-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UV6XLN9cI0EvcReoADVdLxfN2tcIG40sR165u92oSrxslwyjCtYd56ur1hsOmBy5 QKnxU8JJz5IDRN0wZKm7qQ== 0000930661-99-002616.txt : 19991115 0000930661-99-002616.hdr.sgml : 19991115 ACCESSION NUMBER: 0000930661-99-002616 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BANK OF THE OZARKS INC CENTRAL INDEX KEY: 0001038205 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 710556208 STATE OF INCORPORATION: AR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22759 FILM NUMBER: 99749845 BUSINESS ADDRESS: STREET 1: 12615 CHENAL PARKWAY STREET 2: SUITE 3100 CITY: LITTLE ROCK STATE: AR ZIP: 72211 BUSINESS PHONE: 5019782265 MAIL ADDRESS: STREET 1: 12615 CHENAL PARKWAY CITY: LITTLE ROCK STATE: AR ZIP: 72211 10-Q 1 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 September 30, 1999 ( ) 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 September 30, 1999 - --------------------------------------- --------------------------------- Common Stock, $0.01 par value per share 3,779,555 BANK OF THE OZARKS, INC. FORM 10-Q September 30, 1999 INDEX PART I. Financial Information Item 1. Consolidated Balance Sheets as of September 30, 1999 and 1998 and December 31, 1998 1 Consolidated Statements of Income for the Three Months Ended September 30, 1999 and 1998 and the Nine Months Ended September 30, 1999 and 1998 2 Consolidated Statements of Stockholders' Equity for the Nine Months Ended September 30, 1999 and 1998 3 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1999 and 1998 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 19 Item 3. Quantitative and Qualitative Disclosures About Market Risk 21 PART II. Other Information Item 1. Legal Proceedings N/A 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
September 30, December 31, ----------------------------- ------------ 1999 1998 1998 ----------- ----------- ------------ ASSETS Cash and due from banks $ 19,452 $ 11,927 $ 14,168 Interest bearing deposits 342 380 856 Investment securities - available for sale 39,197 8,217 17,629 Investment securities - held to maturity 208,618 153,529 158,989 Federal funds sold 620 695 - Loans, net of unearned income 448,944 359,165 387,526 Allowance for loan losses (5,611) (4,392) (4,689) Premises and equipment, net 29,678 25,916 27,155 Foreclosed assets held for sale, net 2,035 236 314 Interest receivable 7,410 5,343 5,517 Intangible assets, net 3,388 3,733 3,665 Other 3,240 1,736 1,301 ------------- ------------- ------------- Total assets $ 757,313 $ 566,485 $ 612,431 ============= ============= ============== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Demand - non-interest bearing $ 55,730 $ 46,702 $ 50,138 Savings and interest-bearing transaction 112,824 82,430 95,471 Time 425,787 334,789 383,431 ------------- ------------- -------------- Total deposits 594,341 463,921 529,040 Notes payable 108 12,022 12,448 FHLB advances and federal funds purchased 92,505 48,516 26,823 Repurchase agreements 7,714 10 1,408 Accrued interest and other liabilities 2,679 2,900 2,357 ------------- ------------- -------------- Total liabilities 697,347 527,369 572,076 ------------- ------------- -------------- Guaranteed preferred beneficial interest in the Company's subordinated debentures 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; Authorized 10,000,000 shares; 3,779,555 shares issued and outstanding 38 38 38 Additional paid-in capital 14,314 14,314 14,314 Retained earnings 29,679 24,701 25,922 Accumulated other comprehensive income (1,315) 63 81 ------------- ------------- -------------- Total stockholders' equity 42,716 39,116 40,355 ------------- ------------- -------------- Total liabilities and stockholders' equity $ 757,313 $ 566,485 $ 612,431 ============= ============= ==============
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 Nine Months Ended September 30, September 30, ---------------------------- ---------------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Interest income Loans $ 9,439 $ 8,162 $26,999 $22,507 Investment securities - taxable 3,361 1,981 9,352 3,946 - non-taxable 426 269 1,207 670 Federal funds sold 3 6 12 92 Deposits with banks 5 5 11 201 ---------- ---------- ---------- ---------- Total interest income 13,234 10,423 37,581 27,416 Interest expense Deposits 5,904 4,925 17,605 12,569 Notes payable 1 226 384 434 FHLB advances 940 437 1,589 979 Federal funds purchased and repurchase agreements 167 194 585 207 ---------- ---------- ---------- ---------- Total interest expense 7,012 5,782 20,163 14,189 ---------- ---------- ---------- ---------- Net interest income 6,222 4,641 17,418 13,227 Provision for loan losses 578 742 1,769 1,222 ---------- ---------- ---------- ---------- Net interest income after provision for loan losses 5,644 3,899 15,649 12,005 ---------- ---------- ---------- ---------- Other income Trust income 113 62 355 239 Service charges on deposit accounts 674 366 1,774 973 Other income, charges and fees 471 730 1,602 1,879 Gains on sales of securities - 130 75 255 Other 35 45 58 234 ---------- ---------- ---------- ---------- Total other income 1,293 1,333 3,864 3,580 ---------- ---------- ---------- ---------- Other expense Salaries and employee benefits 2,273 1,651 6,594 5,284 Net occupancy and equipment 681 529 1,936 1,407 Other operating expenses 1,241 1087 3,673 2,829 ---------- ---------- ---------- ---------- Total other expense 4,195 3,267 12,203 9,520 ---------- ---------- ---------- ---------- Income before income taxes and trust distribution 2,742 1,965 7,310 6,065 Provision for income taxes 639 544 1,970 1,883 Distributions on trust preferred securities 397 - 449 - ---------- ---------- ---------- ---------- Net income $ 1,706 $ 1,421 $ 4,891 $ 4,182 ========== ========== ========== ========== Basic earnings per common share $0.45 $0.38 $1.29 $1.11 ========== ========== ========== ========== Diluted earnings per common share 0.45 0.37 1.29 1.09 ========== ========== ========== ========== Cash dividends declared 0.10 0.06 0.30 0.17 ========== ========== ========== ==========
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 Total ------ --------- -------- ------------ -------- Beginning balance - January 1, 1998 $ 38 $ 14,314 $ 21,162 $ 152 $ 35,666 Comprehensive income: Net income 4,182 4,182 Other comprehensive income Unrealized gains on available for sale securities net of $28 tax effect 45 45 Reclassification adjustment for gains included in income net of $82 tax effect (134) (134) -------- Comprehensive income 4,093 -------- Cash dividends (643) (643) ------ --------- -------- ------------ -------- Ending balance - September 30, 1998 $ 38 $ 14,314 $ 24,701 $ 63 $ 39,116 ====== ========= ======== ============ ======== Beginning balance January 1, 1999 $ 38 $ 14,314 $ 25,922 $ 81 $ 40,355 Comprehensive income: Net income 4,891 4,891 Other comprehensive income (loss) Unrealized gains (losses) on available for sale securities net of $823 tax effect (1,328) (1,328) Reclassification adjustment for gains included in income net of $42 tax effect (68) (68) -------- Comprehensive income 3,495 -------- Cash dividends (1,134) (1,134) ------ --------- -------- ------------ -------- Ending balance - September 30, 1999 $ 38 $ 14,314 $ 29,679 ($ 1,315) $ 42,716 ====== ========= ======== ============ ========
3 BANK OF THE OZARKS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) Unaudited
Nine Months Ended September 30, ------------------------------------- 1999 1998 ------------ ------------ Cash flows from operating activities Net income $ 4,891 $ 4,182 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 1,018 826 Amortization 197 64 Provision for loan losses 1,769 1,222 Provision for losses on foreclosed assets 57 29 Gain on sales of securities (75) (255) Gain on sale of loans (4) - (Increase) decrease in mortgage loans held for sale 3,504 (3,756) Gain on disposition of premises and equipment (35) (15) (Gain) loss on disposition of foreclosed assets 34 (91) Deferred income taxes (54) (70) Changes in assets and liabilities: Interest receivable (1,893) (2,328) Other, net (992) (1,811) Accrued interest and other liabilities 374 1,081 --------------- ---------------- Net cash provided (used) by operating activities 8,791 (922) --------------- ---------------- Cash flows from investing activities Purchase of subsidiary, net of funds acquired - 7,164 Proceeds from sales and maturities of investment securities available for sale 19,512 51,957 Purchases of investment securities available for sale (43,269) (8,692) Proceeds from maturities of investment securities held to maturity 32,186 22,087 Purchase of investment securities held to maturity (81,814) (184,248) Increase in federal funds sold (620) 2,635 Net increase in loans (69,652) (81,041) Proceeds from sale of loans 994 - Proceeds from dispositions of bank premises and equipment 321 15 Purchase of bank premises and equipment (3,826) (12,634) Proceeds from dispositions of foreclosed assets 1,082 531 --------------- ---------------- Net cash used by investing activities (145,086) (202,226) --------------- ---------------- Cash flows from financing activities Net increase in deposits 65,301 159,011 Net change in FHLB advances and federal funds purchased 65,682 34,499 Net increase in repurchase agreements 6,306 10 Proceeds from notes payable - 13,360 Payments of notes payable (12,340) (6,410) Proceeds from trust preferred securities 17,250 - Dividends paid (1,134) (643) --------------- ---------------- Net cash provided by financing activities 141,065 199,827 --------------- ---------------- Net increase in cash and cash equivalents 4,770 (3,321) Cash and cash equivalents - beginning of period 15,024 15,628 --------------- ---------------- Cash and cash equivalents - end of period $ 19,794 $ 12,307 =============== ================
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 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 generally accepted accounting principles for interim financial information. Certain information, accounting policies and footnote disclosures normally included in complete financial statements prepared in accordance with generally accepted accounting principles 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, 1998. In the opinion of management all adjustments considered necessary, consisting of normal recurring items, have been included for a fair presentation of the accompanying consolidated financial statements. Operating results for the three and nine months ended September 30, 1999 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. No dilution for any potentially dilutive securities is included. Diluted EPS includes the dilutive effect of stock options. In computing dilution for stock options, the average share price is used for the reporting period. Basic and diluted earnings per common share is computed as follows:
Three Months Ended Nine Months Ended September 30, September 30, ---------------------------- ---------------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- (In thousands, except per share amounts) Common shares - weighted averages................. 3,780 3,780 3,780 3,780 Common share equivalents - weighted averages...... 9 34 12 42 ------ ------ ------ ------ 3,789 3,814 3,792 3,822 ====== ====== ====== ====== Net income........................................ $1,706 $1,421 $4,891 $4,182 Basic earnings per common share................... $ 0.45 $ 0.38 $ 1.29 $ 1.11 Diluted earnings per common share................. 0.45 0.37 1.29 1.09
5 4. Federal Home Loan Bank ("FHLB") Advances FHLB advances with original maturities exceeding one year totaled $82.7 million at September 30, 1999. Interest rates on these advances ranged from 4.16% to 6.30% at September 30, 1999 with a weighted average rate of 4.92%. Aggregate annual maturities (amounts in thousands) and weighted average interest rates of FHLB advances with an original maturity of over one year at September 30, 1999 are as follows:
Weighted Amounts Average Rate ------- ------------ 2000 $ 2,145 5.77% 2001 4,198 5.95 2002 197 6.30 2003 197 6.30 Thereafter 75,988 4.83 ------- $82,725 4.92
FHLB advances of $75.0 million maturing in 2008 and 2009 may be called quarterly. In the period September 30 through November 12, 1999 advances totaling $65.0 million have been called and have been or are expected to be refinanced with short-term FHLB advances, other short-term funding sources or FHLB long-term callable advances. At September 30, 1999 the Company had no FHLB advance outstanding with original maturities of one year or less. 5. Guaranteed Preferred Beneficial Interest in the Company's Subordinated Debentures On June 18, 1999 Ozark Capital Trust ("Ozark Capital"), a Delaware business trust wholly owned by Bank of the Ozarks, Inc., sold to investors in a public underwritten offering $17.3 million of 9% cumulative trust preferred securities. The proceeds were used to purchase an equal principal amount of 9% subordinated debentures of Bank of the Ozarks, Inc. Bank of the Ozarks, Inc. has, through various contractual arrangements, fully and unconditionally guaranteed all obligations of Ozark Capital on a subordinated basis with respect to the preferred securities. Subject to certain limitations, the preferred securities qualify as Tier 1 capital and are presented in the Consolidated Balance Sheets as "Guaranteed preferred beneficial interest in the Company's subordinated debentures." The sole asset of Ozark Capital is the subordinated debentures issued by Bank of the Ozarks, Inc. Both the preferred securities of Ozark Capital and the subordinated debentures of Bank of the Ozarks, Inc. will mature on June 18, 2029; however, they may be prepaid, subject to regulatory approval, prior to maturity at any time on or after June 18, 2004, or earlier upon certain changes in tax or investment company laws or regulatory capital requirements. The net proceeds from the offering were used to repay $12.5 million of outstanding borrowings under the Company's revolving line of credit with the balance of the proceeds used for general corporate purposes including a $3.0 million capital investment in the Company's bank subsidiary. 6. Supplementary Data for Cash Flows: Cash payments for interest by the Company during the nine months ended September 30, 1999 amounted to $20.0 million and during the nine months ended September 30, 1998 amounted to $14.0 million. Cash payments for income taxes during the nine months ended September 30, 1999 and 1998 amounted to $1.6 million and $1.5 million, respectively. (The remainder of this page intentionally left blank) 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General Net income was $1,706,000 for the third quarter of 1999, a 20.1% increase over net income of $1,421,000 for the same quarter in 1998. Diluted earnings rose 21.6% to $0.45 per share for the quarter ended September 30, 1999, compared to $0.37 per share for the same quarter in 1998. For the nine months ended September 30, 1999, net income totaled $4,891,000, a 17.0% increase over net income of $4,182,000 for the first nine months of 1998. Diluted earnings for the first nine months of 1999 were $1.29 per share compared to $1.09 for the same period in 1998, an 18.3% increase. The Company's annualized returns on average assets and on average stockholders' equity were 0.93% and 15.86%, respectively, for the third quarter of 1999, compared with 1.07% and 14.67%, respectively, for the same quarter of 1998. Annualized returns on average assets and average stockholders' equity for the nine months ended September 30, 1999 were 0.95% and 15.79%, respectively, compared with 1.24% and 14.98%, respectively, for the nine month period ended September 30, 1998. Total assets increased from $612.4 million at December 31, 1998, to $757.3 million at September 30, 1999. Loans were $448.9 million at September 30, 1999, compared to $387.5 million at December 31, 1998. Deposits were $594.3 million at September 30, 1999, compared to $529.0 million at December 31, 1998. Stockholders' equity increased from $40.4 million at December 31, 1998, to $42.7 million at September 30, 1999, increasing book value per share from $10.35 to $11.30. 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 significantly affected by its provision for loan losses. The following discussion provides a summary of the Company's operations for the three and nine months ended September 30, 1999 and 1998. (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 (34%). Net interest income (FTE) increased 34.8% to $6,467,000 for the three months ended September 30, 1999, from $4,797,000 for the three months ended September 30, 1998. This increase primarily resulted from a 40.0% increase in average earning assets to $677.3 million for the 1999 period from $483.8 million for the 1998 period. Net interest income (FTE) increased 32.7% to $18,098,000 for the nine months ended September 30, 1999 compared to $13,635,000 for the nine months ended September 30, 1998. This increase primarily resulted from a 53.3% increase in average earning assets to $638.4 million for the 1999 period from $416.5 for the 1998 period. The increase in average earning assets for the 1999 period resulted from continued growth in the Company's loan portfolio as well as substantial growth in the Company's investment securities portfolio. The Company's net interest margin was 3.79% for the third quarter of 1999 compared with 3.93% for the third quarter of 1998. The net interest margin for the nine months ended September 30, 1999 was 3.79% compared with 4.38% for the same period in 1998. Although the Company's interest margin declined throughout 1998 as a result of competitive factors and a reduction in its loan to deposit ratio, during the past four quarters the Company's net interest margin has varied within a narrow range from 3.77% to 3.81% Analysis of Net Interest Income (FTE = Fully Taxable Equivalent)
Three Months Ended Nine Months Ended September 30, September 30, -------------------------------- --------------------------------- 1999 1998 1999 1998 --------- --------- --------- --------- (Dollars in thousands) (Dollars in thousands) Interest income............................. $13,234 $10,423 $37,581 $27,416 FTE adjustment.............................. 245 156 680 408 ------- ------- ------- ------- Interest income - FTE....................... 13,479 10,579 38,261 27,824 Interest expense............................ 7,012 5,782 20,163 14,189 ------- ------- ------- ------- Net interest income - FTE................... $ 6,467 $ 4,797 $18,098 $13,635 ======= ======= ======= ======= Yield on interest earning assets - FTE...... 7.89% 8.67% 8.01% 8.93% Cost of interest bearing liabilities........ 4.55 5.17 4.62 5.09 Net interest spread - FTE................... 3.34 3.50 3.39 3.84 Net interest margin - FTE................... 3.79 3.93 3.79 4.38
(The remainder of this page intentionally left blank) 8 Average Consolidated Balance Sheets and Net Interest Analysis (Dollars in thousands)
Three Months Ended September 30, ------------------------------------------------------------------------ 1999 1998 -------------------------------- ------------------------------- Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate ASSETS ------- ------- ------ ------- ------- ------ Earnings assets: Interest bearing deposits........................ $ 409 $ 5 5.08% $ 324 $ 5 6.12% Federal funds sold............................... 240 3 5.39 418 6 5.69 Investment securities: Taxable....................................... 204,056 3,361 6.53 118,404 1,981 6.64 Tax-exempt - FTE.............................. 38,223 646 6.71 23,115 408 7.00 Loans (net of unearned income).................. 434,414 9,464 8.64 341,563 8,179 9.50 -------- ------- -------- ------- Total earning assets........................ 677,342 13,479 7.89 483,824 10,579 8.67 Non-earning assets............................... 51,859 42,076 -------- -------- Total assets................................ $729,201 $525,900 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: Deposits: Savings and interest bearing transaction ...... $108,776 $ 713 2.60% $ 75,444 $ 541 2.84% Time deposit of $100,000 or more............... 174,262 2,157 4.91 90,459 1,285 5.64 Other time deposits............................ 241,237 3,034 4.99 216,969 3,099 5.67 -------- ------- -------- ------- Total interest bearing deposits............. 524,275 5,904 4.47 382,872 4,925 5.10 FHLB advances and federal funds................ 83,772 1,072 5.08 47,963 631 5.22 Repurchase agreements.......................... 3,132 35 4.45 - - Notes payable.................................. 48 1 6.01 12,477 226 7.19 -------- ------- -------- ------- Total interest bearing liabilities.......... 611,227 7,012 4.55 443,312 5,782 5.17 Non-interest liabilities: Non-interest bearing deposits.................. 54,942 40,727 Other non-interest liabilities................. 3,117 3,433 -------- -------- Total liabilities........................... 669,286 487,472 Trust preferred securities....................... 17,250 - Stockholders' equity............................. 42,665 38,428 -------- -------- Total liabilities and stockholders' equity.. $729,201 $525,900 ======== ======== Interest rate spread - FTE....................... 3.34% 3.50% ------- ------- Net interest income - FTE........................ $ 6,467 $ 4,797 ======= ======= Net interest margin - FTE........................ 3.79% 3.93%
Nine Months Ended September 30, ------------------------------------------------------------------------ 1999 1998 -------------------------------- ------------------------------- Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate ASSETS ------- ------- ------ ------- ------- ------ Earnings assets: Interest bearing deposits....................... $ 288 $ 11 5.32% $ 4,836 $ 201 5.56% Federal funds sold.............................. 297 11 5.17 2,089 92 5.89 Investment securities: Taxable....................................... 189,165 9,352 6.61 78,812 3,946 6.69 Tax-exempt - FTE.............................. 36,226 1,829 6.75 18,609 1,015 7.29 Loans (net of unearned income).................. 412,448 27,058 8.77 312,229 22,570 9.66 -------- ------- -------- ------- Total earning assets........................ 638,424 38,261 8.01 416,575 27,824 8.93 Non-earning assets............................... 50,273 34,276 -------- -------- Total assets................................ $688,697 $450,851 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: Deposits: Savings and interest bearing transaction ..... $104,729 $ 2,042 2.61% $ 69,908 $ 1,485 2.84% Time deposit of $100,000 or more.............. 175,564 6,511 4.96 77,640 3,279 5.65 Other time deposits........................... 237,351 9,052 5.10 184,012 7,805 5.67 -------- ------- -------- ------- Total interest bearing deposits............. 517,644 17,605 4.55 331,560 12,569 5.07 FHLB advances and federal funds................. 55,929 2,110 5.04 33,593 1,186 4.72 Repurchase agreements........................... 2,045 64 4.19 - - Notes payable................................... 7,904 384 6.50 7,720 434 7.52 -------- ------- -------- ------- Total interest bearing liabilities.......... 583,522 20,163 4.62 372,873 14,189 5.09 Non-interest liabilities: Non-interest bearing deposits................... 54,217 38,215 Other non-interest liabilities.................. 2,978 2,429 -------- -------- Total liabilities........................... 640,717 413,517 Trust preferred securities....................... 6,571 - Stockholders' equity............................. 41,409 37,334 -------- -------- Total liabilities and stockholders' equity.. $688,697 $450,851 ======== ======== Interest rate spread - FTE....................... 3.39% 3.84% ------- ------- Net interest income - FTE........................ $18,098 $13,635 ======= ======= Net interest margin - FTE........................ 3.79% 4.38%
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) gains on sales of assets. Non-interest income for the third quarter of 1999 was $1,293,000 compared with $1,333,000 for the third quarter of 1998, a 3.0% decrease. For the first nine months of 1999 non-interest income was $3,864,000 compared with $3,580,000 for the same period in 1998, a 7.9% increase. During each of the first three quarters of 1999 the Company benefited from strong growth in service charges on deposits and increases in trust income from the levels achieved during the comparable quarters of 1998. These improvements have been offset by declining mortgage lending income. The increase in service charges on deposit accounts resulted from continued growth in the number of checking, savings and money market accounts, the impact of an increase in service charge rates effective January 1, 1999, and more stringent waiver and collection practices. The Company's growth in trust income resulted from an increase in the volume of trust business due to expansion and relocation of the Company's trust department to Little Rock in late 1998. Mortgage lending income, which has been the largest contributor to the Company's growth in non-interest income in recent years, declined for the third quarter of 1999 and the first nine months of 1999 compared to the levels achieved during the comparative periods in 1998. This decline resulted primarily from a reduction in the volume of mortgage refinancing and new home purchases as mortgage rates have risen and slowed real estate activity in general. The table below shows non-interest income for the three and nine months ended September 30, 1999 and 1998. Non-Interest Income
Three Months Ended Nine Months Ended September 30, September 30, ----------------------------- ------------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ (Dollars in thousands) Service charges on deposit accounts............ $ 674 $ 366 $1,774 $ 973 Mortgage lending income........................ 316 570 1,116 1,388 Other charges and fees......................... 155 160 486 491 Trust income................................... 113 62 356 239 Gain on sales of foreclosed real estate........ 16 6 21 91 Gain (loss) on sales of other assets........... - - (14) 15 Gain on sales of securities.................... - 130 75 255 Printed check sales............................ 9 32 27 106 Other.......................................... 10 7 23 22 ------------ ------------ ------------ ------------ Total non-interest income................. $1,293 $1,333 $3,864 $3,580 ============ ============ ============ ============
(The remainder of this page intentionally left blank) 10 Non-Interest Expense Non-interest expense for the third quarter of 1999 was $4,195,000 compared with $3,267,000 for the same period in 1998, a 28.4% increase. Non-interest expense for the nine months ended September 30, 1999, was $12,203,000 compared with $9,520,000 for the nine months ended September 30, 1998, a 28.2% increase. The table below shows non-interest expense for the three and nine months ended September 30, 1999 and 1998. Non-Interest Expense
Three Months Ended Nine Months Ended September 30, September 30, ------------------------------- --------------------------------- 1999 1998 1999 1998 ------------ ------------ --------------- ------------- (Dollars in thousands) Salaries and employee benefits.................... $2,273 $1,651 $ 6,594 $5,284 Net occupancy expense............................. 316 235 896 616 Equipment expense................................. 365 294 1,040 791 Other real estate and foreclosure expense......... 79 14 218 46 Other operating expense: Professional and outside services............. 119 68 332 129 Postage....................................... 65 64 214 184 Telephone .................................... 105 86 298 236 Data lines.................................... 56 30 139 99 Operating supplies............................ 129 111 367 339 Advertising and public relations.............. 175 233 476 419 Directors' fees............................... 28 28 89 84 Software expense.............................. 78 52 210 130 Check printing charges........................ 8 49 18 128 ATM expense.................................. 52 26 131 80 FDIC & state assessment....................... 57 38 159 105 Business development, meals and travel........ 41 44 115 104 Amortization of goodwill...................... 22 23 67 63 Amortization of other intangibles ............ 42 13 130 67 Other ........................................ 185 208 710 616 ------------ ------------ --------------- ------------- Total non-interest expense................... $4,195 $3,267 $12,203 $9,520 ============ ============ =============== =============
The increase in the 1999 non-interest expenses primarily resulted from increased costs associated with the Company's continued growth, including the addition of five new offices in 1998 and two new offices in the first half of 1999, as well as expenses incurred in connection with consolidation of the Company's subsidiaries into a single charter. The Company's efficiency ratios (non-interest expenses divided by the sum of net interest income on a tax equivalent basis and non-interest income) were 54.1% and 55.6%, respectively, for the third quarter and first nine months of 1999 compared to 53.3% and 55.3%, respectively, for the third quarter and first nine months of 1998. Income Taxes The provision for income taxes was $639,000 for the quarter ended September 30, 1999, compared to $544,000 for the same period in 1998. The effective income tax rates were 27.2% and 27.7%, respectively, for the third quarters of 1999 and 1998. The provision for income taxes was $1,970,000 for the nine months ended September 30, 1999, compared to $1,883,000 for the first nine months of 1998. The effective income tax rates were 28.7% and 31.0%, respectively, for these periods. The decrease in effective tax rates for the 1999 periods resulted primarily from the Company's increased investments in tax- exempt securities. These include securities exempt from both federal and Arkansas income taxes as well as other securities exempt solely from Arkansas income taxes. 11 Analysis of Financial Condition Loan Portfolio At September 30, 1999, the Company's loan portfolio was $448.9 million, an increase from $387.5 million at December 31, 1998. As of September 30, 1999, the Company's loan portfolio consisted of approximately 61.6% real estate loans, 18.1% consumer loans, 15.1% commercial and industrial loans and 4.4% agricultural loans (non-real estate). The amount and type of loans outstanding at September 30, 1999 and 1998 and December 31, 1998 are reflected in the following table. Loan Portfolio
September 30, December 31, ------------------------------- ------------ 1999 1998 1998 ----------- ----------- ------------ (Dollars in thousands) Real Estate: Single family residential.............. $128,190 $116,561 $121,539 Non-farm/non-residential............... 96,753 64,328 76,563 Agricultural........................... 20,668 16,345 19,463 Construction/land development.......... 26,750 21,372 23,305 Multifamily residential................ 4,210 5,975 6,207 ----------- ----------- ----------- Total real estate................ $276,571 $224,581 $247,077 Consumer ................................... 81,206 64,510 66,407 Commercial and industrial................... 67,806 50,131 52,192 Agricultural (non-real estate).............. 19,701 19,087 20,068 Other....................................... 3,660 856 1,782 ----------- ----------- ----------- Total loans..................... $448,944 $359,165 $387,526 =========== =========== ===========
Nonperforming Assets Nonperforming assets consist of (1) nonaccrual loans, (2) accruing loans 90 days or more past due, (3) 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 assets as a percent of total assets were 0.62% as of September 30, 1999, compared to 0.50% as of December 31, 1998, and 0.45% as of September 30, 1998. Nonperforming loans as a percent of total loans were 0.59% as of September 30, 1999 compared to 0.70% as of December 31, 1998, and 0.65% as of September 30, 1998. During the first quarter of 1999 the Company placed on non-accrual status real estate loans to a single borrower and charged these loans down to the $1.6 million dollar appraised value of the collateral. During the third quarter the Company completed foreclosure and acquired title to the real estate securing these loans and transferred the loan balances to other real estate. This transfer resulted in a significant reduction in the Company's ratio of non-performing loans from the same ratio reported for the first two quarters of 1999. 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 being adjusted to the then market value, if lower, until disposition. Under Arkansas banking law, other real estate owned is generally required to be written off over a five year period unless approval of the Arkansas State Bank Department can be obtained to write such assets off over an extended period. 12 The following table presents information concerning nonperforming assets, including nonaccrual and restructured loans and foreclosed assets held for sale. Nonperforming Assets
September 30, December 31, ------------------------------ ------------ 1999 1998 1998 ---------- ---------- ------------ (Dollars in thousands) Nonaccrual loans......................................... $2,670 $2,287 $2,708 Accruing loans 90 days or more past due.................. - 43 21 Restructured loans....................................... - - - ------ ------ ------ Total nonperforming loans..................... 2,670 2,330 2,729 Foreclosed assets held for sale and repossessions........ 2,035 237 314 ------ ------ ------ Total nonperforming assets.................... $4,705 $2,567 $3,043 ====== ====== ====== Nonperforming loans to total loans....................... 0.59% 0.65% 0.70% Nonperforming assets to total assets..................... 0.62 0.45 0.50
Allowance and Provision for Loan Losses Allowance for Loan Losses: The following table shows an analysis of the allowance for loan losses for the nine month periods ended September 30, 1999 and 1998 and the year ended December 31, 1998.
Nine Months Ended Twelve Months Ended September 30, December 31, ----------------- ------------------- 1999 1998 1998 ---- ---- ---- (Dollars in thousands) Balance, beginning of period ............................... $ 4,689 $ 3,737 $ 3,737 Loans charged off: Real estate........................................... 348 32 93 Consumer ............................................. 403 376 633 Commercial and industrial ............................ 161 214 423 Agricultural (non-real estate) ....................... 33 - - ------- ------- ------- Total loans charged off ......................... 945 622 1,149 ------- ------- ------- Recoveries of loans previously charged off: Real estate .......................................... 5 10 9 Consumer.............................................. 89 42 55 Commercial and industrial............................. 4 3 11 Agricultural (non-real estate)........................ - - - ------- ------- ------- Total recoveries ............................... 98 55 75 ------- ------- ------- Net loans charged off....................................... 847 567 1,074 Provision charged to operating expense ..................... 1,769 1,222 2,026 ------- ------- ------- Balance, end of period...................................... $ 5,611 $ 4,392 $ 4,689 ======= ======= ======= Net charge-offs to average loans outstanding during the periods indicated................................... 0.27%(1) 0.24%(1) 0.33% Allowance for loan losses to total loans ................... 1.25 1.22 1.21 Allowance for loan losses to nonperforming loans.... ....... 210.13 188.50 171.82 (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 reserve are (1) an internal grading system, (2) a peer group analysis, and (3) a historical analysis. In addition to this 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 $5,611,000 at September 30, 1999, or 1.25% of total loans, compared with $4,689,000, or 1.21% of total loans, at December 31, 1998. 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 nine months of 1999, annualized net charge-offs were 0.27% of average outstanding loans compared with 0.24% for the year of 1998 and 0.24% annualized for the first nine months of 1998. The annualized charge-off ratio for the third quarter of 1999 was 0.20%. Provision for Loan Losses: The loan loss provision reflects management's ongoing assessment of the loan portfolio and is evaluated in light of risk factors mentioned above. The provision for loan losses was $1,769,000 for the nine months ended September 30, 1999, compared to $1,222,000 for the same nine month period in 1998. Investments and Securities The Company's securities portfolio is the second largest component of earning assets and provides a significant source of revenue for the Company. The table below presents the amortized cost and the fair value of investment securities for each of the dates indicated.
Investment Securities September 30, September 30, December 31, 1999 1998 1998 -------------------- ----------------------- --------------------- Amortized Fair Amortized Fair Amortized Fair Cost(1) Value(2) Cost(1) Value(2) Cost(1) Value(2) -------------------- ----------------------- --------------------- (Dollars in thousands) Securities of U.S. Government Agencies......................... $193,230 $185,133 $152,424 $153,172 $156,351 $156,331 Mortgage-backed securities............ 12,690 12,060 2,111 2,145 2,107 2,117 Obligations of state and political subdivisions..................... 38,785 36,572 4,203 4,063 14,742 14,884 Other securities...................... 5,241 5,311 2,904 2,961 3,286 3,347 -------- -------- -------- -------- -------- -------- Total.......... $249,946 $239,076 $161,642 $162,341 $176,486 $176,679 ======== ======== ======== ======== ======== ========
(1) The amortized cost on available-for-sale securities does not include unrealized gains or losses on those securities. (2) The fair value of the Company's financial instruments 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. Liquidity and Capital Resources Line of Credit. The Company maintains a revolving line of credit for up to $22 million with a correspondent bank. Interest accrues on all outstanding borrowings due under the line of credit at a variable rate equal to the average prime lending rate reported from time to time by the Wall Street Journal minus 1.25%, provided, however, the rate is not to exceed 7.75%. Interest is payable quarterly. The line of credit is effective through March 31, 2003 subject to an annual compliance review by the lender. No standby or unused commitment fees are payable by the Company under the line of credit. All borrowings under the line of credit are secured by a pledge of 100% of the Company's stock in its bank subsidiary. As of September 30, 1999, there were no borrowings outstanding under this line of credit. 14 The line of credit requires the Company's bank subsidiary to maintain, among other requirements, (1) a return on average assets for each calendar year equal to at least 1.0%, (2) a ratio of capital, as defined in the line of credit, to assets at levels acceptable to bank regulatory authorities but at least 7.0% at each calendar year end, (3) its classified assets as defined by regulatory authorities not in excess of 40% of its capital, (4) non-performing assets (as shown on its call report) in an amount not to exceed 2% of assets as of year end, (5) a loan loss reserve equal to the greater of 1% of total loans or 100% of non-performing assets, and (6) net charges to the reserve for loan losses at less than 1.0% of net loans during any calendar year. In addition, the line of credit requires that the parent Company's aggregate indebtedness not exceed 55.0% of the Company's tangible net worth through March 31, 2000, reducing 5% a year thereafter and that borrowings under the line of credit not exceed 50.0% of the tangible book value of its bank subsidiary stock pledged to secure such borrowings. At September 30, 1999 the Company was in compliance with these requirements. Trust Preferred Securities. On June 18, 1999 Ozark Capital sold to investors $17.3 million of 9% 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 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 preferred securities and the subordinated debentures will mature on June 18, 2029; however, they may be prepaid, subject to regulatory approval, prior to maturity at any time on or after June 18, 2004, or earlier upon certain changes in tax or investment company laws or regulatory capital requirements. The net proceeds from this offering were used to repay $12.5 million outstanding borrowings under the Company's revolving line of credit with the balance of the proceeds used for general corporate purposes including a $3.0 million capital investment in the Company's bank subsidiary. Growth and Expansion. Construction continued in the third quarter on a branch in Clinton, Arkansas with completion expected in the fourth quarter of 1999. The Company began construction on a second branch location in North Little Rock with completion expected late in the fourth quarter. The Company has received regulatory approval for additional branches in the Otter Creek area of Little Rock, on Zero Street in Fort Smith and in Yellville. Construction of the Yellville office is expected to begin in late 1999 with an opening scheduled for the second quarter of 2000. Construction of the new Little Rock and Fort Smith branches should begin and be completed in 2000. In the first nine months of 1999 the Company spent approximately $3.1 million on acquiring, constructing and furnishing its new branch offices. The Company expects its capital expenditures to be approximately $1.2 million for the remainder of 1999. Bank Liquidity. Liquidity represents an institution's ability to provide funds to satisfy demands from depositors and borrowers by either converting assets into cash or accessing new or existing sources of incremental funds. Generally, the Company's bank subsidiary relies on customer deposits and loan repayments as their primary sources of funds. The Company has used these funds, together with FHLB advances and other borrowings, to make loans, acquire investment securities and other assets and to fund continuing operations. Deposit levels may be affected by a number of factors, including rates paid by competitors, general interest rate levels, returns available to customers on alternative investments and general economic conditions. Loan repayments are a relatively stable source of funds, but such loans generally are not readily convertible to cash. Accordingly, the Company may be required from time to time to rely on secondary sources of liquidity to meet loan and withdrawal demands or otherwise fund operations. Such sources include FHLB advances, federal funds lines of credit from correspondent banks, Federal Reserve Bank, and borrowings by the Company under its line of credit described above. At September 30, 1999, the Company's bank subsidiary had substantial unused borrowing availability. This availability is primarily comprised of the following three options: (1) $7.0 million with the Federal Home Loan Bank which offers various terms, (2) $62.7 million of securities available to pledge on a federal funds line of credit, and (3) up to $190.3 million from several 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 borrowings (including borrowings under the Company's line of credit) will be used to augment the Company's primary funding sources. Year 2000 Liquidity Needs. The Company may experience additional liquidity needs in connection with increased deposit withdrawals due to customer concerns over the Year 2000 issue. The Board of Directors has adopted a Contingency Funding Plan to guide management in handling unusual liquidity needs. In preparing for possible increased Year 2000 liquidity demands, management has taken several actions including: (1) modification of the pricing and terms of certain time deposit products to encourage depositors to accept maturities after year-end, (2) developing plans to place collateral with various sources of secondary liquidity to facilitate short-term borrowing, and (3) developing plans to have additional cash available at the branches and ATMs of the bank subsidiary during the latter part of the year. Although management believes these and other actions will prepare the Company for this potential liquidity need, there can be no assurance these steps will be adequate. 15 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 Company's risk-based and leverage capital ratios exceeded these minimum requirements at September 30, 1999, and December 31, 1998, and are presented below, followed by the capital ratios of the Company's bank subsidiary at September 30, 1999. Consolidated Capital Ratios
September 30, December 31, ------------- ------------ 1999 1998 ------------- ------------ (Dollars in thousands) Tier 1 capital: Stockholders' equity.................................................. $ 42,716 $ 40,355 Allowed amount of guaranteed preferred beneficial interest in Company's subordinated debentures (trust preferred securities)...... 14,677 - Plus (less) net unrealized losses (gains) on available for sale securities.......................................................... 1,315 (81) Less goodwill and certain intangible assets........................... (3,346) (3,623) ------------- -------------- Total tier 1 capital.................................. $ 55,362 $ 36,651 ============= ============== Tier 2 capital: Qualifying allowance for loan losses................................. 5,611 4,689 Remaining amount of guaranteed preferred beneficial interest in Company's subordinated debentures (trust preferred securities).... 2,573 - ------------- ------------- Total risk-based capital............................. $ 63,546 $ 41,340 ============= ============= Risk-weighted assets..................................................... $ 483,376 $ 404,879 ============== ============== Ratios at end of period: Leverage............................................................. 7.63% 6.21% Tier 1 risk-based capital............................................ 11.45 9.05 Total risk-based capital............................................. 13.15 10.21 Minimum ratio guidelines: Leverage............................................................. 3.00%(1) 3.00%(1) Tier 1 risk-based capital............................................ 4.00 4.00 Total risk-based capital............................................. 8.00 8.00
Capital Ratios of Bank Subsidiary
September 30, 1999 ---------------------- (Dollars in thousands) Stockholders' equity - Tier 1........................ $ 56,122 Leverage ratio....................................... 7.73% Risk-based capital ratios: Tier 1....................................... 11.63% Total capital................................ 12.79
(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. 16 Year 2000 The Year 2000 issue relates to the ability of the Company's computer and other systems with imbedded microchips to properly handle Year 2000 date sensitive data and the potential risk to the Company because of relationships with third parties (e.g. software and hardware vendors, loan customers, correspondent banks, utility companies and others) who do not adequately address the Year 2000 issue. Failure in any of these areas could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions or engage in normal business activities. In late 1997 the Company established a Year 2000 Project Committee to evaluate and assess the Company's exposure to this issue. This Committee has implemented an approach to the Year 2000 issue consisting of four phases. These phases include awareness, assessment, renovation and testing. The awareness phase consisted of defining the Year 2000 problem, developing the resources necessary to perform compliance work, establishing a Year 2000 program committee and program coordinator and developing an overall strategy that encompasses in-house systems, service bureaus, vendors, auditors, customers and suppliers (including correspondents). This phase has been completed. The assessment phase consists of evaluating the size and complexity of the problem and detailing the magnitude of the effort necessary to address the Year 2000 issue. The objective of this phase is to identify all hardware, software, networks, automated teller machines, other various processing platforms, and customer and vendor interdependencies affected by the Year 2000 date change. The assessment phase goes beyond the Company's information systems and includes environmental systems that are dependent on embedded microchips, such as security systems, elevators, sprinkler systems, alarms and vaults. The assessment phase is substantially completed, but is considered an ongoing process for the Company. The renovation phase includes the remediation of any systems identified in the awareness phase as not Year 2000 compliant. The replacement of a proof/capture system was expedited due to lack of Year 2000 compliance earlier in 1998. Also the need for minor upgrades to several proof machines were identified and have been completed. Environmental systems including vault doors, security systems, elevators, sprinkler systems and alarms have been evaluated and assurances from vendors have been received regarding their Year 2000 compliance. The renovation phase is complete with all identified problem areas having been addressed. The Company has completed its testing phase with the primary focus having been on the core software that runs basic bank services including the following applications: checking, savings, time deposits, individual retirement accounts, loans, safe deposit box and general ledger accounting. Complete testing of mission critical systems was substantially complete as of December 31, 1998. Further testing with mission critical vendors and other significant third party vendors was completed in the first half of 1999. The Company has not identified any problems with any of its systems that would have a material adverse impact upon its operations. The Company incurred expenses throughout 1996, 1997, 1998 and in the first nine months of 1999 related to this project and will continue to incur expenses over the next three months. The Company currently estimates that the cost to remediate both its Year 2000 hardware and software issues to be less than $130,000 with substantially all of these costs having already been expended through September 30, 1999. A significant portion of total Year 2000 project expenses is represented by existing staff that have been redeployed to this project. The Company does not believe that the redeployment of existing staff has had or will have a material adverse effect on its business, results of operations or financial position nor have any projects under consideration by the Company been deferred because of Year 2000. The Company expects to maintain cash balances within its branch network in excess of normal levels during the remainder of 1999 and early 2000. These cash balances will result in lost interest income to the Company. In addition the Company expects to incur additional cost in shipping such cash balances to and from its offices and may also incur additional security cost during this time period. The amount of lost interest and additional cost cannot be determined at this time, but the Company does not expect these costs to materially impact its financial results. The impact of Year 2000 issues on the Company will depend not only on corrective actions that the Company takes, but also on the way in which Year 2000 issues are addressed by governmental agencies, businesses and other third parties that provide services or data to, or receive services or data from, the Company, or whose financial condition or operational capability is important to the Company. To reduce this exposure, the Company has an ongoing process of identifying and contacting mission critical third party vendors and other significant third parties to determine their Year 2000 plans and target dates. Notwithstanding the Company's efforts, there can be no assurance that mission critical third party vendors or other significant third parties will adequately address their Year 2000 issues. 17 The Company has developed contingency plans for implementation in the event that mission critical third party vendors or other significant third parties fail to adequately address Year 2000 issues. Such plans principally involve identifying alternate vendors or internal remediation. There can be no assurance that any such plans will fully mitigate any failures or problems. Furthermore, there may be certain mission critical third parties, such as utilities or telecommunication companies, where alternative arrangements or sources are limited or unavailable. The most reasonably likely worst case scenario would be that the Company may experience disruption in its operations if any of these mission critical third parties experienced system failure. The Company's credit risk associated with borrowers may increase to the extent borrowers fail to adequately address Year 2000 issues. As a result there may be increases in the Company's problem loans and credit losses in future years. The Company is making ongoing efforts to assess the risks associated with loan customers, large depositors and significant employers in the Company's service areas, however, it is not possible to quantify the potential impact of such risks at this time. As remediated and tested systems and other new systems are brought into operation, the Company will need to take steps to avoid the re-introduction of Year 2000 related problems into its systems. This is an ongoing process for the Company because normal operations and other considerations may require that modifications continue to be made to its systems in 1999. To some extent, therefore, all four phases of the Company's project will need to continue throughout 1999 and beyond. The forward-looking statements contained herein with regard to the timing and overall cost estimates of the Company's efforts to address the Year 2000 problem are based upon the Company's experience thus far in this effort. Should the Company encounter unforeseen difficulties either in the continuing review of its computerized systems, their ultimate remediation, or the response of parties with which it does business or from which it obtains services, the actual results could vary significantly from the estimates contained in these forward- looking statements. 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 anticipated future operating and financial performance, growth opportunities and growth rates, acquisition opportunities and other similar forecasts and statements of expectation. Words such as "anticipate," "believe," "estimate," "expect," "intend" and similar expressions, as they relate to the Company or its management, identify forward-looking statements. Forward-looking statements made by the Company and its management are based on estimates, projections, beliefs and assumptions of management at the time of such statements and are not guarantees of future performance. The Company disclaims any obligation to update or revise any forward-looking statement based on the occurrence of future events, the receipt of new information, or otherwise. Actual future performance, outcomes and results may differ materially from those expressed in forward-looking statements made by the Company and its management due to certain risks, uncertainties and assumptions. Certain factors that may affect operating results of the Company include, but are not limited to, the following: (1) potential delays or other problems in implementing the Company's growth and expansion strategy; (2) the ability to attract new deposits and loans; (3) interest rate fluctuations; (4) competitive factors and pricing pressures; (5) general economic conditions; and (6) changes in legal and regulatory requirements, as well as, other factors described in this and other Company reports and statements. Should one or more of the foregoing risks materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described in the forward-looking statements. (The remainder of this page intentionally left blank) 18 Selected and Supplemental Financial Data The Company is also providing the selected and supplemental financial data in the tables below. The following table sets forth selected consolidated financial data concerning the Company for the three and nine month periods ended September 30, 1999 and 1998 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 Nine Months Ended September 30, September 30, ----------------------- ----------------------- 1999 1998 1999 1998 -------- -------- -------- -------- Income statement data: Net interest income............................................. $ 6,222 $ 4,641 $ 17,418 $ 13,227 Provision for loan losses....................................... 578 742 1,769 1,222 Non-interest income............................................. 1,293 1,333 3,864 3,580 Non-interest expenses - excluding goodwill charges ............. 4,173 3,244 12,136 9,457 Goodwill charges - net of tax................................... 22 23 67 63 Distribution on trust preferred securities...................... 397 - 449 - Net income...................................................... 1,706 1,421 4,891 4,182 Per common share data: Earnings - diluted.............................................. $ 0.45 $ 0.37 $ 1.29 $ 1.09 Book value...................................................... 11.30 10.35 11.30 10.35 Fully diluted shares outstanding (thousands).................... 3,789 3,814 3,792 3,828 End of period shares outstanding (thousands) ................... 3,780 3,780 3,780 3,780 Balance sheet data at period end: Total assets.................................................... $757,313 $566,485 $757,313 $566,485 Total loans..................................................... 448,944 359,165 448,944 359,165 Allowance for loan losses....................................... 5,611 4,392 5,611 4,392 Total investment securities..................................... 247,815 161,746 247,815 161,746 Total deposits.................................................. 594,341 463,921 594,341 463,921 FHLB advances & fed funds purchased............................. 92,505 48,526 92,505 48,526 Notes payable................................................... 108 12,022 108 12,022 Total stockholders' equity...................................... 42,716 39,116 42,716 39,116 Loan to deposit ratio........................................... 75.54% 77.42% 75.54% 77.42% Performance ratios: Return on average assets*....................................... 0.93% 1.07% 0.95% 1.24% Return on average stockholders' equity*......................... 15.86 14.67 15.79 14.98 Net interest margin - FTE*...................................... 3.79 3.93 3.79 4.38 Overhead ratio*................................................. 2.28 2.46 2.37 2.82 Efficiency ratio................................................ 54.07 53.30 55.56 55.30 Asset quality ratios: Net charge-offs as a percentage of average total loans* ........ 0.20% 0.24% 0.27% 0.24% Nonperforming loans to total loans.............................. 0.59 0.65 0.59 0.65 Nonperforming assets to total assets............................ 0.62 0.45 0.62 0.45 Allowance for loan losses as a percentage of: Total loans..................................................... 1.25% 1.22% 1.25% 1.22% Nonperforming loans............................................. 210.13 188.50 210.13 188.50 Capital ratios at period end: Leverage capital ratio.......................................... 7.63% 6.77% 7.63% 6.77% Tier 1 risk-based capital....................................... 11.45 9.50 11.45 9.50 Total risk-based capital........................................ 13.15 10.68 13.15 10.68
*Annualized based on actual days 19 Bank of the Ozarks, Inc. Supplemental Quarterly Financial Data (Dollars in thousands, except per share amounts) Unaudited
12/31/97 3/31/98 6/30/98 9/30/98 12/31/98 3/31/99 6/30/99 9/30/99 -------- ------- ------- ------- -------- ------- ------- ------- Earnings Summary: - ----------------- Net interest income $ 4,251 $ 4,157 $ 4,430 $ 4,641 $ 5,136 $ 5,309 $ 5,887 $ 6,222 Federal tax equivalent adjustment 56 72 158 156 56 193 242 244 -------- ------- ------- ------- -------- ------- ------- ------- Net interest margin - FTE 4,307 4,229 4,588 4,797 5,192 5,502 6,129 6,466 Loan loss provision (465) (225) (255) (742) (804) (611) (580) (578) Non-interest income 880 1,094 1,152 1,333 1,452 1,269 1,303 1,293 Non-interest expense (2,588) (2,924) (3,329) (3,267) (3,599) (3,768) (4,241) (4,195) -------- ------- ------- ------- -------- ------- ------- ------- Pretax income - FTE 2,134 2,174 2,156 2,121 2,241 2,392 2,611 2,986 FTE adjustment (56) (72) (158) (156) (56) (193) (242) (244) Provision for taxes (709) (728) (611) (544) (738) (673) (658) (639) Distribution on trust preferred securities - - - - - - (52) (397) -------- ------- ------- ------- -------- ------- ------- ------- Net income $ 1,369 $ 1,374 $ 1,387 $ 1,421 $ 1,447 $ 1,526 $ 1,659 $ 1,706 ======== ======= ======= ======= ======== ======= ======= ======= Earnings per share - diluted $ 0.36 $ 0.36 $ 0.36 $ 0.37 $ 0.38 $ 0.40 $ 0.44 $ 0.45 Non-interest Income Detail: - --------------------------- Trust income $ 98 $ 78 $ 99 $ 62 $ 96 $ 128 $ 115 $ 113 Service charges on deposit accounts 263 281 326 366 399 502 599 674 Mortgage lending income 199 395 423 570 748 449 351 316 Gain (loss) on sale of 138 88 12 6 6 (5) (5) 16 assets Security gains - 51 74 130 - 25 50 - Other 182 201 218 199 203 170 193 174 -------- ------- ------- ------- -------- ------- ------- ------- Total non-interest income $ 880 $ 1,094 $ 1,152 $ 1,333 $ 1,452 $ 1,269 $ 1,303 $ 1,293 Non-interest Expense Detail: - ---------------------------- Salaries and employee benefits $ 1,502 $ 1,677 $ 1,955 $ 1,651 $ 1,913 $ 2,000 $ 2,322 $ 2,273 Net occupancy expense 386 426 453 529 553 636 619 681 Other operating expenses 681 799 894 1,051 1,045 1,065 1,234 1,177 Goodwill charges 14 17 22 23 44 22 23 22 Other intangibles 5 5 5 13 44 45 43 42 -------- ------- ------- ------- -------- ------- ------- ------- Total non-interest $ 2,588 $ 2,924 $ 3,329 $ 3,267 $ 3,599 $ 3,768 $ 4,241 $ 4,195 expense Allowance for Loan Losses: - -------------------------- Balance beginning of period $ 3,535 $ 3,737 $ 3,822 $ 3,853 $ 4,392 $ 4,689 $ 4,850 $ 5,248 Net charge offs (263) (140) (224) (203) (507) (450) (182) (215) Loan loss provision 465 225 255 742 804 611 580 578 -------- ------- ------- ------- -------- ------- ------- ------- Balance at end of period $ 3,737 $ 3,822 $ 3,853 $ 4,392 $ 4,689 $ 4,850 $ 5,248 $ 5,611 Selected Ratios: - ---------------- Net interest margin - FTE 5.27% 4.83% 4.50% 3.93% 3.77% 3.77% 3.81% 3.79% Overhead expense ratio* 2.95 3.10 3.01 2.46 2.41 2.38 2.45 2.28 Efficiency ratio 49.89 54.93 58.00 53.30 54.17 55.65 57.06 54.07 Non-performing loans to total loans 0.25 0.54 0.55 0.65 0.70 1.04 1.01 0.59 Non-performing assets to total assets 0.24 0.40 0.45 0.45 0.50 0.75 0.70 0.62
*Annualized 20 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 review other alternative interest rate risk measures and models in assessing the Company's interest rate sensitivity. Using a simple GAP analysis as shown in the following table, at September 30, 1999, the cumulative ratios of rate sensitive assets to rate sensitive liabilities at six months and one year, respectively, were 47.71% and 49.25%. 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 conclusions may not reflect future results.
Rate Sensitive Assets and Liabilities September 30, 1999 Rate Rate Cumulative Cumulative Sensitive Sensitive Period Cumulative Gap to RSA(1) to Assets Liabilities Gap Gap Total RSA(1) RSL(2) --------- ----------- -------- ---------- ------------ ---------- (Dollars in thousands) Floating rate................ $ 43,128 $ 61,933 $(18,805) $ (18,805) (2.70%) 69.64% Fixed rate repricing in: 1 month.............. 43,773 69,995 (26,222) (45,027) (6.45) 65.87 2 month.............. 24,738 114,447 (89,709) (134,736) (19.31) 45.31 3 month.............. 22,129 53,842 (31,713) (166,449) (23.86) 44.56 4 month.............. 16,732 20,725 (3,993) (170,442) (24.43) 46.89 5 month.............. 15,827 24,210 (8,383) (178,825) (25.63) 48.19 6 month.............. 16,721 38,489 (21,768) (200,593) (28.75) 47.71 6 months - 1 year.... 76,314 142,983 (66,669) (267,262) (38.30) 49.25 1 - 2 years.......... 84,170 53,170 31,000 (236,262) (33.86) 59.25 2 - 3 years.......... 16,236 5,553 10,683 (225,579) (32.33) 61.46 3 - 4 years.......... 45,861 20,862 24,999 (200,580) (28.75) 66.91 4 - 5 years.......... 30,166 14,658 15,508 (185,072) (26.52) 70.19 Over 5 years......... 261,927 35,320 226,607 41,535 5.95 106.33 --------- --------- --------- Total.......... $697,722 $656,187 $ 41,535 ========= ========= =========
(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 which are reflected as repricing prorata during the first four years. 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 21 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 ----------------- Not Applicable 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: November 12, 1999 /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). 27 Financial Data Schedule for the period ended September 30, 1999 (attached). 24 EX-27 2 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCORPORATED BY REFERENCE IN QUARTERLY REPORT 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 19,452 342 620 0 39,197 208,618 199,879 448,944 5,611 757,313 594,341 72,691 2,679 27,528 17,250 0 38 42,678 757,313 26,999 10,559 23 37,581 17,605 20,163 17,418 1,769 75 12,203 7,310 7,310 0 0 4,891 1.29 1.29 3.79 2,670 0 0 3,609 4,689 945 98 5,611 5,611 0 0
-----END PRIVACY-ENHANCED MESSAGE-----