<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
________________
(Mark one)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
( ) 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
425 West Capitol Avenue, Suite 3100, Little Rock, Arkansas 72201
(Former name or address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes (X) No ( )
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practical date.
Class Outstanding at June 30, 1998
- --------------------------------------- ----------------------------
Common Stock, $0.01 par value per share 3,779,555
<PAGE>
BANK OF THE OZARKS, INC.
FORM 10-Q
June 30, 1998
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets as of June 30,
1998 and 1997 and December 31, 1997 1
Consolidated Statements of Income for the
Three Months Ended June 30, 1998 and 1997 and the
Six Months Ended June 30, 1998 and 1997 2
Consolidated Statements of Stockholders' Equity for the
Six Months Ended June 30, 1998 and 1997 3
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1998 and 1997 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 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 21
Item 5. Other Information 21
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
<PAGE>
BANK OF THE OZARKS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
-------------------------------- ---------------
1998 1997 1997
----------- -------------- ---------------
ASSETS
<S> <C> <C> <C>
Cash and due from banks $ 15,420 $ 7,195 $ 9,021
Interest bearing deposits 799 3,316 6,607
Investment securities - available for sale 9,054 32,531 25,297
Investment securities - held to maturity 98,915 2,669 17,162
Federal funds sold - 4,630 2,885
Loans, net of unearned income 321,719 245,795 275,463
Allowance for loan losses (3,853) (3,462) (3,737)
Bank premises and equipment, net 23,465 10,774 13,439
Interest receivable 4,459 2,760 3,013
Excess cost over fair value of net assets acquired, at
amortized cost 2,143 1,366 1,337
Other 1,607 1,746 1,606
-------------- -------------- --------------
Total assets $473,728 $309,320 $352,093
============== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Demand - non-interest bearing $ 39,783 $ 25,552 $ 31,091
Savings and interest bearing transaction 70,554 58,826 64,742
Time 269,933 179,917 199,722
-------------- -------------- --------------
Total deposits 380,270 264,295 295,555
Notes payable 13,072 10,096 5,072
FHLB advances and federal funds purchased 40,038 12,017 14,017
Accrued interest and other liabilities 2,466 2,696 1,783
-------------- -------------- --------------
Total liabilities 435,846 289,104 316,427
-------------- -------------- --------------
Stockholders' equity
Common stock; $0.01 par value; Authorized 10,000,000
shares; 3,779,555 shares issued and outstanding at
December 31, 1997 and June 30, 1998; 2,879,800 shares
issued and outstanding at June 30, 1997 38 29 38
Additional paid in capital 14,314 1,168 14,314
Retained earnings 23,507 18,925 21,162
Accumulated other comprehensive income (net of tax):
Unrealized gain on available for sale securities 23 94 152
-------------- -------------- --------------
Total stockholders' equity 37,882 20,216 35,666
-------------- -------------- --------------
Total liabilities and stockholders' equity $473,728 $309,320 $352,093
============== ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
BANK OF THE OZARKS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------- ---------------------------------
1998 1997 1998 1997
-------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Interest income
Loans $7,426 $5,898 $14,347 $11,206
Investment securities - taxable 1,190 620 1,966 1,232
- non-taxable 273 57 401 112
Federal funds sold 29 24 83 42
Deposits with banks 82 39 196 59
-------------- --------------- -------------- --------------
Total interest income 9,000 6,638 16,993 12,651
Interest expense
Deposits 4,156 2,852 7,644 5,446
Borrowed funds 401 367 750 669
Federal funds purchased 13 1 13 1
-------------- --------------- -------------- --------------
Total interest expense 4,570 3,220 8,407 6,116
-------------- --------------- -------------- --------------
Net interest income 4,430 3,418 8,586 6,535
Provision for loan losses 255 265 480 524
-------------- --------------- -------------- --------------
Net interest income after provision
for loan losses 4,175 3,153 8,106 6,011
-------------- --------------- -------------- --------------
Other income
Trust income 99 78 177 137
Service charges on deposit accounts 326 242 607 452
Other service charges and loan fees 592 300 1,149 490
Gains on sale of securities 74 4 125 14
Other income 61 17 188 290
-------------- --------------- -------------- --------------
Total other income 1,152 641 2,246 1,383
-------------- --------------- -------------- --------------
Other expense
Salaries and employee benefits 1,955 1,283 3,633 2,521
Net occupancy and equipment 453 293 878 578
Other operating expenses 921 642 1,742 1,225
-------------- --------------- -------------- --------------
Total other expense 3,329 2,218 6,253 4,324
-------------- --------------- -------------- --------------
Income before income taxes 1,998 1,576 4,099 3,070
Income taxes 611 572 1,338 1,109
-------------- --------------- -------------- --------------
Net income $1,387 $1,004 $ 2,761 $ 1,961
============== =============== ============== ==============
Basic earnings per common share $0.37 $0.35 $0.73 $0.68
============== =============== ============== ==============
Diluted earnings per common share $0.36 $0.35 $0.72 $0.68
============== =============== ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE>
BANK OF THE OZARKS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in Thousands)
Unaudited
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE
STOCK CAPITAL EARNINGS INCOME TOTAL
----------- ------------- -------- ---------------- ---------
<S> <C> <C> <C> <C> <C>
BEGINNING BALANCE - JANUARY 1, 1997 $ 29 $ 1,168 $17,251 $ 99 $18,547
Comprehensive income:
Net income 1,961 1,961
Other comprehensive income
Unrealized gains on available
for sale securities net of
$2 tax effect 3 3
Less: reclassification adjustment
for gains included in income
net of $5 tax effect (8) (8)
---------
Comprehensive income 1,956
---------
Cash dividends (287) (287)
----------- ------------ -------- ---------- ---------
ENDING BALANCE JUNE 30, 1997 $ 29 $ 1,168 $18,925 $ 94 $20,216
=========== ============ ======== ========== =========
BEGINNING BALANCE JANUARY 1, 1998 $ 38 $ 14,314 $21,162 $ 152 $35,666
Comprehensive income:
Net income 2,761 2,761
Other comprehensive income
Unrealized gains on available
for sale securities net of
$2 tax effect 2 2
Less: reclassification adjustment
for gains included in income
net of $81 tax effect (131) (131)
---------
Comprehensive income 2,632
---------
Cash dividends (416) (416)
----------- ------------ -------- ---------- ---------
ENDING BALANCE JUNE 30, 1998 $ 38 $ 14,314 $23,507 $ 23 $37,882
=========== ============ ======== ========== =========
</TABLE>
3
<PAGE>
BANK OF THE OZARKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Unaudited
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------------------------
1998 1997
---------------- -----------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 2,761 $ 1,961
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Depreciation 375 277
Amortization of goodwill 41 28
Provision for loan losses 480 524
Gain on sale of securities (125) (14)
Gain on sale of loans - (68)
Gain on disposition of premises and equipment (15) (45)
Gain on disposition of foreclosed assets (85) (142)
Deferred income tax benefit (243) (111)
Changes in assets and liabilities
Interest receivable (1,446) (208)
Other assets, net 568 5
Accrued interest and other liabilities 629 414
---------------- -----------------
Net cash provided by operating activities 2,940 2,621
---------------- -----------------
Cash flows from investing activities
Purchase of subsidiary, net of funds acquired 7,164 -
Proceeds from sales and maturities of securities available
for sale 17,033 11,158
Purchases of investment securities available for sale (827) (6,807)
Proceeds from maturities of investment securities held to
maturity 3,402 56
Purchase of investment securities held to maturity (85,156) -
Net change in federal funds sold 3,330 (4,280)
Net increase in loans (47,086) (32,398)
Proceeds from sales of loans - 811
Proceeds from dispositions of bank premises and equipment 15 117
Purchase of bank premises and equipment (9,732) (4,251)
Proceeds from dispositions of foreclosed assets 543 320
---------------- -----------------
Net cash used by investing activities (111,314) (35,274)
---------------- -----------------
Cash flows from financing activities
Net increase in deposits 75,360 32,647
Net change in FHLB advances and federal funds purchased 26,021 (711)
Proceeds from notes payable 13,000 10,096
Payments of notes payable (5,000) (5,396)
Dividends paid (416) (287)
---------------- -----------------
Net cash provided by financing activities 108,965 36,349
---------------- -----------------
Net increase in cash and interest bearing deposits 591 3,696
Cash and interest bearing deposits beginning of period 15,628 6,815
---------------- -----------------
Cash and interest bearing deposits end of period $ 16,219 $ 10,511
================ =================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
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, Bank of
the Ozarks, wca, Bank of the Ozarks, nwa, Bank of the Ozarks and Ozark
Commercial Corporation (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, 1997.
In the opinion of management all adjustments considered necessary,
consisting of normal recurring items, have been included for a fair presentation
of the accompanying consolidated financial statements. Operating results for
the three and six months ended June 30, 1998, are not necessarily indicative of
the results that may be expected for the full year.
3. EARNINGS PER COMMON SHARE:
In 1997, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 128, Earnings per Share. SFAS No. 128 replaced primary earnings
per share ("EPS") with basic EPS. 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 replaces fully diluted EPS and includes the dilutive effect of stock
options. In computing dilution for stock options, the average share price is
used for the period presented. Earnings per share amounts have been presented,
and where appropriate, restated to conform to the requirements of SFAS No. 128.
Basic and diluted earnings per common share is computed as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------------- ----------------------------
1998 1997 1998 1997
-------- ------- -------- ---------
<S> <C> <C> <C> <C>
Common shares - weighted averages................... 3,780 2,880 3,780 2,880
Common share equivalents - weighted averages........ 54 - 48 -
------ ------ ------ ------
3,834 2,880 3,828 2,880
====== ====== ====== ======
Net income.......................................... $1,387 $1,004 $2,761 $1,961
Basic earnings per common share..................... $ 0.37 $ 0.35 $ 0.73 $ 0.68
Diluted earnings per common share................... 0.36 0.35 0.72 0.68
</TABLE>
5
<PAGE>
4. COMPREHENSIVE INCOME:
In 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income".
This statement is effective for fiscal years beginning after December 15, 1997.
This statement establishes standards for reporting and display of comprehensive
income and its components in the financial statements. The objective of the
statement is to report a measure of all changes in equity of an enterprise that
results from transactions and other economic events of the period from nonowner
sources. Comprehensive income begins with net income as reported and includes
gains and losses that under generally accepted accounting principles are
recorded directly to equity. Examples include foreign currency translations,
pension liability adjustments and unrealized gains and losses on available for
sale securities (SFAS 115 adjustment). The Company currently has only
unrealized gains or losses on available for sale securities as an item of
comprehensive income. The Company adopted this statement in the first quarter
of 1998 and has reported its comprehensive income in the consolidated statements
of stockholders' equity.
5. ACQUISITIONS
In February 1998 the Company acquired all of the outstanding shares of
Heritage Banc Holding, Inc. and indirectly its wholly owned subsidiary Heartland
Community Bank, FSB in exchange for $3.1 million in cash. The acquisition was
accounted for as a purchase and the Company recorded excess cost over fair value
of net assets acquired of $846,000. Heartland Community Bank, FSB, which was
subsequently renamed Bank of the Ozarks, had assets of $12.5 million and
deposits of $9.4 million at the time of acquisition.
6. NOTES PAYABLE
In June 1998 the Company incurred additional borrowings of $8 million under
its existing $22 million revolving line of credit ("Credit Agreement"). At June
30, 1998, $13 million was outstanding under this Credit Agreement. The
additional borrowings were used to fund investments in Bank of the Ozarks wca
and Bank of the Ozarks. This Credit Agreement matures March 31, 2003 and
interest accrues on all outstanding borrowings 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.
7. FEDERAL HOME LOAN BANK ("FHLB") ADVANCES
FHLB advances with original maturities exceeding one year totaled $26.0
million at June 30, 1998. Interest rates on these advances ranged from 4.96% to
6.50% at June 30, 1998 with a weighted average rate of 5.67%. Aggregate annual
maturities (amounts in thousands) and weighted average interest rates of FHLB
advances with an original maturity of over one year at June 30, 1998 are as
follows:
Weighted
Amounts Average Rate
-------- ------------
1998 $ 3,000 5.74%
1999 5,268 6.48
2000 2,145 5.77
2001 4,198 5.95
2002 197 6.30
Thereafter 11,185 5.14
-------
$25,993 5.67
=======
In addition, at June 30, 1998, the Company had an FHLB advance with an
original maturity of less than 30 days of $11.6 million. The interest rate on
this advance was 5.80%.
8. SUPPLEMENTARY DATA FOR CASH FLOWS:
Cash payments for interest by the Company during the six months ended June
30, 1998, amounted to $8.4 million and during the six months ended June 30,
1997, amounted to $6.1 million. Cash payments for income taxes during the six
months ended June 30, 1998 and 1997 amounted to $902,000 and $1.1 million,
respectively.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Net income was $1,387,000 for the second quarter of 1998, a 38.1% increase
over net income of $1,004,000 for the same quarter in 1997. Diluted earnings
per share rose 2.9% to $0.36 per share for the quarter ended June 30, 1998,
compared to $0.35 per share for the same quarter in 1997. For the six months
ended June 30, 1998, net income totaled $2,761,000, a 40.8% increase over net
income of $1,961,000 for the first six months of 1997. Diluted earnings for the
first six months of 1998 were $0.72 per share compared to $0.68 per share for
the same period in 1997, a 5.9% increase. Diluted earnings per share for the
1998 periods were impacted by the Company's issuance of 899,755 additional
shares of common stock in the Company's initial public offering ("IPO")
completed during the third quarter of 1997.
The Company's annualized returns on average assets and on average
stockholders' equity were 1.25% and 14.92%, respectively, for the second quarter
of 1998, compared with 1.34% and 20.50%, respectively, for the same quarter of
1997. Annualized returns on average assets and average stockholders' equity for
the six months ended June 30, 1998, were 1.35% and 15.14%, respectively,
compared with 1.36% and 20.55% for the six month period ended June 30, 1997.
Returns on average stockholders' equity for the 1998 periods were impacted by
the increase in equity due to the issuance of new shares in the IPO.
Total assets increased 69.7% on an annualized basis from $352.1 million at
December 31, 1997, to $473.7 million at June 30, 1998. Loans were $321.7
million at June 30, 1998, compared to $275.5 million at December 31, 1997, an
annualized increase of 33.9%. Deposits were $380.3 million at June 30, 1998,
compared to $295.6 million at December 31, 1997, an annualized increase of
57.8%.
Stockholders' equity increased 12.5% on an annualized basis from $35.7
million at December 31, 1997, to $37.9 million at June 30, 1998, increasing per
share book value on an annualized basis by 12.4% from $9.44 to $10.02.
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,
fees from origination of residential mortgage loans for resale, other service
charges and fees, trust fees, and gains on sales. 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 six
months ended June 30, 1998 and 1997.
(The remainder of this page intentionally left blank)
7
<PAGE>
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 33.1% to $4,588,000 for the three
months ended June 30, 1998, from $3,446,000 for the three months ended June 30,
1997. This increase primarily resulted from a 45.4% increase in average earning
assets to $409.4 million for the 1998 period from $281.6 million for the 1997
period. Net interest income (FTE) increased 33.6% to $8,808,000 for the six
months ended June 30, 1998, from $6,593,000 for the six months ended June 30,
1997. This increase primarily resulted from a 40.9% increase in average earning
assets to $382.4 million for the 1998 period from $271.3 million for the 1997
period. The increase in average earning assets for the 1998 periods 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 declined from 4.91% in the second quarter
ended June 30, 1997, to 4.50% for the same quarter of 1998 and from 4.90% in the
six months ended June 30, 1997, to 4.64% in the comparable six month period in
1998. The decline in interest margin for the 1998 periods is primarily a result
of two factors. First, the Company continues to experience strong rate
competition for both loans and deposits. Secondly, the Company has accelerated
its entry into the Little Rock market in order to capitalize on opportunities
presented by recent bank mergers. This accelerated entry together with
continued growth in its existing markets has allowed the Company to capture
market share and grow deposits faster than the Company has grown its loan
portfolio. This increase in deposit growth has caused the Company's loan to
deposit ratio to decline to 84.6% at June 30, 1998, compared with 93.2% at
December 31, 1997. The funds generated by this deposit growth, as well as
additional borrowings from the Federal Home Loan Bank and federal funds, have
been used to purchase investment securities. The increase in the investment
security portfolio in amount and as a percentage of total assets has resulted in
increased net interest income to the Company but has caused the Company's net
interest margin to decline.
ANALYSIS OF NET INTEREST INCOME
(FTE = FULLY TAXABLE EQUIVALENT)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------------ ---------------------------
1998 1997 1998 1997
-------- --------- -------- -------
(Dollars in thousands) (Dollars in thousands)
<S> <C> <C> <C> <C>
Interest income............................. $9,000 $6,638 $16,993 $12,651
FTE adjustment.............................. 158 28 222 58
------ ------ ------- -------
Interest income -- FTE...................... 9,158 6,666 17,215 12,709
Interest expense............................ 4,570 3,220 8,407 6,116
------ ------ ------- -------
Net interest income -- FTE.................. $4,588 $3,446 $ 8,808 $ 6,593
====== ====== ======= =======
Yield on interest earning assets FTE....... 8.97% 9.50% 9.08% 9.45%
Cost of interest bearing liabilities........ 5.03 5.10 5.03 5.06
Net interest spread -- FTE.................. 3.95 4.40 4.05 4.39
Net interest margin -- FTE.................. 4.50 4.91 4.64 4.90
</TABLE>
(The remainder of this page intentionally left blank)
8
<PAGE>
AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST ANALYSIS
(Dollars in Thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------------------------------------------------
ASSETS 1998 1997
------------------------------ -------------------------------
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
-------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Earnings assets:
Interest-earning deposits............ $ 5,781 $ 82 5.69% $ 2,976 $ 39 5.26%
Federal funds sold................... 2,063 29 5.64 1,909 24 5.04
Investment securities
Taxable............................ 70,748 1,190 6.75 36,151 620 6.88
Tax-exempt-FTE..................... 22,885 414 7.26 3,387 85 10.02
Loans (net of unearned income)....... 307,882 7,443 9.70 237,154 5,898 9.98
-------- ------ -------- ------
Total earnings assets.............. 409,359 9,158 8.97 281,577 6,666 9.50
Non-earning assets..................... 34,484 19,875
-------- --------
Total assets....................... $443,843 $301,452
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits:
Interest bearing transaction
and savings...................... $ 69,333 $ 492 2.85% $ 58,899 $ 431 2.94%
Certificates of deposit
$100,000 or more................. 77,662 1,093 5.64 47,118 662 5.64
Other time deposits................ 181,589 2,571 5.68 126,442 1,759 5.58
---------- ------ ---------- ---------
Total interest bearing deposits.. 328,584 4,156 5.07 232,459 2,852 4.92
Federal funds and FHLB
borrowings........................... 30,601 314 4.12 13,067 195 5.99
Notes payable.......................... 5,534 100 7.25 7,589 173 9.14
---------- ------ ---------- ---------
Total interest-bearing
liabilities.................... 364,719 4,570 5.03 253,115 3,220 5.10
Non-interest liabilities:
Non-interest bearing deposits........ 39,272 25,283
Other non-interest liabilities....... 2,553 3,408
---------- ----------
Total liabilities................ 406,544 281,806
Stockholders' equity................... 37,299 19,646
---------- ----------
Total liabilities and
stockholders' equity........... $443,843 $301,452
========== ==========
Interest rate spread................... 3.95% 4.40%
------ ---------
Net interest income-FTE................ $4,588 $3,446
====== =========
Net interest margin.................... 4.50% 4.91%
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------------------------------------
ASSETS 1998 1997
--------------------------- --------------------------
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
------- ------- ----- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Earnings assets:
Interest-earnings deposits........... $ 7,128 $ 196 5.55% $ 2,272 $ 59 5.24%
Federal funds sold................... 2,940 83 5.69 1,640 42 5.16
Investment securities
Taxable............................ 58,690 1,966 6.76 36,527 1,232 6.80
Tax-exempt-FTE..................... 16,319 608 7.51 3,308 170 10.34
Loans (net of unearned income)....... 297,323 14,362 9.74 227,582 11,206 9.93
-------- ------ -------- -------
Total earnings assets.............. 382,400 17,215 9.08 271,329 12,709 9.45
Non-earnings assets.................... 31,197 18,425
-------- --------
Total assets....................... $413,597 $289,754
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits:
Interest bearing transcations
and savings...................... $ 67,092 $ 944 2.84% $ 58,385 $ 850 2.94%
Certificates of deposit $100,000
or more.......................... 71,124 1,994 5.65 45,474 1,266 5.61
Other time deposits................. 167,262 4,706 5.67 120,836 3,330 5.56
-------- ------- -------- -------
Total interest bearing deposits.. 305,478 7,644 5.05 224,695 5,446 4.89
Federal funds and FHLB borrowings...... 26,289 555 4.26 12,548 375 6.03
Notes payable.......................... 5,304 208 7.91 6,565 295 9.06
-------- ------ -------- ------
Total interest-bearing
liabilities.................... 337,071 8,407 5.03 243,808 6,116 5.06
Non-interest liabilities:
Non-interest bearing
deposits.......................... 37,734 23,728
Other non-interest bearing
liabilities........................ 2,012 2,976
-------- --------
Total liabilities................ 376,817 270,512
Stockholders' equity................... 36,780 19,242
-------- --------
Total liabilities and
stockholders' equity........... $413,597 $289,754
======== ========
Interest rate spread................... 4.05% 4.39%
------- -------
Net interest income-FTE................ $ 8,808 $ 6,593
======= =======
Net interest margin.................... 4.64% 4.90%
</TABLE>
9
<PAGE>
NON-INTEREST INCOME
The Company's non-interest income can primarily be broken down into five
main sources: service charges on deposit accounts, fees from origination of
residential mortgage loans for resale, other service charges and fees including
appraisal fees and commissions from the sale of credit related insurance
products, trust income, and gains on sales of assets.
Non-interest income for the second quarter of 1998 was $1,152,000 compared
with $641,000 for the second quarter of 1997, a 79.7% increase. For the first
six months of 1998 non-interest income was $2,246,000 compared with $1,383,000
for the same period in 1997, a 62.4% increase. The Company benefited in 1998
from strong increases in revenue from loan fees, primarily fees on residential
mortgage loans originated for resale in the secondary market, service charges
and fees and trust income.
The table below shows non-interest income for the three and six months
ended June 30, 1998 and 1997.
NON-INTEREST INCOME
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------- -----------------------------
1998 1997 1998 1997
---------- ----------- ----------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Trust income....................................... $ 99 $ 78 $ 177 $ 137
Service charges on deposit accounts................ 326 242 607 452
Loan fees.......................................... 423 156 818 211
Other service charges and fees..................... 169 144 331 279
Gain on sale of loans.............................. - - - 68
Gain on sale of previously foreclosed real estate.. 1 5 85 142
Gain on sale of other assets....................... 11 (23) 15 9
Gain on sale of securities......................... 74 4 125 14
Printed check sales................................ 43 29 75 55
Other income....................................... 6 6 13 16
---------- ----------- ----------- ----------
Total non-interest income.......................... $1,152 $641 $2,246 $1,383
========== =========== =========== ==========
</TABLE>
(The remainder of this page intentionally left blank)
10
<PAGE>
NON-INTEREST EXPENSE
Non-interest expense for the second quarter of 1998 was $3,329,000 compared
with $2,218,000 for the same period in 1997, a 50.1% increase. Non-interest
expense for the six months ended June 30, 1998, was $6,253,000 compared with
$4,324,000 for the six months ended June 30, 1997, a 44.6% increase. These
increases resulted primarily from the Company's continued growth and expansion,
including commencement of operations during the first quarter of 1998 at the
Company's newly acquired Little Rock savings bank and the opening in late June
1998 of two additional Little Rock offices. Full time equivalent employees
increased from 195 at March 31, 1998, to 236 at June 30, 1998, as the Company
added commercial and consumer lenders, customer service staff, trust department
personnel and others to staff the new Little Rock offices.
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
58.00% and 56.57%, respectively, for the second quarter and first six months of
1998 compared to 54.27% and 54.21%, respectively, for the second quarter and
first six months of 1997. The increased investment in staff and facilities, as
well as relocation costs and other opening expenses attributable to the new
Little Rock offices increased the Company's efficiency ratios.
The table below shows non-interest expense for the three and six months
ended June 30, 1998 and 1997.
NON-INTEREST EXPENSE
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------------- --------------------------------
1998 1997 1998 1997
------------------------------- --------------------------------
<S> <C> <C> <C> <C>
(Dollars in thousands)
Salaries and employee
benefits......................................... $1,955 $1,283 $3,633 $2,521
Net occupancy expense............................. 197 126 382 259
Equipment expense................................. 256 167 496 319
Other real estate and foreclosure expense......... 17 43 32 74
Other operating expense:
Professional and outside services............... 30 9 61 49
Postage......................................... 52 51 119 83
Telephone....................................... 78 45 150 78
Operating supplies.............................. 108 32 227 105
Advertising and public relations................ 90 101 187 146
Directors' fees................................. 28 29 56 52
Software expense................................ 41 27 80 54
Check printing charges.......................... 42 33 79 61
FDIC & state assessment......................... 32 28 55 53
Travel and entertainment........................ 33 19 60 32
Amortization of goodwill........................ 22 14 41 28
Miscellaneous................................... 348 211 595 410
------------ ------------ ------------- ------------
Total non-interest expense................... $3,329 $2,218 $6,253 $4,324
============ ============ ============= ============
</TABLE>
INCOME TAXES
The provision for income taxes was $611,000 for the quarter ended June 30,
1998, compared to $572,000 for the same period in 1997. The effective income tax
rates were 30.6% and 36.3%, respectively, for these periods. The provision for
income taxes was $1,338,000 for the six months ended June 30, 1998, compared to
$1,109,000 for the same period in 1997. The effective income tax rates were
32.6% and 36.1%, respectively, for these periods. The decrease in effective tax
rates for the 1998 periods resulted primarily from the Company's increased
investments in tax exempt securities, including securities exempt from both
federal and Arkansas income taxes as well as other securities exempt solely from
Arkansas income taxes.
11
<PAGE>
ANALYSIS OF FINANCIAL CONDITION
Loan Portfolio
At June 30, 1998, the Company's loan portfolio was $321.7 million, an
annualized increase of 33.9% from $275.5 million at December 31, 1997. As of
June 30, 1998, the Company's loan portfolio consisted of approximately 61.9%
real estate loans, 18.3% consumer loans, 13.6% commercial and industrial loans
and 5.1% agricultural loans (non-real estate).
The amount and type of loans outstanding at June 30, 1998 and 1997 and
December 31, 1997 are reflected in the following table.
LOAN PORTFOLIO
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
---------------------------------- --------------
1998 1997 1997
------------- ------------- --------------
(Dollars in thousands)
<S> <C> <C> <C>
Real Estate:
Single family residential........ $108,076 $ 88,534 $ 96,943
Non-farm/non-residential......... 53,010 42,404 41,710
Agricultural..................... 14,460 10,640 13,443
Construction/land development.... 19,444 12,060 16,257
Multifamily residential.......... 4,213 2,616 3,897
------------- ------------- --------------
Total real estate............. $199,203 $156,254 $172,250
Consumer............................. 58,931 47,525 53,233
Commercial and industrial............ 43,746 31,750 37,470
Agricultural (non-real estate)....... 16,520 10,130 10,824
Other................................ 3,319 136 1,686
------------- ------------- --------------
Total loans................... $321,719 $245,795 $275,463
============= ============= ==============
</TABLE>
NONPERFORMING ASSETS
Nonperforming assets consist of (i) nonaccrual loans, (ii) accruing loans
90 days or more past due, (iii) loans for which the terms have been restructured
to provide a reduction or deferral of interest or principal because of a
deterioration in the financial position of the borrower and (iv) real estate or
other assets that have been acquired in partial or full satisfaction of loan
obligations or upon foreclosure. Nonperforming assets as a percent of total
assets were 0.45% as of June 30, 1998, compared to an unusually low level of
0.24% as of December 31, 1997, and 0.63% as of June 30, 1997. Nonperforming
loans as a percent of total loans were 0.55% as of June 30, 1998 compared to an
unusually low level of 0.25% as of December 31, 1997, and 0.75% as of June 30,
1997.
The Company's policy generally is to place a loan on nonaccrual status when
payment of principal or interest is contractually past due 90 days, or earlier
when 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.
(The remainder of this page intentionally left blank)
12
<PAGE>
The following table presents information concerning nonperforming assets,
including nonaccrual and restructured loans and foreclosed assets held for sale.
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
---------------------------------- -------------
1998 1997 1997
------------ ------------ --------------
(Dollars in thousands)
<S> <C> <C> <C>
Nonaccrual loans.......................................... $1,705 $1,772 $ 664
Accruing loans 90 days or more past due................... 70 74 35
Restructured loans........................................ - - -
------ ------ -----
Total nonperforming loans............... 1,775 1,846 699
Foreclosed assets hold for sale and repossessions......... 370 103 136
------ ------ -----
Total nonperforming assets.............. $2,145 $1,949 $ 835
====== ====== =====
Nonperforming loans to total loans........................ 0.55% 0.75% 0.25%
Nonperforming assets to total assets...................... 0.45 0.63 0.24
</TABLE>
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.
ALLOWANCE AND PROVISION FOR LOAN LOSSES
Allowance for Loan Losses: The following table shows an analysis of the
allowance for loan losses for the six month periods ended June 30, 1998 and 1997
and the year ended December 31, 1997.
<TABLE>
<CAPTION>
SIX MONTHS TWELVE MONTHS
ENDED JUNE 30, ENDED DECEMBER 31,
------------------------------------- ------------------
1998 1997 1997
---------------- ----------------- --------------
<S> <C> <C> <C>
(Dollars in thousands)
Balance of allowance for loan losses at beginning of period........ $ 3,737 $ 3,019 $ 3,019
Loans charged off:
Real estate................................................. 18 4 35
Consumer.................................................... 173 101 434
Commercial and industrial................................... 202 - -
------- ------- -------
Total loans charged off............................... 393 105 469
------- ------- -------
Recoveries of loans previously charged off:
Real estate................................................. 8 2 7
Consumer.................................................... 19 22 39
Commercial and industrial................................... 2 - 2
------- ------- -------
Total recoveries..................................... 29 24 48
------- ------- -------
Net loans charged off.............................................. 364 81 421
Provision charged to operating expense............................. 480 524 1,139
------- ------- -------
Balance, end of period............................................. $ 3,853 $ 3,462 $ 3,737
======= ======= =======
Net charge-offs to average loans outstanding during
the periods indicated...................................... 0.25%/(1)/ 0.07%/(1)/ 0.17%
Allowance for loan losses to total loans........................... 1.20 1.41 1.36
Allowance for loan losses to nonperforming loans................... 217.07 187.54 534.62
(1) Annualized
</TABLE>
13
<PAGE>
The amounts of additions 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 (i) an internal grading system, (ii) a peer group analysis and
(iii) 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. Based on these procedures, management is of the opinion
that the allowance of $3,853,000 at June 30, 1998, is adequate. While management
believes the current allowance is adequate, changing economic and other
conditions may require future adjustments to the allowance for loan losses.
For the first six months of 1998, the annualized net charge-off ratio was
0.25% of average outstanding loans compared with 0.17% for the year of 1997 and
0.07% annualized for the first six month period in 1997. Although the Company's
annualized ratio of charge-offs for the first six months of 1998 was higher than
the ratios of charge-offs for the year 1997 and the first six months of 1997,
the Company believes its charge-off ratio for the first six months of 1998 is
below industry averages.
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 $480,000 for
the six months ended June 30, 1998, compared to $524,000 for the same six month
period in 1997.
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
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, DECEMBER 31,
1998 1997 1997
----------------------- ------------------------ -----------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE/(1)/ COST VALUE/(1)/ COST VALUE/(1)/
----------------------- ------------------------ -----------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities of U.S. Government
agencies......................... $ 75,294 $ 75,140 $21,004 $20,948 $24,562 $24,596
Mortgage-backed securities............ 2,324 2,359 9,811 10,021 9,340 9,571
Obligations of states and political
subdivisions..................... 27,698 27,882 2,784 2,785 6,801 6,819
Other securities...................... 2,615 2,615 1,448 1,448 1,510 1,510
-------- -------- ------- ------- ------- -------
Total.......... $107,931 $107,996 $35,047 $35,202 $42,213 $42,496
======== ======== ======= ======= ======= =======
</TABLE>
(1) The fair value of the Company's financial instruments is determined
pursuant to Statement of Financial Accounting Standards No. 107.
LIQUIDITY AND CAPITAL RESOURCES
Credit Agreement. The Company maintains a revolving line of credit ("Credit
Agreement") for up to $22 million with a correspondent bank. Interest accrues on
all outstanding borrowings due under the Credit Agreement 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 Credit Agreement 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 Credit Agreement.
All borrowings under the Credit Agreement are secured by a pledge of 100%
of the Company's stock in each of Bank of the Ozarks, wca and Bank of the
Ozarks, nwa. As of June 30, 1998, $13.0 million was outstanding under the Credit
Agreement.
14
<PAGE>
The Credit Agreement requires the Company's bank subsidiaries, Bank of the
Ozarks, wca and Bank of the Ozarks, nwa, to maintain (i) a return on average
assets for each calendar year equal to at least 1.0%, (ii) a ratio of capital,
as defined in the Credit Agreement, to assets at levels acceptable to bank
regulatory authorities but at least 7.0% at each calendar year end and (iii) net
charges to the reserve for loan losses at less than 1.0% of net loans during any
calendar year. In addition, the Credit Agreement requires (i) that the parent
company's aggregate indebtedness not exceed 60.0% of the Company's tangible net
worth through March 31, 1999, reducing 5% a year thereafter and (ii) borrowings
under the Credit Agreement not exceed 50.0% of the tangible book value of all
subsidiary bank stock pledged to secure such borrowings. At June 30, 1998, the
Company was in compliance with these requirements.
Growth and Expansion. In June 1998 the Company opened its Little Rock
corporate headquarters and banking center on Chenal Parkway and a third Little
Rock branch on Rodney Parham Road. The Company has obtained regulatory approval
and is constructing a fourth Little Rock branch on Cantrell Road with completion
expected in late 1998 or early 1999. During the second quarter the Company also
obtained regulatory approval to offer a full range of trust services at its new
Little Rock headquarters. The Company believes the recent bank mergers in the
Little Rock market provide good growth opportunities.
In May 1998 the Company announced the signing of a definitive agreement for
the purchase of the Marshall, Arkansas branch of Superior Federal Bank, F.S.B.
The acquisition will include the branch bank building, related assets and
deposit accounts totaling approximately $17.3 million. The Company will pay a
purchase premium of approximately $1.4 million in connection with this
transaction. The Company believes this transaction, along with growth at its
existing Marshall office, will give the Company the largest market share in
Searcy County. The Company has obtained regulatory approval for this
transaction and closing is expected in the third quarter of 1998.
During the second quarter, the Company continued to acquire and develop
sites for future offices in its other markets. Construction continued on the
Company's permanent Fort Smith office which is expected to be completed and open
for business late in the third quarter of 1998. The Company obtained regulatory
approval for construction of a third Harrison, Arkansas area office. The new
Harrison facility is expected to be completed and opened in the first half 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 subsidiaries rely on customer deposits and loan
repayments as their primary sources of funds. These funds are used to make
loans, acquire investment securities and other assets and to fund continuing
operations.
The Company has experienced significant growth in its loan portfolio. While
scheduled loan repayments are a relatively stable source of funds, such loans
generally are not readily convertible to cash. Additionally, 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. Accordingly, the Company may be required from
time to time to rely on secondary sources of liquidity to meet withdrawal
demands or otherwise fund operations. Such sources include FHLB advances,
federal funds lines of credit from correspondent banks and borrowings by the
Company under its Credit Agreement described above.
At June 30, 1998, the Company's bank subsidiaries had an aggregate of $35.1
million of unused blanket FHLB borrowing availability. Additionally at June 30,
1998, the bank subsidiaries had available substantial federal funds lines of
credit.
Management anticipates that the Company's bank subsidiaries 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 Credit Agreement) will be used to augment the
Company's primary funding sources.
(The remainder of this page intentionally left blank)
15
<PAGE>
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 (i) Tier 1 capital (i.e. common stockholders' equity excluding goodwill and
appreciation on investment securities, but including certain other qualifying
items) to total risk-weighted assets and (ii) total capital (Tier 1 capital plus
Tier 2 capital which is the qualifying portion of the allowance for loan losses)
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 exceed these minimum
requirements at June 30, 1998, and December 31, 1997, and are presented below,
followed by the capital ratios of each of the Company's three bank and thrift
subsidiaries at June 30, 1998.
CONSOLIDATED CAPITAL RATIOS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------------- ---------------
<S> <C> <C>
Tier 1 capital:
Stockholders' equity.................................................. $ 37,882 $ 35,666
Less net unrealized gains on available for sale securities............ (23) (152)
Less goodwill......................................................... (2,143) (1,337)
-------------- --------------
Total tier 1 capital.................................. $ 35,716 $ 34,177
============== ==============
Tier 2 capital:
Qualifying allowance for loan losses................................... 3,853 3,288
-------------- --------------
Total risk-based capital.............................. $ 39,569 $ 37,465
============== ==============
Risk-weighted assets.......................................................... $326,096 $262,592
============== ==============
Ratios at end of period:
Leverage.............................................................. 8.09% 9.86%
Tier 1 risk-based capital............................................. 10.95 13.01
Total risk-based capital.............................................. 12.13 14.27
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
</TABLE>
CAPITAL RATIOS OF SUBSIDIARY BANKS AND THRIFT
<TABLE>
<CAPTION>
JUNE 30, 1998
--------------------------------------------------------------------
BANK OF THE BANK OF THE BANK OF THE
OZARKS, WCA OZARKS, NWA OZARKS/(2)/
------------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
Stockholders' equity - Tier 1....................... $33,511 $10,621 $4,201
Leverage ratio...................................... 11.95% 8.25% 10.98%
Risk-based capital ratios:
Tier 1...................................... 15.08 11.90 34.29
Total capital............................... 16.27 13.15 35.03
</TABLE>
(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.
(2) A federal savings bank acquired by the Company in February 1998. The
federal savings bank had assets of $39.0 million at June 30, 1998, of which
$25.4 million were securities of U.S. government agencies.
16
<PAGE>
YEAR 2000
The Year 2000 Issue relates to the ability of computer systems and other
systems with imbedded microchips to properly handle year 2000 date sensitive
data and the potential for risk to the Company because of relationships with
third parties (e.g. software and hardware vendors, loan customers, correspondent
banks, and others) who do no 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.
The Company has established a Year 2000 Project Team to evaluate and assess
the Company's exposure to this issue. This team has conducted evaluations of
all software, hardware, environmental systems and other relationships affecting
the Company's daily operating capabilities. The most significant area of
exposure to the Company relates to computer programs and software, which are
provided to the Company from third party vendors. In each case the Company has
received assurance that such software programs are fully operational with
respect to the Year 2000. The Company continues to monitor its year 2000
readiness through testing of various applications, development of contingency
plans and planning for the active implementation of a customer awareness
program.
The Year 2000 Project Team will continue to identify and assess additional
exposures to this issue and develop solutions in areas where exposures are
identified. Based on recent and ongoing assessments by the team, no area of
material exposure has been identified with respect to the Year 2000 issue. The
necessary system changes or testing procedures identified to date are not
expected to result in a material expense to the Company.
PENDING ACCOUNTING STANDARDS
The Company plans to adopt the provisions of SFAS 133, Accounting for
Derivative Instruments and Hedging Activities, effective July 1, 1998. The
Company expects the adoption of this standard to not have a significant impact
on its financial position or its results of operations for the year ending
December 31, 1998.
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, may 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: (i) potential delays in opening new branches and other
operating locations; (ii) the ability to attract deposits and loans from new
locations or markets; (iii) competitive factors and pricing pressures; (iv)
changes in legal and regulatory requirements; (v) interest rate fluctuations and
(vi) general economic conditions, 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
<PAGE>
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 six month periods ended June 30, 1998 and 1997 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
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------- --------------------------------
1998 1997 1998 1997
-------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net interest income.......................................... $ 4,430 $ 3,418 $ 8,586 $ 6,535
Provision for loan losses.................................... 255 265 480 524
Non-interest income.......................................... 1,152 641 2,246 1,383
Non-interest expense......................................... 3,329 2,218 6,253 4,324
Income tax expense........................................... 611 572 1,338 1,109
Net income................................................... $ 1,387 $ 1,004 2,761 1,961
PER COMMON SHARE DATA:
Earnings - diluted........................................... $ 0.36 $ 0.35 $ 0.72 $ 0.68
Book value................................................... 10.02 7.02 10.02 7.02
Fully diluted shares outstanding thousands).................. 3,834 2,880 3,828 2,880
End of period shares outstanding (thousands) ................ 3,780 2,880 3,780 2,880
BALANCE SHEET DATA AT PERIOD END:
Total assets................................................. $473,728 $309,320 $473,728 $309,320
Total loans.................................................. 321,719 245,795 321,719 245,795
Allowance for loan losses.................................... 3,853 3,462 3,853 3,462
Total investment securities.................................. 107,969 35,200 107,969 35,200
Total deposits............................................... 380,270 264,295 380,270 264,295
FHLB advances & fed funds purchased.......................... 40,038 12,017 40,038 12,017
Notes payable................................................ 13,072 10,096 13,072 10,096
Total stockholders' equity................................... 37,882 20,216 37,882 20,216
Loan to deposit ratio........................................ 84.60% 93.00% 84.60% 93.00%
PERFORMANCE RATIOS:
Return on average assets*................................... 1.25% 1.34% 1.35% 1.36%
Return on average stockholders' equity*..................... 14.92 20.50 15.14 20.55
Net interest margin*........................................ 4.50 4.91 4.64 4.90
Overhead ratio*............................................. 3.01 2.95 3.05 3.01
Efficiency ratio............................................ 58.00 54.27 56.57 54.21
ASSETS QUALITY RATIOS:
Net charge-offs as a percentage of average total loans* ..... 0.29% 0.07% 0.25% 0.07%
Nonperforming loans to total loans........................... 0.55 0.75 0.55 0.75
Nonperforming assets to total assets......................... 0.45 0.63 0.45 0.63
ALLOWANCE FOR LOAN LOSSES AS A PERCENTAGE OF:
Total loans.................................................. 1.20% 1.41% 1.20% 1.41%
Nonperforming loans.......................................... 217.04 187.54 217.04 187.54
CAPITAL RATIOS AT PERIOD END:
Leverage capital ratio....................................... 8.09% 6.25% 8.09% 6.25%
Tier 1 risk-based capital.................................... 10.95 8.13 10.95 8.13
Total risk-based capital..................................... 12.13 9.38 12.13 9.38
*Annualized based on actual days
</TABLE>
18
<PAGE>
BANK OF THE OZARKS, INC.
SUPPLEMENTAL QUARTERLY FINANCIAL DATA
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
-----------------------------------------------------------------------------------------------------
9/30/96 12/31/96 3/31/97 6/30/97 9/30/97 12/31/97 3/31/98 6/30/98
-------- --------- -------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
EARNINGS SUMMARY:
- ------------------------------
Net interest income $ 3,110 $ 3,040 $ 3,116 $ 3,418 $ 3,703 $ 4,251 $ 4,157 $ 4,430
Federal tax (FTE)
adjustment 45 38 28 28 32 56 72 158
-------- --------- -------- -------- -------- --------- -------- --------
Net interest margin (FTE) 3,155 3,078 3,144 3,446 3,735 4,307 4,229 4,588
Loan loss provision (375) (567) (259) (265) (150) (465) (225) (255)
Non-interest income 488 740 742 641 662 880 1,094 1,152
Non-interest expense (1,856) (2,033) (2,105) (2,218) (2,316) (2,588) (2,924) (3,329)
-------- --------- -------- -------- -------- --------- -------- --------
Pretax income (FTE) 1,412 1,218 1,522 1,604 1,931 2,134 2,174 2,156
FTE adjustment (45) (38) (28) (28) (32) (56) (72) (158)
Provision for taxes (489) (633) (537) (572) (698) (709) (728) (611)
-------- --------- -------- -------- -------- --------- -------- --------
Net income $ 878 $ 547 $ 957 $ 1,004 $ 1,201 $ 1,369 $ 1,374 $ 1,387
======== ========= ======== ======== ======== ========= ======== ========
Earnings per share - diluted $ 0.30 $ 0.19 $ 0.33 $ 0.35 $ 0.34 $ 0.36 $ 0.36 $ 0.36
NON-INTEREST INCOME DETAILS:
- ------------------------------
Trust department income $ 60 $ 51 $ 59 $ 78 $ 39 $ 98 $ 78 $ 99
Service charges on deposit
accounts 193 226 211 242 242 263 281 326
Loan fees 15 31 55 156 156 199 395 423
Gain (losses) sale of assets 7 271 236 (17) 30 138 88 12
Security gains 24 1 10 4 - - 51 74
Other income 189 160 171 178 195 182 201 218
-------- --------- -------- -------- -------- --------- -------- --------
Total non-interest income $ 488 $ 740 $ 742 $ 641 $ 662 $ 880 $ 1,094 $ 1,152
NON-INTEREST EXPENSE DETAIL:
- ------------------------------
Salaries and employee
benefits $ 1,110 $ 1,244 $ 1,238 $ 1,283 $ 1,301 $ 1,502 $ 1,677 $ 1,955
Net occupancy expense 262 260 285 293 341 386 426 453
Other operating expenses 484 529 582 642 674 700 821 921
-------- --------- -------- -------- -------- --------- -------- --------
Total non-interest $ 1,856 $ 2,033 $ 2,105 $ 2,218 $ 2,316 $ 2,588 $ 2,924 $ 3,329
expense
ALLOWANCE FOR LOAN LOSSES:
- ------------------------------
Balance beginning of period $ 2,282 $ 2,617 $ 3,019 $ 3,240 $ 3,462 $ 3,535 $ 3,737 $ 3,822
Net charge offs (40) (165) (38) (43) (77) (263) (140) (224)
Loan loss provision 375 567 259 265 150 465 225 255
-------- --------- -------- -------- -------- --------- -------- --------
Balance at end of period $ 2,617 $ 3,019 $ 3,240 $ 3,462 $ 3,535 $ 3,737 $ 3,822 $ 3,853
SELECTED RATIOS:
- ------------------------------
Overhead expense ratio* 3.05% 3.02% 3.07% 2.95% 2.78% 2.95% 3.10% 3.01%
Efficiency ratio 50.95 53.25 54.17 54.27 52.67 49.89 54.93 58.00
Non-performing loans
to total loans 0.58 1.08 0.80 0.75 0.77 0.25 0.54 0.55
Non-performing assets to
to total assets 0.46 0.88 0.66 0.63 0.62 0.24 0.40 0.45
*Annualized
</TABLE>
19
<PAGE>
PART I (continued)
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's interest rate risk management is the responsibility of
the ALCO and Investment Committee, which reports to the Board of
Directors. This committee establishes policies and oversees the
Company's sources, uses and pricing of funds. The committee is also
involved with management in the Company's planning and budgeting
process.
As shown in the table below at June 30, 1998, the cumulative rate
sensitive assets to rate sensitive liabilities at six months and one
year, respectively, were 72.2% and 69.2%. A financial institution is
considered to be liability sensitive, or as having a negative GAP, when
the amount of its interest bearing liabilities maturing or repricing
within a given time period exceeds the amount of its interest earning
assets also maturing or repricing within that time period. Conversely,
an institution is considered to be asset sensitive, or as having a
positive GAP, when the amount of its interest bearing liabilities
maturing and repricing is less than the amount of its interest earning
assets also maturing or repricing during the same period. Generally, in
a falling interest rate environment, a negative GAP should result in an
increase in net interest income, and in a rising interest rate
environment this negative GAP should adversely affect net interest
income. The converse would be true for a positive GAP. Since the GAP
analysis reflected below has certain inherent limitations and does not
include many factors such as call features, prepayments, interest rate
floors and caps on certain assets and liabilities and the different
relative movements of interest rates for different financial assets, and
since conditions change on a daily basis, these theoretical conclusions
may not be indicative of future results.
<TABLE>
<CAPTION>
RATE SENSITIVE ASSETS AND LIABILITIES
JUNE 30, 1998
--------------------------------------------------------------------------------------
RATE RATE CUMULATIVE CUMULATIVE
SENSITIVE SENSITIVE PERIOD CUMULATIVE GAP TO RSA/(1)/ TO
ASSETS LIABILITIES GAP GAP TOTAL RSA/(1)/ RSL/(2)/
------------ ------------- --------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Floating rate................. $ 20,106 $ 43,301 $(23,195) $(23,195) -5.41% 46.43%
Fixed rate repricing in:
1 month............... 35,424 40,459 (5,035) (28,230) -6.58 66.30
2 month............... 20,756 20,156 600 (27,630) -6.44 73.41
3 month............... 19,670 20,255 (585) (28,215) -6.58 77.28
4 month............... 15,419 21,953 (6,534) (34,749) -8.10 76.22
5 month............... 13,290 21,651 (8,361) (43,110) -10.05 74.30
6 month............... 15,723 26,585 (10,862) (53,972) -12.58 72.23
6 months - 1 year..... 61,837 98,019 (36,182) (90,154) -21.01 69.17
1--2 years............ 56,541 53,877 2,664 (87,490) -20.39 74.73
2--3 years............ 22,918 4,712 18,206 (69,284) -16.15 80.26
3--4 years............ 27,308 7,086 20,222 (49,062) -11.43 86.30
4--5 years............ 22,796 12,337 10,459 (38,603) -9.00 89.58
Over 5 years.......... 97,271 23,608 73,663 35,060 8.17 108.90
-------- -------- --------
Total........... $429,059 $393,999 $ 35,060
======== ======== ========
</TABLE>
(1) Rate Sensitive Assets
(2) Rate Sensitive Liabilities
(The remainder of this page intentionally left blank)
20
<PAGE>
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
---------------------------------------------------
The 1998 Annual Meeting of Stockholders of the Company was held on April
21, 1998. The following item of business was presented to the
stockholders:
Election of Directors
---------------------
The eleven (11) directors were elected as proposed in the Proxy
Statement dated March 10, 1998, under the caption "Election of
Directors:
<TABLE>
<CAPTION>
Total Vote For Total Vote Witheld
Each Director From Each Director
------------- ------------------
<S> <C> <C>
George Gleason 3,314,435 1,000
Mark Ross 3,314,535 900
Linda Gleason 3,313,105 2,330
Roger Collins 3,314,435 1,000
C. E. Dougan 3,314,435 1,000
Robert East 3,314,905 530
Porter Hillard 3,312,635 2,800
Henry Mariani 3,314,935 500
James Patridge 3,314,535 900
R. L. Qualls 3,314,435 1,000
Kennith Smith 3,313,435 2,000
</TABLE>
Item 5. OTHER MATTERS
-------------
Effective June 29, 1998, the Securities and Exchange Commission
amended Rule 14a-4(c) under the Securities Exchange Act of 1934 (the
"1934 Act") which governs a company's use of discretionary proxy voting
authority with respect to shareholder proposals that are not being
included in the company's proxy solicitation materials pursuant to Rule
14a-8 of the 1934 Act. New Rule 14a-4(c)(1) provides that if a
proponent fails to notify the Company at least 45 days prior to the
month and day of mailing of the prior years' proxy statement (or by an
earlier or later date established by an overriding advance notice
provision contained in the company's charter or bylaws), then the
management proxies named in the form of proxy distributed in connection
with the company's proxy statement would be allowed to use their
discretionary voting authority to address the matter submitted by the
proponent, without discussion of the matter in the proxy statement. The
Company's bylaws contain an advance notice provision which provides that
a matter may not be brought before the Company's annual meeting by a
stockholder unless the proposal (the "Proposal") is delivered in writing
to the Secretary of the Company no later than 30 days prior to the
Company's fiscal year end. Accordingly, if any stockholder of the
Company desires to submit a Proposal to be brought before the Company's
1999 Annual Meeting, the stockholder must deliver written notice of the
Proposal to the Secretary of the Company no later than December 1, 1998.
In addition, if the stockholder desires to include the Proposal in the
Company's proxy statement for the 1999 Annual Meeting, the Proposal must
be received by the Company on or before November 10, 1998, and the
Proposal must comply with the requirements of Rule 14a-8 of the
Securities and Exchange Commission.
21
<PAGE>
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
The Company filed form 8-K regarding "Changes in Registrants
Certifying Accountants" under Item (4) which occurred July 21,
1998, and such form was filed on July 24, 1998, and amended
August 6, 1998.
(The remainder of this page intentionally left blank)
22
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Bank of the Ozarks, Inc.
DATE: August 13, 1998 /s/ Paul E. Moore
--------------------
Paul E. Moore
Chief Financial Officer
(Chief Accounting Officer)
23
<PAGE>
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 Second Amendment to Employment Agreement, dated July 21, 1998, by and
between the Company and George G. Gleason, II (attached).
27 Financial Data Schedule for the period ended June 30, 1998
(attached).
24
<PAGE>
EXHIBIT 10
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
----------------------------------------
This Second Amendment to Employment Agreement (the "Second Amendment") is
made and entered into on this 21st day of July, 1998 to be effective as of July
16, 1998, by and between Bank of the Ozarks, Inc., an Arkansas Corporation (the
"Corporation"), and George G. Gleason, II, an individual and resident of
Arkansas ("Gleason").
W I T N E S S E T H:
WHEREAS, the Corporation and Gleason entered into an Employment Agreement
dated May 22, 1997 which was amended by that certain Amendment to Employment
Agreement dated September 16, 1997 (collectively the "Agreement");
WHEREAS, the Corporation and Gleason have negotiated this Second Amendment
of the Agreement to reduce Gleason's base salary from $324,613.92 to $225,000
effective July 16, 1998 as part of a plan to reduce Gleason's cash compensation
and increase his equity compensation to more closely align his interests with
those of the Corporation's shareholders;
NOW, THEREFORE, in consideration of the premises, the mutual covenants
herein contained and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Paragraph 3(a) of the Agreement is hereby amended and restated as
follows:
(a) Effective July 16, 1998, the sum of Two Hundred Twenty-Five
Thousand Dollars ($225,000) per annum, with such base salary to be
prorated for the remaining portion of the 1998 calendar year and to be
payable in semi-monthly installments. The base salary shall be
increased (but not decreased) commencing on January 1, 1999 and
annually thereafter by the same percentage as the percentage increase,
if any, in the Consumer Price Index for the twelve months ending on
the preceding October 31st. As used herein, the term "Consumer Price
Index" means the Consumer Price Index for All Urban Consumers (CPI-U),
All Items, U.S. Average (1982-84=100), which is now compiled with the
U.S. Department of Labor, and shall mean and include such other index
or statistics as may succeed it, as adjusted to account for any change
in the standard reference base year.
2. Except as explicitly amended hereby, all other terms, provisions and
conditions of the Agreement remain in full force and effect.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Second Amendment in
duplicate original the day and year first above recited.
ATTEST: BANK OF THE OZARKS, INC.
By:/s/ MARK D. ROSS, PRESIDENT
------------------------------------
Mark D. Ross, President
/s/ DONNA QUANDT, SECRETARY
- ---------------------------------
Donna Quandt, Secretary
/s/ GEORGE G. GLEASON, II
------------------------------------
George G. Gleason, II
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCORPORATED BY
REFERENCE IN THE QUARTERLY REPORT FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL REPORTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 15,420
<INT-BEARING-DEPOSITS> 799
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 9,054
<INVESTMENTS-CARRYING> 98,915
<INVESTMENTS-MARKET> 98,942
<LOANS> 321,719
<ALLOWANCE> (3,853)
<TOTAL-ASSETS> 473,728
<DEPOSITS> 380,270
<SHORT-TERM> 17,243
<LIABILITIES-OTHER> 2,466
<LONG-TERM> 35,867
0
0
<COMMON> 38
<OTHER-SE> 37,844
<TOTAL-LIABILITIES-AND-EQUITY> 473,728
<INTEREST-LOAN> 14,347
<INTEREST-INVEST> 2,367
<INTEREST-OTHER> 279
<INTEREST-TOTAL> 16,993
<INTEREST-DEPOSIT> 7,644
<INTEREST-EXPENSE> 8,407
<INTEREST-INCOME-NET> 8,586
<LOAN-LOSSES> 480
<SECURITIES-GAINS> 125
<EXPENSE-OTHER> 6,253
<INCOME-PRETAX> 4,099
<INCOME-PRE-EXTRAORDINARY> 4,099
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,761
<EPS-PRIMARY> .73
<EPS-DILUTED> .72
<YIELD-ACTUAL> 4.64
<LOANS-NON> 1,705
<LOANS-PAST> 70
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,934
<ALLOWANCE-OPEN> 3,737
<CHARGE-OFFS> 393
<RECOVERIES> 29
<ALLOWANCE-CLOSE> 3,853
<ALLOWANCE-DOMESTIC> 3,853
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
