10-Q 1 d10q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q __________________ (Mark one) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2002 [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to ____________. Commission File Number 0-22759 BANK OF THE OZARKS, INC. (Exact name of registrant as specified in its charter) ARKANSAS 71-0556208 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 12615 CHENAL PARKWAY, LITTLE ROCK, ARKANSAS 72211 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (501) 978-2265 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practical date. Class Outstanding at March 31, 2002 ----------------------------------------- ------------------------------ Common Stock, $0.01 par value per share 3,784,480 BANK OF THE OZARKS, INC. FORM 10-Q March 31, 2002 INDEX PART I. Financial Information Item 1. Consolidated Balance Sheets as of March 31, 2002 and 2001 and December 31, 2001 1 Consolidated Statements of Income for the Three Months Ended March 31, 2002 and 2001 2 Consolidated Statements of Stockholders' Equity for the Three Months Ended March 31, 2002 and 2001 3 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2002 and 2001 4 Notes to Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Selected and Supplemental Financial Data 18 Item 3. Quantitative and Qualitative Disclosures About Market Risk 20 PART II. Other Information Item 1. Legal Proceedings 21 Item 2 Change in Securities N/A Item 3. Defaults Upon Senior Securities N/A Item 4. Submission of Matters to a Vote of Security Holders N/A Item 5. Other Information N/A Item 6. Exhibits and Reports on Form 8-K (a). Exhibits Reference is made to the Exhibit Index contained at the end of this report. (b). Reports on Form 8-K 22 Signature 23 Exhibit Index 24
BANK OF THE OZARKS, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share amounts) Unaudited
March 31, December 31, ---------------------------- ------------- 2002 2001 2001 --------- --------- ------------- ASSETS Cash and due from banks $ 17,662 $ 18,504 $ 31,114 Interest-earning deposits 226 212 218 Investment securities - available for sale 190,202 41,047 182,704 Investment securities - held to maturity 4,454 182,545 4,463 Loans, net of unearned income 616,695 520,852 616,076 Allowance for loan losses (8,963) (6,740) (8,712) --------- --------- ------------- Net loans 607,732 514,112 607,364 Premises and equipment, net 34,158 31,469 33,123 Foreclosed assets held for sale, net 547 1,333 661 Interest receivable 5,703 8,257 5,821 Goodwill 1,808 1,875 1,808 Core deposit intangible, net 977 1,129 1,015 Other 3,754 2,509 3,088 --------- --------- ------------- Total assets $ 867,223 $ 802,992 $ 871,379 ========= ========= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Demand - non-interest bearing $ 76,355 $ 63,537 $ 72,801 Savings and interest-bearing transaction 247,649 115,826 241,042 Time 351,640 462,409 363,900 --------- --------- ------------- Total deposits 675,644 641,772 677,743 Repurchase agreements with customers 17,570 16,858 16,213 Other borrowings 92,866 71,677 99,690 Accrued interest and other liabilities 5,547 4,435 3,866 --------- --------- ------------- Total liabilities 791,627 734,742 797,512 --------- --------- ------------- Guaranteed preferred beneficial interest in the Company's subordinated debentures 17,250 17,250 17,250 Stockholders' equity Preferred stock; $0.01 par value, 1,000,000 shares authorized, no shares issued and outstanding - - - Common stock; $0.01 par value, 10,000,000 shares authorized, 3,784,480, 3,779,555 and 3,782,055 shares issued and outstanding at March 31, 2002, March 31, 2001 and December 31, 2001, respectively. 38 38 38 Additional paid-in capital 14,410 14,314 14,360 Retained earnings 45,358 36,944 42,718 Accumulated other comprehensive loss (1,460) (296) (499) --------- --------- ------------- Total stockholders' equity 58,346 51,000 56,617 --------- --------- ------------- Total liabilities and stockholders' equity $ 867,223 $ 802,992 $ 871,379 ========= ========= =============
See accompanying notes to consolidated financial statements. 1 BANK OF THE OZARKS, INC. CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except per share amounts) Unaudited
Three Months Ended March 31, -------------------------- 2002 2001 ----------- ----------- Interest income Loans $ 11,802 $ 11,484 Investment securities - taxable 2,361 3,406 - non-taxable 214 467 Deposits with banks and federal funds sold 4 17 ----------- ----------- Total interest income 14,381 15,374 Interest expense Deposits 3,833 8,074 Repurchase agreements with customers 56 176 Other borrowings 1,158 1,112 ----------- ----------- Total interest expense 5,047 9,362 ----------- ----------- Net interest income 9,334 6,012 Provision for loan losses (550) (354) ----------- ----------- Net interest income after provision for loan losses 8,784 5,658 ----------- ----------- Other income Trust income 162 173 Service charges on deposit accounts 1,505 842 Other income, charges and fees 703 528 Gain (loss) on sale of securities (217) 113 Other 39 1 ----------- ----------- Total other income 2,192 1,657 ----------- ----------- Other expense Salaries and employee benefits 3,202 2,359 Net occupancy and equipment 859 728 Other operating expenses 1,575 1,209 ----------- ----------- Total other expense 5,636 4,296 ----------- ----------- Income before income taxes and trust distributions 5,340 3,019 Distributions on trust preferred securities 397 397 Provision for income taxes 1,849 760 ----------- ----------- Net income $ 3,094 $ 1,862 =========== =========== Basic earnings per common share $ 0.82 $ 0.49 =========== =========== Diluted earnings per common share $ 0.80 $ 0.49 =========== =========== Dividends declared per common share $ 0.12 $ 0.11 =========== ===========
See accompanying notes to consolidated financial statements. 2 BANK OF THE OZARKS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Dollars in thousands) Unaudited
Accumulated Additional Other Common Paid-In Retained Comprehensive Stock Capital Earnings Income (Loss) Total ------------ ----------- ------------ -------------- -------- Balance - January 1, 2001 $ 38 $14,314 $35,498 $(1,501) $48,349 Comprehensive income: Net income 1,862 1,862 Other comprehensive income Unrealized gains on available for sale securities net of $577 tax effect 930 930 Reclassification adjustment for losses included in income net of $170 tax effect 275 275 -------- Comprehensive income 3,067 Cash dividends (416) (416) ---------- ------------ ------------ ------------ -------- Balance - March 31, 2001 $ 38 $14,314 $36,944 $ (296) $51,000 ========== ============ ============ ============ ========= Balance - January 1, 2002 $ 38 $14,360 $42,718 $ (499) $56,617 Comprehensive income: Net income 3,094 3,094 Other comprehensive income Unrealized losses on available for sale securities net of $652 tax effect (1,051) (1,051) Reclassification adjustment for losses included in income net of $56 tax effect 90 90 -------- Comprehensive income 2,133 Cash dividends (454) (454) Issuance of 2,425 shares of common stock from exercise of stock options, including tax benefits of $10 50 50 ---------- ------------ ------------ ------------ -------- Balance - March 31, 2002 $ 38 $14,410 $45,358 $(1,460) $58,346 ========== ============ ============ ============ ========
See accompanying notes to consolidated financial statements. 3 BANK OF THE OZARKS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) Unaudited
Three Months Ended March 31, ------------------------------- 2002 2001 ------------ ------------ Cash flows from operating activities Net income $ 3,094 $ 1,862 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 390 344 Amortization 47 69 Provision for loan losses 550 354 Provision for losses on foreclosed assets 10 67 Amortization and accretion on investment securities 80 (30) Gain (loss) on sale of securities 217 (113) Decrease (increase) in mortgage loans held for sale 10,113 (3,025) (Gain) loss on disposition of foreclosed assets (9) 7 Deferred income taxes (154) (67) Changes in assets and liabilities: Interest receivable 118 638 Other assets, net 77 (35) Accrued interest and other liabilities 1,691 1,307 ------------ ------------ Net cash provided by operating activities 16,224 1,378 ------------ ------------ Cash flows from investing activities Proceeds from sales and maturities of investment securities available for sale 36,993 13,393 Purchases of investment securities available for sale (46,346) (664) Proceeds from maturities of investment securities held to maturity 10 18,791 Decrease in federal funds sold - 2,000 Net increase in loans (11,472) (7,735) Purchase of bank premises and equipment (1,426) (1,278) Proceeds from dispositions of foreclosed assets 553 625 ------------ ---------- Net cash (used in) provided by investing activities (21,688) 25,132 ------------ ---------- Cash flows from financing activities Net decrease in deposits (2,098) (35,911) Net (repayments) proceeds from other borrowings (6,825) 4,974 Net increase in repurchase agreements 1,357 3,019 Proceeds on exercise of stock options 40 - Dividends paid (454) (416) ------------ ---------- Net cash used in financing activities (7,980) (28,334) ------------ ---------- Net decrease in cash and cash equivalents (13,444) (1,824) Cash and cash equivalents - beginning of period 31,332 20,540 ------------ ---------- Cash and cash equivalents - end of period $ 17,888 $ 18,716 ============ ==========
See accompanying notes to consolidated financial statements. 4 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Principles of Consolidation: The consolidated financial statements of Bank of the Ozarks, Inc. include the accounts of the parent company and its wholly owned subsidiaries, including Bank of the Ozarks, a state chartered bank, and Ozark Capital Trust (collectively the "Company"). All material intercompany transactions have been eliminated. 2. Basis of Presentation: The accompanying consolidated financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") in Article 10 of Regulation S-X and with the instructions to Form 10-Q, and in accordance with accounting principles generally accepted in the United States for interim financial information. Certain information, accounting policies and footnote disclosures normally included in complete financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted in accordance with such rules and regulations. It is therefore suggested that these consolidated financial statements be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2001. In the opinion of management all adjustments considered necessary, consisting of normal recurring items, have been included for a fair presentation of the accompanying consolidated financial statements. Operating results for the three months ended March 31, 2002 are not necessarily indicative of the results that may be expected for the full year. 3. Earnings Per Common Share: Basic EPS is computed by dividing reported earnings available to common stockholders by weighted average shares outstanding. Diluted EPS includes only the dilutive effect of stock options. In computing dilution for stock options, the average share price is used for the reporting period. The Company had outstanding stock options to purchase approximately 17,800 shares at March 31, 2002 and 205,700 shares at March 31, 2001 that were not included in the dilutive EPS calculation for these respective three month periods because they would have been antidilutive. Basic and diluted earnings per common share are computed as follows: Three Months Ended March 31, 2002 2001 ------ ------ (In thousands, except per share amounts) Common shares - weighted averages (basic) ..... 3,784 3,780 Common share equivalents - weighted averages .. 79 9 ----- ----- Common shares - diluted ....................... 3,863 3,789 ===== ===== Net income .................................... $3,094 $1,862 Basic earnings per common share ............... $ 0.82 $ 0.49 Diluted earnings per common share ............. 0.80 0.49 (The remainder of this page intentionally left blank) 5 4. Federal Home Loan Bank ("FHLB") Advances FHLB advances with original maturities exceeding one year totaled $81.2 million at March 31, 2002. Interest rates on these advances ranged from 2.49% to 6.43% at March 31, 2002 with a weighted average rate of 5.46%. Aggregate annual maturities (amounts in thousands) and weighted average interest rates of FHLB advances with an original maturity of over one year at March 31, 2002 are as follows: Weighted Amounts Average Rate ------- ------------ 2003 $20,198 3.03% 2004 198 6.30 2005 198 6.30 2006 197 6.30 Thereafter 60,395 6.27 -------- $81,186 5.46% ======= FHLB advances of $60.0 million maturing in 2010 may be called quarterly and if called the Company expects to refinance with short-term FHLB advances, other short-term funding sources or FHLB long-term callable advances. At March 31, 2002 the Company had no short-term FHLB advances. 5 Guaranteed Preferred Beneficial Interest in the Company's Subordinated Debentures On June 18, 1999 Ozark Capital Trust ("Ozark Capital"), a Delaware business trust wholly owned by Bank of the Ozarks, Inc., sold to investors in a public underwritten offering $17.3 million of 9% cumulative trust preferred securities. The proceeds were used to purchase an equal principal amount of 9% subordinated debentures of Bank of the Ozarks, Inc. Bank of the Ozarks, Inc. has, through various contractual arrangements, fully and unconditionally guaranteed all obligations of Ozark Capital on a subordinated basis with respect to the preferred securities. Subject to certain limitations, the preferred securities qualify as Tier 1 capital and are presented in the Consolidated Balance Sheets as "Guaranteed preferred beneficial interest in the Company's subordinated debentures." The sole asset of Ozark Capital is the subordinated debentures issued by Bank of the Ozarks, Inc. Both the preferred securities of Ozark Capital and the subordinated debentures of Bank of the Ozarks, Inc. will mature on June 18, 2029; however, they may be prepaid, subject to regulatory approval, prior to maturity at any time on or after June 18, 2004, or earlier upon certain changes in tax or investment company laws or regulatory capital requirements. 6. Supplementary Data for Cash Flows: Cash payments for interest by the Company during the three months ended March 31, 2002 amounted to $4.8 million and during the three months ended March 31, 2001 amounted to $10.0 million. Cash payments for income taxes during the three months ended March 31, 2002 was $488,000 and for the three months ended March 31, 2001 was $10,000. 7. Recent Account 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. Goodwill amortization was not material to the three months ended March 31, 2001. During the second quarter of 2002 the Company will perform the first of the required impairment test of goodwill as of January 1, 2002. The Company does not expect to record an impairment loss as a result of this test. 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General Net income was $3,094,000 for the first quarter of 2002, a 66.2% increase from net income of $1,862,000 for the same quarter in 2001. Diluted earnings increased 63.3% to $0.80 per share for the quarter ended March 31, 2002, compared to $0.49 per share for the same quarter in 2001. The Company's annualized returns on average assets and on average stockholders' equity were 1.46% and 21.87%, respectively, for the first quarter of 2002, compared with 0.92% and 15.25%, respectively, for the same quarter of 2001. Total assets declined from $871 million at December 31, 2001 to $867 million at March 31, 2002. Loans were $617 million at March 31, 2002, compared to $616 million at December 31, 2001. Deposits were $676 million at March 31, 2002, compared to $678 million at December 31, 2001. Stockholders' equity increased from $56.6 million at December 31, 2001, to $58.3 million at March 31, 2002, resulting in book value per share increasing from $14.97 to $15.42. Annualized results for these interim periods may not be indicative of those for the full year or future periods. Analysis of Results of Operations The Company's results of operations depend primarily on net interest income, which is the difference between the interest income from earning assets, such as loans and investments, and the interest expense incurred on interest bearing liabilities, such as deposits and other borrowings. The Company also generates non-interest income, including service charges on deposit accounts, mortgage lending income, other charges and fees, trust income, and gains on sales of assets. The Company's non-interest expenses primarily consist of employee compensation and benefits, occupancy, equipment, and other operating expenses. The Company's results of operations are also impacted by its provision for loan losses. The following discussion provides a summary of the Company's operations for the three months ended March 31, 2002. (The remainder of this page intentionally left blank) 7 Net Interest Income Net interest income is analyzed in the discussion and tables below on a fully taxable equivalent ("FTE") basis. The adjustment to convert certain income to an FTE basis consists of dividing tax-exempt income by one minus the statutory federal income tax rate (35% in 2002, 34% in 2001 and prior years). Net interest income (FTE) increased 50.9% to $9,472,000 for the three months ended March 31, 2002 compared to $6,275,000 for the three months ended March 31, 2001. The growth in net interest income is primarily attributable to two factors - an increase in average earnings assets and continued improvement in net interest margin. Average earning assets increased 5.8% to $803.0 million for the first quarter of 2002 from the comparable period in 2001, due primarily to a 19.0% increase in average loans. Net interest margin, on a fully taxable equivalent basis, improved to 4.78% for the first quarter of 2002 compared to 3.35% for the first quarter of 2001, an increase of 143 basis points. The improvement in net interest margin was a result of a 265 basis point decline in interest bearing deposit and liability costs which more than offset a 103 basis point decline in earning asset yields. Loan yields declined 124 basis points from the first quarter of 2001 to the same period in 2002 principally as a result of the general decline in interest rates. Interest-bearing liability costs declined primarily as a result of a change in deposit mix and a general decline in interest rates. From the first quarter of 2001 to the first quarter of 2002, the average balance of CD's declined $128.6 million while lower costing savings and interest-bearing transaction accounts average balances increased $131.1 million. In the first quarter of 2002 non-CD deposits accounted for 47.0% of total average deposits, an improvement from 26.3% during the first quarter of 2001. Analysis of Net Interest Income (FTE = Fully Taxable Equivalent) Three Months Ended March 31, --------------------------- 2002 2001 ----------- ----------- (Dollars in thousands) Interest income ......................... $14,381 $15,374 FTE adjustment .......................... 138 263 --------- --------- Interest income - FTE ................... 14,519 15,637 Interest expense ........................ 5,047 9,362 -------- -------- Net interest income - FTE ............... $ 9,472 $ 6,275 ======= ======= Yield on interest earning assets - FTE .. 7.33% 8.36% Cost of interest bearing liabilities .... 2.88 5.53 Net interest spread - FTE ............... 4.45 2.83 Net interest margin - FTE ............... 4.78 3.35 (The remainder of this page intentionally left blank) 8 Average Consolidated Balance Sheet and Net Interest Analysis (Dollars in thousands)
Three Months Ended March 31, ------------------------------------------------------------------- 2002 2001 ---------------------------- ---------------------------------- Average Income/ Yield/ Average Income/ Yield/ ASSETS Balance Expense Rate Balance Expense Rate ------- ------- ---- ------- ------- ---- Earnings assets: Interest-bearing deposits and federal funds sold.......... $ 222 $ 4 7.50% $ 1,103 $ 17 6.24% Investment securities: Taxable ................................................ 173,216 2,361 5.53 205,012 3,406 6.74 Tax-exempt - FTE ....................................... 17,385 329 7.67 38,058 707 7.54 Loans - FTE (net of unearned income) ..................... 612,169 11,825 7.83 514,541 11,507 9.07 --------- ------- ---------- -------- Total earning assets .................................. 802,992 14,519 7.33 758,714 15,637 8.36 Non-earning assets ......................................... 59,315 59,880 --------- ---------- Total assets .......................................... $ 862,307 $ 818,594 ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: Deposits: Savings and interest-bearin transaction... ............... $ 243,402 $ 938 1.56% $ 112,299 $ 726 2.62% Time deposit of $100,000 or more ......................... 187,186 1,406 3.05 253,215 3,897 6.24 Other time deposits .................................... 170,191 1,489 3.55 232,782 3,451 6.01 --------- ------- ---------- -------- Total interest-bearing deposits ...................... 600,779 3,833 2.59 598,296 8,074 5.47 Repurchase agreements with customers ..................... 15,509 56 1.46 15,094 176 4.73 Other borrowings ......................................... 93,156 1,158 5.04 73,565 1,112 6.13 --------- ------- ---------- -------- Total interest-bearing liabilities ................... 709,444 5,047 2.88 686,955 9,362 5.53 Non-interest liabilities: Non-interest bearing deposits ............................ 73,712 61,158 Other non-interest liabilities ........................... 4,520 3,709 --------- ---------- Total liabilities .................................... 787,676 751,822 Trust preferred securities ................................. 17,250 17,250 Stockholders' equity ....................................... 57,381 49,522 --------- ---------- Total liabilities and stockholders equity ............ $ 862,307 $ 818,594 ========= ========== Interest rate spread - FTE ................................. 4.45% 2.83% ------- -------- Net interest income - FTE .................................. $ 9,472 $ 6,275 ======= ======== Net interest margin - FTE .................................. 4.78% 3.35%
(The remainder of this page intentionally left blank) 9 Non-Interest Income The Company's non-interest income can primarily be broken down into five main sources: (1) service charges on deposit accounts, (2) mortgage lending income, (3) other charges and fees including appraisal fees and commissions from the sale of credit related insurance products, (4) trust income and (5) net gains on sales of assets. Non-interest income for the first quarter of 2002 was $2,192,000 compared with $1,657,000 for the first quarter of 2001, a 32.3% increase. In the first quarter of 2002, the Company had net securities losses of $217,000 compared with $113,000 of security gains in the first quarter of 2001. During the first quarter, the Company sold approximately $8.7 million of non-rated municipal securities having an average maturity of approximately 16 years and replaced them with a like amount of AAA rated mortgaged backed securities having an expected average life of approximately four years. During the first quarter of 2002, the Company benefited from strong growth in service charges on deposit accounts which increased 78.7% from the comparable quarter of 2001. The introduction of the Company's new Bounce Proof Security product was a significant contributor to this increase along with the continued growth of new core deposit customers. The table below shows non-interest income for the three months ended March 31, 2002 and 2001. Non-Interest Income
Three Months Ended March 31, ------------------------- 2002 2001 ---------- --------- (Dollars in thousands) Service charges on deposit accounts ..... $ 1,505 $ 842 Mortgage lending income ................. 494 347 Other charges and fees .................. 170 155 Trust income ............................ 162 173 Gain (loss) on sale of other asset ...... 9 (11) (Loss) gain on sale of securities ....... (217) 113 Brokerage fee income .................... 39 26 Other ................................... 30 12 ------- ------- Total non-interest income ......... $ 2,192 $ 1,657 ======= =======
(The remainder of this page intentionally left blank) 10 Non-Interest Expense Non-interest expense for the first quarter of 2002 was $5,636,000 compared with $4,296,000 for the same period in 2001, a 31.2% increase. The Company's continued growth and expansion contributed to the increase in non-interest expense. During 2001 the Company opened four new banking offices and one loan production office. The Company opened its new Maumelle office and a temporary office in Conway during the first quarter of 2002. Non-interest expenses also increased during the first quarter of 2002 because of heavy advertising expenses, higher bonus accruals for our cash profit sharing bonus program, and increases in charges related to losses on overdraft deposit accounts as a result of our new Bounce Proof Security product. The table below shows non-interest expense for the three months ended March 31, 2002 and 2001. Non-Interest Expense
Three Months Ended March 31, ------------------------ 2002 2001 ---------- ---------- (Dollars in thousands) Salaries and employee benefits ................. $3,202 $2,359 Net occupancy expense .......................... 505 406 Equipment expense .............................. 354 322 Other operating expense: Professional and outside services .......... 67 48 Postage .................................... 86 88 Telephone .................................. 123 123 Data lines ................................. 52 66 Operating supplies ......................... 152 119 Advertising and public relations ........... 254 90 Software expense ........................... 95 93 Check printing charges ..................... 16 8 ATM expense ................................ 81 67 FDIC & state assessment .................... 83 67 Other real estate and foreclosure expense .. 42 135 Business development, meals and travel ..... 34 31 Amortization of goodwill ................... - 22 Amortization of other intangibles .......... 38 38 Other ...................................... 452 214 ---------- ---------- Total non-interest expense ............... $5,636 $4,296 ========== ==========
The Company's efficiency ratio (non-interest expenses divided by the sum of net interest income on a tax equivalent basis and non-interest income) for the quarter ended March 31, 2002 was 48.3%, compared to 54.2% for the comparable quarter of 2001. Income Taxes The provision for income taxes was $1,849,000 for the quarter ended March 31, 2002, compared to $760,000 for the same period in 2001. The effective income tax rates were 37.4% and 29.0%, respectively, for these periods. The increase in the effective tax rate for the first quarter of 2002 compared with the same period in 2001 is primarily a result of two factors. First the Company substantially reduced its portfolio of municipal securities which were exempt from both federal and state income tax. This reduction was both in absolute dollar amount and as a percentage of earning assets. This accounted for approximately 460 basis points of the increase in the effective tax rate. Secondly the amount of securities income exempt solely from Arkansas tax declined significantly as the Company both reduced its investment portfolio and shifted a large portion of its remaining investment portfolio from securities exempt from Arkansas tax to securities subject to Arkansas tax. The Company had no state income tax expense in the first quarter of 2001 but an effective state expense, after federal benefit, of 3.3% in the first quarter of 2002. 11 Analysis of Financial Condition Loan Portfolio At March 31, 2002, the Company's loan portfolio was $617 million, an increase from $616 million at December 31, 2001. As of March 31, 2002, the Company's loan portfolio consisted of approximately 76.0% real estate loans, 8.8% consumer loans, 12.1% commercial and industrial loans and 2.3% agricultural loans (non-real estate). The amount and type of loans outstanding at March 31, 2002 and 2001 and December 31, 2001 are reflected in the following table. Loan Portfolio
March 31, December 31, -------------------------- ---------------- 2002 2001 2001 ----------- ---------- ---------------- (Dollars in thousands) Real Estate: Residential 1-4 family ............. $162,534 $146,551 $167,559 Non-farm/non-residential ........... 180,345 139,148 180,257 Agricultural ....................... 49,131 37,852 45,303 Construction/land development ...... 53,037 44,505 51,140 Multifamily residential ............ 23,933 10,231 20,850 -------- -------- -------- Total real estate ................ 468,980 378,287 465,109 Consumer ............................... 54,402 55,080 55,805 Commercial and industrial .............. 74,316 67,658 78,324 Agricultural (non-real estate) ......... 14,095 14,530 12,866 Other .................................. 4,902 5,297 3,972 -------- -------- -------- Total loans ...................... $616,695 $520,852 $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 improved to 0.22% as of March 31, 2002, compared to 0.29% at December 31, 2001 and 0.25% as of March 31, 2001. Nonperforming assets as a percent of total assets improved to 0.22% as of March 31, 2002 compared to 0.28% at December 31, 2001 and 0.33% as of March 31, 2001. The 0.22% at March 31, 2002 is the Company's best nonperforming asset ratio since the Company went public in 1997. (The remainder of this page intentionally left blank) 12 The following table presents information concerning nonperforming assets, including nonaccrual and certain restructured loans and foreclosed assets held for sale. Nonperforming Assets
March 31, December 31, ----------------------------- ---------------- 2002 2001 2001 ------------ ------------ ---------------- (Dollars in thousands) Nonaccrual loans ........................................... $1,353 $ 1,316 $1,806 Accruing loans 90 days or more past due .................... - - - Restructured loans ......................................... - - - ------ -------- ------ Total nonperforming loans .............................. 1,353 1,316 1,806 Foreclosed assets held for sale and repossessions/(1)/ ..... 547 1,333 661 ------ -------- ------ Total nonperforming assets ............................. $1,900 $ 2,649 $2,467 ====== ======== ====== Nonperforming loans to total loans ......................... 0.22% 0.25% 0.29% Nonperforming assets to total assets ....................... 0.22 0.33 0.28
(1) Foreclosed assets held for sale and repossessions are generally written down to estimated market value at the time of transfer from the loan portfolio. The value of such assets is reviewed from time to time throughout the holding period with the value adjusted to the then estimated market value, if lower, until disposition. Allowance and Provision for Loan Losses Allowance for Loan Losses: The following table shows an analysis of the allowance for loan losses for the three month periods ended March 31, 2002 and 2001 and the year ended December 31, 2001.
Three Months Ended Year Ended March 31, December 31, ----------------------- --------------- 2002 2001 2001 -------- ------- --------------- (Dollars in thousands) Balance, beginning of period ........................ $ 8,712 $ 6,606 $ 6,606 Loans charged off: Real estate .................................... 140 69 468 Consumer ....................................... 154 78 452 Commercial and industrial ...................... 27 112 463 Agricultural (non-real estate) ................. 3 4 37 ------- ------- ------- Total loans charged off ........... 324 263 1,420 ------- ------- ------- Recoveries of loans previously charged off: Real estate .................................... 9 9 30 Consumer ....................................... 10 30 84 Commercial and industrial ...................... 6 4 11 Agricultural (non-real estate) ................. - - - ------- ------- ------- Total recoveries .................. 25 43 125 ------- ------- ------- Net loans charged off ............................... 299 220 1,295 Provision charged to operating expense .............. 550 354 3,401 ------- ------- ------- Balance, end of period .............................. $ 8,963 $ 6,740 $ 8,712 ======= ======= ======= Net charge-offs to average loans outstanding during the periods indicated ........................... 0.20%/(1)/ 0.17%/(1)/ 0.24% Allowance for loan losses to total loans ............ 1.45 1.29 1.41 Allowance for loan losses to nonperforming loans .... 662.45 512.16 482.39
(1) Annualized 13 The amounts of provisions to the allowance for loan losses are based on management's judgment and evaluation of the loan portfolio utilizing objective and subjective criteria. The objective criteria utilized by the Company to assess the adequacy of its allowance for loan losses and required additions to such allowance are (1) an internal grading system, (2) a peer group analysis and (3) a historical analysis. In addition to these objective criteria, the Company subjectively assesses adequacy of the allowance for loan losses and the need for additions thereto, with consideration given to the nature and volume of the portfolio, overall portfolio quality, review of specific problem loans, national, regional and local business and economic conditions that may affect borrowers' ability to pay or the value of collateral securing loans, and other relevant factors. The Company's allowance for loan losses was $8,963,000 at March 31, 2002, or 1.45% of total loans, compared with $8,712,000, or 1.41% of total loans, at December 31, 2001 and $6,740,000, or 1.29% of total loans, at March 31, 2001. The increase in the Company's allowance for loan losses over this period reflects the Company's cautious outlook regarding the current uncertainty about economic conditions, as well as a change in the mix and size of the Company's loan portfolio. While management believes the current allowance is adequate, changing economic and other conditions may require future adjustments to the allowance for loan losses. For the first three months of 2002, annualized charge-offs were 0.20% of average outstanding loans compared with 0.24% for the year of 2001 and 0.17% annualized for the first three months of 2001. Provision for Loan Losses: The loan loss provision reflects management's ongoing assessment of the loan portfolio and is evaluated in light of risk factors mentioned above. The provision for loan losses was $550,000 for the three months ended March 31, 2002 compared to $354,000 for the same three month period in 2001. Investments and Securities The Company's securities portfolio is the second largest component of earning assets and provides a significant source of revenue for the Company. The table below presents the book value and the fair value of investment securities for each of the dates indicated. Investment Securities
March 31, March 31, December 31, 2002 2001 2001 ------------------------- ------------------------- ------------------------- Book Fair Book Fair Book Fair Value/(1)/ Value/(2)/ Value/(1)/ Value/(2)/ Value/(1)/ Value/(2)/ ------------ ------------ ------------ ------------ ------------ ------------ (Dollars in thousands) Securities of U.S. Government Agencies ........................... $ 44,662 $ 44,662 $177,581 $177,766 $ 70,177 $ 70,177 Mortgage-backed securities .............. 130,839 130,839 171 171 91,234 91,234 Obligations of state and political subdivisions ....................... 11,518 11,551 33,434 33,475 18,120 18,152 Other securities ........................ 7,637 7,642 12,406 12,412 7,636 7,642 -------- --------- -------- -------- -------- -------- Total ........................... $194,656 $ 194,694 $223,592 $223,824 $187,167 $187,205 ======== ========= ======== ======== ======== ========
(1) Book value for available-for-sale securities equals their original cost adjusted for unrealized gains or losses as reflected in the Company's financial statements. (2) The fair value of the Company's investment securities is based on quoted market prices where available. If quoted market prices are not available, fair values are based on market prices for comparable securities. (The remainder of this page intentionally left blank) 14 Liquidity and Capital Resources Growth and Expansion. In February 2002 the Company opened a new office in Maumelle, Arkansas and later that month opened its first Conway, Arkansas office in a temporary facility. The Company recently acquired two additional Conway sites on which permanent offices are planned for completion in late 2002 or early 2003. A second temporary Conway office is expected to open around mid 2002 on one of these sites. The Company also plans to continue its expansion in Little Rock in 2002 and 2003. The company has signed a lease for a banking office in the Cantrell West office building currently under construction on Highway 10 (Cantrell Road). This office is expected to open in the third quarter of 2002. The Company has entered into a conditional contract to purchase a site at the intersection of Highway 10 and Taylor Loop Road on which it plans to construct an office for opening in late 2002 or early 2003. The Company continues to evaluate other sites for expansion in 2002 and 2003. As previously announced the Company expects to open approximately six new offices in 2002. While the Company had previously estimated its 2002 capital expenditures in the range of $7 to $9 million, it now estimates its 2002 capital expenditures will be in the range of $8 to $10 million. This increase is primarily a result of the Company accelerating plans to acquire additional sites for development in 2003. Bank Liquidity. Liquidity represents an institution's ability to provide funds to satisfy demands from depositors and borrowers by either converting assets into cash or accessing new or existing sources of incremental funds. Generally, the Company's bank subsidiary relies on customer deposits and loan repayments as its primary sources of funds. The Company has used these funds, together with FHLB advances and other borrowings, to make loans, acquire investment securities and other assets and to fund continuing operations. Deposit levels may be affected by a number of factors, including rates paid by competitors, general interest rate levels, returns available to customers on alternative investments and general economic conditions. Loan repayments are a relatively stable source of funds, but such loans generally are not readily convertible to cash. Accordingly, the Company may be required from time to time to rely on secondary sources of liquidity to meet loan and withdrawal demands or otherwise fund operations. Such sources include FHLB advances, federal funds lines of credit from correspondent banks and Federal Reserve Bank borrowings. At March 31, 2002, the Company's bank subsidiary had substantial unused borrowing availability. This availability is primarily comprised of the following three options: (1) $50.8 million from the Federal Home Loan Bank, (2) $21.7 million of securities available to pledge on a federal funds line of credit and (3) up to $95.0 million from borrowing programs of the Federal Reserve Bank. Management anticipates that the Company's bank subsidiary will continue to rely primarily on customer deposits and loan repayments to provide liquidity. Additionally, where necessary, the above described borrowing sources will be used to augment the Company's primary funding sources. Capital Compliance. Bank regulatory authorities in the United States impose certain capital standards on all bank holding companies and banks. These capital standards require compliance with certain minimum "risk-based capital ratios" and a minimum "leverage ratio". The risk-based capital ratios consist of (1) Tier 1 capital (i.e. common stockholders' equity excluding goodwill, certain intangibles and net unrealized gains on available for sale securities, but including, subject to limitations, trust preferred securities and other qualifying items) to total risk-weighted assets and (2) total capital (Tier 1 capital plus Tier 2 capital which is the qualifying portion of the allowance for loan losses and the portion of trust preferred securities not counted as Tier 1 capital) to risk-weighted assets. The leverage ratio is measured as Tier 1 capital to adjusted quarterly average assets. The remainder of this page intentionally left blank) 15 The Company's risk-based and leverage capital ratios exceeded these minimum requirements at March 31, 2002 and December 31, 2001, and are presented below, followed by the capital ratios of the Company's bank subsidiary at March 31, 2002. Consolidated Capital Ratios
March 31, December 31, 2002 2001 ----------- -------------- (Dollars in thousands) Tier 1 capital: Stockholders' equity .......................................................... $ 58,346 $ 56,617 Allowed amount of guaranteed preferred beneficial interest in Company's subordinated debentures (trust preferred securities) .............. 17,250 17,250 Plus (less) net unrealized losses (gains) on available for sale securities .... 1,460 499 Less goodwill and certain intangible assets ................................... (2,785) (2,823) --------- --------- Total tier 1 capital ................................................ 74,271 71,543 Tier 2 capital: Qualifying allowance for loan losses .......................................... 7,939 7,846 Remaining amount of guaranteed preferred beneficial interest in Company's subordinated debentures (trust preferred securities) .............. - - --------- --------- Total risk-based capital ............................................ $ 82,210 $ 79,389 ========= ========= Risk-weighted assets ............................................................... $ 634,113 $ 626,806 ========= ========= Ratios at end of period: Leverage ...................................................................... 8.64% 8.51% Tier 1 risk-based capital ..................................................... 11.71 11.41 Total risk-based capital ...................................................... 12.96 12.67 Minimum ratio guidelines: Leverage capital/(1)/ ......................................................... 3.00% 3.00% Tier 1 risk-based capital ..................................................... 4.00 4.00 Total risk-based capital ...................................................... 8.00 8.00
Capital Ratios of Bank Subsidiary
March 31, 2002 ---------------------- (Dollars in thousands) Stockholders' equity - Tier 1 ......................... $72,282 Leverage capital ...................................... 8.41% Tier 1 risk-based capital ............................. 11.42 Total risk-based capital ......................... 12.67
(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. (The remainder of this page intentionally left blank) 16 Forward-Looking Information This Management's Discussion and Analysis of Financial Condition and Results of Operations, other filings made by the Company with the Securities and Exchange Commission and other oral and written statements or reports by the Company and its management, include certain forward-looking statements including, without limitation, statements with respect to net interest margin, net interest income and anticipated future operating and financial performance, statements regarding asset quality and nonperforming loans, growth opportunities and growth rates, capital expenditures and other similar forecasts and statements of expectation. Words such as "anticipate," "believe," "estimate," "expect," "intend" and similar expressions, as they relate to the Company or its management, identify forward-looking statements. Forward-looking statements made by the Company and its management are based on estimates, projections, beliefs and assumptions of management at the time of such statements and are not guarantees of future performance. The Company disclaims any obligation to update or revise any forward-looking statement based on the occurrence of future events, the receipt of new information or otherwise. Actual future performance, outcomes and results may differ materially from those expressed in forward-looking statements made by the Company and its management due to certain risks, uncertainties and assumptions. Certain factors that may affect operating results of the Company include, but are not limited to, the following: (1) potential delays or other problems in implementing the Company's growth and expansion strategy; (2) the ability to attract new deposits and loans; (3) interest rate fluctuations; (4) competitive factors and pricing pressures; (5) general economic conditions, including the effects of the current economic slowdown; and (6) changes in legal and regulatory requirements, as well as, other factors described in this and other Company reports and statements. Should one or more of the foregoing risks materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described in the forward-looking statements. (The remainder of this page intentionally left blank) 17 Selected and Supplemental Financial Data The following table sets forth selected consolidated financial data concerning the Company for the three month periods ended March 31, 2002 and 2001 and is qualified in its entirety by the consolidated financial statements, including the notes thereto, included elsewhere herein. Selected Consolidated Financial Data (Dollars in thousands, except per share amounts) Unaudited
Three Months Ended March 31, ------------------------------- 2002 2001 -------------- ------------- Income statement data: Interest income .......................................... $ 14,381 $ 15,374 Interest expense ......................................... 5,047 9,362 Net interest income ...................................... 9,334 6,012 Provision for loan losses ................................ 550 354 Non-interest income ...................................... 2,192 1,657 Non-interest expenses .................................... 5,636 4,296 Net income ............................................... 3,094 1,862 Per common share data: Earnings - diluted ....................................... $ 0.80 $ 0.49 Book value ............................................... 15.42 13.49 Dividends ................................................ 0.12 0.11 Weighted avg. shares outstanding (thousands) ............. 3,863 3,789 Balance sheet data at period end: Total assets ............................................. $ 867,223 $ 802,992 Total loans .............................................. 616,695 520,852 Allowance for loan losses ................................ 8,963 6,740 Total investment securities .............................. 194,656 223,592 Total deposits ........................................... 675,644 641,772 Repurchase agreements with customers ..................... 17,570 16,858 Other borrowings ......................................... 92,866 71,677 Total stockholders' equity ............................... 58,346 51,000 Loan to deposit ratio .................................... 91.28% 81.16% Average balance sheet data: Total average assets ..................................... $ 862,307 $ 818,594 Total average stockholders' equity ....................... 57,381 49,522 Average equity to average assets ......................... 6.65% 6.05% Performance ratios: Return on average assets* ................................ 1.46% 0.92% Return on average stockholders' equity* .................. 21.87 15.25 Net interest margin ...................................... 4.78 3.35 Efficiency ............................................... 48.32 54.16 Dividend payout .......................................... 14.67 22.45 Asset quality ratios: Net charge-offs as a percentage of average total loans* .. 0.20% 0.17% Nonperforming loans to total loans ....................... 0.22 0.25 Nonperforming assets to total assets ..................... 0.22 0.33 Allowance for loan losses as a percentage of: Total loans .............................................. 1.45% 1.29% Nonperforming loans ...................................... 662.45 512.16 Capital ratios at period end: Leverage capital ......................................... 8.64% 8.02% Tier 1 risk-based capital ................................ 11.71 11.79 Total risk-based capital ................................. 12.96 13.03 *Annualized based on actual days
18 Bank of the Ozarks, Inc. Supplemental Quarterly Financial Data (Dollars in Thousands, Except Per Share Amounts) Unaudited
6/30/00 9/30/00 12/31/00 3/31/01 6/30/01 9/30/01 12/31/01 3/31/02 ------- ------- -------- ------- ------- ------- ------- -------- Earnings Summary: ---------------- Net interest income $ 6,093 $ 5,569 $ 5,795 $ 6,012 $ 6,929 $ 7,825 $ 8,939 $ 9,334 Federal tax (FTE) adjustment 272 274 279 263 217 187 145 138 ------- ------- ------- ------- ------- ------- ------- ------- Net interest margin (FTE) 6,365 5,843 6,074 6,275 7,146 8,012 9,084 9,472 Loan loss provision (324) (1,225) (398) (354) (658) (910) (1,479) (550) Non-interest income 1,417 1,552 1,323 1,657 1,920 1,737 2,039 2,192 Non-interest expense (4,244) (4,351) (4,182) (4,296) (4,746) (4,816) (5,171) (5,636) ------- ------- ------- ------- ------- ------- ------- ------- Pretax income (FTE) 3,214 1,819 2,817 3,282 3,662 4,023 4,473 5,478 FTE adjustment (272) (274) (279) (263) (217) (187) (145) (138) Provision for taxes (730) (255) (596) (760) (835) (1,138) (1,348) (1,849) Distribution on trust preferred securities (397) (397) (396) (397) (397) (397) (397) (397) ------- ------- ------- ------- ------- ------- ------- ------- Net income $ 1,815 $ 893 $ 1,546 $ 1,862 $ 2,213 $ 2,301 $ 2,583 $ 3,094 ======= ======= ======= ======= ======= ======= ======= ======= Earnings per share - diluted $ 0.48 $ 0.24 $ 0.41 $ 0.49 $ 0.58 $ 0.60 $ 0.67 $ 0.80 Non-interest Income Detail: --------------------------- Trust income $ 131 $ 162 $ 168 $ 173 $ 174 $ 142 $ 116 $ 162 Service charges on deposit accounts 877 868 872 842 919 979 1,035 1,505 Mortgage lending income 208 278 188 347 516 410 647 494 Gain (loss) on sale of assets 2 30 (58) (11) 2 19 (9) 9 Security gains (losses) -- -- -- 113 6 (16) 51 (217) Other 199 214 153 193 303 203 199 239 ------- ------- ------- ------- ------- ------- ------- ------- Total non-interest income $ 1,417 $ 1,552 $ 1,323 $ 1,657 $ 1,920 $ 1,737 $ 2,039 $ 2,192 Non-interest Expense Detail: ---------------------------- Salaries and employee benefits $ 2,285 $ 2,220 $ 2,178 $ 2,359 $ 2,582 $ 2,716 $ 2,894 $ 3,202 Net occupancy expense 703 748 759 728 783 792 795 859 Other operating expenses 1,192 1,319 1,179 1,149 1,321 1,247 1,422 1,537 Goodwill charges 22 22 23 22 22 23 22 -- Amortization of other intangibles - pretax 42 42 43 38 38 38 38 38 ------- ------- ------- ------- ------- ------- ------- ------- Total non-interest expense $ 4,244 $ 4,351 $ 4,182 $ 4,296 $ 4,746 $ 4,816 $ 5,171 $ 5,636 Allowance for Loan Losses: -------------------------- Balance beginning of period $ 6,139 $ 6,310 $ 6,447 $ 6,606 $ 6,740 $ 7,139 $ 7,754 $ 8,712 Net charge offs (153) (1,088) (239) (220) (259) (295) (521) (299) Loan loss provision 324 1,225 398 354 658 910 1,479 550 ------- ------- ------- ------- ------- ------- ------- ------- Balance at end of period $ 6,310 $ 6,447 $ 6,606 $ 6,740 $ 7,139 $ 7,754 $ 8,712 $ 8,963 Selected Ratios: ---------------- Net interest margin - FTE* 3.42% 3.04% 3.10% 3.35% 3.86% 4.35% 4.62% 4.78% Overhead expense ratio* 2.11 2.09 1.98 2.13 2.37 2.41 2.43 2.65 Efficiency ratio 54.54 58.84 56.54 54.16 52.35 49.40 46.49 48.32 Nonperforming loans to total loans 0.88 0.34 0.37 0.25 0.30 0.21 0.29 0.22 Nonperforming assets to total assets 0.78 0.61 0.42 0.33 0.37 0.27 0.28 0.22 Loans past due 30 days or more, including non-accrual loans, to total loans 1.48 0.90 0.88 0.79 0.77 0.74 0.72 0.79 *Annualized
19 PART I (continued) Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company's interest rate risk management is the responsibility of the Asset/Liability Management Committee, which reports to the Board of Directors. This committee establishes policies that monitor and coordinate the Company's sources, uses and pricing of funds. The committee is also involved with management in the Company's planning and budgeting process. The Company regularly reviews its exposure to changes in interest rates. Among the factors considered are changes in the mix of earning assets and interest bearing liabilities, interest rate spreads and repricing periods. Typically, the committee reviews on at least a quarterly basis the bank subsidiary's relative ratio of rate sensitive assets to rate sensitive liabilities and the related cumulative gap for different time periods. Additionally, the committee and management utilize a simulation model in assessing the Company's interest rate sensitivity. This simulation modeling process projects a baseline net interest income (assuming no changes in interest rate levels) and estimates changes to that baseline net interest income resulting from changes in interest rate levels. The Company relies primarily on the results of this model in evaluating its interest rate risk. In addition to the repricing data used to prepare the GAP table presented below, this model incorporates a number of assumptions and predictions regarding additional factors. These factors include: (1) the expected exercise of call features on various assets and liabilities, (2) the expected rates at which various rate sensitive assets and liabilities will reprice, (3) the expected growth in various interest earning assets and interest bearing liabilities and the expected rates on such new assets and liabilities, (4) the expected relative movements in different interest rate indexes which are used as the basis for pricing or repricing various assets and liabilities, (5) existing and expected contractual cap and floor rates on various assets and liabilities, (6) expected changes in administered rates on interest bearing transaction, savings, money market and time deposit accounts and the expected impact of competition on the pricing or repricing of such accounts and (7) other factors. Inclusion of these factors in the model is intended to more accurately project the Company's changes in net interest income resulting from an immediate and sustained parallel shift in interest rates of up 100 basis points (bps), up 200 bps, down 100 bps and down 200 bps. While the Company believes this model provides a more accurate projection of its interest rate risk, the model includes a number of assumptions and predictions which may or may not be accurate. These assumptions and predictions include inputs to compute baseline net interest income, growth rates, competition and a variety of other factors that are difficult to accurately predict. Accordingly, there can be no assurance the estimated results projected by the simulation model will reflect future results. The following table presents the simulation model's projected impact of an immediate and sustained parallel shift in interest rates on the projected baseline net interest income for a twelve month period commencing March 31, 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. Shift in % Change in Interest Rates Projected Baseline (in bps) Net Interest Income ---------------- --------------------- +200 (5.8)% +100 (6.2) -100 3.8 -200 2.5 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 March 31, 2002 the cumulative ratios of rate sensitive assets to rate sensitive liabilities at six months and one year, respectively, were 51.7% and 61.6%. A financial institution is considered to be liability sensitive, or as having a negative GAP, when the amount of its interest bearing liabilities maturing or repricing within a given time period exceeds the amount of its interest earning assets also maturing or repricing within that time period. Conversely, an institution is considered to be asset sensitive, or as having a positive GAP, when the amount of its interest bearing liabilities maturing and repricing is less than the amount of its interest earning assets also maturing or repricing during the same period. Generally, in a falling interest rate environment, a negative GAP should result in an increase in net interest income, and in a rising interest rate environment this negative GAP should adversely affect net interest income. The converse would be true for a positive GAP. Due to inherent limitations in any static GAP analysis and since conditions change on a daily basis, these expectations may not reflect future results. 20 Rate Sensitive Assets and Liabilities
March 31, 2002 ------------------------------------------------------------------------------------ Rate Rate Cumulative Cumulative Sensitive Sensitive Period Cumulative Gap to RSA/(1)/ to Assets Liabilities Gap Gap Total RSA/(1)/ RSL/(2)/ --------- ----------- ---------- ---------- -------------- ------------ (Dollars in thousands) Immediate to 6 months ................ $ 235,460 $ 455,362 $ (219,902) $(219,902) (27.10)% 51.71% 7 months - 12 months ............... 105,301 97,481 7,820 (212,082) (26.13) 61.64 1 - 2 years ........................ 144,620 49,492 95,128 (116,954) (14.41) 80.58 2 - 3 years ........................ 107,964 1,393 106,571 (10,383) (1.28) 98.28 3 - 5 years ........................ 143,806 26,317 117,489 107,106 13.20 117.00 Over 5 years ....................... 74,426 79,680 (5,254) 101,852 12.55 114.35 --------- --------- ---------- Total .......................... $ 811,577 $ 709,725 $ 101,852 ========= ========= ==========
(1) Rate Sensitive Assets (2) Rate Sensitive Liabilities The data used in the table above is based on contractual repricing dates for variable or adjustable rate instruments except for interest bearing Now accounts and regular savings accounts of which 50% are reflected as repricing prorata during the first two years with the remaining 50% distributed over future periods. Callable investments or borrowings are scheduled on their contractual maturity unless the Company has received notification the investment or borrowing will be called. In the event the Company has received notification of call, the investment or borrowing is placed in the fixed rate category for the time period in which the call occurs or is expected to occur. Other financial instruments are scheduled on their contractual maturity. This simple GAP analysis gives no consideration to a number of factors which can have a material impact on the Company's interest rate risk position. Such factors include call features on certain assets and liabilities, prepayments, interest rate floors and caps on various assets and liabilities, the current interest rates on assets and liabilities to be repriced in each period, and the relative changes in interest rates on different types of assets and liabilities. PART II Other Information Item 1. Legal Proceedings ----------------- On July 26, 2000, the case of David Dodds, et. al. vs. Bank of the ------------------------------------ Ozarks and Jean Arehart was filed in the Circuit Court of Pulaski ----------------------- County, Arkansas, Fifth Division, which contained allegations that the Company's bank subsidiary (the "Bank") committed breach of contract, certain common law torts, fraud, and a violation of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. ss. 1961, et. seq. ("RICO"). The Bank made several residential construction loans related to houses built by the plaintiffs, and in 1998, the Bank commenced foreclosure of a house that was being constructed by one of the plaintiffs. The complaint related to such transactions. The Bank removed the case to the United States District Court for the Eastern District of Arkansas, Western Division. The original complaint sought alternative remedies of either (a) compensatory damages of $5 million and punitive damages of $10 million based on the common law tort claims, or (b) compensatory damages of $5 million trebled to $15 million based on RICO. The Bank filed a Motion for Partial Summary Judgment in which the Bank asked the Court to dismiss with prejudice the plaintiffs' RICO claims, as well as their state law claims of fraud, defamation and outrage/intentional infliction of emotional distress. On October 29, 2001, the Court granted the Bank's Motion for Partial Summary Judgment and dismissed the plaintiffs' RICO claims and state law claims of fraud, defamation and outrage/intentional infliction of emotional distress. The time for an appeal of the District Court's award of partial summary judgment has passed. Presently the only surviving claims of the plaintiffs are breach of contract and intentional interference with contract. The District Court has remanded the case back to the Circuit Court of Pulaski County, Arkansas, Fifth Division, where it is currently pending. The Company believes it has substantial defenses to the remaining claims made in the complaint and intends to vigorously defend the case. 21 Item 2. Changes in Securities --------------------- Not Applicable Item 3. Defaults Upon Senior Securities ------------------------------- Not Applicable Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- Not applicable Item 5. Other Information ----------------- Not Applicable Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a). Exhibits Reference is made to the Exhibit Index contained at the end of this report. (b). Reports on Form 8-K Not Applicable 22 SIGNATURE Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Bank of the Ozarks, Inc. DATE: May 10, 2002 /s/ Paul E. Moore ------------------------------- Paul E. Moore Chief Financial Officer (Chief Accounting Officer) 23 Bank of the Ozarks, Inc. Exhibit Index Exhibit Number ------ 3 (a) Amended and Restated Articles of Incorporation of the Company, effective May 22, 1997, (previously filed as Exhibit 3.1 to the Company's Form S-1 Registration Statement (File No. 333-27641) and incorporated herein by reference). 3 (b) Amended and Restated Bylaws of the Company, dated as of March 13, 1997, (previously filed as Exhibit 3.2 to the Company's Form S-1 Registration Statement (File No. 333-27641) and incorporated herein by reference). 10.1 Lease agreement dated March 14, 2002 between Cantrell West Properties, LLC and Bank of the Ozarks. 24