EX-13 4 dex13.txt SELECTED CONSOLIDATED FINANCIAL DATA [LOGO] Financial Information Selected Consolidated Financial Data
Year Ended December 31, ------------------------------------------------------ 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- (Dollars in thousands, except per share amounts) Income statement data: Interest income ............................ $ 60,119 $ 60,752 $ 51,575 $ 38,882 $ 27,468 Interest expense ........................... 30,414 37,089 27,782 20,518 12,979 Net interest income ........................ 29,705 23,663 23,793 18,364 14,489 Provision for loan losses .................. 3,401 2,325 2,485 2,026 1,139 Non-interest income ........................ 7,353 5,542 5,147 5,031 2,925 Non-interest expense ....................... 19,030 16,964 16,464 13,119 9,228 Distribution on trust preferred securities . 1,587 1,587 846 - - Net income ................................. 8,959 6,040 6,635 5,629 4,531 Per common share data: Earnings - diluted ......................... $ 2.35 $ 1.60 $ 1.75 $ 1.47 $ 1.38 Book value ................................. 14.97 12.79 11.61 10.68 9.44 Dividends .................................. 0.46 0.42 0.40 0.23 0.20 Weighted avg. shares outstanding (thousands) 3,816 3,782 3,792 3,819 3,281 Balance sheet data at period end: Total assets ............................... $ 871,379 $ 826,952 $ 796,042 $ 612,431 $ 352,093 Total loans ................................ 616,076 510,544 467,131 387,526 275,463 Allowance for loan losses .................. 8,712 6,606 6,072 4,689 3,737 Total investment securities ................ 187,167 253,016 263,395 176,618 42,459 Total deposits ............................. 677,743 677,683 595,930 529,040 295,555 Repurchase agreements with customers ....... 16,213 13,839 9,026 1,408 - Other borrowings ........................... 99,690 66,703 126,989 39,271 19,089 Total stockholders' equity ................. 56,617 48,349 43,874 40,355 35,666 Loan to deposit ratio ...................... 90.90% 75.34% 78.39% 73.25% 93.20% Average balance sheet data: Total average assets ....................... $ 813,913 $ 818,197 $ 709,640 $ 486,729 $ 314,489 Total average stockholders' equity ......... 52,334 45,723 41,988 37,951 26,328 Average equity to average assets ........... 6.43% 5.59% 5.92% 7.80% 8.37% Performance ratios: Return on average assets ................... 1.10% 0.74% 0.93% 1.16% 1.44% Return on average stockholders' equity ..... 17.12 13.21 15.80 14.83 17.21 Net interest margin ........................ 4.05 3.27 3.77 4.19 4.98 Efficiency ................................. 50.25 55.98 55.09 54.98 52.55 Dividend payout ............................ 19.57 26.25 22.86 15.65 14.49 Assets quality ratios: Net charge-offs as a percentage of average total loans .............................. 0.24% 0.36% 0.26% 0.33% 0.17% Nonperforming loans to total loans ......... 0.29 0.37 0.42 0.70 0.25 Nonperforming assets to total assets ....... 0.28 0.42 0.53 0.50 0.24 Allowance for loan losses as a percentage of: Total loans ................................ 1.41% 1.29% 1.30% 1.21% 1.36% Nonperforming loans ........................ 482.39 351.38 307.91 171.82 534.62 Capital ratios at period end: Leverage capital ........................... 8.51% 7.57% 7.46% 6.21% 9.86% Tier I risk-based capital .................. 11.41 11.52 11.50 9.05 13.01 Total risk-based capital ................... 12.67 12.83 13.15 10.21 14.27
9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General Net income was $9.0 million for the year ended December 31, 2001, a 48.3% increase from net income of $6.0 million in 2000. Net income in 1999 was $6.6 million. Diluted earnings increased 46.9% to $2.35 per share in 2001 compared to $1.60 per share in 2000. Diluted earnings in 1999 were $1.75 per share. As shown below total assets, loans and deposits increased 5.4%, 20.7% and 0.0%, respectively, from December 31, 2000 to December 31, 2001 and 3.9%, 9.3% and 13.7%, respectively, from December 31, 1999 to December 31, 2000. Stockholders' equity increased 17.1% from December 31, 2000 to December 31, 2001 and 10.2% from December 31, 1999 to December 31, 2000. During these same periods, book value per share increased 17.0% and 10.2%, respectively. -------------------------------------------------
% Change December 31, -------------------- -------------------------------- 2001 2000 2001 2000 1999 from 2000 from 1999 ---- ---- ---- --------- --------- (Dollars in thousands except per share amounts) Assets ................. $ 871,379 $ 826,952 $ 796,042 5.4% 3.9% Loans .................. 616,076 510,544 467,131 20.7 9.3 Deposits ............... 677,743 677,683 595,930 - 13.7 Stockholders' equity ... 56,617 48,349 43,874 17.1 10.2 Book value per share ... 14.97 12.79 11.61 17.0 10.2
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, 2001, the Company's ROA was 1.10% compared with 0.74% and 0.93%, respectively, for the years ended December 31, 2000 and 1999. 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, 2001, the Company's ROE was 17.12% compared with 13.21% and 15.80%, respectively, for the years ended December 31, 2000 and 1999. 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%). 2001 compared to 2000 Net interest income (FTE) increased 23.3% to $30.5 million for 2001 compared to $24.8 million in 2000. Net interest margin, on a fully taxable equivalent basis, improved to 4.05% in 2001 compared to 3.27% in 2000, an increase of 78 basis points. Beginning in late 2000 and continuing throughout 2001, the Company sought to improve financial performance by changing its mix of both assets and deposits. From 2000 to 2001 the Company's average balance of loans increased $58.1 million and the average balance of securities declined $62.6 million. This change in earning asset mix resulted in the yield on total earning assets declining only 8 basis points while loan yields 10 declined 21 basis points. Additionally, interest-bearing liability costs declined as a result of a change in deposit mix and a general decline in interest rates during the year. From 2000 to 2001, the average balance of CD's declined $43.4 million and lower costing savings and interest-bearing transaction accounts average balances increased $54.6 million. This change in interest-bearing deposit mix, combined with the general decline in interest rates during 2001, resulted in an 87 basis point reduction in both the cost of interest-bearing deposits and total interest-bearing liabilities. This reduction was the most significant contributor to the increase in net interest income and net interest margin during 2001. 2000 compared to 1999 Net interest income (FTE) increased modestly to $24.8 million in 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. ------------------------------------------------------ Analysis of Net Interest Income (FTE = Fully Taxable Equivalent) Year Ended December 31, ----------------------------------- 2001 2000 1999 -------- -------- -------- (Dollars in thousands) Interest income ........................ $60,119 $60,752 $51,575 FTE adjustment 813 1,098 947 -------- -------- -------- Interest income--FTE ................... 60,932 61,850 52,522 Interest expense ....................... 30,414 37,089 27,782 -------- -------- -------- Net interest income--FTE ............... $30,518 $24,761 $24,740 ======== ======== ======== Yield on interest earning assets--FTE .. 8.09% 8.17% 8.00% Cost of interest-bearing liabilities ... 4.50 5.37 4.63 Net interest spread--FTE ............... 3.59 2.80 3.37 Net interest margin--FTE ............... 4.05 3.27 3.77 The following table sets forth certain information relating to the Company's net interest income for the years ended December 31, 2001, 2000 and 1999. 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. 11 Average Consolidated Balance Sheets and Net Interest Analysis
Year Ended December 31, ---------------------------------------------------------------------------------- 2001 2000 1999 -------------------------- -------------------------- -------------------------- Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Balance Expense Rate -------- ------- --------- -------- ------- --------- -------- ------- --------- ASSETS (Dollars in thousands) Earning assets: Interest-bearing deposits and federal funds sold ...................................... $ 931 $ 49 5.25% $ 282 $ 17 6.11% $ 841 $ 45 5.26% Investment securities: Taxable ..................................... 173,329 11,203 6.46 225,515 15,331 6.80 194,511 12,847 6.61 Tax-exempt--FTE ............................. 29,412 2,125 7.23 39,875 2,960 7.42 36,938 2,538 6.87 Loans--FTE (net of unearned income) ......... 549,497 47,555 8.65 491,390 43,542 8.86 424,339 37,092 8.74 -------- ------- -------- ------- -------- ------- Total earning assets .................... 753,169 60,932 8.09 757,062 61,850 8.17 656,629 52,522 8.00 Non-earning assets ............................ 60,744 61,135 53,011 -------- -------- -------- Total assets ............................ $813,913 $818,197 $709,640 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: Deposits: Savings and interest-bearing transaction .. $165,923 $ 3,754 2.26% $111,283 $ 3,285 2.95% $105,980 $ 2,756 2.60% Time deposits of $100,000 or more ......... 207,273 10,702 5.16 224,231 13,471 6.01 177,938 8,892 5.00 Other time deposits ....................... 205,328 10,844 5.28 231,764 12,945 5.59 239,707 12,183 5.08 -------- ------- -------- ------- -------- ------- Total interest-bearing deposits ......... 578,524 25,300 4.37 567,278 29,701 5.24 523,625 23,831 4.55 Repurchase agreements with customers ........ 16,919 537 3.17 12,536 680 5.42 2,991 132 4.40 Other borrowings ............................ 79,787 4,577 5.74/(1)/ 111,312 6,708 6.03/(1)/ 73,717 3,819 5.18/(1)/ -------- ------- -------- ------- -------- ------- Total interest-bearing liabilities ...... 675,230 30,414 4.50 691,126 37,089 5.37 600,333 27,782 4.63 Non-interest liabilities: Non-interest bearing deposits ............... 65,368 60,636 54,782 Other non-interest liabilities .............. 3,731 3,462 3,085 -------- -------- -------- Total liabilities ....................... 744,329 755,224 658,200 Trust preferred securities .................... 17,250 17,250 9,452 Stockholders' equity .......................... 52,334 45,723 41,988 -------- -------- -------- Total liabilities and stockholders' equity ................................ $813,913 $818,197 709,640 ======== ======== ======== Interest rate spread--FTE ..................... 3.59% 2.80% 3.37% ------- ------- ------- Net interest income--FTE ...................... $30,518 $24,761 $24,740 ======= ======= ======= Net interest margin--FTE ...................... 4.05% 3.27% 3.77%
(1) This rate is impacted by the capitalization of interest on construction projects in the amount of $53, $52 and $51 for the years ended December 31, 2001, 2000 and 1999, respectively. In the absence of this capitalization these percentages would have been 5.80%, 6.07% and 5.25% for the years ended December 31, 2001, 2000 and 1999, 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 (changes 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. 12 Analysis of Changes in Net Interest Income
2001 over 2000 2000 over 1999 -------------------------- -------------------------- 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 $ (2) $ 32 $ (34) $ 6 $ (28) Investment securities: Taxable ................................... (3,373) (755) (4,128) 2,108 376 2,484 Tax-exempt--FTE ........................... (756) (79) (835) 218 204 422 Loans (net of unearned income) .............. 5,029 (1,016) 4,013 5,941 509 6,450 ------ ------ ------ ------ ------ ----- Total interest income--FTE ................ 934 (1,852) (918) 8,233 1,095 9,328 ------ ------ ------ ------ ------ ----- Interest expense: Savings and interest-bearing transaction .... 1,236 (767) 469 157 372 529 Time deposits of $100,000 or more ........... (876) (1,893) (2,769) 2,781 1,798 4,579 Other time deposits ......................... (1,396) (705) (2,101) (444) 1,206 762 Repurchase agreements with customers ........ 139 (282) (143) 518 30 548 Other borrowings ............................ (1,808) (323) (2,131) 2,266 623 2,889 ------ ------ ------ ------ ------ ----- Total interest expense .................... (2,705) (3,970) (6,675) 5,278 4,029 9,307 ------ ------ ------ ------ ------ ----- Increase (decrease) in net interest income--FTE ................................. $3,639 $2,118 $5,757 $2,955 $(2,934) $ 21 ====== ====== ====== ====== ====== =====
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, 2001 increased 32.7% to $7.4 million compared with $5.5 million in 2000. Non-interest income was $5.1 million in 1999. During 2001 the Company benefited from strong growth in service charges on deposit accounts which increased 11.7% from 2000. In 2001 the Company continued and intensified its efforts to add new transaction, savings and money market deposit customers. These efforts contributed to growth in service charges on deposit accounts. During 2001 the Company's non-CD deposits accounted for 35.9% of total average deposits, an improvement from 27.4% in 2000. Non-CD deposits increased throughout 2001 and were 45.5% of total average deposits for the fourth quarter of 2001. The Company benefited from good 2001 mortgage lending income as a result of a favorable mortgage rate environment and a high level of refinancing activity. The table below shows non-interest income for the years ended December 31, 2001, 2000 and 1999. Non-Interest Income Year Ended December 31, ----------------------------- 2001 2000 1999 ------ ------ ------- (Dollars in thousands) Service charges on deposit accounts ........ $3,776 $3,380 $ 2,499 Mortgage lending income .................... 1,920 849 1,306 Other charges and fees ..................... 574 620 630 Trust income ............................... 604 592 479 Brokerage fee income ....................... 108 61 - Gain (loss) on sales ....................... 2 (38) 12 Gain on sale of securities ................. 153 - 69 Other ...................................... 216 78 152 ------ ------ ------- Total non-interest income ............... $7,353 $5,542 $ 5,147 ====== ====== ======= 13 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, 2001 increased 12.2% to $19.0 million compared with $17.0 million in 2000. Non-interest expense was $16.5 million in 1999. The increase in non-interest expense in 2001 primarily resulted from the Company's continued growth and expansion, and increased bonus accruals as a result of the Company's improved performance. The number of full time equivalent employees as of December 31, 2001 was 327, a 12% increase from 292 as of the end of the previous year. As a result of the Company's continuing efforts to control non-interest expenses, the Company's efficiency ratio (non-interest expense divided by the sum of net interest income on a tax equivalent basis and non-interest income) was 50.3% for the year ended December 31, 2001 compared to 56.0% in 2000 and 55.1% in 1999. ------------------------------------------------------ The table below shows non-interest expense for the years ended December 31, 2001, 2000 and 1999. Non-Interest Expense
Year Ended December 31, ------------------------------------- 2001 2000 1999 ------- ------- ------- (Dollars in thousands) Salaries and employee benefits ............... $10,551 $ 8,928 $ 8,752 Net occupancy and equipment expense .......... 3,098 2,910 2,655 Other real estate and foreclosure expense .... 526 592 358 Other operating expense: Professional and outside services ......... 375 315 319 Postage ................................... 326 255 286 Telephone ................................. 490 478 418 Data lines ................................ 238 236 186 Operating supplies ........................ 543 487 513 Advertising and public relations .......... 583 551 612 Directors' fees ........................... 118 103 121 Software expense .......................... 374 409 301 ATM expense ............................... 306 236 178 FDIC and state assessments ................ 259 238 217 Business development, meals and travel .... 136 136 147 Amortization of goodwill .................. 90 90 90 Amortization of other intangibles ......... 151 169 172 Other ..................................... 866 831 1,139 ------- ------- ------- Total non-interest expense .............. $19,030 $16,964 $16,464 ======= ======= =======
Income Taxes The provision for income taxes was $4.1 million for the year ended December 31, 2001 compared to $2.3 million in 2000 and $2.5 million in 1999. The effective income tax rates were 31.3%, 27.5% and 27.4%, respectively, for 2001, 2000 and 1999. The effective tax rates for these years are below the statutory tax rates because of state income tax recoveries in 2001 and 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. In the years 2000 and 1999 the Company incurred no Arkansas income tax due to the large amount of interest income exempt from Arkansas income taxes. The Company began incurring Arkansas income tax expense in 2001 as a result of a reduction in its interest income exempt from Arkansas income tax combined with an increase in the level of its taxable income. 14 Analysis of Financial Condition Loan Portfolio At December 31, 2001 the Company's loan portfolio was $616.0 million, an increase of 20.7% from $510.5 million at December 31, 2000. As of December 31, 2001 the Company's loan portfolio consisted of approximately 75.5% real estate loans, 9.1% consumer loans, 12.7% commercial and industrial loans and 2.1% agricultural loans (non-real estate). The amount and type of loans outstanding are reflected in the following table. Loan Portfolio
December 31, ------------------------------------------------ 2001 2000 1999 1998 1997 -------- -------- -------- -------- -------- (Dollars in thousands) Real estate: Residential 1-4 family ......... $167,559 $144,920 $136,856 $121,539 $ 96,943 Non-farm/non-residential ....... 180,257 134,726 101,766 76,563 41,710 Agricultural ................... 45,303 38,808 20,396 19,463 13,443 Construction/land development .. 51,140 42,354 28,294 23,305 16,257 Multifamily residential ........ 20,850 8,367 4,687 6,207 3,897 -------- -------- -------- -------- -------- Total real estate ........... 465,109 369,175 291,999 247,077 172,250 Consumer .......................... 55,805 58,430 81,753 66,407 53,233 Commercial and industrial ......... 78,324 63,799 70,012 52,192 37,470 Agricultural (non-real estate) .... 12,866 14,605 19,947 20,068 10,824 Other ............................. 3,972 4,535 3,420 1,782 1,686 -------- -------- -------- -------- -------- Total loans ................. $616,076 $510,544 $467,131 $387,526 $275,463 ======== ======== ======== ======== ========
The following table reflects loans grouped by remaining maturities at December 31, 2001 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 principal paydowns scheduled in periods prior to the period in which they mature. Also many variable rate loans are subject to repricing in periods prior to the period in which they mature. Loan Maturities
Over 1 Year 1 Year Through Over or Less 5 Years 5 Years Total -------- ----------- ------- -------- (Dollars in thousands) Real estate .............................. $112,527 $295,073 $57,509 $465,109 Consumer ................................. 13,719 40,924 1,162 55,805 Commercial, industrial and agricultural .. 46,650 43,554 986 91,190 Other .................................... 846 505 2,621 3,972 -------- ----------- ------- -------- $173,742 $380,056 $62,278 $616,076 ======== =========== ======= ======== Fixed rate ............................... $136,747 $353,100 $37,738 $527,585 Floating rate ............................ 36,995 26,956 24,540 88,491 -------- ----------- ------- -------- $173,742 $380,056 $62,278 $616,076 ======== =========== ======= ========
The following table reflects loans as of December 31, 2001 grouped by expected amortizations, expected paydowns or the earliest repricing opportunity for floating rate loans. This cash flow or repricing schedule approximates the Company's ability to reprice loans or the ability to utilize loan principal repayments for new loans, other investments or repayment of borrowings. 15 Loan Cash Flows or Repricing Over 1 Year 1 Year Through Over or Less 5 Years 5 Years Total --------- --------- -------- --------- (Dollars in thousands) Fixed rate ........... $ 237,091 $ 278,455 $ 12,039 $ 527,585 Floating rate ........ 82,431 5,589 471 88,491 --------- --------- -------- --------- $ 319,522 $ 284,044 $ 12,510 $ 616,076 ========= ========= ======== ========= Nonperforming Assets Nonperforming assets consist of (1) nonaccrual loans, (2) accruing loans 90 days or more past due, (3) certain restructured loans providing for a reduction or deferral of interest or principal because of a deterioration in the financial position of the borrower and (4) real estate or other assets that have been acquired in partial or full satisfaction of loan obligations or upon foreclosure. The Company generally places a loan on nonaccrual status when payment of principal or interest is contractually past due 90 days, or earlier when doubt exists as to the ultimate collection of principal and interest. 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 was 0.29% at year-end 2001 compared to 0.37% and 0.42%, respectively, at years-end 2000 and 1999. Nonperforming assets as a percent of total assets was 0.28% as of year-end 2001 compared to 0.42% and 0.53%, respectively, as of years-end 2000 and 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 of 2000 and the year of 2001 the Company completed the sale of these properties, recognizing a net gain of $23,000 in 2001. These and other sales resulted in a reduction of foreclosed assets held for sale and repossessed assets from $1.6 million at year-end 2000 to $661,000 at year-end 2001. -------------------------------------------------------------------------------- The following table presents information concerning nonperforming assets including nonaccrual and restructured loans and foreclosed assets held for sale. Nonperforming Assets
December 31, --------------------------------------- 2001 2000 1999 1998 1997 ------- ------- ------- ------- ----- (Dollars in thousands) Nonaccrual loans ........................................ $ 1,806 $ 1,880 $ 1,972 $ 2,708 $ 664 Accruing loans 90 days or more past due ................. - - - 21 35 Restructured loans ...................................... - - - - - ------- ------- ------- ------- ----- Total nonperforming loans ............................ 1,806 1,880 1,972 2,729 699 Foreclosed assets held for sale and repossessions/(1)/ .. 661 1,600 2,238 314 136 ------- ------- ------- ------- ----- Total nonperforming assets ........................... $ 2,467 $ 3,480 $ 4,210 $ 3,043 $ 835 ======= ======= ======= ======= ===== Nonperforming loans to total loans ...................... 0.29% 0.37% 0.42% 0.70% 0.25% Nonperforming assets to total assets .................... 0.28 0.42 0.53 0.50 0.24
/(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. 16
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, --------------------------------------------- 2001 2000 1999 1998 1997 ------- ------- ------- ------- ------- (Dollars in thousands) Balance, beginning of period ............................ $ 6,606 $ 6,072 $ 4,689 $ 3,737 $ 3,019 Loans charged off: Real estate: Residential 1-4 family ............................. 306 690 260 75 35 Non-farm/non-residential ........................... 112 121 8 18 - Agricultural ....................................... 9 10 3 - - Construction/land development ...................... 41 - 115 - - Multifamily residential ............................ - 79 - - - ------- ------- ------- ------- ------- Total real estate ............................... 468 900 386 93 35 Consumer ............................................. 452 549 516 633 434 Commercial and industrial ............................ 463 443 271 423 - Agricultural (non-real estate) ....................... 37 106 52 - - ------- ------- ------- ------- ------- Total loans charged off ......................... 1,420 1,998 1,225 1,149 469 ------- ------- ------- ------- ------- Recoveries of loans previously charged off: Real estate: Residential 1-4 family ............................. 20 39 4 9 5 Non-farm/non-residential ........................... 9 44 - - - Agricultural ....................................... - 1 - - 2 Construction/land development ...................... 1 - 2 - - Multifamily residential ............................ - - - - - ------- ------- ------- ------- ------- Total real estate ............................... 30 84 6 9 7 Consumer ............................................. 84 74 111 55 39 Commercial and industrial ............................ 11 48 6 11 2 Agricultural (non-real estate) ....................... - 1 - - - ------- ------- ------- ------- ------- Total recoveries ................................ 125 207 123 75 48 ------- ------- ------- ------- ------- Net loans charged off ................................... 1,295 1,791 1,102 1,074 421 Provision charged to operating expense .................. 3,401 2,325 2,485 2,026 1,139 ------- ------- ------- ------- ------- Balance, end of period .................................. $ 8,712 $ 6,606 $ 6,072 $ 4,689 $ 3,737 ======= ======= ======= ======= ======= Net charge-offs to average loans outstanding during the periods indicated ......................... 0.24% 0.36% 0.26% 0.33% 0.17% Allowance for loan losses to total loans ................ 1.41 1.29 1.30 1.21 1.36 Allowance for loan losses to nonperforming loans ........ 482.39 351.38 307.91 171.82 534.62
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 $8,712,000 at December 31, 2001, or 1.41% of total loans, compared with $6,606,000, or 1.29% of total loans, at December 31, 2000. While management believes the current allowance is adequate, changing economic and other conditions may require future adjustments to the allowance for loan losses. 17 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 allowance 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 an allowance allocation percentage based on past due status. Allowance allocation percentages for the various risk grades and past due categories are determined by management and may be changed periodically. In determining these allowance allocation percentages, management considers historical loss percentages for risk rated loans, consumer loans and residential 1-4 family loans. In addition to this historical data, management considers subjective factors such as national and local economic conditions. The sum of all allowance amounts determined by this methodology, combined with a reasonable unallocated allowance determined by management, is utilized as the primary indicator of the appropriate level of allowance for loan losses. The unallocated allowance compensates for the uncertainty in estimating loan losses including factors and conditions that may not be fully reflected in the determination of the allowance allocation percentages. The factors and conditions evaluated in determining the appropriate unallocated allowance may include the following: (1) general economic and business conditions affecting our key lending areas, (2) credit quality trends (including trends in nonperforming loans expected to result from existing conditions), (3) trends that could affect collateral values, (4) loan volumes and concentrations, (5) seasoning of the loan portfolio, (6) specific industry conditions affecting portfolio segments, (7) recent loss experience in particular segments of the portfolio, (8) duration of the current business cycle, (9) bank regulatory examination results and (10) findings of our internal loan review department. In addition to the internal grading system 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 Report and the Federal Reserve Bank's Uniform Bank Holding Company Report. 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, multifamily residential loans, and agricultural real estate 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 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; (3) 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 (4) 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. The Board of Directors reviews the allowance on a quarterly basis to determine whether the amount of monthly provisions are adequate 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 allowances 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 allowance. The table also reflects the percentage of loans in each category to the total portfolio of loans for each of the periods indicated. These allowance 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. 18 Allocation of the Allowance for Loan Losses
December 31, --------------------------------------------------------------------------------------------- 2001 2000 1999 1998 1997/(1)/ ----------------- ----------------- ----------------- ----------------- ----------------- % of % of % of % of % of Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans ----------------- ----------------- ----------------- ----------------- ----------------- (Dollars in thousands) Real estate: Residential 1-4 family ............ $ 929 27.2% $ 430 28.4% $ 478 29.2% $ 532 31.4% $1,116 35.2% Non-farm/non-residential .......... 2,177 29.3 1,499 26.4 1,067 21.8 801 19.7 423 15.2 Agricultural ...................... 591 7.3 517 7.6 302 4.4 231 5.0 152 4.9 Construction/land development ..... 614 8.3 456 8.3 321 6.1 267 6.0 163 5.9 Multifamily ....................... 227 3.4 95 1.6 57 1.0 63 1.6 41 1.4 Consumer ............................. 986 9.1 883 11.4 1,313 17.5 1,236 17.1 372 19.3 Commercial and industrial ............ 896 12.7 859 12.5 808 15.0 610 13.5 412 13.6 Agricultural (non-real estate) ....... 166 2.1 199 2.9 322 4.3 257 5.2 114 3.9 Other ................................ 479 0.6 326 0.9 225 0.7 179 0.5 248 0.6 Unallocated allowance ................ 1,647 1,342 1,179 513 696 --------- ------ --------- ------ --------- ------ --------- ------ --------- ------ $8,712 100.0% $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, 2001, substandard loans not designated as nonaccrual or 90 days past due totaled $1.7 million. No loans were designated as doubtful or loss at December 31, 2001. 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 and certain other executive officers 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 $1.5 million up to the lending limit of the bank are authorized by the loan committee which consists of any five directors. 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 a summary of the 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 recent years, key allowance and nonperforming loan ratios and comparisons to industry averages. Based on these procedures, management believes that the allowance of $8,712,000 at December 31, 2001 is adequate. The allowance for loan losses was 1.41% of loans at December 31, 2001 compared to 1.29% at December 31, 2000. 19 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 2001 was $3.4 million compared to $2.3 million in 2000 and $2.5 million in 1999. -------------------------------- 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, -------------------------------------------------------------------------- 2001 2000 1999 ---------------------- ----------------------- ------------------------ 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 ........................... $ 70,177 $ 70,177 $ 195,771 $ 192,107 $ 215,713 $ 202,947 Mortgage-backed securities ............ 91,234 91,234 174 174 192 192 Obligations of states and political subdivisions ....................... 18,120 18,152 43,135 43,092 39,705 39,665 Other securities ...................... 7,636 7,642 14,136 14,142 7,785 7,782 --------- --------- --------- --------- --------- --------- Total ............................ $ 187,167 $ 187,205 $ 253,216 $ 249,515 $ 263,395 $ 250,586 ========= ========= ========= ========= ========= =========
(1) Book value for available-for-sale securities equals their original cost adjusted for unrealized gains or losses as reflected in the Company's financial statements. (2) The fair value of the Company's investment securities is based on quoted market prices where available. If quoted market prices are not available, fair values are based on market prices for comparable securities. The following table reflects the maturity distribution of the Company's investment securities, at book value, as of December 31, 2001 and weighted average yields (for tax-exempt obligations on a fully taxable equivalent basis assuming a 34% tax rate) of such securities. The maturity for all securities are shown based on their contractual maturity date, except (1) equity securities with no contractual maturity date which are shown in the longest maturity category and (2) mortgage-backed securities which are allocated among various maturities based on an estimated repayment schedule utilizing Bloomberg median prepayment speeds. 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/(1)/ ..................... $ - $ 60,168 $10,009 $ - $ 70,177 $ 70,177 Mortgage-backed securities/(2)/ ................................. 14,670 54,607 15,569 6,388 91,234 91,234 Obligations of states and political subdivisions/(3)/ ........... 514 1,716 1,429 14,461 18,120 18,152 Other securities/(4)/ ........................................... - - - 7,636 7,636 7,642 ------- -------- ------- ------- -------- -------- Total ........................................................ $15,184 $116,491 $27,007 $28,485 $187,167 $187,205 ======= ======== ======= ======= ======== ======== Percentage of total ............................................. 8.11% 62.24% 14.43% 15.22% 100.00% Weighted average yield (FTE)/(5)/ ............................... 6.10 5.39 6.03 6.51 5.71
(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) For purposes of this maturity distribution schedule mortgage-backed securities have been allocated among estimated repayment periods based on Bloomberg median prepayment speeds as of January 23, 2002. (3) Includes approximately $1.0 million of securities earning interest at floating rates repricing semi-annually. (4) Includes approximately $4.7 million of Federal Home Loan Bank stock which has historically paid quarterly dividends at a variable rate approximating the federal funds rate. (5) The weighted average yields (FTE) are based on book value. 20 Deposits The Company's bank subsidiary's lending and investing activities are funded primarily by deposits, approximately 53.7% of which were time deposits and 46.3% of which were demand and savings deposits at December 31, 2001. Interest-bearing deposits other than time deposits consist of transaction, savings and money market accounts. These deposits comprise 35.6% of total deposits at December 31, 2001. Non-interest bearing demand deposits at December 31, 2001, constituted approximately 10.7% of total deposits. The Company had $3.5 million of brokered deposits at December 31, 2001. Average Deposit Balances and Rates
Year Ended December 31, -------------------------------------------------------------- 2001 2000 1999 ------------------ ------------------ ------------------ Average Average Average Average Rate Average Rate Average Rate Amount Paid Amount Paid Amount Paid ------------------ ------------------ ------------------ (Dollars in thousands) Non-interest bearing accounts .................. $ 65,368 - $ 60,636 - $ 54,782 - Interest-bearing accounts: Transaction (NOW) ........................... 102,318 2.30% 55,452 2.47% 51,615 2.21% Savings ..................................... 18,745 1.14 16,586 2.06 15,702 1.97 Money market ................................ 44,860 2.63 39,245 4.01 38,663 3.38 Time deposits less than $100,000 ............ 205,328 5.28 231,764 5.59 239,707 5.08 Time deposits $100,000 or more .............. 207,273 5.16 224,231 6.01 177,938 5.00 -------- -------- -------- Total deposits ............................ $643,892 $627,914 $578,407 ======== ======== ========
The following table sets forth by time remaining to maturity, time deposits in amounts of $100,000 or more at December 31, 2001. Maturity Distribution of Time Deposits of $100,000 and Over December 31, 2001 ----------------- (Dollars in thousands) Maturity -------- 3 months or less ..................... $94,079 Over 3 to 6 months ................... 60,751 Over 6 to 12 months .................. 32,956 Over 12 months 2,829 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 factors in the 21 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 correct and may impact the model results. 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, 2002. A parallel shift in the interest rates is an arbitrary assumption which fails to take into account changes in the slope of the yield curve. Change in % Change in Interest Rates Projected Baseline (in bps) Net Interest Income -------------- ------------------- +200 (6.2)% +100 (2.5) -100 (2.5) -200 (6.6) --------------------------------------------- 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, 2001 the cumulative ratios of rate sensitive assets to rate sensitive liabilities at six months and one year, respectively, were 52.5% and 61.2%. 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, 2001 ------------------------------------------------------------------------------ Rate Rate Cumulative Cumulative Sensitive Sensitive Period Cumulative Gap to RSA/(1)/ to Assets Liabilities Gap Gap Total RSA/(1)/ RSL/(2)/ --------- ----------- --------- ---------- -------------- ------------ (Dollars in thousands) Immediate to 6 months .................... $ 248,567 $ 473,585 $(225,018) $(225,018) (28.01)% 52.49% 7 months--12 months ...................... 93,393 85,009 8,384 (216,634) (26.96) 61.22 1--2 years ............................... 146,232 52,495 93,737 (122,897) (15.30) 79.89 2--3 years ............................... 116,569 2,444 114,125 (8,772) (1.09) 98.57 3--4 years ............................... 134,689 1,348 133,341 124,569 15.50 120.26 4--5 years ............................... 9,112 16,715 (7,603) 116,966 14.56 118.52 Over 5 years ............................. 54,899 89,249 (34,350) 82,616 10.28 111.46 --------- --------- --------- Total .................................... $ 803,461 $ 720,845 $ 82,616 ========= ========= =========
(1) Rate Sensitive Assets (2) Rate Sensitive Liabilities 22 The data used in the table above is based on contractual repricing dates for variable or adjustable rate instruments except for interest-bearing Now accounts (except MaxYield/TM/) and regular savings accounts of which 50% are reflected as repricing pro rata 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. Mortgage-backed securities are scheduled over maturity periods based on Bloomberg median estimated prepayment speeds as of January 23, 2002. Other financial instruments are scheduled based 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. 23 The Company's risk-based and leverage capital ratios exceeded these minimum requirements at December 31, 2001 and December 31, 2000 and are presented below, followed by the capital ratios of the Company's bank subsidiary at December 31, 2001. Consolidated Capital Ratios
December 31, --------------------- 2001 2000 ---------- --------- (Dollars in thousands) Tier 1 capital: Stockholders' equity ........................................................ $ 56,617 $ 48,349 Allowed amount of guaranteed preferred beneficial interest in Company's subordinated debentures (trust preferred securities) ...................... 17,250 16,617 Plus net unrealized losses on available for sale securities ................. 499 1,501 Less goodwill and certain intangible assets ................................. (2,823) (3,064) -------- -------- Total Tier 1 capital ................................................... 71,543 63,403 Tier 2 capital: Qualifying allowance for loan losses ........................................ 7,846 6,606 Remaining amount of guaranteed preferred beneficial interest in Company's subordinated debentures (trust preferred securities) ...................... - 633 -------- -------- Total risk-based capital ............................................... $ 79,389 $ 70,642 ======== ======== Risk-weighted assets ........................................................... $626,806 $550,516 ======== ======== Ratios at end of period: Leverage capital ............................................................ 8.51% 7.57% Tier 1 risk-based capital ................................................... 11.41 11.52 Total risk-based capital .................................................... 12.67 12.83 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, 2001 ----------------- Bank of the Ozarks (Dollars in Thousands) Stockholders' equity - Tier 1 ................ $ 69,645 Leverage capital ............................. 8.29% Tier 1 risk-based capital .................... 11.13 Total risk-based capital ..................... 12.38 (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. Liquidity and Capital Resources 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. Growth and Expansion. During 2001 the Company opened four new banking offices and one new loan production office. This gives the Company a total of 28 banking offices and one loan production office. The Company expects to open its new 24 Maumelle office in the first quarter of 2002 and plans to open at least two offices in the Conway, Arkansas market during 2002. Additional offices may be opened in 2002, including possible new offices in the metropolitan Little Rock area and Fort Smith. Capital expenditures were $4.0 million in 2001 and are expected to be in the range of $7 to $9 million for 2002. 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 and are subject to risks associated with borrowers ability to pay which may be impacted by national and local economic conditions. 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, 2001, the Company's bank subsidiary had substantial unused borrowing availability. This availability was primarily comprised of the following three sources: (1) $31.9 million of available blanket borrowing capacity with the Federal Home Loan Bank which offers various terms, (2) $8.9 million of securities available to pledge on a federal funds line of credit or for repurchase agreements or other borrowings and (3) up to $118.8 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 2001 the Company paid dividends of $0.46 per share. In 2000 and 1999 the Company paid dividends of $0.42 and $0.40 per share, respectively. Commencing in the third quarter of 2001 the dividend was increased from $0.11 per quarter to $0.12 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 $0.12 quarterly dividend with consideration to future changes depending on the Company's earnings, capital and liquidity needs. 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, including the impact of the current economic slowdown and its effect on the credit worthiness of borrowers and collateral values; 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. 25 Summary of Quarterly Results of Operations, Common Stock Market Prices and Dividends
2001 - Three Months Ended ------------------------------------------- Mar. 31 June 30 Sept. 30 Dec. 31 ------- ------- -------- ------- (Dollars in thousands, except per share amounts) Total interest income ................................. $ 15,374 $ 15,044 $ 14,782 $ 14,919 Total interest expense ................................ 9,362 8,115 6,957 5,980 -------- -------- -------- -------- Net interest income ................................ 6,012 6,929 7,825 8,939 Provision for loan losses ............................. 354 658 910 1,479 Non-interest income ................................... 1,657 1,920 1,737 2,039 Non-interest expense .................................. 4,296 4,746 4,816 5,171 Income taxes .......................................... 760 835 1,138 1,348 Distributions on trust preferred securities ........... 397 397 397 397 -------- -------- -------- -------- Net income ......................................... $ 1,862 $ 2,213 $ 2,301 $ 2,583 ======== ======== ======== ======== Per share: Earnings - diluted ................................. $ 0.49 $ 0.58 $ 0.60 $ 0.67 Cash dividends ..................................... 0.11 0.11 0.12 0.12 Bid price per common share: Low ................................................ $ 12.63 $ 13.00 $ 19.38 $ 20.75 High ............................................... 14.75 20.20 24.10 25.60 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
See Note 14 to Consolidated Financial Statements for discussion of dividend restrictions. 26 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, 2001 and 2000, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. 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, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Little Rock, Arkansas January 10, 2002 27 Bank of the Ozarks, Inc. CONSOLIDATED BALANCE SHEETS December 31, ------------------------ 2001 2000 -------- -------- (Dollars in thousands, except per share amounts) ASSETS ------ Cash and due from banks $ 31,114 $ 20,523 Interest-bearing deposits 218 217 -------- -------- Cash and cash equivalents 31,332 20,740 Investment securities - available for sale 182,704 51,696 Investment securities - held to maturity (estimated market value: $4,501 in 2001 and $197,619 in 2000) 4,463 201,320 Federal funds sold - 2,000 Loans, net of unearned income 616,076 510,544 Allowance for loan losses (8,712) (6,606) -------- -------- Net loans 607,364 503,938 Premises and equipment, net 33,123 30,535 Foreclosed assets held for sale, net 661 1,600 Interest receivable 5,821 8,894 Intangible assets, net 2,823 3,064 Other 3,088 3,165 -------- -------- Total assets $871,379 $826,952 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Deposits Demand non-interest bearing $ 72,801 $ 64,572 Savings and interest-bearing transaction 241,042 113,606 Time 363,900 499,505 -------- -------- Total deposits 677,743 677,683 Repurchase agreements with customers 16,213 13,839 Other borrowings 99,690 66,703 Accrued interest and other liabilities 3,866 3,128 -------- -------- Total liabilities 797,512 761,353 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, 3,782,055 and 3,779,555 shares issued and outstanding in 2001 and 2000, respectively 38 38 Additional paid-in capital 14,360 14,314 Retained earnings 42,718 35,498 Accumulated other comprehensive loss (499) (1,501) -------- -------- Total stockholders' equity 56,617 48,349 -------- -------- Total liabilities and stockholders' equity $871,379 $826,952 ======== ======== The accompanying notes are an integral part of these consolidated financial statements 28 Bank of the Ozarks, Inc. CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31, ----------------------------------------------- 2001 2000 1999 ------- ------- ------- (Dollars in thousands, except per share amounts) Interest income Loans $47,464 $43,451 $37,008 Investment securities - taxable 11,203 15,331 12,847 - nontaxable 1,403 1,953 1,675 Deposits with banks and federal funds sold 49 17 45 ------- ------- ------- Total interest income 60,119 60,752 51,575 ------- ------- ------- Interest expense Deposits 25,300 29,701 23,831 Repurchase agreements with customers 537 680 132 Other borrowings 4,577 6,708 3,819 ------- ------- ------- Total interest expense 30,414 37,089 27,782 ------- ------- ------- Net interest income 29,705 23,663 23,793 Provision for loan losses (3,401) (2,325) (2,485) ------- ------- ------- Net interest income after provision for loan losses 26,304 21,338 21,308 ------- ------- ------- Other income Trust income 604 592 479 Service charges on deposit accounts 3,776 3,380 2,499 Other income, charges and fees 2,602 1,530 1,936 Gain on sale of securities 153 - 69 Other 218 40 164 ------- ------- ------- Total other income 7,353 5,542 5,147 ------- ------- ------- Other expense Salaries and employee benefits 10,551 8,928 8,752 Net occupancy and equipment 3,098 2,910 2,655 Other operating expenses 5,381 5,126 5,057 ------- ------- ------- Total other expense 19,030 16,964 16,464 ------- ------- ------- Income before income taxes and trust distribution 14,627 9,916 9,991 Distributions on trust preferred securities 1,587 1,587 846 Provision for income taxes 4,081 2,289 2,510 ------- ------- ------- Net income $ 8,959 $ 6,040 $ 6,635 ======= ======= ======= Basic earnings per common share $ 2.37 $ 1.60 $ 1.76 ======= ======= ======= Diluted earnings per common share $ 2.35 $ 1.60 $ 1.75 ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements 29 Bank of the Ozarks, Inc. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated Additional Other Common Paid-In Retained Comprehensive Stock Capital Earnings Income (Loss) Total ------- ---------- -------- -------------- ------- (Dollars in thousands, except per share amounts) Balance - January 1, 1999 $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 (loss) 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 Comprehensive income: Net income - - 8,959 - 8,959 Other comprehensive income Unrealized gains on available for sale securities net of $457 tax effect - - - 737 737 Reclassification adjustment for gains included in income net of $164 tax effect - - - 265 265 ------- Comprehensive income 9,961 Dividends paid, $0.46 per share - - (1,739) - (1,739) Issuance of 2,500 shares of common stock for exercise of stock options including tax benefits of $5 - 46 - - 46 --- ------- ------- ------ ------- Balance - December 31, 2001 $38 $14,360 $42,718 $ (499) $56,617 === ======= ======= ====== =======
The accompanying notes are an integral part of these consolidated financial statements 30 Bank of the Ozarks, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, ------------------------------- 2001 2000 1999 --------- --------- --------- (Dollars in thousands) Cash flows from operating activities Net income $ 8,959 $ 6,040 $ 6,635 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 1,460 1,490 1,375 Amortization 276 293 262 Provision for loan losses 3,401 2,325 2,485 Provision for losses on foreclosed assets 163 183 90 Amortization and accretion on investment securities (130) (104) (132) Gain on sale of investment securities (153) - (69) (Increase) decrease in mortgage loans held for sale (12,308) 545 4,308 Gain on disposition of premises and equipment - (8) (40) (Gain) loss on disposition of foreclosed assets (2) 45 28 Deferred income taxes (569) 405 (139) Changes in assets and liabilities: Interest receivable 3,073 (1,720) (1,657) Other assets, net (11) 128 (1,500) Accrued interest and other liabilities 741 155 1,017 --------- --------- --------- Net cash provided by operating activities 4,900 9,777 12,663 --------- --------- --------- Cash flows from investing activities Proceeds from sales and maturities of investment securities available for sale 48,302 316 19,922 Purchases of investment securities available for sale (177,681) (7,093) (49,635) Proceeds from maturities of investment securities held to maturity 197,135 20,176 42,293 Purchases of investment securities held to maturity - (2,880) (101,756) Increase (decrease) in federal funds sold 2,000 (2,000) - Net increase in loans (96,515) (48,862) (89,630) Proceeds from sale of loans - - 994 Proceeds from dispositions of premises and equipment - 99 317 Purchases of premises and equipment (4,048) (1,570) (5,048) Proceeds from dispositions of foreclosed assets 2,775 3,524 1,454 --------- --------- --------- Net cash used in investing activities (28,032) (38,290) (181,089) --------- --------- --------- Cash flows from financing activities Net increase in deposits 60 81,752 66,890 Net proceeds (repayments) from other borrowings 32,988 (60,287) 87,718 Net increase in repurchase agreements with customers 2,374 4,813 7,618 Proceeds from trust preferred securities - - 17,250 Proceeds on exercise of stock options 41 - - Dividends paid (1,739) (1,587) (1,512) --------- --------- --------- Net cash provided by financing activities 33,724 24,691 177,964 --------- --------- --------- Net increase (decrease) in cash and cash equivalents 10,592 (3,822) 9,538 Cash and cash equivalents - beginning of year 20,740 24,562 15,024 --------- --------- --------- Cash and cash equivalents - end of year $ 31,332 $ 20,740 $ 24,562 ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements 31 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 named Bank of the Ozarks 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. 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 and other comprehensive income. 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. Interest on 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. 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 32 Notes to Consolidated Financial Statements, Dollars in Thousands, Except Per Share Data 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, improvements and 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. Valuations are periodically performed by management and the real estate is carried at the lower of book value 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 in 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 is 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 $1,765 and $1,524 at December 31, 2001 and 2000, 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 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 $583, $551 and $612 for the years ended December 31, 2001, 2000 and 1999, respectively. Stock-based compensation - The Company has elected to follow Accounting ------------------------ Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations in accounting for its employee stock options. Under APB 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. Recent Accounting Pronouncements - In June 2001, the Financial Accounting -------------------------------- Standards Board issued Statements of Financial Accounting Standards No. 141, "Business Combinations", and No. 142, "Goodwill and Other Intangible Assets", effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the statements. Other intangible assets such as core deposit intangibles will continue to be amortized over their useful lives. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. During 2002, the Company will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002. The Company does not expect the adoption of these accounting standards to have a significant impact on the operating results and financial position of the Company. Reclassifications - Certain reclassifications of 2000 and 1999 amounts have ----------------- been made to conform with the 2001 financial statements presentation. 33 Notes to Consolidated Financial Statements, Dollars in Thousands, Except Per Share Data 2. Investment Securities The following is a summary of the amortized cost and estimated market values of investment securities:
December 31, 2001 -------------------------------------------------- Amortized Unrealized Unrealized Market Cost Gains Losses Value --------- ------ --------- ---------- Securities - available for sale: Securities of United States government and agencies $ 69,912 $ 429 $ (164) $ 70,177 Mortgage-backed securities 91,726 138 (630) 91,234 State and political subdivisions 17,121 81 (662) 16,540 Other securities 4,753 - - 4,753 --------- ------ --------- ---------- Total securities - available for sale $ 183,512 $ 648 $ (1,456) $ 182,704 ========= ====== ========= ========== Securities - held to maturity: Securities of United States government and agencies $ - $ - $ - $ - State and political subdivisions 1,580 32 - 1,612 Other securities 2,883 6 - 2,889 --------- ------ --------- ---------- Total securities - held to maturity $ 4,463 $ 38 $ - $ 4,501 ========= ====== ========= ========== 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 2,980 6 - 2,986 --------- ------ --------- ---------- Total securities - held to maturity $ 201,320 $ 22 $ (3,723) $ 197,619 ========= ====== ========= ==========
34 Notes to Consolidated Financial Statements, Dollars in Thousands, Except Per Share Data A maturity distribution of available-for-sale and held-to-maturity investment securities reflected at amortized cost and estimated market value as of December 31, 2001 is as follows:
Available for Sale Held to Maturity ------------------------- ---------------------- Estimated Estimated Amortized Market Amortized Market Cost Value Cost Value --------- --------- ------- ------- Due in one year or less $ 15,011 $ 15,013 $ 171 $ 172 Due after one year to five years 115,273 115,527 964 981 Due after five years to ten years 26,531 26,562 445 459 Due after ten years 26,697 25,602 2,883 2,889 --------- --------- ------- ------- Totals $ 183,512 $ 182,704 $ 4,463 $ 4,501 ========= ========= ======= =======
----------------------------------------------- For purposes of this maturity distribution all securities are shown based on their contractual maturity date, except equity securities with no contractual maturity date which are shown in the longest maturity category and mortgage-backed securities which are allocated among various maturities based on an estimated repayment schedule utilizing Bloomberg median prepayment speeds. 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. During the year ended December 31, 2001 investment securities available-for- sale with a fair value at the date of sale of $35,153 were sold. In the year ended December 31, 2000 no securities were sold. In the year ended December 31, 1999 investment securities available-for-sale with a fair value of $18,408 were sold. The gross realized gains on such sales in 2001 and 1999 totaled $273 and $78, respectively. The gross realized losses totaled $83 in 2001 and $9 in 1999. The Company maintained a trading account of up to $200 during part of 2001. No trading account securities were held at December 31, 2001. The Company had no trading securities during 2000 or 1999. The gross realized gains on trading securities in 2001 totaled $3 and gross realized losses totaled $40. Assets, principally investment securities, having a carrying value of approximately $173,684 and $229,853 at December 31, 2001 and 2000, 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, ---------------------- 2001 2000 -------- -------- Real Estate: Residential 1-4 family $167,559 $144,920 Non-farm/non-residential 180,257 134,726 Agricultural 45,303 38,808 Construction/land development 51,140 42,354 Multifamily residential 20,850 8,367 Consumer 55,805 58,430 Commercial and industrial 78,324 63,799 Agricultural (non-real estate) 12,866 14,605 Other 3,972 4,535 -------- -------- Loans, net of unearned discounts $616,076 $510,544 ======== ======== These loan categories are presented net of unearned income, unearned purchase discounts and deferred costs totaling $750 and $799 at December 31, 2001 and 2000, respectively. Loans on which the accrual of interest has been discontinued aggregated $1,806 and $1,880 at December 31, 2001 and 2000, respectively. Interest income recorded during 2001 for non-accrual loans at December 31, 2001 was $117. Under the original terms, these loans would have reported approximately $175 of interest income during 2001. The Company did not segregate income recognized on a cash basis in its financial records in 2000 and 1999, and thus, such disclosure is not practical. Mortgage loans held for resale of $14,140 and $1,832 at December 31, 2001 and 2000, respectively, are included in residential 1-4 family loans. The carrying value of these loans approximates their fair value. Other income, charges and fees include mortgage lending income of $1,920, $849 and $1,306 during 2001, 2000 and 1999, respectively. 4. Allowance for Loan Losses The following is a summary of activity within the allowance for loan losses: Year Ended December 31, ---------------------------- 2001 2000 1999 ------ ------ ------ Balance - beginning of year $6,606 $6,072 $4,689 Loans charged-off (1,420) (1,998) (1,225) Recoveries on loans previously charged-off 125 207 123 ------ ------ ------ Net Charge-offs (1,295) (1,791) (1,102) Provision charged to operating expense 3,401 2,325 2,485 ------ ------ ------ Balance - end of year $8,712 $6,606 $6,072 ====== ====== ====== Impairment of loans having carrying values of $1,806 and $1,880 (all of which were on a non-accrual basis) at December 31, 2001 and 2000, 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 $323 and $212 at December 31, 2001 and 2000, respectively. The average carrying value of impaired loans was $1,659, $2,748 and $3,611, for the years ended December 31, 2001, 2000 and 1999, respectively. For impairment recognized in conformity with SFAS 114, as amended, the entire change in present value of expected cash 35 Notes to Consolidated Financial Statements, Dollars in Thousands, Except Per Share Data flows is reported as provision for loan losses in the same manner in which impairment 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 $1,336 and $2,641 was transferred to foreclosed assets held for sale in 2001 and 2000, respectively. The Company 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, -------------------- 2001 2000 ------- ------- Land $ 8,088 $ 7,289 Construction in process 496 369 Buildings and improvements 21,696 19,408 Leasehold improvements 2,660 2,460 Equipment 7,910 7,926 ------- ------- 40,850 37,452 Accumulated depreciation (7,727) (6,917) ------- ------- Premises and equipment, net $33,123 $30,535 ======= ======= The Company capitalized $53, $52 and $51 of interest on construction projects during the years ended December 31, 2001, 2000 and 1999, respectively. Included in occupancy expense is rent of approximately $162, $123 and $71 incurred under noncancelable operating leases in 2001, 2000 and 1999, 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, 2001 are $163 -- 2002, $161 -- 2003, $143 -- 2004, $126 -- 2005, $102 -- 2006 and $775 -- thereafter. 6. Deposits The aggregate amount of time deposits with a minimum denomination of $100 was $190,615 and $265,345 at December 31, 2001 and 2000, respectively. The following is a summary of the scheduled maturities of all time deposits: December 31, ---------------------- 2001 2000 -------- -------- Up to one year $352,098 $470,707 One year to two years 8,003 24,543 Two years to three years 2,148 1,954 Three years to four years 578 1,019 Four years to five years 334 556 Thereafter 739 726 -------- -------- Total time deposits $363,900 $499,505 ======== ======== 7. Borrowings Short-term borrowings with maturities less than one year include FHLB advances, Federal Reserve Bank borrowings, 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, -------------------- 2001 2000 ------- ------- Average annual balance $14,299 $28,700 December 31 balance 18,247 1,062 Maximum month-end balance during year 40,793 45,702 Interest rate: Weighted average 3.54% 6.37% December 31 1.74 5.00 The following is a summary of long term borrowings: December 31, -------------------- 2001 2000 ------- ------- FHLB advances with original maturities exceeding one year. Interest rates range from 2.49% to 6.43% at December 31, 2001. At December 31, 2001, the Company's bank subsidiary had remaining $31,936 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. $81,383 $65,581 Other 60 60 ------- ------- $81,443 $65,641 ======= ======= Maturities of long term borrowings at December 31, 2001 are as follows: 2002 -- $198; 2003 -- $20,258; 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. 36 Notes to Consolidated Financial Statements, Dollars in Thousands, Except Per Share Data 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 regulatory 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, ------------------------------ 2001 2000 1999 ------ ------ ------ Current: Federal $4,520 $1,884 $2,814 State 130 - (165) ------ ------ ------ Total current 4,650 1,884 2,649 ------ ------ ------ Deferred: Federal (515) 405 (146) State (54) - 7 ------ ------ ------ Total deferred (569) 405 (139) ------ ------ ------ Provision for income taxes $4,081 $2,289 $2,510 ====== ====== ====== The reconciliation between the statutory federal income tax rate and effective income tax rate is as follows: Year Ended December 31, -------------------------- 2001 2000 1999 ---- ---- ---- Statutory federal income tax rate 35.0% 34.0% 34.0% State income taxes, net of federal benefit 0.9 - - Effect of non-taxable interest income (3.6) (7.1) (5.7) Refund of prior years state income tax (0.7) - (1.1) Effect of graduated rate differential (0.9) - - Other 0.6 0.6 0.2 ---- ---- ---- Effective income tax rate 31.3% 27.5% 27.4% ==== ==== ==== In 2001 and 1999 the Company recorded tax refunds of a state income tax assessment the Company had paid and expensed in 1997. These settlements resulted in a refund of $147 of tax and $123 of interest in 2001 and a refund of $153 of tax and $91 of interest in 1999. These amounts were recorded as a credit to tax expense and other income, respectively, for the years 2001 and 1999. 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, ------------------ 2001 2000 ------ ------ Deferred tax assets: Allowance for loan losses $3,207 $2,153 Valuation of foreclosed assets 34 40 Unrealized depreciation on securities available for sale 309 931 ------ ------ Gross deferred tax assets 3,550 3,124 Deferred tax liabilities: Accelerated depreciation on premises and equipment 1,635 1,269 Other 531 418 ------ ------ Gross deferred tax liabilities 2,166 1,687 ------ ------ Net deferred tax assets included in other assets $1,384 $1,437 ====== ====== 37 Notes to Consolidated Financial Statements, Dollars in Thousands, Except Per Share Data 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. 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 2001, 2000 and 1999 of $157, $160 and $146, 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 385,000 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, ----------------------------------------------------------------- 2001 2000 1999 ----------------- -------------------- ------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price -------- ------ ------- ----- ------- ------ Outstanding - beginning of year 307,775 $ 17.08 254,100 $19.72 198,050 $ 20.42 Granted 38,450 19.56 105,650 12.26 71,500 17.96 Exercised (2,500) 16.24 - - Canceled (14,575) 18.31 (51,975) 20.15 (15,450) 20.57 -------- ------- -------- Outstanding - end of year 329,150 $ 17.33 307,775 $17.08 254,100 $ 19.72 ======== ======= ======== Exercisable at end of year 129,500 $ 19.71 144,825 $18.68 83,200 $ 22.20 ======== ======= ========
38 Notes to Consolidated Financial Statements, Dollars in Thousands, Except Per Share Data Exercise prices for options outstanding as of December 31, 2001 ranged from $11.85 to $34.13. The weighted-average fair value of options granted during 2001, 2000 and 1999 was $5.47, $4.22 and $6.85, respectively. The weighted-average remaining contractual life of the options issued in 2001 is 7.3 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: 2001 2000 1999 ---- ---- ---- Risk-free interest rate 4.13% 5.71% 5.71% Dividend yield 2.38 2.77 2.00 Expected dividend yield increase 9.00 9.00 12.00 Expected stock volatility 33.13 38.88 42.16 Weighted average expected life 5 years 5 years 5 years For purposes of pro forma disclosures as required by SFAS No. 123, the estimated fair value of the options is amortized over the options' vesting period. The following table represents the required pro forma disclosures for options granted subsequent to December 31, 1996: 2001 2000 1999 ---- ---- ---- Pro forma net income $8,674 $5,797 $6,243 Pro forma earnings per share: Basic $ 2.29 $ 1.53 $ 1.65 Diluted 2.27 1.53 1.64 ------------------------------------------------------ The following is a summary of currently outstanding and exercisable options at December 31, 2001:
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 ------------ ----------- --------------- -------- ----------- -------- $11.85-19.19 228,400 4.8 $14.78 69,500 $16.31 21.50-27.75 94,750 4.1 22.39 54,000 22.49 34.13 6,000 6.3 34.13 6,000 34.13 ------- ------- 329,150 129,500 ======= =======
------------------------------------------------------ 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 $70,798 and $53,803 at December 31, 2001 and 2000, 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 $3,662 and $1,922 at December 31, 2001 and 2000, 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 Company has entered into transactions with its executive officers, directors, principal shareholders, and their affiliates (related parties). The aggregate amount of loans to such related parties at December 31, 2001 and 2000 was $14,587 and $8,061, respectively. New loans and advances on prior commitments made to such related parties were $14,186, $13,955 and $3,263 for the years ended December 31, 2001, 2000 39 Notes to Consolidated Financial Statements, Dollars in Thousands, Except Per Share Data and 1999, respectively. Repayments of loans made by such related parties were $7,660, $13,407 and $1,067 for the years ended December 31, 2001, 2000 and 1999, respectively. During 2001, 2000 and 1999 the Company incurred costs in connection with construction of eight banking buildings or facilities. The majority owner of the contractor on five of these construction projects is a member of the Company's Board of Directors. Total payments to the contractor for these projects and certain renovation type contracts during the years ended December 31, 2001, 2000 and 1999 were approximately $545, $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, 2001 December 31, 2000 -------------------- -------------------- Computed Computed Computed Computed Capital Percent Capital Percent -------- -------- -------- -------- Bank of the Ozarks, Inc. (consolidated): Total risk-based capital $79,389 12.67% $70,642 12.83% Tier 1 risk-based capital 71,543 11.41 63,403 11.52 Leverage ratio - 8.51 - 7.57 Bank of the Ozarks: Total risk-based capital $77,479 12.38% $68,963 12.54% Tier 1 risk-based capital 69,645 11.13 62,357 11.34 Leverage ratio - 8.29 - 7.45
As of December 31, 2001 and 2000, 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, 2001, the subsidiary bank exceeded its minimum capital requirements. As of December 31, 2001, 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. $7,429 was available at December 31, 2001, 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, 2001, the maximum amount available for transfer from the subsidiary bank to the Company in the form of loans is limited to 10% of the bank's total risk-based capital or approximately $7,748. 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, 2001 and 2000, these required balances aggregated $958 and $678, 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. 40 Notes to Consolidated Financial Statements, Dollars in Thousands, Except Per Share Data 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 counterparties. 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 counterparties 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.
2001 2000 ------------------------- ----------------------- Carrying Fair Carrying Fair Amount Value Amount Value --------- -------- ---------- -------- Financial assets: Cash and cash equivalents $ 31,332 $ 31,332 $ 20,740 $ 20,740 Available-for-sale securities 182,704 182,704 51,696 51,696 Held-to-maturity securities 4,463 4,501 201,320 197,619 Loans, net of allowance for loan losses 607,364 618,374 503,938 501,842 Accrued interest receivable 5,821 5,821 8,894 8,894 Financial liabilities: Demand, NOW and savings account deposits $ 313,843 $ 313,843 $ 178,178 $ 178,178 Time deposits 363,900 365,753 499,505 502,214 Repurchase agreements with customers 16,213 16,225 13,839 13,844 Other borrowings 99,690 102,011 66,703 70,038 Accrued interest and other liabilities 3,866 3,866 3,128 3,128 Off-balance sheet items: Standby letters of credit $ - $ 3,662 $ - $ 1,922 Commitments to extend credit - 70,798 - 53,803
16. Supplemental Cash Flow Information Supplemental cash flow information is as follows:
Year Ended December 31, ------------------------------------ 2001 2000 1999 ---- ---- ---- Cash paid during the period for: Interest $31,096 $36,909 $27,448 Income taxes 4,205 1,927 2,314 Supplemental schedule of non-cash investing and financing activities: Transfer of loans to foreclosed assets held for sale 1,336 2,641 3,625 Loans advanced for sales of foreclosed assets 1,215 441 771 Change in unrealized loss (gain) in available for sale securities 1,623 (36) 2,600
41 Notes to Consolidated Financial Statements, Dollars in Thousands, Except Per Share Data 17. Other Operating Expenses The following is a summary of other operating expenses:
Year Ended December 31, ------------------------- 2001 2000 1999 ------ ------ ------ Telephone and data lines $ 728 $ 714 $ 604 Operating supplies 543 487 513 Advertising and public relations 583 551 612 Other 3,527 3,374 3,328 ------ ------ ------ Total other operating expenses $5,381 $5,126 $5,057 ====== ====== ======
18. Earnings Per Common Share The following table sets forth the computation of basic and diluted earnings per share ("EPS"):
Year Ended December 31, ------------------------- 2001 2000 1999 ------ ------ ------ Numerator: Net income $8,959 $6,040 $6,635 ====== ====== ====== Denominator: Denominator for basic EPS weighted average shares 3,781 3,780 3,780 Effect of dilutive securities: Stock options 35 2 12 ------ ------ ------ Denominator for diluted EPS - adjusted weighted average shares and assumed conversions 3,816 3,782 3,792 ====== ====== ====== Basic EPS $ 2.37 $ 1.60 $ 1.76 ====== ====== ====== Diluted EPS $ 2.35 $ 1.60 $ 1.75 ====== ====== ======
Options to purchase 101, 211 and 97 shares of common stock at prices ranging from $21.87 to $34.13 per share were outstanding during 2001, 2000 and 1999 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, ----------------- 2001 2000 ------- ------- Assets ------ Cash and cash equivalents $ 817 $ 720 Investment in subsidiaries 71,410 63,307 Premises and equipment, net 3 6 Excess cost over fair value of net assets acquired, at amortized cost 1,092 1,148 Debt issuance cost, net 936 970 Other 183 25 ------- ------- Total assets $74,441 $66,176 ======= ======= Liabilities and Stockholders' Equity ------------------------------------ Accrued interest and other liabilities $ 40 $ 43 Notes payable - - Subordinated debentures 17,784 17,784 ------- ------- Total liabilities 17,824 17,827 ------- ------- Stockholders' equity Common stock 38 38 Additional paid-in capital 14,360 14,314 Retained earnings 42,718 35,498 Accumulated other comprehensive loss (499) (1,501) ------- ------- Total stockholders' equity 56,617 48,349 ------- ------- Total liabilities and stockholders' equity $74,441 $66,176 ======= =======
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Notes to Consolidated Financial Statements, Dollars in Thousands, Except Per Share Data Condensed Statements of Income Year Ended December 31, ----------------------------- 2001 2000 1999 ------- ------- -------- Income Dividends from subsidiaries $ 3,048 $ 2,748 $ 2,591 Other 88 29 92 ------- ------- -------- Total income 3,136 2,777 2,683 ------- ------- -------- Expenses Interest 1,635 1,636 1,257 Other operating expenses 486 477 777 ------- ------- -------- Total expenses 2,121 2,113 2,034 ------- ------- -------- Income before income tax benefit and equity in undistributed earnings of subsidiaries 1,015 664 649 Income tax benefit 843 672 743 Equity in undistributed earnings of subsidiary 7,101 4,704 5,243 ------- ------- -------- Net income $ 8,959 $ 6,040 $ 6,635 ======= ======= ======== Condensed Statements of Cash Flows Year Ended December 31, ----------------------------- 2001 2000 1999 ------- ------- -------- Cash flows from operating activities Net income $ 8,959 $ 6,040 $ 6,635 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 3 8 11 Amortization 90 90 75 Equity in undistributed earnings of subsidiaries (7,101) (4,704) (5,243) Changes in assets and liabilities: Accrued interest and other liabilities (3) (4) 27 Other, net (158) 188 (195) ------- ------- -------- Net cash provided by operating activities 1,790 1,618 1,310 ------- ------- -------- Cash flows from investing activities Investment in subsidiaries - - (3,534) ------- ------- -------- Net cash used in investing activities - - (3,534) ------- ------- -------- Cash flows from financing activities Issue common stock 46 - - Increase in deferred debt issuance cost - - (1,022) Issue subordinated debentures - - 17,784 Payments of notes payable - (24) (12,364) Dividends paid (1,739) (1,587) (1,512) ------- ------- -------- Net cash (used in) provided by financing activities (1,693) (1,611) 2,886 ------- ------- -------- Net increase in cash and cash equivalents 97 7 662 Cash and cash equivalents - beginning of period 720 713 51 ------- ------- -------- Cash and cash equivalents - end of period $ 817 $ 720 $ 713 ======= ======= ========
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