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OZRK > SEC Filings for OZRK > Form 10-Q on 5-Nov-2012All Recent SEC Filings

Show all filings for BANK OF THE OZARKS INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for BANK OF THE OZARKS INC


5-Nov-2012

Quarterly Report


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

GENERAL

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

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

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

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

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

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

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

ANALYSIS OF RESULTS OF OPERATIONS

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

The Company's non-interest expense consists of salaries and employee benefits, net occupancy and equipment and other operating expenses. The Company's results of operations are significantly impacted by its provision for loan and lease losses and its provision for income taxes. The following discussion provides a comparative summary of the Company's operations for the three months and nine months ended September 30, 2012 and 2011 and should be read in conjunction with the consolidated financial statements and related notes presented elsewhere in this report.


Table of Contents

Net Interest Income

Net interest income is analyzed in this discussion and the following tables on a fully taxable equivalent ("FTE") basis. The adjustment to convert certain income to a FTE basis consists of dividing federal tax-exempt income by one minus the Company's statutory federal income tax rate of 35%. The FTE adjustments to net interest income were $2.1 million and $2.3 million for the quarters ended September 30, 2012 and 2011, respectively, and $6.5 million and $6.8 million for the nine months ended September 30, 2012 and 2011, respectively. No adjustments have been made in this analysis for income exempt from state income taxes or for interest expense deductions disallowed under the provisions of the Internal Revenue Code as a result of investment in certain tax-exempt securities.

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

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

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

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

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

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


Table of Contents

      Average Consolidated Balance Sheets and Net Interest Analysis - FTE



                                                                                   Three Months Ended September 30,                                                     Nine Months Ended September 30,
                                                                            2012                                      2011                                      2012                                       2011
                                                              Average       Income/      Yield/         Average       Income/      Yield/         Average        Income/      Yield/         Average        Income/      Yield/
                                                              Balance       Expense       Rate          Balance       Expense       Rate          Balance        Expense       Rate          Balance        Expense       Rate
                                                                                                                                   (Dollars in thousands)
ASSETS
Earning assets:
Interest earning deposits and federal funds sold            $     1,226     $      2        0.61 %    $     1,405     $      5        1.60 %    $     1,138     $       5        0.59 %    $     1,865     $      31        2.21 %
Investment securities:
Taxable                                                          85,845          757        3.51          109,782          838        3.03           84,732         2,177        3.43          101,646         2,324        3.06
Tax-exempt - FTE                                                325,756        5,945        7.26          342,368        6,427        7.45          337,591        18,589        7.36          344,845        19,400        7.52
Loans and leases - FTE                                        2,003,013       29,492        5.86        1,796,113       27,799        6.14        1,932,708        85,217        5.89        1,815,004        83,734        6.17
Covered loans                                                   682,506       15,347        8.95          884,864       19,089        8.56          731,658        47,710        8.69          744,069        48,119        8.65

Total earning assets - FTE                                    3,098,346       51,543        6.62        3,134,532       54,158        6.85        3,087,827       153,698        6.65        3,007,429       153,608        6.83
Non-interest earning assets                                     640,824                                   800,269                                   680,379                                    706,952

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

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Deposits:
Savings and interest bearing transaction                    $ 1,559,520     $  1,002        0.26 %    $ 1,632,593     $  2,071        0.50 %    $ 1,561,417     $   3,517        0.30 %    $ 1,500,892     $   6,854        0.61 %
Time deposits of $100,000 or more                               332,122          377        0.45          403,394          888        0.87          358,956         1,539        0.57          446,737         3,219        0.96
Other time deposits                                             422,632          533        0.50          631,347        1,430        0.90          457,445         2,082        0.61          582,906         4,294        0.99

Total interest bearing deposits                               2,314,274        1,912        0.33        2,667,334        4,389        0.65        2,377,818         7,138        0.40        2,530,535        14,367        0.76
Repurchase agreements with customers                             32,288            7        0.09           37,082           35        0.37           35,626            40        0.15           39,944           153        0.51
Other borrowings                                                301,673        2,628        3.47          283,176        2,712        3.80          295,342         8,020        3.63          291,484         8,096        3.71
Subordinated debentures                                          64,950          465        2.85           64,950          430        2.63           64,950         1,398        2.88           64,950         1,288        2.65

Total interest bearing liabilities                            2,713,185        5,012        0.73        3,052,542        7,566        0.98        2,773,736        16,596        0.80        2,926,913        23,904        1.09
Non-interest bearing liabilities:
Non-interest bearing deposits                                   498,529                                   419,349                                   480,593                                    377,278
Other non-interest bearing liabilities                           56,588                                    64,069                                    60,411                                     45,642

Total liabilities                                             3,268,302                                 3,535,960                                 3,314,740                                  3,349,833
Common stockholders' equity                                     467,449                                   395,430                                   450,044                                    361,123
Noncontrolling interest                                           3,419                                     3,411                                     3,422                                      3,425

Total liabilities and stockholders' equity                  $ 3,739,170                               $ 3,934,801                               $ 3,768,206                                $ 3,714,381

Net interest income - FTE                                                   $ 46,531                                  $ 46,592                                  $ 137,102                                  $ 129,704

Net interest margin - FTE                                                                   5.97 %                                    5.90 %                                     5.93 %                                     5.77 %


Table of Contents

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                        Nine Months Ended
                                                 September 30, 2012                       September 30, 2012
                                                        Over                                     Over
                                                 Three Months Ended                        Nine Months Ended
                                                 September 30, 2011                       September 30, 2011
                                                       Yield/         Net                       Yield/         Net
                                         Volume         Rate         Change       Volume         Rate         Change
                                                                   (Dollars in thousands)
Increase (decrease) in:
Interest income - FTE:
Interest earning deposits and federal
funds sold                              $     -       $     (3 )    $     (3 )    $    (3 )    $    (23 )    $    (26 )
Investment securities:
Taxable                                     (211 )         130           (81 )       (435 )         288          (147 )
Tax-exempt - FTE                            (303 )        (179 )        (482 )       (400 )        (411 )        (811 )
Loans and leases - FTE                     3,046        (1,353 )       1,693        5,190        (3,707 )       1,483
Covered loans                             (4,551 )         809        (3,742 )       (809 )         400          (409 )

Total interest income - FTE               (2,019 )        (596 )      (2,615 )      3,543        (3,453 )          90

Interest expense:
Savings and interest bearing
transaction                                  (47 )      (1,022 )      (1,069 )        136        (3,473 )      (3,337 )
Time deposits of $100,000 or more            (81 )        (430 )        (511 )       (376 )      (1,304 )      (1,680 )
Other time deposits                         (263 )        (634 )        (897 )       (571 )      (1,641 )      (2,212 )
Repurchase agreements with customers          (1 )         (27 )         (28 )         (5 )        (108 )        (113 )
Other borrowings                             161          (245 )         (84 )        105          (181 )         (76 )
Subordinated debentures                       -             35            35           -            110           110

Total interest expense                      (231 )      (2,323 )      (2,554 )       (711 )      (6,597 )      (7,308 )

Increase (decrease) in net interest
income - FTE                            $ (1,788 )    $  1,727      $    (61 )    $ 4,254      $  3,144      $  7,398

Non-Interest Income

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

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

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

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


Table of Contents

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

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

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

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

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

During the first nine months of 2011, the Company made three FDIC-assisted acquisitions resulting in total pre-tax bargain purchase gains of $65.7 million. Specifically, on April 29, 2011 the Company, through the Bank, entered into a purchase and assumption agreement with loss share agreements with the FDIC pursuant to which it acquired substantially all of the assets and assumed substantially all of the deposits and certain other liabilities of the former First Choice Community Bank. This FDIC-assisted acquisition resulted in the Company recognizing a pre-tax bargain purchase gain of $2.95 million in the second quarter of 2011. On April 29, 2011 the Company, through the Bank, entered into a purchase and assumption agreement with loss share agreements with the FDIC pursuant to which it acquired substantially all of the assets and assumed substantially all of the deposits and certain other liabilities of the former The Park Avenue Bank. This FDIC-assisted acquisition resulted in the Company recognizing a pre-tax bargain purchase gain of $59.8 million in the second . . .

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