EX-13 4 0004.txt SELECTED CONSOLIDATED FINANCIAL DATA EXHIBIT 13 Selected Consolidated Financial Data
Year Ended December 31, ---------------------------------------------------------------------- 2000 1999 1998 1997 1996 ----------- ------------ ------------ ------------ ---------- (Dollars in thousands, except per share amounts) Income statement data: Interest income.................................... $ 60,752 $ 51,575 $ 38,882 $ 27,468 $ 21,836 Interest expense................................... 37,089 27,782 20,518 12,979 10,031 Net interest income................................ 23,663 23,793 18,364 14,489 11,805 Provision for loan losses.......................... 2,325 2,485 2,026 1,139 1,486 Non-interest income................................ 5,542 5,147 5,031 2,925 1,865 Non-interest expense............................... 16,964 16,464 13,119 9,228 7,151 Distribution on trust preferred securities......... 1,587 846 -- -- -- Net income......................................... 6,040 6,635 5,629 4,531 3,027 Per common share data: Earnings - diluted................................. $ 1.60 $ 1.75 $ 1.47 $ 1.38 $ 1.05 Book value......................................... 12.79 11.61 10.68 9.44 6.44 Dividends.......................................... 0.42 0.40 0.23 0.20 0.30 Weighted avg. shares outstanding (thousands)....... 3,782 3,792 3,819 3,281 2,880 Balance sheet data at period end: Total assets....................................... $826,952 $796,042 $ 612,431 $ 352,093 $ 270,600 Total loans........................................ 510,544 467,131 387,526 275,463 214,462 Allowance for loan losses.......................... 6,606 6,072 4,689 3,737 3,019 Total investment securities........................ 253,216 263,395 176,618 42,459 39,608 Total deposits..................................... 677,683 595,930 529,040 295,555 231,648 Repurchase agreements with customers............... 13,839 9,026 1,408 -- -- Other borrowings................................... 66,703 126,989 39,271 19,089 18,123 Total stockholders' equity......................... 48,349 43,874 40,355 35,666 18,547 Loan to deposit ratio.............................. 75.34% 78.39% 73.25% 93.20% 92.58% Average balance sheet data: Total average assets............................... $818,197 $709,640 $ 486,729 $ 314,489 $ 240,208 Total average stockholders' equity................. 45,723 41,988 37,951 26,328 17,144 Average equity to average assets................... 5.59% 5.92% 7.80% 8.37% 7.14% Performance ratios: Return on average assets........................... 0.74% 0.93% 1.16% 1.44% 1.26% Return on average stockholders' equity............. 13.21 15.80 14.83 17.21 17.66 Net interest margin................................ 3.27 3.77 4.19 4.98 5.36 Efficiency ........................................ 55.98 55.09 54.98 52.55 51.60 Dividend payout ................................... 26.25 22.86 15.65 14.49 28.57 Assets quality ratios: Net charge-offs as a percentage of average total loans ........................................... 0.36% 0.26% 0.33% 0.17% 0.21% Nonperforming loans to total loans................. 0.37 0.42 0.70 0.25 1.08 Nonperforming assets to total assets............... 0.42 0.53 0.50 0.24 0.88 Allowance for loan losses as a percentage of: Total loans........................................ 1.29% 1.30% 1.21% 1.36% 1.41% Nonperforming loans................................ 351.38 307.91 171.82 534.62 130.69 Capital ratios at period end: Leverage capital................................... 7.57% 7.46% 6.21% 9.86% 6.42% Tier I risk-based capital.......................... 11.52 11.50 9.05 13.01 8.45 Total risk-based capital........................... 12.83 13.15 10.21 14.27 9.70
4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General Net income was $6.0 million for the year ended December 31, 2000, a 9.0% decrease from net income of $6.6 million in 1999. Net income in 1998 was $5.6 million. Diluted earnings declined 8.6% to $1.60 per share in 2000 compared to $1.75 per share in 1999. Diluted earnings in 1998 were $1.47 per share. As shown below total assets, loans and deposits increased 3.9%, 9.3% and 13.7%, respectively, from December 31, 1999 to December 31, 2000 and 30.0%, 20.5% and 12.6%, respectively, from December 31, 1998 to December 31, 1999. Stockholders' equity increased 10.2% from December 31, 1999 to December 31, 2000 and 8.7% from December 31, 1998 to December 31, 1999. During these same periods, book value per share increased 10.2% and 8.7%, respectively.
% Change December 31, ---------------------- ------------------------------------- 2000 1999 2000 1999 1998 from 1999 from 1998 --------- --------- --------- --------- -------- (Dollars in thousands, except per share amounts) Assets................ $826,952 $796,042 $612,431 3.9% 30.0% Loans................. 510,544 467,131 387,526 9.3 20.5 Deposits.............. 677,683 595,930 529,040 13.7 12.6 Stockholders' equity.. 48,349 43,874 40,355 10.2 8.7 Book value per share.. 12.79 11.61 10.68 10.2 8.7
Two measures of performance by banking institutions are return on average assets and return on average equity. Return on average assets ("ROA") measures net earnings in relation to average total assets and indicates a company's ability to employ its resources profitably. For the year ended December 31, 2000, the Company's ROA was 0.74% compared with 0.93% and 1.16%, respectively, for the years ended December 31, 1999 and 1998. Return on average equity ("ROE") is determined by dividing annual net earnings by average shareholders' equity and indicates how effectively a company can generate net income on the capital invested by its shareholders. For the year ended December 31, 2000, the Company's ROE was 13.21% compared with 15.80% and 14.83%, respectively, for the years ended December 31, 1999 and 1998. 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 significantly affected by its provision for loan losses. The following discussion provides a summary of the Company's operations for the past three years. 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 (34%). 2000 compared to 1999 Net interest income (FTE) increased modestly to $24.8 million for 2000 from $24.7 million in 1999, a 0.1% increase. While average earning assets increased 15.3% from 1999 to 2000, net interest income (FTE) increased very little primarily as a result of the narrowing of interest rate spreads as increases in deposit and borrowing cost exceeded increases in loan and other earning asset yields. Thus, an increase in net interest income usually associated with growth in average earning assets did not occur due to the decline in interest rate spreads. The Company's net interest margin declined from 3.77% for 1999 to 3.27% for 2000. The Company experienced strong competition for loans and deposits during 2000 which resulted in the Company's average loan yields increasing only 12 basis points compared to 1999 while deposit and borrowing costs increased 74 basis points in 2000 compared to 1999. These competitive conditions, coupled with the Company's liability sensitive balance sheet and 2000's rising rate environment, were the principal factors in the decline in the Company's net interest margin in 2000. 5 1999 compared to 1998 Net interest income (FTE) increased 31.4% to $24.7 million in 1999 from $18.8 million in 1998. This increase primarily resulted from a 46.1% increase in average earning assets to $656.6 million in 1999 from $449.4 million in 1998. The increase in average earning assets resulted from continued growth in the Company's loan portfolio and a significant increase in the investment securities portfolio. The Company's net interest margin declined from 4.19% for 1998 to 3.77% for 1999. The Company experienced strong competition for loans which reduced the Company's average loan yields by 77 basis points in 1999 compared to 1998. Deposit costs declined 48 basis points in 1999 compared to 1998 primarily as a result of lower CD rates on the repricing of promotional CD's offered in connection with certain branch openings in 1997 and 1998. Deposit growth not used to fund loans, along with certain borrowings, was used to increase the investment securities portfolio. The increase in the investment securities portfolio in amount and as a percentage of total assets reduced net interest margin as the yield on securities was less than the yield on loans. Analysis of Net Interest Income (FTE = Fully Taxable Equivalent)
Year Ended December 31, ------------------------------------------ 2000 1999 1998 ------- ------- ------- (Dollars in thousands) Interest income........................... $60,752 $51,575 $38,882 FTE adjustment............................ 1,098 947 466 ------- ------- ------- Interest income - FTE..................... 61,850 52,522 39,348 Interest expense.......................... 37,089 27,782 20,518 ------- ------- ------- Net interest income - FTE................. $24,761 $24,740 $18,830 ======= ======= ======= Yield on interest earning assets - FTE.... 8.17% 8.00% 8.76% Cost of interest-bearing liabilities...... 5.37 4.63 5.06 Net interest spread - FTE................. 2.80 3.37 3.70 Net interest margin - FTE................. 3.27 3.77 4.19
The following table sets forth certain information relating to the Company's net interest income for the years ended December 31, 2000, 1999 and 1998. The yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown except where otherwise noted. Average balances are derived from daily average balances for assets and liabilities. The average balance of loans receivable includes loans on which the Company has discontinued accruing interest. The yields and costs include amortization of certain deferred fees and origination costs, capitalization of interest on construction projects and late fees. These are considered adjustments to yields or rates. 6 Average Consolidated Balance Sheets and Net Interest Analysis
Year Ended December 31, -------------------------------------------------------------------------------- 2000 1999 1998 ---------------------------- ------------------------ ------------------------- Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Balance Expense Rate -------- ------- ------- ------- ------- ------ ------- ------- ------ (Dollars in thousands) ASSETS Earning assets: Interest-bearing deposits and federal funds sold..................................... $ 282 $ 17 6.11% $ 841 $ 45 5.26% $ 5,389 $ 294 5.46 Investment securities: Taxable.................................. 225,515 15,331 6.80 194,511 12,847 6.61 99,840 6,654 6.66 Tax-exempt-FTE........................... 39,875 2,960 7.42 36,938 2,538 6.87 15,790 1,160 7.35 Loans - FTE (net of unearned income)......... 491,390 43,542 8.86 424,339 37,092 8.74 328,394 31,240 9.51 --------- ------- -------- ------- -------- ------- Total earning assets.................. 757,062 61,850 8.17 656,629 52,522 8.00 449,413 39,348 8.76 Non-earning assets............................. 61,135 53,011 37,316 --------- -------- -------- Total assets.......................... $818,197 $709,640 $486,729 ========= ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: Deposits: Savings and interest-bearing transaction... $111,283 $ 3,285 2.95% $105,980 $ 2,756 2.60% $ 74,354 $ 2,054 2.76% Time deposits of $100,000 or more.......... 224,231 13,471 6.01 177,938 8,892 5.00 87,751 4,899 5.58 Other time deposits........................ 231,764 12,945 5.59 239,707 12,183 5.08 198,268 11,165 5.63 --------- ------- -------- ------- -------- ------- Total interest-bearing deposits 567,278 29,701 5.24 523,625 23,831 4.55 360,373 18,118 5.03 Repurchase agreements with customers......... 12,536 680 5.42 2,991 132 4.40 108 4 3.70 Other borrowings............................. 111,312 6,708 6.03(1) 73,717 3,819 5.18(1) 45,213 2,396 5.30(1) --------- ------- -------- ------- -------- ------- Total interest-bearing liabilities 691,126 37,089 5.37 600,333 27,782 4.63 405,694 20,518 5.06 Non-interest liabilities: Non-interest bearing deposits................ 60,636 54,782 40,583 Other non-interest liabilities............... 3,462 3,085 2,501 --------- -------- -------- Total liabilities........................ 755,224 658,200 448,778 Trust preferred securities..................... 17,250 9,452 - Stockholders' equity........................... 45,723 41,988 37,951 --------- -------- -------- Total liabilities and stockholders' equity ............................... $818,197 $709,640 $486,729 ========= ======== ======== Interest rate spread - FTE..................... 2.80% 3.37% 3.70% ------- ------- ------- Net interest income - FTE...................... $24,761 $24,740 $18,830 ======= ======= ======= Net interest margin - FTE...................... 3.27% 3.77% 4.19%
(1) This rate is impacted by the capitalization of interest on construction projects in the amount of $52,000, $51,000 and $275,000 for the years ended December 31, 2000, 1999 and 1998, respectively. In the absence of this capitalization these percentages would have been 6.07%, 5.25% and 5.91% for the years ended December 31, 2000, 1999 and 1998, respectively. 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 and interest expense during 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 rate); (2) changes in rate (changes in rate multiplied by prior volume); and (3) changes in rate/volume (change in rate multiplied by change in volume). The changes attributable to the combined impact of volume and rate have all been allocated to the changes due to volume. 7 Analysis of Changes in Net Interest Income
2000 over 1999 1999 over 1998 --------------------------------- ------------------------------ Yield/ Yield/ Volume Rate Total Volume Rate Total --------- -------- -------- -------- ------- -------- (Dollars in thousands) Increase (decrease) in: Interest income - FTE: Interest-bearing deposits and federal funds sold .................................. $ (34) $ 6 $ (28) $ (236) $ (13) $ (249) Investment securities: Taxable ....................................... 2,108 376 2,484 6,253 (60) 6,193 Tax-exempt - FTE ............................... 218 204 422 1,453 (75) 1,378 Loans (net of unearned income) .................. 5,941 509 6,450 8,388 (2,536) 5,852 -------- -------- -------- -------- ------- -------- Total interest income - FTE .................. 8,233 1,095 9,328 15,858 (2,684) 13,174 -------- -------- -------- -------- ------- -------- Interest expense: Savings and interest-bearing transaction ......... 157 372 529 823 (121) 702 Time deposits of $100,000 or more ................ 2,781 1,798 4,579 4,507 (514) 3,993 Other time deposits .............................. (444) 1,206 762 2,106 (1,088) 1,018 Repurchase agreements with customers ............. 518 30 548 127 1 128 Other borrowings ................................. 2,266 623 2,889 1,401 22 1,423 -------- -------- -------- -------- ------- -------- Total interest expense ....................... 5,278 4,029 9,307 8,964 (1,700) 7,264 -------- -------- -------- -------- ------- -------- Increase (decrease) in net interest income - FTE ................................. $ 2,955 $ (2,934) $ 21 $ 6,894 $ (984) $ 5,910 ======== ======== ======== ======== ======= ========
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) gains on sales of assets. Non-interest income for the year ended December 31, 2000 increased 7.7% to $5.5 million compared with $5.1 million in 1999. Non-interest income was $5.0 million in 1998. During 2000 the Company benefited from strong growth in service charges on deposit accounts which increased 35.3% from 1999. The increase in service charge income resulted primarily from the continued growth in the number of retail checking, commercial checking and cash management customers, increased service charge rates and improved collection and waiver practices. The Company also achieved good growth in trust income as the Company continued to capitalize on enhanced trust services and competitive opportunities. The improvements in these components of non-interest income were offset by declining mortgage lending income in 2000, due primarily to increased mortgage rates during most of 2000. The table below shows non-interest income for the years ended December 31, 2000, 1999 and 1998. Non-Interest Income
Year Ended December 31, ----------------------------------------- 2000 1999 1998 ---------- ---------- ---------- (Dollars in thousands) Service charges on deposit accounts..................... $ 3,380 $ 2,499 $ 1,372 Mortgage lending income................................. 849 1,306 2,136 Other charges and fees.................................. 620 630 656 Trust income............................................ 592 479 335 Gain (loss) on sales.................................... (38) 12 113 Gain on sale of securities.............................. - 69 255 Brokerage fee income.................................... 61 - - Other................................................... 78 152 164 ------- ------- ------- Total non-interest income.......................... $ 5,542 $ 5,147 $ 5,031 ======= ======= =======
8 Non-Interest Expense Non-interest expense consists of salaries and employee benefits, occupancy, equipment and other operating expenses. Non-interest expense for the year ended December 31, 2000 increased 3.0% to $17.0 million compared with $16.5 million in 1999. Non-interest expense was $13.1 million in 1998. The increase in 2000 primarily resulted from the Company's continued growth and expansion. Full time equivalent employees remained stable at 292 as of December 31, 2000 as the Company slowed its rate of new office openings with only one new office opened in 2000. 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) was 56.0% for the year ended December 31, 2000 compared to 55.1% in 1999 and 55.0% in 1998. The table below shows non-interest expense for the years ended December 31, 2000, 1999 and 1998. Non-Interest Expense
Year Ended December 31, ----------------------------------------- 2000 1999 1998 ---------- ----------- -------- (Dollars in thousands) Salaries and employee benefits...................... $ 8,928 $ 8,752 $ 7,197 Net occupancy and equipment expense................. 2,910 2,655 1,961 Other real estate and foreclosure expense .......... 592 358 130 Other operating expense: Professional and outside services................ 315 319 211 Postage.......................................... 255 286 243 Telephone........................................ 478 418 314 Data lines....................................... 236 186 139 Operating supplies............................... 487 513 454 Advertising and public relations................. 551 612 566 Directors' fees.................................. 103 121 114 Software expense................................. 409 301 190 ATM expense...................................... 236 178 118 FDIC and state assessments....................... 238 217 166 Business development, meals and travel........... 136 147 120 Amortization of goodwill......................... 90 90 106 Amortization of other intangibles................ 169 172 67 Other............................................ 831 1,139 1,023 ------- ------- ------- Total non-interest expense................... $16,964 $16,464 $13,119 ======= ======= =======
Income Taxes The provision for income taxes was $2.3 million for the year ended December 31, 2000 compared to $2.5 million in 1999 and $2.6 million in 1998. The effective income tax rates were 27.5%, 27.4% and 31.8%, respectively, for 2000, 1999 and 1998. The effective tax rates for these years are below the statutory tax rates because of a state income tax recovery in 1999 and the large portfolio of investments in tax-exempt securities, including securities exempt from both federal and Arkansas income taxes as well as certain federal agency securities exempt solely from Arkansas income taxes. 9 Analysis of Financial Condition Loan Portfolio At December 31, 2000 the Company's loan portfolio was $510.5 million, an increase of 9.3% from $467.1 million at December 31, 1999. As of December 31, 2000 the Company's loan portfolio consisted of approximately 72.3% real estate loans, 11.4% consumer loans, 12.5% commercial and industrial loans and 2.9% agricultural loans (non-real estate). The amount and type of loans outstanding are reflected in the following table. Loan Portfolio
December 31, ------------------------------------------------------------------------ 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- (Dollars in thousands) Real Estate: Residential 1-4 family....................... $144,920 $136,856 $121,539 $ 96,943 $ 78,124 Non-farm/non-residential..................... 134,726 101,766 76,563 41,710 35,258 Agricultural................................. 38,808 20,396 19,463 13,443 11,583 Construction/land development................ 42,354 28,294 23,305 16,257 8,808 Multifamily residential...................... 8,367 4,687 6,207 3,897 3,743 -------- -------- -------- -------- -------- Total real estate........................ 369,175 291,999 247,077 172,250 137,516 Consumer......................................... 58,430 81,753 66,407 53,233 39,868 Commercial and industrial........................ 63,799 70,012 52,192 37,470 28,154 Agricultural (non-real estate)................... 14,605 19,947 20,068 10,824 8,363 Other............................................ 4,535 3,420 1,782 1,686 561 -------- -------- -------- -------- -------- Total loans.............................. $510,544 $467,131 $387,526 $275,463 $214,462 ======== ======== ======== ======== ========
The following table reflects loans classified by remaining maturities at December 31, 2000 by type and by fixed or floating interest rates. This table is based on actual maturities and does not reflect amortizations, projected paydowns or the earliest repricing for floating rate loans. Many loans have maturities exceeding one year but have principal paydowns scheduled in less than a year. Also many variable rate loans have maturities exceeding one year but are repriceable in periods of one year or less. Loan Maturities
Over 1 Year 1 Year Through Over or Less 5 Years 5 Years Total -------- --------- --------- -------- (Dollars in thousands) Real Estate .................................... $ 97,138 $235,253 $ 36,784 $369,175 Consumer........................................ 13,966 43,314 1,150 58,430 Commercial, industrial and agricultural......... 34,022 41,114 3,268 78,404 Other........................................... 412 1,007 3,116 4,535 -------- -------- -------- -------- $145,538 $320,688 $ 44,318 $510,544 ======== ======== ======== ======== Fixed rate...................................... $128,296 $301,664 $ 22,852 $452,812 Floating rate................................... 17,242 19,024 21,466 57,732 -------- -------- -------- -------- $145,538 $320,688 $ 44,318 $510,544 ======== ======== ======== ========
The following table reflects loans classified as of December 31, 2000 by expected amortizations, expected paydowns or the earliest repricing opportunity for floating rate loans. This cash flow or repricing classification approximates the Company's ability to reprice loans or the ability to reinvest loan payoffs in new loans, other investments or reduce borrowings. 10 Loan Cash Flows or Repricing
Over 1 Year 1 Year Through Over or Less 5 Years 5 Years Total -------- -------- -------- -------- (Dollars in thousands) Fixed rate................... $213,084 $218,068 $ 21,660 $452,812 Floating rate................ 51,102 6,630 - 57,732 -------- -------- -------- -------- $264,186 $224,698 $ 21,660 $510,544 ======== ======== ======== ========
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. The Company continues to accrue interest on certain loans contractually past due 90 days if such loans are both well secured and in the process of collection. 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 improved to 0.37% at year-end 2000 compared to 0.42% at year-end 1999. Nonperforming assets as a percent of total assets improved to 0.42% as of year-end 2000 compared to 0.53% as of year-end 1999. During the third quarter of 2000 the Company transferred a large credit to other real estate owned and took a significant charge-off of $787,000. During the fourth quarter twenty-four of the thirty-four properties securing this credit were sold. This resulted in a 69.7% reduction of the outstanding book value of these properties from $1,515,000 at September 30, 2000 to $459,000 at December 31, 2000. The Company's experience to date in the disposal of these properties leads management to believe the Company will incur no additional losses with respect to this credit. During the first quarter of 1999 the Company placed on nonaccrual status residential real estate development loans to a single borrower and charged these loans down to the $1.6 million dollar appraised value of the collateral. During the third quarter the Company completed foreclosure and acquired title to the real estate securing these loans and transferred the loan balances to other real estate. The following table presents information concerning nonperforming assets including nonaccrual and restructured loans and foreclosed assets held for sale. Nonperforming Assets
December 31, ---------------------------------------------- 2000 1999 1998 1997 1996 ------ ------ ------ ------ ------ (Dollars in thousands) Nonaccrual loans ..................................................... $1,880 $1,972 $2,708 $ 664 $2,057 Accruing loans 90 days or more past due .............................. -- -- 21 35 253 Restructured loans ................................................... -- -- -- -- -- ------ ------ ------ ------ ------ Total nonperforming loans ................................... 1,880 1,972 2,729 699 2,310 Foreclosed assets held for sale and repossessions(1).................. 1,600 2,238 314 136 78 ------ ------ ------ ------ ------ Total nonperforming assets .................................. $3,480 $4,210 $3,043 $ 835 $2,388 ====== ====== ====== ====== ====== Nonperforming loans to total loans ................................... 0.37% 0.42% 0.70% 0.25% 1.08% Nonperforming assets to total assets ................................. 0.42 0.53 0.50 0.24 0.88
(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. Under Arkansas banking law, other real estate owned is generally required to be written off over a five year period unless approval of the Arkansas State Bank Department is obtained to write such assets off over an extended period. The Company's other real estate owned is being written off over periods of five or twenty years. 11 An analysis of the allowance for loan losses for the periods indicated is shown in the table below. Allowance and Provision for Loan Losses
Year Ended December 31, ----------------------------------------------------------- 2000 1999 1998 1997 1996 ------ ------ ------ ------ ------ (Dollars in thousands) Balance, beginning of period...................................... $6,072 $4,689 $3,737 $3,019 $1,909 Loans charged off: Real estate: Residential 1-4 family..................................... 690 260 75 35 73 Non-farm/non-residential................................... 121 8 18 -- -- Agricultural............................................... 10 3 -- -- -- Construction/land development.............................. -- 115 -- -- -- Multifamily residential.................................... 79 -- -- -- -- ------ ------ ------ ------ ------ Total real estate........................................ 900 386 93 35 73 Consumer..................................................... 549 516 633 434 216 Commercial and industrial.................................... 443 271 423 -- 128 Agricultural (non-real estate)............................... 106 52 -- -- -- ------ ------ ------ ------ ------ Total loans charged off.................................. 1,998 1,225 1,149 469 417 ------ ------ ------ ------ ------ Recoveries of loans previously charged off: Real estate: Residential 1-4 family..................................... 39 4 9 5 2 Non-farm/non-residential................................... 44 -- -- -- -- Agricultural............................................... 1 -- -- 2 -- Construction/land development.............................. -- 2 -- -- -- Multifamily residential.................................... -- -- -- -- -- ------ ------ ------ ------ ------ Total real estate........................................ 84 6 9 7 2 Consumer..................................................... 74 111 55 39 35 Commercial and industrial.................................... 48 6 11 2 4 Agricultural (non-real estate)............................... 1 -- -- -- -- ------ ------ ------ ------ ------ Total recoveries......................................... 207 123 75 48 41 ------ ------ ------ ------ ------ Net loans charged off............................................. 1,791 1,102 1,074 421 376 Provision charged to operating expense............................ 2,325 2,485 2,026 1,139 1,486 ------ ------ ------ ------ ------ Balance, end of period............................................ $6,606 $6,072 $4,689 $3,737 $3,019 ====== ====== ====== ====== ====== Net charge-offs to average loans outstanding during the periods indicated........................................ 0.36% 0.26% 0.33% 0.17% 0.21% Allowance for loan losses to total loans.......................... 1.29 1.30 1.21 1.36 1.41 Allowance for loan losses to nonperforming loans.................. 351.38 307.91 171.82 534.62 130.69
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 reserve 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 the borrowers' ability to pay or the value of collateral securing the loans, and other relevant factors. The Company's allowance for loan losses increased to $6,606,000 at December 31, 2000, or 1.29% of total loans, compared with $6,072,000, or 1.30% of total loans, at December 31, 1999. While management believes the current allowance is adequate, changing economic and other conditions may require future adjustments to the allowance for loan losses. 12 The Company's net charge-offs for 2000 were significantly increased by a third quarter charge-off in the amount of $787,000 related to a single credit, which the Company considers to be an unusual situation. Excluding the charge-off related to this one credit, net charge-offs for the year 2000 would have been $1,004,000, or 0.20% of average outstanding loans. The Company's internal grading system analysis assigns grades to all loans except residential 1-4 family loans and consumer installment loans. Graded loans are assigned to one of seven risk grades, with each grade being assigned a specific reserve allocation percentage. The loan grade for each individual loan is determined by the loan officer at the time it is made and changed from time to time to reflect an ongoing assessment of loan risk. Loan grades are reviewed on specific loans from time to time by senior management and as part of the Company's internal loan review process. Residential 1-4 family and consumer installment loans are assigned a reserve allocation percentage based on past due status. The sum of all reserve amounts determined by this methodology is utilized by management as the primary indicator of the appropriate reserve level. The unallocated reserve generally serves to compensate for the uncertainty in estimating loan losses including the possibility of changing risk ratings or specific reserve allocations. In addition to the above analysis, the Company compares the allowance for loan losses (as a percentage of total loans) maintained by its subsidiary bank to the peer group average percentage as shown on the most recently available FDIC Uniform Bank Performance Reports for such banks. The Company also compares the allowance for loan loss to the bank's historical cumulative net charge-offs for the five preceding calendar years. Although the Company does not determine the overall allowance based upon the amount of loans in a particular type or category (except in the case of residential 1-4 family and consumer installment loans), risk elements attributable to particular loan types or categories are considered in assigning loan grades to individual loans. These risk elements include the following: (1) for non-farm/non-residential loans and multifamily residential loans, the debt service coverage ratio (income from the property in excess of operating expenses compared to loan payment requirements), operating results of the owner in the case of owner-occupied properties, the loan to value ratio, the age and condition of the collateral and the volatility of income, property value and future operating results typical of properties of that type; (2) for agricultural real estate loans, the loan to value ratio; (3) for construction and land development loans, the perceived feasibility of the project including the ability to sell developed lots or improvements constructed for resale or ability to lease property constructed for lease, the quality and nature of contracts for presale or preleasing, if any, experience and ability of the developer and loan to value ratios; (4) for commercial and industrial loans, the operating results of the commercial, industrial or professional enterprise, the borrower's business, professional and financial ability and expertise, the specific risks and volatility of income and operating results typical for businesses in that category and the value, nature and marketability of collateral; and (5) for non-real estate agricultural loans, the operating results, experience and ability of the borrower, historical and expected market conditions and the value, nature and marketability of collateral. In addition, for each category the Company considers secondary sources of income and the financial strength of the borrower and any guarantors. Management reviews the allowance on a quarterly basis to determine whether the amount of monthly provisions should be increased or decreased or whether additional provisions should be made to the allowance. The allowance is determined by management's assessment and grading of individual loans in the case of loans other than residential 1-4 family and consumer installments and specific reserves made for other categories of loans. The total allowance amount is available to absorb losses across the Company's entire portfolio. The following table sets forth the sum of the amounts of the allowance for loan losses attributable to individual loans within each loan category, or loan categories in general, and unallocated reserves as of December 31, 2000, 1999, 1998 and 1997. These amounts have been computed using the Company's grading system analysis. The amounts shown are not necessarily indicative of the actual future losses that may occur within particular loan categories. Information prior to the Company's initial public offering in 1997 is not available. 13 Allocation Of The Allowance For Loan Losses
Percent of Percent of Percent of Percent of Loans in Loans in Loans in Loans in Category Category Category Category Allowance to Total Allowance to Total Allowance to Total Allowance to Total Amount Loans Amount Loans Amount Loans Amount/1/ Loans --------- ---------- --------- ---------- --------- ---------- --------- ---------- December 31, 2000 December 31, 1999 December 31, 1998 December 31, 1997 --------------------- --------------------- --------------------- --------------------- (Dollars in thousands) Real estate: Residential 1-4 family.............. $ 430 28.4% $ 478 29.2% $ 532 31.4% $ 1,116 35.2% Non-farm/ non-residential................. 1,499 26.4 1,067 21.8 801 19.7 423 15.2 Agricultural........................ 517 7.6 302 4.4 231 5.0 152 4.9 Construction/land development..................... 456 8.3 321 6.1 267 6.0 163 5.9 Multifamily......................... 95 1.6 57 1.0 63 1.6 41 1.4 Consumer.............................. 883 11.4 1,313 17.5 1,236 17.1 372 19.3 Commercial and industrial............. 859 12.5 808 15.0 610 13.5 412 13.6 Agricultural (non-real estate)........ 199 2.9 322 4.3 257 5.2 114 3.9 Other................................. 326 0.9 225 0.7 179 0.5 248 0.6 Unallocated reserves.................. 1,342 N/A 1,179 N/A 513 N/A 696 N/A ------- ------ ------- ----- ------- ----- ------- ------ $ 6,606 100.0% $ 6,072 100.0% $ 4,689 100.0% $ 3,737 100.0%
(1) The allocation of the allowance by loan type as of December 31, 1997 is presented based on the Company's previous methodology as information is not available to restate this allocation. The Company maintains an internally classified loan list that, along with the list of nonaccrual or nonperforming loans, helps management assess the overall quality of the loan portfolio and the adequacy of the allowance. Loans classified as "substandard" are loans with clear and defined weaknesses such as highly leveraged positions, unfavorable financial ratios, uncertain repayment sources or poor financial condition which may jeopardize recoverability of the loan. Loans classified as "doubtful" are those loans that have characteristics similar to substandard loans, but also have an increased risk that a loss may occur or at least a portion of the loan may require a charge-off if liquidated. Although loans classified as substandard do not duplicate loans classified as doubtful, both substandard and doubtful loans may include some loans that are past due at least 90 days, are on nonaccrual status or have been restructured. Loans classified as "loss" are loans that are in the process of being charged off. At December 31, 2000, substandard loans not designated as nonaccrual or 90 days past due totaled $1.8 million. No loans were designated as doubtful or loss at December 31, 2000. Administration of the subsidiary bank's lending function is the responsibility of the Chief Executive Officer and certain senior lenders. Such officers perform their lending duties subject to the oversight and policy direction of the Board of Directors and various loan committees. Loan authority is granted to the Chief Executive Officer as determined appropriate by the Board of Directors. Loan authorities of other lending officers are assigned by the Chief Executive Officer. Loans and aggregate loan relationships exceeding $3 million up to the lending limit of the bank can be authorized only by the Board of Directors. Loans and aggregate loan relationships exceeding $1 million up to $3 million can be authorized by the loan committee. The Board of Directors reviews on a monthly basis reports of loan originations, loan commitments over $100,000, past due loans, internally classified and watch list loans and activity in the Company's allowance for loan losses. The Company's compliance and loan review officers are responsible for serving the bank subsidiary of the Company in the loan review and compliance areas. Periodic reviews are scheduled for the purpose of evaluating asset quality and effectiveness of loan administration. The compliance and loan review officers prepare loan review reports which identify deficiencies, establish recommendations for improvement, and outline management's proposed action plan for curing the deficiencies. These reports are provided to the audit committee, which consists of three non-employee independent members of the Board of Directors. The Company's allowance for loan losses exceeds its cumulative historical net charge-off experience for the last five years. However, the allowance is considered reasonable given the significant growth in the loan portfolio during the last three years, key allowance and nonperforming loan ratios and comparisons to industry averages. Based on these procedures, management believes that the allowance of $6,606,000 at December 31, 2000 is adequate. The allowance for loan losses was 1.29% of loans at December 31, 2000 compared to 1.30% at December 31, 1999. 14 Provision for Loan Losses: The amounts of provision to the allowance for loan losses are based on management's judgment and evaluation of the loan portfolio utilizing the criteria discussed above. The provision for 2000 was $2.3 million compared to $2.5 million in 1999 and $2.0 million in 1998. 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 following table presents the book value and the fair value of investment securities for each of the dates indicated. Investment Securities
December 31, -------------------------------------------------------------------------- 2000 1999 1998 ------------------------ ----------------------- ----------------------- 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........................... $ 195,771 $ 192,107 $ 215,713 $ 202,947 $ 156,351 $ 156,331 Mortgage-backed securities............ 174 174 192 192 2,117 2,117 Obligations of states and political subdivisions....................... 43,135 43,092 39,705 39,665 14,904 14,985 Other securities...................... 14,136 14,142 7,785 7,782 3,246 3,246 --------- --------- --------- --------- --------- --------- Total ......................... $ 253,216 $ 249,515 $ 263,395 $ 250,586 $ 176,618 $ 176,679 ========= ========= ========= ========= ========= =========
(1) The book value on available-for-sale securities is adjusted to reflect the unrealized gains or losses on those securities. (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. The following table reflects the book value, by contractual maturity, of the Company's investment securities at December 31, 2000 and weighted average yields (for tax-exempt obligations on a fully taxable equivalent basis assuming a 34% tax rate) of such securities. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Maturity Distribution of Investment Securities
Over Over 1 Year 1 Year 5 Years Over or Thru 5 Thru 10 10 Fair Less Years Years Years Total Value ------ ------ -------- ------- --------- -------- (Dollars in thousands) Securities of U.S. Government agencies....... $ - $ 250 $161,016 $34,505 $195,771/(1)/ $192,107 Mortgage-backed securities................... - - 57 117 174 174 Obligations of states and political subdivisions................................ 1,454 5,483 9,350 26,848 43,135/(2)/ 43,092 Other securities............................. 997 1,879 - 11,260 14,136/(3)/ 14,142 ------ ------ -------- ------- -------- -------- Total...................................... $2,451 $7,612 $170,423 $72,730 $253,216 $249,515 ====== ====== ======== ======= ======== ======== Percentage of total.......................... 0.97% 3.01% 67.30% 28.72% 100.00% Weighted average yield (FTE)/(4)/............ 7.95 7.85 6.62 7.08 6.80
(1) All federal agency securities held by the Company have certain rights which allow the issuer to call or prepay the obligation without prepayment penalties. (2) Includes approximately $1.0 million of securities earning interest at floating rates repricing semi-annually. (3) Includes approximately $8.1 million of Federal Home Loan Bank stock which has historically paid quarterly dividends at a variable rate approximating the federal funds rate. (4) The weighted average yields (FTE) are based on book value. 15 Deposits The Company's bank subsidiary lending and investing activities are funded primarily by deposits, approximately 73.7% of which were time deposits and 26.3% of which were demand and savings deposits at December 31, 2000. Interest-bearing deposits other than time deposits consist of transaction, savings and money market accounts. These deposits comprise 16.8% of total deposits at December 31, 2000. Non-interest bearing demand deposits at December 31, 2000, constituted approximately 9.5% of total deposits. The Company had $1.6 million of brokered deposits at December 31, 2000. Average Deposit Balances and Rates
Year Ended December 31, ---------------------------------------------------------------------------------- 2000 1999 1998 ------------------------ ------------------------ ------------------------ Average Average Average Average Rate Average Rate Average Rate Amount Paid Amount Paid Amount Paid --------- ---------- --------- ---------- --------- ---------- (Dollars in thousands) Non-interest bearing accounts......... $ 60,636 - $ 54,782 - $ 40,583 - Interest-bearing accounts: Transaction (NOW)................... 55,452 2.47% 51,615 2.21% 32,419 2.25% Savings............................. 16,586 2.06 15,702 1.97 12,002 2.11 Money Market........................ 39,245 4.01 38,663 3.38 29,933 3.58 Time deposits less than $100,000.... 231,764 5.59 239,707 5.08 198,268 5.63 Time deposits $100,000 or more...... 224,231 6.01 177,938 5.00 87,751 5.58 -------- -------- -------- Total deposits................... $627,914 $578,407 $400,956 ======== ======== ========
The following table sets forth by time remaining to maturity, time deposits in amounts of $100,000 or more at December 31, 2000. Maturity distribution of time deposits of $100,000 and over
December 31, 2000 ---------------------- (Dollars in thousands) Maturity -------- 3 months or less............. $134,383 3 to 6 months................ 94,348 6 to 12 months............... 28,842 Over 12 months............... 7,772
Interest Rate Sensitivity 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 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 data in the GAP table presented below, this model incorporates a number of 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 interest 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 16 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 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 January 1, 2001.
Change in $ Change in % Change in Interest Rates Projected Baseline Projected Baseline (in bps) Net Interest Income Net Interest Income -------------- ------------------- ------------------- (Dollars in thousands) +200 $(2,875) (11.1)% +100 (1,269) (4.9) -100 783 3.0 -200 (2,242) (8.6)
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 December 31, 2000 the cumulative ratios of rate sensitive assets to rate sensitive liabilities at six months and one year, respectively, were 44.4% and 51.1%. 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. Rate Sensitive Assets and Liabilities
December 31, 2000 ---------------------------------------------------------------------------------------- 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) Floating rate.............. $ 60,987 $ 52,275 $ 8,712 $ 8,712 1.14% 116.67% Fixed rate repricing in: 1 day - 6 months......... 131,677 381,336 (249,659) (240,947) (31.46) 44.43 7 months - 12 months..... 84,677 109,660 (24,983) (265,930) (34.73) 51.05 1 - 2 years.............. 105,517 47,076 58,441 (207,489) (27.10) 64.85 2 - 3 years.............. 91,146 2,177 88,969 (118,520) (15.48) 80.00 3 - 4 years.............. 28,125 20,887 7,238 (111,282) (14.53) 81.86 4 - 5 years.............. 38,473 12,264 26,209 (85,073) (11.11) 86.40 Over 5 years............. 225,175 67,978 157,197 72,124 9.42 110.40 --------- --------- --------- Total.................. $ 765,777 $ 693,653 $ 72,124 ========= ========= =========
(1) Rate Sensitive Assets (2) Rate Sensitive Liabilities 17 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 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. 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. Impact of Inflation and Changing Prices The Consolidated Financial Statements and related Notes presented elsewhere in the report have been prepared in accordance with accounting principles generally accepted in the United States. This requires the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company's operations. Unlike most industrial companies, nearly all the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a greater impact on the Company's performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services. 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. 18 The Company's risk-based and leverage capital ratios exceeded these minimum requirements at December 31, 2000 and December 31, 1999 and are presented below, followed by the capital ratios of the Company's bank subsidiary at December 31, 2000. Consolidated Capital Ratios
December 31, --------------------------------- 2000 1999 --------- ---------- (Dollars in thousands) Tier 1 capital: Stockholders' equity....................................................... $ 48,349 $ 43,874 Allowed amount of guaranteed preferred beneficial interest in Company's subordinated debentures (trust preferred securities).......... 16,617 15,132 Plus net unrealized losses on available for sale securities ............... 1,501 1,523 Less goodwill and certain intangible assets................................ (3,064) (3,304) --------- --------- Total tier 1 capital................................................. $ 63,403 $ 57,225 Tier 2 capital: Qualifying allowance for loan losses....................................... 6,606 6,072 Remaining amount of guaranteed preferred beneficial interest in Company's subordinated debentures (trust preferred securities).......... 633 2,118 --------- --------- Total risk-based capital............................................. $ 70,642 $ 65,415 ========= ========= Risk-weighted assets........................................................... $ 550,516 $ 497,460 ========= ========= Ratios at end of period: Leverage capital........................................................... 7.57% 7.46% Tier 1 risk-based capital.................................................. 11.52 11.50 Total risk-based capital................................................... 12.83 13.15 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
December 31, 2000 ---------------------- Bank of the Ozarks (Dollars in thousands) Stockholders' equity - Tier 1......... $62,357 Leverage capital ..................... 7.45% Tier 1 risk-based capital ............ 11.34 Total risk-based capital ............. 12.54
(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. 19 Liquidity and Capital Resources Line of Credit. Prior to the fourth quarter of 2000 the Company maintained a revolving line of credit for up to $22 million with a correspondent bank. In the fourth quarter of 2000 the Company terminated their line of credit. No borrowings had been outstanding for more than a year and no borrowing needs were anticipated in the immediate future. Consequently, to reduce administration associated with maintaining this line, the Company asked the correspondent bank to terminate the agreement. Trust Preferred Securities. On June 18, 1999 Ozark Capital Trust, the Company's wholly owned Delaware trust subsidiary, sold to investors $17.3 million of 9% trust preferred securities. The proceeds were used to purchase an equal principal amount of subordinated debentures of Bank of the Ozarks, Inc. Subject to certain limitations, the trust 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." Both the trust preferred securities and the subordinated debentures 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. The net proceeds from this offering were used to repay $12.5 million outstanding borrowings under the Company's revolving line of credit with the balance of the proceeds used for general corporate purposes including a $3.0 million capital investment in the Company's bank subsidiary. Growth and Expansion. On May 30, 2000 the Company opened its 24/th/ banking office located in Yellville, Arkansas, the county seat of Marion County. This new office is an expansion of the Company's operations in North Arkansas. During 2000 the Company broke ground for two new banking offices at 2520 South Zero Street in Fort Smith, Arkansas and 10300 Stagecoach Road in the Otter Creek area of Little Rock, Arkansas. The Company's new Fort Smith office will be its second in that city and is expected to open during the first half of 2001. The Company's new Otter Creek office will be the Company's seventh office in the Little Rock and North Little Rock market and is expected to open during the second quarter of 2001. The Company has submitted application for approval of a branch location in a Wal-Mart Supercenter located in Bryant, Arkansas. Opening is expected to occur in the first half of 2001 subject to regulatory approval. Capital expenditures were $1.6 million in 2000 and are projected to be in the range of $2.0-$2.5 million for 2001. 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 their primary sources of funds. The Company has used these funds, together with FHLB advances 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 conditions. Loan repayments are a relatively stable source of funds, but such 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 and Federal Reserve Bank borrowings At December 31, 2000, the Company's bank subsidiary had substantial unused borrowing availability. This availability was primarily comprised of the following three sources: (1) $188.5 million of available blanket borrowing capacity with the Federal Home Loan Bank which offers various terms, (2) $8.2 million of securities available to pledge on a federal funds line of credit or for repurchase agreements or other borrowings and (3) up to $4.4 million from several borrowing programs of the Federal Reserve Bank. Management anticipates 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 borrowings will be used to augment the Company's primary funding sources. Dividend Policy. In 2000 the Company paid dividends of $0.42 per share. In 1999 and 1998 the Company paid dividends of $0.40 and $0.23 per share, respectively. Commencing in the third quarter of 2000 the dividend was increased from $0.10 per quarter to $0.11 per quarter. The determination of future dividends on the Company's common stock will depend on conditions existing at that time. The Company's goal is to continue the current $0.11 quarterly dividend with consideration to future changes depending on the Company's earnings, capital and liquidity needs. 20 Year 2000 The Company believes it has completed its Year 2000 Project as scheduled. As of December 31, 2000, the Company's computer and other systems with imbedded microchips have operated without Year 2000 related problems and appear to be Year 2000 compliant. The Company is not aware that any of its software and hardware vendors, major loan customers, correspondent banks or governmental agencies with which the Company interacts have experienced material Year 2000 related problems. While the Company believes all of its critical systems are Year 2000 ready, there can be no guarantee the Company has discovered all possible failure points including all of its systems, non-ready third parties whose systems and failures could impact the Company, or other uncertainties. The Company's aggregate expenses incurred since 1996 with respect to its Year 2000 Project were less than $130,000, all of which were expensed as of December 31, 1999. A significant portion of these costs were represented by the redeployment of existing staff during 1998 and 1999 to the Year 2000 project. No projects under consideration by the Company have been deferred because of Year 2000 efforts. The Company does not anticipate any additional material costs relating to the Year 2000 issue. 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, acquisition opportunities 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; 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. 21 Summary of Quarterly Results of Operations, Common Stock Market Prices and Dividends
2000 - Three Months Ended ---------------------------------------------------------- Mar. 31 June 30 Sept. 30 Dec. 31 --------- --------- ---------- --------- (Dollars in thousands, except per share amounts) Total interest income........................... $ 14,404 $ 14,905 $ 15,425 $ 16,018 Total interest expense.......................... 8,198 8,812 9,856 10,223 -------- -------- --------- --------- Net interest income.......................... 6,206 6,093 5,569 5,795 Provision for loan losses....................... 378 324 1,225 398 Non-interest income............................. 1,250 1,417 1,552 1,323 Non-interest expense............................ 4,187 4,244 4,351 4,182 Income taxes.................................... 708 730 255 596 Distributions on trust preferred securities..... 397 397 397 396 -------- -------- --------- --------- Net income................................... $ 1,786 $ 1,815 $ 893 $ 1,546 ======== ======== ========= ========= Per share: Earnings - diluted........................... $ 0.47 $ 0.48 $ 0.24 $ 0.41 Cash dividends............................... 0.10 0.10 0.11 0.11 Bid price per common share: Low.......................................... $ 14.13 $ 14.94 $ 11.75 $ 10.19 High......................................... 19.44 18.25 16.50 12.94 1999 - Three Months Ended ---------------------------------------------------------- Mar. 31 June 30 Sept. 30 Dec. 31 --------- --------- ---------- --------- (Dollars in thousands, except per share amounts) Total interest income........................... $ 11,730 $ 12,617 $ 13,234 $ 13,993 Total interest expense.......................... 6,421 6,730 7,012 7,618 -------- -------- -------- --------- Net interest income.......................... 5,309 5,887 6,222 6,375 Provision for loan losses....................... 611 580 578 716 Non-interest income............................. 1,269 1,303 1,293 1,282 Non-interest expense............................ 3,768 4,241 4,195 4,261 Income taxes.................................... 673 658 639 539 Distributions on trust preferred securities .... - 52 397 397 ======== ======== ======== ========= Net income................................... $ 1,526 $ 1,659 $ 1,706 $ 1,744 ======== ======== ======== ========= Per share: Earnings - diluted........................... $ 0.40 $ 0.44 $ 0.45 $ 0.46 Cash dividends............................... 0.10 0.10 0.10 0.10 Bid price per common share: Low.......................................... $ 20.50 $ 17.00 $ 16.75 $ 16.63 High......................................... 23.25 21.38 21.25 20.63
See Note 14 to Consolidated Financial Statements for discussion of dividend restrictions. 22 Report of Independent Auditors ------------------------------ Board of Directors and Shareholders Bank of the Ozarks, Inc. We have audited the accompanying consolidated balance sheets of Bank of the Ozarks, Inc. and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Bank of the Ozarks, Inc. and subsidiaries at December 31, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. /s/ ERNST & YOUNG LLP -------------------------------- Ernst & Young LLP Little Rock, Arkansas January 11, 2001 23 BANK OF THE OZARKS, INC. CONSOLIDATED BALANCE SHEETS
December 31, ------------------------------------------------ 2000 1999 ----------------- ----------------- (Dollars in thousands, except per share amounts) ASSETS ------ Cash and due from banks $ 20,523 $ 24,279 Interest-bearing deposits 17 283 ---------- --------- Cash and cash equivalents 20,540 24,562 Investment securities - available for sale 51,696 44,837 Investment securities - held to maturity (estimated market value: $197,819 in 2000 and $205,749 in 1999) 201,520 218,558 Federal funds sold 2,000 - Loans, net of unearned income 510,544 467,131 Allowance for loan losses (6,606) (6,072) ---------- --------- Net loans 503,938 461,059 Premises and equipment, net 30,535 30,547 Foreclosed assets held for sale, net 1,600 2,238 Interest receivable 8,894 7,174 Intangible assets, net 3,064 3,323 Other 3,165 3,744 ---------- --------- Total assets $ 826,952 $ 796,042 ========== ========= LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Deposits Demand non-interest bearing $ 64,572 $ 56,177 Savings and interest-bearing transaction 113,606 105,211 Time 499,505 434,542 ---------- --------- Total deposits 677,683 595,930 Repurchase agreements with customers 13,839 9,026 Other borrowings 66,703 126,989 Accrued interest and other liabilities 3,128 2,973 ---------- --------- Total liabilities 761,353 734,918 Guaranteed preferred beneficial interest in the Company's subordinated debentures 17,250 17,250 Commitments and contingencies - - 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, 3,779,555 shares issued and outstanding in 2000 and 1999 38 38 Additional paid-in capital 14,314 14,314 Retained earnings 35,498 31,045 Accumulated other comprehensive loss (1,501) (1,523) ---------- --------- Total stockholders' equity 48,349 43,874 ---------- --------- Total liabilities and stockholders' equity $ 826,952 $ 796,042 ========== =========
The accompanying notes are an integral part of these consolidated financial statements. 24 BANK OF THE OZARKS, INC. CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31, ----------------------------------------------------- 2000 1999 1998 ------------- ------------- ------------- (Dollars in thousands, except per share amounts) Interest income Loans $ 43,451 $ 37,008 $ 31,168 Investment securities - taxable 15,331 12,847 6,654 - nontaxable 1,953 1,675 766 Deposits with banks and federal funds sold 17 45 294 --------- --------- --------- Total interest income 60,752 51,575 38,882 --------- --------- --------- Interest expense Deposits 29,701 23,831 18,118 Repurchase agreements with customers 680 132 4 Other borrowings 6,708 3,819 2,396 --------- --------- --------- Total interest expense 37,089 27,782 20,518 --------- --------- --------- Net interest income 23,663 23,793 18,364 Provision for loan losses (2,325) (2,485) (2,026) --------- --------- --------- Net interest income after provision for loan losses 21,338 21,308 16,338 --------- --------- --------- Other income Trust income 592 479 335 Service charges on deposit accounts 3,380 2,499 1,372 Other income, charges and fees 1,530 1,936 2,792 Gain on sale of securities - 69 255 Other 40 164 277 --------- --------- --------- Total other income 5,542 5,147 5,031 --------- --------- --------- Other expense Salaries and employee benefits 8,928 8,752 7,197 Net occupancy and equipment 2,910 2,655 1,961 Other operating expenses 5,126 5,057 3,961 --------- --------- --------- Total other expense 16,964 16,464 13,119 --------- --------- --------- Income before income taxes and trust distribution 9,916 9,991 8,250 Distributions on trust preferred securities 1,587 846 - Provision for income taxes 2,289 2,510 2,621 --------- --------- --------- Net income $ 6,040 $ 6,635 $ 5,629 ========= ========= ========= Basic earnings per common share $ 1.60 $ 1.76 $ 1.49 ========= ========= ========= Diluted earnings per common share $ 1.60 $ 1.75 $ 1.47 ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 25 BANK OF THE OZARKS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional Accumulated Other Common Paid-In Retained Comprehensive Stock Capital Earnings Income (Loss) Total ------- ---------- -------- ----------------- --------- (Dollars in thousands, except per share amounts) Balance - January 1, 1998 $ 38 $ 14,314 $ 21,162 $ 152 $ 35,666 Comprehensive income: Net income - - 5,629 - 5,629 Other comprehensive income Unrealized gains on available for sale securities net of $35 tax effect - - - 57 57 Less: reclassification adjustment for gains included in income net of $79 tax effect - - - (128) (128) --------- Comprehensive income 5,558 Dividends paid, $0.23 per share - - (869) - (869) ------ -------- -------- -------- --------- Balance - December 31, 1998 38 14,314 25,922 81 40,355 Comprehensive income: Net income - - 6,635 - 6,635 Other comprehensive income (loss) Unrealized losses on available for sale securities net of $966 tax effect - - - (1,558) (1,558) Less: reclassification adjustment for gains included in income net of $30 tax effect - - - (46) (46) --------- Comprehensive income 5,031 Dividends paid, $0.40 per share - - (1,512) - (1,512) ------ -------- -------- -------- --------- Balance - December 31, 1999 38 14,314 31,045 (1,523) 43,874 Comprehensive income: Net income - - 6,040 - 6,040 Other comprehensive income Unrealized gains on available for sale securities net of $14 tax effect - - - 22 22 Reclassification adjustment for gains included in income - - - - - --------- Comprehensive income 6,062 Dividends paid, $0.42 per share (1,587) (1,587) ------ -------- -------- -------- --------- Balance - December 31, 2000 $ 38 $ 14,314 $ 35,498 $ (1,501) $ 48,349 ====== ======== ======== ======== =========
The accompanying notes are an integral part of these consolidated financial statements. 26 BANK OF THE OZARKS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, ---------------------------------------- 2000 1999 1998 -------- ---------- ---------- (Dollars in thousands) Cash flows from operating activities Net income $ 6,040 $ 6,635 $ 5,629 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 1,490 1,375 1,043 Amortization 293 262 173 Provision for loan losses 2,325 2,485 2,026 Provision for losses on foreclosed assets 183 90 35 Amortization and accretion on investment securities (104) (132) (115) Gain on disposition of investments - (69) (255) Gain on sale of loans - (4) - (Increase) decrease in mortgage loans held for sale 545 4,308 (3,750) Gain on disposition of premises and equipment (8) (36) (14) (Gain) loss on disposition of foreclosed assets 45 28 (98) Deferred income taxes 405 (139) 222 Changes in assets and liabilities: Interest receivable (1,720) (1,657) (2,502) Other assets, net 128 (1,500) (305) Accrued interest and other liabilities 155 1,017 74 -------- --------- --------- Net cash provided by operating activities 9,777 12,663 2,163 -------- --------- --------- Cash flows from investing activities Acquisitions, net of funds acquired - - 22,123 Proceeds from sales and maturities of investment securities available for sale 316 19,922 54,036 Purchases of investment securities available for sale (7,093) (49,635) (20,260) Proceeds from maturities of investment securities held to maturity 20,176 42,293 67,386 Purchases of investment securities held to maturity (3,080) (101,756) (234,804) Increase (decrease) in federal funds sold (2,000) - 3,149 Net increase in loans (48,862) (89,630) (110,019) Proceeds from sale of loans - 994 - Proceeds from dispositions of bank premises and equipment 99 317 30 Purchases of bank premises and equipment (1,570) (5,048) (14,109) Proceeds from dispositions of foreclosed assets 3,524 1,454 525 -------- --------- --------- Net cash used in investing activities (38,490) (181,089) (231,943) -------- --------- --------- Cash flows from financing activities Net increase in deposits 81,752 66,890 208,455 Net (repayments) proceeds from other borrowings (60,287) 87,718 20,182 Net increase in repurchase agreements with customers 4,813 7,618 1,408 Proceeds from trust preferred - 17,250 - Dividends paid (1,587) (1,512) (869) -------- --------- --------- Net cash provided by financing activities 24,691 177,964 229,176 -------- --------- --------- Net increase (decrease) in cash and cash equivalents (4,022) 9,538 (604) Cash and cash equivalents - beginning of year 24,562 15,024 15,628 -------- --------- --------- Cash and cash equivalents - end of year $ 20,540 $ 24,562 $ 15,024 ======== ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 27 BANK OF THE OZARKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) 1. Summary of Significant Accounting Policies Organization - Bank of the Ozarks, Inc. (the "Company") is a bank ------------ holding company headquartered in Little Rock, Arkansas, which operates under the rules and regulations of the Board of Governors of the Federal Reserve System and owns a state chartered bank and Ozark Capital Trust, a Delaware business trust. The bank is subject to the regulation of certain federal and state agencies and undergoes periodic examinations by those regulatory authorities. The bank has offices located in northern, western, and central Arkansas. Merger of subsidiaries - During 1999 the Company consolidated its ---------------------- federal savings bank and two banking subsidiaries into a single banking subsidiary. This resulted in the Company owning one state chartered bank subsidiary which is named Bank of the Ozarks. Principles of consolidation - The consolidated financial statements --------------------------- include the accounts of the Company and its wholly owned subsidiaries. Significant intercompany transactions and amounts have been eliminated in consolidation. Use of estimates - The preparation of financial statements in ---------------- conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Cash and cash equivalents - For purposes of reporting cash flows, cash ------------------------- and cash equivalents include cash on hand, amounts due from banks and interest-bearing deposits with banks. Investment securities - Management determines the appropriate --------------------- classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost. Debt securities not classified as held-to-maturity or trading and marketable equity securities not classified as trading are classified as available-for-sale. Available-for-sale securities are stated at estimated fair value, with the unrealized gains and losses, net of tax, reported as a separate component of stockholders' equity. The amortized cost of debt securities classified as held-to-maturity or available-for-sale is adjusted for amortization of premiums and accretion of discounts to maturity, or in the case of mortgage-backed securities, over the estimated life of the security. Such amortization is included in interest income from investments. Interest and dividends are included in interest income from investments. Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Gains or losses on the sale of securities are recognized on the specific identification method at the time of sale. Loans - Loans receivable that management has the intent and ability to ----- hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal adjusted for any charge-offs, deferred fees or costs on originated loans, and unamortized premiums or discounts on purchased loans. Unearned discounts on certain installment loans are recognized as income over the terms by the rule of 78's interest method which approximates the interest method. The Company discontinued the use of the rule of 78's method on loans originated in 1999, and interest on these loans is recognized using the interest method. Unearned purchased discounts are recorded as income over the life of the loans utilizing the interest method to achieve a constant yield. Interest on other loans is calculated by using the simple interest method on daily balances of the principal amount outstanding. Loan origination fees and direct origination costs are capitalized and recognized as adjustments to yields on the related loans. Allowance for loan losses - The allowance for loan losses is ------------------------- established through a provision for loan losses charged against income. Loans deemed to be uncollectible are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely, and subsequent recoveries, if any, are credited to the allowance. The allowance is maintained at a level that management believes will be adequate to absorb losses on existing loans that may become uncollectible, based on evaluations of the collectibility of loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, historical loan loss experience and current economic and business conditions that may affect the borrowers' ability to pay or the value of the collateral securing the loans. The Company's policy generally is to place a loan on nonaccrual status when payment of principal or interest is contractually past due 90 days, or earlier when concern exists as to the ultimate collection of principal and interest. The Company continues to accrue interest on certain loans contractually past due 90 days if such loans are both well secured and in the process of collection. The Company considers a loan to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms thereof. The Company applies this policy even if delays or shortfalls in payment are expected to be insignificant. 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Dollars in thousands All nonaccrual loans and all loans that have been restructured from their original contractual terms are considered impaired loans. The aggregate amount of impairment of loans is utilized in evaluating the adequacy of the allowance for loan losses and amount of provisions thereto. Losses on impaired loans are charged against the allowance for loan losses when in the process of collection it appears likely that such losses will be realized. The accrual of interest on impaired loans is discontinued, when in management's opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received. Premises and equipment - Premises and equipment are stated at cost ---------------------- less accumulated depreciation and amortization. Depreciation and amortization are computed on a straight-line basis over the estimated useful lives of the related assets. Estimated book depreciation lives for the major classes of assets are 20 to 50 years for buildings, 40 years for leaseholds and 3 to 15 years for furniture, fixtures and equipment. Accelerated depreciation methods are used for tax purposes. Foreclosed assets held for sale - Real estate and personal properties ------------------------------- acquired through or in lieu of loan foreclosure are to be sold and are initially recorded at fair value at the date of foreclosure establishing a new cost basis. After foreclosure, real property is generally amortized over 60 months unless regulatory authority approves the write off over an extended period. Valuations are periodically performed by management and the real estate is carried at the lower of carrying amount or fair value less cost to sell. Gains and losses from the sale of other real estate are recorded in other income, and expenses used to maintain the properties are included as operating expenses. Income taxes - The Company utilizes the liability method in accounting ------------ for income taxes. Under this method, deferred tax assets and liabilities are determined based upon the difference between the values of the assets and liabilities as reflected in the financial statement and their related tax basis using enacted tax rates in effect for the year in which the differences are expected to be recovered or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. The Company and its subsidiaries file consolidated tax returns. Its subsidiaries provide for income taxes on a separate return basis, and remit to the Company amounts determined to be currently payable. Trust department income - Property, other than cash deposits, held by ----------------------- the Company's trust department in fiduciary or agency capacities for its customers are not included in the accompanying consolidated financial statements, since such items are not assets of the Company. Trust department income has been recognized on the cash basis in accordance with customary banking practice, which does not differ materially from the accrual method. Intangible assets - Intangible assets consist of goodwill and core ----------------- deposit intangibles. These assets are being amortized over periods ranging from 10 to 40 years. Goodwill represents the excess purchase price over the fair value of net assets acquired in business acquisitions. Core deposit intangibles represent premiums paid for deposits acquired. Accumulated amortization of intangibles totaled $1,524 and $1,449 at December 31, 2000 and 1999, respectively. Earnings per share - Basic earnings per share has been calculated ------------------ based on the weighted average number of shares outstanding. Diluted earnings per share has been calculated based on the weighted average number of shares outstanding after consideration of the dilutive effect of the Company's outstanding stock options. Financial instruments - In the ordinary course of business, the --------------------- Company has entered into off-balance sheet financial instruments consisting of commitments to extend credit, commitments under credit card arrangements, and letters of credit. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received. Advertising and public relations expense - Advertising and public ---------------------------------------- relations expense is expensed as incurred and totaled $551, $612 and $566 for the years ended December 31, 2000, 1999 and 1998, respectively. Stock-based compensation - The Company has elected to follow ------------------------ Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("ABP 25") and related interpretations in accounting for its employee stock options. Under ABP 25, because the exercise price of employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recorded. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation". Segment Disclosures - On December 31, 1998, the Company adopted SFAS ------------------- No. 131, "Disclosures about Segments of an Enterprise and Related Information". SFAS 131 established standards for reporting information about operating segments and related disclosures about products and services, geographic areas and major customers. As the Company operates in only one segment - community banking - the adoption of SFAS 131 did not have a material effect on the primary financial statements or the disclosure of segment information. No revenues are derived from foreign countries and no single external customer comprises more than 10% of the Company's revenues. Derivatives and Hedging Activities - In June 1998, the Financial ---------------------------------- Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133, which requires the Company to recognize all derivatives on the balance sheet at fair value, was adopted by the Company effective July 1, 1998. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of the assets, liabilities, or firm 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Dollars in thousands commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portions of a derivative's change in fair value will be immediately recognized in earnings. The adoption of SFAS No. 133 did not have a significant impact on the Company's financial position or results of operations. In connection with the adoption of SFAS No. 133, the Company transferred investment securities with a carrying value of $25,795 and unrealized gains of $167 from its held-to-maturity to available-for-sale portfolio. Reclassifications - Certain reclassifications of 1999 and 1998 amounts ----------------- have been made to conform with the 2000 financial statements presentation. 2. Investment Securities The following is a summary of the amortized cost and estimated market values of investment securities:
December 31, 2000 ----------------------------------------------------- Amortized Unrealized Unrealized Market Cost Gains Losses Value --------- ---------- ---------- --------- Securities - available for sale: Securities of United States government and agencies $ - $ - $ - $ - Mortgage-backed securities 178 - (4) 174 State and political subdivisions 42,943 - (2,377) 40,566 Other securities 11,006 72 (122) 10,956 --------- ---------- ---------- --------- Total securities - available for sale $ 54,127 $ 72 $ (2,503) $ 51,696 ========= ========== ========== ========= Securities - held to maturity: Securities of United States government and agencies $ 195,771 $ - $ (3,664) $ 192,107 State and political subdivisions 2,569 16 (59) 2,526 Other securities 3,180 6 - 3,186 --------- ---------- ---------- --------- Total securities - held to maturity $ 201,520 $ 22 $ (3,723) $ 197,819 ========= ========== ========== ========= December 31, 1999 ----------------------------------------------------- Amortized Unrealized Unrealized Market Cost Gains Losses Value --------- ---------- ---------- --------- Securities - available for sale: Securities of United States government and agencies $ - $ - $ - $ - Mortgage-backed securities 201 - (9) 192 State and political subdivisions 39,488 - (2,528) 36,960 Other securities 7,615 70 - 7,685 --------- ---------- ---------- --------- Total securities - available for sale $ 47,304 $ 70 $ (2,537) $ 44,837 ========= ========== ========== ========= Securities - held to maturity: Securities of United States government and agencies $ 215,713 $ - $ (12,766) $ 202,947 State and political subdivisions 2,745 14 (54) 2,705 Other securities 100 - (3) 97 --------- ---------- ---------- --------- Total securities - held to maturity $ 218,558 $ 14 $ (12,823) $ 205,749 ========= ========== ========== =========
30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Dollars in thousands The amortized cost and estimated market value by contractual maturity of investment securities classified as available-for-sale and held-to-maturity at December 31, 2000 are as follows:
Available-for-Sale Held-to-Maturity ------------------------ ------------------------ Estimated Estimated Amortized Market Amortized Market Cost Value Cost Value --------- --------- --------- --------- Due in one year or less $ 2,214 $ 2,212 $ 239 $ 239 Due from one year to five years 6,463 6,260 1,352 1,351 Due from five years to ten years 8,808 8,479 161,944 159,302 Due after ten years 36,642 34,745 37,985 36,927 --------- --------- --------- --------- Totals $ 54,127 $ 51,696 $ 201,520 $ 197,819 ========= ========= ========= =========
Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. For purposes of the maturity table, mortgage-backed securities which are not due at a single maturity date have been allocated over maturity groupings based on anticipated maturities. The mortgage-backed securities may mature earlier than their weighted average contractual maturities because of principal prepayments. During the year ended December 31, 2000 no investment securities available- for-sale were sold. During the years ended December 31, 1999 and 1998, investment securities available-for-sale with a fair value at the date of sale of $18,408 and $41,613, respectively, were sold. The gross realized gains on such sales in 1999 and 1998 totaled $78 and $322, respectively. The gross realized losses totaled $9 and $67, respectively. The income tax expenses related to net security gains was $23 and $87 in 1999 and 1998, respectively. The Bank had no trading securities during 2000, 1999 or 1998. Assets, principally investment securities, having a carrying value of approximately $229,853 and $202,660 at December 31, 2000 and 1999, respectively, were pledged to secure public deposits and for other purposes required or permitted by law. 3. Loans The following is a summary of the loan portfolio by principal categories:
December 31, -------------------- 2000 1999 -------- -------- Real Estate Residential 1-4 family $144,920 $136,856 Non-farm/non-residential 134,726 101,766 Agricultural 38,808 20,396 Construction/land development 42,354 28,294 Multifamily residential 8,367 4,687 Consumer 58,430 81,753 Commercial and industrial 63,799 70,012 Agricultural (non-real estate) 14,605 19,947 Other 4,535 3,420 -------- -------- Loans, net of unearned discounts $510,544 $467,131 ======== ========
These loan categories are presented net of unearned discounts, unearned purchase discounts and deferred costs totaling $799 at December 31, 2000 and $812 at December 31, 1999. Loans on which the accrual of interest has been discontinued aggregated $1,880 and $1,972 at December 31, 2000 and 1999, respectively. Mortgage loans held for resale of $1,832 and $2,377 at December 31, 2000 and 1999, respectively, are included in residential 1-4 family loans. The carrying value of these loans approximate their fair value. Other income, charges and fees include mortgage lending income of $849, $1,306 and $2,136 during 2000, 1999 and 1998, respectively. 4. Allowance for Loan Losses The following is a summary of activity within the allowance for loan losses:
Year Ended December 31, ----------------------------------- 2000 1999 1998 -------- -------- -------- Balance - beginning of year $ 6,072 $ 4,689 $ 3,737 Loans charged-off (1,998) (1,225) (1,149) Recoveries on loans previously charged-off 207 123 75 -------- -------- -------- Net charge-offs (1,791) (1,102) (1,074) Provision charged to operating expense 2,325 2,485 2,026 -------- -------- -------- Balance - end of year $ 6,606 $ 6,072 $ 4,689 ======== ======== ========
Impairment of loans having carrying values of $1,880 and $1,972 (all of which were on a non-accrual basis) at December 31, 2000 and 1999, respectively, have been recognized in conformity with SFAS No. 114, as amended by SFAS No. 118. The total allowance for credit losses related to these loans was $212 and $276 at December 31, 2000 and 1999, respectively. The average carrying value of impaired loans was $2,748, $3,611 and $1,840, for the years ended December 31, 2000, 1999 and 1998, respectively. The Company does not segregate income recognized on a cash basis in its financial records, and thus, such disclosure is not practicable. For impairment recognized in conformity with SFAS 114, as amended, the entire change in present value of expected cash flows is reported as provision for loan losses in the same manner in which impairment 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Dollars in thousands initially was recognized or as a reduction in the amount of provision for loan losses that otherwise would be reported. Real estate securing loans having a carrying value of $2,641 and $3,625 was transferred to foreclosed assets held for sale in 2000 and 1999, respectively. The bank is not committed to lend additional funds to debtors whose loans have been modified. 5. Premises and Equipment The following is a summary of premises and equipment: December 31, -------------------- 2000 1999 ------- ------- Land $ 7,289 $ 7,284 Construction in process 369 60 Buildings and improvements 19,408 18,130 Leasehold improvements 2,460 2,243 Equipment 7,926 8,384 ------- ------- 37,452 36,101 Accumulated depreciation (6,917) (5,554) ------- ------- Premises and equipment, net $30,535 $30,547 ======= ======= The Company capitalized $52, $51 and $275 of interest on construction projects during the years ended December 31, 2000, 1999 and 1998, respectively. Included in occupancy expense is rent of approximately $123, $71, and $45 incurred under noncancelable operating leases in 2000, 1999 and 1998, respectively, for leases of real estate in connection with buildings and premises. These leases contain certain renewal and purchase options according to the terms of the agreements. Future amounts due under noncancelable operating leases at December 31, 2000 are $101 -- 2001, $76 -- 2002, $76 -- 2003, $76 -- 2004, $60 -- 2005 and $849 - thereafter. 6. Deposits The aggregate amount of time deposits with a minimum denomination of $100 was $265,345 and $190,900 at December 31, 2000 and 1999, respectively. The following is a summary of the scheduled maturities of all time deposits: December 31, ----------------------- 2000 1999 -------- --------- Up to one year $470,707 $384,365 One year to two years 24,543 43,859 Two years to three years 1,954 3,653 Three years to four years 1,019 1,096 Four years to five years 556 811 Thereafter 726 758 -------- -------- Total time deposits $499,505 $434,542 ======== ======== 7. Borrowings Short-term borrowings with maturities less than one year include FHLB advances, non-customer repurchase agreements, treasury, tax and loan note accounts and federal funds purchased. The following is a summary of information relating to the short-term borrowings: December 31, ---------------------- 2000 1999 ------- ------- Average annual balance $28,700 $20,793 December 31 balance 1,062 38,206 Maximum month-end balance during year 45,702 38,206 Interest rate: Weighted average 6.37% 4.47% December 31 5.00% 4.53% The following is a summary of long term borrowings:
December 31, ---------------------------- 2000 1999 ---------- ---------- FHLB advances with original maturities exceeding one year. Interest rates range from 5.93% to 6.43% at December 31, 2000. At December 31, 2000, the Company's bank subsidiary had remaining $188,500 of unused blanket FHLB borrowing availability. The FHLB maintains as collateral a blanket lien on a portion of the Company's real estate, commercial and agricultural loans. $65,581 $97,725 Other 60 84 ---------- ---------- $65,641 $97,809 ========== ==========
Maturities of long term borrowings at December 31, 2000 are as follows: 2001--$4,198; 2002--$198; 2003--$258; 2004--$198; 2005--$198; 2006--$197; 2007- -$197; 2008--$197 and 2010 -- $60,000. FHLB advances of $60 million maturing in 2010 may be called quarterly but the Company has the option to refinance on a long-term basis any amounts called. During 2000 the Company terminated their revolving line of credit for up to $22 million with a correspondent bank. No borrowings were outstanding on the line of credit at December 31, 1999. 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Dollars in thousands 8. 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. 9. Income Taxes The following is a summary of the components of the provision (benefit) for income taxes: Year Ended December 31, ------------------------------- 2000 1999 1998 -------- -------- -------- Current: Federal $1,884 $2,814 $2,363 State - (165) 36 -------- -------- ------- Total current 1,884 2,649 2,399 -------- -------- ------- Deferred: Federal 405 (146) 180 State - 7 42 -------- -------- ------- Total deferred 405 (139) 222 -------- -------- ------- Provision for income taxes $2,289 $2,510 $2,621 ======== ======== ======= The reconciliation between the statutory federal income tax rate and effective income tax rate is as follows:
Year Ended December 31, ---------------------------------------------------- 2000 1999 1998 ------------- ------------- ------------ Statutory federal income tax rate 34.0% 34.0% 34.0% State income taxes, net of federal benefit - - 0.6 Effect of non-taxable interest income (7.1) (5.7) (3.7) Refund of 1992 state income tax assessment - (1.1) - Other 0.6 0.2 0.9 ------------- ------------- ------------ Effective income tax rate 27.5% 27.4% 31.8% ============= ============= ============
In 1999 the Company recorded a tax refund for 1992 state income taxes. The state agreed to a settlement with respect to a 1992 tax assessment the Company had paid in 1997. This settlement resulted in a refund of $153 of tax and $91 of interest. These were recorded in 1999 as a credit to tax expense and other income, respectively. The types of temporary differences between the tax basis of assets and liabilities and their financial reporting amounts that give rise to deferred income tax assets and liabilities and their approximate tax effects are as follows:
December 31, -------------------------------- 2000 1999 ------------- ------------ Deferred tax assets: Allowance for loan losses $2,153 $1,913 Valuation of foreclosed assets 40 13 Unrealized depreciation on securities available for sale 931 945 ------------- ------------ Gross deferred tax assets 3,124 2,871 Deferred tax liabilities: Accelerated depreciation on premises and equipment 1,269 807 Other 418 208 ------------- ------------ Gross deferred tax liabilities 1,687 1,015 Net deferred tax assets included ------------- ------------ in other assets $1,437 $1,856 ============= ============
33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Dollars in thousands 10. Employee Benefit Plans Employee Stock Ownership Plan - The Company had an employee stock ownership ----------------------------- plan ("ESOP") to provide benefits to substantially all employees of the Company. The ESOP was merged into the 401(k) Plan in 1999. The Company had historically made annual contributions to the plan as determined solely by the Board of Directors. The Company made no contributions in 1999 and 1998. 401(k) Plan - In May 1997 the Company established a qualified retirement ----------- plan, with a salary deferral feature designed to qualify under Section 401 of the Internal Revenue Code (the "401(k) Plan"). The 401(k) Plan permits the employees of the Company to defer a portion of their compensation in accordance with the provisions of Section 401(k) of the Code. Matching contributions may be made in amounts and at times determined by the Company. Certain other statutory limitations with respect to the Company's contribution under the 401(k) Plan also apply. Amounts contributed by the Company for a participant will vest over six years and will be held in trust until distributed pursuant to the terms of the 401(k) Plan. Employees of the Company are eligible to participate in the 401(k) Plan when they meet certain requirements concerning minimum age and period of credited service. All contributions to the 401(k) Plan will be invested in accordance with participant elections among certain investment options. Distributions from participant accounts will not be permitted before age 65, except in the event of death, permanent disability, certain financial hardships or termination of employment. The Company made matching contributions to the 401(k) plan during 2000, 1999 and 1998 of $160, $146 and $99, respectively. 11. Stock Options The Company has a nonqualified stock option plan for certain key employees and officers of the Company. This plan provides for the granting of incentive nonqualified options to purchase up to 285,000 shares of common stock in the Company. No option may be granted under this plan for less than the fair market value of the common stock at the date of the grant. The exercise period and the termination date for the employee plan options is determined when the options are actually granted. The Company also has a nonqualified stock option plan for non-employee directors. The non-employee director plan calls for options to purchase 1,000 shares of common stock to be granted to non-employee directors the day after the annual stockholders' meeting. These options are exercisable immediately and expire ten years after issuance. The following summarizes stock option activity for the year indicated:
Year ended December 31, -------------------------------------------------------------------------------------------------------------- 2000 1999 1998 ------------------------------------ ------------------------------------ ------------------------------ Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price ------------- ------------------ ------------- ------------------ ------------- ------------ Outstanding - beginning of year 254,100 $19.72 198,050 $20.42 106,500 $16.42 Granted 105,650 12.26 71,500 17.96 103,700 24.11 Exercised - - - Canceled (51,975) 20.15 (15,450) 20.57 (12,150) 16.00 ---------- ----------- ----------- Outstanding - end of year 307,775 $17.08 254,100 $19.72 198,050 $20.42 ========== =========== =========== Exercisable at end of year 144,825 $18.68 83,200 $22.20 17,000 $22.37 ========== =========== ===========
34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Dollars in thousands Exercise prices for options outstanding as of December 31, 2000 ranged from $11.85 to $34.13. The weighted-average fair value of options granted during 2000, 1999 and 1998 was $4.22, $6.85 and $8.36, respectively. The weighted- average remaining contractual life of the options issued in 2000 is 3.4 years. The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: 2000 1999 1998 ---- ---- ---- Risk-free interest rate 5.71% 5.71% 4.94% Dividend yield 2.77 2.00 0.91 Expected dividend yield increase 9.00 12.00 15.00 Expected stock volatility 38.88 42.16 39.09 Weighted average expected life 5 years 5 years 4 years For purposes of pro forma disclosures as required by SFAS No. 123, the estimated fair value of the options is amortized over the option's vesting period. The following table represents the required pro forma disclosures for options granted subsequent to December 31, 1996:
2000 1999 1998 -------------- -------------- -------------- Pro forma net income $5,797 $6,243 $5,363 Pro forma earnings per share: Basic 1.53 1.65 1.42 Diluted 1.53 1.64 1.40
The following is a summary of currently outstanding and exercisable options at December 31, 2000:
Options Outstanding Options Exercisable --------------------------------------------------------- ----------------------------------- Weighted Average Weighted Weighted Range of Remaining Average Average Exercise Options Contractual Exercise Options Exercise Prices Outstanding Life (in years) Price Exercisable Price -------------- ------------- --------------- --------------- ------------- --------------- $11.85-19.19 233,050 6.3 $14.78 87,400 $16.36 21.50-27.75 68,725 3.6 23.39 51,425 22.05 34.13 6,000 7.3 34.13 6,000 34.13 ------------- ---------- 307,775 144,825 ============= ==========
12. Commitments and Contingencies The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual notional amount of those instruments. The Company has the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since these commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. The Company had outstanding commitments to extend credit of approximately $53,803 and $36,686 at December 31, 2000 and 1999, respectively. The commitments extend over varying periods of time with the majority to be disbursed within a one-year period. The Company had total outstanding letters of credit amounting to $1,922 and $684 at December 31, 2000 and 1999, respectively. The commitment terms generally expire within one year. The Company grants agribusiness, commercial, residential and consumer installment loans to customers primarily in northern, western and central Arkansas. The Company maintains a diversified loan portfolio. 13. Related Party Transactions The Banks have entered into transactions with their executive officers, directors, principal shareholders, and their affiliates (related parties). The aggregate amount of loans to such related parties at December 31, 2000 and 1999 was $8,061 and $7,513, respectively. New loans and advances on prior commitments made to 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Dollars in thousands such related parties were $13,955, $3,263 and $5,483 for the years ended December 31, 2000, 1999 and 1998, respectively. Repayments of loans made by such related parties were $13,407, $1,067 and $376 for the years ended December 31, 2000, 1999 and 1998, respectively. During 2000 and 1999 the Company constructed four banking buildings. The majority owner of the contractor on these construction projects is a member of the Company's Board of Directors. Total payments to the contractor during the years ended December 31, 2000 and 1999 were approximately $708 and $2,343, respectively. 14. Regulatory Matters Federal regulatory agencies generally require member banks to maintain core (Tier 1) capital of at least 3% of total assets plus an additional cushion of 1% to 2%, depending upon capitalization classifications. Tier 1 capital generally consists of total stockholders' equity. Additionally, these agencies require member banks to maintain total risk-based capital of at least 8% of risk-weighted assets, with at least one-half of that total capital amount consisting of Tier 1 capital. Total capital for risk-based purposes includes Tier 1 capital plus the lesser of the allowance for loan losses or 1.25% of risk weighted assets. The Company's regulatory capital positions were as follows:
December 31, 2000 December 31, 1999 -------------------------------- -------------------------------- Computed Computed Computed Computed Capital Percent Capital Percent -------------------------------- -------------------------------- Bank of the Ozarks, Inc. (consolidated): Total risk-based capital $70,642 12.83% $65,415 13.15% Tier 1 risk-based capital 63,403 11.52 57,225 11.50 Leverage ratio - 7.57 - 7.46 Bank of the Ozarks: Total risk-based capital $68,963 12.54% $63,552 12.64% Tier 1 risk-based capital 62,357 11.34 57,450 11.44 Leverage ratio - 7.45 - 7.50
As of December 31, 2000 and 1999, the most recent notification from the regulators categorized the Company and its subsidiary bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Company's or its subsidiary bank's category. At December 31, 2000, the subsidiary bank exceeded its minimum capital requirements. As of December 31, 2000, the state bank commissioner's approval was required before the bank could declare and pay any dividend of 75% or more of the net profits of the bank after all taxes for the current year plus 75% of the retained net profits for the immediately preceding year. $6,144 was available at December 31, 2000, for payments of dividends by the bank without the approval of regulatory authorities. Under Federal Reserve regulation, the subsidiary bank is also limited as to the amount it may loan to its affiliates, including the Company, unless such loans are collateralized by specific obligations. At December 31, 2000, the maximum amount available for transfer from the subsidiary bank to the Company in the form of loans approximated $6,896. The subsidiary bank is required by bank regulatory agencies to maintain certain minimum balances of cash or non-interest bearing deposits primarily with the Federal Reserve. At December 31, 2000 and 1999, these required balances aggregated $678 and $5,458, respectively. 15. Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of financial instruments. Cash and due from banks - For these short-term instruments, the ----------------------- carrying amount is a reasonable estimate of fair value. Investment securities - For securities held for investment purposes, --------------------- fair values are based on quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities or the carrying amount. Loans, net of unearned income - The fair value of loans is estimated ----------------------------- by discounting the future cash flows using the current rate at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Deposit liabilities - The fair value of demand deposits, savings ------------------- accounts, NOW accounts and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed maturity certificates is estimated using the rate currently offered for deposits of similar remaining maturities. The carrying amount of accrued interest payable approximates its fair value. 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Dollars in thousands Other borrowed funds - For these short-term instruments, the carrying -------------------- amount is a reasonable estimate of fair value. The fair value of long-term debt is estimated based on the current rates available to the Company for debt with similar terms and remaining maturities. Accrued interest - The carrying amount of accrued interest payable ---------------- approximates its fair value. Off-balance sheet instruments - Fair values for off-balance sheet ----------------------------- lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. Commitments to extend credit and standby letters of credit - The fair ---------------------------------------------------------- value of these commitments is estimated using the fees currently charged to enter into similar agreements taking into account the remaining terms of the agreements and the present credit-worthiness of the counter-parties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counter-parties at the reporting date. The following table presents the estimated fair values of the Company's financial instruments. The fair values of certain of these instruments were calculated by discounting expected cash flows, which involves significant judgments by management and uncertainties. Fair value is the estimated amount at which financial assets or liabilities could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Because no market exists for certain of these financial instruments and because management does not intend to sell these financial instruments, the Company does not know whether the fair values shown below represent values at which the respective financial instruments could be sold individually or in the aggregate.
2000 1999 ------------------------------------------------------------------------ Carrying Fair Carrying Fair Amount Value Amount Value --------------- --------------- -------------- --------------- Financial assets: Cash and cash equivalents $ 20,540 $ 20,540 $ 24,562 $ 24,562 Available-for-sale securities 51,696 51,696 44,837 44,837 Held-to-maturity securities 201,520 197,819 218,558 205,749 Loans, net of allowance for loan losses 503,938 501,842 461,059 456,848 Accrued interest receivable 8,894 8,894 7,174 7,174 Financial liabilities: Demand, NOW and savings account deposits $178,178 $178,178 $161,388 $161,388 Time deposits 499,505 502,214 434,542 434,000 Repurchase agreements with customers 13,839 13,844 9,026 9,026 Other borrowings 66,703 70,038 126,989 124,243 Accrued interest and other liabilities 3,128 3,128 2,973 2,973 Off balance sheet items: Standby letters of credit $ - $ 1,922 $ - $ 684 Commitments to extend credit - 53,802 - 36,686
16. Supplemental Cash Flow Information Supplemental cash flow information is as follows:
Year Ended December 31, --------------------------------------------------- 2000 1999 1998 -------------- ------------- -------------- Cash paid during the period for: Interest $36,909 $27,448 $20,466 Income taxes 1,927 2,314 2,333 Supplemental schedule of non-cash investing and financing activities: Transfer of loans to foreclosed assets held for sale 2,641 3,625 628 Loans advanced for sales of foreclosed assets 441 771 251 Change in unrealized loss (gain) in available for sale securities (36) 2,600 (78)
37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Dollars in thousands 17. Other Operating Expenses The following is a summary of other operating expenses:
Year Ended December 31, ------------------------------------------------ 2000 1999 1998 ------------ ------------ ------------ Telephone and data lines $ 714 $ 604 $ 453 Operating supplies 487 513 454 Advertising and public relations 551 612 566 Other 3,374 3,328 2,488 ------------ ------------ ------------ Total other operating expenses $5,126 $5,057 $3,961 ============ ============ ============
18. Earnings Per Common Share The following table sets forth the computation of basic and diluted earnings per share ("EPS"):
Year Ended December 31, ------------------------------------------------- 2000 1999 1998 ------------ ------------ ----------- Numerator: Net income $6,040 $6,635 $5,629 ============ ============ =========== Denominator: Denominator for basic EPS weighted average shares 3,780 3,780 3,780 Effect of dilutive securities: Stock options 2 12 39 ------------ ------------ ----------- Denominator for diluted EPS - adjusted weighted average shares and assumed conversions 3,782 3,792 3,819 ============ ============ =========== Basic EPS $ 1.60 $ 1.76 $ 1.49 ============ ============ =========== Diluted EPS $ 1.60 $ 1.75 $ 1.47 ============ ============ ===========
Options to purchase 211, 97 and 24 shares of common stock at prices ranging from $21.50 to $34.13 per share were outstanding during 2000, 1999 and 1998 but were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the common shares and inclusion would have been antidilutive. 19. Parent Company Financial Information The following condensed balance sheets, income statements and statements of cash flows reflect the financial position and results of operations for the parent company: Condensed Balance Sheets
December 31, ------------------------------- 2000 1999 ------------- ------------- Assets ------ Cash and cash equivalents $ 720 $ 713 Investment in subsidiaries 63,307 58,580 Premises and equipment, net 6 14 Excess cost over fair value of net assets acquired, at amortized cost 1,148 1,204 Debt issuance cost, net 970 1,004 Other 25 214 ------------- ------------- Total assets $66,176 $61,729 ============= ============= Liabilities and Stockholders' Equity ------------------------------------ Accrued interest and other liabilities $ 43 $ 47 Notes payable - 24 Subordinated debentures 17,784 17,784 ------------- ------------- Total liabilities 17,827 17,855 ------------- ------------- Stockholders' equity Common stock 38 38 Additional paid-in capital 14,314 14,314 Retained earnings 35,498 31,045 Accumulated other comprehensive income (1,501) (1,523) ------------- ------------- Total stockholders' equity 48,349 43,874 ------------- ------------- Total liabilities and stockholders' equity $66,176 $61,729 ============= =============
38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Dollars in thousands Condensed Statements of Income
Year Ended December 31, --------------------------------------------- 2000 1999 1998 ----------- ----------- ----------- Income Dividends from subsidiaries $2,748 $2,591 $3,174 Other 29 92 2 ----------- ----------- ----------- Total income 2,777 2,683 3,176 ----------- ----------- ----------- Expenses Interest 1,636 1,257 637 Net occupancy and equipment - - 53 Other operating expenses 477 777 620 ----------- ----------- ----------- Total expenses 2,113 2,034 1,310 ----------- ----------- ----------- Income before income tax benefit and equity in undistributed earnings of subsidiaries 664 649 1,866 Income tax benefit 672 743 461 Equity in undistributed earnings of subsidiary 4,704 5,243 3,302 ----------- ----------- ----------- Net income $6,040 $6,635 $5,629 =========== =========== ===========
Condensed Statements of Cash Flows
Year Ended December 31, --------------------------------------------------- 2000 1999 1998 ------------- ------------- ------------- Cash flows from operating activities Net income $ 6,040 $ 6,635 $ 5,629 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 8 11 13 Amortization 90 75 77 Equity in undistributed earnings of subsidiaries (4,704) (5,243) (3,302) Change in assets and liabilities: Accrued interest and other liabilities (4) 27 (110) Other, net 188 (195) (3) ------------- ------------- ------------- Net cash provided by operating activities 1,618 1,310 2,304 ------------- ------------- ------------- Cash flows from investing activities Purchases of premises and equipment - - (7) Purchase 100% of the stock in Heartland Community Bank, FSB - - (3,100) Additional investment in subsidiaries - (3,534) (9,000) Dividends from prior years earnings of subsidiary - - 143 -------------- ------------ ------------ Net cash used in investing activities - (3,534) (11,964) -------------- ------------ ------------ Cash flows from financing activities Increase in deferred debt issuance cost - (1,022) - Issue subordinated debentures - 17,784 - Proceeds from notes payable - - 14,350 Payments of notes payable (24) (12,364) (7,034) Dividends paid (1,587) (1,512) (869) -------------- ------------ ------------ Net cash (used in) provided by financing activities (1,611) 2,886 6,447 -------------- ------------ ------------ Net increase (decrease) in cash and cash equivalents 7 662 (3,213) Cash and cash equivalents - beginning of period 713 51 3,264 -------------- ------------ ------------ Cash and cash equivalents - end of period $ 720 $ 713 $ 51 ============== ============ ============
39