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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 June 30, 2002
( ) 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)
12615 CHENAL PARKWAY, LITTLE ROCK, ARKANSAS 72211
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (501) 978-2265
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes (X) No ( )
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practical date.
Class Outstanding at June 30, 2002
- --------------------------------------- ---------------------------------
Common Stock, $0.01 par value per share 7,648,360
BANK OF THE OZARKS, INC.
FORM 10-Q
June 30, 2002
INDEX
PART I. Financial Information
Item 1. Consolidated Balance Sheets as of June 30, 2002
and 2001 and December 31, 2001 1
Consolidated Statements of Income for the Three Months
Ended June 30, 2002 and 2001 and the Six Months Ended
June 30, 2002 and 2001 2
Consolidated Statements of Stockholders' Equity for the
Six Months Ended June 30, 2002 and 2001 3
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2002 and 2001 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Selected and Supplemental Financial Data 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
PART II. Other Information
Item 1. Legal Proceedings 21
Item 2 Change in Securities N/A
Item 3. Defaults Upon Senior Securities N/A
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information N/A
Item 6. Exhibits and Reports on Form 8-K
(a). Exhibits
Reference is made to the Exhibit Index contained at
the end of this report.
(b). Reports on Form 8-K 22
Signature 23
Exhibit Index 24
BANK OF THE OZARKS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
Unaudited
June 30, December 31,
---------------------------- --------------
2002 2001 2001
------------- ----------- --------------
ASSETS
Cash and due from banks $ 21,126 $ 26,519 $ 31,114
Interest-earning deposits 419 222 218
Trading account securities - 185 -
Investment securities - available for sale 185,583 31,728 182,704
Investment securities - held to maturity 4,385 172,698 4,463
Loans, net of unearned income 647,113 547,520 616,076
Allowance for loan losses (9,649) (7,139) (8,712)
------------- ----------- --------------
Net loans 637,464 540,381 607,364
Premises and equipment, net 35,830 33,019 33,123
Foreclosed assets held for sale, net 428 1,370 661
Interest receivable 5,679 7,983 5,821
Goodwill 1,808 1,853 1,808
Core deposit intangible, net 939 1,091 1,015
Other 2,492 2,594 3,088
------------- ----------- --------------
Total assets $ 896,153 $ 819,643 $ 871,379
============= =========== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Demand - non-interest bearing $ 82,037 $ 72,377 $ 72,801
Savings and interest-bearing transaction 288,670 171,502 241,042
Time 336,169 398,335 363,900
------------- ----------- --------------
Total deposits 706,876 642,214 677,743
Repurchase agreements with customers 18,076 17,789 16,213
Other borrowings 85,318 86,145 99,690
Accrued interest and other liabilities 3,764 3,536 3,866
------------- ----------- --------------
Total liabilities 814,034 749,684 797,512
------------- ----------- --------------
Guaranteed preferred beneficial interest in the Company's
subordinated debentures 17,250 17,250 17,250
Stockholders' equity
Preferred stock; $0.01 par value, 1,000,000 shares authorized,
no shares issued and outstanding - - -
Common stock; $0.01 par value, 10,000,000 shares authorized,
7,648,360, 7,559,110 (split adjusted) and 7,564,110 (split
adjusted) shares issued and outstanding at June 30, 2002,
June 30, 2001 and December 31, 2001, respectively 76 38 38
Additional paid-in capital 15,462 14,314 14,360
Retained earnings 48,263 38,741 42,718
Accumulated other comprehensive income (loss) 1,068 (384) (499)
------------- ----------- --------------
Total stockholders' equity 64,869 52,709 56,617
------------- ----------- --------------
Total liabilities and stockholders' equity $ 896,153 $ 819,643 $ 871,379
============= =========== ==============
See accompanying notes to consolidated financial statements.
1
BANK OF THE OZARKS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
Unaudited
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2002 2001 2002 2001
------------ ----------- ----------- ------------
Interest income
Loans $ 12,002 $ 11,705 $ 23,804 $ 23,189
Investment securities - taxable 2,793 2,940 5,154 6,345
- nontaxable 137 377 351 845
Deposits with banks and federal funds sold 5 22 9 39
------------ ----------- ----------- ------------
Total interest income 14,937 15,044 29,318 30,418
Interest expense
Deposits 3,511 6,828 7,344 14,903
Repurchase agreements with customers 80 165 136 341
Other borrowings 1,152 1,122 2,310 2,233
------------ ----------- ----------- ------------
Total interest expense 4,743 8,115 9,790 17,477
------------ ----------- ----------- ------------
Net interest income 10,194 6,929 19,528 12,941
Provision for loan losses (945) (658) (1,495) (1,012)
------------ ----------- ----------- ------------
Net interest income after provision for loan losses 9,249 6,271 18,033 11,929
------------ ----------- ----------- ------------
Other income
Trust income 163 174 325 347
Service charges on deposit accounts 1,806 919 3,311 1,761
Other income, charges and fees 681 681 1,385 1,209
Gain (loss) on sale of securities - 6 (217) 119
Other 59 140 97 141
------------ ----------- ----------- ------------
Total other income 2,709 1,920 4,901 3,577
------------ ----------- ----------- ------------
Other expense
Salaries and employee benefits 3,461 2,582 6,663 4,941
Net occupancy and equipment 878 783 1,737 1,511
Other operating expenses 1,719 1,381 3,294 2,590
------------ ----------- ----------- ------------
Total other expense 6,058 4,746 11,694 9,042
------------ ----------- ----------- ------------
Income before income taxes and trust preferred
distributions 5,900 3,445 11,240 6,464
Distributions on trust preferred securities 397 397 793 793
Provision for income taxes 2,068 835 3,918 1,596
------------ ----------- ----------- ------------
Net income $ 3,435 $ 2,213 $ 6,529 $ 4,075
============ =========== =========== ============
Basic earnings per common share $ 0.45 $ 0.29 $ 0.86 $ 0.54
============ =========== =========== ============
Diluted earnings per common share $ 0.44 $ 0.29 $ 0.84 $ 0.54
============ =========== =========== ============
Dividends declared per common share $ 0.07 $ 0.055 $ 0.13 $ 0.11
============ =========== =========== ============
See accompanying notes to consolidated financial statements.
2
BANK OF THE OZARKS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
Unaudited
Accumulated
Additional Other
Common Paid-In Retained Comprehensive
Stock Capital Earnings Income (Loss) Total
------------ ------------ ------------ ------------- ------------
Balance - January 1, 2001 $ 38 $ 14,314 $ 35,498 $ (1,501) $ 48,349
Comprehensive income:
Net income 4,075 4,075
Other comprehensive income
Unrealized gains on available for
sale securities net of $532 tax effect 860 860
Reclassification adjustment for losses
included in income net of $160 tax effect 257 257
------------
Comprehensive income 5,192
------------
Cash dividends (832) (832)
------------ ------------ ------------ ------------- ------------
Balance - June 30, 2001 $ 38 $ 14,314 $ 38,741 $ (384) $ 52,709
============ ============ ============ ============= ============
Balance - January 1, 2002 $ 38 $ 14,360 $ 42,718 $ (499) $ 56,617
Comprehensive income:
Net income 6,529 6,529
Other comprehensive income
Unrealized gains on available for sale
securities net of $921 tax effect 1,485 1,485
Reclassification adjustment for losses
included in income net of $51 tax effect 82 82
------------
Comprehensive income 8,096
------------
Cash dividends (984) (984)
2-for-1 stock split in the form of a 100% stock dividend 38 (38) -
Issuance of 84,250 split adjusted shares of common stock
from exercise of stock options, including tax benefits
of $318 - 1,140 1,140
------------ ------------ ------------ ------------- ------------
Balance - June 30, 2002 $ 76 $ 15,462 $ 48,263 $ 1,068 $ 64,869
============ ============ ============ ============= ============
See accompanying notes to consolidated financial statements.
3
BANK OF THE OZARKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Unaudited
Six Months Ended
June 30,
-------------------------------
2002 2001
------------ ------------
Cash flows from operating activities
Net income $ 6,529 $ 4,075
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 767 710
Amortization 93 137
Provision for loan losses 1,495 1,012
Provision for losses on foreclosed assets 20 104
Amortization and accretion on investment securities 59 (58)
Loss (gain) on sale of securities 217 (119)
Decrease (increase) in mortgage loans held for sale 7,456 (6,600)
(Gain) loss on disposition of foreclosed assets (29) 10
Deferred income taxes (154) (67)
Changes in assets and liabilities:
Interest receivable 143 911
Other assets, net (239) (257)
Accrued interest and other liabilities (102) 407
------------ ------------
Net cash provided by operating activities 16,255 265
------------ ------------
Cash flows from investing activities
Proceeds from sales and maturities of investment securities
available for sale 55,628 23,388
Purchases of investment securities available for sale (56,212) (1,273)
Purchase of investment securities held to maturity (34) -
Proceeds from maturities of investment securities held to maturity 80 28,662
Decrease in federal funds sold - 2,000
Net increase in loans (39,682) (31,721)
Purchase of bank premises and equipment (3,474) (3,194)
Proceeds from dispositions of foreclosed assets 872 983
------------ ------------
Net cash (used in) provided by investing activities (42,822) 18,845
------------ ------------
Cash flows from financing activities
Net increase (decrease) in deposits 29,133 (35,469)
Net (repayments) proceeds from other borrowings (14,372) 19,442
Net increase in repurchase agreements 1,863 3,950
Proceeds on exercise of stock options 1,140 -
Dividends paid (984) (832)
------------ ------------
Net cash provided by (used in) financing activities 16,780 (12,909)
------------ ------------
Net (decrease) increase in cash and cash equivalents (9,787) 6,201
Cash and cash equivalents - beginning of period 31,332 20,540
------------ ------------
Cash and cash equivalents - end of period $ 21,545 $ 26,741
============ ============
See accompanying notes to consolidated financial statements.
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Principles of Consolidation
The consolidated financial statements of Bank of the Ozarks, Inc. include
the accounts of the parent company and its wholly owned subsidiaries, including
Bank of the Ozarks, a state chartered bank, and Ozark Capital Trust
(collectively the "Company"). All material intercompany transactions have been
eliminated.
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
with the instructions to Form 10-Q, and in accordance with accounting principles
generally accepted in the United States for interim financial information.
Certain information, accounting policies and footnote disclosures normally
included in complete financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted in accordance with such rules and regulations. It is therefore suggested
that these consolidated financial statements 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, 2001.
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 six months ended June 30, 2002 are not necessarily indicative of the
results that may be expected for the full year.
3. Earnings Per Common Share
On June 17, 2002, 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 June 3, 2002. All share and per share
information contained in the consolidated financial statements or other
disclosures in this report have been adjusted to give effect to this stock
split.
Basic EPS is computed by dividing reported earnings available to common
stockholders by weighted average shares outstanding. Diluted EPS includes only
the dilutive effect of stock options. In computing dilution for stock options, a
simple average share price based on the daily ending trade as reported on
Bloomberg is used for the reporting period. The Company had outstanding stock
options to purchase no shares for the three months ended June 30, 2002, 16,000
split adjusted shares for the six months ended June 30, 2002, and 263,350 and
410,000 split adjusted shares, respectively, for the three and six month periods
ended at June 30, 2001 that were not included in the dilutive EPS calculation
because they would have been antidilutive.
Basic and diluted earnings per common share are computed as follows:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- --------------------
2002 2001 2002 2001
------ ------ ------ ------
(In thousands, except per share amounts)
Common shares - weighted averages (basic) ....... 7,614 7,560 7,590 7,560
Common share equivalents - weighted averages .... 207 44 185 28
------ ------ ------ ------
Common shares - diluted ......................... 7,821 7,604 7,775 7,588
====== ====== ====== ======
Net income ...................................... $3,435 $2,213 $6,529 $4,075
Basic earnings per common share ................. $ 0.45 $ 0.29 $ 0.86 $ 0.54
Diluted earnings per common share ............... 0.44 0.29 0.84 0.54
5
4. Federal Home Loan Bank ("FHLB") Advances
FHLB advances with original maturities exceeding one year totaled $81.2
million at June 30, 2002. Interest rates on these advances ranged from 2.49% to
6.43% at June 30, 2002 with a weighted average rate of 5.46%. At June 30, 2002
aggregate annual maturities (amounts in thousands) and weighted average interest
rates of FHLB advances with an original maturity of over one year are as
follows:
Weighted
Maturity Amount Average Rate
-------- ------ ------------
2003 $20,198 3.03%
2004 198 6.30
2005 198 6.30
2006 197 6.30
Thereafter 60,395 6.27
-------
$81,186 5.46%
=======
FHLB advances of $60.0 million maturing in 2010 may be called quarterly and
if called the Company expects to refinance with short-term FHLB advances, other
short-term funding sources or FHLB long-term callable advances.
At June 30, 2002 the Company had no FHLB advances with original maturities
of one year or less.
5. Guaranteed Preferred Beneficial Interest in the Company's Subordinated
Debentures
On June 18, 1999 Ozark Capital Trust ("Ozark Capital"), a Delaware business
trust wholly owned by Bank of the Ozarks, Inc., sold to investors in a public
underwritten offering $17.3 million of 9% cumulative trust preferred securities.
The proceeds were used to purchase an equal principal amount of 9% subordinated
debentures of Bank of the Ozarks, Inc. Bank of the Ozarks, Inc. has, through
various contractual arrangements, fully and unconditionally guaranteed all
obligations of Ozark Capital on a subordinated basis with respect to the
preferred securities. Subject to certain limitations, the preferred securities
qualify as Tier 1 capital and are presented in the Consolidated Balance Sheets
as "Guaranteed preferred beneficial interest in the Company's subordinated
debentures." The sole asset of Ozark Capital is the subordinated debentures
issued by Bank of the Ozarks, Inc. Both the preferred securities of Ozark
Capital and the subordinated debentures of Bank of the Ozarks, Inc. will mature
on June 18, 2029; however, they may be prepaid, subject to regulatory approval,
prior to maturity at any time on or after June 18, 2004, or earlier upon certain
changes in tax or investment company laws or regulatory capital requirements.
6. Supplementary Data for Cash Flows
Cash payments for interest by the Company during the six months ended June
30, 2002 amounted to $9.8 million and during the six months ended June 30, 2001
amounted to $18.4 million. Cash payments for income taxes during the six months
ended June 30, 2002 were $4.2 million and for the six months ended June 30, 2001
were $1.6 million.
7. Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations", and No. 142,
"Goodwill and Other Intangible Assets", effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill and intangible assets
deemed to have indefinite lives will no longer be amortized but will be subject
to annual impairment tests in accordance with the statements. Other intangible
assets such as core deposit intangibles will continue to be amortized over their
estimated useful lives.
Goodwill amortization was not material to the three or six month periods
ended June 30, 2001. During the second quarter of 2002 the Company performed the
first step of the required impairment tests of goodwill as of January 1, 2002.
The results of the transitional impairment test indicate that the Company's
goodwill was not impaired as of January 1, 2002. The Company will perform the
first of its annual impairment test of goodwill in the third or fourth quarter
of 2002. The Company does not expect any impairment of its goodwill in 2002.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
Net income was $3,435,000 for the second quarter of 2002, a 55.2% increase
from net income of $2,213,000 for the comparable quarter in 2001. Diluted
earnings increased 51.7% to $0.44 per share for the quarter ended June 30, 2002,
compared to $0.29 per share for the comparable quarter in 2001. For the six
months ended June 30, 2002, net income totaled $6,529,000, a 60.2% increase over
net income of $4,075,000 for the first six months of 2001. Diluted earnings for
the first six months of 2002 were $0.84 per share compared to $0.54 for the
comparable period in 2001, a 55.6% increase.
On June 17, 2002, 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 June 3, 2002. All share and per share
information contained in this discussion has been adjusted to give effect to
this stock split.
The Company's annualized returns on average assets and on average
stockholders' equity were 1.55% and 22.41%, respectively, for the second quarter
of 2002, compared with 1.11% and 17.17%, respectively, for the comparable
quarter of 2001. Annualized returns on average assets and average stockholders'
equity for the six months ended June 30, 2002 were 1.50% and 22.15%,
respectively, compared with 1.01% and 16.31%, respectively, for the six month
period ended June 30, 2001.
Total assets increased from $871 million at December 31, 2001 to $896
million at June 30, 2002. Loans were $647 million at June 30, 2002, compared to
$616 million at December 31, 2001. Deposits were $707 million at June 30, 2002,
compared to $678 million at December 31, 2001.
Stockholders' equity increased from $56.6 million at December 31, 2001, to
$64.9 million at June 30, 2002, resulting in book value per share increasing
from $7.49 to $8.48.
Annualized results for these interim periods may not be indicative of those
for the full year or future periods.
Analysis of Results of Operations
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 and investments, and the interest expense incurred on interest
bearing liabilities, such as deposits and other borrowings. The Company also
generates non-interest income, including service charges on deposit accounts,
mortgage lending income, other charges and fees, trust income, and gains on
sales of assets. The Company's non-interest expenses primarily consist of
employee compensation and benefits, occupancy, equipment, and other operating
expenses. The Company's results of operations are also impacted by its provision
for loan losses. The following discussion provides a summary of the Company's
operations for the three and six months ended June 30, 2002.
(The remainder of this page intentionally left blank)
7
Net Interest Income
Net interest income is analyzed in the discussion and tables below on a
fully taxable equivalent ("FTE") basis. The adjustment to convert certain income
to an FTE basis consists of dividing tax-exempt income by one minus the
statutory federal income tax rate (35% in 2002, 34% in 2001 and prior years).
Net interest income (FTE) increased 44.0% to $10,289,000 for the three
months ended June 30, 2002 compared to $7,146,000 for the three months ended
June 30, 2001. Net interest income (FTE) increased 47.2% to $19,761,000 for the
six months ended June 30, 2002, from $13,421,000 for the six months ended June
30, 2001. Net interest margin, on a fully taxable equivalent basis, improved to
4.97% for the second quarter of 2002 compared to 3.86% for the second quarter of
2001, an increase of 111 basis points. Net interest margin for the six months
ended June 30, 2002 improved to 4.88% compared with 3.60% for the same period in
2001, an increase of 128 basis points.
Net interest margin for the second quarter and first six months of 2002
benefited respectively from a 227 and 247 basis point decline in interest
bearing deposit and liability costs. This decline more than offset a 97 and 100
basis point decline, respectively, in earning asset yields for the same periods.
A decline in loan yields of 120 and 122 basis points, respectively, for these
periods was a significant contributor to the decline in earning assets yields.
This was principally a result of the general decline in interest rates.
Interest-bearing liability costs declined in these periods primarily as a result
of a change in deposit mix and a general decline in interest rates. For the
second quarter of 2001 compared to the second quarter of 2002, the average
balance of certificates of deposits ("CD's") declined $91.2 million while lower
costing savings and interest-bearing transaction account average balances
increased $137.0 million. In the second quarter of 2002 non-CD deposits
accounted for 50.8% of total average deposits, an improvement from 31.8% during
the second quarter of 2001.
Analysis of Net Interest Income
(FTE = Fully Taxable Equivalent)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -----------------------
2002 2001 2002 2001
-------- -------- -------- --------
(Dollars in thousands)
Interest income ............................... $ 14,937 $ 15,044 $ 29,318 $ 30,418
FTE adjustment ................................ 95 217 233 480
-------- -------- -------- --------
Interest income - FTE ......................... 15,032 15,261 29,551 30,898
Interest expense .............................. 4,743 8,115 9,790 17,477
-------- -------- -------- --------
Net interest income - FTE ..................... $ 10,289 $ 7,146 $ 19,761 $ 13,421
======== ======== ======== ========
Yield on interest earning assets - FTE ........ 7.27% 8.24% 7.30% 8.30%
Cost of interest bearing liabilities .......... 2.61 4.88 2.74 5.21
Net interest spread - FTE ..................... 4.66 3.35 4.56 3.09
Net interest margin - FTE ..................... 4.97 3.86 4.88 3.60
(The remainder of this page intentionally left blank)
8
Average Consolidated Balance Sheet and Net Interest Analysis
(Dollars in thousands)
Three Months Ended June 30,
-------------------------------------------------------------
2002 2001
--------------------------- ----------------------------
Average Income/ Yield/ Average Income/ Yield/
ASSETS Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ----
Earnings assets:
Interest-bearing deposits and
federal funds sold ........................ $ 355 $ 5 5.68% $ 1,965 $ 22 4.46%
Investment securities:
Taxable ...................................... 187,783 2,793 5.97 177,884 2,940 6.63
Tax-exempt - FTE ............................. 11,319 211 7.48 31,949 572 7.18
Loans - FTE (net of unearned income) ........... 630,153 12,023 7.65 531,466 11,727 8.85
-------- ------- -------- -------
Total earning assets ....................... 829,610 15,032 7.27 743,264 15,261 8.24
Non-earning assets ............................... 59,650 59,179
-------- --------
Total assets ............................... $889,260 $802,443
======== ========
Interest-bearing liabilities:
Deposits:
Savings and interest-bearing
transaction ............................... $276,386 $ 1,139 1.65% $139,425 $ 868 2.50%
Time deposit of $100,000 or more ............. 177,590 1,178 2.66 220,024 2,976 5.43
Other time deposits .......................... 164,846 1,194 2.91 214,359 2,984 5.58
-------- ------- -------- -------
Total interest-bearing deposits ............ 618,822 3,511 2.28 573,808 6,828 4.77
Repurchase agreements with
customers ................................. 20,123 80 1.59 18,065 165 3.67
Other borrowings ............................... 90,789 1,152 5.09 74,535 1,122 6.04
-------- ------- -------- -------
Total interest-bearing liabilities ......... 729,734 4,743 2.61 666,408 8,115 4.88
Non-interest liabilities:
Non-interest bearing deposits .................. 76,657 63,461
Other non-interest liabilities ................. 4,136 3,616
-------- --------
Total liabilities .......................... 810,527 733,485
Trust preferred securities ....................... 17,250 17,250
Stockholders' equity ............................. 61,483 51,708
-------- --------
Total liabilities and stockholders'
equity .................................... $889,260 $802,443
======== ========
Interest rate spread - FTE ....................... 4.66% 3.36%
------- -------
Net interest income - FTE ........................ $10,289 $ 7,146
======= =======
Net interest margin - FTE ........................ 4.97% 3.86%
Six Months Ended June 30,
--------------------------------------------------------------
2002 2001
--------------------------- -----------------------------
Average Income/ Yield/ Average Income/ Yield/
ASSETS Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ----
Earnings assets:
Interest-bearing deposits and
federal funds sold ........................ $ 289 $ 9 6.38% $ 1,537 $ 39 5.10%
Investment securities:
Taxable ...................................... 180,540 5,154 5.76 191,373 6,345 6.69
Tax-exempt - FTE ............................. 14,336 540 7.59 34,986 1,280 7.38
Loans - FTE (net of unearned income) ........... 621,210 23,848 7.74 523,050 23,234 8.96
-------- ------- -------- -------
Total earning assets ....................... 816,375 29,551 7.30 750,946 30,898 8.30
Non-earning assets ............................... 59,556 59,307
-------- --------
Total assets ............................... $875,931 $810,253
======== ========
Interest-bearing liabilities:
Deposits:
Savings and interest-bearing
transaction ............................... $259,985 $ 2,077 1.61% $125,937 $ 1,594 2.55%
Time deposit of $100,000 or more ............. 182,362 2,584 2.86 236,528 6,874 5.86
Other time deposits .......................... 167,502 2,683 3.23 223,520 6,435 5.81
-------- ------- -------- -------
Total interest-bearing deposits ............ 609,849 7,344 2.43 585,985 14,903 5.13
Repurchase agreements with
customers ................................. 17,828 136 1.54 16,588 341 4.15
Other borrowings ............................... 91,966 2,310 5.06 74,052 2,233 6.08
-------- ------- -------- -------
Total interest-bearing liabilities ......... 719,643 9,790 2.74 676,625 17,477 5.21
Non-interest liabilities:
Non-interest bearing deposits .................. 75,249 62,333
Other non-interest liabilities ................. 4,346 3,666
-------- --------
Total liabilities .......................... 799,238 742,624
Trust preferred securities ....................... 17,250 17,250
Stockholders' equity ............................. 59,443 50,379
-------- --------
Total liabilities and stockholders'
equity .................................... $875,931 $810,253
======== ========
Interest rate spread - FTE ....................... 4.56% 3.09%
------- -------
Net interest income - FTE ........................ $19,761 $13,421
======= =======
Net interest margin - FTE ........................ 4.88% 3.60%
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9
Non-Interest Income
The Company's non-interest income can primarily be broken down into five
main sources: (1) service charges on deposit accounts, (2) mortgage lending
income, (3) other charges and fees including appraisal fees and commissions from
the sale of credit related insurance products, (4) trust income and (5) net
gains on sales of assets.
Non-interest income for the second quarter of 2002 was $2,709,000 compared
with $1,920,000 for the second quarter of 2001, a 41.1% increase. Non-interest
income for the six months ended June 30, 2002 was $4,901,000 compared to
$3,577,000 for the six months ended June 30, 2001, a 37.0% increase. During the
first six months of 2002, the Company benefited from strong growth in service
charges on deposit accounts. The introduction of the Company's new Bounce Proof
Security product was a significant contributor to this increase along with the
continued growth of new core deposit customers.
The table below shows non-interest income for the three and six months
ended June 30, 2002 and 2001.
Non-Interest Income
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ --------------------------
2002 2001 2002 2001
-------- -------- ---------- ----------
(Dollars in thousands)
Service charges on deposit accounts .................. $ 1,806 $ 919 $ 3,311 $ 1,761
Mortgage lending income .............................. 498 516 992 863
Other charges and fees ............................... 155 143 326 298
Trust income ......................................... 163 174 325 347
Gain (loss) on sale of other assets .................. 21 2 30 (10)
Gain (loss) on sale of securities .................... - 6 (217) 119
Brokerage fee income ................................. 28 22 67 48
Other ................................................ 38 138 67 151
-------- -------- ---------- ----------
Total non-interest income ...................... $ 2,709 $ 1,920 $ 4,901 $ 3,577
======== ======== ========== ==========
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10
Non-Interest Expense
Non-interest expense for the second quarter of 2002 was $6,058,000 compared
with $4,746,000 for the comparable period in 2001, a 27.6% increase.
Non-interest expense for the six months ended June 30, 2002 was $11,694,000
compared to $9,042,000 for the six months ended June 30, 2001, a 29.3% increase.
The Company's continued growth and expansion contributed to the increase in
non-interest expense. During 2001 the Company opened four new banking offices
and one loan production office. In the first six months of 2002 the Company
opened two new offices including its Maumelle office and a temporary office in
Conway. Non-interest expenses also increased during the first six months of 2002
because of additional advertising expenses, higher bonus accruals for its cash
profit sharing bonus program, and increases in losses on overdraft deposit
accounts as a result of its new Bounce Proof Security product.
The table below shows non-interest expense for the three and six month
periods ended June 30, 2002 and 2001.
Non-Interest Expense
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ -------------------------
2002 2001 2002 2001
-------- -------- -------- --------
(Dollars in thousands)
Salaries and employee benefits ................... $ 3,461 $ 2,582 $ 6,663 $ 4,941
Net occupancy expense ............................ 509 445 1,014 851
Equipment expense ................................ 369 338 723 660
Other operating expense:
Professional and outside services ............ 120 79 187 127
Postage ...................................... 106 74 192 162
Telephone .................................... 127 125 250 248
Data lines ................................... 54 79 106 145
Operating supplies ........................... 151 135 303 254
Advertising and public relations ............. 179 179 433 269
Software expense ............................. 84 91 179 184
Check printing charges ....................... 13 26 29 34
ATM expense .................................. 103 74 184 141
FDIC & state assessment ...................... 73 63 156 130
Other real estate and foreclosure expense .... 117 146 159 281
Business development, meals and travel ....... 34 33 68 64
Amortization of goodwill ..................... - 22 - 44
Amortization of other intangibles ............ 38 38 76 76
OD/NSF check losses .......................... 177 56 314 75
Other ........................................ 343 161 658 356
-------- -------- -------- --------
Total non-interest expense ................. $ 6,058 $ 4,746 $ 11,694 $ 9,042
======== ======== ======== ========
The Company's efficiency ratio (non-interest expenses divided by the sum of
net interest income on a tax equivalent basis and non-interest income) for the
second quarter and first six months of 2002 improved to 46.6% and 47.4%,
respectively, compared to 52.4% and 53.2%, respectively, for the second quarter
and first six months of 2001.
Income Taxes
The provision for income taxes was $2,068,000 for the quarter ended June
30, 2002, compared to $835,000 for the same period in 2001. The effective income
tax rates were 37.6% and 27.4%, respectively, for these periods. The provision
for income taxes was $3,918,000 for the six months ended June 30, 2002, compared
to $1,596,000 for the comparable six months period in 2001. The effective income
tax rates were 37.5% and 28.1%, respectively, for these periods. The increase in
the effective tax rate for the 2002 periods compared with the comparable periods
in 2001 is primarily a result of two factors. First, the Company substantially
reduced its portfolio of municipal securities which were exempt from both
federal and state income tax. This reduction was both in absolute dollar amount
and as a percentage of earning assets. This accounted for approximately 340 and
390 basis points of the increase in the effective tax rate for the three and six
month periods, respectively. Second, the amount of securities income exempt
solely from Arkansas income tax declined significantly as the Company both
reduced its investment portfolio and shifted a large portion of its remaining
investment portfolio from securities exempt from Arkansas income tax to
securities subject to Arkansas income tax. The Company had no state income tax
expense in the first six months of 2001 but an effective state rate, after
federal benefit, of 3.7% and 3.5%, respectively, in the comparable three and six
month periods in 2002. In addition to the impact of the above items, in the
second quarter of 2001 the Company recognized a net reduction of $62,000 in
income tax expense related to the resolution of a dispute with the state of
Arkansas.
11
Analysis of Financial Condition
Loan Portfolio
At June 30, 2002, the Company's loan portfolio was $647 million, an
increase from $616 million at December 31, 2001. As of June 30, 2002, the
Company's loan portfolio consisted of approximately 76.7% real estate loans,
8.3% consumer loans, 11.9% commercial and industrial loans and 2.4% agricultural
loans (non-real estate).
The amount and type of loans outstanding at June 30, 2002 and 2001 and
December 31, 2001 are reflected in the following table.
Loan Portfolio
June 30, December 31,
--------------------------- ------------
2002 2001 2001
----------- ----------- ------------
(Dollars in thousands)
Real Estate:
Residential 1-4 family .................. $ 169,142 $ 151,821 $ 167,559
Non-farm/non-residential ................ 190,860 158,652 180,257
Agricultural ............................ 53,863 43,482 45,303
Construction/land development ........... 55,502 44,566 51,140
Multifamily residential ................. 26,780 9,393 20,850
----------- ----------- ------------
Total real estate ..................... 496,147 407,914 465,109
Consumer .................................... 53,407 55,765 55,805
Commercial and industrial ................... 77,295 66,869 78,324
Agricultural (non-real estate) .............. 15,280 12,865 12,866
Other ....................................... 4,984 4,107 3,972
----------- ----------- ------------
Total loans ........................... $ 647,113 $ 547,520 $ 616,076
=========== =========== ============
Nonperforming Assets
Nonperforming assets consist of (1) nonaccrual loans, (2) accruing loans 90
days or more past due, (3) certain restructured loans providing for a reduction
or deferral of interest or principal because of a deterioration in the financial
position of the borrower and (4) real estate or other assets that have been
acquired in partial or full satisfaction of loan obligations or upon
foreclosure.
The Company generally places a loan on nonaccrual status when payment of
principal or interest is contractually past due 90 days, or earlier when doubt
exists as to the ultimate collection of principal and interest. At the time a
loan is placed on nonaccrual status, interest previously accrued but uncollected
is generally reversed and charged against interest income. If a loan is
determined to be uncollectible, the portion of the loan principal determined to
be uncollectible will be charged against the allowance for loan losses. Interest
income on nonaccrual loans is recognized on a cash basis when and if actually
collected.
Nonperforming loans as a percent of total loans were 0.37% as of June 30,
2002, compared to 0.29% at December 31, 2001 and 0.30% as of June 30, 2001.
Nonperforming assets as a percent of total assets were 0.31% as of June 30, 2002
compared to 0.28% at December 31, 2001 and 0.37% as of June 30, 2001.
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12
The following table presents information concerning nonperforming assets,
including nonaccrual and certain restructured loans and foreclosed assets held
for sale.
Nonperforming Assets
June 30, December 31,
---------------------------- --------------
2002 2001 2001
----------- ----------- --------------
(Dollars in thousands)
Nonaccrual loans............................................ $ 2,388 $ 1,645 $ 1,806
Accruing loans 90 days or more past due..................... - - -
Restructured loans.......................................... - - -
----------- ----------- --------------
Total nonperforming loans............................... 2,388 1,645 1,806
Foreclosed assets held for sale and repossessions/(1)/...... 428 1,370 661
----------- ----------- --------------
Total nonperforming assets.............................. $ 2,816 $ 3,015 $ 2,467
=========== =========== ==============
Nonperforming loans to total loans.......................... 0.37% 0.30% 0.29%
Nonperforming assets to total assets........................ 0.31 0.37 0.28
(1) Foreclosed assets held for sale and repossessions are generally written
down to estimated market value at the time of transfer from the loan portfolio.
The value of such assets is reviewed from time to time throughout the holding
period with the value adjusted to the then estimated market value, if lower,
until disposition.
Allowance and Provision for Loan Losses
Allowance for Loan Losses: The following table shows an analysis of the
allowance for loan losses for the six month periods ended June 30, 2002 and 2001
and the year ended December 31, 2001.
Six Months Ended Year Ended
June 30, December 31,
----------------------------- --------------
2002 2001 2001
----------- ---------- --------------
(Dollars in thousands)
Balance, beginning of period................................. $ 8,712 $ 6,606 $ 6,606
Loans charged off:
Real estate............................................. 298 183 468
Consumer................................................ 323 193 452
Commercial and industrial............................... 74 161 463
Agricultural (non-real estate).......................... 14 8 37
----------- ---------- --------------
Total loans charged off.................... 709 545 1,420
----------- ---------- --------------
Recoveries of loans previously charged off:
Real estate............................................. 103 14 30
Consumer................................................ 40 46 84
Commercial and industrial............................... 7 6 11
Agricultural (non-real estate).......................... 1 - -
----------- ---------- --------------
Total recoveries........................... 151 66 125
----------- ---------- --------------
Net loans charged off........................................ 558 479 1,295
Provision charged to operating expense....................... 1,495 1,012 3,401
----------- ---------- --------------
Balance, end of period....................................... $ 9,649 $ 7,139 $ 8,712
=========== ========== ==============
Net charge-offs to average loans outstanding during
the periods indicated.................................... 0.18%/(1)/ 0.18%/(1)/ 0.24%
Allowance for loan losses to total loans..................... 1.49 1.30 1.41
Allowance for loan losses to nonperforming loans............. 404.06 433.98 482.39
/(1)/ Annualized
13
The amounts of provisions to the allowance for loan losses are based on
management's judgment and evaluation of the loan portfolio utilizing objective
and subjective criteria. The objective criteria utilized by the Company to
assess the adequacy of its allowance for loan losses and required additions to
such allowance are (1) an internal grading system, (2) a peer group analysis and
(3) a historical analysis. In addition to these objective criteria, the Company
subjectively assesses adequacy of the allowance for loan losses and the need for
additions thereto, with consideration given to the nature and volume of the
portfolio, overall portfolio quality, review of specific problem loans,
national, regional and local business and economic conditions that may affect
borrowers' ability to pay or the value of collateral securing loans, and other
relevant factors. The Company's allowance for loan losses was $9,649,000 at June
30, 2002, or 1.49% of total loans, compared with $8,712,000, or 1.41% of total
loans, at December 31, 2001 and $7,139,000, or 1.30% of total loans, at June 30,
2001. The increase in the Company's allowance for loan losses over this period
reflects the Company's cautious outlook regarding the current uncertainty about
economic conditions, as well as changes in the mix and size of the Company's
loan portfolio. While management believes the current allowance is adequate,
changing economic and other conditions may require future adjustments to the
allowance for loan losses.
For the first six months of 2002, annualized charge-offs were 0.18% of
average outstanding loans compared with 0.24% for the year of 2001 and 0.18%
annualized for the first six months of 2001.
Provision for Loan Losses: The loan loss provision reflects management's
ongoing assessment of the loan portfolio and is evaluated in light of risk
factors mentioned above. The provision for loan losses was $1,495,000 for the
six months ended June 30, 2002 compared to $1,012,000 for the comparable six
month period in 2001.
Investments and Securities
The Company's securities portfolio is the second largest component of
earning assets and provides a significant source of revenue for the Company. The
table below presents the book value and the fair value of investment securities
for each of the dates indicated.
Investment Securities
June 30, June 30, December 31,
2002 2001 2001
------------------------- ------------------------- -------------------------
Book Fair Book Fair Book Fair
Value/(1)/ Value/(2)/ Value/(1)/ Value/(2)/ Value/(1)/ Value/(2)/
------------ ------------ ------------ ------------ ------------ ------------
(Dollars in thousands)
Securities of U.S. Government
Agencies .......................... $ 30,235 $ 30,235 $ 167,903 $ 168,162 $ 70,177 $ 70,177
Mortgage-backed securities ............. 141,332 141,332 109 109 91,234 91,234
Obligations of state and political
subdivisions ...................... 10,729 10,766 30,102 30,139 18,120 18,152
Other securities ....................... 7,672 7,677 6,312 6,317 7,636 7,642
------------ ------------ ------------ ------------ ------------ -----------
Total .......................... $ 189,968 $ 190,010 $ 204,426 $ 204,727 $ 187,167 $ 187,205
============ ============ ============ ============ ============ ============
(1) Book value for available-for-sale securities equals their original cost
adjusted for unrealized gains or losses as reflected in the Company's financial
statements.
(2) The fair value of the Company's investment securities is based on
quoted market prices where available. If quoted market prices are not available,
fair values are based on market prices for comparable securities.
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14
Liquidity and Capital Resources
Growth and Expansion. In February 2002 the Company opened a new office in
Maumelle, Arkansas and later that month opened its first Conway, Arkansas office
in a temporary facility. The Company recently acquired two additional Conway
sites on which permanent offices are planned for completion in 2003. A second
temporary Conway office opened in July 2002 on one of these sites. During the
third quarter of 2002, the Company expects to open a new grocery store banking
office in Hot Springs Village and a sixth Little Rock office in the new Cantrell
West office building on Cantrell Road. The Company continues to evaluate and
acquire other sites for expansion.
During the first six months of 2002 the Company spent $3.5 million on
capital expenditures. The Company expects its capital expenditures for the
remainder of the year will approximate $3.5 to 5.7 million. Actual expenditures
will vary within this range primarily depending on the number and cost of
additional sites acquired for future development.
Bank Liquidity. Liquidity represents an institution's ability to provide
funds to satisfy demands from depositors and borrowers by either converting
assets into cash or accessing new or existing sources of incremental funds.
Generally, the Company's bank subsidiary relies on customer deposits and loan
repayments as its primary sources of funds. The Company has used these funds,
together with FHLB advances, brokered deposits and other borrowings, to make
loans, 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 and general economic and market conditions. Loan
repayments are a relatively stable source of funds but are subject to the
ability of borrowers' to repay the loans, which can be adversely affected by a
number of factors including changes in general economic conditions, adverse
trends or events affecting business industry groups, reductions in real estate
values or markets, business closings or lay-offs, inclement weather and natural
disasters. Furthermore loans generally are not readily convertible to cash.
Accordingly, the Company may be required from time to time to rely on secondary
sources of liquidity to meet loan and withdrawal demands or otherwise fund
operations. Such sources include FHLB advances, federal funds lines of credit
from correspondent banks, Federal Reserve Bank borrowings and brokered deposits.
At June 30, 2002, the Company's bank subsidiary had substantial unused
borrowing availability. This availability is primarily comprised of the
following three options: (1) $61.0 million from the Federal Home Loan Bank, (2)
$25.5 million of securities available to pledge on a federal funds line of
credit and (3) up to $92.9 million from borrowing programs of the Federal
Reserve Bank. As of June 30, 2002, the Company had outstanding brokered deposits
of $16.6 million.
Management anticipates that the Company's bank subsidiary will continue to
rely primarily on customer deposits and loan repayments to provide liquidity.
Additionally, where necessary, the above described sources will be used to
augment the Company's primary funding sources.
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 on available for sale securities, but
including, subject to limitations, trust preferred securities and other
qualifying items) to total risk-weighted assets and (2) total capital (Tier 1
capital plus Tier 2 capital which is the qualifying portion of the allowance for
loan losses and the portion of trust preferred securities 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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15
The Company's risk-based and leverage capital ratios exceeded these minimum
requirements at June 30, 2002 and December 31, 2001, and are presented below,
followed by the capital ratios of the Company's bank subsidiary at June 30,
2002.
Consolidated Capital Ratios
June 30, December 31,
2002 2001
---------------- -----------------
(Dollars in thousands)
Tier 1 capital:
Stockholders' equity......................................................... $ 64,869 $ 56,617
Allowed amount of guaranteed preferred beneficial interest in
Company's subordinated debentures (trust preferred securities)............. 17,250 17,250
Plus (less) net unrealized losses (gains) on available for sale securities... (1,068) 499
Less goodwill and certain intangible assets.................................. (2,747) (2,823)
---------------- -----------------
Total tier 1 capital............................................... 78,304 71,543
Tier 2 capital:
Qualifying allowance for loan losses......................................... 8,205 7,846
Remaining amount of guaranteed preferred beneficial interest in
Company's subordinated debentures (trust preferred securities)............. - -
---------------- -----------------
Total risk-based capital........................................... $ 86,509 $ 79,389
================ =================
Risk-weighted assets.............................................................. $ 654,965 $ 626,806
================ =================
Ratios at end of period:
Leverage capital............................................................. 8.83% 8.51%
Tier 1 risk-based capital.................................................... 11.96 11.41
Total risk-based capital..................................................... 13.21 12.67
Minimum ratio guidelines:
Leverage capital/(1)/........................................................ 3.00% 3.00%
Tier 1 risk-based capital.................................................... 4.00 4.00
Total risk-based capital..................................................... 8.00 8.00
Capital Ratios of Bank Subsidiary
June 30, 2002
--------------------------
(Dollars in thousands)
Stockholders' equity - Tier 1............. $76,108
Leverage capital.......................... 8.60%
Tier 1 risk-based capital................. 11.63
Total risk-based capital.................. 12.88
(1) Regulatory authorities require institutions to operate at varying
levels (ranging from 100-200 basis points) above a minimum leverage ratio of 3%
depending upon capitalization classification.
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16
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 with respect to net interest margin,
net interest income and anticipated future operating and financial performance,
statements regarding asset quality and nonperforming loans, growth opportunities
and growth rates, capital expenditures and other similar forecasts and
statements of expectation. Words such as "anticipate," "believe," "estimate,"
"expect," "intend" 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
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.
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, the following: (1) potential delays or other problems in implementing the
Company's growth and expansion strategy; (2) the ability to attract new deposits
and loans; (3) interest rate fluctuations; (4) competitive factors and pricing
pressures; (5) general economic conditions, including the effects of the current
economic slowdown; and (6) changes in legal and regulatory requirements, 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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17
Selected and Supplemental Financial Data
The following table sets forth selected consolidated financial data
concerning the Company for the three and six month periods ended June 30, 2002
and 2001 and is qualified in its entirety by the consolidated financial
statements, including the notes thereto, included elsewhere herein.
Selected Consolidated Financial Data
(Dollars in thousands, except per share amounts)
Unaudited
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- ------------------------------
2002 2001 2002 2001
-------------- ------------- ------------- -------------
Income statement data
Interest income ........................................... $ 14,937 $ 15,044 $ 29,318 $ 30,418
Interest expense .......................................... 4,743 8,115 9,790 17,477
Net interest income ....................................... 10,194 6,929 19,528 12,941
Provision for loan losses ................................. 945 658 1,495 1,012
Non-interest income ....................................... 2,709 1,920 4,901 3,577
Non-interest expenses ..................................... 6,058 4,746 11,694 9,042
Net income ................................................ 3,435 2,213 6,529 4,075
Per common share data*
Earnings - diluted ........................................ $ 0.44 $ 0.29 $ 0.84 $ 0.54
Book value ................................................ 8.48 6.97 8.48 6.97
Dividends ................................................. 0.07 0.055 0.13 0.11
Weighted avg. diluted shares outstanding (thousands) ...... 7,821 7,604 7,775 7,588
Balance sheet data at period end
Total assets .............................................. $ 896,153 $ 819,643 $ 896,153 $ 819,643
Total loans ............................................... 647,113 547,520 647,113 547,520
Allowance for loan losses ................................. 9,649 7,139 9,649 7,139
Total investment securities ............................... 189,968 204,426 189,968 204,426
Total deposits ............................................ 706,876 642,214 706,876 642,214
Repurchase agreements with customers ...................... 18,076 17,789 18,076 17,789
Other borrowings .......................................... 85,318 86,145 85,318 86,145
Total stockholders' equity ................................ 64,869 52,709 64,869 52,709
Loan to deposit ratio ..................................... 91.55% 85.26% 91.55% 85.26%
Average balance sheet data
Total average assets ...................................... $ 889,260 $ 802,443 $ 875,931 $ 810,253
Total average stockholders' equity ........................ 61,483 51,708 59,443 50,379
Average equity to average assets .......................... 6.91% 6.44% 6.79% 6.22%
Performance ratios
Return on average assets** ................................ 1.55% 1.11% 1.50% 1.01%
Return on average stockholders' equity** .................. 22.41 17.17 22.15 16.31
Net interest margin ....................................... 4.97 3.86 4.88 3.60
Efficiency ................................................ 46.60 52.35 47.42 53.19
Dividend payout ........................................... 15.91 18.80 15.48 20.42
Asset quality ratios
Net charge-offs as a percentage of average total loans**... 0.16% 0.20% 0.18% 0.18%
Nonperforming loans to total loans ........................ 0.37 0.30 0.37 0.30
Nonperforming assets to total assets ...................... 0.31 0.37 0.31 0.37
Allowance for loan losses as a percentage of
Total loans ............................................... 1.49% 1.30% 1.49% 1.30%
Nonperforming loans ....................................... 404.06 433.98 404.06 433.98
Capital ratios at period end
Leverage capital .......................................... 8.83% 8.43% 8.83% 8.43%
Tier 1 risk-based capital ................................. 11.96 11.74 11.96 11.74
Total risk-based capital .................................. 13.21 12.98 13.21 12.98
*Adjusted to give effect to 2-for-1 stock split effective June 17, 2002
**Ratios annualized based on actual days
18
Bank of the Ozarks, Inc.
Supplemental Quarterly Financial Data
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
9/30/00 12/31/00 3/31/01 6/30/01 9/30/01 12/31/01 3/31/02 6/30/02
--------- ---------- --------- --------- --------- ---------- --------- ---------
Earnings Summary
- ----------------
Net interest income $ 5,569 $ 5,795 $ 6,012 $ 6,929 $ 7,825 $ 8,939 $ 9,334 $ 10,194
Federal tax (FTE) adjustment 274 279 263 217 187 145 138 95
--------- ---------- --------- --------- --------- ---------- --------- ---------
Net interest margin (FTE) 5,843 6,074 6,275 7,146 8,012 9,084 9,472 10,289
Loan loss provision (1,225) (398) (354) (658) (910) (1,479) (550) (945)
Non-interest income 1,552 1,323 1,657 1,920 1,737 2,039 2,192 2,709
Non-interest expense (4,351) (4,182) (4,296) (4,746) (4,816) (5,171) (5,636) (6,058)
--------- ---------- --------- --------- --------- ---------- --------- ---------
Pretax income (FTE) 1,819 2,817 3,282 3,662 4,023 4,473 5,478 5,995
FTE adjustment (274) (279) (263) (217) (187) (145) (138) (95)
Provision for taxes (255) (596) (760) (835) (1,138) (1,348) (1,849) (2,068)
Distribution on trust preferred
securities (397) (396) (397) (397) (397) (397) (397) (397)
--------- ---------- --------- --------- --------- ---------- --------- ---------
Net income $ 893 $ 1,546 $ 1,862 $ 2,213 $ 2,301 $ 2,583 $ 3,094 $ 3,435
========= ========== ========= ========= ========= ========== ========= =========
Earnings per share - diluted* $ 0.12 $ 0.20 $ 0.25 $ 0.29 $ 0.30 $ 0.34 $ 0.40 $ 0.44
Non-interest Income Detail
- --------------------------
Trust income $ 162 $ 168 $ 173 $ 174 $ 142 $ 116 $ 162 $ 163
Service charges on deposit
accounts 868 872 842 919 979 1,035 1,505 1,806
Mortgage lending income 278 188 347 516 410 647 494 498
Gain (loss) on sale of assets 30 (58) (11) 2 19 (9) 9 21
Security gains (losses) - - 113 6 (16) 51 (217) -
Other 214 153 193 303 203 199 239 221
--------- ---------- --------- --------- --------- ---------- --------- ---------
Total non-interest income $ 1,552 $ 1,323 $ 1,657 $ 1,920 $ 1,737 $ 2,039 $ 2,192 $ 2,709
Non-interest Expense Detail
- ---------------------------
Salaries and employee benefits $ 2,220 $ 2,178 $ 2,359 $ 2,582 $ 2,716 $ 2,894 $ 3,202 $ 3,461
Net occupancy expense 748 759 728 783 792 795 859 878
Other operating expenses 1,319 1,179 1,149 1,321 1,247 1,422 1,537 1,681
Goodwill charges 22 23 22 22 23 22 - -
Amortization of other
intangibles - pretax 42 43 38 38 38 38 38 38
--------- ---------- --------- --------- --------- ---------- --------- ---------
Total non-interest expense $ 4,351 $ 4,182 $ 4,296 $ 4,746 $ 4,816 $ 5,171 $ 5,636 $ 6,058
Allowance for Loan Losses
- -------------------------
Balance beginning of period $ 6,310 $ 6,447 $ 6,606 $ 6,740 $ 7,139 $ 7,754 $ 8,712 $ 8,963
Net charge offs (1,088) (239) (220) (259) (295) (521) (299) (259)
Loan loss provision 1,225 398 354 658 910 1,479 550 945
--------- ---------- --------- --------- --------- ---------- --------- ---------
Balance at end of period $ 6,447 $ 6,606 $ 6,740 $ 7,139 $ 7,754 $ 8,712 $ 8,963 $ 9,649
Selected Ratios
- ---------------
Net interest margin - FTE** 3.04% 3.10% 3.35% 3.86% 4.35% 4.62% 4.78% 4.97%
Overhead expense ratio** 2.09 1.98 2.13 2.37 2.41 2.43 2.65 2.73
Efficiency ratio 58.84 56.54 54.16 52.35 49.40 46.49 48.32 46.60
Nonperforming loans to
total loans 0.34 0.37 0.25 0.30 0.21 0.29 0.22 0.37
Nonperforming assets to
total assets 0.61 0.42 0.33 0.37 0.27 0.28 0.22 0.31
Loans past due 30 days or more,
including non-accrual loans,
to total loans 0.90 0.88 0.79 0.77 0.74 0.72 0.79 0.69
*Adjusted to give effect to 2-for-1 stock split effective June 17, 2002
**Annualized
19
PART I (continued)
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's interest rate risk management is the responsibility of
the Asset/Liability Management Committee, which reports to the Board
of Directors. This committee establishes policies that monitor and
coordinate the Company's sources, uses and pricing of funds. The
committee is also involved with management in the Company's planning
and budgeting process.
The Company regularly reviews its exposure to changes in interest
rates. Among the factors considered are changes in the mix of earning
assets and interest bearing liabilities, interest rate spreads and
repricing periods. Typically, the committee reviews on at least a
quarterly basis the bank subsidiary's relative ratio of rate
sensitive assets to rate sensitive liabilities and the related
cumulative gap for different time periods. Additionally, the
committee and management utilize a simulation model in assessing the
Company's interest rate sensitivity.
This simulation modeling process projects a baseline net interest
income (assuming no changes in market 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. In
addition to the repricing data used to prepare the GAP table
presented below, this model incorporates a number of assumptions and
predictions regarding additional factors. These factors include: (1)
the expected exercise of call features on various assets and
liabilities, (2) the expected rates at which various rate sensitive
assets and liabilities will reprice, (3) the expected growth in
various interest earning assets and interest bearing liabilities and
the expected rates on such 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 factors. Inclusion of these factors in the model is intended to
more accurately project the Company's changes in net interest income
resulting from an immediate and sustained parallel shift in interest
rates of up 100 basis points (bps), up 200 bps, down 100 bps and down
200 bps. While the Company believes this model provides a more
accurate projection of its interest rate risk, the model includes a
number of assumptions and predictions which may or may not be
accurate. These assumptions and predictions include inputs to compute
baseline net interest income, growth rates, competition and a variety
of other factors that are difficult to accurately predict.
Accordingly, there can be no assurance the estimated results
projected by the simulation model will reflect future results.
The following table presents the simulation model's projected impact
of an immediate and sustained parallel shift in interest rates on the
projected baseline net interest income for a twelve month period
commencing June 30, 2002. A parallel shift in interest rates is an
arbitrary assumption which fails to take into account changes in the
slope of the yield curve.
Shift in % Change in
Interest Rates Projected Baseline
(in bps) Net Interest Income
---------------- ---------------------
+200 (4.8)%
+100 (4.5)
-100 1.5
-200 2.9
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 earning assets and interest bearing liabilities,
seeking alternative funding sources or investment opportunities and
modifying the pricing or terms of loans and deposits.
The Company's simple static GAP analysis is shown in the following
table. At June 30, 2002 the cumulative ratios of rate sensitive
assets to rate sensitive liabilities at six months and one year,
respectively, were 55.1% and 59.9%. A financial institution is
considered to be liability sensitive, or as having a negative GAP,
when the amount of its interest bearing liabilities maturing or
repricing within a given time period exceeds the amount of its
interest earning assets also maturing or repricing within that time
period. Conversely, an institution is considered to be asset
sensitive, or as having a positive GAP, when the amount of its
interest bearing liabilities maturing and repricing is less than the
amount of its interest earning assets also maturing or repricing
during the same period. Generally, in a falling interest rate
environment a negative GAP should result in an increase in net
interest income, and in a rising interest rate environment this
negative GAP should adversely affect net interest income. The
converse would be true for a positive GAP. Due to inherent
limitations in any static GAP analysis and since conditions change on
a daily basis, these expectations may not reflect future results.
20
Rate Sensitive Assets and Liabilities
June 30, 2002
-------------------------------------------------------------------------------
Rate Rate Cumulative Cumulative
Sensitive Sensitive Period Cumulative Gap to RSA(1) to
Assets Liabilities Gap Gap Total RSA(1) RSL(2)
--------- ----------- ---------- ---------- ------------ ----------
(Dollars in thousands)
Immediate to 6 months ...... $ 248,791 $ 451,253 $(202,462) $(202,462) (24.17)% 55.13%
7 months - 12 months ..... 100,526 131,907 (31,381) (233,843) (27.92) 59.90
1 - 2 years .............. 157,190 38,946 118,244 (115,599) (13.80) 81.42
2 - 3 years .............. 144,553 1,730 142,823 27,224 3.25 104.36
3 - 5 years .............. 99,572 22,356 77,216 104,440 12.47 116.16
Over 5 years ............. 86,868 82,041 4,827 109,267 13.05 115.00
--------- ----------- ----------
Total .............. $ 837,500 $ 728,233 $ 109,267
========= =========== ==========
(1) Rate Sensitive Assets
(2) Rate Sensitive Liabilities
The data used in the table above is based on contractual repricing
dates for variable or adjustable rate instruments except for
interest-bearing Now accounts (except MaxYield(TM) which is
considered as immediately repricing) and regular savings accounts of
which 50% are reflected as repricing prorata during the first two
years with the remaining 50% distributed over future periods. Callable
investments or borrowings are scheduled on their contractual maturity
unless the Company has received notification the investment or
borrowing will be called. In the event the Company has received
notification of call, the investment or borrowing is placed in the
fixed rate category for the time period in which the call occurs or is
expected to occur. Collateralized mortgage obligations and other
mortgage-backed securities are scheduled over maturity periods based
on Bloomberg median estimated prepayment speeds. Other financial
instruments are scheduled on their contractual maturity. This simple
GAP analysis gives no consideration to a number of factors which can
have a material impact on the Company's interest rate risk position.
Such factors include among other things, call features on certain
assets and liabilities, prepayments, interest rate floors and caps on
various assets and liabilities, the current interest rates on assets
and liabilities to be repriced in each period, and the relative
changes in interest rates on different types of assets and
liabilities.
PART II
Other Information
Item 1. Legal Proceedings
On July 26, 2000, the case of David Dodds, et. al. vs. Bank of the
------------------------------------
Ozarks and Jean Arehart was filed in the Circuit Court of Pulaski
-----------------------
County, Arkansas, Fifth Division, which contained allegations that
the Company's bank subsidiary (the "Bank") committed breach of
contract, certain common law torts, fraud, and a violation of the
Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. (S)
1961, et. seq. ("RICO"). The Bank made several residential
construction loans related to houses built by the plaintiffs, and in
1998, the Bank commenced foreclosure of a house that was being
constructed by one of the plaintiffs. The complaint related to such
transactions. The Bank removed the case to the United States District
Court for the Eastern District of Arkansas, Western Division. The
original complaint sought alternative remedies of either (a)
compensatory damages of $5 million and punitive damages of $10
million based on the common law tort claims, or (b) compensatory
damages of $5 million trebled to $15 million based on RICO. The Bank
filed a Motion for Partial Summary Judgment in which the Bank asked
the Court to dismiss with prejudice the plaintiffs' RICO claims, as
well as their state law claims of fraud, defamation and
outrage/intentional infliction of emotional distress. On October 29,
2001, the Court granted the Bank's Motion for Partial Summary
Judgment and dismissed the plaintiffs' RICO claims and state law
claims of fraud, defamation and outrage/intentional infliction of
emotional distress. The time for an appeal of the District Court's
award of partial summary judgment has passed. Presently the only
surviving claims of the plaintiffs are breach of contract and
intentional interference with contract. The District Court has
remanded the case back to the Circuit Court of Pulaski County,
Arkansas, Fifth Division, where it is currently pending. Mr. and Mrs.
Dodds have also filed a suit in the Circuit Court of Faulkner County,
Arkansas attempting to set aside a foreclosure sale by Bank and
alleging tort claims and seeking $2 million in compensatory damages
and $5 million in punitive damages from Bank. The Faulkner County
Circuit Court has issued an order, which is now on appeal, refusing
to set aside the foreclosure sale. The Court is now considering the
disposition of the tort claims in that litigation. The tort claims in
the Faulkner County case involve similar theories of damages as the
Pulaski County case. The Company believes it has substantial defenses
to the remaining claims made in the complaints and intends to
vigorously defend the cases.
21
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
The 2002 Annual Meeting of Stockholders of the Company was held on
April 16, 2002. The following item of business was presented to the
stockholders:
Election of Directors
The eleven (11) directors were elected as proposed in the
Proxy Statement dated March 13, 2002, under the caption
"Election of Directors":
Total Vote For Total Vote Withheld
Each Director* For Each Director*
---------------- ---------------------
George Gleason 6,955,844 38,190
Mark Ross 6,955,868 38,166
Jean Arehart 6,933,106 60,928
Steven Arnold 6,977,984 16,050
Jerry Davis 6,989,754 4,280
Robert East 6,991,984 2,050
Linda Gleason 6,981,984 12,050
Porter Hillard 6,991,984 2,050
Henry Mariani 6,991,984 2,050
R. L. Qualls 6,991,984 2,050
Kennith Smith 6,991,984 2,050
*Adjusted to give effect to 2-for-1 stock split effective
June 17, 2002
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a). Exhibits
Reference is made to the Exhibit Index contained at the end of
this report.
(b). Reports on Form 8-K
Not Applicable
22
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Bank of the Ozarks, Inc.
DATE: August 13, 2002 /s/ Paul E. Moore
---------------------------------
Paul E. Moore
Chief Financial Officer
(Chief Accounting Officer)
23
Bank of the Ozarks, Inc.
Exhibit Index
Exhibit
Number
3 (a) Amended and Restated Articles of Incorporation of the Company,
effective May 22, 1997, (previously filed as Exhibit 3.1 to the
Company's Form S-1 Registration Statement (File No. 333-27641)
and incorporated herein by reference).
3 (b) Amended and Restated Bylaws of the Company, dated as of March 13,
1997, (previously filed as Exhibit 3.2 to the Company's Form S-1
Registration Statement (File No. 333-27641) and incorporated
herein by reference).
10.2 Lease agreement dated May 21, 2002 between Larry Wayne Cranford
and Carla Jane Cranford, husband and wife, d/b/a Cranford's Fresh
World and Bank of the Ozarks (attached).
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
24