed assets, are presented as covered assets in the accompanying consolidated financial statements.

On July 16, 2010, the Company, through the Bank, acquired substantially all of the assets and assumed substantially all of the deposits and certain other liabilities of Woodlands in a FDIC-assisted acquisition. Loans comprise the majority of the assets acquired and all but $1.1 million of acquired consumer loans are subject to loss share agreements with the FDIC whereby the Bank is indemnified against a portion of the losses on covered loans and covered foreclosed assets. The loans acquired from Woodlands that are covered by loss share agreements, as well as the covered foreclosed assets, are presented as covered assets in the accompanying consolidated financial statements.

On September 10, 2010, the Company, through the Bank, acquired substantially all of the assets and assumed substantially all of the deposits and certain other liabilities of Horizon in a FDIC-assisted acquisition. Loans comprise the majority of the assets acquired and all but $0.9 million of acquired consumer loans are subject to loss share agreements with the FDIC whereby the Bank is indemnified against a portion of the losses on covered loans and covered foreclosed assets. The loans acquired from Horizon that are covered by loss share agreements, as well as the covered foreclosed assets, are presented as covered assets in the accompanying consolidated financial statements.

 

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On December 17, 2010, the Company, through the Bank, acquired substantially all of the assets and assumed substantially all of the deposits and certain other liabilities of Chestatee in a FDIC-assisted acquisition. Loans comprise the majority of the assets acquired and all but $3.6 million of acquired consumer loans are subject to loss share agreements with the FDIC whereby the Bank is indemnified against a portion of the losses on covered loans and covered foreclosed assets. The loans acquired from Chestatee that are covered by loss share agreements, as well as the covered foreclosed assets, are presented as covered assets in the accompanying consolidated financial statements.

On January 14, 2011, the Company through the Bank, acquired substantially all of the assets and assumed substantially all of the deposits and certain other liabilities of Oglethorpe in a FDIC-assisted acquisition. Loans comprise the majority of the assets acquired and all but $3.1 million of acquired consumer loans are subject to loss share agreements with the FDIC whereby the Bank is indemnified against a portion of the losses on covered loans and covered foreclosed assets. The loans acquired from Oglethorpe that are covered by loss share agreements, as well as the covered foreclosed assets, are presented as covered assets in the accompanying consolidated financial statements.

On April 29, 2011 the Company, through the Bank, acquired substantially all the assets and assumed substantially all of the deposits and certain other liabilities of First Choice in a FDIC-assisted acquisition. Loans comprise the majority of the assets acquired and all but $1.6 million of acquired consumer loans are subject to loss share agreements with the FDIC whereby the Bank is indemnified against a portion of the losses on covered loans and covered foreclosed assets. The loans acquired from First Choice that are covered by FDIC loss share agreements, as well as the covered foreclosed assets, are presented as covered assets in the accompanying consolidated financial statements.

On April 29, 2011 the Company, through the Bank, acquired substantially all the assets and assumed substantially all of the deposits and certain other liabilities of Park Avenue in a FDIC-assisted acquisition. Loans comprise the majority of the assets acquired and all but $17.7 million of acquired consumer loans are subject to loss share agreements with the FDIC whereby the Bank is indemnified against a portion of the losses on covered loans and covered foreclosed assets. The loans acquired from Park Avenue that are covered by FDIC loss share agreements, as well as the covered foreclosed assets, are presented as covered assets in the accompanying consolidated financial statements.

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

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

To the extent that actual losses incurred by the Bank are less than (i) $65 million on the Unity assets covered under the loss share agreements, (ii) $107 million on the Woodlands assets covered under the loss share agreements, (iii) $60 million on the Horizon assets covered under the loss share agreements, (iv) $66 million on the Chestatee assets covered under the loss share agreements, (v) $66 million on the Oglethorpe assets covered under the loss share agreements, (vi) $87 million on the First Choice assets covered under the loss share agreements and (vii) $269 million on the Park Avenue assets covered under loss share agreements, the Bank may be required to reimburse the FDIC under the clawback provisions of the loss share agreements. The covered loans and covered foreclosed assets and the related FDIC loss share receivable and the FDIC clawback payable are reported at the net present value of expected future amounts to be paid or received.

 

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

Covered Assets, FDIC Loss Share Receivable and FDIC Clawback Payable

 

     September 30,      December 31,  
     2011      2010      2010  
     (Dollars in thousands)  

Covered loans

   $ 865,096       $ 391,014       $ 494,895   

Covered foreclosed assets

     73,249         17,540         31,145   

FDIC loss share receivable

     318,730         123,702         154,150   
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,257,075       $ 532,256       $ 680,190   
  

 

 

    

 

 

    

 

 

 

FDIC clawback payable

   $ 24,475       $ 6,036       $ 7,203   
  

 

 

    

 

 

    

 

 

 

Covered Loans

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

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

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

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

The accretable difference on purchased loans is the difference between the expected cash flows and the net present value of expected cash flows. Such difference is accreted into earnings using the effective yield method over the term of the loans. In determining the net present value of the expected cash flows, the Company used discount rates ranging from 6.0% to 9.5% per annum depending on the risk characteristics of each individual loan. The weighted average period during which management expects to receive the estimated cash flows for its covered loan portfolio (not considering any payment under the FDIC loss share agreements) is 2.4 years.

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Management separately monitors the purchased loan portfolio and periodically reviews loans contained within this portfolio against the factors and assumptions used in determining the Day 1 Fair Values. A loan is reviewed (i) any time it is renewed or extended, (ii) at any other time additional information becomes available to the Company that provides material additional insight regarding the loan’s performance, the status of the borrower, or the quality or value of the underlying collateral, or (iii) in conjunction with the annual review of projected cash flows of each acquired portfolio. Management separately reviews, on an annual basis, the performance of a substantial portion of each acquired loan portfolio, or more frequently to the extent that material information becomes available regarding the performance of an individual loan, to make determinations of the constituent loans’ performance and to consider whether there has been any significant change in performance since management’s initial expectations established in conjunction with the determination of the Day 1 Fair Values. To the extent that a loan is performing in accordance with management’s performance expectation established in conjunction with the determination of the Day 1 Fair Values, such loan is not included in any of the credit quality ratios, is not considered to be a nonaccrual or impaired loan, is not risk rated in a similar manner as are the Company’s non-purchased loans and is not considered in the determination of the required allowance for loan and lease losses. To the extent that a loan’s performance has deteriorated from management’s expectation established in conjunction with the determination of the Day 1 Fair Values, such loan will be included in the Company’s credit quality metrics, may be considered a nonaccrual or impaired loan, and is considered in the determination of the required level of allowance for loan and lease losses. To the extent that deterioration in the credit quality of the loan would result in some portion or all of such loan being included in the calculation of the allowance for loan and lease losses, there would be an increase of the FDIC loss share receivable balance for the portion of such additional loss expected to be collected from the FDIC. Currently, the expected losses on covered assets for each of the Company’s loss share agreements would result in expected recovery of approximately 80% of incurred losses. Any improvement in the expected performance of a purchased loan would result in (i) a reversal of the provision for loan and lease losses to the extent of prior charges and then an adjustment to accretable yield, which would have a positive impact on interest income and (ii) a decrease in the FDIC loss share receivable balance for the applicable percentage of the portion of such loss no longer expected to be incurred by the Company.

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

Covered Loans

 

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

At acquisition date:

        

Contractually required principal and interest

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

Nonaccretable difference

     (49,650     (83,933     (52,388     (42,665     (69,453     (86,210     (126,321     (510,620
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows expected to be collected

     158,760        231,170        127,053        138,858        104,657        173,968        326,337        1,260,803   

Accretable difference

     (24,308     (44,692     (35,245     (22,050     (23,981     (24,074     (63,420     (237,770
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value at acquisition date

   $ 134,452      $ 186,478      $ 91,808      $ 116,808      $ 80,676      $ 149,894      $ 262,917      $ 1,023,033   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value at January 1, 2010

   $ —        $ —        $ —        $ —        $ —        $ —        $ —        $ —     

Covered loans acquired

     134,452        186,478        91,808        —          —          —          —          412,738   

Accretion

     5,238        3,275        429        —          —          —          —          8,942   

Transfers to foreclosed assets covered by FDIC loss share agreements

     (1,812     (69     —          —          —          —          —          (1,881

Payments received

     (18,873     (8,054     (1,516     —          —          —          —          (28,443

Other activity, net

     (342     —          —          —          —          —          —          (342
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value at September 30, 2010

   $ 118,663      $ 181,630      $ 90,721      $ —        $ —        $ —        $ —        $ 391,014   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value at January 1, 2011

   $ 114,983      $ 175,720      $ 87,714      $ 116,478      $ —        $ —        $ —        $ 494,895   

Covered loans acquired

     —          —          —          —          80,676        149,894        262,917        493,487   

Accretion

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

Transfers to foreclosed assets covered by FDIC loss share agreements

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

Payments received

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

Other activity, net

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value at September 30, 2011

   $ 100,376      $ 143,550      $ 81,224      $ 93,440      $ 64,368      $ 139,221      $ 242,917      $ 865,096   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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The following table presents a summary of the carrying value and type of covered loans at September 30, 2011 and 2010 and at December 31, 2010.

Covered Loan Portfolio

 

     September 30,      December  31,
2010
 
     2011      2010     
     (Dollars in thousands)  

Real estate:

        

Residential 1-4 family

   $ 210,858       $ 107,882       $ 132,494   

Non-farm/non-residential

     390,099         145,349         213,327   

Construction/land development

     177,029         86,875         108,548   

Agricultural

     28,960         7,806         9,643   

Multifamily residential

     17,620         10,525         10,709   
  

 

 

    

 

 

    

 

 

 

Total real estate

     824,566         358,437         474,721   

Commercial and industrial

     33,756         24,619         17,646   

Consumer

     1,028         5,523         1,301   

Agricultural (non-real estate)

     3,582         35         73   

Other

     2,164         2,400         1,154   
  

 

 

    

 

 

    

 

 

 

Total covered loans

   $ 865,096       $ 391,014       $ 494,895   
  

 

 

    

 

 

    

 

 

 

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

Accretable Difference on Covered Loans

 

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

Accretable difference at January 1, 2010

   $ —        $ —        $ —        $ —        $ —        $ —        $ —        $ —     

Accretable difference acquired

     24,308        44,692        35,245        —          —          —          —          104,245   

Accretion

     (5,238     (3,275     (429     —          —          —          —          (8,942

Adjustments to accretable difference due to:

                

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

     (208     —          —          —          —          —          —          (208

Covered loans paid off

     (228     (442     —          —          —          —          —          (670

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

     1,015        4        —          —          —          —          —          1,019   

Other, net

     —          —          —          —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Accretable difference at September 30, 2010

   $ 19,649      $ 40,979      $ 34,816      $ —        $ —        $ —        $ —        $ 95,444   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Accretable difference at January 1, 2011

   $ 15,279      $ 37,182      $ 30,970      $ 21,711      $ —        $ —        $ —        $ 105,142   

Accretable difference acquired

     —          —          —          —          23,981        24,074        63,420        111,475   

Accretion

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

Adjustments to accretable difference due to:

                

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

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

Covered loans paid off

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

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

     3,050        4,201        1,369        2,151        1,046        (112     1,170        12,875   

Other, net

     42        35        27        143        25        186        172        630   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Accretable difference at September 30, 2011

   $ 11,966      $ 28,484      $ 26,496      $ 12,884      $ 17,615      $ 17,923      $ 52,799      $ 168,167   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Foreclosed Assets Covered by FDIC Loss Share Agreements

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

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

Foreclosed Assets Covered by FDIC Loss Share Agreements

 

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

At acquisition date:

               

Balance on acquired bank’s books

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

Total expected losses

    (9,979     (5,897     (3,678     (15,960     (7,848     (628     (49,400     (93,390

Discount for net present value of expected cash flows

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value at acquisition date

  $ 8,859      $ 5,029      $ 3,683      $ 13,406      $ 7,144      $ 1,671      $ 31,630      $ 71,422   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value at January 1, 2010

  $ —        $ —        $ —        $ —        $ —        $ —        $ —        $ —     

Covered foreclosed assets acquired

    8,859        5,029        3,683        —          —          —          —          17,571   

Loans transferred to covered foreclosed assets

    1,812        69        —          —          —          —          —          1,881   

Sales of covered foreclosed assets

    (1,655     (257     —          —          —          —          —          (1,912
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value at September 30, 2010

  $ 9,016      $ 4,841      $ 3,683      $ —        $ —        $ —        $ —        $ 17,540   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value at January 1, 2011

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

Covered foreclosed assets acquired

    —          —          —          —          7,144        1,671        31,630        40,445   

Loans transferred to covered foreclosed assets

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

Sales of covered foreclosed assets

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value at September 30, 2011

  $ 9,603      $ 12,246      $ 4,074      $ 11,093      $ 7,864      $ 1,671      $ 26,698      $ 73,249   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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The following table presents a summary of the carrying value and type of foreclosed assets covered by FDIC loss share agreements, or covered foreclosed assets, at September 30, 2011 and 2010 and December 31, 2010.

Foreclosed Assets Covered by FDIC Loss Share Agreements

 

     September 30,      December  31,
2010
 
     2011      2010     
     (Dollars in thousands)  

Real estate:

        

Residential 1-4 family

   $ 15,219       $ 6,934       $ 10,624   

Non-farm/non-residential

     12,314         922         3,755   

Construction/land development

     43,038         9,448         16,366   

Multifamily residential

     2,649         209         —     
  

 

 

    

 

 

    

 

 

 

Total real estate

     73,220         17,513         30,745   

Repossessions

     29         27         400   
  

 

 

    

 

 

    

 

 

 

Total covered foreclosed assets

   $ 73,249       $ 17,540       $ 31,145   
  

 

 

    

 

 

    

 

 

 

FDIC Loss Share Receivable

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

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

FDIC Loss Share Receivable

 

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

At acquisition date:

               

Expected principal loss on covered assets:

               

Covered loans

  $ 51,354      $ 73,220      $ 40,537      $ 41,996      $ 65,043      $ 81,583      $ 115,127      $ 467,860   

Covered foreclosed assets

    9,979        5,897        3,678        15,960        7,848        628        49,400        93,390   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expected principal losses

    60,333        79,117        44,215        57,956        72,891        82,211        164,527        561,250   

Estimated loss sharing percentage (1)

    80     80     80     80     80     80     80     80
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Estimated recovery from FDIC loss share agreements

    48,266        63,294        35,372        46,365        58,313        65,769        131,622        449,001   

Discount for net present value on FDIC loss share receivable

    (4,119     (7,428     (6,283     (4,293     (5,918     (6,225     (17,939     (52,205
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net present value of FDIC loss share receivable at acquisition date

  $ 44,147      $ 55,866      $ 29,089      $ 42,072      $ 52,395      $ 59,544      $ 113,683      $ 396,796   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value at January 1, 2010

  $ —        $ —        $ —        $ —        $ —        $ —        $ —        $ —     

FDIC loss share receivable recorded in acquisition

    44,147        55,866        29,089        —          —          —          —          129,102   

Accretion income

    830        415        —          —          —          —          —          1,245   

Cash received from FDIC

    (7,110     —          —          —          —          —          —          (7,110

Other activity, net

    538        (73     —          —          —          —          —          465   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value at September 30, 2010

  $ 38,405      $ 56,208      $ 29,089      $ —        $ —        $        $ —        $ 123,702   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value at January 1, 2011

  $ 31,120      $ 51,776      $ 29,182      $ 42,072      $ —        $ —        $ —        $ 154,150   

FDIC loss share receivable recorded in acquisition

    —          —          —          —          52,395        59,544        113,683        225,622   

Accretion income

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

Cash received from FDIC

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

Other activity, net

    327        (2,858     776        (24     (3,283     (1,410     (4,263     (10,735
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value at September 30, 2011

  $ 27,780      $ 34,995      $ 26,722      $ 32,749      $ 46,305      $ 51,328      $ 98,851      $ 318,730   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

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FDIC Clawback Payable

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

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

FDIC Clawback Payable

 

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

At acquisition date:

                

Estimated FDIC clawback payable

   $ 2,612      $ 4,846      $ 2,380      $ 1,778      $ 1,506      $ 1,515      $ 24,219      $ 38,856   

Discount for net present value on FDIC clawback payable

     (1,046     (1,905     (919     (687     (582     (585     (9,351     (15,075
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net present value of FDIC clawback payable at acquisition date

   $ 1,566      $ 2,941      $ 1,461      $ 1,091      $ 924      $ 930      $ 14,868      $ 23,781   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value at January 1, 2010

   $ —        $ —        $ —        $ —        $ —        $ —        $ —        $ —     

FDIC clawback payable recorded in acquisition

     1,566        2,941        1,461        —          —          —          —          5,968   

Amortization expense

     43        25        —          —          —          —          —          68   

Other activity, net

     —          —          —          —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value at September 30, 2010

   $ 1,609      $ 2,966      $ 1,461      $        $ —        $ —        $ —        $ 6,036   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value at January 1, 2011

   $ 1,629      $ 3,004      $ 1,479      $ 1,091      $ —        $ —        $ —        $ 7,203   

FDIC clawback payable recorded in acquisition

     —          —          —          —          924        930        14,868        16,722   

Amortization expense

     60        113        55        41        31        19        319        638   

Other activity, net

     —          —          —          (88     —          —          —          (88
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value at September 30, 2011

   $ 1,689      $ 3,117      $ 1,534      $ 1,044      $ 955      $ 949      $ 15,187      $ 24,475   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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Nonperforming Assets

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

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

The following table presents information concerning nonperforming assets, including nonaccrual and certain restructured loans and leases, and foreclosed assets not covered by FDIC loss share agreements, at September 30, 2011 and 2010 and at December 31, 2010.

Nonperforming Assets

 

     September 30,     December  31,
2010
 
     2011     2010    
     (Dollars in thousands)  

Nonaccrual loans and leases

   $ 22,805      $ 17,044      $ 13,944   

Accruing loans and leases 90 days or more past due

     —          —          —     

Troubled and restructured loans and leases(1)

     —          —          —     
  

 

 

   

 

 

   

 

 

 

Total nonperforming loans and leases

     22,805        17,044        13,944   

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

     34,338        41,868        42,216   
  

 

 

   

 

 

   

 

 

 

Total nonperforming assets

   $ 57,143      $ 58,912      $ 56,160   
  

 

 

   

 

 

   

 

 

 

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

     1.22     0.90     0.75

Nonperforming assets to total assets(3)

     1.45        1.85        1.72   

 

(1) All troubled and restructured loans and leases as of the dates shown were on nonaccrual status and are included as nonaccrual loans and leases in this table.
(2) Repossessed personal properties and real estate acquired through or in lieu of foreclosure are initially recorded at the lesser of current principal investment or estimated market value less estimated cost to sell at the date of repossession or foreclosure. Valuations of these assets are periodically reviewed by management with the carrying value of such assets adjusted through non-interest expense to the then estimated market value net of estimated selling costs, if lower, until disposition.
(3) Excludes assets covered by FDIC loss share agreements, except for their inclusion in total assets.

At September 30, 2011, management had not identified any purchased loan acquired in its FDIC-assisted acquisitions where the expected performance had deteriorated from management’s performance expectation established in conjunction with the determination of the Day 1 Fair Values. Accordingly, none of the Company’s covered loans acquired in the FDIC-assisted acquisitions were included (i) in the calculation of the Company’s credit quality metrics, (ii) as a nonaccrual or impaired loan, or (iii) in its determination of the appropriate level of allowance for loan and lease losses. Because no covered loans are included in the Company’s calculation of its credit quality metrics, as a nonaccrual or impaired loan, or in its determination of the appropriate level of allowance for loan and lease losses, but may be included in future periods when and if appropriate, the Company’s credit quality ratios, its level of nonaccrual or impaired loans and its allowance for loan and lease loss ratios may not be comparable from period to period or with such ratios of other financial institutions, including institutions that have made FDIC-assisted acquisitions.

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

 

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At September 30, 2011, the Company has reduced the carrying value of its impaired loans and leases (all of which were included in nonaccrual loans and leases) by $10.1 million to the estimated fair value of $19.6 million for such loans and leases. The $10.1 million adjustment to reduce the carrying value of impaired loans and leases to estimated fair value consisted of $9.1 million of partial charge-offs and $1.0 million of specific loan and lease loss allocations.

The following table presents information concerning the geographic location of nonperforming assets, excluding assets covered by FDIC loss share agreements, at September 30, 2011. Nonaccrual loans and leases are reported at the physical location of the principal collateral. Foreclosed real estate assets are reported at 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 Not Covered by FDIC Loss Share Agreements

 

     Nonaccrual
Loans and
Leases
     Foreclosed
Assets
     Total
Nonperforming
Assets
 
     (Dollars in thousands)  

Arkansas

   $ 5,999       $ 16,545       $ 22,544   

Texas

     10,890         15,974         26,864   

North Carolina

     3,856         —           3,856   

South Carolina

     1,596         1,155         2,751   

Georgia

     381         65         446   

Florida

     —           —           —     

Alabama

     —           —           —     

All other

     83         599         682   
  

 

 

    

 

 

    

 

 

 

Total

   $ 22,805       $ 34,338       $ 57,143   
  

 

 

    

 

 

    

 

 

 

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

Activity Within Foreclosed Assets Not Covered by FDIC Loss Share Agreements

 

     Nine Months Ended
September 30,
 
     2011     2010  
     (Dollars in thousands)  

Balance – January 1

   $ 42,216      $ 61,148   

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

     8,613        10,952   

Sales of foreclosed assets not covered by FDIC loss share agreements

     (7,729     (23,104

Write downs of foreclosed assets not covered by FDIC loss share agreements

     (8,877     (7,128

Foreclosed assets not covered by FDIC loss share agreements acquired in FDIC-assisted acquisitions

     115        —     
  

 

 

   

 

 

 

Balance – September 30

   $ 34,338      $ 41,868   
  

 

 

   

 

 

 

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Allowance and Provision for Loan and Lease Losses

Allowance for Loan and Lease Losses: The following table shows an analysis of the allowance for loan and lease losses (“ALLL”) for the nine-month periods ended September 30, 2011 and 2010 and the year ended December 31, 2010.

Allowance for Loan and Lease Losses

 

     Nine Months Ended
September 30,
    Year Ended
December 31,
 
     2011     2010     2010  
     (Dollars in thousands)  

Balance, beginning of period

   $ 40,230      $ 39,619      $ 39,619   

Loans and leases charged off:

      

Real estate

     6,766        4,530        7,045   

Commercial and industrial

     1,092        5,550        6,937   

Consumer

     657        1,020        1,196   

Direct financing leases

     324        369        478   

Agricultural (non-real estate)

     74        744        1,108   
  

 

 

   

 

 

   

 

 

 

Total loans and leases charged off

     8,913        12,213        16,764   
  

 

 

   

 

 

   

 

 

 

Recoveries of loans and leases previously charged off:

      

Real estate

     83        414        485   

Commercial and industrial

     78        349        656   

Consumer

     150        161        212   

Direct financing leases

     5        20        20   

Agricultural (non-real estate)

     3        —          2   
  

 

 

   

 

 

   

 

 

 

Total recoveries

     319        944        1,375   
  

 

 

   

 

 

   

 

 

 

Net loans and leases charged off

     8,594        11,269        15,389   

Provision charged to operating expense

     7,500        11,900        16,000   
  

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 39,136      $ 40,250      $ 40,230   
  

 

 

   

 

 

   

 

 

 

Net charge-offs to average loans and leases outstanding during the periods indicated (1)

     0.63 %(2)      0.80 %(2)      0.81

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

     2.10     2.13     2.17

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

     172     236     288

 

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

The Company’s allowance for loan and lease losses was $39.1 million, or 2.10% of total loans and leases (excluding loans covered by FDIC loss share agreements), at September 30, 2011 compared with $40.2 million, or 2.17% of total loans and leases (excluding loans covered by FDIC loss share agreements), at December 31, 2010 and $40.3 million, or 2.13% of total loans and leases (excluding loans covered by FDIC loss share agreements), at September 30, 2010. The Company’s allowance for loan and lease losses was equal to 172% of its total nonperforming loans and leases (excluding loans covered by FDIC loss share agreements) at September 30, 2011 compared to 288% at December 31, 2010 and 236% at September 30, 2010. The Company’s unallocated allowance for loan and lease losses was 22.1% of its total allowance for loan and lease losses at September 30, 2011 compared to 15.8% at December 31, 2010 and 15.4% at September 30, 2010.

At September 30, 2011, the Company had one credit relationship totaling $10.5 million that was considered impaired and for which the Company had determined that no specific allowance for loan and lease losses was necessary. Primarily as a result of this credit relationship, the Company’s allowance for loan and lease losses as a percent of its total nonperforming loans and leases decreased to 172% at September 30, 2011 compared to 288% at December 31, 2010.

Net charge-offs were $1.5 million for the third quarter of 2011 compared to $4.2 million for the third quarter of 2010. Net charge-offs were $8.6 million for the first nine months of 2011 compared to $11.3 million for the first nine months of 2010. The Company’s annualized net charge-off ratio was 0.33% for the quarter ended September 30, 2011 compared to 0.88% for the quarter ended September 30, 2010. The Company’s annualized net charge-off ratio was 0.63% for the nine months ended September 30, 2011 compared to 0.80% for the nine months ended September 30, 2010.

The provision for loan and lease losses was $1.5 million for the third quarter and $7.5 million for the first nine months of 2011 compared to $4.3 million for the third quarter and $11.9 million for the first nine months of 2010.

Management monitors the allowance for loan and lease losses as a whole in relation to various facts and circumstances, described below, and loan and lease portfolio conditions experienced for a given period. The Company maintains the allowance for loan and lease losses at a level management believes is appropriate to absorb estimated losses in the loan and lease portfolio.

 

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For each quarterly reporting period, management reviews numerous facts and circumstances, credit quality indicators, and a number of trends and other information in determining the appropriate amount of allowance for loan and lease losses and the amount of provision recorded during the period. The various information and data reviewed includes both objective and subjective criteria. The objective criteria utilized to assess the adequacy of the allowance for loan and lease losses and required additions to such allowance consists primarily of an internal grading system, historical loss rates and specific allowances. In addition to these objective criteria, management subjectively assesses the adequacy of the allowance for loan and lease losses and the need for additions thereto, with consideration given to the nature, mix and volume of the portfolio, overall portfolio quality, review of specific problem loans and leases, national, regional and local business and economic conditions that may affect borrowers’ or lessees’ ability to pay, the value of collateral securing the loans and leases, and other relevant factors. The sum of the allowance amounts derived from this methodology, combined with a reasonable unallocated allowance determined by management that reflects inherent but undetected losses in the portfolio and imprecision in the allowance methodology, is utilized as the primary indicator of the appropriate estimate of the allowance for loan and lease losses.

At September 30, 2011, management’s calculation of the sum of allowance amounts derived from its objective calculation based on the internal grading system and specific allowances resulted in a calculated amount of allowance for loan and lease losses that was less than such calculated amount at December 31, 2010, primarily due to a reduction of specific allocations for impaired loans and leases at September 30, 2011 compared to December 31, 2010. This decrease in the objective calculated amount of the required allowance for loan and lease losses supported a reduction in the overall amount of the allowance in both volume and as a percentage of non-covered loans and leases. Additionally, net charge-offs and the Company’s net charge-off ratio for the first nine months of 2011 decreased compared to the amount of net charge-offs and net charge off ratio for 2010 in further support of a reduction of the allowance. The past due ratio decreased 13 bps at September 30, 2011 compared to December 31, 2010. In reviewing certain credit quality indicators at September 30, 2011, specifically the ratio of nonperforming loans and leases to total loans and leases, management noted this ratio had increased by 27 basis points at September 30, 2011 compared to December 31, 2010, primarily as a result of the $10.5 million credit relationship previously discussed. These facts were considered as part of management’s subjective assessment and implied decreasing the allowance both in volume and as a percentage of non-covered loans and leases. Given this information, management concluded that the overall level of allowance at September 30, 2011, both in volume and as a percent of total loans and leases, should decrease compared to such levels at December 31, 2010. Accordingly, the Company recorded the level of provision during the third quarter of 2011 necessary to provide for the amount of net charge-offs of non-covered loans and leases during the third quarter of 2011.

The portion of the allowance that is not derived by the allowance allocation percentages compensates for the uncertainty and complexity in estimating loan and lease losses, including factors and conditions that may not be fully reflected in the determination and application of the allowance allocation percentages. The factors and conditions evaluated in determining the unallocated portion of the allowance may include the following: (1) general economic and business conditions affecting key lending areas, (2) credit quality trends (including trends in nonperforming loans and leases expected to result from existing conditions), (3) trends that could affect collateral values, (4) seasoning of the loan and lease portfolio, (5) specific industry conditions affecting portfolio segments, (6) recent loss experience in particular segments of the portfolio, (7) concentrations of credit to single borrowers or related borrowers or to specific industries, or in specific collateral types in the loan and lease portfolio, including concentrations of credit in commercial real estate loans, (8) the Company’s expansion into new markets, (9) the offering of new loan and lease products, (10) expectations regarding the current business cycle, (11) bank regulatory examination results and (12) findings of the internal loan review department.

The key factors management considered that supported its unallocated ALLL of 22.1% of the total ALLL at September 30, 2011 primarily consisted of factor #1 – general economic and business conditions affecting key lending areas, factor #3 – trends that could affect collateral values, factor #7 – concentrations of credit to single borrowers or related borrowers or to specific industries, or in specific collateral types in the loan and lease portfolio, including concentrations of credit in commercial real estate loans and factor #10 – expectations regarding the current business cycle. Specifically, management concluded that economic data available at December 31, 2010 supported the probability of some improvement in the level of economic activity. However, much economic data available at September 30, 2011 suggested less certainty regarding the potential for and magnitude of economic recovery. These factors led management to conclude that the unallocated allowance at September 30, 2011 appropriately reflects these qualitative factors that affect the allowance for loan and lease losses.

While management believes the current allowance is appropriate, changing economic and other conditions may require future adjustments to the allowance for loan and lease losses. In addition, bank regulatory agencies, as part of their examination process, may require adjustments to the allowance for loan and lease losses based on their judgments and estimates.

 

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Investment Securities

At September 30, 2011 and 2010 and at December 31, 2010, the Company classified all of its investment securities portfolio as available for sale. Accordingly, its investment securities are stated at estimated fair value in the consolidated financial statements with the unrealized gains and losses, net of related income tax, reported as a separate component of stockholders’ equity and included in accumulated other comprehensive income (loss).

The following table presents the amortized cost and estimated fair value of investment securities AFS at September 30, 2011 and 2010 and at December 31, 2010. The Company’s holdings of “other equity securities” include FHLB – Dallas, Federal Home Loan Bank of Atlanta (“FHLB – Atlanta”) and First National Banker’s Bankshares, Inc. (“FNBB”) shares which do not have readily determinable fair values and are carried at cost.

Investment Securities

 

     September 30,      December 31,  
     2011      2010      2010  
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 
     (Dollars in thousands)  

Obligations of state and political subdivisions

   $ 357,489       $ 368,767       $ 376,347       $ 393,828       $ 378,822       $ 378,547   

U.S. Government agency residential mortgage-backed securities

     48,749         50,518         193         193         1,269         1,269   

Other equity securities

     20,311         20,311         18,422         18,422         18,882         18,882   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 426,549       $ 439,596       $ 394,962       $ 412,443       $ 398,973       $ 398,698   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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. For investment securities traded in an active market, the fair values are based on quoted market prices if available. If quoted market prices are not available, fair values are based on market prices for comparable securities, broker quotes or comprehensive interest rate tables, pricing matrices or a combination thereof. For investment securities traded in a market that is not active, fair value is determined using unobservable inputs.

The Company’s investment securities portfolio is reported at estimated fair value, which included gross unrealized gains of $14.4 million and gross unrealized losses of $1.4 million at September 30, 2011; gross unrealized gains of $6.4 million and gross unrealized losses of $6.7 million at December 31, 2010; and gross unrealized gains of $18.9 million and gross unrealized losses of $1.5 million at September 30, 2010. Management believes that all of its unrealized losses on individual investment securities at September 30, 2011 and 2010 and at December 31, 2010, are the result of fluctuations in interest rates and do not reflect deterioration in the credit quality of its investments. Accordingly management considers these unrealized losses to be temporary in nature. The Company does not have the intent to sell these investment securities with unrealized losses and, more likely than not, will not be required to sell these investment securities before fair value recovers to amortized cost.

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

Unaccreted Discounts and Unamortized Premiums

 

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

September 30, 2011:

          

Obligations of states and political subdivisions

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

U.S. Government agency residential mortgage-backed securities

     48,749         —           (1,767     46,982   

Other equity securities

     20,311         —           —          20,311   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

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

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2010:

          

Obligations of states and political subdivisions

   $ 378,822       $ 5,307       $ (193   $ 383,936   

U.S. Government agency residential mortgage-backed securities

     1,269         —           (22     1,247   

Other equity securities

     18,882         —           —          18,882   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 398,973       $ 5,307       $ (215   $ 404,065   
  

 

 

    

 

 

    

 

 

   

 

 

 

September 30, 2010:

          

Obligations of states and political subdivisions

   $ 376,347       $ 4,338       $ (211   $ 380,474   

U.S. Government agency residential mortgage-backed securities

     193         —           —          193   

Other equity securities

     18,422         —           —          18,422   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 394,962       $ 4,338       $ (211   $ 399,089   
  

 

 

    

 

 

    

 

 

   

 

 

 

During the third quarter of 2011, the Company recognized net premium amortization of $0.1 million compared to $0.1 million of net discount accretion during the third quarter of 2010. During the first nine months of 2011, the Company recognized net premium amortization of $0.3 million compared to $0.5 million of net discount accretion during the first nine months of 2010.

The Company had net gains of $0.6 million from the sale of $58 million of investment securities in the third quarter of 2011 compared with net gains of $0.6 million from the sale of $138 million of investment securities in the third quarter of 2010. The Company had net gains of $1.0 million from the sale of $96 million of investment securities in the first nine months of 2011 compared with net gains of $4.3 million from the sale of $247 million of investment securities in the first nine months of 2010. During the quarters ended September 30, 2011 and 2010, respectively, investment securities totaling $9 million and $5 million matured, were called or were paid down by the issuer. During the nine months ended September 30, 2011 and 2010, respectively, investment securities totaling $20 million and $43 million matured, were called or were paid down by the issuer. The Company purchased $0.01 million and $12 million of investment securities during the quarters ended September 30, 2011 and 2010, respectively, and purchased $8 million and $104 million of investment securities during the first nine months of 2011 and 2010, respectively. The Company also acquired $136 million and $95 million of investment securities from FDIC-assisted acquisitions during the first nine months of 2011 and 2010, respectively.

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

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

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The following table presents the types and estimated fair values of the Company’s investment securities AFS at September 30, 2011 based on credit ratings by one or more nationally-recognized credit rating agencies.

Credit Ratings of Investment Securities

 

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

Obligations of states and political subdivisions:

            

Arkansas

   $ —        $ 127,464      $ 5,840      $ 6,211      $ 135,506      $ 275,021   

Texas

     1,333        29,665        13,382        14,879        11,911        71,170   

Pennsylvania

     —          —          —          —          5,914        5,914   

Louisiana

     —          4,255        —          —          —          4,255   

South Carolina

     —          —          —          —          3,439        3,439   

Connecticut

     —          —          2,711        —          —          2,711   

Iowa

     —          —          2,556        —          —          2,556   

Massachusetts

     —          —          —          —          2,021        2,021   

Georgia

     —          617        190        610        —          1,417   

Alabama

     —          —          —          263        —          263   

U.S. Government agency residential mortgage-backed securities

     —          50,518        —          —          —          50,518   

Other equity securities

     —          —          —          —          20,311        20,311   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 1,333      $ 212,519      $ 24,679      $ 21,963      $ 179,102      $ 439,596   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of total

     0.3     48.4     5.6     5.0     40.7     100.0

Cumulative percentage of total

     0.3     48.7     54.3     59.3     100.0  

 

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

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Deposits

The Company’s lending and investment activities are funded primarily by deposits. The amount and type of deposits outstanding at September 30, 2011 and 2010 and at December 31, 2010 and their respective percentage of the total deposits are reflected in the following table.

Deposits

 

     September 30,     December 31,  
     2011     2010     2010  
     (Dollars in thousands)  

Non-interest bearing

   $ 466,938         15.3   $ 271,407         11.2   $ 298,585         11.8

Interest bearing:

               

Transaction (NOW)

     716,102         23.5        652,058         27.0        625,524         24.6   

Savings and money market

     893,530         29.3        619,316         25.6        673,534         26.5   

Time deposits less than $100,000

     420,195         13.8        427,123         17.7        459,027         18.1   

Time deposits of $100,000 or more

     549,704         18.1        445,810         18.5        484,083         19.0   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total deposits

   $ 3,046,469         100.0   $ 2,415,714         100.0   $ 2,540,753         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The Company’s total deposits increased $0.63 billion to $3.05 billion at September 30, 2011 compared to $2.42 billion at September 30, 2010. In recent years, the Company has benefited from favorable changes in its deposit mix. The Company’s non-CD deposits have grown and comprised 68.2% of total deposits at September 30, 2011, compared to 62.9% at December 31, 2010 and 63.9% at September 30, 2010. Non-CD deposits totaled $2.08 billion at September 30, 2011, compared to $1.60 billion at December 31, 2010 and $1.54 billion at September 30, 2010.

The amount and percentage of the Company’s deposits, by state of originating office, are reflected in the following table.

Deposits by State of Originating Office

 

     September 30,     December 31,  

Deposits Attributable to Offices In

   2011     2010     2010  
     (Dollars in thousands)  

Arkansas

   $ 1,584,472         52.0   $ 1,681,417         69.6   $ 1,607,962         63.3

Texas

     448,464         14.8        417,684         17.3        455,089         17.9   

Georgia

     801,446         26.3        144,931         6.0        328,037         12.9   

Florida

     172,009         5.6        105,094         4.3        99,842         4.0   

South Carolina

     12,701         0.4        31,291         1.3        17,958         0.7   

North Carolina

     14,208         0.5        18,735         0.8        15,816         0.6   

Alabama

     13,169         0.4        16,562         0.7        16,049         0.6   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 3,046,469         100.0   $ 2,415,714         100.0   $ 2,540,753         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Other Interest Bearing Liabilities

The Company relies on other interest bearing liabilities to supplement the funding of its lending and investing activities. Such liabilities consist of repurchase agreements with customers, other borrowings (primarily FHLB – Dallas advances and, to a lesser extent, FRB borrowings and federal funds purchased) and subordinated debentures.

The following table reflects the average balance and rate paid for each category of other interest bearing liabilities for the quarters and nine months ended September 30, 2011 and 2010.

Average Balances and Rates of Other Interest Bearing Liabilities

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2011     2010     2011     2010  
     Average
Balance
     Rate
Paid
    Average
Balance
     Rate
Paid
    Average
Balance
     Rate
Paid
    Average
Balance
     Rate
Paid
 
     (Dollars in thousands)  

Repurchase agreements with customers

   $ 37,082         0.37   $ 51,618         0.71   $ 39,944         0.51   $ 50,009         0.81

Other borrowings (1)

     283,176         3.80        307,264         3.53        291,484         3.71        325,175         3.88   

Subordinated debentures

     64,950         2.63        64,950         2.87        64,950         2.65        64,950         2.72   
  

 

 

      

 

 

      

 

 

      

 

 

    

Total other interest bearing liabilities

   $ 385,208         3.27   $ 423,832         3.09   $ 396,378         3.22   $ 440,134         3.36
  

 

 

      

 

 

      

 

 

      

 

 

    

 

(1) Included in other borrowings at September 30, 2011 are FHLB – Dallas advances that contain quarterly call features and mature as follows: 2017, $260 million at 3.90% weighted-average interest rate and 2018, $20 million at 2.53% weighted-average interest rate.

 

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CAPITAL RESOURCES AND LIQUIDITY

Capital Resources

Subordinated Debentures. At September 30, 2011 and 2010 and at December 31, 2010, the Company had an aggregate of $64.9 million of subordinated debentures and related trust preferred securities outstanding consisting of (i) $20.6 million of subordinated debentures and securities issued in 2006 that bear interest, adjustable quarterly, at LIBOR plus 1.60%; (ii) $15.4 million of subordinated debentures and securities issued in 2004 that bear interest, adjustable quarterly, at LIBOR plus 2.22%; and (iii) $28.9 million of subordinated debentures and securities issued in 2003 that bear interest, adjustable quarterly, at a weighted-average rate of LIBOR plus 2.925%. These subordinated debentures and securities generally mature 30 years after issuance and may be prepaid at par, subject to regulatory approval, on or after approximately five years from the date of issuance, or at an earlier date upon certain changes in tax laws, investment company laws or regulatory capital requirements. These subordinated debentures and the related trust preferred securities provide the Company additional regulatory capital to support its expected future growth and expansion.

Tangible Common Stockholders’ Equity. The Company uses its tangible common stockholders’ equity ratio as the principal measure of the strength of its capital. The tangible common stockholders’ equity ratio is calculated by dividing total common stockholders’ equity less intangible assets by total assets less intangible assets. The Company’s tangible common stockholders’ equity ratio was 10.06% at September 30, 2011 compared to 9.57% at December 31, 2010 and 9.74% at September 30, 2010.

Common Stock Dividend Policy. During the quarter ended September 30, 2011, the Company paid a dividend of $0.095 per common share compared to $0.075 per common share in the quarter ended September 30, 2010. On October 3, 2011, the Company’s board of directors approved a dividend of $0.10 per common share that was paid on October 21, 2011. The determination of future dividends on the Company’s common stock will depend on conditions existing at that time.

Capital Compliance

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

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The Company’s and the Bank’s risk-based capital and leverage ratios exceeded these minimum requirements, as well as the minimum requirements to be considered “well capitalized”, at both September 30, 2011 and December 31, 2010, and are presented in the following tables.

Consolidated Capital Ratios

 

     September 30,
2011
    December 31,
2010
 
     (Dollars in thousands)  

Tier 1 capital:

    

Common stockholders’ equity

   $ 406,945      $ 320,355   

Allowed amount of trust preferred securities

     63,000        63,000   

Net unrealized (gains) losses on investment securities AFS

     (7,930     167   

Less goodwill and certain intangible assets

     (12,716     (7,925
  

 

 

   

 

 

 

Total tier 1 capital

     449,299        375,597   

Tier 2 capital:

    

Qualifying allowance for loan and lease losses

     30,853        29,241   
  

 

 

   

 

 

 

Total risk-based capital

   $ 480,152      $ 404,838   
  

 

 

   

 

 

 

Risk-weighted assets

   $ 2,459,953      $ 2,328,251   
  

 

 

   

 

 

 

Adjusted quarterly average assets

   $ 3,922,085      $ 3,160,452   
  

 

 

   

 

 

 

Ratios at end of period:

    

Tier 1 leverage

     11.46     11.88

Tier 1 risk-based capital

     18.26        16.13   

Total risk-based capital

     19.52        17.39   

Minimum ratio guidelines:

    

Tier 1 leverage (1)

     3.00     3.00

Tier 1 risk-based capital

     4.00        4.00   

Total risk-based capital

     8.00        8.00   

Minimum ratio guidelines to be “well capitalized”:

    

Tier 1 leverage

     5.00     5.00

Tier 1 risk-based capital

     6.00        6.00   

Total risk-based capital

     10.00        10.00   

 

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

Capital Ratios of the Bank

 

     September 30,
2011
    December 31,
2010
 
     (Dollars in thousands)  

Stockholders’ equity – Tier 1

   $ 430,075      $ 358,852   

Tier 1 leverage ratio

     11.01     11.40

Tier 1 risk-based capital ratio

     17.50        15.49   

Total risk-based capital ratio

     18.76        16.75   

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Liquidity

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

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

At September 30, 2011 the Company had unused borrowing availability that was primarily comprised of the following four sources: (1) $829 million of available blanket borrowing capacity with the FHLB – Dallas, (2) $115 million of investment securities available to pledge for federal funds or other borrowings, (3) $144 million of available unsecured federal funds borrowing lines and (4) $71 million from borrowing programs of the FRB.

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

Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”). On July 21, 2010, the Dodd-Frank Act was signed into law. Among other things, the Dodd-Frank Act provides full deposit insurance with no maximum coverage amount for noninterest bearing transaction accounts for two years beginning December 31, 2010. Participation in this deposit insurance coverage of the Dodd-Frank Act is mandatory for all financial institutions and requires no separate fee assessment to the Bank. Additionally, the Dodd-Frank Act permanently increases the maximum deposit insurance coverage for all other deposit categories to $250,000 retroactive to January 1, 2008.

Sources and Uses of Funds. Net cash provided by operating activities totaled $14.2 million and $27.4 million for the nine months ended September 30, 2011 and 2010, respectively. Net cash provided by operating activities is comprised primarily of net income, adjusted for certain non-cash items and for changes in operating assets and liabilities.

Investing activities provided $704.7 million in the nine months ended September 30, 2011 and $373.6 million in the nine months ended September 30, 2010. The Company’s primary sources and uses of cash for investing activities include net activity in its investment securities portfolio, which provided $109.5 million and $190.6 million in the nine months ended September 30, 2011 and 2010, respectively, net loan and lease activity, which used $2.9 million and provided $14.8 million in the nine months ended September 30, 2011 and 2010, respectively, and purchases of premises and equipment, which used $16.8 million and $10.0 million in the nine months ended September 30, 2011 and 2010, respectively. The Company received $365.4 million and $141.1 million for the nine months ended September 30, 2011 and 2010, respectively, in connection with FDIC-assisted acquisitions and received cash of $244.0 million and $39.1 million for the nine months ended September 30, 2011 and 2010, respectively, from liquidation of covered assets. The Company had proceeds from dispositions of premises and equipment, foreclosed and other assets of $7.2 million and $13.6 million for the nine months ended September 30, 2011 and 2010, respectively. The Company paid $1.7 million and $4.1 million in the nine months ended September 30, 2011 and 2010, respectively, for interest in unconsolidated investments and noncontrolling interests; and paid $10.2 million in the nine months ended September 30, 2010 (none in the nine months ended September 30, 2011) to purchase BOLI.

Financing activities used $698.4 million in the nine months ended September 30, 2011 and $426.1 million in the nine months ended September 30, 2010. The Company’s primary financing activities include net changes in deposit accounts, which used $609.0 million and $331.2 million in the nine months ended September 30, 2011 and 2010, respectively, and net repayments of other borrowings and repurchase agreements with customers, which used $83.3 million and $90.0 million in the nine months ended September 30, 2011 and 2010, respectively. In addition the Company paid common stock cash dividends of $9.2 million and $7.5 million in the nine months ended September 30, 2011 and 2010, respectively. Proceeds and current tax benefits from exercise of stock options provided $3.2 million and $2.6 million during the nine months ended September 30, 2011 and 2010, respectively.

 

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Growth and Expansion

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

On July 16, 2010 the Company, through the Bank, entered into a purchase and assumption agreement with loss share agreements with the FDIC pursuant to which it acquired substantially all of the assets and assumed substantially all of the deposits and other liabilities of Woodlands, with offices in South Carolina (2), North Carolina (2), Georgia (1) and Alabama (3). On October 26, 2010 the Company closed four Woodlands offices including one each in South Carolina and North Carolina and two in Alabama, and in December 2010 the Company relocated two offices. The Company also renegotiated the leases on the two remaining offices. As a result the Company now operates one office each in Bluffton, South Carolina; Wilmington, North Carolina; Savannah, Georgia; and Mobile, Alabama.

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

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

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

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

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

The Company plans to continue evaluating and bidding on failed bank opportunities and hopes to make additional FDIC-assisted acquisitions in the coming quarters.

In addition, the Company expects to continue its growth and de novo branching strategy, although it has slowed the pace of new office openings in recent years and currently has a significant focus on additional FDIC-assisted acquisitions. In the first and second quarters of 2011, the Company opened three offices in the metro-Dallas area in Carrollton, Texas; Plano, Texas; and Keller, Texas. In 2012, the Company expects to open a loan production office in Austin, Texas; open a full service banking office in The Colony, Texas in the metro-Dallas area; replace its existing Charlotte, North Carolina loan production office with a full service banking office; and open its second banking office in Mobile, Alabama.

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

During the first nine months of 2011, the Company had $16.8 million of capital expenditures for premises and equipment, including premises and equipment acquired in FDIC-assisted acquisitions. The Company’s capital expenditures for the full year of 2011 are expected to be in the range of $30 million to $35 million and include premises and equipment expected to be acquired in the fourth quarter of 2011 in connection with the earlier First Choice and Park Avenue acquisitions, progress payments on construction projects expected to be completed in 2011 or 2012, furniture and equipment costs and acquisition of sites for future development. Actual expenditures may vary significantly from those expected, depending on the number and cost of additional sites acquired for future development, progress or delays encountered on ongoing and new construction projects, delays in or inability to obtain required approvals and other factors.

 

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Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates, assumptions and judgments that affect the amounts reported in the consolidated financial statements. The Company’s determination of (i) the provisions to and the adequacy of the allowance for loan and lease losses, (ii) the fair value of its investment securities portfolio, (iii) the fair value of foreclosed assets not covered by FDIC loss share agreements and (iv) the fair value of the assets acquired and liabilities assumed pursuant to business combination transactions, including the Company’s FDIC-assisted acquisitions, all involve a higher degree of judgment and complexity than its other significant accounting policies. Accordingly, the Company considers the determination of (i) the adequacy of the allowance for loan and lease losses, (ii) the fair value of its investment securities portfolio, (iii) the fair value of foreclosed assets not covered by FDIC loss share agreements and (iv) the fair value of the assets acquired and liabilities assumed pursuant to business combination transactions to be critical accounting policies.

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

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

The Company utilizes independent third parties as its principal sources for determining fair value of its investment securities that are measured on a recurring basis. For investment securities traded in an active market, the fair values are based on quoted market prices if available. If quoted market prices are not available, fair values are based on market prices for comparable securities, broker quotes or comprehensive interest rate tables, pricing matrices or a combination thereof. For investment securities traded in a market that is not active, fair value is determined using unobservable inputs.

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

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

Fair value of assets acquired and liabilities assumed pursuant to business combination transactions. Assets acquired and liabilities assumed in business combinations are recorded at estimated fair value on their purchase date. Purchased loans acquired in a business combination, including covered loans, are accounted for in accordance with the provisions of GAAP applicable to loans acquired with deteriorated credit quality and pursuant to the AICPA’s December 18, 2009 letter in which the AICPA summarized the SEC’s view regarding the accounting in subsequent periods for discount accretion associated with non-credit impaired loans acquired in a business combination or asset purchase. Considering, among other factors, the general lack of adequate underwriting, proper documentation, appropriate loan structure and insufficient equity contributions for a large number of these acquired loans, and the uncertainty of the borrowers’ and/or guarantors’ ability or willingness to make contractually required (or any) principal and interest payments, management has determined that a significant portion of the purchased loans acquired in FDIC-assisted acquisitions have evidence of credit deterioration since origination. Accordingly, management has elected to apply the provisions of GAAP applicable to loans acquired with deteriorated credit quality as provided by the AICPA’s December 18, 2009 letter, to all purchased loans acquired in its FDIC-assisted acquisitions.

 

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

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

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

The accretable difference on purchased loans is the difference between the expected cash flows and the net present value of expected cash flows. Such difference is accreted into earnings using the effective yield method over the term of the loans. In determining the net present value of the expected cash flows, the Company used discount rates ranging from 6.0% to 9.5% per annum depending on the risk characteristics of each individual loan. The weighted average period during which management expects to receive the estimated cash flows for its covered loan portfolio (not considering any payment under the FDIC loss share agreements) is 2.4 years.

Management separately monitors the purchased loan portfolio and periodically reviews loans contained within this portfolio against the factors and assumptions used in determining the Day 1 Fair Values. A loan is reviewed (i) any time it is renewed or extended, (ii) at any other time additional information becomes available to the Company that provides material additional insight regarding the loan’s performance, the status of the borrower, or the quality or value of the underlying collateral, or (iii) in conjunction with the annual review of projected cash flows of each acquired portfolio. Management separately reviews, on an annual basis, the performance of a substantial portion of each acquired loan portfolio, or more frequently to the extent that material information becomes available regarding the performance of an individual loan, to make determinations of the constituent loans’ performance and to consider whether there has been any significant change in performance since management’s initial expectations established in conjunction with the determination of the Day 1 Fair Values. To the extent that a loan is performing in accordance with management’s performance expectation established in conjunction with the determination of the Day 1 Fair Values, such loan is not included in any of the credit quality ratios, is not considered to be a nonaccrual or impaired loan, is not risk rated in a similar manner as are the Company’s non-purchased loans and is not considered in the determination of the required allowance for loan and lease losses. To the extent that a loan’s performance has deteriorated from management’s expectation established in conjunction with the determination of the Day 1 Fair Values, such loan will be included in the Company’s credit quality metrics, may be considered a nonaccrual or impaired loan, and is considered in the determination of the required level of allowance for loan and lease losses. To the extent that deterioration in the credit quality of the loan would result in some portion or all of such loan being included in the calculation of the allowance for loan and lease losses, there would be an increase of the FDIC loss share receivable balance for the portion of such additional loss expected to be collected from the FDIC. Currently, the expected losses on covered assets for each of the Company’s loss share agreements would result in expected recovery of approximately 80% of incurred losses. Any improvement in the expected performance of a purchased loan would result in (i) a reversal of the provision for loan and lease losses to the extent of prior charges and then an adjustment to accretable yield, which would have a positive impact on interest income and (ii) a decrease in the FDIC loss share receivable balance for the applicable percentage of the portion of such loss no longer expected to be incurred by the Company.

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

 

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

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

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

Recently Issued Accounting Standards

See Note 16 to the Consolidated Financial Statements for a discussion of certain recently issued and recently adopted accounting pronouncements.

Forward-Looking Information

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

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Actual future performance, outcomes and results may differ materially from those expressed in forward-looking statements made by the Company and its management due to certain risks, uncertainties and assumptions. Certain factors that may affect operating results of the Company include, but are not limited to, potential delays or other problems in implementing the Company’s growth and expansion strategy including delays in identifying satisfactory sites, hiring qualified personnel, obtaining regulatory or other approvals, obtaining permits and designing, constructing and opening new offices; the ability to enter into additional FDIC-assisted acquisitions or problems with integrating or managing such acquisitions; opportunities to profitably deploy capital; the ability to attract new or retain existing deposits, loans and leases; the ability to generate future revenue growth or to control future growth in non-interest expense; interest rate fluctuations, including changes in the yield curve between short-term and long-term interest rates; competitive factors and pricing pressures, including their effect on the Company’s net interest margin; general economic, unemployment, credit market and real estate market conditions, including their effect on the creditworthiness of borrowers and lessees, collateral values, the value of investment securities and asset recovery values, including the value of the FDIC loss share receivable and related assets covered by FDIC loss share agreements; changes in legal and regulatory requirements; recently enacted and potential legislation and regulatory actions, including legislation and regulatory actions intended to stabilize economic conditions and credit markets, increase regulation of the financial services industry and protect homeowners or consumers; changes in U.S. government monetary and fiscal policy; possible further downgrade of U.S. Treasury securities; adoption of new accounting standards or changes in existing standards; and adverse results in current or future litigation as well as other factors described in this and other Company reports and statements. Should one or more of the foregoing risks materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described in the forward-looking statements.

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SELECTED AND SUPPLEMENTAL FINANCIAL DATA

The following tables set forth selected consolidated financial data of the Company for the three and nine months ended September 30, 2011 and 2010 and supplemental quarterly financial data of the Company for each of the most recent eight quarters beginning with the fourth quarter of 2009 through the third quarter of 2011. These tables are qualified in their entirety by the consolidated financial statements and related notes presented elsewhere in this report.

Selected Consolidated Financial Data

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2011     2010     2011     2010  
     (Dollars in thousands, except per share amounts)  

Income statement data:

           

Interest income

   $ 51,902      $ 41,092         $ 146,799      $ 115,885   

Interest expense

     7,566        8,324           23,904        26,195   

Net interest income

     44,336        32,768           122,895        89,690   

Provision for loan and lease losses

     1,500        4,300           7,500        11,900   

Non-interest income

     16,071        25,183           104,119        51,676   

Non-interest expense

     31,800        23,565           93,191        62,146   

Net income available to common stockholders

     18,904        20,225           83,751        47,070   

Common share and per common share data:*

           

Earnings – diluted

   $ 0.55      $ 0.59         $ 2.43      $ 1.38   

Book value

     11.87        9.30           11.87        9.30   

Dividends

     0.095        0.075           0.27        0.22   

Weighted-average diluted shares outstanding (thousands)

     34,510        34,134           34,434        34,030   

End of period shares outstanding (thousands)

     34,277        33,980           34,277        33,980   

Balance sheet data at period end:

           

Total assets

   $ 3,930,647      $ 3,175,810         $ 3,930,647      $ 3,175,810   

Loans and leases not covered by FDIC loss share agreements

     1,863,114        1,888,936           1,863,114        1,888,936   

Loans covered by FDIC loss share agreements

     865,096        391,014           865,096        391,014   

Allowance for loan and lease losses

     39,136        40,250           39,136        40,250   

FDIC loss share receivable

     318,730        123,702           318,730        123,702   

Investment securities AFS

     439,596        412,443           439,596        412,443   

Foreclosed assets covered by FDIC loss share agreements

     73,249        17,540           73,249        17,540   

Total deposits

     3,046,469        2,415,714           3,046,469        2,415,714   

Repurchase agreements with customers

     46,334        55,750           46,334        55,750   

Other borrowings

     289,353        294,502           289,353        294,502   

Subordinated debentures

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

Total common stockholders’ equity

     406,945        316,072           406,945        316,072   

Loan and lease (including covered loans) to deposit ratio

     89.55     94.52        89.55     94.52

Average balance sheet data:

           

Total average assets

   $ 3,934,801      $ 3,083,789         $ 3,714,381      $ 2,930,684   

Total average common stockholders’ equity

     395,430        305,378           361,123        288,800   

Average common equity to average assets

     10.05     9.90        9.72     9.85

Performance ratios:

           

Return on average assets**

     1.91     2.60        3.01     2.15

Return on average common stockholders’ equity**

     18.97        26.28           31.01        21.79   

Net interest margin – FTE**

     5.90        5.31           5.77        5.14   

Efficiency ratio

     50.75        39.02           39.86        41.71   

Common stock dividend payout ratio

     17.27        12.58           11.11        15.83   

Asset quality ratios:

           

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

     0.33     0.88        0.63     0.80

Nonperforming loans and leases to total loans and leases(1)

     1.22        0.90           1.22        0.90   

Nonperforming assets to total assets(1)

     1.45        1.85           1.45        1.85   

Allowance for loan and lease losses as a percentage of:

           

Total loans and leases(1)

     2.10     2.13        2.10     2.13

Nonperforming loans and leases(1)

     172     236        172     236

Capital ratios at period end:

           

Tier 1 leverage

     11.46     11.73        11.46     11.73

Tier 1 risk-based capital

     18.26        15.45           18.26        15.45   

Total risk-based capital

     19.52        16.71           19.52        16.71   

 

* Adjusted to give effect to 2-for-1 stock split effective August 16, 2011.
** Ratios annualized based on actual days.
(1) Excludes loans and/or foreclosed assets covered by FDIC loss share agreements, except for their inclusion in total assets.

 

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Supplemental Quarterly Financial Data

 

    12/31/09     3/31/10     6/30/10     9/30/10     12/31/10     3/31/11     6/30/11     9/30/11  
    (Dollars in thousands, except per share amounts)  

Earnings Summary:

               

Net interest income

  $ 28,495      $ 27,193      $ 29,729      $ 32,768      $ 33,945      $ 36,083      $ 42,476      $ 44,336   

Federal tax (FTE) adjustment

    2,229        2,649        2,554        2,447        2,341        2,318        2,235        2,256   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (FTE)

    30,724        29,842        32,283        35,215        36,286        38,401        44,711        46,592   

Provision for loan and lease losses

    (5,600     (4,200     (3,400     (4,300     (4,100     (2,250     (3,750     (1,500

Non-interest income

    13,257        17,365        9,127        25,183        18,646        12,990        75,058        16,071   

Non-interest expense

    (19,001     (17,471     (21,110     (23,565     (25,274     (26,192     (35,200     (31,800
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pretax income (FTE)

    19,380        25,536        16,900        32,533        25,558        22,949        80,819        29,363   

FTE adjustment

    (2,229     (2,649     (2,554     (2,447     (2,341     (2,318     (2,235     (2,256

Provision for income taxes

    (4,472     (6,944     (3,488     (9,878     (6,303     (6,004     (28,380     (8,220

Noncontrolling interest

    17        11        32        17        17        3        13        17   

Preferred stock dividend

    (3,048     —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common stockholders

  $ 9,648      $ 15,954      $ 10,890      $ 20,225      $ 16,931      $ 14,630      $ 50,217      $ 18,904   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share – diluted*

  $ 0.29      $ 0.47      $ 0.32      $ 0.59      $ 0.49      $ 0.43      $ 1.46      $ 0.55   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest Income:

               

Service charges on deposit accounts

  $ 3,338      $ 3,202      $ 3,933      $ 4,002      $ 4,019      $ 3,838      $ 4,586      $ 4,734   

Mortgage lending income

    682        527        815        1,024        1,495        681        634        815   

Trust income

    880        922        794        802        888        782        803        810   

Bank owned life insurance income

    1,729        464        534        580        574        568        575        585   

Gains (losses) on investment securities

    6,322        1,697        2,052        570        226        152        199        638   

Gains (losses) on sales of other assets

    (142     (73     38        267        571        407        705        1,727   

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

    —          —          271        906        1,252        1,998        2,923        2,861   

Other loss share income, net

    —          —          —          295        304        971        984        2,976   

Gains on FDIC-assisted transactions

    —          10,037        —          16,122        8,859        2,952        62,756        —     

Other

    448        589        690        615        458        641        893        925   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

  $ 13,257      $ 17,365      $ 9,127      $ 25,183      $ 18,646      $ 12,990      $ 75,058      $ 16,071   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest Expense:

               

Salaries and employee benefits

  $ 8,131      $ 8,275      $ 8,996      $ 10,539      $ 12,351      $ 11,647      $ 14,817      $ 14,597   

Net occupancy expense

    2,156        2,421        2,416        2,782        2,999        3,106        3,775        4,301   

Other operating expenses

    8,686        6,748        9,587        10,111        9,764        11,211        16,172        12,398   

Amortization of intangibles

    28        27        111        133        160        228        436        504   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expense

  $ 19,001      $ 17,471      $ 21,110      $ 23,565      $ 25,274      $ 26,192      $ 35,200      $ 31,800   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for Loan and Lease Losses:

               

Balance at beginning of period

  $ 39,280      $ 39,619      $ 39,774      $ 40,176      $ 40,250      $ 40,230      $ 39,225      $ 39,124   

Net charge-offs

    (5,261     (4,045     (2,998     (4,226     (4,120     (3,255     (3,851     (1,488

Provision for loan and lease losses

    5,600        4,200        3,400        4,300        4,100        2,250        3,750        1,500   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

  $ 39,619      $ 39,774      $ 40,176      $ 40,250      $ 40,230      $ 39,225      $ 39,124      $ 39,136   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Selected Ratios:

               

Net interest margin - FTE**

    4.89     4.99     5.10     5.31     5.35     5.61     5.80     5.90

Efficiency ratio

    43.20        37.01        50.98        39.02        46.01        50.97        29.39        50.75   

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

    1.08        0.86        0.64        0.88        0.87        0.72        0.85        0.33   

Nonperforming loans and leases/total loans and leases(1)

    1.24        1.02        0.87        0.90        0.75        0.77        1.09        1.22   

Nonperforming assets/total assets(1)

    3.06        2.68        2.12        1.85        1.72        1.62        1.39        1.45   

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

    2.08        2.11        2.11        2.13        2.17        2.17        2.17        2.10   

Loans and leases past due 30 days or more, including past due non-accrual loans and leases, to total loans and leases(1)

    1.99        1.70        1.80        1.90        2.02        2.19        2.47        1.89   

 

* Adjusted to give effect to 2-for-1 stock split effective August 16, 2011.
** Annualized based on actual days.
(1) Excludes loans and/or foreclosed assets covered by FDIC loss share agreements, except for their inclusion in total assets.

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

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

This earnings simulation modeling process projects a baseline net interest income (assuming no changes in interest rate levels) and estimates changes to that baseline net interest income resulting from changes in interest rate levels. The Company relies primarily on the results of this model in evaluating its interest rate risk. This model incorporates a number of additional factors including: (1) the expected exercise of call features on various assets and liabilities, (2) the expected rates at which various RSA and RSL will reprice, (3) the expected growth in various interest earning assets and interest bearing liabilities and the expected interest rates on new assets and liabilities, (4) the expected relative movements in different interest rate indexes which are used as the basis for pricing or repricing various assets and liabilities, (5) existing and expected contractual cap and floor rates on various assets and liabilities, (6) expected changes in administered rates on interest bearing transaction, savings, money market and time deposit accounts and the expected impact of competition on the pricing or repricing of such accounts and (7) other relevant factors. Inclusion of these factors in the model is intended to more accurately project the Company’s expected changes in net interest income resulting from interest rate changes. The Company typically models its change in net interest income assuming interest rates go up 100 bps, up 200 bps, down 100 bps and down 200 bps. Based on current conditions, the Company is now modeling its change in net interest income assuming interest rates go up 100 bps, up 200 bps, up 300 bps and up 400 bps. For purposes of this model, the Company has assumed that the change in interest rates phases in over a 12-month period. While the Company believes this model provides a reasonably accurate projection of its interest rate risk, the model includes a number of assumptions and predictions which may or may not be correct and may impact the model results. These assumptions and predictions include inputs to compute baseline net interest income, growth rates, expected changes in administered rates on interest bearing deposit accounts, competition and a variety of other factors that are difficult to accurately predict. Accordingly, there can be no assurance the earnings simulation model will accurately reflect future results.

The following table presents the earnings simulation model’s projected impact of a change in interest rates on the projected baseline net interest income for the 12-month period commencing October 1, 2011. This change in interest rates assumes parallel shifts in the yield curve and does not take into account changes in the slope of the yield curve.

 

Shift in
Interest Rates
(in bps)

  % Change in
Projected Baseline
Net Interest Income
+400   (3.4)%
+300   (3.0)   
+200   (2.2)   
+100   (1.2)   
-100   Not meaningful
-200   Not meaningful

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

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Item 4. Controls and Procedures

 

  (a) Evaluation of Disclosure Controls and Procedures.

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

 

  (b) Changes in Internal Control over Financial Reporting.

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

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

On April 8, 2011, the Company was served with a petition filed on March 31, 2011 by the Seib Family, GP, LLC, a Texas limited liability company, as General Partner of Seib Family, LP in the District Court of Dallas County, Texas, Cause Number 11-04057, against the Company and two entities which the plaintiff apparently believed had some type of ownership interest in a former borrower of the Bank, alleging, among other things, that the defendants fraudulently induced the plaintiff to purchase a tract of real estate consisting of approximately 60 acres located at 318 Cadiz Street in Dallas, Texas, owned by the former borrower and financed by the Bank. The petition alleges that the defendants knew that a levee protecting the property from the Trinity River flood plain did not meet federal standards, that the defendants omitted to disclose that information to plaintiff prior to the sale of the property, and that due to the problems or potential problems with the levee, the value of the property was significantly impaired, as supported by a report by the U.S. Corps of Engineers concerning the condition of the levee, released at approximately the same time as the plaintiff purchased the property from the former borrower and affiliates with the aid and assistance of the Company. The petition alleges that the plaintiff did not become aware of the U.S. Corps of Engineers’ report until a month or two after it purchased the property.

The original petition alleged that the defendants’ conduct violated the Texas Securities Act and the Texas Deceptive Trade Practices Act, and seeks compensatory damages, trebled under the Texas Deceptive Trade Practices Act, plus exemplary damages, attorneys’ fees, costs, interest, and other relief the court deems just. Since the original petition was filed, the plaintiff has (i) dropped all claims against the Company, but substituted the Bank as a defendant and (ii) dropped all claims with respect to the Texas Deceptive Trade Practices Act. Under its amended petition, the Plaintiff is seeking $15,962,677 in actual damages and $31,925,354 in exemplary damages. Discovery is currently ongoing with respect to this petition. The Company believes the allegations of the petition are wholly without merit and intends to vigorously defend against these claims.

The Company is party to various other legal proceedings, as both plaintiff and defendant, arising in the ordinary course of business, including claims of lender liability, predatory lending, broken promises and other similar lending-related claims, as well as legal proceedings arising from acquired operations in its FDIC-assisted transactions and third party claims alleging that the Company and the Bank, along with certain other financial institutions, have infringed certain “business method” patents claimed to be violated by the institutions’ use of web site authentication software and check imaging and processing software not authorized by the patent holder claimants. While the ultimate resolution of these various claims and proceedings cannot be determined at this time, management of the Company believes that such claims and proceedings, individually or in the aggregate, will not have a material adverse effect on the future results of operations, financial condition or liquidity of the Company.

 

Item 1A. Risk Factors

There have been no material changes to the risk factors disclosed in Item 1A Risk Factors in the Company’s 2010 annual report on Form 10-K filed with the Securities and Exchange Commission on March 10, 2011.

 

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

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

 

Item 3. Defaults Upon Senior Securities

Not Applicable.

 

Item 4. Reserved

 

Item 5. Other Information

Not Applicable

 

Item 6. Exhibits

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

 

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SIGNATURE

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

 

  Bank of the Ozarks, Inc.
DATE: November 8, 2011  

/s/ Greg McKinney

  Greg McKinney
  Chief Financial Officer and Chief Accounting Officer

 

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Bank of the Ozarks, Inc.

Exhibit Index

 

Exhibit
Number
    
  2 (i)   Purchase and Assumption Agreement, dated as of January 14, 2011, among Federal Deposit Insurance Corporation, Receiver of Oglethorpe Bank, Brunswick, Georgia, Federal Deposit Insurance Corporation and Bank of the Ozarks (previously filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K, as amended, filed with the Commission on January 20, 2011, and incorporated herein by this reference).
  2(i) (a)   Purchase and Assumption Agreement, dated as of April 29, 2011, among Federal Deposit Insurance Corporation, Receiver of First Choice Community Bank, Dallas, Georgia, Federal Deposit Insurance Corporation and Bank of the Ozarks (previously filed as Exhibit 2.1(a) to the Company’s Current Report on Form 8-K, as amended, filed with the Commission on May 4, 2011, and incorporated herein by this reference).
  2(i) (b)   Purchase and Assumption Agreement, dated as of April 29, 2011, among Federal Deposit Insurance Corporation, Receiver of The Park Avenue Bank, Valdosta, Georgia, Federal Deposit Insurance Corporation and Bank of the Ozarks (previously filed as Exhibit 2.1(b) to the Company’s Current Report on Form 8-K, as amended, filed with the Commission on May 4, 2011, and incorporated herein by this reference).
  3 (i) (a)   Amended and Restated Articles of Incorporation of the Registrant, dated May 22, 1997 (previously filed as Exhibit 3.1 to the Company’s Registration Statement on Form S-1 filed with the Commission on May 22, 1997, as amended, Commission File No. 333-27641, and incorporated herein by this reference).
  3 (i) (b)   Articles of Amendment to the Amended and Restated Articles of Incorporation of the Registrant dated December 9, 2003 (previously filed as Exhibit 3.2 to the Company’s Annual Report on Form 10-K filed with the Commission on March 12, 2004 for the year ended December 31, 2003, and incorporated herein by this reference).
  3 (i) (c)   Articles of Amendment to the Amended and Restated Articles of Incorporation of the Registrant dated December 10, 2008 (previously filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Commission on December 10, 2008, and incorporated herein by this reference).
  3 (ii)   Amended and Restated Bylaws of the Registrant, dated December 11, 2007 (previously filed as Exhibit 3(ii) to the Company’s Current Report on Form 8-K filed with the Commission on December 11, 2007, and incorporated herein by this reference).
10.1   Form of Indemnification Agreement between the Registrant and its directors and its executive officers (previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on April 21, 2011 and incorporated herein by this reference).
31.1   Certification of Chairman and Chief Executive Officer.
31.2   Certification of Chief Financial Officer and Chief Accounting Officer.
32.1   Certification of Chairman and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2   Certification of Chief Financial Officer and Chief Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101   The following materials from Bank of the Ozarks, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Stockholders’ Equity, (iv) Consolidated Statements of Cash Flows and (v) Notes to Consolidated Financial Statements ***

 

*** Pursuant to Rule 406T of Regulations S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under these sections.

 

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