<PAGE>
Filed pursuant to Rule 424(b)(1)
SEC File No. 333-79381
PROSPECTUS
1,500,000 Preferred Securities
Ozark Capital Trust
9.0% Cumulative Trust Preferred Securities
(liquidation amount $10 per preferred security)
Guaranteed by
[LOGO OF BANK OF THE OZARKS APPEARS HERE]
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The Trust:
Ozark Capital Trust is a Delaware business trust which will:
. Sell preferred securities to the public and common securities to Bank of
the Ozarks, Inc.;
. Use the proceeds from these sales to buy an equal principal amount of 9.0%
subordinated debentures due June 18, 2029 of Bank of the Ozarks, Inc.; and
. Distribute the cash payments it receives from Bank of the Ozarks, Inc. on
the debentures to the holders of the preferred securities and the common
securities.
The Offering:
. For each preferred security that you own, you will receive cumulative cash
distributions accumulating from June 18, 1999 at an annual rate of 9.0% of
the liquidation amount of $10 per preferred security on March 31, June 30,
September 30 and December 31 of each year, beginning September 30, 1999.
. Bank of the Ozarks, Inc. may defer interest payments on the debentures at
any time for up to 20 consecutive quarterly periods, in which case, the
Trust will also defer payment of distributions on the preferred securities
to you. However, deferred distributions will themselves accumulate interest
at an annual rate of 9.0%.
. The preferred securities mature on June 18, 2029.
. The Trust may redeem the preferred securities, at a redemption price of $10
per preferred security plus accrued and unpaid distributions, at any time
on or after June 18, 2004 or earlier under certain circumstances.
Bank of the Ozarks, Inc.:
. Bank of the Ozarks, Inc. will effectively fully and unconditionally
guarantee the preferred securities on a subordinated basis based on its
obligations under a guarantee, a trust declaration, an indenture and an
expense agreement.
The preferred securities have been approved for listing on The Nasdaq National
Market under the trading symbol "OZRKP."
----------------
Investing in the preferred securities involves certain risks which are
described in the "Risk Factors" section beginning on page 10.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
None of the securities offered by this prospectus are deposits or accounts of
a bank. They are not insured by the Federal Deposit Insurance Corporation or
any other governmental agency.
----------------
<TABLE>
<CAPTION>
Per Security Total
------------ -----------
<S> <C> <C>
Public offering price........................... $10.00 $15,000,000
Underwriting commissions (paid by Bank of the
Ozarks, Inc.).................................. $ .375 $ 562,500
Proceeds to the Trust........................... $10.00 $15,000,000
</TABLE>
The underwriters may also purchase up to an additional 225,000 preferred
securities at the public offering price within 30 days after the date of this
prospectus to cover any over-allotments.
The Trust expects the preferred securities will be ready for delivery in book-
entry form only through The Depository Trust Company on or about June 18,
1999.
----------------
Stephens Inc. Morgan Keegan & Company, Inc.
The date of this prospectus is June 14, 1999
<PAGE>
[MAP APPEARS HERE]
TABLE OF CONTENTS
<TABLE>
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Page
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Prospectus Summary......................................................... 3
Special Note Regarding Forward-Looking Information......................... 9
Risk Factors............................................................... 10
Use of Proceeds............................................................ 18
Accounting Treatment....................................................... 18
Ratio of Earnings to Fixed Charges......................................... 18
Capitalization............................................................. 19
Selected Consolidated Financial Data....................................... 20
Management's Discussion and Analysis....................................... 21
Supplemental Quarterly Data................................................ 45
Business................................................................... 46
Supervision and Regulation................................................. 56
Management................................................................. 62
Certain Transactions....................................................... 68
Securities Ownership of Certain Beneficial Owners and Management........... 69
</TABLE>
<TABLE>
<CAPTION>
Page
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<S> <C>
Description of the Preferred Securities.................................... 70
Description of the Subordinated Debentures................................. 80
Book-Entry Issuance........................................................ 89
Description of Guarantee................................................... 91
Relationship Among the Preferred Securities, the Subordinated Debentures
and the Guarantee......................................................... 94
United States Federal Income Tax Consequences.............................. 95
ERISA Considerations....................................................... 99
Underwriting............................................................... 100
Transfer Agent............................................................. 101
Legal Matters.............................................................. 101
Experts.................................................................... 101
Where You Can Find More Information........................................ 102
Index to Consolidated Financial Statements................................. F-1
</TABLE>
You may rely on the information contained in this prospectus. We have not
authorized anyone to provide information different from that contained in this
prospectus. Neither the delivery of this prospectus nor sale of preferred
securities means that information contained in this prospectus is correct after
the date of this prospectus. This prospectus is not an offer to sell or
solicitation of an offer to buy the preferred securities in any circumstances
under which the offer or solicitation is unlawful.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information from this prospectus. The summary is not
complete and does not contain all of the information that you should review.
You should read the entire prospectus carefully before investing in the
preferred securities.
The term "Trust" refers to Ozark Capital Trust, a Delaware business trust
organized to purchase our subordinated debentures and issue the preferred
securities. We use the term "bank subsidiaries" to refer to Bank of the Ozarks,
wca and Bank of the Ozarks, nwa, our state chartered bank subsidiaries, which
were merged into one surviving entity, Bank of the Ozarks, on June 11, 1999.
The terms "we", "our", "us" and "the Company" refer to Bank of the Ozarks, Inc.
and, in some cases, will include the Trust and the bank subsidiaries.
Bank of the Ozarks, Inc.
We are a bank holding company that conducts banking operations through 20
offices in 15 communities throughout northern, western and central Arkansas. We
provide a wide range of retail and commercial banking services including
checking, savings, money market, time deposit, and individual retirement
accounts, as well as real estate, consumer, commercial, industrial and
agricultural loans. We also provide mortgage lending, cash management, trust
services, safety deposit boxes, real estate appraisals, credit related life and
disability insurance, ATMs, telephone banking and debit cards.
In 1994 we initiated our expansion strategy, via de novo branching, into
target Arkansas markets. Since embarking on this strategy we have opened 15 new
offices, with 10 being opened since January 1997. In 1998 we added a new
element to our growth strategy by significantly expanding into two of Arkansas'
largest metropolitan markets--Little Rock and Fort Smith. Since 1994 we have
experienced significant growth in operations and maintained profitability:
. Total assets increased to $666.9 million at March 31, 1999 from $165.0
million at December 31, 1994, representing a compounded annual growth
rate of 38.9%.
. Net income increased to $1,526,000 for the three months ended March 31,
1999, up from $1,374,000 for the same quarter in 1998. For the year
ended December 31, 1998 net income was $5,629,000.
. For the three months ended March 31, 1999 return on average assets
equaled 0.97% and return on average stockholders' equity equaled 15.14%.
For the year ended December 31, 1998 return on average assets and return
on average stockholders' equity were 1.16% and 14.83%, respectively.
. Our leverage capital ratio was 5.95% at March 31, 1999 and 6.21% at
December 31, 1998. After inclusion in Tier 1 capital of the eligible net
proceeds of $13.8 million from this offering, our pro forma leverage
capital ratio at March 31, 1999 would have been 7.96%.
Our goal is to maximize long-term stockholder value through strong year-to-
year growth in assets, loans, deposits and earnings per share in a manner
consistent with safe, sound and prudent banking practices. To achieve this
goal, our strategy is to:
. Expand loans and deposits primarily through market share growth at
existing locations and de novo branching in northern, western and
central Arkansas;
. Provide customers with the breadth of financial products and services of
a regional bank;
. Employ, empower and motivate personnel to provide personalized customer
service, consistent with the best traditions of community banking, while
increasing profits; and
. Maintain asset quality and control overhead expense.
Our corporate offices are located at 12615 Chenal Parkway, P. O. Box 8811,
Little Rock, Arkansas 72231-8811, and our telephone number is (501) 978-2265.
Our internet web site is www.bankozarks.com. The information in our web site is
not incorporated into this prospectus.
3
<PAGE>
Ozark Capital Trust
Ozark Capital Trust is a Delaware business trust and will exist solely to
issue and sell its preferred securities to the public and engage in other
activities that are necessary or incidental to the offering described below.
The Trust's corporate offices are located at c/o FMB Trust Company, National
Association, 25 South Charles Street, Baltimore, Maryland 21203, and its
telephone number is (410) 244-3987.
The Offering
Preferred securities
issuer...................... Ozark Capital Trust.
Securities offered.......... The Trust is offering for sale 1,500,000(/1/)
preferred securities at an offering price of
$10 each. The preferred securities represent an
indirect interest in our subordinated
debentures which will be purchased by the Trust
with the proceeds of this offering.
The Trust will sell its preferred securities to
the public and its common securities to us.
Together, the preferred securities and the
common securities are referred to as "trust
securities."
Use of proceeds............. The Trust will use the net proceeds from the
sale of trust securities to buy our 9.0%
subordinated debentures which will have the
same payment terms as the preferred securities.
We plan to use the net proceeds of
approximately $14.1 million(/2/) from the
issuance of the subordinated debentures:
. to repay indebtedness under our revolving
line of credit (approximately $13.1
million); and
. for general corporate purposes including
capital investments in our bank subsidiaries
to fund growth. See "Use of Proceeds" and
"Capitalization."
Quarterly distributions are
payable to you on the
preferred securities........ The distributions payable on each preferred
security will:
. accumulate at a fixed rate of 9.0% per year;
. accrue from the date of issuance of the
preferred securities; and
. be payable quarterly in arrears on March 31,
June 30, September 30 and December 31 of
each year that the preferred securities are
outstanding, beginning on September 30,
1999.
We may defer distributions
to you on the preferred
securities.................. The Trust may defer distributions on the
preferred securities if we defer paying
interest to the Trust on the subordinated
debentures. We generally have the right to
defer interest payments on the subordinated
debentures for up to 20 consecutive quarters.
During any deferral period, you will accumulate
distributions at the annual rate of 9.0%, plus
you will earn additional interest at the annual
rate of 9.0%, compounded quarterly, on the
deferred distributions.
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(1) An additional 225,000 preferred securities may be sold by the Trust upon
exercise of the over-allotment option granted to the underwriters.
(2) Underwriting commissions for this offering will be $562,500 and expenses
are estimated to be approximately $315,000, all of which will be paid by
Bank of the Ozarks, Inc.
4
<PAGE>
During any deferral period, we will not be
permitted (with certain exceptions) to pay a
dividend or make any other payment or
distribution on our common stock or redeem,
purchase or make a liquidation payment on our
common stock. We currently have no intention of
exercising our right to defer payments of
interest by extending the interest payment
period on the subordinated debentures.
If we defer distributions, you must still
include the related income in your taxable
gross income for United States federal income
tax purposes for as long as the subordinated
debentures remain outstanding. For further
information on deferrals and their tax
consequences, see "Risk Factors--Preferred
Securities Risk Factors" and "United States
Federal Income Tax Consequences."
You will be required to
sell your preferred
securities when the
subordinated debentures
mature...................... The subordinated debentures will mature on June
18, 2029. You will be required to sell your
preferred securities to the Trust upon the
stated maturity date of the subordinated
debentures.
If the subordinated
debentures are prepaid,
your preferred securities
will be redeemed............ Subject to prior approval of the Federal
Reserve, if then required, we may prepay the
subordinated debentures prior to maturity:
. in whole or in part at any time on or after
June 18, 2004; or
. in whole, but not in part, if certain
changes in tax or investment company laws or
in federal bank regulatory capital
requirements occur or may occur.
Upon any prepayment of the subordinated
debentures, your preferred securities will be
redeemed at the liquidation amount of $10 each
plus any accrued and unpaid distributions to
the date of redemption. For further information
on redemptions, see "Description of the
Preferred Securities--Redemption" and
"Description of the Subordinated Debentures--
Redemption."
At our option, we may
require you to exchange
your preferred securities
for our subordinated
debentures.................. We have the right at any time to dissolve or
liquidate the Trust and distribute the
subordinated debentures to you in exchange for
your preferred securities. If that happens, you
will receive subordinated debentures in
exchange for the same principal amount of your
holdings of preferred securities. However, we
must pay the creditors of the Trust and receive
prior approval of the Federal Reserve, if then
required, before we dissolve or liquidate the
Trust. If the subordinated debentures are
distributed, we will use our best efforts to
list them on The Nasdaq National Market in
place of the preferred securities. For further
information concerning distribution of the
subordinated debentures, see "Description of
the Preferred Securities--Distribution of
Subordinated Debentures."
5
<PAGE>
We guarantee your preferred
securities on a
subordinated basis.......... We fully and unconditionally guarantee the
payment of all distributions the Trust is
obligated to make, but only to the extent the
Trust has sufficient funds to satisfy those
payments.
If we do not make a payment on the subordinated
debentures, the Trust will not have sufficient
funds to make payments on the preferred
securities. The guarantee does not require us
to make any payments on our subordinated
debentures nor does it require us to make up
any shortfall in the Trust's funds needed to
make a payment on the preferred securities to
you. The guarantee only covers payments to the
extent the Trust holds any funds.
We believe that, taken together, our
obligations under the Indenture, the Guarantee
Agreement, the Trust Agreement and the Expense
Agreement (each defined on page 70) provide in
the aggregate, a full, irrevocable and
unconditional guarantee, on a subordinated
basis, of all of the obligations of the Trust
under the preferred securities.
For further information concerning our
guarantee of the preferred securities, see
"Risk Factors--Preferred Securities Risk
Factors" and "Description of Guarantee."
Your preferred securities
rank lower in payment
compared to our other
obligations................. Our obligations under the guarantee, the
subordinated debentures and the related
governing documents are unsecured and have a
payment priority below all of our current and
future Senior and Subordinated Debt (as defined
on page 84). In addition, because we are a
holding company that relies on dividends from
our bank subsidiaries for virtually all of our
income, all existing and future borrowings and
other liabilities of our bank subsidiaries will
effectively rank higher than all of our
obligations relating to the preferred
securities and the subordinated debentures. See
"Risk Factors--Preferred Securities Risk
Factors."
The terms of the preferred securities and the
subordinated debentures do not limit the amount
of other debt, preferred securities or other
subordinated debentures that we or the Trust
may issue in the future or on the amount of
future liabilities of the bank subsidiaries.
Future issuances of securities similar to the
preferred securities and the subordinated
debentures will rank equally with our
obligations under the subordinated debentures
and our guarantee of the preferred securities
described in this prospectus.
Limited voting rights....... As a holder of preferred securities, you will
have very limited voting rights. See "Risk
Factors--Preferred Securities Risk Factors" and
"Description of the Preferred Securities--
Voting Rights; Amendment of the Trust
Agreement."
6
<PAGE>
Book-entry issuance......... You will not receive a certificate for your
preferred securities. Instead, the preferred
securities will be represented by a global
security that will be deposited with The
Depository Trust Company or its custodian and
registered in the name of The Depository Trust
Company or its nominee.
Trustees.................... The Trust will have five trustees. Three of the
trustees are officers of Bank of the Ozarks,
Inc. and will act as "administrative trustees"
for the Trust. FMB Trust Company, National
Association, a subsidiary of First Maryland
Bancorp, will act as "property trustee" for the
Trust, "indenture trustee" for the subordinated
debentures and "guarantee trustee" for the
guarantee. Its offices are located at 25 South
Charles Street, Baltimore, Maryland 21203
(referred to in this prospectus as the
"Corporate Trust Office"). First Omni Bank,
National Association, will act as Delaware
trustee for the Trust.
The Nasdaq National
Market...................... The preferred securities have been approved for
listing on The Nasdaq National Market under the
trading symbol "OZRKP." See "Risk Factors--
Preferred Securities Risk Factors" and
"Underwriting."
7
<PAGE>
BANK OF THE OZARKS, INC.
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Three Months
Ended
Year Ended December 31, March 31,
----------------------------------------------------- -----------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- -------- --------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Income statement data:
Net interest income.... $ 7,994 $ 8,312 $ 11,805 $ 14,489 $ 18,364 $ 4,157 $ 5,309
Provision for loan
losses................ 339 360 1,486 1,139 2,026 225 611
Non-interest income.... 2,713(/1/) 1,168 1,865 2,925 5,031 1,094 1,269
Non-interest expense... 5,735 5,996 7,151 9,228 13,119 2,924 3,768
Income before income
taxes................. 4,509(/1/) 3,015 5,033 7,047 8,250 2,102 2,199
Net income............. 2,954(/1/) 2,170 3,027 4,531 5,629 1,374 1,526
Per common share data:
Earnings--diluted...... $ 0.99(/1/) $ 0.75 $ 1.05 $ 1.38 $ 1.47 $ 0.36 $ 0.40
Book value............. 5.07 5.66 6.44 9.44 10.68 9.73 11.01
Weighted avg. shares
outstanding
(thousands)........... 2,975 2,894 2,880 3,281 3,819 3,821 3,796
Balance sheet data at
period end:
Total assets........... $165,030 $212,476 $270,600 $352,093 $612,431 $422,655 $666,921
Total loans............ 112,806 153,198 214,462 275,463 387,526 299,505 400,851
Allowance for loan
losses................ 1,649 1,909 3,019 3,737 4,689 3,822 4,850
Total investment
securities............ 40,521 37,137 39,608 42,459 176,618 70,252 215,049
Total deposits......... 148,453 182,463 231,648 295,555 529,040 352,312 581,704
Notes payable.......... -- 3,920 5,396 5,072 12,448 5,072 13,183
Total stockholders'
equity................ 15,076 16,294 18,547 35,666 40,355 36,793 41,630
Loan to deposit ratio.. 75.99% 83.96% 92.58% 93.20% 73.25% 85.01% 68.91%
Performance ratios:
Return on average
assets................ 1.77%(/1/) 1.17% 1.26% 1.44% 1.16% 1.46%(/4/) 0.97%(/4/)
Return on average
stockholders' equity.. 20.67(/1/) 14.09 17.66 17.21 14.83 15.41(/4/) 15.14(/4/)
Net interest margin.... 5.24 4.95 5.36 4.98 4.19 4.83(/4/) 3.77(/4/)
Efficiency ratio(/2/).. 60.19(/3/) 61.83 51.60 52.55 54.98 54.93 55.65
Assets quality ratios:
Net charge-offs to
average loans......... 0.09% 0.08% 0.21% 0.17% 0.33% 0.20%(/4/) 0.46%(/4/)
Nonperforming loans to
total loans........... 0.57 0.85 1.08 0.25 0.70 0.54 1.04
Nonperforming assets to
total assets.......... 0.50 0.63 0.88 0.24 0.50 0.40 0.75
Allowance for loan
losses as a percentage
of:
Total loans............ 1.46% 1.25% 1.41% 1.36% 1.21% 1.28% 1.21%
Nonperforming loans.... 258.46 146.28 130.69 534.62 171.82 234.19 116.71
Regulatory capital
ratios at period end:
Leverage capital
ratio................. 9.10% 7.49% 6.42% 9.86% 6.21% 9.08% 5.95%
Tier 1 risk-based
capital............... 12.71 9.80 8.45 13.01 9.05 11.65 8.89
Total risk-based
capital............... 13.96 11.05 9.70 14.27 10.21 12.90 10.03
Earnings to fixed
charges ratios:
Including interest on
deposits.............. 2.00x 1.42x 1.50x 1.52x 1.38x 1.52x 1.34x
Excluding interest on
deposits.............. 34.09 45.00 5.65 5.99 3.89 5.68 3.98
</TABLE>
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(1) Includes the effect of a gain of $1.4 million ($1.0 million after tax, or
$0.34 per common share) from the May 1994 sale of a bank subsidiary.
(2) Calculated by dividing non-interest expense by the sum of fully taxable
equivalent net interest income and non-interest income.
(3) Excludes the effect of the gain referenced in footnote (1) of this table.
(4) Annualized. Results for the three months ended March 31, 1999 may not be
indicative of full year results.
8
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
This prospectus contains certain forward-looking statements and information
that are based on management's beliefs, assumptions and expectations of our
future economic performance, taking into account information currently
available. When used in this prospectus, words such as "anticipate,"
"believe," "estimate," "expect," "intend" and similar expressions identify
forward-looking statements. Such statements reflect our current views of
future events and are subject to certain risks, uncertainties and assumptions
that may cause actual results or outcomes to vary materially from management's
expectations.
Some of the important factors that could cause our actual results of
operation or financial condition to differ materially from expectations, which
in turn could have an adverse impact on our ability to pay distributions on
the subordinated debentures and preferred securities are: (1) potential delays
or other problems in implementing our growth and expansion strategy; (2) the
ability to continue to attract new deposits and loans; (3) interest rate
fluctuations; (4) competitive factors and pricing pressures; (5) general
economic conditions; (6) Year 2000 problems; and (7) changes in legal and
regulatory requirements as well as other factors described in this prospectus.
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. These and other
material risk factors relating to our operations and the preferred securities
are more fully described under the caption "Risk Factors."
9
<PAGE>
RISK FACTORS
In addition to the other information in this prospectus, you should
carefully consider the following risk factors before investing in the
preferred securities.
PREFERRED SECURITIES RISK FACTORS
The Holders of Our Senior and Subordinated Debt Will Be Paid Before You Are
Paid Under the Guarantee or Subordinated Debentures
Our obligations under the guarantee and subordinated debentures are
unsecured and rank junior in right of payment to all of our Senior and
Subordinated Debt and equal to any securities we may later have that are
similar to the preferred securities and subordinated debentures. The guarantee
and subordinated debentures also will be effectively junior to all obligations
of our bank subsidiaries.
The preferred securities, the subordinated debentures and the guarantee do
not limit our ability to incur additional indebtedness, including indebtedness
that ranks senior to the subordinated debentures and the guarantee. As of
March 31, 1999 we had approximately $13.1 million of Senior and Subordinated
Debt outstanding (substantially all of which was outstanding under our $22
million revolving line of credit and will be repaid with the proceeds of this
offering). Only our common stock currently ranks junior in right of payment to
the subordinated debentures and our obligations under the guarantee. See "Use
of Proceeds," "Description of Guarantee--Status of the Guarantee" and
"Description of the Subordinated Debentures--Subordination."
If We Are Unable to Make Payments on the Subordinated Debentures, the Trust
Will Not Be Able to Pay Distributions on the Preferred Securities and the
Guarantee Will Not Apply
The Trust's ability to pay distributions on the preferred securities depends
upon our making timely payments on the subordinated debentures. In turn, our
ability to make payments on the subordinated debentures depends primarily upon
our receipt of cash dividends from our bank subsidiaries. Dividend payments
from the bank subsidiaries are subject to a number of operational, regulatory
and other risks which we describe in more detail under the caption "Bank of
the Ozarks, Inc. Risk Factors."
If we default on our obligations under the subordinated debentures, you will
not be able to rely on the guarantee for payment because the guarantee only
applies if we make a payment of principal or interest on the subordinated
debentures. Instead, you or the property trustee will have to sue us to
enforce the rights of the holder of the subordinated debentures. For more
information on our obligations under the preferred securities guarantee and
the subordinated debentures, see "Description of Guarantee--Status of the
Guarantee" and "Description of the Subordinated Debentures--Subordination.
Distributions on the Preferred Securities May be Deferred; You May Have to
Include Interest in Your Taxable Income Before You Receive Cash
It is possible that you will not receive cash distributions on the preferred
securities for up to 20 consecutive quarters (in each case, an "Extension
Period"). We have the right, at one or more times, to defer interest payments
on the subordinated debentures for an Extension Period, but not beyond the
maturity date of the subordinated debentures. We must make payments of all
deferred interest upon the earlier of the end of the Extension Period or the
maturity date. This deferral right exists only if no event of default under
the subordinated debentures has occurred and is continuing. If we exercise
this right, the Trust will also defer distributions on the preferred
securities during an Extension Period. However, you would still accumulate
distributions at an annual rate of 9.0% of the liquidation amount of $10 per
preferred security, plus you will earn interest at the annual rate of 9.0%,
compounded quarterly, on any unpaid distributions. When we pay all the
accumulated amounts due to you during an Extension Period, the Extension
Period will terminate. However, we have the right to begin
10
<PAGE>
another Extension Period under the same terms outlined above. There is no
limit on the number of times we can elect to begin an Extension Period. During
an Extension Period, the preferred securities may trade at a price that does
not fully reflect the value of accrued but unpaid distributions. See
"Description of the Preferred Securities."
You will also not receive the cash distributions related to any accrued and
unpaid interest from the Trust if you sell the preferred securities before the
end of an Extension Period. However, you will be required to include accrued
interest income as original issue discount for United States federal income
tax purposes in respect of your pro rata share of the subordinated debentures
held by the Trust. While we will take the position that original issue
discount will not arise before the first Extension Period, it is possible that
all interest on the subordinated debentures would be required to be accounted
for as original issue discount. In these circumstances, the receipt of
interest would not separately be reported as taxable income. See "United
States Federal Income Tax Consequences" for more information regarding the tax
consequences of the preferred securities.
We have no current intention of exercising our right to defer interest
payments on the subordinated debentures. However, if we exercise our right in
the future, the market price of the preferred securities is likely to be
adversely affected.
If We Redeem the Subordinated Debentures it Will Cause a Redemption of the
Preferred Securities and You May Not be Able to Reinvest the Proceeds at the
Same or Higher Rate of Return
You are subject to prepayment risk of your preferred securities. If your
preferred securities are redeemed, you may not be able to reinvest the money
you receive in the redemption at a rate that is equal to or higher than the
rate of return you receive on the preferred securities. Although the
subordinated debentures have a stated maturity date of June 18, 2029, they may
be redeemed by us prior to maturity (which, in turn, would cause an early
redemption of the preferred securities) in the following circumstances:
. in whole or in part at any time on or after June 18, 2004 at our option;
. in whole, but not in part, within 90 days following a change in the
federal tax laws or a change in the interpretation of the tax laws by
the courts or the Internal Revenue Service, which would result in a risk
that (1) the Trust may be subject to federal income tax with respect to
income received or accrued on the subordinated debentures, (2) the
interest payable on the subordinated debentures will not be deductible
by us for federal income tax purposes, or (3) the Trust is or will be
subject to more than a minimal amount of other taxes or governmental
charges;
. in whole, but not in part, within 90 days following a change in
investment company laws or regulations if there is a risk that the Trust
is or will be considered to be an investment company that is required to
be registered under the Investment Company Act of 1940; or
. in whole, but not in part, within 90 days following a change in banking
laws or regulations if there is a risk that we will not be able to treat
all or a substantial portion of the preferred securities as "Tier 1
capital" for purposes of federal banking guidelines.
Our exercise of these redemption rights is subject to our receipt of prior
approval of the Federal Reserve, if then required. For tax or regulatory
events that may trigger redemption of the subordinated debentures and
prepayment of the preferred securities, see "Description of the Preferred
Securities--Redemption." Additionally, for a discussion of certain tax
consequences that could be caused by a redemption, see "Federal Income Tax
Consequences--Receipt of Subordinated Debentures or Cash Upon Termination or
Redemption."
11
<PAGE>
An Active Trading Market for the Preferred Securities May Not Develop and a
Distribution of Subordinated Debentures to Holders of Preferred Securities May
Have an Adverse Effect on the Market Price of Your Investment
The preferred securities constitute a new issue of securities with no
established trading market. Although the preferred securities have been
approved for listing on The Nasdaq National Market, such listing does not
guarantee that a trading market for the preferred securities will develop. If
a trading market does develop, there is no assurance of the depth of that
market or that holders of preferred securities will be able to sell their
preferred securities easily.
Your investment in the preferred securities may decrease in value if the
subordinated debentures are distributed to you in exchange for your preferred
securities. We cannot predict the liquidity or market prices for the
subordinated debentures that may be distributed. Accordingly, the subordinated
debentures that you receive upon a distribution, or the preferred securities
you hold pending such a distribution, may trade at a discount to your purchase
for the preferred securities.
Because you may receive subordinated debentures, you must also make an
investment decision with regard to those securities. You should carefully
review all the information regarding the subordinated debentures contained in
this prospectus.
Under "United States Federal Income Tax Consequences" we discuss applicable
United States federal income tax consequences of a distribution of the
subordinated debentures.
In an Event of a Default, You May be Required to Rely on the Property Trustee
of the Trust to Enforce Your Rights
You may not be able to directly enforce rights against us if an event of
default occurs with respect to the subordinated debentures. For a list of
events of default, see "Description of the Preferred Securities--Events of
Default; Notice" and "Description of the Subordinated Debentures--Debenture
Events of Default."
If an event of default under the subordinated debentures occurs and is
continuing, this event will also be an event of default under the preferred
securities. In that case, you generally would first have to rely on the
property trustee's enforcement of its rights as holder of the subordinated
debentures against us. If the property trustee fails to exercise its rights
under the subordinated debentures, you will then be able to exercise any other
remedies available under the subordinated debentures.
However, if the default arises because we fail to pay interest or principal
(except during an Extension Period) on the subordinated debentures, you may
proceed directly against us without first relying on the property trustee.
Limited Covenants Relating to the Preferred Securities and the Subordinated
Debentures Will Not Necessarily Protect You
The governing documents impose only limited obligations on us with respect
to the preferred securities and the subordinated debentures. As a result, the
governing documents will not necessarily protect you in the event of an
adverse change in our financial condition or results of operations. The
governing documents do not limit the ability of us or our bank subsidiaries to
incur additional debt. You should not consider the covenants contained in the
governing documents to be a significant factor in evaluating whether we will
be able to comply with our obligations under the subordinated debentures or
the guarantee.
12
<PAGE>
You Will Have Limited Voting Rights
As a holder of preferred securities, you will have very limited voting
rights relating only to the modification of the preferred securities, the
dissolution or winding up of the Trust and the removal of the property trustee
upon a limited number of events. You will not have any voting rights regarding
Bank of the Ozarks Inc.'s business or any matters regarding the administrative
trustees. See "Description of the Preferred Securities--Voting Rights;
Amendment of the Trust Agreement" for more information on your limited voting
rights.
Trading Characteristics of the Preferred Securities May Create Adverse Tax
Consequences for You
The preferred securities may trade at a price that does not reflect the
value of accrued but unpaid interest on the underlying subordinated
debentures. If you use the accrual method of accounting for tax purposes (or
if you use the cash method and the preferred securities are deemed to have
been issued with original issue discount) and you dispose of your preferred
securities between record dates for any distribution payments, you will have
to include as ordinary income for United States federal income tax purposes an
amount equal to the accrued but unpaid interest on your proportionate share of
the interest on the subordinated debentures through the date of your
disposition.
You will recognize a capital loss on the amount that the selling price is
less than your adjusted tax basis. Generally, capital losses may be used by a
corporate taxpayer only to offset capital gains and may be used by individual
taxpayers only to offset capital gains plus $3,000 of other income.
See "United States Federal Income Tax Consequences--Potential Extension of
Interest Payment Period and Original Issue Discount" and "--Sale of Preferred
Securities" for more information on possible adverse tax consequences to you.
13
<PAGE>
BANK OF THE OZARKS, INC. RISK FACTORS
Each of these factors may have a material adverse effect on our operations,
financial results or financial condition in future periods which in turn could
adversely affect our ability to make payments on the subordinated debentures
and the Trust's ability to effect distributions on the preferred securities.
We Could Sustain Losses If Asset Quality Declines
Our earnings are significantly affected by our ability to properly
originate, underwrite and service loans. We could sustain losses if we
incorrectly assess the creditworthiness of our borrowers or fail to detect or
respond to a deterioration in asset quality in a timely manner. Problems with
asset quality could cause our interest income and net interest margin to
decrease and our provisions for loan losses to increase, which could
materially adversely affect our results of operations and financial condition.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Nonperforming Assets" and "Business--Asset Quality."
Changes in Interest Rates Could Adversely Affect Our Results of Operations and
Financial Condition
Our earnings depend substantially on "rate differentials," which are the
differences between the rates we earn on loans, securities and other earning
assets, and the interest rates we pay on deposits and other borrowings. These
rates are highly sensitive to many factors which are beyond our control,
including general economic conditions and the policies of various governmental
and regulatory authorities. Frequently the maturities of assets and
liabilities are not balanced, and an increase or decrease in interest rates
could have a material adverse effect on our net interest margin, results of
operations and financial condition. For instance, our liabilities are
currently scheduled to reprice more quickly than our assets. As a result, an
increase in interest rates may have a material adverse effect on our results
of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Interest Rate Sensitivity."
Liquidity Needs Could Adversely Affect Our Results of Operations and Financial
Condition
Bank Subsidiaries. Our primary sources of funds are customer deposits and
loan repayments. We have experienced significant growth in our loan portfolio
which has resulted in a high loan to deposit ratio in recent years. Although
our loan to deposit ratio was 68.91% at March 31, 1999, this ratio could
increase to higher levels if loan growth outpaces deposit growth. While
scheduled loan repayments are a relatively stable source of funds, 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, we 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 borrowings under
our revolving line of credit, Federal Home Loan Bank ("FHLB") advances and
federal funds lines of credit from correspondent banks. While we believe that
these sources are currently adequate, there can be no assurance they will be
sufficient to meet future liquidity demands. We may be required to slow or
discontinue loan growth, capital expenditures or other investments or
liquidate assets should such sources not be adequate. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
Holding Company. We rely on the dividends from our bank subsidiaries as our
principal source of funds for our operations including the repayment of our
debt. Federal and state banking regulations restrict the ability of the bank
subsidiaries to pay dividends. Although we expect the level of our bank
subsidiaries' dividends to be adequate to meet our current and anticipated
cash needs, the continued ability to pay dividends at adequate levels is
determined primarily by the net profits, after taxes, of such bank
subsidiaries. Accordingly, because there can be no assurance as to the future
profitability of the bank subsidiaries, dividends we receive may not be
sufficient to meet our future cash requirements. Also, there can be no
assurance that additional federal or state regulations will not further
restrict the bank subsidiaries' ability to pay dividends. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources" and "Supervision and Regulation--Bank
Subsidiaries."
14
<PAGE>
Year 2000 Liquidity Needs. We may experience additional liquidity needs in
connection with increased deposit withdrawals due to customer concerns over
the Year 2000 issue. While we have developed a contingency funding plan to
prepare for this potential liquidity need, there can be no assurance that such
steps will be adequate. Consequently, significant depositor withdrawals
immediately before or after January 1, 2000 could have a material adverse
effect on our results of operations or financial condition. See "Management's
Discussion and Analysis of Financial Conditions and Results of Operations--
Liquidity and Capital Resources."
We May Not Succeed in Implementing Our Growth Strategy
Our current growth strategy primarily involves growth at existing offices
and through new, or de novo, branches. This strategy involves certain special
risks as follows:
Management of Growth. Our past and expected growth involves a variety of
risks including:
. maintaining loan quality in the context of significant loan growth;
. maintaining adequate management personnel and systems to oversee such
growth;
. maintaining adequate internal audit, loan review and compliance
functions; and
. implementing additional policies, procedures and operating systems
required to support such growth.
Operating Results. There is no assurance that our new offices will achieve
deposit levels, loan balances or other operating results necessary to avoid
losses or produce profitability. Our historical results may not be indicative
of future results or results that may be achieved from a larger number of
locations. Should any new location be unprofitable or marginally profitable,
or should any existing location experience a decline in profitability or incur
losses, the adverse effect on our results of operations and financial
condition could be more significant than would be the case for a larger
company.
Development of Offices. We may encounter delays or other problems in opening
offices. Additionally, we may be unable to accomplish future expansion plans
due to lack of available satisfactory sites, difficulties in acquiring such
sites, increased expenses or loss of potential sites due to complexities
associated with zoning and permitting processes, higher than anticipated
acquisition costs or other factors. We may also consider strategic acquisition
opportunities should they be presented. If we make any acquisitions, there can
be no assurance we will be able to successfully integrate the operations of
any acquired entity.
Regulatory and Economic Factors. Our growth and expansion plans may be
adversely affected by a number of regulatory and economic developments or
other events. Failure to obtain required regulatory approvals, changes in laws
and regulations or other regulatory developments and changes in prevailing
economic conditions or other unanticipated events may prevent or adversely
affect our continued growth and expansion. Such factors may cause us to alter
our growth and expansion plans or slow or halt the growth and expansion
process, which may prevent us from entering certain target markets or allow
competitors to gain or retain market share in our existing or expected
markets.
Failure to successfully address the above issues could have a material
adverse effect on our results of operations and financial condition. See
"Business--Growth Strategy."
15
<PAGE>
The Banking Industry Is Highly Competitive
The banking industry in our market area is highly competitive. We compete
with many different financial and financial service institutions, including:
. other commercial and savings banks and savings and loan associations;
. credit unions;
. finance companies;
. mortgage companies;
. brokerage and investment banking firms; and
. asset-based non-bank lenders.
A substantial number of the commercial banks in our market area are branches
or subsidiaries of much larger organizations affiliated with statewide,
regional or national banking companies, and as a result may have greater
resources and lower cost of funds. Additionally, we may face increased
competition from de novo community banks, including those with senior
management who were previously with other local banks or those controlled by
investor groups with strong local business and community ties.
Various legislative acts in recent years, including the interstate banking
and branching laws, have led to increased competition among financial
institutions. There can be no assurance that we will compete effectively in
the future. Further, there can be no assurance that the United States Congress
or the Arkansas General Assembly will not enact legislation that may further
increase competitive pressures on us. See "Business--Competition" and
"Supervision and Regulation."
Changes in Economic Conditions Could Adversely Affect Our Results of Operation
and Financial Condition
Our profitability depends on the profitability of our bank subsidiaries,
whose operating results and asset quality may be significantly affected by
national and local economic conditions. We make loans primarily to borrowers
who are located in northern, western and central Arkansas and secure these
loans in substantial part with real estate collateral located in the area. We
are subject to adverse changes in general economic conditions in the United
States such as inflation, recession and high levels of unemployment, consumer
credit and bankruptcies. We are also subject to unfavorable changes in
economic conditions affecting our markets which may have a material adverse
effect on our results of operations and financial condition. Such changes
could result from numerous factors beyond our control, including a reduction
in real estate values, business closings or layoffs, inclement weather,
natural disasters and adverse trends or events affecting various industry
groups such as agriculture, real estate and real estate development and
construction.
We Could be Adversely Affected by the Year 2000 Problem
The Year 2000 issue relates to the ability of our computer systems and other
systems with imbedded microchips to properly handle Year 2000 date sensitive
data and the potential risk to us because of relationships with third parties
who do not adequately address the Year 2000 issue. Such third parties include
software and hardware vendors, loan customers, correspondent banks, federal,
state and local governmental agencies, utility companies and others. Failure
in any of these areas could result in a system failure or miscalculations
causing disruptions of our operations, including a temporary inability to
process transactions or engage in normal business activities.
16
<PAGE>
We have a Year 2000 Project Committee that has been evaluating and assessing
our exposure to this issue. We have substantially completed the testing of our
internal mission critical systems and have not yet identified any problems
with our systems that would have a material impact on operations. However,
there can be no assurance that our internal systems will be free of material
errors. In addition, we can give no assurance that our vendors, borrowers or
other third parties who could affect our operations will be Year 2000
compliant. If either our computer systems or the systems of these third
parties fail to function properly because of the Year 2000 problem, our
results of operations may materially suffer. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Year 2000."
We Rely on the Services of Key Personnel
We depend on the services of George Gleason, our Chairman of the Board and
Chief Executive Officer. Mr. Gleason is our largest individual stockholder,
and although we have entered into an employment agreement with him, the loss
of the services of Mr. Gleason could have a material adverse effect on our
results of operations and financial condition. We are also dependent on
certain other key officers who have important customer relationships or are
instrumental to our operations. The loss of these individuals could have a
material adverse effect on our results of operations and financial condition.
In addition, we may not be able to attract and retain key personnel with the
skills and expertise necessary to achieve and manage our planned growth. See
"Business--Growth Strategy" and "Management."
We Could be Adversely Affected by Government Regulation
We are subject to extensive government regulation and supervision under
various state and federal laws, rules and regulations, including rules and
regulations of the Federal Reserve, the Federal Deposit Insurance Corporation
("FDIC") and the Arkansas State Bank Department. These laws and regulations
are designed primarily to protect depositors, borrowers, and the Bank
Insurance Fund of the FDIC and to further certain social policies;
consequently, they may impose limitations on us that may not be in our best
interests or the interests of holders of the preferred securities. We are
subject to changes in federal and state laws, regulations, governmental
policies and accounting principles. The effects of any such potential changes
cannot be predicted, but they could have a material adverse effect on our
results of operations and financial condition. See "Supervision and
Regulation."
Arkansas Usury Laws Could Adversely Affect Our Operating Results
Under the Arkansas Constitution, "consumer loans and credit sales" and other
"general loans" are subject to an interest rate limitation equal to 5% over
the Federal Reserve Discount Rate in effect on the date of the loan. "Consumer
loans and credit sales" are subject to an additional interest rate limitation
of 17% per annum. During 1998 and the first quarter of 1999 the maximum
interest rates we could charge on these categories of loans ranged from 10.0%
at January 1, 1998 to 9.5% at March 31, 1999. The Arkansas Constitution
provides significant penalties, including the forfeiture of interest and
principal depending on the type of loans, for usurious loans. These usury
provisions could adversely affect our net interest margin and loan volume.
Thus, if the Federal Reserve Discount Rate failed to move in tandem with
market rates or if a high interest rate environment reduced or eliminated our
net interest margin, Arkansas usury laws could have a material adverse effect
on our results of operations and financial condition. See "Supervision and
Regulation--State Regulations."
17
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of preferred securities by the Trust will be
invested in the subordinated debentures and are expected to be approximately
$14.1 million ($16.3 million if the underwriters' over-allotment option is
exercised in full), after deducting underwriting commissions and offering
expenses payable by the Company.
We intend to use approximately $13.1 million of the net proceeds from the
subordinated debentures to repay outstanding borrowings under the Company's
revolving line of credit, which provides for maximum outstanding amounts of up
to $22 million and has a maturity date of March 31, 2003. Interest accrues on
outstanding borrowings under the revolving line of credit at a variable rate
equal to the prime rate minus 1.25%, but not to exceed 7.75%. For a more
detailed description of the Company's line of credit, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
We intend to use the balance of the net proceeds for general corporate
purposes, including capital investments in and advances to the bank
subsidiaries to finance the continued implementation of our growth strategy.
See "Business--Growth Strategy." The precise amounts and timing of expenditure
of such net proceeds will depend on the funding requirements of the Company
and the availability of other capital resources. Pending application of the
net proceeds as described above, the Company intends to invest such proceeds
in short term and intermediate term interest bearing securities or in deposits
in its bank subsidiaries.
ACCOUNTING TREATMENT
For financial reporting purposes, the Company will treat the Trust as its
subsidiary. Accordingly, the Company will include the accounts of the Trust in
its Consolidated Financial Statements. The preferred securities will be
presented as a separate category in the consolidated balance sheet of the
Company under the caption "Guaranteed preferred beneficial interest in the
Company's subordinated debentures" and appropriate disclosures about the
preferred securities, the guarantee and the subordinated debentures will be
included in the notes to the Consolidated Financial Statements. The Company
will record distributions on the preferred securities as a reduction in net
earnings available to common stockholders in its consolidated statements of
income.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the Company's consolidated ratios of earnings
to fixed charges for the periods indicated. For purposes of computing the
ratios of earnings to fixed charges, earnings represent income from continuing
operations before income taxes, extraordinary items and cumulative effect of
changes in accounting principle plus fixed charges. Fixed charges represent
total interest expense, including and excluding interest on deposits, as
applicable, as well as the interest component of rental expense.
<TABLE>
<CAPTION>
Three Months
Ended
Year Ended December 31, March 31,
------------------------------ --------------
1994 1995 1996 1997 1998 1998 1999
----- ----- ---- ---- ---- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings to fixed charges:
Including interest on
deposits..................... 2.00x 1.42x 1.50x 1.52x 1.38x 1.52x 1.34x
Excluding interest on
deposits..................... 34.09 45.00 5.65 5.99 3.89 5.68 3.98
</TABLE>
18
<PAGE>
CAPITALIZATION
The following table shows the consolidated capitalization of the Company at
March 31, 1999 and as adjusted to give effect to the receipt and application
of the estimated net proceeds from the offering (assuming no exercise of the
underwriters' over-allotment option). See "Use of Proceeds."
<TABLE>
<CAPTION>
March 31, 1999
-------------------------
As Adjusted
Actual for the Offering
------- ----------------
(Dollars in thousands)
<S> <C> <C>
Notes payable........................................ $13,183 $ 108
Guaranteed preferred beneficial interest in Company's
subordinated debentures............................. -- 15,000
Stockholders' equity:
Preferred Stock, $0.01 par value, 1,000,000 shares
authorized, no shares issued and outstanding....... -- --
Common Stock, $0.01 par value, 10,000,000 shares
authorized, 3,779,555 shares issued and
outstanding........................................ 38 38
Additional paid-in capital.......................... 14,314 14,314
Retained earnings................................... 27,070 27,070
Accumulated other comprehensive income.............. 208 208
------- -------
Total stockholders' equity......................... 41,630 41,630
------- -------
Total capitalization.............................. $54,813 $56,738
======= =======
Ratio of equity to assets............................ 6.24% 6.22%
Regulatory capital ratios:
Leverage capital ratio.............................. 5.95% 7.96%
Tier 1 risk-based capital........................... 8.89 11.92
Total risk-based capital............................ 10.03 13.33
</TABLE>
A substantial portion of the net proceeds of the preferred securities is
expected to qualify as Tier 1 capital with respect to the Company under the
risk-based guidelines established by the Federal Reserve. These guidelines
currently provide that the Tier 1 capital related to the preferred securities
cannot constitute more than 25% of the total core capital elements of the
Company. Amounts in excess of this 25% limitation are expected to constitute
Tier 2 capital of the Company. As of March 31, 1999 this 25% limitation would
limit the amount of net proceeds of the preferred securities eligible for
inclusion in Tier 1 capital to $13.8 million.
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected financial data concerning the
Company and is qualified in its entirety by the Company's Consolidated
Financial Statements, including the related notes thereto, and by
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and other financial data included in this prospectus. The
consolidated statement of operations data for the years ended December 31,
1996, 1997 and 1998 and the consolidated balance sheet data at December 31,
1997 and 1998 are derived from audited Consolidated Financial Statements
included elsewhere in this prospectus. The consolidated statement of
operations data for the years ended December 31, 1994 and 1995 and the
consolidated balance sheet data at December 31, 1994, 1995 and 1996 are
derived from audited Consolidated Financial Statements not included in this
prospectus. The income statement, balance sheet and per common share data as
of and for the periods ending March 31, 1998 and March 31, 1999, were derived
from the unaudited Consolidated Financial Statements of the Company included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
Three Months
Ended
Year Ended December 31, March 31,
----------------------------------------------------- -----------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- -------- --------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Income statement data:
Interest income........ $ 12,645 $ 15,703 $ 21,836 $ 27,468 $ 38,882 $ 7,993 $ 11,730
Interest expense....... 4,651 7,391 10,031 12,979 20,518 3,836 6,421
Net interest income.... 7,994 8,312 11,805 14,489 18,364 4,157 5,309
Provision for loan
losses................ 339 360 1,486 1,139 2,026 225 611
Non-interest income.... 2,713(/1/) 1,168 1,865 2,925 5,031 1,094 1,269
Non-interest expense... 5,735 5,996 7,151 9,228 13,119 2,924 3,768
Income before income
taxes................. 4,509(/1/) 3,015 5,033 7,047 8,250 2,102 2,199
Net income............. 2,954(/1/) 2,170 3,027 4,531 5,629 1,374 1,526
Per common share data:
Earnings--diluted...... $ 0.99(/1/) $ 0.75 $ 1.05 $ 1.38 $ 1.47 $ 0.36 $ 0.40
Book value............. 5.07 5.66 6.44 9.44 10.68 9.73 11.01
Dividends.............. 0.30 0.30 0.30 0.20 0.23 0.05 0.10
Weighted avg. shares
outstanding
(thousands)........... 2,975 2,894 2,880 3,281 3,819 3,821 3,796
Balance sheet data at
period end:
Total assets........... $165,030 $212,476 $270,600 $352,093 $612,431 $422,655 $666,921
Total loans............ 112,806 153,198 214,462 275,463 387,526 299,505 400,851
Allowance for loan
losses................ 1,649 1,909 3,019 3,737 4,689 3,822 4,850
Total investment
securities............ 40,521 37,137 39,608 42,459 176,618 70,252 215,049
Total deposits......... 148,453 182,463 231,648 295,555 529,040 352,312 581,704
FHLB advances and
Federal funds
purchased............. -- 7,947 12,517 14,017 26,823 25,993 25,425
Notes payable.......... -- 3,920 5,396 5,072 12,448 5,072 13,183
Total stockholders'
equity................ 15,076 16,294 18,547 35,666 40,355 36,793 41,630
Loan to deposit ratio.. 75.99% 83.96% 92.58% 93.20% 73.25% 85.01% 68.91%
Average balance sheet
data:
Total average assets... $167,333 $185,160 $240,208 $314,489 $486,729 $382,406 $640,792
Total average
stockholders' equity.. 14,287 15,392 17,144 26,328 37,951 36,171 40,867
Average equity to
average assets........ 8.54% 8.31% 7.14% 8.37% 7.80% 9.46% 6.38%
Performance ratios:
Return on average
assets................ 1.77%(/1/) 1.17% 1.26% 1.44% 1.16% 1.46%(/5/) 0.97%(/5/)
Return on average
stockholders' equity.. 20.67%(/1/) 14.09 17.66 17.21 14.83 15.41(/5/) 15.14(/5/)
Net interest margin.... 5.24 4.95 5.36 4.98 4.19 4.83(/5/) 3.77(/5/)
Efficiency ratio(/2/).. 60.19(/3/) 61.83 51.60 52.55 54.98 54.93 55.65
Dividend payout
ratio(/4/)............ 30.30 40.00 28.57 14.49 15.65 13.89 25.00
Assets quality ratios:
Net charge-offs to
average loans......... 0.09% 0.08% 0.21% 0.17% 0.33% 0.20%(/5/) 0.46%(/5/)
Provision for loan
losses to average
loans................. 0.31 0.28 0.82 0.47 0.62 0.31 0.62
Nonperforming loans to
total loans........... 0.57 0.85 1.08 0.25 0.70 0.54 1.04
Nonperforming assets to
total assets.......... 0.50 0.63 0.88 0.24 0.50 0.40 0.75
Allowance for loan
losses as a percentage
of:
Total loans............ 1.46% 1.25% 1.41% 1.36% 1.21% 1.28% 1.21%
Nonperforming loans.... 258.46 146.28 130.69 534.62 171.82 234.19 116.71
Regulatory capital
ratios at period end:
Leverage capital
ratio................. 9.10% 7.49% 6.42% 9.86% 6.21% 9.08% 5.95%
Tier 1 risk-based
capital............... 12.71 9.80 8.45 13.01 9.05 11.65 8.89
Total risk-based
capital............... 13.96 11.05 9.70 14.27 10.21 12.90 10.03
Earnings to fixed
charges ratios:
Including interest on
deposits.............. 2.00x 1.42x 1.50x 1.52x 1.38x 1.52x 1.34x
Excluding interest on
deposits.............. 34.09 45.00 5.65 5.99 3.89 5.68 3.98
</TABLE>
- --------
(1) Includes the effect of a gain of $1.4 million ($1.0 million after tax, or
$0.34 per common share) from the May 1994 sale of a bank subsidiary.
(2) Calculated by dividing non-interest expense by the sum of fully taxable
equivalent net interest income and non-interest income.
(3) Excludes the effect of the gain referenced in footnote (1) of this table.
(4) Calculated by dividing dividends per share by diluted earnings per share.
(5) Annualized. Results for the three months ended March 31, 1999 may not be
indicative of full year results.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and related Notes appearing
elsewhere in this prospectus.
General
Net income was $1,526,000 for the first quarter of 1999, an increase of
11.1% over net income of $1,374,000 for the same quarter in 1998. Diluted
earnings per share rose 11.1% to $0.40 for the quarter ended March 31, 1999,
compared to $0.36 for the same quarter in 1998.
Total assets increased from $612.4 million at December 31, 1998 to $666.9
million at March 31, 1999. Loans were $400.9 million at March 31, 1999,
compared to $387.5 million at December 31, 1998. Deposits were $581.7 million
at March 31, 1999, compared to $529.0 million at December 31, 1998.
Stockholders' equity increased from $40.4 million at December 31, 1998 to
$41.6 million at March 31, 1999, increasing book value per share from $10.68
to $11.01.
For the year ended December 31, 1998 net income was $5,629,000, a 24.2%
increase over net income of $4,531,000 in 1997. Net income in 1996 was
$3,027,000. Diluted earnings per share, which were impacted by the issuance of
899,755 additional shares of common stock in the third quarter of 1997, rose
6.5% to $1.47 per share in 1998 compared to $1.38 per share in 1997. Diluted
earnings per share in 1996 were $1.05 per share.
As shown below total assets, loans and deposits increased 73.9%, 40.7% and
79.0%, respectively, from December 31, 1997 to December 31, 1998 and 30.1%,
28.4% and 27.6%, respectively, from December 31, 1996 to December 31, 1997.
Stockholders' equity increased 13.1% from December 31, 1997 to December 31,
1998 and 92.3% from December 31, 1996 to December 31, 1997. The change from
1996 to 1997 reflects the impact of the Company's initial public offering.
During these same periods, book value per share increased 13.1% and 46.6%,
respectively.
<TABLE>
<CAPTION>
December 31, % Change
-------------------------- ----------
1997 1998
March 31, from from
1996 1997 1998 1999 1996 1997
-------- -------- -------- --------- ---- ----
(Dollars in thousands, except per share
amounts)
<S> <C> <C> <C> <C> <C> <C>
Assets......................... $270,600 $352,093 $612,431 $666,921 30.1% 73.9%
Loans.......................... 214,462 275,463 387,526 400,851 28.4 40.7
Deposits....................... 231,648 295,555 529,040 581,704 27.6 79.0
Stockholders' equity........... 18,547 35,666 40,355 41,630 92.3 13.1
Book value per share........... 6.44 9.44 10.68 11.01 46.6 13.1
</TABLE>
Two measures of performance by banking institutions are return on average
assets and return on average equity. Annualized results presented below for
interim periods may not be indicative of those for the full year or future
periods.
Return on average assets ("ROA") measures net earnings in relation to
average total assets and indicates a company's ability to employ its resources
profitably. For the three months ended March 31, 1999, the Company's
annualized ROA was 0.97%, compared with 1.46% for the same period in 1998. For
the year ended December 31, 1998, the Company's ROA was 1.16% compared with
1.44% and 1.26%, respectively, for the years ended December 31, 1997 and 1996.
Return on average equity ("ROE") is determined by dividing annual net
earnings by average shareholders' equity and indicates how effectively a
company can generate net income on the capital invested by its shareholders.
For the three months ended March 31, 1999 the Company's annualized ROE was
15.14%
21
<PAGE>
compared with 15.41% for the same period in 1998. For the year ended December
31, 1998, the Company's ROE was 14.83% compared with 17.21% and 17.66%,
respectively, for the years ended December 31, 1997 and 1996.
Analysis of Results of Operations
The Company's results of operations depend primarily on net interest income,
which is the difference between the interest income from earning assets, such
as loans and investments, and the interest expense incurred on interest
bearing liabilities, such as deposits and other borrowings. The Company also
generates non-interest income, including service charges on deposit accounts,
mortgage lending income, other charges and fees, trust income, and gains on
sales of assets. The Company's non-interest expenses primarily consist of
employee compensation and benefits, occupancy, equipment, and other operating
expenses. The Company's results of operations are also significantly affected
by its provision for loan losses. The following discussion summarizes the
Company's operations for the past three years and for the three months ended
March 31, 1999.
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
federal income tax rate (34%).
Three months ended March 31, 1999 compared to three months ended March 31,
1998
Net interest income (FTE) increased 30.1% to $5.5 million for the three
months ended March 31, 1999, from $4.2 million for the three months ended
March 31, 1998. This increase primarily resulted from a 66.5% increase in
average earning assets to $591.5 million for the 1999 period from $355.3
million 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 declined from 4.83% in the first quarter
ended March 31, 1998, to 3.77% for the same quarter of 1999. The Company's net
interest margin declined throughout the year of 1998 as a result of
competitive factors, including promotional CD rates at new offices and intense
pricing competition for loans, and a reduction in the Company's loan to
deposit ratio. While the net interest margin declined throughout 1998, the net
interest margin for the first quarter of 1999 remained unchanged from the
fourth quarter of 1998.
1998 compared to 1997
Net interest income (FTE) increased 28.7% to $18.8 million in 1998 from
$14.6 million in 1997. This increase primarily resulted from a 53.1% increase
in average earning assets to $449.4 million in 1998 from $293.6 million in
1997. The increase in average earning assets resulted from continued growth in
the Company's loan portfolio and a significant increase in the investment
securities portfolio. The Company's net interest margin declined from 4.98%
for 1997 to 4.19% for 1998. While the Company experienced strong competition
for loans which reduced the Company's average loan yields, deposit costs did
not decline proportionately due to competition and promotional time deposit
rates offered by the Company at its eight new offices opened in the past 18
months. The Company capitalized on favorable competitive opportunities
resulting from industry consolidation to capture deposit market share causing
its loan to deposit ratio to decline from 93.2% at the beginning of 1998 to
73.3% at December 31, 1998. Deposit growth not used to fund loans, along with
certain borrowings, was used to increase the investment securities portfolio.
The increase in the investment securities portfolio in amount and as a
percentage of total assets has increased the Company's net interest income but
has reduced net interest margin as the yield on securities was less than the
yield on loans.
22
<PAGE>
1997 compared to 1996
Net interest income (FTE) increased 22.0% to $14.6 million in 1997 from
$12.0 million in 1996. This increase primarily resulted from a 31.1% increase
in average earning assets to $293.6 million in 1997 from $223.9 million in
1996. The increase in average earning assets resulted from expansion of the
Company's loan portfolio due to continued growth of existing branches and
opening of new branches. The decrease in the net interest margin resulted
primarily from a 44 basis point decrease in the yield on average earning
assets. A substantial portion of this decrease was attributable to lower
average balances on a relatively high yielding portfolio of loans acquired
prior to 1996 from the Resolution Trust Corporation.
Analysis of Net Interest Income
(FTE = Fully Taxable Equivalent)
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
------------------------- -------------------
1996 1997 1998 1998 1999
------- ------- ------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest income............... $21,836 $27,468 $38,882 $ 7,993 $ 11,730
FTE adjustment................ 187 144 466 72 193
------- ------- ------- -------- ---------
Interest income--FTE.......... 22,023 27,612 39,348 8,065 11,923
Interest expense.............. 10,031 12,979 20,518 3,836 6,421
------- ------- ------- -------- ---------
Net interest income--FTE...... $11,992 $14,633 $18,830 $ 4,229 $ 5,502
======= ======= ======= ======== =========
Yield on interest earning
assets--FTE.................. 9.84% 9.40% 8.76% 9.21% 8.17%
Cost of interest bearing
liabilities.................. 5.02 5.02 5.06 5.03 4.77
Net interest spread--FTE...... 4.82 4.38 3.70 4.18 3.40
Net interest margin--FTE...... 5.36 4.98 4.19 4.83 3.77
</TABLE>
23
<PAGE>
The following table sets forth certain information relating to the Company's
net interest income for the years ended December 31, 1996, 1997 and 1998 and
for the three months ended March 31, 1998 and 1999. The yields and costs are
derived by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods shown except where otherwise noted.
Average balances are derived from daily balances for assets and liabilities.
The average balance of loans receivable includes loans on which the Company
has discontinued accruing interest. The yields and costs include amortization
of certain deferred fees and costs, capitalization of interest on construction
projects and late fees. These are considered adjustments to yields or rates.
Average Consolidated Balance Sheets and Net Interest Analysis
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------
1996 1997 1998
----------------------- ----------------------- -----------------------
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Average
Balance Expense Rate Balance Expense Rate Balance Expense Rate Balance
-------- ------- ------ -------- ------- ------ -------- ------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Earning assets:
Interest bearing
deposits......... $ 3,077 $ 169 5.49% $ 3,883 $ 213 5.49% $ 3,730 $ 205 5.50% $ 8,490
Federal funds
sold............. 2,720 145 5.33 2,021 108 5.34 1,659 89 5.36 3,967
Investment
securities:
Taxable.......... 32,526 2,069 6.36 39,413 2,684 6.81 99,840 6,654 6.66 46,501
Tax-exempt--FTE.. 5,215 551 10.57 3,520 353 10.03 15,790 1,160 7.35 9,677
Loans--FTE (net
of unearned
income).......... 180,334 19,089 10.59 244,757 24,254 9.91 328,394 31,240 9.51 286,647
-------- ------- -------- ------- -------- ------- --------
Total earning
assets--FTE..... 223,872 22,023 9.84 293,594 27,612 9.40 449,413 39,348 8.76 355,282
Non-earning
assets............ 16,336 20,895 37,316 27,124
-------- -------- -------- --------
Total assets.... $240,208 $314,489 $486,729 $382,406
======== ======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest bearing
liabilities:
Deposits:
Savings and
interest bearing
transaction...... $ 48,989 $ 1,311 2.68% $ 61,184 $ 1,786 2.92% $ 74,354 $ 2,054 2.76% $ 64,828
Time deposits
$100,000 or
more............. 34,689 1,975 5.69 48,919 2,753 5.63 87,751 4,899 5.58 64,513
Other time
deposits......... 102,076 5,719 5.60 129,969 7,287 5.61 198,268 11,165 5.63 152,776
-------- ------- -------- ------- -------- ------- --------
Total interest-
bearing
deposits........ 185,754 9,005 4.85 240,072 11,826 4.93 360,373 18,118 5.03 282,117
FHLB advances and
federal funds.... 9,564 558 5.83 12,347 599 4.85(/1/) 36,402 1,759 4.83(/1/) 22,072
Repurchase
agreements....... -- -- -- -- -- -- 108 4 3.70 --
Notes
payable(/2/)..... 4,315 468 10.85 6,125 554 9.04 8,811 637 7.23 5,072
-------- ------- -------- ------- -------- ------- --------
Total interest
bearing
liabilities..... 199,633 10,031 5.02 258,544 12,979 5.02 405,694 20,518 5.06 309,261
Non-interest
liabilities:
Non-interest
bearing
deposits......... 20,129 26,981 40,583 34,844
Other non-
interest
liabilities...... 3,302 2,636 2,501 2,130
-------- -------- -------- --------
Total
liabilities..... 223,064 288,161 448,778 346,235
Stockholders'
equity............ 17,144 26,328 37,951 36,171
-------- -------- -------- --------
Total
liabilities and
stockholders'
equity.......... $240,208 $314,489 $486,729 382,406
======== ======== ======== ========
Interest rate
spread--FTE....... 4.82% 4.38% 3.70%
------- ------- -------
Net interest
income--FTE....... $11,992 $14,633 $18,830
======= ======= =======
Net interest
margin--FTE....... 5.36% 4.98% 4.19%
<CAPTION>
Three Months Ended March 31,
--------------------------------------
1998 1999
-------------- -----------------------
Income/ Yield/ Average Income/ Yield
Expense Rate Balance Expense Rate
------- ------ -------- ------- ------
<S> <C> <C> <C> <C> <C>
ASSETS
Earning assets:
Interest bearing
deposits......... $ 114 5.45% $ 347 $ 5 5.45%
Federal funds
sold............. 54 5.62 208 3 4.88
Investment
securities:
Taxable.......... 776 6.77 166,560 2,758 6.72
Tax-exempt--FTE.. 194 8.13 30,914 525 6.89
Loans--FTE (net
of unearned
income).......... 6,927 9.80 393,493 8,632 8.90
------- -------- -------
Total earning
assets--FTE..... 8,065 9.21 591,522 11,923 8.17
Non-earning
assets............ 49,270
--------
Total assets.... $640,792
========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest bearing
liabilities:
Deposits:
Savings and
interest bearing
transaction...... $ 453 2.83% $ 98,861 $ 649 2.66%
Time deposits
$100,000 or
more............. 900 5.66 159,165 1,997 5.09
Other time
deposits......... 2,135 5.67 236,156 3,071 5.27
------- -------- -------
Total interest-
bearing
deposits........ 3,488 5.02 494,182 5,717 4.69
FHLB advances and
federal funds.... 240 4.41 37,903 486 5.20
Repurchase
agreements....... -- -- 1,379 13 3.95
Notes
payable(/2/)..... 108 8.64 12,821 205 6.47
------- -------- -------
Total interest
bearing
liabilities..... 3,836 5.03 546,285 6,421 4.77
Non-interest
liabilities:
Non-interest
bearing
deposits......... 50,799
Other non-
interest
liabilities...... 2,841
--------
Total
liabilities..... 599,925
Stockholders'
equity............ 40,867
--------
Total
liabilities and
stockholders'
equity.......... $640,792
========
Interest rate
spread--FTE....... 4.18% 3.40%
------- -------
Net interest
income--FTE....... $4,229 $5,502
======= =======
Net interest
margin--FTE....... 4.83% 3.77%
</TABLE>
- ----
(1) This rate is impacted by the capitalization of interest on construction
projects in the amount of $145,000 and $275,000 for the years ended
December 31, 1997 and 1998, respectively, and $60,000 and $14,000 for the
periods ended March 31, 1998 and 1999, respectively. In the absence of
this capitalization, these percentages would have been 6.03% and 5.59% for
the years ended December 31, 1997 and 1998, respectively.
(2) The interest expense on notes payable includes interest accrued for the
years ended December 31, 1996 and 1997 for a tax dispute related to the
years 1992-1995. Such interest accruals were $93,000 and $25,000 and were
recorded during the years ended December 31, 1996 and 1997, respectively.
24
<PAGE>
The following table reflects how changes in the volume of interest earning
assets and interest bearing liabilities and changes in interest rates have
affected the Company's interest income and interest expense during the periods
indicated. Information is provided in each category with respect to changes
attributable to (1) changes in volume (changes in volume multiplied by prior
rate); (2) changes in rate (changes in rate multiplied by prior volume); and
(3) changes in rate/volume (change in rate multiplied by change in volume).
The changes attributable to the combined impact of volume and rate have all
been allocated to the changes due to volume.
Analysis of Changes in Net Interest Income
<TABLE>
<CAPTION>
March 31, 1999 over
1997 over 1996 1998 over 1997 March 31, 1998
----------------------- ------------------------- ----------------------
Yield/ Yield/ Yield/
Volume Rate Total Volume Rate Total Volume Rate Total
------ ------- ------ ------- ------- ------- ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (decrease) in:
Interest income--FTE:
Interest bearing
deposits.............. $ 44 $ -- $ 44 $ (8) $ -- $ (8) $ (109) $ -- $ (109)
Federal funds sold..... (37) -- (37) (19) -- (19) (45) (7) (52)
Investment securities:
Taxable............... 469 146 615 4,027 (57) 3,970 1,988 (6) 1,982
Tax-exempt--FTE....... (170) (28) (198) 901 (94) 807 361 (30) 331
Loans--FTE, net of
unearned income....... 6,384 (1,219) 5,165 7,956 (970) 6,986 2,345 (639) 1,706
------ ------- ------ ------- ------- ------- ------ ------ ------
Total interest
income--FTE.......... 6,690 (1,101) 5,589 12,857 (1,121) 11,736 4,539 (681) 3,858
------ ------- ------ ------- ------- ------- ------ ------ ------
Interest expense:
Savings and interest
bearing transaction... 356 119 475 364 (96) 268 223 (27) 196
Time deposits of
$100,000 or more...... 801 (23) 778 2,168 (22) 2,146 1,188 (91) 1,097
Other time deposits.... 1,564 4 1,568 3,846 32 3,878 1,084 (148) 936
Federal funds,
repurchase agreements
and FHLB advances..... 135 (94) 41 1,167 (3) 1,164 216 43 259
Notes payable.......... 164 (78) 86 194 (111) 83 124 (27) 97
------ ------- ------ ------- ------- ------- ------ ------ ------
Total interest
expense.............. 3,020 (72) 2,948 7,739 (200) 7,539 2,835 (250) 2,585
------ ------- ------ ------- ------- ------- ------ ------ ------
Increase (decrease) in
net interest income--
FTE.................... $3,670 $(1,029) $2,641 $ 5,118 $ (921) $ 4,197 $1,704 $ (431) $1,273
====== ======= ====== ======= ======= ======= ====== ====== ======
</TABLE>
Non-Interest Income
The Company's non-interest income consists of 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 first quarter of 1999 was $1.3 million compared
with $1.l million for the first quarter of 1998, a 16.0% increase. During the
first quarter the Company benefited from record levels of service charges on
deposit accounts and trust income. The increase in service charges resulted
from continued growth in the number of checking, savings and money market
accounts as well as the impact of an increase in service charge rates
effective January 1, 1999. 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 for the first quarter of 1999 increased from the level for the first
quarter of 1998, but declined from the record levels for the last two quarters
of 1998.
Non-interest income for the year ended December 31, 1998 increased 72.0% to
$5.0 million compared with $2.9 million in 1997. Non-interest income was $1.9
million in 1996. The Company's growth in non-interest income is primarily due
to increases in mortgage lending income and service charges on the higher
level of deposit accounts. In 1996 the Company began to originate residential
mortgage loans for resale in the secondary market. The related growth in
mortgage lending income over the past two years has been the largest single
contributor to the Company's improvement in non-interest income.
25
<PAGE>
The table below shows non-interest income for the years ended December 31,
1996, 1997 and 1998 and for the three months ended March 31, 1998 and 1999.
Non-Interest Income
<TABLE>
<CAPTION>
Three Months
Ended
Year Ended December 31, March 31,
------------------------ -------------
1996 1997 1998 1998 1999
------- ------- ------- ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Service charges on deposit accounts... $ 806 $ 957 $ 1,372 $ 281 $ 502
Mortgage lending income............... 68 566 2,136 395 449
Other charges and fees................ 469 570 656 162 154
Trust income.......................... 214 274 335 78 128
Gain on sale of loans................. 274 57 -- -- --
Gain on sale of foreclosed real
estate............................... 14 261 98 84 (10)
Gain on sale of other assets.......... -- 76 15 4 3
Gain (loss) on sale of securities..... (77) 14 255 51 25
Printed check sales................... 90 127 118 32 8
Other................................. 7 23 46 7 10
------- ------- ------- ------ ------
Total non-interest income........... $ 1,865 $ 2,925 $ 5,031 $1,094 $1,269
======= ======= ======= ====== ======
</TABLE>
Non-Interest Expense
Non-interest expense consists of salaries and employee benefits, occupancy,
equipment and other operating expenses. Non-interest expense for first quarter
of 1999 was $3.8 million compared with $2.9 million for the same period in
1998, a 28.9% increase. This increase resulted primarily from continued growth
and expansion in connection with the opening of five new offices in 1998 and
one new office in the first quarter of 1999.
Non-interest expense for the year ended December 31, 1998 increased 42.2% to
$13.1 million compared with $9.2 million in 1997. Non-interest expense was
$7.2 million in 1996. These increases resulted primarily from continued growth
and expansion in 1998, including commencement in February of branch operations
in Little Rock, the June opening of two additional Little Rock offices
including the new corporate headquarters, the September opening of a banking
center in Fort Smith and the December opening of the Company's fourth Little
Rock office. Full-time equivalent employees increased to 266 at December 31,
1998 from 182 at December 31, 1997 as the Company added commercial and
consumer lenders, customer service staff, trust department personnel and
others to staff these new offices.
During the fourth quarter of 1998 the Company incurred after tax charges
totaling approximately $67,000, or approximately $0.02 per diluted share,
related to combining the operations of certain corporate subsidiaries and
certain expenses related to a proposed acquisition which was not consummated.
The efficiency ratio (non-interest expenses divided by the sum of net
interest income on a tax equivalent basis and non-interest income) was 55.65%
for the first quarter of 1999 compared to 54.93% for the first quarter of
1998. The efficiency ratio was 54.98% for the year ended December 31, 1998
compared to 52.55% in 1997 and 51.60% in 1996.
26
<PAGE>
The table below shows non-interest expense for the years ended December 31,
1996, 1997 and 1998 and for the three months ended March 31, 1998 and 1999.
Non-Interest Expense
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
------------------------ ---------------
1996 1997 1998 1998 1999
------- ------- -------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits....... $ 4,263 $ 5,330 $ 7,197 $ 1,677 $ 2,000
Net occupancy expense................ 457 584 877 187 297
Equipment expense.................... 541 721 1,084 239 339
Other real estate and foreclosure
expense............................. 49 40 130 16 63
Other operating expense:
Professional services.............. 60 102 211 45 100
Postage............................ 140 178 243 68 71
Telephone.......................... 125 221 314 67 101
Data lines......................... 25 41 139 18 86
Operating supplies................. 215 405 454 121 112
Advertising and public relations... 123 332 566 96 176
Directors' fees.................... 96 116 114 28 30
Software expense................... 69 119 190 38 64
Check printing charges............. 102 137 147 37 --
ATM expense........................ 36 53 118 24 36
FDIC and state assessments......... 47 112 166 32 47
Business development, meals and
travel............................ 58 84 149 27 36
Amortization of intangibles........ 75 75 173 22 67
Other.............................. 670 578 847 182 143
------- ------- -------- ------- -------
Total non-interest expense....... $ 7,151 $ 9,228 $ 13,119 $ 2,924 $ 3,768
======= ======= ======== ======= =======
</TABLE>
The Company has initiated a series of organizational enhancements intended
to eliminate redundant expenses, improve efficiency, enhance customer service
and facilitate the introduction of new products and services in the future.
During the first quarter of 1999 the Company consolidated its federal savings
bank subsidiary into its lead bank. On June 11, 1999 the Company merged its
two commercial bank subsidiaries into one surviving entity, Bank of the
Ozarks.
Income Taxes
The provision for income taxes was $673,000 for the first quarter of 1999,
compared to $728,000 for the same period in 1998. The effective income tax
rates were 30.6% and 34.6%, respectively, for these periods.
The provision for income taxes was $2.6 million for the year ended December
31, 1998 compared to
$2.5 million in 1997 and $2.0 million in 1996. The effective income tax rates
were 31.8%, 35.7% and 39.9%, respectively, for 1998, 1997 and 1996.
The decrease in the effective tax rate in 1998 and the first quarter of 1999
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 certain federal agency securities exempt solely from Arkansas
income taxes. In 1996 the Company was assessed $326,000 of additional state
income taxes for the years 1992 through 1995 with respect to a dispute
involving the taxation of intercompany dividends. The Company fully expensed
this assessment in 1996 which significantly increased its effective income tax
rate. The tax rate for 1996 would have been 35.6% without this additional tax
expense.
27
<PAGE>
Analysis of Financial Condition
Loan Portfolio
At March 31, 1999 the Company's loan portfolio was $400.9 million, an
increase from $387.5 million at December 31, 1998. As of March 31, 1999 the
Company's loan portfolio consisted of approximately 64.6% real estate loans,
16.2% consumer loans, 13.7% commercial and industrial loans and 5.0%
agricultural loans (non-real estate).
At December 31, 1998 the Company's loan portfolio was $387.5 million, an
increase of 40.7% from $275.5 million at December 31, 1997. As of December 31,
1998 the Company's loan portfolio consisted of approximately 63.8% real estate
loans, 17.1% consumer loans, 13.5% commercial and industrial loans and 5.2%
agricultural loans (non-real estate).
The following table reflects the amount and type of loans outstanding.
Loan Portfolio
<TABLE>
<CAPTION>
December 31,
-------------------------------------------- March 31,
1994 1995 1996 1997 1998 1999
-------- -------- -------- -------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate:
Single family
residential.......... $ 41,494 $ 55,609 $ 78,124 $ 96,943 $121,539 $119,404
Non-farm/non-
residential.......... 22,978 36,603 35,258 41,710 76,563 86,560
Agricultural.......... 8,373 9,274 11,583 13,443 19,463 20,784
Construction/land
development.......... 4,668 3,471 8,808 16,257 23,305 26,778
Multifamily
residential.......... 3,806 4,388 3,743 3,897 6,207 5,465
-------- -------- -------- -------- -------- --------
Total real estate... 81,319 109,345 137,516 172,250 247,077 258,991
Consumer................ 17,583 25,372 39,868 53,233 66,407 64,976
Commercial and
industrial............. 6,191 11,077 28,154 37,470 52,192 55,163
Agricultural (non-real
estate)................ 6,889 6,963 8,363 10,824 20,068 20,027
Other................... 824 441 561 1,686 1,782 1,694
-------- -------- -------- -------- -------- --------
Total loans......... $112,806 $153,198 $214,462 $275,463 $387,526 $400,851
======== ======== ======== ======== ======== ========
</TABLE>
The following table reflects remaining maturities at March 31, 1999 by type
and by fixed or floating interest rates.
Loan Maturities
<TABLE>
<CAPTION>
Over 1 Year
1 Year Through Over
or Less 5 Years 5 Years Total
-------- ----------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate............................. $ 75,262 $147,634 $36,095 $258,991
Consumer................................ 15,700 47,537 1,739 64,976
Commercial, industrial and
agricultural........................... 33,301 38,953 2,936 75,190
Other................................... 47 105 1,542 1,694
-------- -------- ------- --------
$124,310 $234,229 $42,312 $400,851
======== ======== ======= ========
Fixed rate.............................. $116,825 $225,920 $23,342 $366,087
Floating rate........................... 7,485 8,309 18,970 34,764
-------- -------- ------- --------
$124,310 $234,229 $42,312 $400,851
======== ======== ======= ========
</TABLE>
28
<PAGE>
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 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. When 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 0.75% as of March 31,
1999, compared to 0.70% as of December 31, 1998 and 0.40% as of March 31,
1998. Nonperforming loans as a percent of total loans were 1.04% as of March
31, 1999 compared to 0.70% as of December 31, 1998, and 0.54% as of March 31,
1998. The Company's ratios of nonperforming loans and nonperforming assets as
of March 31, 1999 were impacted by the placing on nonaccrual status of $1.6
million of real estate loans to a single borrower. These loans were charged
down by $103,000 to the current appraised value of the collateral.
The Company's nonperforming loans increased in 1998 from an unusually low
1997 level. The year-end 1998 nonperforming loan percentage of 0.70% is
consistent with the Company's historical performance. In 1998 loan charge-offs
increased in amount and as a percentage of average loans when compared to
prior years. Charge-offs for commercial and industrial loans increased to
$423,000 in 1998 from zero in 1997. Over half of this amount was attributable
to a single borrower, whose loans were fully liquidated in 1998. Charge-offs
for consumer loans increased 45.8% to $633,000 in 1998 from $434,000 in 1997.
This increase was attributable primarily to the Company's growth in its
consumer loan portfolio as well as a somewhat higher incidence of defaults
within that loan category.
While management expects nonperforming loans and net charge-offs to continue
to exhibit volatility, it does not presently foresee any adverse trends in
asset quality which would materially affect the Company's results of
operations or financial condition.
Foreclosed assets held for sale and repossessions are generally written down
to appraised value at the time of transfer from the loan portfolio. The
Company reviews the value of such assets from time to time throughout the
holding period and makes adjustments to the then market value, if lower, until
disposition. Under Arkansas banking law, other real estate owned must be
written off over a five year period unless the Arkansas State Bank Department
approves the write-off over an extended period.
29
<PAGE>
The following table presents information concerning nonperforming assets
including nonaccrual and restructured loans and foreclosed assets held for
sale.
Nonperforming Assets
<TABLE>
<CAPTION>
December 31,
------------------------------------ March 31,
1994 1995 1996 1997 1998 1999
----- ------ ------ ----- ------ ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual loans.............. $ 571 $1,181 $2,057 $ 664 $2,708 $4,126
Accruing loans 90 days or more
past due..................... 67 124 253 35 21 30
Restructured loans............ -- -- -- -- -- --
----- ------ ------ ----- ------ ------
Total nonperforming
loans.................... 638 1,305 2,310 699 2,729 4,156
Foreclosed assets held for
sale and repossessions....... 189 29 78 136 314 855
----- ------ ------ ----- ------ ------
Total nonperforming
assets................... $ 827 $1,334 $2,388 $ 835 $3,043 $5,011
===== ====== ====== ===== ====== ======
Nonperforming loans to total
loans........................ 0.57% 0.85% 1.08% 0.25% 0.70% 1.04%
Nonperforming assets to total
assets....................... 0.50 0.63 0.88 0.24 0.50 0.75
</TABLE>
30
<PAGE>
An analysis of the allowance for loan losses for the periods indicated is
shown in the table below.
Allowance for Loan Losses
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------- March 31,
1994 1995 1996 1997 1998 1999
------ ------ ------ ------ ------ ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning of
period................. $1,716 $1,649 $1,909 $3,019 $3,737 $4,689
Loans charged off:
Real estate:
Single family
residential......... 58 14 73 35 75 237(/1/)
Non-farm/non-
residential......... 34 51 -- -- 18 --
Agricultural......... -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Total real estate... 92 65 73 35 93 237
Consumer............... 31 44 216 434 633 180
Commercial and
industrial............ 3 47 128 -- 423 79
Agricultural (non-real
estate)............... -- -- -- -- -- 4
------ ------ ------ ------ ------ ------
Total loans charged
off................ 126 156 417 469 1,149 500
------ ------ ------ ------ ------ ------
Recoveries of loans
previously charged off:
Real estate:
Single family
residential......... 7 33 2 5 9 --
Non-farm/non-
residential......... -- -- -- -- -- --
Agricultural......... -- -- -- 2 -- --
------ ------ ------ ------ ------ ------
Total real estate... 7 33 2 7 9 --
Consumer............... 12 23 35 39 55 49
Commercial and
industrial............ -- -- 4 2 11 1
Agricultural (non-real
estate)............... 2 -- -- -- -- --
------ ------ ------ ------ ------ ------
Total recoveries.... 21 56 41 48 75 50
------ ------ ------ ------ ------ ------
Net loans charged off... 105 100 376 421 1,074 450
Provision charged to
operating expense...... 339 360 1,486 1,139 2,026 611
Sale of subsidiary...... (301) -- -- -- -- --
------ ------ ------ ------ ------ ------
Balance, end of period.. $1,649 $1,909 $3,019 $3,737 $4,689 $4,850
====== ====== ====== ====== ====== ======
Net charge-offs to
average loans
outstanding during the
periods indicated...... 0.09% 0.08% 0.21% 0.17% 0.33% 0.46%(/2/)
Allowance for loan
losses to total loans.. 1.46 1.25 1.41 1.36 1.21 1.21
Allowance for loan
losses to nonperforming
loans.................. 258.46 146.28 130.69 534.62 171.82 116.70
</TABLE>
- --------
(1) Includes $103,000 related to construction and land development loans to a
single borrower which were charged down to the appraised value of the
collateral.
(2) Annualized. Results for the three months ended March 31, 1999 may not be
indicative of full year results.
The Company continuously monitors its underwriting procedures in an attempt
to maintain loan quality. During 1998 the Company implemented changes in its
lending process, including changes in personnel, to more effectively address
credit risks associated with the Company's loan portfolio growth. These
changes are intended to improve loan quality and allow the Company to continue
to maintain a satisfactory charge-off level.
The allowance for loan losses is the amount determined by management to be
adequate to provide for losses on loans that may become uncollectible. The
level of the allowance for loan losses and the need for additions are based on
management's judgment as well as the 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.
31
<PAGE>
The Company's internal grading system assigns each loan (other than consumer
installment loans) to one of seven risk categories, with each category being
assigned a specific reserve allocation percentage as follows:
<TABLE>
<CAPTION>
Loan Grade Reserve Allocation
Risk Category Percentage
------------- --------------------
<S> <C>
1Excellent 0.10%
2Good 0.50
3Moderate 1.00
4Fair 2.00
5Watch 7.00
6(a) Substandard 15.00
6(b) Impaired--SFAS 114 Impaired Amount
or 15%,
whichever is greater
7Doubtful 50.00
</TABLE>
The loan grade for each individual loan is determined by the loan officer at
the time it is made and changed from time to time to reflect an ongoing
assessment of loan risk. Loan grades are reviewed on specific loans from time
to time by senior management and as part of the Company's internal loan review
process.
Required reserves are calculated for consumer installment loans based upon
past due status as follows:
<TABLE>
<CAPTION>
Reserve
Past Due Status Allocation Percentage
--------------- ---------------------
<S> <C>
Current 0.225%
Overdue 30 to 89 days 7.500
Overdue 90 days or more 37.500
</TABLE>
Reserve allocations are also calculated using the internal grading system
for all outstanding letters of credit, outstanding loan commitments and
unfunded loan balances. The sum of all reserve amounts determined by the
internal grading system is utilized by management as the primary indicator of
the appropriate reserve level.
In addition to the internal grading system, the Company compares the
allowance for loan losses (as a percentage of total loans) maintained by each
of its subsidiary banks to the peer group average percentage as shown on the
most recently available FDIC Uniform Bank Performance Reports for such banks.
The Company also compares the allowance for loan losses for each subsidiary
bank to such bank's historical cumulative net charge-offs for the five
preceding calendar years.
The Company subjectively assesses the adequacy of the allowance for loan
losses by considering 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. Although the Company does not determine the overall allowance based
upon the amount of loans in a particular type or category, risk elements
attributable to particular loan types or categories are considered in
assigning loan grades to individual loans. These risk elements include the
following: (1) in the case of single family residential real estate loans, the
borrower's ability to repay including credit history, debt to income ratio and
employment and income stability, the loan to value ratio, and the age,
condition and marketability of collateral; (2) for non-farm/non-residential
loans and multifamily residential loans, the debt service coverage ratio
(income from the property in excess of operating expenses compared to loan
payment requirements), operating results of the owner in the case of owner-
occupied properties, the loan to value ratio, the age and condition of the
collateral and the volatility of income, property value and future operating
results typical of properties of that type; (3) for agricultural real estate
loans, the loan to value ratio; (4) for construction and land development
loans, the perceived feasibility of the project including the ability to sell
developed lots or improvements constructed for resale or ability to lease
property constructed for lease, the quality and nature of contracts for
presale or preleasing if any, experience and ability of the developer and loan
32
<PAGE>
to value ratios; (5) for commercial and industrial loans, the operating
results of the commercial, industrial or professional enterprise, the
borrower's business, professional and financial ability and expertise, the
specific risks and volatility of income and operating results typical for
businesses in that category and the value, nature and marketability of
collateral; and (6) for non-real estate agricultural loans, the operating
results, experience and ability of the borrower, historical and expected
market conditions and the value, nature and marketability of collateral. In
addition, for each category the Company considers secondary sources of income
and the financial strength of the borrower and any guarantors.
Management reviews the allowance on a quarterly basis to determine whether
the amount of regular monthly provision should be increased or decreased or
whether additional provision should be made to the allowance. Because the
allowance is primarily determined based upon management's assessment and
grading of individual loans, no reserve is made for specific categories of
loans. The total allowance amount is available to absorb losses across the
Company's entire portfolio.
The following table sets forth the sum of the amounts of the allowance for
loan losses attributable to individual loans within each loan category,
unfunded items and unallocated reserves as of December 31, 1997 and 1998.
Information prior to the Company's initial public offering in 1997 is not
available. The amounts shown are not necessarily indicative of the actual
future losses that may occur within particular loan categories.
Allocation of the Allowance for Loan Losses
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1998 March 31, 1999
-------------------------- -------------------------- --------------------------
Percent of Loans Percent of Loans Percent of Loans
Allowance in Category to Allowance in Category to Allowance in Category to
Amount Total Loans Amount Total Loans Amount Total Loans
--------- ---------------- --------- ---------------- --------- ----------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate:
Single family
residential........... $1,116 35.2% $1,618 31.4% $1,553 29.8%
Non-farm/non-
residential........... 423 15.2 794 19.7 899 21.6
Agriculture............ 152 4.9 242 5.0 258 5.2
Construction/land
development........... 163 5.9 291 6.0 323 6.7
Multifamily............ 41 1.4 63 1.6 62 1.4
Consumer................ 372 19.3 534 17.1 474 16.2
Commercial and
industrial............. 412 13.6 640 13.5 636 13.8
Agriculture (non-real
estate)................ 114 3.9 270 5.2 301 5.0
Other................... 15 0.6 15 0.5 9 0.4
Unfunded items (letters
of credit, outstanding
loan commitments and
unadvanced loan
balances).............. 233 N/A 206 N/A 195 N/A
Unallocated reserve..... 696 N/A 16 N/A 140 N/A
------ ----- ------ ----- ------ -----
$3,737 100.0% $4,689 100.0% $4,850 100.0%
====== ===== ====== ===== ====== =====
</TABLE>
The Company maintains an internally classified loan list that, along with
the list of nonaccrual or nonperforming loans, helps management assess the
overall quality of the loan portfolio and the adequacy of the allowance. Loans
classified as "substandard" are loans with clear and defined weaknesses such
as highly leveraged positions, unfavorable financial ratios, uncertain
repayment sources or poor financial condition which may jeopardize
recoverability of the loan. Loans classified as "doubtful" are those loans
that have characteristics similar to substandard loans, but also have an
increased risk that a loss may occur or at least a portion of the loan may
require a charge-off if liquidated. Although loans classified as substandard
do not duplicate loans
33
<PAGE>
classified as doubtful, both substandard and doubtful loans may include some
loans that are past due at least 90 days, are on nonaccrual status or have
been restructured. Loans classified as "loss" are loans that are in the
process of being charged off. At December 31, 1998 "substandard" loans not
designated as nonaccrual or 90 days past due totaled $2.5 million. No loans
were designated as "doubtful" or "loss" at December 31, 1998.
Administration of the bank subsidiaries' lending function is the
responsibility of the Chief Executive Officer, Vice Chairman and certain
senior lenders. Such officers perform their lending duties subject to the
oversight and policy direction of the Board of Directors and various loan
committees. Loan authorities are granted to the Chief Executive Officer and
Vice Chairman as determined appropriate by the Board of Directors. Loan
authorities of other lending officers are assigned by the Chief Executive
Officer and Vice Chairman.
Loans and aggregate loan relationships exceeding $3 million up to the
lending limit of the banks can be authorized only by the Board of Directors.
Loans and aggregate loan relationships exceeding $1 million up to $3 million
can be authorized by one of the loan committees. At monthly meetings, a
designated loan review committee reviews reports of new loans, loan
commitments over $100,000, loan loss activity, past due and problem loans,
asset quality and other matters as appropriate. The Board of Directors also
reviews on a monthly basis reports of loan originations, past due loans,
internally classified and watch list loans and activity in the Company's
allowance for loan losses.
The Company's compliance and loan review officers are responsible for
serving the bank subsidiaries of the Company in the loan review and compliance
areas. Periodic reviews are scheduled for the purpose of evaluating asset
quality and effectiveness of loan administration. The compliance and loan
review officers prepare loan review reports which identify deficiencies,
establish recommendations for improvement, and outline management's proposed
action plan for curing the deficiencies. This report is provided to the audit
committee, which consists of three non-employee members of the Boards of
Directors.
The Company's allowance for loan losses exceeds its cumulative historical
net charge-off experience for the last five years. However, the allowance is
considered reasonable given the significant growth in the loan portfolio in
1998, key allowance and nonperforming loan ratios and comparisons to industry
averages.
The Company's allowance for loan losses increased to $4.9 million at March
31, 1999, or 1.21% of total loans, compared to $4.7 million at December 31,
1998. The allowance for loan losses was 1.21% of loans at December 31, 1998
compared to 1.36% at December 31, 1997. While management believes the current
allowance is adequate based on the procedures outlined above, changing
economic and other conditions may require future adjustments to the allowance
for loan losses.
Provision for Loan Losses. The amounts of provision to the allowance for
loan losses are based on management's judgment and evaluation of the loan
portfolio utilizing the criteria discussed above. The provision for loan
losses was $611,000 for the three months ended March 31, 1999, compared to
$225,000 for the same three months in 1998. The provision for the year ended
1998 was $2.0 million compared to $1.1 million in 1997 and $1.5 million in
1996.
34
<PAGE>
Investments and Securities
The Company's securities portfolio is the second largest component of
earning assets and provides a significant source of revenue for the Company.
The following table presents the amortized cost and the fair value of
investment securities for each of the dates indicated.
Investment Securities
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------- March 31,
1996 1997 1998 1999
-------------------- -------------------- -------------------- --------------------
Amortized Fair Amortized Fair Amortized Fair Amortized Fair
Cost Value(/1/) Cost Value(/1/) Cost Value(/1/) Cost Value(/1/)
--------- ---------- --------- ---------- --------- ---------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities of U.S.
Government agencies.... $23,881 $23,896 $24,562 $24,596 $156,351 $156,331 $167,290 $165,151
Mortgage-backed
securities............. 10,119 10,256 9,340 9,571 2,107 2,117 257 254
Obligations of states
and political
subdivisions........... 4,094 4,119 6,801 6,819 14,742 14,884 43,836 44,167
Other securities........ 1,353 1,353 1,510 1,510 3,286 3,347 3,329 3,390
------- ------- ------- ------- -------- -------- -------- --------
Total................ $39,447 $39,624 $42,213 $42,496 $176,486 $176,679 $214,712 $212,962
======= ======= ======= ======= ======== ======== ======== ========
</TABLE>
- --------
(1) The fair value of the Company's investments is based on quoted market
prices where available. If quoted market prices are not available, fair
values are based on market prices of comparable securities.
The following table reflects the amortized cost, by contractual maturity, of
the Company's investment securities at March 31, 1999 and weighted average
yields (for tax-exempt obligations on a fully taxable equivalent basis
assuming a 34% tax rate) of such securities. Expected maturities may differ
from contractual maturities because issuers may have the right to call or
prepay obligations with or without call or prepayment penalties.
Maturity Distribution of Investment Securities
<TABLE>
<CAPTION>
Over Over
1 Year 1 Year 5 Years Over
or Thru 5 Thru 10 10
Less Years Years Years Total Fair Value
------ ------ -------- ------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities of U.S.
Government agencies.... $ -- $ -- $144,264 $23,026 $167,290(/1/) $165,151
Mortgage-backed
securities............. -- -- 85 172 257(/2/) 254
Obligations of states
and political
subdivisions........... 922 7,503 10,552 24,859 43,836(/3/) 44,167
Other securities........ -- -- -- 3,329 3,329 3,390
----- ------ -------- ------- -------- --------
Total................. $ 922 $7,503 $154,901 $51,386 $214,712 $212,962
===== ====== ======== ======= ======== ========
Percentage of total..... 0.43% 3.49% 72.14% 23.93% 100.00%
Weighted average yield
(FTE)(/4/)............. 5.97 5.87 6.52 6.47 6.48
</TABLE>
- --------
(1) At March 31, 1999 all federal agency securities held by the Company had
certain rights which allowed the issuer to call or prepay the obligation
without prepayment penalties.
(2) At March 31, 1999 approximately $167,000 of these securities earned
interest at floating rates repricing monthly or semi-annually.
(3) At March 31, 1999 approximately $1.3 million of these securities earned
interest at floating rates repricing semi-annually.
(4) The weighted average yields (FTE) are based on book value.
35
<PAGE>
Deposits
The Company's bank subsidiaries' lending and investing activities are funded
primarily by deposits, approximately 72.3% of which were time deposits and
27.7% of which were demand and savings deposits at March 31, 1999. Interest
bearing deposits other than time deposits consist of transaction, savings and
money market accounts. These deposits comprised 18.0% of total deposits at
March 31, 1999. Non-interest bearing demand deposits at March 31, 1999
constituted approximately 9.7% of total deposits. The Company had no brokered
deposits at March 31, 1999.
Average Deposit Balances and Rates
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------- Three Months Ended
1996 1997 1998 March 31, 1999
---------------- ---------------- ---------------- ---------------------
Average Average Average Average
Average Rate Average Rate Average Rate Average Rate
Amount Paid Amount Paid Amount Paid Amount Paid
-------- ------- -------- ------- -------- ------- ----------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest bearing
accounts............... $ 20,129 -- $ 26,981 -- $ 40,583 -- $ 50,799 --
Interest bearing
accounts:
Transaction (NOW)...... 22,209 2.20% 25,469 2.19% 32,419 2.25% 47,350 2.22%
Savings................ 8,238 2.14 8,734 2.13 12,002 2.11 14,079 1.96
Money market........... 18,542 3.49 26,981 3.86 29,933 3.58 37,432 3.48
Time deposits less than
$100,000.............. 102,076 5.60 129,969 5.61 198,268 5.63 236,156 5.27
Time deposits $100,000
or more............... 34,689 5.69 48,919 5.63 87,751 5.58 159,165 5.09
-------- -------- -------- -----------
Total deposits......... $205,883 $267,053 $400,956 $ 544,981
======== ======== ======== ===========
</TABLE>
The following table sets forth by time remaining to maturity, time deposits
in amounts of $100,000 or more at March 31, 1999.
Maturity distribution of time deposits of $100,000 and over
<TABLE>
<CAPTION>
Maturity March 31, 1999
-------- ----------------------
(Dollars in thousands)
<S> <C>
3 months or less...................................... $102,653
3 to 6 months......................................... 40,876
6 to 12 months........................................ 34,074
Over 12 months........................................ 11,113
</TABLE>
Interest Rate Sensitivity
The Company's interest rate risk management is the responsibility of the
Asset/Liability Management Committee, which reports to the Board of Directors.
This committee establishes policies that monitor and coordinate the Company's
sources, uses and pricing of funds. The committee is also involved with
management in the Company's planning and budgeting process.
The Company regularly reviews its exposure to changes in interest rates.
Among the factors considered are changes in the mix of earning assets and
interest bearing liabilities, interest rate spreads and repricing periods.
Typically, the committee reviews on at least a quarterly basis the bank
subsidiaries' 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.
36
<PAGE>
Using a simple static GAP analysis as shown in the following table, at March
31, 1999 the cumulative ratios of rate sensitive assets to rate sensitive
liabilities at six months and one year were 54.1% and 53.8%, respectively. 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
<TABLE>
<CAPTION>
March 31, 1999
----------------------------------------------------------------
Rate Rate Cumulative Cumulative
Sensitive Sensitive Period Cumulative Gap to RSA to
Assets Liabilities Gap Gap Total RSA RSL
--------- ----------- -------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Floating rate........... $ 37,941 $ 56,016 $(18,075) $(18,075) (2.92)% 67.73%
Fixed rate repricing
in:....................
1 month................ 52,283 81,370 (29,087) (47,162) (7.63) 65.67
2 month................ 21,686 43,832 (22,146) (69,308) (11.21) 61.75
3 month................ 20,196 43,344 (23,149) (92,457) (14.95) 58.83
4 month................ 16,168 32,675 (16,507) (108,964) (17.62) 57.64
5 month................ 14,415 33,544 (19,129) (128,093) (20.72) 55.95
6 month................ 14,526 36,650 (22,124) (150,217) (24.30) 54.12
6 months--1 year....... 66,870 126,706 (59,836) (210,053) (33.97) 53.75
1--2 years............. 75,372 53,942 21,431 (188,622) (30.51) 62.88
2--3 years............. 48,262 14,714 33,548 (155,074) (25.08) 70.34
3--4 years............. 31,273 23,665 7,608 (147,466) (23.85) 73.01
4--5 years............. 9,200 2,727 6,473 (140,993) (22.80) 74.33
Over 5 years........... 210,073 16,971 193,102 52,109 8.43 109.20
-------- -------- --------
Total.................. $618,265 $566,156 $ 52,109
======== ======== ========
</TABLE>
The data used in the table above is based on contractual repricing dates
rather than maturities. This simple GAP analysis gives no consideration to a
number of factors which can have a material impact on the Company's interest
rate risk position. Such factors include call features on certain assets and
liabilities, prepayments, interest rate floors and caps on various assets and
liabilities, the current interest rates on assets and liabilities to be
repriced in each period, and the relative changes in interest rates on
different types of assets and liabilities.
The Company also utilizes an earnings change ratio analysis, which it
believes is a more accurate analysis of interest rate sensitivity because it
measures not only the volume of assets and liabilities being repriced but also
the expected relative change in interest rates on the different types of
assets and liabilities. This analysis applies coefficients to the various
types of assets and liabilities in order to estimate the relative rates of
change expected. As of March 31, 1999 this model reflected a one-year ratio of
rate sensitive assets to rate sensitive liabilities of 67.1%. The earnings
change ratio analysis is subject to a number of limitations, including the
other limitations discussed above.
37
<PAGE>
The following table provides contractual balances of the Company's financial
instruments at the expected maturity as well as the fair value of those
financial instruments as of December 31, 1998. Fixed and variable rate
categories are based upon expected amortization or contractual maturity dates.
The Company considers assets and liabilities that do not have a stated
maturity date, as in cash equivalents and certain deposits, to be long term in
nature and reports them in the "Thereafter" column. The Company does not
consider these financial instruments materially sensitive to interest rate
fluctuations and management expects these balances to remain fairly constant
over various economic conditions. The weighted average interest rates for the
various assets and liabilities presented are actual as of December 31, 1998.
The fair value of cash, interest bearing deposits at other banks, and
interest receivable approximates their book values due to their short
maturities. The fair value of available for sale securities is based on
reports provided the Company by third parties. Federal Home Loan Bank stock is
valued at stated redemption value. The fair value of loans and time deposits
is estimated by discounted cash flows through the estimated maturity using
estimated market discount rates that reflect current rates offered by the
Company. The fair value of FHLB borrowings is estimated by discounting the
cash flows through maturity based on current rates offered by the FHLB for
borrowings with similar maturities. The fair value of the note payable
approximates the carrying value due to the note payable's interest rate
approximating market rates. The components of the Company's financial
instruments did not materially change from December 31, 1998 to March 31,
1999.
38
<PAGE>
Expected Maturity Dates of Financial Instruments
<TABLE>
<CAPTION>
December 31, Dec. 31, Dec. 31, Dec. 31,
-------------------------------------------- 1998 1998 1997
1999 2000 2001 2002 2003 Thereafter Total Fair Value Total
-------- ------- ------- ------- ------- ---------- -------- ---------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Financial Assets:
Cash and due from
banks................. $ -- $ -- $ -- $ -- $ -- $ 14,168 $ 14,168 $ 14,168 $ 9,021
Interest bearing
deposits.............. 856 -- -- -- -- -- 856 856 6,607
Weighted avg. interest
rate.................. 4.70% -- -- -- -- -- 4.70% 5.98%
Federal funds sold..... -- -- -- -- -- -- -- 2,885
Weighted avg. interest
rate.................. -- -- -- -- -- -- -- 5.50%
Securities--available
for sale:
US Govt. agencies...... -- -- 1,001 -- -- -- 1,001 1,001 12,619
Weighted avg. interest
rate.................. -- -- 6.04% -- -- -- 6.04% 6.52%
Mortgage-backed
securities:
Fixed rate............. -- -- -- -- -- 156 156 156 133
Weighted avg. interest
rate.................. -- -- -- -- -- 6.37% 6.37% 5.51%
Variable rate.......... -- -- -- -- -- 1,961 1,961 1,961 9,206
Weighted avg. interest
rate.................. -- -- -- -- -- 6.50% 6.50% 6.44%
State and political
subdivision
obligations:
Fixed rate............. 20 118 151 187 195 10,594 11,265 11,265 1,583
Weighted avg. interest
rate.................. 5.45% 5.61% 5.75% 5.72% 5.79% 6.98% 6.90% 5.33%
Equity securities...... -- -- -- -- -- 136 136 136 75
Dividend yields........ -- -- -- -- -- -- -- --
FHLB stock............. -- -- -- -- -- 3,110 3,110 3,110 1,435
Dividend yield......... -- -- -- -- -- 5.50% 5.50% 6.00%
Securities--held to
maturity:
US Govt. agencies...... -- -- -- -- 1,000 154,351 155,351 155,330 11,943
Weighted avg. interest
rate.................. -- -- -- -- 6.21% 6.56% 6.56% 6.67%
State and political
subdivision
obligations:
Fixed rate............. 72 82 94 80 86 2,045 2,459 2,541 3,091
Weighted avg. interest
rate.................. 7.58% 8.03% 8.18% 7.67% 7.70% 7.54% 7.59% 4.74%
Variable rate.......... 70 76 83 91 100 658 1,078 1,078 2,031
Weighted avg. interest
rate.................. 10.95% 10.95% 10.95% 10.95% 10.95% 10.95% 10.95% 10.95%
Other securities....... -- -- -- -- -- 101 101 101 --
Weighted avg. interest
rate.................. -- -- -- -- -- 6.53% 6.53%
Loans held for sale--
fixed rate............ 6,493 -- -- -- -- -- 6,493 6,493 2,935
Weighted avg. interest
rate.................. 7.09% -- -- -- -- -- 7.09% 7.14%
Loans held for sale--
var. rate............. 192 -- -- -- -- -- 192 192 --
Weighted avg. interest
rate.................. 4.50% -- -- -- -- -- 4.50% --
Loans:
Loans--fixed........... 117,383 52,757 67,907 32,400 60,123 17,038 347,608 347,508 235,984
Weighted avg. interest
rate.................. 9.56% 9.75% 9.63% 9.59% 9.29% 8.95% 9.53% 9.46%
Loans--variable........ 7,148 1,658 178 3,414 532 20,303 33,233 33,216 36,544
Weighted avg. interest
rate.................. 8.99% 9.76% 9.15% 8.26% 8.19% 8.71% 8.97% 9.23%
Interest receivable.... -- -- -- -- -- 5,517 5,517 5,517 3,013
Financial Liabilities:
Deposits:
Demand deposits........ -- -- -- -- -- $ 50,138 $ 50,138 $ 50,138 $ 31,091
NOW accounts........... -- -- -- -- -- 46,914 46,914 46,914 27,527
Weighted avg. interest
rate.................. -- -- -- -- -- 1.59% 1.59% 2.00%
Money market accounts.. -- -- -- -- -- 35,238 35,238 35,238 28,132
Weighted avg. interest
rate.................. -- -- -- -- -- 4.30% 4.30% 3.71%
Regular savings........ -- -- -- -- -- 13,319 13,319 13,319 9,083
Weighted avg. interest
rate.................. -- -- -- -- -- 2.00% 2.00% 2.15%
Time deposits:
Fixed rate............. 357,806 13,396 5,868 1,884 997 993 380,944 382,111 197,364
Weighted avg. interest
rate.................. 5.38% 5.40% 5.54% 5.85% 5.57% 5.96% 5.39% 5.68%
Variable rate.......... 1,412 1,075 -- -- -- -- 2,487 2,487 2,358
Weighted avg. interest
rate.................. 4.60% 4.60% -- -- -- -- 4.60% 5.20%
Repurchase agreements.. 1,408 -- -- -- -- -- 1,408 1,408 --
Weighted avg. interest
rate.................. 3.93% -- -- -- -- -- 3.93% --
FHLB advances--long
term.................. 5,268 2,144 4,198 198 198 10,987 22,993 23,600 14,017
Weighted avg. interest
rate.................. 6.46% 5.77% 5.95% 6.30% 6.30% 5.02% 5.13% 6.06%
Federal funds
purchased............. 3,830 -- -- -- -- -- 3,830 3,830 --
Weighted avg. interest
rate.................. 4.79% -- -- -- -- -- 4.79% --
Notes payable.......... 24 24 -- -- 12,400 -- 12,448 12,448 5,072
Weighted avg. interest
rate.................. 6.00% 6.00% -- -- 6.50% -- 6.50% 8.79%
Interest payable....... -- -- -- -- -- 1,828 1,828 1,828 1,409
</TABLE>
39
<PAGE>
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and related Notes presented elsewhere
in this prospectus have been prepared in accordance with generally accepted
accounting principles. This requires the measurement of financial position and
operating results in terms of historical dollars without considering the
changes in the relative purchasing power of money over time due to inflation.
The impact of inflation is reflected in the increased cost of the Company's
operations. Unlike most industrial companies, nearly all the assets and
liabilities of the Company are monetary in nature. As a result, interest rates
have a greater impact on the Company's performance than do the effects of
general levels of inflation. Interest rates do not necessarily move in the
same direction or to the same extent as the prices of goods and services.
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 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 subsidiaries. As of March 31, 1999 $13.1
million was outstanding under the line of credit.
The line of credit requires the Company's bank subsidiaries 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 and (3) 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 60.0% of its tangible net worth through March 31, 1999
reducing 5% a year thereafter and that borrowings under the line of credit not
exceed 50.0% of the tangible book value of all stock pledged to secure such
borrowings. At March 31, 1999 the Company was in compliance with these
requirements.
Growth and Expansion. In February 1998 the Company acquired Heartland
Community Bank, FSB in Little Rock, from its parent company--Heartland
Community Bank, Camden--for $3.1 million in cash. The Company received the
federal savings bank charter, approximately $9.4 million in customer deposits
and the related banking facility. No loans were acquired as a part of the
transaction. Following closing the Company commenced operations in Little Rock
under the Bank of the Ozarks name. This federal savings bank was merged into
the Company's lead bank subsidiary on January 7, 1999.
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.
In August 1998 the Company completed the purchase of the Marshall, Arkansas
branch of Superior Federal Bank, F.S.B. The acquisition included the branch
bank building, related assets and deposit accounts totaling approximately $16
million. The Company paid a purchase premium and incurred other acquisition
costs totaling approximately $1.5 million.
In September 1998 the Company opened its new Fort Smith facility and in
December 1998 opened a fourth Little Rock branch at 7500 Cantrell Road.
During the first quarter of 1999 the Company opened its first branch in
North Little Rock. A third Harrison branch is under construction and is
expected to open during the second quarter of 1999 and a second North Little
Rock branch is scheduled for opening in late 1999 or early 2000. The Company
has obtained regulatory approval
40
<PAGE>
to construct a branch in Clinton, Arkansas and expects to begin construction
on that site in the second or third quarter of 1999 with an opening planned in
2000.
In 1998 the Company spent approximately $13.9 million on acquiring,
constructing and furnishing its corporate banking headquarters in Little Rock,
the new Fort Smith facility and three other branch offices. Although the
Company is currently working to open additional branches in 1999, capital
expenditures are expected to be substantially less than 1998.
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. The Company has used these
funds, together with FHLB 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. 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 and
investments. Such sources include FHLB advances, federal funds lines of credit
from correspondent banks and borrowings by the Company under its revolving
credit facility described above.
At March 31, 1999 the Company's bank subsidiaries had an aggregate of $58.6
million of unused blanket FHLB borrowing availability. Additionally at March
31, 1999 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.
However, 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 is taking 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 subsidiaries 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.
Dividend Policy. In 1998 the Company paid dividends of $0.23 per share. In
1997 and 1996 the Company paid dividends of $0.20 and $0.30 per share,
respectively. The Company increased its dividend for the second quarter of
1998 to $0.06 from $0.05. The Company increased the dividend effective for the
first quarter of 1999 to $0.10 per share. The determination of future
dividends on the Company's common stock will depend on conditions existing at
that time. The Company's goal is to continue the current $0.10 quarterly
dividend amount with consideration to future increases depending on the
Company's earnings, capital and liquidity needs.
41
<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 (1) Tier 1 capital (i.e. common stockholders' equity excluding goodwill,
certain intangibles and appreciation on investment securities, but including
certain 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) 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 December 31, 1997, December 31, 1998 and March 31, 1999 and
are presented below, followed by the capital ratios of each of the bank
subsidiaries at March 31, 1999.
Consolidated Regulatory Capital Ratios
<TABLE>
<CAPTION>
December 31,
----------------------- March 31,
1997 1998 1999
-------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Tier 1 capital:
Stockholders' equity............ $ 35,666 $ 40,355 $ 41,630
Less net unrealized gains on
available for sale securities.. (152) (81) (208)
Less goodwill and certain
intangibles.................... (1,337) (3,623) (3,478)
-------- -------- --------
Total tier 1 capital.......... $ 34,177 $ 36,651 $ 37,944
-------- -------- --------
Tier 2 capital:
Qualifying allowance for loan
losses......................... 3,288 4,689 4,850
-------- -------- --------
Total risk-based capital...... $ 37,465 $ 41,340 $ 42,794
-------- -------- --------
Risk-weighted assets.............. $262,592 $404,879 $426,644
======== ======== ========
Ratios at end of period:
Leverage........................ 9.86% 6.21% 5.95%
Tier 1 risk-based capital....... 13.01 9.05 8.89
Total risk-based capital........ 14.27 10.21 10.03
Minimum ratio guidelines:
Leverage........................ 3.00%(/1/) 3.00%(/1/) 3.00%(/1/)
Tier 1 risk-based capital....... 4.00 4.00 4.00
Total risk-based capital........ 8.00 8.00 8.00
</TABLE>
Regulatory Capital Ratios of Bank Subsidiaries
<TABLE>
<CAPTION>
March 31, 1999
---------------------------------
Bank of the Bank of the
Ozarks, wca(/2/) Ozarks, nwa(/2/)
---------------- ----------------
<S> <C> <C>
Stockholders' equity--Tier 1.................. $39,036 $11,579
Leverage ratio................................ 8.17% 7.25%
Risk-based capital ratios:
Tier 1...................................... 12.22% 11.06%
Total capital............................... 13.38 12.16
</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) Bank of the Ozarks, wca and Bank of the Ozarks, nwa were merged into one
surviving entity, Bank of the Ozarks, on June 11, 1999.
42
<PAGE>
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 consists 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 essentially complete with all
identified problem areas having been addressed.
The Company is well into its testing phase with the primary focus being 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 completed as of December
31, 1998. Further testing with mission critical vendors and other significant
third party vendors will continue and is expected to be completed by June 30,
1999. The Company has not identified any problems thus far with any of its
systems that would have a material adverse impact upon its operations.
The Company incurred expenses throughout 1996, 1997 and 1998 and in the
first quarter of 1999 related to this project and will continue to incur
expenses over the last 9 months of 1999. The Company currently estimates that
the cost to remediate both its Year 2000 hardware and software issues to be
less than $130,000 with approximately 85% of the costs having already been
expended through March 31, 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 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. Incremental expenses related
to the Year 2000 project are not expected to materially impact operating
results in any one period.
43
<PAGE>
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 party vendors 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 party
vendors will adequately address their Year 2000 issues.
The Company has developed contingency plans for implementation in the event
that mission critical third party vendors or other significant third party
vendors 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 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.
44
<PAGE>
SUPPLEMENTAL QUARTERLY DATA
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31,
1998 1998 1998 1998 1999
----------- ----------- ------------ ------------ ----------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Total interest income... $ 7,993 $ 9,000 $ 10,423 $ 11,466 $ 11,730
Total interest expense.. 3,836 4,570 5,782 6,330 6,421
----------- ----------- ------------ ------------ ----------
Net interest income... 4,157 4,430 4,641 5,136 5,309
Provision for loan
losses................. 225 255 742 804 611
Non-interest income..... 1,094 1,152 1,333 1,452 1,269
Non-interest expense.... 2,924 3,329 3,267 3,599 3,768
----------- ----------- ------------ ------------ ----------
Income before income
taxes................ 2,102 1,998 1,965 2,185 2,199
Income taxes............ 728 611 544 738 673
----------- ----------- ------------ ------------ ----------
Net income............ $ 1,374 $ 1,387 $ 1,421 $ 1,447 $ 1,526
=========== =========== ============ ============ ==========
Per share:
Earnings--diluted..... $ 0.36 $ 0.36 $ 0.37 $ 0.38 $ 0.40
Cash dividends........ 0.05 0.06 0.06 0.06 0.10
Bid price per common
share:
Low................... $ 21.94 $ 30.00 $ 20.00 $ 18.50 $ 20.00
High.................. 30.00 34.75 30.75 24.00 23.25
<CAPTION>
Three Months Ended
----------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31,
1997 1997 1997 1997
----------- ----------- ------------ ------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Total interest income... $ 6,016 $ 6,635 $ 7,168 $ 7,649
Total interest expense.. 2,900 3,216 3,465 3,398
----------- ----------- ------------ ------------
Net interest income... 3,116 3,419 3,703 4,251
Provision for loan
losses................. 259 265 150 465
Non-interest income..... 742 641 662 880
Non-interest expense.... 2,105 2,219 2,316 2,588
----------- ----------- ------------ ------------
Income before income
taxes................ 1,494 1,576 1,899 2,078
Income taxes............ 537 572 698 709
----------- ----------- ------------ ------------
Net income............ $ 957 $ 1,004 $ 1,201 $ 1,369
=========== =========== ============ ============
Per share:
Earnings--diluted..... $ 0.33 $ 0.35 $ 0.34 $ 0.36
Cash dividends........ 0.10 -- 0.05 0.05
Bid price per common
share:
Low................... -- -- $ 17.38 $ 19.75
High.................. -- -- 20.13 25.25
</TABLE>
See "Supervision and Regulation" and Note 15 to Consolidated Financial
Statements for discussion of dividend restrictions.
45
<PAGE>
BUSINESS
Bank of the Ozarks is an Arkansas business corporation registered under the
Bank Holding Company Act of 1956. On June 11, 1999 the Company's two state
chartered banks, Bank of the Ozarks, wca and Bank of the Ozarks, nwa, were
merged into one surviving entity, Bank of the Ozarks, which conducts banking
operations through 20 offices in 15 communities throughout northern, western
and central Arkansas.
The Company provides a wide range of retail and commercial banking services.
Deposit services include checking, savings, money market, time deposit and
individual retirement accounts. Loan services include various types of real
estate, consumer, commercial, industrial and agricultural loans. The Company
also provides mortgage lending, cash management, trust services, safety
deposit boxes, real estate appraisals, credit related life and disability
insurance, ATMs, telephone banking and debit cards.
In 1994 the Company initiated its expansion strategy, via de novo branching,
into target Arkansas markets. Since embarking on this strategy the Company has
opened 15 new offices, with 10 being opened since January 1997. In 1998 the
Company added a new element to its growth strategy by significantly expanding
into two of Arkansas' largest metropolitan markets--Little Rock and Fort
Smith. Since 1994 the Company has experienced significant growth in operations
and maintained profitability:
. Total assets increased to $666.9 million at March 31, 1999 from $165.0
million at December 31, 1994, representing a compounded annual growth
rate of 38.9%.
. Net income increased to $1,526,000 for the three months ended March 31,
1999, up from $1,374,000 for the same quarter in 1998. For the year
ended December 31, 1998 net income was $5,629,000.
. For the three months ended March 31, 1999 return on average assets
equaled 0.97% and return on average stockholders' equity equaled 15.14%.
For the year ended December 31, 1998 return on average assets and return
on average stockholders' equity were 1.16% and 14.83%, respectively.
. The Company's leverage capital ratio was 5.95% at March 31, 1999 and
6.21% at December 31, 1998. After inclusion in Tier 1 capital of the
eligible net proceeds of $13.8 million from this offering, our pro forma
leverage capital ratio at March 31, 1999 would have been 7.96%.
Business Strategy
The Company's goal is to maximize long-term stockholder value through strong
year-to-year growth in assets, loans, deposits and earnings per share in a
manner consistent with safe, sound and prudent banking practices. To achieve
this goal the Company's business strategy is to:
. Expand loans and deposits primarily through market share growth at
existing locations and de novo branching in northern, western and
central Arkansas;
. Provide customers with the breadth of financial products and services of
a regional bank;
. Employ, empower and motivate personnel to provide personalized customer
service, consistent with the best traditions of community banking, while
increasing profits; and
. Maintain asset quality and control overhead expense.
Growth Strategy. The Company's growth strategy is to (1) build on market
share at existing locations, (2) open new branches in strategic locations, (3)
utilize competitive or superior products and pricing to achieve loan and
deposit growth, (4) aggressively market its products and services and (5)
capitalize on opportunities presented by banking industry consolidation.
In 1994 the Company initiated its expansion strategy, via de novo branching,
into target Arkansas markets. Since embarking on this strategy, the Company
has opened 15 new offices with 10 being opened since January
46
<PAGE>
1997. The Company's de novo branching strategy initially focused on opening
branches in smaller communities throughout its market area. During 1994 the
Company opened its first new office pursuant to this expansion strategy in
Clarksville, Arkansas. In 1995 and 1996 the Company opened additional offices
including new full service offices in Marshall, Van Buren and Harrison,
Arkansas and a second office in Clarksville. In 1997 the Company opened new
full service offices in Mulberry, Alma, Paris and Bellefonte, Arkansas. These
openings contributed to the Company's compounded annual growth rates of 34.7%
in loans, 25.8% in deposits and 28.7% in assets from 1994 through 1997.
In 1998 the Company added a new element to its growth strategy by
significantly expanding into two of Arkansas' largest metropolitan markets--
Little Rock and Fort Smith. Pulaski County (which includes the Little Rock
metropolitan area) is Arkansas' largest banking market with approximately $4.8
billion in total bank and thrift deposits, while Sebastian County (which
includes Fort Smith) is the state's fourth largest market with approximately
$1.6 billion in total bank and thrift deposits. The Company originally entered
the Little Rock market in 1995, when it opened its corporate headquarters and
a small commercial lending office. Encouraged by the results of the commercial
lending office, the Company opened a residential mortgage lending office in
1996. In February 1998 the Company began full service banking operations in
Little Rock with the acquisition of a small savings and loan with $9.4 million
in deposits. In June 1998 the Company opened its second and third Little Rock
deposit offices, including its 40,000 square foot corporate headquarters which
houses a full-service banking center, corporate offices, a mortgage lending
center and full service trust operations. In December 1998 the Company opened
its fourth office in Little Rock. As of March 31, 1999 the Company's total
deposits at these Little Rock offices had grown to $167.5 million.
Additionally, the Company has established itself as one of the leading
mortgage lenders in Pulaski County, originating approximately $98.0 million of
Pulaski County residential mortgages for resale in the secondary market in
1998 and the first quarter of 1999. The Company is continuing to expand its
presence in Pulaski County with the January 1999 opening of an office in North
Little Rock. A second North Little Rock office is planned for opening in late
1999 or early 2000.
The Company pursued major expansion in a second metropolitan market in
September 1998 with the opening of a 22,500 square foot building in Fort Smith
which includes a full service banking center. This full service facility
replaced a temporary branch opened less than a year earlier. At March 31, 1999
the Company's deposits at this office had grown to $51.7 million and loans had
grown to $44.8 million. The growth in the Little Rock and Fort Smith markets
contributed significantly to unusually high growth rates for the Company of
40.7% in loans, 79.0% in deposits, and 73.9% in assets during 1998. The 1998
growth rates also reflect the Company's continued addition of customers
throughout its branch network, now numbering 20 offices in nine Arkansas
counties. The Company continued to experience strong growth in the first
quarter of 1999.
As a result of the August 1998 acquisition of a competitor's branch with $16
million in deposits in Searcy County, Arkansas, and based upon market data
published by the FDIC as of June 30, 1998, the Company now has the number one
deposit market share in three of the nine counties in which it maintains
offices. In addition to its leading market share in Franklin, Newton and
Searcy counties, the June 1998 FDIC data also indicates that the Company
increased its market share in 3 other counties between June 1997 and June
1998. The Company will continue to pursue its growth strategy in each of these
markets, with a goal of obtaining a significant market share in every market
it serves.
47
<PAGE>
The following table reflects loans and deposits for the Company's locations
as of December 31, 1996, 1997 and 1998 and March 31, 1999.
<TABLE>
<CAPTION>
Loans Deposits
------------------------------------ -----------------------------------------
Months in Operation December 31, December 31,
as of -------------------------- March 31, -------------------------- March 31,
March 31, 1999(/1/) 1996 1997 1998 1999 1996 1997 1998 1999
------------------- -------- -------- -------- --------- -------- -------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
North Little Rock..... 3 $ -- $ -- $ -- $ 1,416 $ -- $ -- $ -- $ 20,694
Little Rock (4
offices)............. 13,9,9,4(/2/) 37,250 52,776 80,606 88,239 -- -- 143,359(/3/) 167,487
Fort Smith............ 17 -- 16,600 40,746 44,755 -- 47 42,932 51,702
Alma.................. 19 -- 2,670 9,108 9,025 -- 5,194 10,973 10,655
Paris................. 20 -- 808 8,841 9,665 -- 5,921 10,235 10,240
Mulberry.............. 24 -- 1,326 2,848 2,744 -- 6,735 8,958 9,647
Harrison/Bellefonte
(2 offices).......... 37,15 14,766 28,357 41,116 43,587 17,012 30,709 37,692 37,700
Van Buren............. 41 16,381 13,903 22,729 23,854 17,830 25,750 22,130 23,229
Marshall.............. 49 10,631 14,614 22,347 22,538 16,279 21,878 41,592(/3/) 40,264
Clarksville (2
offices)............. 53,44 25,868 38,671 57,142 54,161 26,496 31,130 38,750 36,617
Western Grove......... -- (/4/) 25,499 27,867 28,199 28,217 12,644 15,023 20,355 20,397
Ozark/Altus (3
offices)............. -- (/4/) 67,602 61,737 57,076 55,497 110,857 117,255 110,169 110,541
Jasper................ -- (/4/) 16,465 16,134 16,768 17,153 30,530 35,913 41,895 42,531
-------- -------- -------- -------- -------- -------- -------- --------
Total................ $214,462 $275,463 $387,526 $400,851 $231,648 $295,555 $529,040 $581,704
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
- --------
(1) Months in operation is from the date the Company opened each full service
banking office in the applicable city.
(2) The Company opened temporary commercial and mortgage lending offices in
Little Rock in 1995 and 1996, respectively, but did not commence deposit
operations in Little Rock until late February 1998.
(3) Deposit growth in 1998 includes deposits obtained through acquisitions in
Little Rock and Marshall of approximately $9.4 million and $16 million,
respectively.
(4) Operations commenced in Western Grove, Altus, Ozark and Jasper in 1976,
1972, 1937 and 1903, respectively.
In addition to growth at existing offices, the Company expects to continue
expansion with additional de novo branches. Specific locations targeted for
future development include a second full service branch in Harrison, which is
currently under construction and is expected to open in the second quarter of
1999, a second North Little Rock location which is planned for opening in late
1999 or early 2000 and a full service branch in Clinton, Arkansas expected to
open in 2000.
Although the Company will continue to open new offices, capitalizing on the
growth potential of existing offices is becoming an increasingly significant
part of its strategy. The Company has 15 offices that are less than five years
old, including 10 opened since January 1997. By seeking to more fully utilize
the unused capacity at existing offices, the Company's goal is to continue
loan, deposit and revenue growth without proportionate increases in the rate
of growth in capital investments and expenses.
The Company is also taking other steps to reduce expenditures in connection
with the opening of new offices. Management is considering other methods of
expanding its branch network including in-store branches, offices in shopping
centers and other leased facilities, and smaller or less expensive branches.
The Company believes that in many instances it can reduce the cost of new
offices while effectively entering new markets and expanding its presence in
existing markets. Finally, the Company may consider growth by acquisition as
opportunities arise.
Finally, the Company believes it will be able to continue to capitalize on
the opportunities presented by consolidation in the banking industry. Many
financial institutions operating in the Company's market areas have become
branches or subsidiaries of larger statewide, regional or national
organizations. Management believes
48
<PAGE>
that many of these organizations have shifted decision making and certain
services away from local offices while in many cases reducing personnel. Such
actions have created and may continue to create substantial opportunities for
the Company to increase market share and develop valuable customer
relationships. The Company has also been able to employ quality senior loan
officers and other management personnel from these institutions.
Banking Products and Services. The Company has expanded its traditional
banking products and services in recent years. New offerings are designed to
provide customers with a competitive or superior array of products and
services in each of the markets it serves. Management believes that these new
product offerings are especially important as the Company increases its
presence in metropolitan markets. Additionally, the expansion of the Company's
product line is intended to increase non-interest income as a percentage of
total revenues in order to diversify income sources and reduce dependence on
net interest margin.
The Company has significantly expanded its deposit products to include a
number of special time deposit offerings with aggressive rates and atypical
maturities, totally free checking, new ATM locations (with a total of 16 at
March 31, 1999), debit cards and telephone banking services. Additionally, in
1998 the Company introduced various cash management products, including
automated clearing house services, sweep accounts, special information
reporting services, wholesale lock box services, controlled disbursement and
account analysis. The Company also significantly expanded its trust operations
by adding new trust officers and a broader range of corporate trust, personal
trust and employee benefit services. Finally, during 1998 the Company
continued its emphasis on building its mortgage lending operations. The
mortgage lending operation has been the single largest contributor to growth
in non-interest income during the past two years. The Company's expanded
product offerings are designed to give the Company a broader range of products
and services than are typically associated with small community banks.
The Company intends to introduce internet banking services by the end of
1999 allowing customers to use their home computers to, among other things,
access personal account information, effect electronic transfers and bill
payments and download personal account data. The Company plans to continue to
introduce new banking products and services in order to meet changing customer
needs and expectations.
Management Structure and Incentives. The Company believes that an empowered
banking team, motivated to provide high quality, personalized customer service
while increasing profits, is a critical element of its business strategy. The
Company implements this element of its strategy by (1) employing experienced,
customer-oriented personnel, (2) using a decentralized and streamlined
management structure, (3) holding managers separately accountable for branch
or departmental performance and (4) providing incentive compensation designed
to reward positive financial performance.
The Company strives to create the personal and comfortable atmosphere of a
small hometown bank in each of its offices. A decentralized management
structure allows managers to make credit and other decisions efficiently while
providing a higher degree of service and increased flexibility to local
customers. The Company encourages branch and departmental managers and their
staff to pursue quality customer service and active community involvement and
to develop extensive market knowledge, new business and customer
relationships.
Although senior management establishes all major plans, policies and
strategies for the Company as a whole, management also reviews key performance
indicators for each branch and department. The Company maintains
accountability and control of each branch and department through (1) direct
senior management oversight, (2) review of asset quality and regulatory
compliance by internal loan review and compliance officers, (3) review of
operations by an internal audit officer and (4) executive management review of
branch and departmental budget and financial reports.
In 1996 the Company implemented an incentive cash bonus plan which provides
employees the potential for bonuses based upon growth and profitability.
Rewards are conditional upon attaining company-wide performance thresholds.
Assuming the Company achieves the minimum thresholds, rewards are based upon a
combination of branch and departmental performance and individual performance
and responsibility.
49
<PAGE>
Management believes this plan has been successful in focusing individuals on
key performance areas. Additionally, the Company provides equity based
compensation to certain personnel in the form of discretionary stock options
to further align their interests with stockholders.
Asset Quality. The successful implementation of the Company's business
strategy requires an emphasis on maintaining asset quality. The Board of
Directors, including its loan review committee, and senior management
regularly monitor asset quality. In addition, the Company employs loan
personnel based primarily upon their ability to properly underwrite, originate
and service loans. The Company's procedures to maintain favorable asset
quality include:
. regular meetings among loan and collection personnel to continuously
assess the status of problem or nonperforming loans;
. rapid resolution of nonaccrual loans with minimal tolerance for loans
remaining in nonaccrual status for extended periods; and
. prompt and orderly liquidation of other real estate received upon
foreclosure.
For a more detailed description of the Company's procedures and policies for
maintaining asset quality, see "Management's Discussion and Analysis of
Financial Condition and Results of Operation--Nonperforming Assets" and "--
Allowance and Provision for Loan Losses."
In the past year the Company has taken several steps to improve its ability
to monitor asset quality. At the end of 1997 the Company hired James Patridge
as Vice Chairman to oversee its lending function. Mr. Patridge has 25 years of
lending experience and has worked in all facets of loan portfolio management,
including the development and administration of credit policies and
underwriting procedures. Additionally, the Company has effected other changes
in personnel, including the hiring of an experienced manager to oversee the
loan administration functions, and modified its lending policies to more
effectively address credit risks associated with the Company's loan portfolio
growth. Finally, the Board of Directors has formed a loan review committee,
with Mr. Patridge as Chairman, to increase the oversight of the lending
function at the Board of Directors level.
The Company is continuing to take steps to improve its ability to
underwrite, originate and service loans. In the first quarter of 1999 the
Company commenced a comprehensive training program that will require
substantially all employees to attend a series of training courses to be
conducted throughout 1999 and 2000. Many courses in this program relate to
lending and credit functions. Further, the Company has established two loan
administration offices in Ozark and Little Rock to serve western and central
Arkansas, respectively, and intends to establish a third such office in
Harrison to serve northern Arkansas. The Company's centralization of loan
documentation and servicing functions within its three geographic regions is
intended to achieve greater uniformity and improved quality while maintaining
quick response times and strong customer service.
Overhead Objectives. One of the Company's goals is to consistently improve
its operating efficiency and ultimately become a low cost provider of
financial services. Although the Company's efficiency ratio has increased from
51.60% in 1996 to 54.98% in 1998, this increase is primarily the result of the
Company having invested heavily to expand into new markets. During 1998 the
Company increased its investment in fixed assets from $13 million to $27
million as it added a number of new offices, including its corporate
headquarters. In addition, the number of full-time equivalent employees
increased by approximately 45% during 1998 as the Company hired new personnel
to staff these offices.
The Company has made substantial capital investments and incurred
significant expenses in connection with opening 10 new offices since January
1997. The Company believes these investments in physical facilities and people
have significantly expanded its capacity for further growth, and create an
opportunity for further loan, deposit and revenue growth without proportionate
increases in the rate of growth in capital investments and expenses. The
Company's 1999 budget for capital expenditures is approximately 40% of the
1998 amount, and its staffing plans for 1999 call for the addition of
approximately 30% of the number of employees added in 1998.
50
<PAGE>
The Company believes the slower growth rate in capital expenditures and
personnel expenses, coupled with its targeted growth rate for new loans and
deposits, will result in an improved efficiency ratio in 1999 compared to the
1998 level. For the quarter ended March 31, 1999, the Company's efficiency
ratio was 55.65%.
In an effort to achieve further efficiencies, the Company has consolidated
subsidiaries and streamlined certain operations. In the fourth quarter of 1998
the Company consolidated the operations of a small mortgage company subsidiary
into Bank of the Ozarks, wca, the Company's lead bank subsidiary. In January
1999 the Company merged its federal savings bank subsidiary into Bank of the
Ozarks, wca. Additionally, on June 11, 1999 the Company merged its two
remaining bank subsidiaries into one surviving entity, Bank of the Ozarks.
These actions should improve operating efficiency and enhance customer service
by making it easier to transact business throughout the Company's expanding
branch network, including facilitating the use of the Company's TeleBank and
voice response services and the introduction of internet and other new banking
services in the future.
Lending Activities
The Company's primary source of income is interest earned from its loan
portfolio and, to a lesser extent, earnings on its investment portfolio. In
underwriting loans, primary emphasis is placed on the borrower's financial
condition, including its ability to generate cash flow to support its debt
obligations and other cash expenses. Additionally, substantial consideration
is given to collateral value and marketability as well as the borrower's
character, reputation and other relevant factors. The Company's portfolio
includes most types of real estate loans, consumer loans, commercial and
industrial loans, agricultural loans and other types of loans. The vast
majority of the properties collateralizing the Company's mortgage loans are
located within the trade areas of the Company's main offices and branches.
The Company prices its loans to be competitive while maintaining
profitability. In establishing loan pricing the Company considers (1) the
risks associated with the loan, (2) the borrower's overall relationship with
the Company and (3) yields on other investment alternatives.
The following table summarizes the Company's loan portfolio, by loan
category, amount and percentage of total loans as of December 31, 1996, 1997
and 1998 and March 31, 1999.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------- March 31,
1996 1997 1998 1999
-------------- -------------- -------------- --------------
% of % of % of % of
Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans
-------- ----- -------- ----- -------- ----- -------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate:
Single family
residential.......... $ 78,124 36.4% $ 96,943 35.2% $121,539 31.4% $119,404 29.8%
Non-farm/non-
residential.......... 35,258 16.4 41,710 15.1 76,563 19.8 86,560 21.6
Agricultural.......... 11,583 5.4 13,443 4.9 19,463 5.0 20,784 5.2
Construction/land
development.......... 8,808 4.1 16,257 5.6 23,305 6.0 26,778 6.6
Multifamily
residential.......... 3,743 1.8 3,897 1.4 6,207 1.6 5,465 1.4
-------- ----- -------- ----- -------- ----- -------- -----
Total real estate... 137,516 64.1 172,250 62.5 247,077 63.8 258,991 64.6
Consumer................ 39,868 18.6 53,233 19.3 66,407 17.1 64,976 16.2
Commercial and
industrial............. 28,154 13.1 37,470 13.6 59,192 13.5 55,163 13.7
Agricultural (non-real
estate)................ 8,363 3.9 10,824 3.9 20,068 5.2 20,027 5.0
Other................... 561 0.3 1,686 0.6 1,782 0.5 1,694 0.5
-------- ----- -------- ----- -------- ----- -------- -----
Total loans......... $214,462 100.0% $275,463 100.0% $387,526 100.0% $400,851 100.0%
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
51
<PAGE>
Real Estate Loans. The Company's portfolio of real estate loans includes
loans secured by single family residential, non-farm non-residential,
agricultural, construction and land development, and multifamily (five or
more) properties. Single family residential loans include permanent loans
secured by first liens on one to four family residential properties. Such
loans comprise the largest portion of the Company's real estate loans. Non-
farm non-residential loans include those secured by real estate mortgages on
hotels, motels, churches, medical facilities, nursing homes, shopping centers,
office buildings, restaurants, and other business and industrial properties.
Agricultural real estate loans include loans secured by farmland and related
improvements including loans guaranteed by the Farm Service Agency or the
Small Business Administration. Real estate construction and land development
loans include loans with original maturities of sixty months or less to
finance land development or construction of industrial, commercial,
residential or farm buildings or additions or alterations to existing
structures.
The Company offers a variety of real estate loan products that are generally
amortized over five to thirty years, payable in monthly or other periodic
installments of principal and interest, and due and payable in full (unless
renewed) at a balloon maturity generally within one to five years. Certain
loans not subject to Arkansas' usury law, typically first mortgage residential
loans, may be structured as term loans with adjustable interest rates
(adjustable daily, every six months, annually, or at other regular adjustment
intervals usually not to exceed every five years) and without balloon
maturities.
Single family residential loans are underwritten primarily based on the
borrower's ability to repay, including prior credit history, and the value of
the collateral. Other real estate loans are underwritten based on the ability
of the property, in the case of income producing property, or the borrower's
business to generate sufficient cash flow to amortize the debt. Secondary
emphasis is placed upon collateral value and other factors. Loans
collateralized by real estate have generally been originated with loan to
appraised value ratios of not more than 89% for owner-occupied single family
residential, 85% for other single family residential and other improved
property, 80% for construction loans secured by commercial, multifamily and
other non-residential properties, 75% for land development loans, and 65% for
raw land loans.
The Company typically requires mortgage title insurance in the amount of the
loan and hazard insurance on improvements. Documentation requirements vary
depending on loan size, type, complexity and other factors.
Consumer Loans. The Company's portfolio of consumer loans generally includes
loans to individuals for household, family and other personal expenditures
(other than those secured by real estate). Proceeds from such loans are used
to, among other things, fund the purchase of automobiles, household
appliances, furniture, trailers, boats and mobile homes, and for credit
extended pursuant to credit card and other similar plans. Consumer loans made
by the Company are generally collateralized with terms typically ranging up to
72 months, depending upon the nature of the collateral and size of the loan.
Consumer loans are attractive to the Company because they generally have a
short term with interest rates at or near the maximum lawful rate in Arkansas.
Such loans, however, pose additional risks of collectibility and loss when
compared to certain other types of loans. The borrower's ability to repay is
of primary importance in the underwriting of consumer loans.
Commercial and Industrial Loans. The Company's commercial and industrial
loan portfolio consists of loans for commercial, industrial and professional
purposes including loans to fund working capital requirements (such as
inventory, floor plan and receivables financing), purchases of machinery and
equipment and other purposes. The Company offers a variety of commercial and
industrial loan arrangements, including term loans, balloon loans and lines of
credit with the purpose and collateral supporting a particular loan
determining its structure. These loans are offered to businesses and
professionals for short and medium terms on both a collateralized and
uncollateralized basis. As a general practice, the Company obtains as
collateral a lien on furniture, fixtures, equipment, inventory, receivables or
other assets.
52
<PAGE>
Commercial and industrial loans typically are underwritten on the basis of
the borrower's ability to make repayment from the cash flow of its business
and generally are collateralized by business assets. As a result, such loans
involve additional complexities, variables and risks and require more thorough
underwriting and servicing than other types of loans.
Agricultural (Non-Real Estate) Loans. The Company's portfolio of
agricultural (non-real estate) loans includes loans for financing agricultural
production, including loans to businesses or individuals engaged in the
production of timber, poultry, livestock and crops. The Company's agricultural
(non-real estate) loans are generally secured by farm machinery, livestock,
crops, vehicles or other agri-related collateral.
Deposits
The Company offers an array of deposit products consisting of non-interest
bearing checking accounts, low cost deposit products, including interest
bearing transaction (such as checking) and savings accounts, and higher cost
deposit products, including money market accounts and time deposits.
The following tables summarizes the deposit products of the Company by
category, amount and percentage of total deposits at December 31, 1996, 1997
and 1998 and March 31, 1999.
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------- March 31,
1996 1997 1998 1999
----------------- ----------------- ----------------- -----------------
% of % of % of % of
Total Total Total Total
Amount Deposits Amount Deposits Amount Deposits Amount Deposits
-------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest bearing
accounts............... $ 21,295 9.2% $ 31,091 10.5% $ 50,138 9.5% $ 56,281 9.7%
Interest bearing
accounts:
Transaction (NOW)..... 24,424 10.5 27,527 9.3 46,915 8.9 51,184 8.8
Savings............... 8,180 3.5 9,082 3.1 13,319 2.5 15,438 2.7
Money market.......... 24,325 10.5 28,133 9.5 35,237 6.7 38,273 6.6
Time deposits:
Less than $100,000.... 111,379 48.1 141,741 48.0 239,891 45.3 231,812 39.8
$100,000 or more...... 42,045 18.2 57,981 19.6 143,540 27.1 188,716 32.4
-------- ----- -------- ----- -------- ----- -------- -----
Total deposits...... $231,648 100.0% $295,555 100.0% $529,040 100.0% $581,704 100.0%
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
The Company acts as depository for a number of state and local governments
and government agencies or instrumentalities. Such public fund deposits are
often subject to competitive bid and in many cases must be secured by the
Company's pledge of government agency or other securities. The Company's
deposits come primarily from within the Company's trade area. As of March 31,
1999 the Company had no outstanding "brokered deposits," defined as deposits
which, to the knowledge of management of the Company, have been placed with
the bank subsidiaries by a person who acts as a broker in placing such
deposits on behalf of others.
Other Banking Services
Trust Services. Historically the Company has provided trust services from
its Ozark, Arkansas office. As the Company has expanded into larger markets,
it has identified a need to expand the capabilities and services of this
department. In 1998 the Company assembled a team of experienced trust officers
to handle personal trusts, corporate trusts, employee benefit accounts and
trust operations. In the fourth quarter of 1998 this team commenced operations
in the Company's corporate headquarters in Little Rock and the Ozark trust
operations were consolidated into that office. The Company also converted to a
new trust computer system which allows the trust department to more
efficiently service its growing base of trust accounts. As of March 31, 1999
total
53
<PAGE>
trust assets under management were $67.8 million. With the new trust resources
in place, the Company expects to increase trust assets under management and
trust revenues in 1999 and future years.
Cash Management Services. In 1998 the Company introduced cash management
products which are designed to provide a high level of specialized support to
the treasury operations of business customers. Cash management has four basic
functions: deposit handling, funds concentration, funds disbursement and
information reporting. The Company's cash management services include
automated clearing house services (e.g., direct deposit, automatic bill
collection and electronic cash concentration), sweep accounts, current and
prior day transaction reporting, wholesale lockbox services, controlled
disbursement and account analysis. The Company will continue to expand its
product offerings in this area in order to meet the increasingly sophisticated
needs of its expanding commercial customer base.
Mortgage Lending. In 1996 the Company expanded its residential mortgage
product line by offering long-term fixed and variable rate loans to be sold on
a servicing released basis in the secondary market. The Company originates
such loans through its Little Rock, Fort Smith and Harrison offices. During
1998 the Company significantly increased its mortgage lending operations by
hiring additional mortgage lending personnel. This has resulted in the
Company's originations of residential mortgage loans growing from just $4.5
million in 1996 to $138.9 million in 1998.
Competition
The banking industry in the Company's market area is highly competitive. In
addition to competing with other commercial and savings banks and savings and
loan associations, the Company competes with credit unions, finance companies,
mortgage companies, brokerage and investment banking firms, asset-based non-
bank lenders and many other financial service firms. Competition is based upon
interest rates offered on deposit accounts, interest rates charged on loans,
fees and service charges, the quality and scope of the services rendered, the
convenience of banking facilities and, in the case of loans to commercial
borrowers, relative lending limits.
A substantial number of the commercial banks operating in the Company's
market area are branches or subsidiaries of much larger organizations
affiliated with statewide, regional or national banking companies, and as a
result may have greater resources and lower costs of funds than the Company.
Additionally, the Company faces increased competition from de novo community
banks, including those with senior management who were previously with other
local banks or those controlled by investor groups with strong local business
and community ties. Management believes the Company will continue to be
competitive because of its strong commitment to quality customer service,
highly autonomous local branches, active community involvement and competitive
products and pricing.
Employees
At March 31, 1999 the Company employed 281 full-time equivalent employees.
None of the employees were represented by any union or similar group. The
Company has not experienced any labor disputes or strikes arising from any
organized labor groups. The Company believes its employee relations are good.
54
<PAGE>
Properties
The Company serves its customers by offering a broad range of banking
services throughout northern, western and central Arkansas from the following
locations:
<TABLE>
<CAPTION>
Banking Location (/1/) Year Opened Square Footage
- ------------------------------------------- -------------------- --------------
<S> <C> <C>
Harrison (Downtown)........................ Under construction 14,000
North Little Rock (Indian Hills)(/2/)...... 1999 1,500
Fort Smith................................. 1998 22,500
Little Rock (Cantrell)..................... 1998 2,700
Little Rock (Chenal)....................... 1998 40,000
Little Rock (Rodney Parham)................ 1998 2,500
Little Rock (Chester)(/3/)................. 1998 1,716
Bellefonte................................. 1997 1,444
Alma....................................... 1997 4,200
Paris...................................... 1997 3,100
Mulberry................................... 1997 1,875
Harrison (North)(/4/)...................... 1996 3,300
Clarksville (Rogers)(/4/).................. 1995 3,300
Van Buren.................................. 1995 2,520
Marshall(/4/).............................. 1995 2,520
Clarksville (Main)......................... 1994 2,520
Ozark (Westside)........................... 1993 2,520
Western Grove.............................. 1976 (expanded 1991) 2,610
Altus(/5/)................................. 1972 (rebuilt 1998) 1,500
Ozark (Main)............................... 1971 (expanded 1985) 30,877
Jasper..................................... 1967 (expanded 1984) 4,408
</TABLE>
- --------
(1) Unless otherwise indicated, the Company owns, or will own upon the
completion of construction, its banking locations.
(2) The Company leases the building and land at this location with an initial
term expiring in December 1999, subject to options to renew for five
additional terms of two years each.
(3) This location was acquired by the Company in February 1998. The facility
was constructed in 1994.
(4) The Company owns the buildings and leases the land at these locations. The
initial lease terms expire in 2001 (Harrison), 2007 (Clarksville) and 2024
(Marshall). The Company has renewal options on the Harrison and Marshall
facilities and purchase options on the Harrison and Clarksville
facilities.
(5) Original facility was destroyed by storm in 1997. This facility was
rebuilt and placed in service in 1998.
While management believes its existing banking locations are adequate for
its present operations, the Company intends to establish additional branch
offices in the future in accordance with its growth strategy. See "--Business
Strategy."
Legal Proceedings
The Company is not currently involved in any material legal proceedings.
However, from time to time the Company is involved in routine legal
proceedings arising in the ordinary course of business. Management does not
believe that any such proceedings, either individually or in the aggregate,
will result in material losses to the Company.
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SUPERVISION AND REGULATION
In addition to the generally applicable state and federal laws governing
businesses and employers, bank holding companies and banks are extensively
regulated under both federal and state law. With few exceptions, state and
federal banking laws have as their principal objective either the maintenance
of the safety and soundness of the Bank Insurance Fund ("BIF") and Savings
Association Insurance Fund ("SAIF") of the FDIC or the protection of consumers
or classes of consumers, rather than the specific protection of the
stockholders of the Company. To the extent that the following information
describes statutory and regulatory provisions, it is qualified in its entirety
by reference to those particular statutory and regulatory provisions. Any
change in applicable law or regulation may have an adverse effect on the
results of operation and financial condition of the Company and its bank
subsidiaries.
Federal Regulations
The primary federal banking regulatory authority for the Company is the
Board of Governors of the Federal Reserve System, acting pursuant to its
authority to regulate bank holding companies. Because the Company's bank
subsidiaries are insured depository institutions who are not member banks of
the Federal Reserve System, they are subject to regulation and supervision by
the FDIC and are not subject to direct supervision by the Federal Reserve.
Bank Holding Company Act. The Company is subject to supervision by the
Federal Reserve under the provisions of the Bank Holding Company Act of 1956,
as amended (the "BHCA"). The BHCA restricts the types of activities in which
bank holding companies may engage and imposes a range of supervisory
requirements on their activities, including regulatory enforcement actions for
violations of laws and policies. The BHCA limits the activities of the Company
and any companies controlled by it to the activities of banking, managing and
controlling banks, furnishing or performing services for its subsidiaries, and
any other activity that the Federal Reserve determines to be incidental to or
closely related to banking. These restrictions also apply to any company in
which the Company owns 5% or more of the voting securities.
Before a bank holding company engages in any bank-related activities, either
by acquisition or commencement of de novo operations, it must comply with the
Federal Reserve's notification and approval procedures. In reviewing these
notifications, the Federal Reserve considers a number of factors, including
the expected benefits to the public versus the risks of possible adverse
effects. In general, the potential benefits include greater convenience to the
public, increased competition and gains in efficiency, while the potential
risks include undue concentration of resources, decreased or unfair
competition, conflicts of interest and unsound banking practices.
Under the BHCA, a bank holding company must obtain Federal Reserve approval
before engaging in acquisitions of banks or bank holding companies. In
particular, the Federal Reserve must generally approve the following actions
by a bank holding company:
. the acquisition of ownership or control of more than 5% of the voting
securities of any bank or bank holding company;
. the acquisition of all or substantially all of the assets of a bank; and
. the merger or consolidation with another bank holding company
In considering any application for approval of an acquisition or merger, the
Federal Reserve is required to consider various competitive factors, the
financial and managerial resources of the companies and banks concerned, the
convenience and needs of the communities to be served and the applicant's
record of compliance with the Community Reinvestment Act (the "CRA"). The CRA
generally requires financial institutions to take affirmative action to
ascertain and meet the credit needs of its entire community, including low and
moderate income neighborhoods. The Attorney General of the United States may,
within 30 days after approval of an
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acquisition by the Federal Reserve, bring an action challenging such
acquisition under the federal antitrust laws, in which case the effectiveness
of such approval is stayed pending a final ruling by the courts.
Interstate Banking. On September 29, 1994, President Clinton signed into law
the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Act") which amended the BHCA to permit bank holding companies to
acquire existing banks in any state effective September 29, 1995. The
Interstate Act preempted barriers that restricted entry into states and
created opportunities for expansion into markets that were previously closed.
Interstate banking and branching authority (discussed below) is subject to
certain conditions and restrictions, such as capital adequacy, management and
CRA compliance.
The Interstate Act also contained interstate branching provisions that allow
multistate banking operations to merge into a single bank with interstate
branches. The interstate branching provisions became effective on June 1,
1997, although states were allowed to pass laws to opt in early or to opt out
completely as long as they acted prior to that date. Effective May 31, 1997,
the Arkansas Interstate Banking and Branching Act of 1997 (the "Arkansas
Interstate Act") authorized banks to engage in interstate branching activities
within the borders of the state of Arkansas.
Banks acquired pursuant to this new branching authority may be converted to
branches. Interstate branching allows banks to merge across state lines to
form a single institution. Interstate merger transactions can be used to
consolidate existing multistate operations or to acquire new branches. A bank
can also establish a new branch as its initial entry into a state if the state
has authorized de novo branching. The Arkansas Interstate Act prohibits entry
into the state through de novo branching.
Deposit Insurance. The FDIC insures the deposits of the Company's bank
subsidiaries to the extent provided by law. BIF is the primary insurance fund
for the banks' deposits, but SAIF insures a portion due to certain
acquisitions by the Company of deposits from SAIF-insured institutions. Under
the FDIC's risk-based insurance system, depository institutions are currently
assessed premiums based upon the institution's capital position and other
supervisory factors. BIF and SAIF members currently have the same risk-based
assessment schedule, which is 0 to 27 cents per $100 of eligible deposits.
Insured depository institutions are further assessed premiums for Financing
Corporation Bond debt service ("FICO"). Beginning January 1, 1997, FICO
premiums for BIF and SAIF became 1.22 and 6.1 basis points, respectively, per
$100 of eligible deposits. For the period July 1, 1998 through December 31,
1998, the Company's bank subsidiaries were assessed an annualized premium of
$0.01164 per $100 of BIF-eligible deposits and $0.0582 per $100 of SAIF-
eligible deposits.
Capital Adequacy Requirements. The Federal Reserve monitors the capital
adequacy of bank holding companies such as the Company, and the FDIC monitors
the capital adequacy of its bank subsidiaries. The federal bank regulators use
a combination of risk-based guidelines and leverage ratios to evaluate capital
adequacy.
Under the risk-based capital guidelines, bank regulators assign a risk
weight to each category of assets based generally on the perceived credit risk
of the asset class. The risk weights are then multiplied by the corresponding
asset balances to determine a "risk-weighted" asset base. The minimum ratio of
total risk-based capital to risk-weighted assets is 8.0%. At least half of the
risk-based capital must consist of Tier 1 capital, which is comprised of
common equity, retained earnings and certain types of preferred stock and
excludes goodwill and various intangible assets. The remainder, or Tier 2
capital, may consist of a limited amount of subordinated debt, certain hybrid
capital instruments and other debt securities, preferred stock, and an
allowance for loan losses not to exceed 1.25% of risk-weighted assets. The sum
of Tier 1 capital and Tier 2 capital is "total risk-based capital."
The leverage ratio is a company's Tier 1 capital divided by its adjusted
total assets. The leverage ratio requires a 3.0% Tier 1 capital to adjusted
total assets ratio for institutions with the highest regulatory rating of 1.
All other institutions must maintain a leverage ratio of 4.0% to 5.0%. For a
tabular summary of the Company's
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and the bank subsidiaries' risk-weighted capital and leverage ratios, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operation--Liquidity and Capital Resources."
Bank regulators from time to time consider raising the capital requirements
of banking organizations beyond current levels. However, the Company is unable
to predict whether higher capital requirements will be imposed and, if so, the
amount or timing of such increases. Therefore, the Company cannot predict what
effect such higher requirements may have on it or its bank subsidiaries.
Enforcement Authority. The Federal Reserve has enforcement authority over
bank holding companies and non-banking subsidiaries to forestall activities
that represent unsafe or unsound practices or constitute violations of law. It
may exercise these powers by issuing cease-and-desist orders or through other
actions. The Federal Reserve may also assess civil penalties against companies
or individuals who violate the BHCA or related regulations in amounts up to $1
million for each day's violation. The Federal Reserve can also require a bank
holding company to divest ownership or control of a non-banking subsidiary or
require such subsidiary to terminate its non-banking activities. Certain
violations may also result in criminal penalties.
The FDIC possesses comparable authority under the Federal Deposit Insurance
Act (the "FDI Act"), the Federal Deposit Insurance Corporation Improvement Act
("FDICIA") and other statutes with respect to the bank subsidiaries. In
addition, the FDIC can terminate insurance of accounts, after notice and
hearing, upon a finding that the insured institution is or has engaged in any
unsafe or unsound practice that has not been corrected, is in an unsafe and
unsound condition to continue operations, or has violated any applicable law,
regulation, rule, or order of, or condition imposed by the appropriate
supervisors.
The FDICIA required federal banking agencies to broaden the scope of
regulatory corrective action taken with respect to depository institutions
that do not meet minimum capital and related requirements and to take such
actions promptly in order to minimize losses to the FDIC. In connection with
FDICIA, federal banking agencies established capital measures (including both
a leverage measure and a risk-based capital measure) and specified for each
capital measure the levels at which depository institutions will be considered
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized or critically undercapitalized. If an institution becomes
classified as undercapitalized, the appropriate federal banking agency will
require the institution to submit an acceptable capital restoration plan and
can suspend or greatly limit the institution's ability to effect numerous
actions including capital distributions, acquisitions of assets, the
establishment of new branches and the entry into new lines of business. On
November 30, 1998 the FDIC advised the Company that each of its existing bank
subsidiaries had been classified as "well-capitalized" under these guidelines.
Examination. The Federal Reserve may examine the Company and any or all of
its subsidiaries. The FDIC examines and evaluates insured banks every 12
months, and it may assess the institution for its costs of conducting the
examinations. The FDIC has a reciprocal agreement with the Arkansas State Bank
Department whereby each will accept the other's examination reports in certain
cases. As a result, the bank subsidiaries generally undergo FDIC and state
examinations either on a joint basis or in alternating years.
Reporting Obligations. As a bank holding company, the Company must file with
the Federal Reserve an annual report and such additional information as the
Federal Reserve may require pursuant to the BHCA. The bank subsidiaries must
submit to federal and state regulators annual audit reports prepared by
independent auditors, and the Company's audit report can be used to satisfy
this requirement.
Other Regulation. The Company's status as a registered bank holding company
under the BHCA does not exempt it from certain federal and state laws and
regulations applicable to corporations generally, including, without
limitation, certain provisions of the federal securities laws. The Company is
under the jurisdiction of the Securities and Exchange Commission and of state
securities commissions for matters relating to the offer and sale of its
securities.
Interest and certain other charges collected or contracted for by the bank
subsidiaries are subject to state usury laws and certain federal laws
concerning interest rates. The bank subsidiaries' loan operations are also
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subject to certain federal laws applicable to credit transactions, such as the
federal Truth-In-Lending Act governing disclosures of credit terms to consumer
borrowers, the Home Mortgage Disclosure Act of 1975 requiring financial
institutions to provide information to enable the public and public officials
to determine whether a financial institution is fulfilling its obligation to
help meet the housing needs of the community it serves, the Equal Credit
Opportunity Act prohibiting discrimination on the basis of race, creed or
other prohibited factors in extending credit, the Fair Credit Reporting Act of
1978 governing the use and provision of information to credit reporting
agencies, the Fair Debt Collection Act governing the manner in which consumer
debts may be collected by collection agencies, the Fair Housing Act
prohibiting discriminatory practices relative to real estate-related
transactions, including the financing of housing and the rules and regulations
of the various federal agencies charged with the responsibility of
implementing such federal laws. The deposit operations of the bank
subsidiaries also are subject to the Right to Financial Privacy Act, which
imposes a duty to maintain confidentiality of consumer financial records and
prescribes procedures for complying with administrative subpoenas of financial
records, and the Electronic Funds Transfer Act, which governs automatic
deposits to and withdrawals from deposit accounts and customers' rights and
liabilities arising from the use of automated teller machines and other
electronic banking services, the Truth in Savings Act requiring depository
institutions to disclose the terms of deposit accounts to consumers and the
Expedited Funds Availability Act requiring financial institutions to make
deposited funds available according to specified time schedules and to
disclose funds availability policies to consumers.
State Regulations
The Company and its bank subsidiaries are subject to examination and
regulation by the Arkansas State Bank Department. Examinations of the bank
subsidiaries are conducted annually but may be extended to 24 months if an
interim examination is performed by the FDIC. The Arkansas State Bank
Department may also make at any time an examination of the Company as may be
necessary to disclose fully the relations between the holding company and its
bank subsidiaries and the effect of those relations.
The Arkansas Constitution provides, in summary, that "consumer loans and
credit sales" have a maximum percentage limitation of 17% per annum and that
all "general loans" have a maximum limitation of 5% over the Federal Reserve
Discount Rate in effect at the time the loan was made. The Arkansas Supreme
Court has determined that "consumer loans and credit sales" are also "general
loans" and are thus subject to an interest rate limitation equal to the lesser
of 5% over the Federal Reserve Discount Rate or 17% per annum. The Arkansas
Constitution also provides penalties for usurious "general loans" and
"consumer loans and credit sales," including forfeiture of all principal and
interest on consumer loans and credit sales made at a greater rate of interest
than 17% per annum. Additionally, "general loans" made at a usurious rate may
result in forfeiture of uncollected interest and a refund to the borrower of
twice the interest collected. Arkansas usury laws, however, are preempted by
federal law with respect to first residential real estate loans and certain
loans guaranteed by the Small Business Administration.
The Company is also subject to the Arkansas Bank Holding Company Act of 1983
("ABHCA") which places certain restrictions on the acquisition of banks by
bank holding companies. Any acquisition by the Company of more than 10% of any
class of the outstanding capital stock of any bank located in Arkansas, would
require the Arkansas Bank Commissioner's approval. Further, no bank holding
company may acquire any bank if after such acquisition the holding company
would control, directly or indirectly, banks having 25% of the total bank
deposits (excluding deposits from other banks and public funds) in the State
of Arkansas. Under the ABHCA a bank holding company cannot own more than one
bank subsidiary if any of its bank subsidiaries has been chartered for less
than 5 years.
Effective January 1, 1999 Arkansas law allows the Company to engage in
branching activities for its bank subsidiaries on a statewide basis.
Immediately prior to that date, the state's branching laws prevented state and
national banks from opening branches in any county of the state other than
their home county and the counties contiguous to their home county. Because
the state branching laws did not limit the branching activities of federal
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savings banks, the Company was able to branch outside of the traditional areas
of its state bank subsidiaries through the federal thrift that it acquired in
February 1998. In response to the change in state branching laws, the Company
merged its thrift charter into its lead state bank subsidiaries in early 1999.
Bank Subsidiaries
The lending and investment authority of the state bank subsidiaries is
derived from Arkansas law. The lending powers of each of these bank
subsidiaries are generally subject to certain restrictions, including the
amount which may be lent to a single borrower.
Regulations of the FDIC and the Arkansas State Bank Department limit the
ability of the bank subsidiaries to pay dividends to the Company without the
prior approval of such agencies. FDIC regulations prevent insured state banks
from paying any dividends from capital and allows the payment of dividends
only from net profits then on hand after deduction for losses and bad debts.
The Arkansas State Bank Department currently limits the amount of dividends
that the bank subsidiaries can pay the Company to 75% of each bank's net
profits after taxes for the current year plus 75% of its retained net profits
after taxes for the immediately preceding year.
Federal law substantially restricts transactions between financial
institutions and their affiliates, particularly their non-financial
institution affiliates. As a result, the bank subsidiaries are sharply limited
in making extensions of credit to the Company or any non-bank subsidiary, in
investing in the stock or other securities of the Company or any non-bank
subsidiary, in buying the assets of, or selling assets to, the Company, and/or
in taking such stock or securities as collateral for loans to any borrower.
Moreover, transactions between the bank subsidiaries and the Company (or any
nonbank subsidiary) must generally be on terms and under circumstances at
least as favorable to the bank subsidiaries as those prevailing in comparable
transactions with independent third parties or, in the absence of comparable
transactions, on terms and under circumstances that in good faith would be
available to nonaffiliated companies.
The FDIC requires all depository institutions, including the bank
subsidiaries, to maintain reserves against their checking and transaction
accounts (primarily checking accounts, NOW and Super NOW checking accounts).
Because reserves must generally be maintained in cash or in non-interest
bearing accounts, the effect of the reserve requirements is to increase the
bank subsidiaries' cost of funds. Arkansas law requires state chartered banks
to maintain such reserves as are required by the applicable federal regulatory
agency.
The bank subsidiaries are subject to Section 23A of the Federal Reserve Act,
which places limits on the amount of loans or extensions of credit to, or
investments in, or certain other transactions with, affiliates, including the
Company. In addition, limits are placed on the amount of advances to third
parties collateralized by the securities or obligations of affiliates. Most of
these loans and certain other transactions must be secured in prescribed
amounts. The bank subsidiaries are also subject to Section 23B of the Federal
Reserve Act, which prohibits an institution from engaging in transactions with
certain affiliates unless the transactions are on terms substantially the
same, or at least as favorable to such institution or its subsidiaries, as
those prevailing at the time for comparable transactions with non-affiliated
companies. The bank subsidiaries are subject to restrictions on extensions of
credit to executive officers, directors, certain principal stockholders, and
their related interests. These extensions of credit (1) must be made on
substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with third parties
and (2) must not involve more than the normal risk of repayment or present
other unfavorable features.
Proposed Legislation For Bank Holding Companies And Banks
Certain proposals affecting the banking industry have been discussed from
time to time. Such proposals include: limitations on investments that an
institution may make with insured funds; regulation of all insured depository
institutions by a single regulator; limitations on the number of accounts
protected by the federal deposit insurance funds; and reduction of the
$100,000 coverage limit on deposits. It is uncertain which, if any, of the
above proposals may become law and what effect they would have on the Company
and its bank subsidiaries.
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Several legislative proposals for reforming the financial services industry
have been submitted before the United States Congress, including the Financial
Services Act of 1999. Each of these proposals would expand the financial
services industry by, among other things, allowing banks to engage in
securities underwriting, insurance and other activities that are "financial"
in nature. The legislation would also repeal Glass-Steagall prohibitions on
bank holding companies owning firms that engage in securities underwriting,
and it would allow bank holding companies to engage in a broad range of
insurance activities. The Company is unable to predict whether any of this
legislation will be adopted or its potential impact on the Company's
operations.
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MANAGEMENT
Directors and Executive Officers
<TABLE>
<CAPTION>
Name Age Position(/1/)
- ---- --- -------------
<S> <C> <C>
George Gleason............ 45 Chairman of the Board and Chief Executive Officer
James Patridge............ 48 Vice Chairman and Director
Mark Ross................. 43 President and Director
Roger Collins............. 50 Director
Jerry Davis............... 59 Director
C. E. Dougan.............. 52 Director
Robert East............... 51 Director
Linda Gleason............. 45 Director
Porter Hillard............ 67 Director
Henry Mariani............. 60 Director
R. L. Qualls.............. 65 Director
Kennith Smith............. 68 Director
Danny Criner.............. 44 President, Bank of the Ozarks, nwa
Paul Moore................ 52 Chief Financial Officer
Margaret Oldner........... 47 Executive Vice President
Aubrey Avants............. 55 Executive Vice President, Bank of the Ozarks, wca
Susan Sisk Grobmyer....... 50 Executive Vice President, Bank of the Ozarks, wca
Darrel Russell............ 45 Executive Vice President, Bank of the Ozarks, wca
Randy Oates............... 55 Senior Vice President
</TABLE>
- --------
(1) Unless otherwise indicated, the individual serves in the same position
with both the Company and each of its bank subsidiaries.
George Gleason, Chairman and Chief Executive Officer. Mr. Gleason has served
the Company or one of its bank subsidiaries as Chairman, Chief Executive
Officer and/or President since 1979. He holds a B.A. in Business and Economics
from Hendrix College and a J.D. from the University of Arkansas.
James Patridge, Vice Chairman since December 1997. From 1985 to 1997 Mr.
Patridge served as Executive Vice President with NationsBank, N.A. (formerly
Boatmen's Arkansas, Inc. and Worthen Banking Corporation). He has served as a
director of the Company and its bank subsidiaries since December 1997. Mr.
Patridge holds a B.S.B.A. from the University of Arkansas, an M.S. in Finance
from Memphis State University and a J.D. from Oklahoma City University.
Mark Ross, President. Mr. Ross has served as President since 1986 and in
various capacities for one of the bank subsidiaries since 1980. He was elected
as a director of the Company in 1992. Mr. Ross holds a B.A. in Business
Administration from Hendrix College.
Roger Collins, Director since July 1997. Mr. Collins is Executive Vice
President, Chief Financial Officer and a director of Harp's Food Stores, Inc.,
a regional grocery chain headquartered in Springdale, Arkansas with 42 stores
located in Arkansas, Oklahoma and Missouri. He holds a B.A. from Rice
University and a M.B.A. from the University of Texas at Austin and is a C.P.A.
Jerry Davis, Director since September 1998. Mr. Davis is Chairman, President
and Chief Executive Officer for Affiliated Foods Southwest, Inc., a wholesale
grocery operation located in Little Rock, Arkansas.
C. E. Dougan, Director since July 1997. Mr. Dougan is co-owner of Mooney-
Dougan, Inc., which is engaged in residential real estate development,
construction and investments. Prior to 1997 he served 12 years as President
and Chief Executive Officer of Mercantile Bank of Crawford County (formerly
Peoples Bank & Trust Company of Van Buren and First National Bank of Crawford
County). Mr. Dougan has also served as a director of one of the bank
subsidiaries since February 1997.
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Robert East, Director since July 1997. Mr. East is Chairman and President of
Robert East Company, an investment company, Chairman and Chief Executive
Officer of East-Harding, Inc., a general contracting firm, and Partner and
Treasurer of AMO Electrical Company, a distributor of electrical supplies. He
is also a partner or owner of numerous real estate projects and other
investments. Mr. East holds a B.A. in Finance and Administration from the
University of Arkansas.
Linda Gleason, Director since 1987. From 1992 to 1996 Ms. Gleason served as
the Company's Deputy Chief Executive Officer and Assistant Secretary. She has
attended Arkansas State University and the University of Arkansas at Little
Rock.
Porter Hillard, Director since July 1997. Mr. Hillard is a retired owner and
operator of various agricultural businesses since 1957. He has owned, operated
or managed various purebred and commercial cattle operations, a turkey
hatchery, feed mills, turkey grow-out operations and other businesses. Mr.
Hillard has also served as a director of one of the bank subsidiaries since
1967. He holds a B.S. in Agriculture from the University of Arkansas.
Henry Mariani, Director since July 1997. Mr. Mariani is Chairman and Chief
Executive Officer of Nite Lite Company, a manufacturing, wholesale and retail
mail order operation which specializes in hunting equipment and supplies. Mr.
Mariani holds a B.S. in Finance from Penn State University and is a C.P.A.
R. L. Qualls, Director since July 1997. Dr. Qualls is Vice Chairman of
Baldor Electric Company, a marketer, designer and manufacturer of electric
motors based in Fort Smith, Arkansas. From 1993 to 1998 he served as Chief
Executive Officer of Baldor. Dr. Qualls holds a B.A. and M.S. in Economics
from Mississippi State University and completed his doctoral work at Louisiana
State University.
Kennith Smith, Director since July 1997. Mr. Smith is retired and previously
served as the owner and operator of Smith Cattle Farm from 1984 until his
retirement in 1993. Prior to that time he was the co-owner of Mulberry Lumber
Company. Mr. Smith has also served as a director of one of the bank
subsidiaries since 1977.
Danny Criner, President of Bank of the Ozarks, nwa since 1990. Mr. Criner
received a B.S.B.A. in Banking and Finance from the University of Arkansas.
Paul Moore, Chief Financial Officer since 1995. From December 1989 to 1995
Mr. Moore served as secretary, secretary/treasurer or director of eight
privately held companies under common ownership of Frank Lyon Jr. and family.
Such companies engaged in diverse activities ranging from real estate to
agricultural to banking. He is a C.P.A. and received a B.S.B.A. in Banking,
Finance and Accounting from the University of Arkansas.
Margaret Oldner, Executive Vice President since October 1997. From January
1991 to March 1997 Ms. Oldner was Senior Vice President and Chief Financial
Officer for Mercantile Bank of Arkansas (formerly Twin City Bank) in North
Little Rock. She is a C.P.A. and received a B.S. in Business Administration
from California State University at Fullerton.
Aubrey Avants, Executive Vice President, Trust of Bank of the Ozarks, wca
since June 1998. From 1993 to 1998 Mr. Avants served as Senior Vice President,
Trust Manager for First Bank of Arkansas, Jonesboro, Arkansas, and Senior Vice
President, Trust for First Commercial Bank, Memphis, Tennessee. Mr. Avants
received an MBA from the University of Tennessee and his undergraduate degree
in Finance from the University of Arkansas.
Susan Sisk Grobmyer, Executive Vice President of Bank of the Ozarks, wca
since May 1997. Ms. Grobmyer joined Bank of the Ozarks, wca in March 1997 as
Senior Vice President. She previously served as a Senior Vice President of
Commercial Loans for Pulaski Bank from 1995 to 1997 and Twin City Bank (now
Mercantile Bank of Arkansas) from 1978 to 1995. Ms. Grobmyer attended the
University of Arkansas at Monticello.
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Darrel Russell, Executive Vice President of Bank of the Ozarks, wca since
May 1997. From 1992 to 1997 Mr. Russell served as Senior Vice President of
Bank of the Ozarks, wca. He received a B.S.B.A. in Banking and Finance from
the University of Arkansas.
Randy Oates, Senior Vice President, Marketing since 1996. From 1992 to 1996
he served as Marketing Director for Commercial National Bank, Shreveport,
Louisiana. He received a B.S.B.A. in Marketing from the University of
Arkansas.
Linda Gleason is the wife of George Gleason. Except for the foregoing, no
family relationships exist among any of the above named persons.
Board of Directors
The Company's Board of Directors is comprised of one class of directors,
elected annually. Each director serves a term of one year or until his or her
successor is duly elected or qualified. The number of directors is currently
set at 12, and the Board of Directors has the power to fix or change the
number of directors by resolution and without any further action of the
stockholders in accordance with the Company's bylaws. The Company's Amended
and Restated Articles of Incorporation contain a provision that allows the
Board of Directors, by resolution and without any further action by the
stockholders, to classify or stagger the board into two or three groups, as
equal in number as possible, with the terms of office of each group of
directors expiring one, two or three years after their election to the Board,
as applicable. All directors serve on the board of directors of the Company
and each bank subsidiary.
Committees of the Board of Directors
During 1998 the Board of Directors met on 12 occasions. Each member of the
Board, other than Mr. Davis who was appointed by the Board on September 15,
1998, was elected by stockholders at the 1998 annual meeting. In 1998 each
Director attended at least 75% or more of the total of meetings of the Board
and committees of the Board during the period in which he or she served. The
Company presently does not have a standing nominating committee, and the Board
of Directors nominates persons for director. The Board will consider
suggestions by stockholders for names of nominees to the Board of Directors
for the 2000 Annual Meeting, provided that such suggestions are made in
writing and delivered to the Secretary of the Company on or before December 1,
1999. The following is a brief description of the functions of the Company's
committees.
Audit Committee. The Audit Committee met 11 times in 1998. The Audit
Committee makes recommendations concerning the engagement of the Company's
independent auditors, reviews the terms of their engagement, reviews the
auditors' report and all related reports and matters, coordinates appropriate
action in response thereto and reviews the adequacy of the Company's internal
controls. The Audit Committee also receives and reviews the monthly reports
and presentations of the loan review and compliance officers and the internal
auditor, provides general oversight and direction for their work, and
coordinates corrective action as appropriate. Roger Collins, as Chairman,
Robert East and Porter Hillard served on the Audit Committee during 1998 and
will continue to serve on such committee in 1999. None of these individuals
was employed during or prior to 1998 as officers or employees of the Company
or its subsidiaries.
Compensation and Personnel Committee. The Compensation and Personnel
Committee met eight times in 1998. The Compensation and Personnel Committee
considers, approves and reviews all salaries and bonuses for officers and
employees, recommends to the Board of Directors the election of officers,
reviews additions and terminations of personnel, oversees administration of
the employee benefit plans and programs, including the Company's stock option
plans, and oversees staff training and educational programs. Henry Mariani, as
Chairman, Porter Hillard, and Kennith Smith served on the Compensation and
Personnel Committee during 1998 and will continue to serve on such committee
in 1999. None of these individuals was employed during or prior to 1998 as
officers or employees of the Company or its subsidiaries.
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Trust Committee. The Trust Committee met 11 times in 1998. The operation of
the bank's trust department and the administration of its trust accounts are
overseen by the Trust Committee. R. L. Qualls, as Chairman, Kennith Smith and
Linda Gleason served on the Trust Committee during 1998 and will continue to
serve on such committee in 1999.
Loan Committees. The Loan Committees met 31 times in 1998. Loan Committees
have been established for each of the three geographic divisions of the
Company and consist of both board members and executive officers. Such Loan
Committees have responsibility for reviewing and approving all loans and
aggregate loan relationships in excess of $1,000,000 and for administering all
other aspects of the lending function within each division. The following
persons served on the Company's Loan Committees during 1998 and will continue
to serve on such committees in 1999:
<TABLE>
<CAPTION>
Western Central Northern
------- ------- --------
<S> <C> <C>
C. E. Dougan, Chairman Robert East, Chairman James Patridge, Chairman
George Gleason George Gleason Danny Criner
Porter Hillard Linda Gleason George Gleason
James Patridge Henry Mariani George Landrum
R. L. Qualls James Patridge Louis Melton
Joe Willis
Bill Witty
</TABLE>
Directors Loan Review Committee. On February 17, 1998 the Board established
the Directors Loan Review Committee to increase the Board's oversight of the
Company's lending activities. The Loan Review Committee met nine times in
1998. The Loan Review Committee, among other things, reviews reports of new
loans, loan commitments over $100,000, loan loss activity, past due and
problem loans, asset quality and other matters as appropriate. James Patridge,
as Chairman, C. E. Dougan, Henry Mariani, Jerry Davis and George Gleason
served on this committee during 1998 and will continue to serve on this
committee in 1999.
ALCO and Investment Committee. The ALCO and Investment Committee met eight
times in 1998. Management of the asset/liability (interest rate risk)
position, liquidity and investment portfolio is overseen by the ALCO and
Investment Committee. Paul Moore, as Chairman, Mark Ross, Danny Criner, Randy
Oates and Dan Rolett served on the ALCO and Investment Committee during 1998
and together with George Gleason will serve on this committee in 1999.
Director Compensation
Non-employee directors are paid a monthly retainer fee of $500 and a fee of
$500 for attending each regular and special board meeting. In addition,
nonemployee directors are paid a fee of $100 for attendance at each meeting of
a committee of the Board of Directors. Additionally, under the Company's Non-
Employee Director Stock Option Plan, each non-employee director is
automatically granted, on the date a director's term of office commences, and
each year thereafter on the day following the annual meeting of stockholders
as long as such director's term as a director is continuing for the ensuing
year, an option to acquire 1,000 shares of common stock at an exercise price
equal to the fair market value of the common stock on the date of grant.
Effective April 22, 1998 the Company granted options to its eight non-employee
directors to purchase 1,000 shares each of common stock at an exercise price
of $34.13 per share. An additional non-employee director joined the Board and
was awarded an option for 1,000 shares at an exercise price of $22.31 on
September 15, 1998. All options granted to non-employee directors become
exercisable upon grant. The Company's officers are not compensated for their
service as directors.
Limitations on Director and Officer Liability
Article Tenth of the Company's Amended and Restated Articles of
Incorporation provides that the Company shall, to the full extent permitted by
Section 4-27-850 of the Arkansas Business Corporation Act, indemnify all
persons whom it may indemnify pursuant thereto.
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<PAGE>
Article Ninth of the Company's Amended and Restated Articles of
Incorporation provides that the Company's directors will not be personally
liable to the Company or any of its stockholders for monetary damages
resulting from breaches of their fiduciary duty as directors except (a) for
any breach of the director's duty of loyalty to the Company or its
stockholders, (b) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (c) under Section 4-27-
833 of the Arkansas Business Corporation Act, as the same exists or hereafter
may be amended, (d) for any transactions from which the director derived an
improper personal benefit, or (e) for any act, omission, transaction, or
breach of a director's duty creating any third party liability to any person
or entity other than the Company or stockholder.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, or persons controlling the
Company pursuant to the foregoing provisions, the Company has been informed
that in the opinion of the SEC such indemnification is against public policy
as expressed in the Act and is therefore unenforceable.
Executive Compensation
The following table shows for the years indicated all cash and certain other
compensation paid or to be paid by the Company to the Chief Executive Officer
and its other executive officers whose aggregate salary and bonus exceeded
$100,000.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
------------------- ---------------------
Name & Principal Securities Underlying All Other
Position Year Salary Bonus Options(#) Compensation(/1/)
- ---------------- ---- ------------------- --------------------- -----------------
<S> <C> <C> <C> <C> <C>
George Gleason(/2/)..... 1998 $ 278,958 $ -- 18,500(/3/) $4,870
Chairman and Chief 1997 372,556 45,297 12,200(/3/) 5,899
Executive Officer 1996 405,900 200,000 -- 4,636
James Patridge(/4/)..... 1998 $ 115,000 $ -- 14,500(/3/) $2,479
Vice Chairman
Mark Ross............... 1998 $ 115,000 $ -- 4,500(/3/) $2,309
President 1997 97,847 19,569 4,200(/3/) 3,526
1996 92,782 22,042 -- 4,047
Jean Arehart(/5/)....... 1998 $ 75,000 $ 106,493 -- $1,405
Executive Vice 1997 73,274 55,988 3,600(/3/) 2,177
President--
Bank of the Ozarks, wca 1996 37,917 2,275 -- --
</TABLE>
- --------
(1) Represents employer matching contributions under the Company's 401(k) Plan
for 1998.
(2) Mr. Gleason's salary and bonus is determined pursuant to a written
employment contract. For a description of this agreement, see "--
Employment Agreement with Mr. Gleason."
(3) Represents option grants under the Company's Stock Option Plan for
employees. See "--Option Grants in Last Fiscal Year."
(4) Mr. Patridge commenced employment with the Company on December 31, 1997.
(5) Ms. Arehart retired from the Company in April 1999.
Employment Agreement with Mr. Gleason
Mr. Gleason's salary and bonus is determined pursuant to a written
employment contract which became effective on July 17, 1997, was amended on
September 16, 1997, and amended again on July 21, 1998. The agreement
continues through December 31, 2000. The agreement, as amended, reduced Mr.
Gleason's annual base salary effective July 21, 1998 to $225,000, subject to
an annual cost of living adjustment and an annual bonus not to exceed 1% of
the Company's net income for each fiscal year. This agreement is in addition
to any other compensation that may be received by Mr. Gleason under employee
benefit plans or reimbursement arrangements.
66
<PAGE>
Stock Option Plan
The Company's Board of Directors and stockholders adopted a Stock Option
Plan in 1997. The purpose of the Stock Option Plan is to provide an additional
incentive to executive officers and employees to put forth maximum efforts for
the success of the Company's business and to serve the best interests of the
stockholders. Under the Stock Option Plan, the Compensation and Personnel
Committee or the full Board of Directors of the Company may grant executive
officers and key employees options to purchase shares of common stock at
prices not less than the fair market value of such shares on the date of
grant. Additionally, the Compensation and Personnel Committee or the full
Board of Directors will determine, among other things, the number of shares
subject to option grants and the terms and conditions of such grants,
including the dates upon which such options vest and become exercisable and
provisions relating to termination of such options. This Stock Option Plan
provides for the issuance of up to 285,000 shares of common stock, and options
relating to 181,050 shares of common stock had been granted and remained
outstanding under this plan at December 31, 1998. For information concerning
grants of options under the Director Option Plan, see "--Director
Compensation."
Options Grants in Last Fiscal Year
The following table sets forth information with respect to the named
executive officers concerning options granted in the last fiscal year and
their potential realizable value:
<TABLE>
<CAPTION>
Potential
Realizable Value
at Assumed Annual
Rates of Stock
Price
Appreciation for
Individual Grants Option Term(/1/)
------------------------------------------------- -----------------
% of Total
Number of Options Granted Exercise or
Securities Underlying to Employees in Base Price Expiration
Name Options Granted Fiscal Year(%) ($/Sh) Date 5% 10%
- ---- --------------------- --------------- ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
George Gleason.......... 10,000 9.6% $27.75 (/2/) $133,035 $320,730
8,500 8.2% 21.88 9/22/03 51,382 113,432
James Patridge.......... 10,000 9.6% $25.13 (/2/) $120,416 $289,422
4,500 4.3% 21.88 9/22/03 27,202 60,097
Mark Ross............... 4,500 4.3% $21.88 9/22/03 $ 27,202 $ 60,097
</TABLE>
- --------
(1) As required by the SEC rules and regulations, potential realizable values
are based on the assumption that the common stock price appreciates at the
annual rates shown compounded annually from the date of the grant until
the end of the option term and is not intended to forecast appreciation in
stock price.
(2) Mr. Gleason's options expire in the amount of 8,500, 3,300, 3,300 and
3,400 shares on each of September 22, 2003 and July 21, 2005, 2006 and
2007, respectively; and Mr. Patridge's options expire in installments of
4,500, 3,300, 3,300 and 3,400 shares on each of September 22, 2003 and
January 20, 2005, 2006 and 2007, respectively.
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<PAGE>
The following table sets forth information with respect to the named
executives concerning exercise of options during the last fiscal year and
unexercised options held as of the end of the fiscal year.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options at
Options at FY-End FY-End(/1/)
------------------------- -------------------------
Shares
Acquired
on Value
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
George Gleason.......... -- -- -- 30,700 -- $94,563
James Patridge.......... -- -- -- 14,500 -- 5,063
Mark Ross............... -- -- -- 8,700 -- 34,463
Jean Arehart............ -- -- -- 3,600 -- 25,200
</TABLE>
- --------
(1) The dollar amounts shown represent the product of the number of shares
purchasable upon exercise of the related options times the difference of
the average of the high and low sales prices reported on December 31, 1998
($23.00) and the purchase price per share payable upon such exercise
applicable to each in-the-money option.
401(k) Plan
The Company established the 401(k) Retirement Savings Plan in 1997. This
plan is a qualified retirement plan with a salary deferral feature designed to
qualify under Section 401 of the Internal Revenue Code of 1986. The 401(k)
Plan permits all employees of the Company to defer a portion of their eligible
compensation on a pre-tax basis subject to certain maximum amounts. With the
January 1999 approval by the Board of Directors to merge the ESOP with the
401(k) Plan, the Company's matching contributions will increase in 1999 up to
a maximum of three percent of the participant's salary per year. Additionally,
in order to encourage employees to invest in the common stock the Company has
amended the 401(k) Plan to include a Company common stock fund as one of its
investment alternatives.
CERTAIN TRANSACTIONS
Each of the Company's bank subsidiaries has had, in the ordinary course of
business, banking transactions with certain of its officers and directors and
with certain officers and directors of the Company. All loan transactions with
officers and directors of the Company, its bank subsidiaries, and their
related and affiliated parties, have been in the ordinary course of business,
on substantially the same terms, including interest rates and collateral as
those prevailing for comparable transactions with other loan customers of the
Company, and have not included more than the normal risk of collectibility
associated with the Company's other banking transactions or other unfavorable
features.
The Company has entered into contracts with East-Harding, Inc., of which
Robert East is co-owner, Chairman and Chief Executive Officer, for the
construction of the Company's facilities in Little Rock, Fort Smith and
Harrison, Arkansas. In 1998 the Company paid East-Harding, Inc. approximately
$7.4 million pursuant to these contracts.
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<PAGE>
SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of the Company's common stock as of February 15, 1999,
for (1) each person who is known by the Company to beneficially own more than
5.0% of the outstanding shares of common stock, (2) each director, (3) each
executive officer named in the Summary Compensation Table and (4) all of the
current directors and executive officers of the Company as a group. This table
is based upon information supplied by officers, directors and principal
stockholders and a review of information on file with the SEC.
<TABLE>
<CAPTION>
Name Shares Owned(/1/) Percentage of Class
---- ----------------- -------------------
<S> <C> <C>
George Gleason(/2/)...................... 1,273,602 33.7
401(k) Plan.............................. 260,300 6.9
James Patridge........................... 2,023 *
Mark Ross(/3/)........................... 114,219 3.0
Linda Gleason(/4/,/5/)................... 39,852 1.1
Roger Collins(/4/,/6/)................... 3,750 *
Jerry Davis(/7/)......................... 6,000 *
C. E. Dougan(/4/)........................ 2,830 *
Robert East(/4/,/8/)..................... 10,900 *
Porter Hillard(/4/)...................... 2,000 *
Henry Mariani(/4/)....................... 21,000 *
R. L. Qualls(/4/)........................ 2,000 *
Kennith Smith(/4/,/9/)................... 37,315 *
Jean Arehart............................. 5,744 *
All directors and executive officers as a
group
(20 persons)............................ 1,541,900 40.8
</TABLE>
- --------
* Less than one percent.
(1) Includes beneficial ownership of shares with respect to which voting or
investment power may be deemed to be directly or indirectly controlled.
Accordingly, the shares in the foregoing table include shares owned
directly, shares held in such person's accounts under the 401(k) Plan,
shares underlying presently exercisable options granted pursuant to the
Company's stock option plans, shares owned by certain of the individual's
family members and shares held by the individual as a trustee or other
similar capacity, unless otherwise described below.
(2) The amount includes (a) 210,700 shares owned of record by a trust of which
Mr. Gleason is sole trustee and has a 25% life income interest, (b) 28,000
shares owned of record by a charitable trust for which Mr. Gleason is a
co-trustee with Ms. Gleason, (c) 11,852 shares owned directly by Ms.
Gleason, and (d) 400 shares owned by the minor children of Mr. Gleason.
(3) Includes (a) 36,300 shares owned of record by a trust for the benefit of
Mr. Ross and his children and for which Mr. Ross maintains a life interest
only and (b) 25,000 shares owned by Mr. Ross' spouse.
(4) Includes exercisable options for 2,000 shares granted under the Company's
Non-Employee Director Stock Option Plan.
(5) Includes 28,000 shares owned of record by a charitable trust for which Ms.
Gleason is a co-trustee with Mr. Gleason.
(6) Includes 500 shares held by spouse.
(7) Includes exercisable options for 1,000 shares granted under the Company's
Non-Employee Director Stock Option Plan.
(8) Includes 600 shares held by children of Mr. East.
(9) Includes 692 shares held by spouse.
69
<PAGE>
DESCRIPTION OF THE PREFERRED SECURITIES
Definitions of Material Agreements
For purposes of this prospectus:
. the "Indenture" means the Subordinated Indenture, dated as of June 18,
1999, as amended and supplemented from time to time, between the Company
and FMB Trust Company, National Association, as the indenture trustee,
under which the subordinated debentures will be issued,
. the "Trust Agreement" means the Amended and Restated Trust Agreement,
under which the preferred securities and the common securities will be
issued, dated as of June 18, 1999, as amended and supplemented from time
to time, among the Company, as Depositor, First Omni Bank, National
Association, as the Delaware trustee, FMB Trust Company, National
Association, as property trustee, and the administrative trustees named
therein,
. the "Guarantee" means the Guarantee Agreement relating to the guarantee
of the Company, between the Company (the "Guarantor") and FMB Trust
Company, National Association, as the guarantee trustee, on behalf of
the holders of the preferred securities, and
. the "Expense Agreement" means the Agreement as to expenses and
liabilities between the Company and the Trust.
The preferred securities and the common securities will be issued pursuant
to the terms of the Trust Agreement, which is qualified as an indenture under
the Trust Indenture Act of 1939 (the "Trust Indenture Act"). This summary is
not complete and is subject to, and is qualified in its entirety by reference
to, all the provisions of the Trust Agreement, including the definitions
portion of the Trust Agreement, and the Trust Indenture Act. The form of each
of the agreements referenced above has been filed as an exhibit to the
registration statement, which is on file with the SEC. This prospectus is a
part of the registration statement. See "Where You Can Find More Information."
General
The administrative trustees on behalf of the Trust will issue the preferred
securities and the common securities (collectively, the "trust securities").
The Company will own 100% of the common securities and you may purchase the
preferred securities. The preferred securities will represent undivided
preferred beneficial interests in the assets of the Trust and each holder will
be entitled to a preference in respect of certain distributions by the Trust
and amounts payable on redemption or liquidation of the Trust. Otherwise, the
preferred securities will generally rank the same as the common securities.
The preferred securities, as well as the subordinated debentures, are
scheduled to mature on June 18, 2029.
The property trustee will hold the subordinated debentures which have been
issued in trust for the benefit of the holders of trust securities. The
guarantee will be subordinated to most of the Company's other obligations and
liabilities. The guarantee will not provide for the payment of distributions
(as described below) or amounts payable on redemption of the preferred
securities if the Trust does not have funds available to make such payments.
See "Description of Guarantee."
If the Company does not make required payments on the subordinated
debentures held by the Trust, taking into account the Company's right to defer
such payments for up to 20 consecutive quarters, the Trust will be unable to
pay any distributions to you. In such event, you may make a claim directly
against the Company to enforce payment of the amounts due to you. See
"Description of the Subordinated Debentures--Enforcement of Certain Rights by
Holders of Preferred Securities."
70
<PAGE>
Distributions
Distributions on the preferred securities will be fixed at an annual rate of
9.0% of the liquidation amount of $10 per preferred security. Unpaid
distributions that are past due will accumulate additional interest at an
annual rate of 9.0% of the unpaid distributions, compounded quarterly. The
term "distribution" includes any additional amounts payable in respect of
distributions unless otherwise stated.
Distributions on the preferred securities:
. will be cumulative;
. will accumulate from June 18, 1999, the date of initial issuance of the
preferred securities; and
. will be payable quarterly in arrears on March 31, June 30, September 30,
and December 31 in each year, commencing September 30, 1999.
The amount of distributions payable for any period will be computed on the
basis of a 360-day year of twelve 30-day months. In the event that any date on
which a distribution is payable is not a Business Day, the payment of that
distribution will generally be made on the next Business Day (and without any
additional interest). "Business Day" means any day other than a Saturday or a
Sunday, or a day on which banking institutions in the State of Delaware are
authorized or required by law or executive order to remain closed or a day on
which the Corporate Trust Office of the property trustee or the indenture
trustee is closed for business.
The Company may defer the payment to the Trust of interest on the
subordinated debentures at any time for one or more extension periods (each an
"Extension Period"). However, the Company may not defer any payments if it is
in default under the Indenture. No Extension Period may extend beyond the
maturity date of the subordinated debentures. If the Company elects to defer
the payment of interest, then quarterly distributions on the preferred
securities will be deferred by the Trust during the Extension Period. The
distributions will continue to accumulate, with additional interest, generally
at an annual rate of 9.0% compounded quarterly, during the Extension Period.
During any Extension Period the Company may not:
. declare or pay any dividends, make any distribution, or redeem,
purchase, acquire or make a liquidation payment on any of its common
stock; and
. make any payment of interest, principal or premium on or repay,
repurchase or redeem any debt securities issued by it (or the Trust)
that rank equal or junior to the subordinated debentures (of which there
are none at the time of this printing), or make any payments on any
guarantee by the Company of any of its subsidiaries if such guarantee
ranks equal or junior to the subordinated debenture.
The Extension Period restrictions do not apply to:
. repurchases, redemptions or other acquisitions of shares of the
Company's common stock in connection with any employment contract,
benefit plan or other similar arrangement with or for the benefit of any
one or more employees, officers or directors, or a dividend reinvestment
or shareholder stock purchase plan;
. any declaration of a dividend in connection with any shareholders'
rights plan, or the issuance of rights, stock or other property under
any shareholders' rights plan, or the redemption or repurchase of rights
pursuant to the plan;
. dividends or distributions in shares of common stock; or
. payments under the guarantee.
When all accumulated amounts due to you are paid during an Extension Period,
the Extension Period will terminate. However, the Company may begin another
Extension Period under the same terms outlined above.
71
<PAGE>
There is no limit on the number of times the Company can elect to begin an
Extension Period. In no way may any single Extension Period extend beyond 20
consecutive calendar quarters.
The Company has no current intention of exercising its right to defer
payments of interest by extending the interest payment period on the
subordinated debentures.
Redemption
If the Company repays or redeems some or all of the subordinated debentures,
whether at maturity or upon earlier redemption, the property trustee will
apply the proceeds from the repayment or redemption to redeem the same
proportionate amount of preferred securities and common securities. The
Company will make this redemption not less than 30 nor more than 60 days after
the notice of a date of redemption (the "Redemption Date"), at the Redemption
Price (as defined below). See "Description of the Subordinated Debentures--
Redemption."
If less than all the subordinated debentures are to be repaid or redeemed,
then the aggregate liquidation amount of preferred and common securities to be
redeemed will be allocated approximately 3% to the common securities and 97%
to the preferred securities, except in the case of an event of default under
the Indenture. See "--Subordination of Common Securities."
The Company will have the right, subject to Federal Reserve approval, if
then required, to redeem the subordinated debentures:
. at any time on or after June 18, 2004 in whole or in part from time to
time; or
. prior to June 18, 2004 in whole, but not in part, at any time within 90
days following the occurrence and continuation of a Tax Event, an
Investment Company Event or a Capital Treatment Event, each as defined
below. See "Description of the Subordinated Debentures--Optional
Redemption."
Selected Definitions
"Additional Sums" means the additional payments the Company is required by
the Indenture to make under the subordinated debentures to cover certain
charges imposed upon the Trust so that the funds available to the Trust for
payment of distributions will not be reduced. An example of the Additional
Sums could be any additional taxes, duties and other governmental charges that
the Trust may incur.
"Capital Treatment Event" means that, in the reasonable determination of the
Company, as a result of:
. any amendment to, or change, including any proposed change, in
applicable laws or regulations or official interpretations thereof or
policies with respect thereto; or
. any official or administrative pronouncement or judicial decision
interpreting or applying such laws or regulations, which amendment,
change, pronouncement or decision is announced or is effective after the
date of this prospectus,
there is more than an insubstantial risk that the preferred securities will
not then constitute Tier 1 capital of the Company for purposes of the
capital adequacy guidelines of federal banking regulators (subject to the
limitation imposed by the Federal Reserve that proceeds of the preferred
securities will qualify for Tier 1 capital up to an amount not in excess of
25% of the Company's total core capital elements).
"Investment Company Event" means that the Company or the Trust has received
an opinion of counsel, who may be an employee of or counsel to the Company,
experienced in such matters that, as a result of the occurrence of a change,
including any announced prospective change, in law or regulation or a written
change, including any announced prospective change, in interpretation or
application of law or regulation by any legislative body, court, governmental
agency or regulatory authority on or after the date of this prospectus, there
is more than an insubstantial risk that the Trust is or will be considered an
"investment company" that is
72
<PAGE>
required to be registered under the Investment Company Act of 1940, as amended
(the "Investment Company Act").
"Liquidation Amount" means the stated amount of $10 per trust security. The
liquidation amount is the amount that you are entitled to receive if the Trust
is terminated at or prior to the maturity date and its assets are distributed
to the holders of its securities. You are entitled to receive this amount from
the assets of the Trust for distribution, after it has paid liabilities owed
to its creditors, if the Trust has sufficient funds to pay this amount.
"Redemption Price" means, with respect to any trust security, the
liquidation amount of such trust security, plus accumulated and unpaid
distributions to the Redemption Date, allocated on a pro rata basis (based on
liquidation amounts) among the holders of trust securities.
"Tax Event" means that the Company and the regular trustees, or, if the
Trust has been terminated at the time, an appropriate representative of the
holders of the subordinated debentures, have received an opinion of counsel
experienced in such matters, who may be an employee of or counsel to the
Company, to the effect that, as a result of:
. any amendment to, or change, including any announced prospective change,
in the laws, or any regulations under the laws, of the United States or
any political subdivision or taxing authority affecting taxation;
. any judicial decision or official administrative pronouncement,
including any announced prospective change;
which amendment or change is effective, or which pronouncement or decision
is announced, in each case, on or after the date of this prospectus, there is
more than an insubstantial risk that:
. the Trust is, or will be within 90 days of the date of the opinion of
counsel, subject to United States federal income tax with respect to
income accrued or received on the subordinated debentures;
. the Trust is, or will be within 90 days of the date of the opinion of
counsel, subject to more than a de minimis amount of taxes, duties or
other governmental charges; or
. interest payable to the Trust on the subordinated debentures is not, or
within 90 days of the date of the opinion of counsel will not be,
deductible, in whole or in part, by the Company for United States
federal income tax purposes.
If any event described in the first two clauses of the definition of "Tax
Event" above has occurred and is continuing and the Trust is the holder of all
of the subordinated debentures, the Company will pay Additional Sums, if any,
on the subordinated debentures (other than Additional Amounts with respect to
withholding taxes).
Distribution of Subordinated Debentures
The Company may at any time elect to dissolve the Trust and, after it has
paid all of the liabilities of creditors of the Trust as provided by
applicable law, cause the subordinated debentures to be distributed to you.
However, the Company may only dissolve the Trust if it has received prior
approval of the Federal Reserve, if such approval is then required. If the
Company dissolves the Trust and distributes the subordinated debentures to
you:
. the preferred securities will no longer be outstanding;
. the Depositary or its nominee, as the record holder of the preferred
securities, will, upon the distribution of the subordinated debentures,
receive a registered global certificate or certificates representing the
subordinated debentures; and
. any certificates representing preferred securities not held by the
Depositary or its nominee will be deemed to represent the subordinated
debentures having a principal amount equal to the liquidation
73
<PAGE>
amount of the preferred securities, accruing interest at the rates
provided in the subordinated debentures from the last Distribution Date
that occurred for the preferred securities until such certificates are
surrendered.
If the subordinated debentures are distributed, the Company will use its
best efforts to list them on the Nasdaq National Market in place of the
preferred securities.
Until a holder of any such preferred securities certificates surrenders them
to the administrative trustees or their agent for replacement by certificates
representing an equal amount of subordinated debentures, no payments of
principal or interest will be made to such holder with respect to such
subordinated debentures.
Redemption Procedures
The Trust may not redeem fewer than all of the outstanding preferred
securities unless it has paid all accumulated and unpaid distributions on all
preferred securities for all quarterly distribution periods terminating on or
prior to the date of redemption. The Trust will only redeem the preferred
securities if the Company has redeemed the subordinated debentures. The Trust
may redeem preferred securities only in an amount equal to the funds it has on
hand and legally available to pay the Redemption Price. See "--Subordination
of Common Securities" and "Description of Guarantee."
Unless there is a payment default, additional interest will stop accruing on
those preferred securities called for redemption on the date they are called
for redemption.
The property trustee will give you notice of the redemption at least 30 but
not more than 60 days before the date fixed for redemption. If notice of
redemption is given, then, by 12:00 noon, New York City time, on the date of
redemption, if the funds are available for payment, the property trustee will,
for preferred securities held in book-entry form:
. deposit with The Depository Trust Company ("DTC") funds sufficient to
pay the Redemption Price; and
. give DTC irrevocable instructions and authority to pay the Redemption
Price to the holders of the preferred securities.
With respect to preferred securities not held in book-entry form, if funds
are available for payment, the property trustee will:
. deposit with the paying agent for the preferred securities funds
sufficient to pay the Redemption Price; and
. give such paying agent irrevocable instructions and authority to pay the
Redemption Price to the holders of preferred securities upon surrender
of their certificates evidencing the preferred securities.
Notwithstanding the foregoing, distributions payable on or prior to the date
of redemption for any preferred securities called for redemption will be
payable to the holders on the relevant record dates.
Once notice of redemption is given and funds are deposited as required, then
all rights of the holders of preferred securities called for redemption will
cease, except the right to receive the Redemption Price, but without interest
after the date of redemption. At that time, those preferred securities will
cease to be outstanding.
Payment of the Redemption Price on the preferred securities and any
distribution of subordinated debentures to holders of preferred securities
will be made to the applicable record holders on the relevant record date,
which date will be one Business Day prior to the relevant redemption date or
liquidation date, as applicable; provided, however, that in the event that any
preferred securities are not in book-entry form, the relevant record date for
such preferred securities will be a date at least 15 days prior to the
redemption date or liquidation date, as applicable. In the case of a
liquidation, the record date will be no more than 45 days before the
liquidation date.
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If any date fixed for redemption is not a Business Day, then payment of the
Redemption Price will be made on the next day that is a Business Day, without
any interest or other payment for the delay. If the next Business Day falls in
the next calendar year, the payment will instead be made on the immediately
preceding Business Day.
If payment of the Redemption Price for the preferred securities called for
redemption is improperly withheld or refused and not paid, either by the Trust
or by the Company under the guarantee, then distributions on those preferred
securities will continue to accumulate at the then applicable rate, from the
date of redemption to the date of actual payment. In this case, the actual
payment date will be the date fixed for redemption for purposes of calculating
the Redemption Price.
The Company or its affiliates may at any time and from time to time purchase
outstanding preferred securities, by tender, in the open market or by private
agreement, and may resell preferred securities.
If the Trust plans to redeem less than all the preferred securities and
common securities, then the aggregate liquidation amount of preferred and
common securities to be redeemed will be allocated approximately 3% to the
common securities and 97% to the preferred securities, except if an Event of
Default has occurred. In such case, holders of preferred securities will be
paid first. See "--Subordination of the Common Securities" immediately below
for a more complete discussion. The property trustee will select the
particular preferred securities to be redeemed on this pro rata basis not more
than 60 days before the date of redemption by any method the property trustee
deems fair and appropriate, or if the preferred securities are then held in
book-entry form, in accordance with DTC's customary procedures.
Subordination of Common Securities
Payment of distributions on, and the Redemption Price of, the preferred
securities and common securities will be made on a proportionate basis, based
on the aggregate Liquidation Amounts of the preferred securities and common
securities. However, if a Debenture Event of Default has occurred and is
continuing, then no payment of any distribution will be made on any of the
common securities, unless all unpaid amounts due on the preferred securities
shall have been paid in full or provided for, as appropriate.
In the case of any Event of Default under the Trust Agreement resulting from
a Debenture Event of Default, the Company as the holder of the common
securities will be deemed to have waived any right to act upon the Event of
Default under the Trust Agreement until the effects of all Events of Default
under the Trust Agreement regarding the preferred securities have been cured,
waived or otherwise eliminated. Until that time, the property trustee shall
act solely on behalf of the holders of the preferred securities.
Liquidation Distribution upon Dissolution
The Company will have the right at any time to dissolve the Trust, and after
paying all the expenses and liabilities of the Trust, distribute the
subordinated debentures to you. However, the Company may only dissolve the
Trust if we have received prior approval of the Federal Reserve, if such
approval is then required. See "--Distribution of Subordinated Debentures"
above.
In addition, the Trust Agreement states that the Trust will dissolve:
. on the expiration of the term of the Trust, which currently expires on
June 18, 2029;
. upon the bankruptcy of the Company;
. upon the filing of a certificate of dissolution or its equivalent of the
Company;
. upon our delivery of a written direction to the property trustee to
dissolve the Trust, which we may do in our discretion; or
. upon entry of a court order for the dissolution of the Trust.
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In the event of a dissolution, after the Trust pays all amounts owed to its
creditors, the holders of the preferred securities and common securities
issued by the Trust will be entitled to receive:
. cash, if the dissolution arises from redemption of the subordinated
debentures, equal to the aggregate Liquidation Amount of each preferred
security and common security specified in this prospectus, plus
accumulated and unpaid distributions to the date of payment; or
. subordinated debentures, if the dissolution does not arise from
redemption of the subordinated debentures, in an aggregate principal
amount equal to the aggregate liquidation amount of the preferred
securities and common securities of the holders to whom such
subordinated debentures are distributed.
If the Trust cannot pay the full amount due on its preferred securities and
common securities because insufficient assets are available for payment, then
the amounts payable by the Trust on its preferred securities and common
securities shall be paid pro rata. However, if a Debenture Event of Default
has occurred, the total amounts due on such preferred securities will be paid
before any distribution on such common securities.
Under current United States federal income tax law and interpretations and
assuming, as expected, the Trust is treated as a grantor trust, a distribution
of the subordinated debentures should not be a taxable event to you. Should
there be a change in law, a change in legal interpretation, a Tax Event or
other circumstances, however, the distribution could be a taxable event to
you. See "United States Federal Income Tax Consequences."
If the Company elects to liquidate the Trust and cause the subordinated
debentures to be distributed to you in liquidation of the Trust, the Company
will continue to have the right to shorten the maturity of the subordinated
debentures, subject to certain conditions. See "Description of the
Subordinated Debentures--Option to Accelerate Maturity."
Events of Default; Notice
The following events constitute an Event of Default (an "Event of Default")
under the terms of the Trust Agreement with respect to the preferred
securities and common securities:
. the occurrence of a Debenture Event of Default under the Indenture (see
"Description of Subordinated Debentures--Debenture Events of Default");
or
. default by the Trust in the payment of any distribution when it becomes
due and payable (other than during an Extension Period), and
continuation of such default for a period of 30 days; or
. default by the Trust in the payment of any Redemption Price of any trust
security when it becomes due and payable.
The property trustee must give notice of any uncured or unwaived Event of
Default to you, to the Company and to the administrative trustees. This notice
must be given within five Business Days after the property trustee actually
knows of the Event of Default. The Company and the administrative trustees are
required to file annual certificates with the property trustee declaring
whether it and they are in compliance with all the conditions and covenants
applicable to it and them under the Trust Agreement.
If a Debenture Event of Default has occurred and is continuing, the
preferred securities will have a preference over the common securities upon
dissolution of the Trust as described above. See "--Liquidation Distribution
upon Dissolution." Upon a Debenture Event of Default, unless the principal of
all the subordinated debentures has already become due and payable, either the
property trustee or the holders of not less than 25% in aggregate principal
amount of the subordinated debentures then outstanding may declare all of the
subordinated debentures to be due and payable immediately by giving the
Company written notice of that fact (and to the property trustee, if notice is
given by holders of the subordinated debentures). If the property trustee or
the holders of the subordinated debentures fail to declare the principal of
all of the subordinated debentures due and payable upon a Debenture Event of
Default, the holders of at least 25% in liquidation amount of the preferred
securities then outstanding will have the right to declare the subordinated
debentures immediately due
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and payable. In either event, payment of principal and interest on the
subordinated debentures will remain subordinated to the extent provided in the
Indenture. In addition, holders of the preferred securities have the right in
certain circumstances to bring a Direct Action (as defined below). See
"Description of the Subordinated Debentures--Enforcement of Certain Rights by
Holders of Preferred Securities."
Removal of Trustees
As the holder of the common securities, the Company may at any time remove
any trustee, unless a Debenture Event of Default has occurred and is
continuing. If a Debenture Event of Default has occurred and is continuing,
the property trustee and the Delaware trustee may be removed at such time by
the holders of a majority in liquidation amount of the outstanding preferred
securities. In no event will the holders of the preferred securities have the
right to vote to appoint, remove or replace the administrative trustees. The
Company as the holder of the common securities has the sole power to remove
the administrative trustee. The resignation or removal of any trustee and the
appointment of a successor trustee is effective only on the acceptance of
appointment by the successor trustee in accordance with the provisions of the
Trust Agreement.
Co-Trustees and Separate Property Trustee
Unless an Event of Default has occurred and is continuing, the Company and
the administrative trustees have the right to appoint co-trustees or a
separate property trustee. The Company may appoint these additional trustees
in order to meet the requirements of the Trust Indenture Act or the state laws
of any jurisdiction where property of the Trust may be located. Our
appointment of any additional trustees will be subject to provisions of the
Trust Agreement. In case a Debenture Event of Default has occurred and is
continuing or if the Company and the administrative trustees refuse to join in
the appointment of a property trustee pursuant to a request from the property
trustee to do so, the property trustee alone will have power to make such
appointment.
Merger or Consolidation of Trustees
Any Person (as defined in the Trust Agreement) into which the property
trustee, the Delaware trustee or any administrative trustee that is not a
natural person may be merged or converted or with which it may be
consolidated, or any Person resulting from any merger, conversion or
consolidation to which such trustee will be a party, or any person succeeding
to all or substantially all the corporate trust business of such trustee,
shall be the successor of such trustee under the Trust Agreement, provided
such corporation shall be otherwise qualified and eligible.
Mergers, Consolidations, Amalgamations or Replacements of the Trust
The Trust may, at the Company's request, with the consent of the
administrative trustees and without your consent, consolidate, amalgamate,
merge with or into or be replaced by or convey, transfer or lease its
properties and assets substantially as an entirety to another trust organized
under the laws of any state provided that:
. such successor entity either (1) expressly assumes all of the
obligations of the Trust with respect to the preferred securities or (2)
substitutes for the preferred securities other securities having
substantially the same terms as the preferred securities (the "Successor
Securities") so long as the Successor Securities rank the same as the
preferred securities for distributions and payments upon liquidation,
redemption and otherwise;
. the Company expressly appoints a trustee of such successor entity
possessing the same powers and duties as the property trustee as the
holder of the subordinated debentures;
. any such transaction does not adversely affect the rights, preferences
and privileges of the holders of the preferred securities (including any
Successor Securities) in any material respect;
. such successor entity has a purpose identical to that of the Trust;
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. the Successor Securities will be listed or traded on any national
securities exchange or other organization on which the preferred
securities may then be listed;
. prior to such a transaction, the Company has received an opinion of
counsel experienced in such matters, who may be counsel for the Trust,
to the effect that (1) such transaction does not adversely affect the
rights, preferences and privileges of the holders of the preferred
securities (including any Successor Securities) in any material respect,
and (2) following any such transaction, neither the Trust nor such
successor entity will be required to register as an investment company
under the Investment Company Act; and
. the Company or any permitted successor or designee owns all of the
common securities of such successor entity and guarantees the
obligations of such successor entity under the Successor Securities at
least to the extent provided by the guarantee.
In addition, unless all of the holders of the preferred securities and
common securities agree, the Trust may not consolidate, amalgamate, merge with
or into, or be replaced by any other entity or permit any other entity to
consolidate, amalgamate, merge with or into, or replace it, if that
transaction would cause the Trust or the successor entity to be classified as
other than a grantor trust for United States federal income tax purposes.
Voting Rights; Amendment of the Trust Agreement
Except as provided below and under "Description of Guarantee--Amendments and
Assignment" and as otherwise required by law and the Trust Agreement, the
holders of the preferred securities will have no voting rights.
The Trust Agreement may be amended from time to time by the Company, the
property trustee and the administrative trustees, without the consent of the
holders of trust securities, (1) to cure any ambiguity, correct or supplement
any provisions in the Trust Agreement that may be inconsistent with any other
provision, or to make any other provisions with respect to matters or
questions arising under the Trust Agreement which shall not be inconsistent
with the other provisions of the Trust Agreement, or (2) to modify, eliminate
or add to any provisions of the Trust Agreement to such extent as will be
necessary to ensure that the Trust will be classified for United States
federal income tax purposes as a grantor trust at all times that any trust
securities are outstanding or to ensure that the Trust will not be required to
register as an "investment company" under the Investment Company Act.
The Company and the trustees may amend the Trust Agreement (1) with the
consent of holders representing not less than a majority of the aggregate
liquidation amount of the outstanding trust securities, and (2) upon receipt
by both the property and administrative trustees of an opinion of counsel to
the effect that the amendment or the exercise of any power granted to trustees
in accordance with the amendment will not affect the Trust's status as a
grantor trust for United States federal income tax purposes or the Trust's
exemption from status as an "investment company" under the Investment Company
Act.
However, the Trust Agreement may not be amended without the consent of each
holder of trust securities to (1) change the amount or timing of any
distribution on trust securities or otherwise adversely affect the amount of
any distribution required to be made in respect of trust securities as of a
specified date or (2) restrict the right of a holder of trust securities to
institute suit for the enforcement of any such payment on or after such date.
So long as any subordinated debentures are held by the property trustee, the
trustees shall not (1) direct the time, method and place of conducting any
proceeding for any remedy available to the indenture trustee, or execute any
trust or power conferred on the property trustee with respect to the
subordinated debentures, (2) waive any past default that is waivable under the
Indenture, (3) exercise any right to rescind or annul a declaration that the
principal of all the subordinated debentures shall be due and payable or (4)
consent to any amendment, modification or termination of the Indenture or the
subordinated debentures, where such consent shall be required, without, in
each case, obtaining the prior approval of the holders of a majority in
aggregate
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liquidation amount of all outstanding preferred securities or in some cases,
the prior consent of each holder of the preferred securities.
In addition to obtaining required approvals, prior to taking any of the
foregoing actions, the trustees must also obtain an opinion of counsel
experienced in such matters to the effect that the Trust will not be
classified as an association taxable as a corporation for United States
federal income tax purposes on account of such action.
The trustees may not revoke any action previously authorized or approved by
a vote of the holders of the preferred securities except by subsequent vote of
the holders of the preferred securities.
The property trustee will notify each holder of the preferred securities of
any notice of default with respect to the subordinated debentures.
Any required approval of holders of the preferred securities may be given at
a meeting of holders of preferred securities convened for such purpose or
pursuant to written consent. The property trustee will cause a notice of any
meeting at which holders of the preferred securities are entitled to vote, or
of any matter upon which action by written consent of such holders is to be
taken, to be given to each holder of record of the preferred securities in the
manner set forth in the Trust Agreement.
If the Company or any of its affiliates, or the trustees or any of their
affiliates own any preferred securities, those preferred securities will not
be treated as outstanding for purposes of the votes or consents described
above.
Book-Entry Only Issuance--The Depository Trust Company
DTC will act as securities depositary for the preferred securities. The
Trust will issue one or more fully registered global preferred securities
certificates in the name of Cede & Co. (DTC's nominee). These certificates
will represent the total aggregate number of preferred securities. The Trust
will deposit these certificates with DTC or a custodian appointed by DTC. The
Trust will not issue certificates to represent the preferred securities,
unless DTC's services are discontinued. For a description of DTC and the
specific terms of the depositary arrangements, see "Book Entry Issuance."
Certificated Securities
If the preferred securities do not remain in book-entry only form as
described above, the following provisions would apply:
. The property trustee will act as paying agent and may designate an
additional or substitute paying agent at any time.
. Registration of transfers of preferred securities will be effected
without charge by or on behalf of the Trust, but the registration will
require payment, with the giving of such indemnity as the Trust or the
Company may require, for any tax or other governmental charges that may
be imposed.
. The Trust will not be required to register or cause to be registered the
transfer of preferred securities after they have been called for
redemption.
Information Concerning the Property Trustee
The property trustee, other than upon the occurrence and during the
continuance of an Event of Default, undertakes to perform only those duties as
are specifically set forth in the Trust Agreement and, after such Event of
Default, must exercise the same degree of care and skill as a prudent person
would exercise or use in the conduct of his or her own affairs.
Subject to this provision, the property trustee is under no obligation to
exercise any of the powers vested in it by the Trust Agreement at the request
of any holder of preferred securities unless the property trustee is offered
reasonable indemnity against the costs, expenses and liabilities that it might
incur. If no Event of Default has
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occurred and is continuing and the property trustee is required to decide
between alternative causes of action, construe ambiguous provisions in the
Trust Agreement or is unsure of the application of any provision of the Trust
Agreement, and the matter is not one on which holders of the preferred
securities are entitled under the Trust Agreement to vote, then the property
trustee shall take such action as is directed by the Company. If the Company
does not direct any action, then the property trustee shall take such action
as it deems advisable and in the best interests of the holders of trust
securities and will have no liability except for its own bad faith, negligence
or willful misconduct.
Miscellaneous
The administrative trustees are authorized and directed to operate the Trust
in such a way so that the Trust will not be:
. required to register as an "investment company" under the Investment
Company Act; or
. characterized as other than a grantor trust for United States federal
income tax purposes.
The Company is authorized and directed to conduct its affairs so that the
subordinated debentures will be treated as indebtedness for United States
federal income tax purposes on the Company's books and accounts.
The Company and the administrative trustees are authorized to take any
action, not inconsistent with applicable law, the certificate of trust of the
Trust or the Company's articles of incorporation, that either the Company or
the administrative trustees determine in either of their discretion to be
necessary or desirable to achieve that end, as long as the action does not
adversely affect the interests of the holders of the preferred securities.
The Trust may not borrow money, issue debt or mortgage or pledge any of its
assets.
DESCRIPTION OF THE SUBORDINATED DEBENTURES
The subordinated debentures will be issued under the Subordinated Indenture,
dated as of June 18, 1999 (the "Indenture"), between the Company and FMB Trust
Company, National Association, as the indenture trustee. The following summary
of the terms and provisions of the subordinated debentures and the Indenture
does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, the Indenture. You should also read the Indenture
for the complete terms of the subordinated debentures. The Indenture has been
filed as an exhibit to the Registration Statement. This prospectus forms a
part of the Registration Statement. The Indenture is also qualified in its
entirety by reference to the Trust Indenture Act. The Indenture is qualified
under the Trust Indenture Act. The Company believes that this section of the
prospectus describes the material terms of the subordinated debentures and the
Related Indenture.
The Trust will invest the proceeds of the issuance of the preferred
securities and common securities in the subordinated debentures that are
issued by the Company. The subordinated debentures are subordinated, unsecured
debt under the Indenture.
General
The Company will issue the subordinated debentures as unsecured debt under
the Indenture. The subordinated debentures will be limited in aggregate
principal amount to the sum of the liquidation amount of the preferred
securities and the amount of capital that the Company contributed to the Trust
in exchange for the common securities.
The subordinated debentures contain no sinking fund provisions. The entire
principal amount of the subordinated debentures will become due and payable,
together with any accrued and unpaid interest, including compound interest and
additional sums, if any, on June 18, 2029.
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If subordinated debentures are distributed to holders of preferred
securities in liquidation of those holders' interests in the Trust, the
subordinated debentures will initially be issued as a global security. As
described in "Description of the Subordinated Debentures--Discontinuance of
the Depositary's Services," under limited circumstances, subordinated
debentures may be issued in certificated form in exchange for a global
security. See "--Book-Entry and Settlement; Depositary" below. If subordinated
debentures are issued in certificated form, the Company will issue them in
denominations of $10, and integral multiples of $10, and they may be
transferred or exchanged at the offices described below.
The Company will make payments on subordinated debentures issued as a global
security to DTC, a successor depositary or, if no depositary is used, to a
paying agent for the subordinated debentures. If the Company issues
subordinated debentures in certificated form, principal and interest will be
payable, the transfer of the subordinated debentures will be registrable, and
subordinated debentures will be exchangeable for subordinated debentures of
other denominations of a like aggregate principal amount, at the Corporate
Trust Office of the indenture trustee in Baltimore, Maryland. At the Company's
option, however, it may pay interest by check mailed to the address of the
persons entitled to the interest.
Interest
The subordinated debentures will bear interest at an annual rate of 9.0%
from the original date of issuance until the principal becomes due and
payable. Interest is payable quarterly in arrears on March 31, June 30,
September 30, and December 31, in each year, beginning September 30, 1999.
Interest payments not paid when due will accrue interest, compounded
quarterly, at the annual rate of 9.0%.
The amount of interest payable for any period will be computed on the basis
of a 360-day year of twelve 30-day months, and, for any period shorter than a
quarter, on the basis of the actual number of days elapsed per 30-day month.
The interest payment provisions for the subordinated debentures correspond
to the distribution provisions for the preferred securities. See "Description
of the Preferred Securities--Distributions."
Option to Extend Interest Payment Period
As long as the Company is not in default on the payment of interest on the
subordinated debentures, the Company has the right, at any time and from time
to time, to defer payments of interest by extending the interest payment
period for a period not exceeding 20 consecutive quarters (an "Extension
Period"), but not beyond the maturity date of the subordinated debentures. At
the end of any Extension Period, the Company will pay all interest then
accrued and unpaid, together with interest on that amount, compounded
quarterly, at the annual rate of 9.0%. After termination of any Extension
Period and the payment of all amounts then due, the Company may begin a new
Extension Period.
During an Extension Period, interest will continue to accrue and holders of
subordinated debentures will be required to accrue interest income for United
States federal income tax purposes. See "United States Federal Income Tax
Consequences."
During any Extension Period:
. the Company may not declare or pay any dividends on, make any
distribution, or redeem, purchase, acquire or make a liquidation payment
on any of its common stock; and
. the Company may not make any payment of interest, principal or premium
on or repay, repurchase or redeem any debt securities issued by it that
rank equal or junior to the subordinated debentures, or make any
payments on any guarantee by the Company of any of its subsidiaries if
such guarantee ranks equal or junior to the subordinated debentures.
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The Extension Period restrictions do not apply to:
. repurchases, redemptions or other acquisitions of shares of the
Company's capital stock in connection with any employment contract,
benefit plan or other similar arrangement with or for the benefit of any
one or more employees, officers or directors, or a dividend reinvestment
plan or shareholder stock purchase plan;
. any declaration of a dividend in connection with any shareholders'
rights plan, or the issuance of rights, stock or other property under
any shareholders' rights plan, or the redemption or repurchase of rights
pursuant to the plan;
. dividends or distributions in shares of common stock; or
. payments by the Company under the guarantee.
The restrictions described above will also apply if the Company defaults on
its obligations under the subordinated debentures or the guarantee.
Before termination of any Extension Period, the Company may further extend
the interest payment period. However, the Extension Period, including all
previous and further extensions, may not exceed 20 consecutive quarters or
extend beyond the maturity date of the subordinated debentures. After
termination of any Extension Period and the payment of all amounts then due,
the Company may begin a new Extension Period, for up to an additional 20
consecutive calendar quarters, as described above.
If the property trustee is the sole holder of the subordinated debentures,
the Company will give the administrative trustees, the indenture trustee and
the property trustee notice of its selection of an Extension Period one
business day before the earlier of:
. the next date distributions on the preferred securities are payable; or
. the date the trustee is required to give notice of the record date to
the Nasdaq National Market or other applicable self-regulatory
organization, or to the holders of record of the preferred securities.
The indenture trustee will give notice of the Company's selection of an
Extension Period to the holders of the preferred securities. The Company may
elect to begin an Extension Period an unlimited number of times.
If the property trustee is not the sole holder of the subordinated
debentures, the Company will give the holders of the subordinated debentures
and the indenture trustee notice of its selection of an Extension Period one
business day before the earlier of:
. the next interest payment date; or
. the date upon which the Company is required to give notice of the record
date to the Nasdaq National Market, or other applicable self-regulatory
organization, or to holders of the subordinated debentures of the record
or payment date of the related interest payment.
The Company has no present intention of exercising its right to defer
payments of interest by extending the interest payment period on the
subordinated debentures.
Additional Sums
If the Trust is required to pay any additional taxes, duties or other
governmental charges as a result of a Tax Event, the Company will pay as
additional amounts on the subordinated debentures the amounts (i.e., the
"Additional Sums") required to be paid so that the distributions paid by the
Trust shall not be reduced as a result of such charges.
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Redemption
The Company has the right, after receipt of prior approval of the federal
banking regulators, if approval is then required, to redeem the subordinated
debentures:
. at any time on or after June 18, 2004, in whole or in part from time to
time; or
. at any time in whole (but not in part), within 90 days after the
occurrence of a Tax Event, an Investment Company Event or a Capital
Treatment Event.
In either case, the Redemption Price will equal 100% of the principal amount
to be redeemed, plus any accrued and unpaid interest, to the date of
redemption.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the redemption date to each holder of subordinated debentures
to be redeemed at such holder's registered address. Interest will cease to
accrue on any subordinated debentures that the Company calls for redemption,
unless the Company defaults in payment of the Redemption Price.
The subordinated debentures will not be subject to any sinking fund.
Option to Accelerate Maturity Date
The subordinated debentures will mature on June 18, 2029. The Company may,
at its option, shorten the maturity to any date not earlier than June 18,
2004. The Company may only shorten the maturity date if it receives prior
approval from the federal banking regulators, if then required. The Company
may only elect to shorten the maturity once.
If the Company elects to shorten the maturity, it will give notice to each
registered holder of the subordinated debentures, the property trustee and the
indenture trustee within 90 days of the effective date of the shortened
maturity. The property trustee must give notice to the holders of trust
securities of the new maturity date of the subordinated debentures. You may be
subject to adverse United States federal income tax consequences if the
Company shortens the maturity. See "United States Federal Income Tax
Consequences--Exercise of Right to Shorten Maturity."
Distribution upon Liquidation
As described under "Description of the Preferred Securities--Liquidation
Distribution upon Dissolution," under certain circumstances involving the
dissolution of the Trust, the subordinated debentures may be distributed to
the holders of the preferred securities and common securities in liquidation
of the Trust after the expenses of the Trust have been paid in full. If
distributed to holders of the preferred securities in liquidation, the
subordinated debentures will initially be issued in the form of one or more
global securities and the Depositary, or any successor depositary for the
preferred securities, will act as depositary for the subordinated debentures.
The Company anticipates that the depositary arrangements for the subordinated
debentures will be substantially identical to those in effect for the
preferred securities. See "Book-Entry Issuance."
If the subordinated debentures are distributed to the holders of preferred
securities upon the liquidation of the Trust, there can be no assurance as to
the market price of the subordinated debentures.
Subordination
The Indenture provides that the subordinated debentures rank junior in right
of payment to all of the Company's "Senior and Subordinated Debt," defined
below. The Company may not make payment of principal, including redemption
payments, or interest on the subordinated debentures if:
. any of its Senior and Subordinated debt is not paid when due and any
applicable grace period after the default has ended and the default has
not been cured or waived; or
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. the maturity of any of its Senior and Subordinated Debt has been
accelerated because of a default, and the acceleration has not been
rescinded.
Upon any distribution of the Company's assets to creditors upon its
dissolution, winding-up, liquidation or reorganization, whether voluntary or
involuntary, or in bankruptcy, insolvency, receivership or other proceedings,
all principal, premium, if any, and interest due or to become due on all of
the Company's Senior and Subordinated Debt must be paid in full before the
holders of subordinated debentures are entitled to receive or retain any
payment. In that event, any payment or distribution on the subordinated
debentures that would otherwise be payable in respect of the subordinated
debentures, but for the subordination provision, will be paid or delivered
directly to the holders of Senior and Subordinated Debt in accordance with the
priorities then existing among the holders of the Company's Senior and
Subordinated Debt until all of its Senior and Subordinated Debt has been paid
in full.
If the indenture trustee or any holder of subordinated debentures receives
any payment or distribution on account of the subordinated debentures before
all of the Company's Senior and Subordinated Debt is paid in full, then that
payment or distribution will be paid to the holders of the Company's Senior
and Subordinated Debt at the time outstanding.
The rights of the holders of the subordinated debentures will be subrogated
to the rights of the holders of the Company's Senior and Subordinated Debt to
the extent of any payment it has made to the holders of Senior and
Subordinated Debt that otherwise would have been made to the holders of the
subordinated debentures but for the subordination provisions.
Selected Definitions
"Debt" means with respect to any person, whether recourse is to all or a
portion of the assets of such person and whether or not contingent:
. every obligation of such person for money borrowed;
. every obligation of such person evidenced by bonds, debentures, notes or
other similar instruments, including obligations incurred in connection
with the acquisition of property, assets or businesses;
. every reimbursement obligation of such person with respect to letters of
credit, bankers' acceptances or similar facilities;
. every obligation of such person issued or assumed as the deferred
purchase price of property or services (but excluding trade accounts
payable or accrued liabilities arising in the ordinary course of
business);
. every capital lease obligation of such person; and
. every obligation of the type referred to in the foregoing clauses of
another person and all dividends of another person the payment of which,
in either case, such person has guaranteed or is responsible or liable,
directly or indirectly, as obligor or otherwise.
"Senior and Subordinated Debt" means the principal of (and premium, if any)
and interest, if any (including interest accruing on or after the filing of
any petition in bankruptcy or for reorganization relating to the Company
whether or not such claim for post-petition interest is allowed in such
proceeding), on Debt, whether incurred on, prior to or after the date of the
Indenture, unless, in the instrument creating or evidencing the Debt, it is
provided that such obligations are not superior in right of payment to the
subordinated debentures or to other Debt which ranks equal with, or
subordinated to, the subordinated debentures. However, Senior and Subordinated
Debt will not include:
. any Debt of the Company which when incurred (and without respect to any
election under section 1111(b) of the United States Bankruptcy Code of
1978, as amended), was without recourse to the Company;
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. any Debt of the Company to any of its subsidiaries;
. any Debt to any employee of the Company;
. the guarantee; and
. any other debt securities issued pursuant to the Indenture.
The Indenture does not limit the amount of additional Senior and
Subordinated Debt that we may incur. We expect that from time to time we may
incur additional indebtedness constituting Senior and Subordinated Debt.
Book-Entry and Settlement; Depositary
If we distribute the subordinated debentures to holders of preferred
securities in connection with the involuntary or voluntary dissolution,
winding-up or liquidation of the Trust, they will be issued in the form of one
or more global certificates registered in the name of a depositary or its
nominee. Except under the limited circumstances described immediately below
under "--Discontinuance of the Depositary's Services," subordinated debentures
represented by a global security will not be exchangeable for, and will not
otherwise be issuable as, certificated securities.
If subordinated debentures are distributed to holders of preferred
securities upon termination of the Trust, DTC will act as securities
depositary for the subordinated debentures. For a description of DTC and the
specific terms of the depositary arrangements, see "Book-Entry Only Issuance."
As of the date of this prospectus, the description of DTC's book-entry
system and DTC's practices as they relate to purchases of, transfers of,
notices concerning and payments on the preferred securities apply in all
material respects to any debt obligations represented by one or more global
securities held by DTC.
The Company may appoint a successor to DTC or any successor depositary if
the current depositary is unable or unwilling to continue as a depositary for
the global securities.
Discontinuance of the Depositary's Services
A global security will be exchangeable for subordinated debentures
registered in the names of persons other than the depositary or its nominee
only if:
. the depositary notifies the Company that it is unwilling or unable to
continue as a depositary for the global security and no successor
depositary has been appointed;
. the depositary ceases to be a clearing agency registered under the
Exchange Act at a time the depositary is required to be so registered to
act as depositary, and no successor depositary has been appointed;
. the Company, in its sole discretion, determines that the global security
shall be exchangeable for definitive certificates; or
. there shall have occurred a Debenture Event of Default.
Any global security that is exchangeable as described above will be
exchangeable for subordinated debentures registered in the names the
depositary directs. The Company expects that the instructions will be based
upon directions received by the depositary from its participants with respect
to ownership of beneficial interests in the global security.
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Payment and Paying Agents
Payment of principal and interest on the subordinated debentures will be
made at the office of the indenture trustee. In addition, at the Company's
option, it may pay interest by check mailed to the address of the holder of
the preferred security as it appears in the securities register or by transfer
to an account of the holder of the preferred security pursuant to proper
transfer instructions that the Company has received prior to the regular
record date. However, the Company may not exercise these options if the
subordinated debentures are represented by a global subordinated debenture.
Payment of any interest on subordinated debentures will be made to the person
in whose name such subordinated debenture is registered at the close of
business on the regular record date for such interest. The Company may at any
time designate additional Paying Agents or rescind the designation of any
Paying Agent; however, the Company will at all times be required to maintain a
Paying Agent in each place of payment for the subordinated debentures.
Any moneys deposited with the indenture trustee or any Paying Agent, or held
by the Company in trust, for the payment of the principal of or interest on
the subordinated debentures and remaining unclaimed for two years after such
principal or interest has become due and payable shall, at the Company's
request, be repaid to it. Thereafter the holder of the Company's subordinated
debenture shall look only to the Company for payment as one of its general
unsecured creditors.
Modification of Indenture
The Indenture provides that the Company and the indenture trustee may enter
into supplemental indentures without the consent of the holders of preferred
securities to: (1) cure any ambiguity, defect, or inconsistency in the
Indenture or in the subordinated debentures provided that any such change does
not materially adversely affect the interests of the holders of the preferred
securities; (2) evidence the assumption by a successor corporation of the
Company's obligations; (3) add to the covenants of the Company for the benefit
of the holders of subordinated debentures or to surrender any right or power
conferred by the Indenture upon the Company; (4) make any change that does not
adversely affect the rights of any holder of preferred securities in any
material respect; (5) qualify or maintain the qualification of the Indenture
under the Trust Indenture Act and (6) evidence and provide for acceptance of
appointment by a successor trustee.
The Indenture also provides that the Company and the indenture trustee may,
with the consent of at least a majority of the holders in aggregate principal
amount of the subordinated debentures then outstanding and affected, add any
provisions to or change the provisions of the Indenture or the rights of the
holders of the subordinated debentures. The Company and the indenture trustee
may not, however, without the consent of each holder of the subordinated
debentures:
. extend the final maturity of the subordinated debentures;
. reduce the principal amount or premium, if any;
. reduce the rate or extend the time of payment of interest;
. reduce any amount payable on redemption; or
. reduce the percentage of holders of the subordinated debentures whose
consent is required for any modification of the Indenture.
Debenture Events of Default
The Indenture provides that any one or more of the following described
events with respect to the subordinated debentures that has occurred and is
continuing constitutes a "Debenture Event of Default" with respect to the
subordinated debentures:
. failure for 30 days to pay any interest on the subordinated debentures,
when due (not including the deferral of any due date in the case of an
Extension Period); or
. failure to pay any principal on the subordinated debentures when due
whether at maturity, upon redemption, by declaration or otherwise; or
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. certain events in bankruptcy, insolvency or reorganization of the
Company, including the voluntary commencement of bankruptcy proceedings,
entry of an order for relief against the Company in a bankruptcy
proceeding, appointment of a custodian over substantially all of its
property, a general assignment for the benefit of creditors, or a court
order for its liquidation; or
. if the Trust shall have voluntarily or involuntarily dissolved, wound up
its business or otherwise terminated its existence (except in connection
with (1) the distribution of subordinated debentures to the holders in
liquidation of their interests in the Trust; (2) the redemption of all
of the outstanding trust securities; or (3) certain mergers,
consolidations or amalgamations, each as permitted by the Trust
Agreement).
The holders of a majority in aggregate outstanding principal amount of the
subordinated debentures have the right to direct any proceeding for any remedy
available to the indenture trustee. The indenture trustee or the holders of
not less than 25% in aggregate outstanding principal amount of the
subordinated debentures may declare the principal due and payable immediately
upon a Debenture Event of Default.
However, the holders of a majority in aggregate outstanding principal amount
of the subordinated debentures may annul such declaration and waive the
default if the default (other than the non-payment of the principal of the
subordinated debentures which has become due solely by such acceleration) has
been cured and a sum sufficient to pay all matured installments of interest
and principal due otherwise than by acceleration has been deposited with the
indenture trustee. If the holders of the subordinated debentures fail to annul
such declaration and waive such default, the holders of a majority in
aggregate liquidation amount of the preferred securities would have such
right.
In case a Debenture Event of Default occurs, the property trustee may
declare the principal of and the interest on the subordinated debentures, and
any other amounts payable under the Indenture, to be due and payable and to
enforce its other rights as a creditor with respect to the subordinated
debentures.
The Company will be required to file annually with the indenture trustee a
certificate, signed by one of its officers, stating whether or not such
officer knows of any default by the Company in the performance, observance or
fulfillment of any condition or covenant of the Indenture.
Enforcement of Certain Rights by Holders of Preferred Securities
If a Debenture Event of Default for failure to pay interest or principal on
the subordinated debentures has occurred and is continuing, you may institute
a legal proceeding directly against the Company for enforcement of payment to
you of the principal of or interest on the subordinated debentures in an
amount equal to the aggregate liquidation amount of the preferred securities
you hold ("Direct Action"). The Company's failure to pay principal or interest
during an Extension Period is not a Debenture Event of Default. If the right
to bring a Direct Action is removed, the Trust may become subject to the
reporting obligations under the Exchange Act. The Company has the right under
the Indenture to set-off any payment made to a holder of preferred securities
by the Company in connection with a Direct Action.
Unless an Event of Default under the Trust Agreement has occurred, you will
not be able to exercise directly any remedies except for those listed above.
See "Description of the Preferred Securities--Events of Default; Notice."
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Consolidation, Merger, Sale of Assets and Other Transactions
The Indenture provides that the Company shall not consolidate with, convert
into or merge into any other Person or convey, transfer or lease its
properties and assets substantially as an entirety to any Person, and no
Person shall consolidate with, convert into or merge into the Company or
convey, transfer or lease its properties and assets substantially as an
entirety to the Company.
However, this does not apply if (1) in case the Company consolidates with,
converts into or merges into another Person or conveys or transfers its
properties and assets substantially as an entirety to any Person, the
successor Person is organized under the laws of the United States or any state
or the District of Columbia, and such Person expressly assumes the Company's
obligations on the subordinated debentures issued under the Indenture; (2)
immediately after giving effect thereto, no Debenture Event of Default, and no
event which, after notice or lapse of time or both, would become a Debenture
Event of Default, shall have occurred and be continuing; and (3) certain other
conditions as prescribed in the Indenture are met.
If these conditions are met, the holders of the preferred securities have no
grounds to object to a highly leveraged or other transaction involving the
Company even if it may adversely affect holders of the subordinated
debentures.
Satisfaction and Discharge
The Indenture provides that when, among other things, all subordinated
debentures not previously delivered to the indenture trustee for cancellation
(1) have become due and payable or (2) will become due and payable at their
maturity date within one year, and the Company deposits with the indenture
trustee, in trust, funds for the purpose and in an amount sufficient to pay
and discharge the entire indebtedness on the outstanding subordinated
debentures, for the principal and interest to the date of the deposit or to
the stated maturity, as the case may be, then the Indenture will cease to be
of further effect. However, the Company will continue to be obligated to pay
all other sums due pursuant to the Indenture and to provide the officers'
certificates and opinions of counsel required by the Indenture. Under these
conditions, the Company will be deemed to have satisfied and discharged the
Indenture.
Governing Law
The Indenture and the subordinated debentures will be governed by and
construed in accordance with the laws of the State of Maryland.
Information Concerning the Indenture Trustee
The indenture trustee will be unaffiliated with the Company. For matters
relating to compliance with Trust Indenture Act, the indenture trustee will
have all of the duties and responsibilities of an Indenture Trustee under the
Trust Indenture Act. The indenture trustee, other than during the occurrence
and continuance of a Debenture Event of Default, undertakes to perform only
such duties as are specifically set forth in the Indenture and, upon a
Debenture Event of Default, must use the same degree of care and skill as a
prudent person would use in the conduct of his or her own affairs. Subject to
this provision, the indenture trustee is under no obligation to exercise any
of the powers given it by the Indenture at the request of any holder of
preferred securities unless it is offered reasonable security or indemnity
against the costs, expenses and liabilities that it might incur. However, the
holders of the preferred securities will not be required to offer such an
indemnity where the holders, by exercising their voting rights, direct the
indenture trustee to take any action following a Debenture Event of Default.
Covenants of the Company
The Company has made certain covenants in the Indenture. One specific
covenant the Company has agreed to is that it will pay to the Trust the
Additional Sums so long as the Trust holds the subordinated debentures.
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In addition, the Company has also agreed to the following terms:
. the Company will maintain directly or indirectly 100% ownership of the
common securities. However, the Indenture does allow the Company to
transfer ownership of the common securities to certain successors;
. the Company will not voluntarily dissolve the Trust unless the Company
has received prior approval from the Federal Reserve, if required.
However, the Company may voluntarily dissolve the Trust if the Company
distributes the subordinated debentures to holders of the preferred
securities or if the Trust is a party to certain mergers, consolidations
or amalgamations permitted by the Trust Agreement; and
. the Company will use its reasonable best efforts to cause the Trust to
be classified as a grantor trust and thus not be taxed as a corporation
for United States federal income tax purposes.
BOOK-ENTRY ISSUANCE
DTC will act as securities depositary for all of the preferred securities
and, if there is a dissolution of the Trust, the subordinated debentures. The
preferred securities and the subordinated debentures will be issued only as
fully-registered securities registered in the name of Cede & Co. (the DTC's
nominee). One or more fully-registered global certificates will be issued for
the preferred securities and the subordinated debentures and will be deposited
with DTC or its custodian.
DTC may discontinue providing its services as securities depositary with
respect to any of the preferred securities or the subordinated debentures at
any time by giving reasonable notice to the relevant trustee and the Company.
In the event that a successor securities depositary is not obtained,
definitive preferred securities or subordinated debenture certificates
representing such preferred securities or subordinated debentures are required
to be printed and delivered. At the Company's option, it may decide to
discontinue use of the system of book-entry transfers through DTC (or a
successor depositary). After a Debenture Event of Default, the holders of a
majority in liquidation amount of preferred securities or aggregate principal
amount of subordinated debentures may determine to discontinue the system of
book-entry transfers through DTC. In any such event, definitive certificates
for such preferred securities or subordinated debentures will be printed and
delivered.
DTC has provided the Trust and the Company with the following information:
DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law,
a member of the Federal Reserve, a "clearing corporation" within the meaning
of the New York Uniform Commercial Code, and a "clearing agency" registered
under the provisions of Section 17A of the Securities Exchange Act of 1934.
DTC holds securities that its participants deposit with DTC. DTC also
facilitates the settlement among participants of securities transactions, such
as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in participants' accounts, thereby eliminating
the need for physical movement of securities certificates. Direct participants
include securities brokers and dealers, banks, trust companies, clearing
corporations and other organizations ("Direct Participants").
DTC is owned by a number of its Direct Participants and by the New York
Stock Exchange, Inc., the American Stock Exchange, Inc., and the National
Association of Securities Dealers, Inc. Access to DTC system is also available
to others, such as securities brokers and dealers, banks and trust companies,
that clear transactions through or maintain a direct or indirect custodial
relationship with a Direct Participant ("Indirect Participants"). The rules
applicable to DTC and its participants are on file with the SEC.
When a purchase of preferred securities is made within the DTC system, it
must be made by or through a Direct Participant. The Direct Participant will
receive a credit for the preferred securities on DTC's records. The actual
owner of the preferred securities is the "beneficial owner." Beneficial
ownership interests will be recorded on the Direct and Indirect Participants'
records, but DTC will have no knowledge of any underlying beneficial
ownership. DTC's records reflect only the identity of the Direct Participants
to whose accounts preferred securities are credited.
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DTC will not provide written confirmation of purchases. The Direct or
Indirect Participant through whom purchases of the preferred securities are
made should send written confirmations to purchasers providing details of
their transactions, as well as periodic statements of their holdings. The
participants are responsible for keeping accurate account of the holdings of
their customers.
Transfers of ownership interests in the preferred securities will be
accomplished by entries made on the books of participants acting on behalf of
beneficial owners.
The laws of some states may require that specified purchasers of securities
take physical delivery of the securities in definitive form. These laws may
impair the ability to transfer beneficial interests in the global certificate
representing the preferred securities.
Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants and by Direct
Participants and Indirect Participants to beneficial owners will be governed
by arrangements among them, and any statutory or regulatory requirements that
may be in effect from time to time.
Redemption notices will be sent to Cede & Co. If less than all of the
preferred securities are being redeemed, DTC will reduce each Direct
Participant's holdings of preferred securities in accordance with its
procedures.
In those cases where a vote by the holders of the preferred securities is
required, neither DTC nor Cede & Co. will itself consent or vote. Under its
usual procedures, DTC would mail an omnibus proxy to the Trust as soon as
possible after the record date. The omnibus proxy assigns Cede & Co.'s
consenting or voting rights to those Direct Participants to whose accounts the
preferred securities are credited on the record date, which are identified in
a listing attached to the omnibus proxy.
The Trust will make distribution payments on the preferred securities
directly to DTC. DTC's practice is to credit Direct Participants' accounts on
the relevant payment date in accordance with their respective holdings shown
on DTC's records, unless DTC has reason to believe that it will not receive
payment on such payment date.
Payments by participants (whether Direct Participants or Indirect
Participants) to beneficial owners will be governed by standing instructions
and customary practices, as is the case with securities held for the account
of customers in bearer form or registered in "street name." These payments
will be the responsibility of the participant and not of DTC, the Trust or the
Company.
Except as provided below in "Description of the Subordinated Debentures--
Discontinuance of the Depositary's Services," a beneficial owner in a global
preferred securities certificate will not be entitled to receive physical
delivery of preferred securities. Accordingly, each beneficial owner must rely
on the procedures of DTC to exercise any rights under the preferred
securities.
DTC may discontinue providing its services as securities depositary with
respect to the preferred securities at any time by giving reasonable notice to
the Trust. In the event that a successor securities depositary is not
obtained, the Trust will print and deliver preferred securities certificates.
Additionally, the administrative trustees, with our consent, may decide to
discontinue the book-entry only system of transfers with respect to the
preferred securities. In that event, the Trust will print and deliver
certificates for the preferred securities to its holders.
The Company and the Trust have obtained the information in this section
concerning DTC and DTC's book-entry system from sources that the Company and
the Trust believe to be reliable, but neither take responsibility for the
accuracy of the information.
DTC's management is aware that some computer applications, systems, and the
like for processing data that are dependent upon calendar dates, including
dates before, on, and after January 1, 2000, may encounter "Year 2000
problems." DTC has informed its participants and other members of the
financial community that it
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has developed and is implementing a program so that its computer systems, as
the same relate to the timely payment of distributions (including principal
and income payments) to security holders, book-entry deliveries and settlement
of trades with DTC, continue to function appropriately. This program includes
a technical assessment and a remediation plan, each of which is complete.
Additionally, DTC's plan includes a testing phase, which is expected to be
completed within appropriate time frames.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to issuers and their agents, as
well as third-party vendors from whom DTC licenses software and hardware, and
third-party vendors on whom DTC relies for information or the provision of
services, including telecommunication and electrical utility service
providers, among others. DTC has informed the industry participants that it is
contacting (and will continue to contact) third-party vendors from whom DTC
acquires services to: (1) impress upon them the importance of such services
being Year 2000 compliant and (2) determine the extent of their efforts for
Year 2000 remediation (and, as appropriate, testing) of their services. In
addition, DTC is in the process of developing such contingency plans as it
deems appropriate.
According to DTC, the foregoing information with respect to DTC has been
provided to the industry participants for informational purposes only and is
not intended to serve as a representation, warranty or contract modification
of any kind.
DESCRIPTION OF GUARANTEE
The Company will execute and deliver the preferred securities Guarantee
Agreement (the "Guarantee Agreement") concurrently with the issuance of the
preferred securities for the benefit of the holders of the preferred
securities. FMB Trust Company, National Association will act as trustee under
the guarantee as the guarantee trustee for the purposes of compliance with the
Trust Indenture Act, and the Guarantee Agreement will be qualified under the
Trust Indenture Act. The following summary of certain provisions of the
Guarantee Agreement does not purport to be complete and is subject to, and
qualified in its entirety by reference to, all of the provisions of the
Guarantee, including the definitions of certain terms, and Trust Indenture
Act. The form of the Guarantee Agreement has been filed as an exhibit to the
Registration Statement of which this prospectus forms a part. You should also
read the Guarantee Agreement. The guarantee trustee will hold the Guarantee
Agreement for the benefit of the holders of the preferred securities.
General
Pursuant to the Guarantee, the Company will agree to pay in full on a
subordinated basis, to the extent set forth in the Guarantee, the Guarantee
Payments, as defined below, to the holders of the preferred securities, as and
when due, regardless of any defense, right of set-off or counterclaim that the
Trust may have or assert other than the defense of payment.
The following payments on the preferred securities, if not fully paid by the
Trust (the "Guarantee Payments"), are covered by the Guarantee Agreement,
without duplication:
. any accumulated and unpaid distributions required to be paid on the
preferred securities, if the Trust has funds available to make the
payment;
. the Redemption Price, if the Trust has funds available to make the
payment, with respect to any preferred securities called for redemption;
and
. upon a voluntary or involuntary dissolution, winding up or liquidation
of the Trust other than in connection with the distribution of the
subordinated debentures to holders of the preferred securities, the
lesser of
(1) the aggregate of the $10 liquidation amount and all accumulated and
unpaid distributions on the preferred securities to the date of
payment if the Trust has funds available to make the payment; or
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(2) the amount of assets the Trust has remaining available for
distribution to holders of preferred securities.
The Company's obligations to make a Guarantee Payment may be satisfied by
direct payment of the required amounts by the Company to the holders of the
preferred securities or by causing the Trust to pay the amounts to the
holders.
The guarantee will be full and unconditional from the time of issuance.
However, the guarantee will not apply to any payment of distributions due if
the Trust lacks funds legally available for payment as a result of a failure
by the Company to make payments of interest or principal on the subordinated
debentures.
The Company is a holding company and it has the right to participate in any
distribution of assets of any of its subsidiaries if any of the Company's
subsidiaries are liquidated or reorganized. However, its right to participate
is subject to the prior claim of the subsidiary's creditors. Accordingly, the
Company's obligations under the guarantee will be effectively subordinated to
all existing and future liabilities of its subsidiaries, and holders of
preferred securities should look only to the Company's assets for payments.
The guarantee does not limit the Company's incurrence or issuance of other
secured or unsecured debt. The Company may issue or incur Senior and
Subordinated Debt in the future. The Company expects that it will issue or
incur Senior and Subordinated Debt in the future.
The Company has, through the Guarantee Agreement, the Trust Agreement, the
subordinated debentures, the Indenture and the Expense Agreement, taken
together, guaranteed on a subordinated basis all of the Trust's obligations
under the preferred securities. No single document standing alone or operating
in conjunction with fewer than all of the other documents constitutes the
guarantee. It is only the combined operation of these documents that has the
effect of providing the Company's guarantee on a subordinated basis of all of
the Trust's obligations under the preferred securities. See "Relationship
Among the Preferred Securities, the Subordinated Debentures and the
Guarantee."
The Expense Agreement
The Company will enter into an agreement with of the Trust as to the
expenses and liabilities of the Trust (the "Expense Agreement"). The Company
will fully and unconditionally guarantee to each person or entity to whom the
Trust becomes indebted or liable, the full payment of any costs, expenses or
liabilities of the Trust, other than obligations of the Trust to the holders
of the preferred securities or other similar interests in the Trust.
Status of the Guarantee
The guarantee is unsecured and ranks subordinate and junior in right of
payment to all Senior and Subordinated Debt in the same manner as the
subordinated debentures. As such, it is (1) subordinate and junior in right of
payment to all of the Company's other liabilities, (2) equal to the most
senior preferred stock now or hereafter issued by the Company, and with any
guarantee now or hereafter issued by the Company in respect of any preferred
stock of its affiliates, and (3) senior to its common stock.
The guarantee will constitute a guarantee of payment and not of collection.
The guaranteed party may institute a legal proceeding directly against the
Company to enforce its rights under the Guarantee Agreement without first
instituting a legal proceeding against any other person or entity. The
Guarantee will be held for the benefit of the holders of the preferred
securities. The guarantee will not be discharged except by payment of the
Guarantee Payments in full to the extent not paid by the Trust or upon
distribution of the subordinated debentures to the holders of the preferred
securities.
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Amendments and Assignment
Except with respect to any changes which do not materially adversely affect
the rights of holders of the preferred securities (in which case no vote will
be required), the Guarantee Agreement may not be amended without the prior
approval of the holders of not less than a majority of the liquidation amount
of the outstanding preferred securities. A description of the way to obtain
any approval is described under "Description of the Preferred Securities--
Voting Rights; Amendment of the Trust Agreement." All guarantees and
agreements contained in the Guarantee Agreement will bind the Company's
successors, assigns, receivers, trustees and representatives and are for the
benefit of the holders of the preferred securities then outstanding.
Events of Default
An event of default under the Guarantee Agreement will occur if the Company
fails to perform any of its payment or other obligations under the Guarantee
Agreement. The holders of at least a majority in aggregate liquidation amount
of the preferred securities have the right to direct any proceeding for any
remedy available to the guarantee trustee relating to the guarantee or to
direct the exercise of any trust or power conferred upon the guarantee trustee
under the Guarantee Agreement.
If the guarantee trustee fails to enforce the guarantee, you may, after your
written request to the guarantee trustee to enforce the guarantee, sue the
Company directly to enforce the guarantee trustee's rights under the guarantee
without first instituting a legal proceeding against the Trust, the guarantee
trustee, or any other person or entity.
Notwithstanding the foregoing, if the Company has failed to make a Guarantee
Payment, you may directly institute a proceeding against the Company to
enforce the guarantee.
The Company is required to file annually with the guarantee trustee a
certificate as to the Company's compliance with all the conditions and
covenants under the Guarantee Agreement.
Information Concerning the Guarantee Trustee
The guarantee trustee, other than during the occurrence and continuance of a
default by the Company in performance of the guarantee, undertakes to perform
only such duties as are specifically set forth in the Guarantee Agreement and,
after default with respect to the Guarantee, must exercise the same degree of
care and skill as a prudent person would exercise or use in the conduct of his
or her own affairs. Subject to this provision, the guarantee trustee is under
no obligation to exercise any of the powers vested in it by the Guarantee
Agreement at the request of any holder of the preferred securities unless it
is offered reasonable indemnity against the costs, expenses and liabilities
that it might incur.
Termination of the Guarantee
The guarantee will remain in effect as long as the preferred securities are
outstanding.
Governing Law
The Guarantee Agreement will be governed by and construed in accordance with
the laws of the State of Maryland.
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RELATIONSHIP AMONG THE PREFERRED SECURITIES,
THE SUBORDINATED DEBENTURES AND THE GUARANTEE
Guarantee
Payments of distributions and other amounts due on the preferred securities
are guaranteed by the Company to the extent described under "Description of
Guarantee." Taken together, the Company's obligations under the subordinated
debentures, the Indenture, the Trust Agreement, the Expense Agreement and the
Guarantee Agreement provide, in the aggregate, a guarantee on a subordinated
basis for payments of distributions and other amounts due on the preferred
securities (but only to the extent the Trust has funds available for the
payment of such distributions). No single document standing alone or operating
in conjunction with fewer than all of the other documents constitutes such
guarantee. It is only the combined operation of the Company's obligations
under those documents that has the effect of providing a guarantee on a
subordinated basis of the Trust's obligations under the preferred securities.
To the extent that the Company does not make required payments on the
subordinated debentures, the Trust will not pay distributions or other amounts
due on the preferred securities. Neither the guarantee described above nor the
Guarantee Agreement covers payment of distributions when the Trust does not
have sufficient funds to pay such distributions. In those circumstances, your
remedy is to institute a legal proceeding directly against the Company to
enforce the payment of the distributions to you. The Company's obligations
under the guarantee and the Guarantee Agreement are subordinate and junior in
right of payment to all Senior and Subordinated Debt.
Sufficiency of Payments
As long as the Company makes payments required by the subordinated
debentures held by the Trust, there will be sufficient funds to cover
distributions and other payments due on the preferred securities, primarily
because:
. the aggregate principal amount of the subordinated debentures will
exceed the aggregate liquidation mount of the preferred securities by
the amount of the common securities;
. the interest rate and interest and other payment dates on the
subordinated debentures will match the distribution rate and
distribution and other payment dates for the preferred securities;
. the Company will directly pay for all costs, expenses and liabilities of
the Trust except the Trust's obligations to holders of preferred
securities; and
. the Trust Agreement further provides that the Trust will not engage in
any activity that is not consistent with the limited purposes of the
Trust.
Notwithstanding anything to the contrary in the Indenture, the Company has
the right to set-off any payment it is required to make with and to the extent
it has made, or is concurrently making a payment under the Guarantee.
Enforcement Rights of Holders of the Preferred Securities under the Guarantee
A holder of the preferred securities may institute a legal proceeding
directly against the Company to enforce its rights under the Guarantee
Agreement without first instituting a legal proceeding against the guarantee
trustee, the Trust or any other person or entity.
A default or event of default under any Senior and Subordinated Debt would
not constitute a Debenture Event of Default. However, in the event of payment
defaults under, or acceleration of, Senior and Subordinated Debt, the
subordination provisions of the Indenture provide that no payments may be made
in respect of the subordinated debentures until the Senior and Subordinated
Debt have been paid in full or any payment default has been cured or waived.
The Company's failure to make the required payments on subordinated debentures
will constitute a Debenture Event of Default.
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Limited Purpose of the Trust
The preferred securities evidence a beneficial interest in the Trust, and it
exists for the sole purpose of issuing trust securities and investing those
proceeds in the subordinated debentures. A principal difference between the
rights of a holder of the preferred securities and a holder of a subordinated
debenture is that a holder of a subordinated debenture is entitled to receive
the principal amount of and interest accrued on subordinated debentures from
the Company, while a holder of the preferred securities is entitled to receive
distributions from the Trust (or from the Company under the Guarantee) if and
to the extent the Trust has funds available for the payment of such
distributions.
Rights upon Dissolution
Upon any voluntary or involuntary dissolution, winding-up or liquidation of
the Trust involving the liquidation of the subordinated debentures, the
holders of preferred securities will be entitled to receive, out of assets
held by the Trust, the liquidation distribution in cash. See "Description of
the Preferred Securities--Liquidation Distribution upon Dissolution." Upon the
Company's voluntary or involuntary liquidation or bankruptcy, the property
trustee, as holder of the subordinated debentures, would be one of the
Company's subordinated creditors, subordinated in right of payment to all
Senior and Subordinated Debt as set forth in the Indenture. However, the
property trustee, and indirectly the holders of the preferred securities, are
entitled to receive payment in full of principal and interest, before any of
the Company's stockholders receive payments or distributions. Since the
Company is the guarantor under the Guarantee Agreement and has agreed to pay
for all costs, expenses and liabilities of the Trust (other than the Trust's
obligations to the holders of its preferred securities), the positions of a
holder of the preferred securities and a holder of subordinated debentures
relative to other creditors and to the Company's stockholders in the event of
the Company's liquidation or bankruptcy are expected to be substantially the
same.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
General
The following is a general summary of the material United States federal
income tax consequences of the purchase, ownership and disposition of the
preferred securities. The matters of law or legal conclusions set forth in
this summary constitute the opinion of Kutak Rock, special tax counsel to the
Company and the Trust ("Tax Counsel"). Unless otherwise stated, this summary
only deals with preferred securities held as capital assets (generally, assets
held for investment) by holders who purchase the preferred securities upon
original issuance. Your tax treatment may vary depending on your particular
situation.
This summary does not address:
. all of the tax consequences that may be relevant to holders who may be
subject to special tax treatment such as, for example, financial
institutions, insurance companies, broker-dealers, tax-exempt
organizations or investors who have acquired preferred securities as
part of a straddle, hedge or similar transaction or, except as described
below, non-U.S. Holders, as we define that term below;
. the tax consequences to holders that have a functional currency other
than the United States dollar;
. the tax consequences to shareholders, partners or beneficiaries of a
holder of preferred securities;
. any aspects of state, local or foreign tax laws; or
. the United States federal alternative minimum tax consequences of the
purchase, ownership and sale of preferred securities.
This summary and Tax Counsel's opinion is based on the United States federal
income tax law in effect as of the date of this prospectus. These laws may
change, and any change could have a retroactive effect. These laws are also
subject to various interpretations, and the IRS or the courts could later
disagree with the explanation of conclusions contained in this summary. The
IRS has not formally ruled (and we do not intend to seek a ruling)
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on the tax consequences of purchasing, holding, and selling the preferred
securities. Accordingly, the IRS could challenge the opinions expressed in
this prospectus concerning such consequences, and a court could agree with the
IRS. We urge you to consult your tax advisor as to the particular tax
consequences to you of purchasing, owning, and disposing of the preferred
securities, including the application and effect of United States federal,
state, local, foreign and other tax laws.
For purposes of this discussion, a "U.S. Holder" means:
. a citizen or resident of the United States (or someone treated as a
citizen or resident of the United States for federal income tax
purposes);
. a corporation, partnership, or other entity created or organized (or
treated as created or organized for United States federal income tax
purposes) in the United States or under the laws of the United States or
of any political subdivision of the United States;
. an estate, the income of which is includible in gross income for United
States federal income tax purposes regardless of its source; or
. a trust, the administration of which is subject to the primary
supervision of a United States court and that has one or more United
States persons who have the authority to control all substantial
decisions of the trust.
Classification of the Subordinated Debentures
In the opinion of Tax Counsel, based on current law and assuming full
compliance with the terms of the Trust and the Indenture, the subordinated
debentures should be treated for United States federal income tax purposes as
indebtedness of the Company. By accepting the preferred securities, you agree
to treat the subordinated debentures as indebtedness for United States federal
income tax purposes and to treat the preferred securities as evidence of an
indirect beneficial ownership interest in the subordinated debentures. No
assurance can be given, however, that such treatment will not be challenged by
the IRS or, if challenged, that such a challenge will not be successful.
Classification of the Trust
Tax Counsel is of the opinion that, based on current law and assuming full
compliance with the terms of the Trust and the Indenture, the Trust should be
classified for United States federal income tax purposes as a grantor trust
and not as an association taxable as a corporation. Accordingly, for United
States federal income tax purposes, you should generally be treated as the
owner of an undivided beneficial ownership interest in the subordinated
debentures. As further discussed below, you may be required to include in
ordinary income your allocable share of interest paid or accrued on the
subordinated debentures.
Potential Extension of Interest Payment Period and Original Issue Discount
The Company has the right to defer payments of interest on the subordinated
debentures, which could cause the subordinated debentures to be treated as
having been issued with OID. In general, a debt instrument will be deemed to
have been issued with OID for United States federal income tax purposes if
there is more than a remote contingency that periodic stated interest payments
due on the instrument will not be timely paid. Because the exercise by the
Company of its option to defer the payment of stated interest on the
subordinated debentures would also prevent it from declaring dividends on any
class of equity, the Company believes that the likelihood that it would
exercise the option is remote.
As a result, the Company intends to take the position, based on the advice
of Tax Counsel, that the subordinated debentures will not be deemed to be
issued with OID. Accordingly, based on this position, stated interest payments
on the subordinated debentures will be includible in your ordinary income at
the time that those payments are paid or accrued in accordance with your
regular method of accounting and in the amount of each payment.
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If the likelihood of the Company deciding to defer any payments of interest
were not treated as remote, the subordinated debentures would be considered as
issued initially with OID in an amount equal to the sum of all the interest
payable over the term of the subordinated debentures. This would mean that you
would have to include interest income in gross income for United States
federal income tax purposes as it accrued daily on an economic accrual basis
instead of on the dates you actually received the cash payments.
The IRS has not issued any rulings or interpretations which define the
meaning of the term "remote" as used in the applicable income tax regulations.
The IRS could take a position that differs from what we state in this
prospectus.
Exercise of Deferral Option
If the Company exercises its option to defer the payment of stated interest
on the subordinated debentures, they would be treated, solely for purpose of
the OID rules, as being "re-issued" at that time with OID. Under these rules,
you would be required to include OID in ordinary income, on a current basis,
over the period that the instrument is held, even though we would not be
making any actual cash payments during the extended interest payment period.
The amount of interest income treated as OID and therefore includible in the
taxable income of a holder of the subordinated debentures would be determined
on the basis of a constant yield method over the remaining term of the
instrument, not on the basis of the stated interest amount. The actual receipt
of future payments of stated interest on the subordinated debentures would no
longer be separately reported as taxable income because it would have been
replaced, solely for tax purposes, by the amount of OID. The amount of OID
that would accrue, in total, during the extended interest payment period would
be approximately equal to the amount of the cash payment due at the end of the
period. Any OID included in income would increase your adjusted tax basis in
the preferred securities or the subordinated debentures, depending on which
you held at that time, and interest payments actually received would reduce
your adjusted tax basis.
Corporate U.S. Holders
Because the income from the preferred securities will not be considered to
be dividends for federal income tax purposes, corporate U.S. Holders of the
preferred securities will not be entitled to a dividends-received deduction
for any income received from the preferred securities.
Receipt of Subordinated Debentures or Cash Upon Termination or Redemption
If the Company exercises its right to terminate the Trust and cause the
subordinated debentures to be distributed to you on a basis proportionate to
your ownership in the preferred securities, the distribution would be treated
as a nontaxable event to you. In that event, you would have an adjusted tax
basis in the subordinated debentures that you receive equal to the adjusted
tax basis in the preferred securities that you surrender, and the holding
period of the subordinated debentures would include the period during which
you held the preferred securities. If, however, the Trust is characterized for
United States federal income tax purposes as an association taxable as a
corporation at the time of the termination, the distribution of the
subordinated debentures would be a taxable event to the holders of preferred
securities.
If the Company redeems the subordinated debentures for cash and the Trust
distributes the proceeds of the redemption to holders in redemption of their
preferred securities, the redemption would be treated as a sale of the
preferred securities in which you would recognize gain or loss as described
below.
Exercise of Right to Shorten Maturity
The Company has the right to shorten the maturity of the subordinated
debentures. If the Company exercises its right to shorten the maturity of the
subordinated debentures, this could result in a taxable event to you. Federal
income tax regulations provide that a significant modification of a debt
instrument is a taxable event. A significant modification includes shortening
the maturity of a debt instrument, provided that the instrument's rate
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of return changes by more than the greater of 25 basis points or five percent
of the annual rate of return. At the present time, the extent to which the
subordinated debenture's rate of return would change (if the Company exercised
its right to shorten the maturity) is unclear.
Sale of Preferred Securities
Upon the sale of preferred securities (including a redemption for cash), you
will recognize gain or loss in an amount equal to the difference between the
amount realized (which for this purpose, will exclude amounts attributable to
accrued interest or OID not previously included in income, which amount will
be subject to tax as ordinary interest income) and your adjusted tax basis in
the preferred securities.
If the Company does not defer interest payments on the subordinated
debentures, your adjusted tax basis in the preferred securities generally will
equal the initial purchase price that you paid for the preferred securities.
If, however, the Company elects to defer interest payments on the subordinated
debentures, your adjusted tax basis in the preferred securities will equal:
(1) the initial purchase price that you paid for the preferred securities; (2)
increased by the amount of any accrual and unpaid distributions you were
required to treat as OID; and (3) reduced by the amount of cash or other
property received by you with respect to such OID.
The gain or loss generally will be capital gain or loss and will be long-
term capital gain or loss if you have held the preferred securities for more
than one year. Capital losses generally may be used by a corporate taxpayer
only to offset capital gains and may be used by individual taxpayers only to
offset capital gains plus $3,000 of other income.
The preferred securities may trade at a price that does not accurately
reflect the value of accrued but unpaid interest (or OID, if the subordinated
debentures are treated as having been issued, or reissued, with OID) relating
to the underlying subordinated debentures. If you dispose of your preferred
securities you will be required to include in your ordinary income:
. any portion of the amount realized that is attributable to accrued but
unpaid interest to the extent not previously included in income; or
. any amount of OID that has accrued on your proportionate share of the
underlying subordinated debentures during the taxable year of sale
through the date of disposition.
However, you can also increase your adjusted tax basis in the preferred
securities to the extent that you include these amounts in ordinary income.
Withholding of U.S. Taxes on Non-U.S. Holders
This summary assumes that the non-U.S. Holder:
. is an individual;
. is not and will not become engaged in a United States trade or business;
and
. will not be present in the United States for 183 days or more during any
particular taxable year.
Payments made to a holder of preferred securities who is a non-U.S. Holder
generally will not be subject to withholding of United States federal income
tax, if:
. the beneficial owner of the preferred securities does not actually or
constructively own 10% or more of the total combined voting power of all
classes of stock entitled to vote; and
. either:
(1) the beneficial owner of the preferred securities certifies to the
Trust or its agent, under penalties of perjury, that it is not a
United States person and provides his name and address; or
(2) a securities clearing organization, bank or other financial
institution that holds customers' securities in the ordinary course
of its trade or business (a "Financial Institution"), and holds the
capital
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securities in that capacity, certifies to the Trust or its agent,
under penalties of perjury, that such statement has been received from
the beneficial owner by it or by a Financial Institution between it
and the beneficial owner and furnishes the Trust or its agent with a
copy of the statement.
In addition, a non-U.S. Holder of preferred securities will not be subject
to withholding of United States federal income tax on any gain realized upon
the sale or other disposition of a capital security.
Backup Withholding
You may be subject to a "backup withholding" tax of 31% on distributions
made on the preferred securities and on the entire price received on the sale
of the preferred securities if you:
. fail to provide your Social Security or taxpayer identification number
to your broker;
. provide your broker with an incorrect Social Security or tax
identification number;
. fail to provide your broker with a certified statement that your Social
Security or tax identification number is correct and that you are not
subject to backup withholding; or
. improperly report interest and dividends on your tax return.
Backup withholding, however, does not apply to payments made to certain
exempt recipients such as corporations or tax-exempt organizations. Any
withheld amounts will be allowed as a credit against your United States
federal income tax, provided the required information is provided to the IRS.
ERISA CONSIDERATIONS
Retirement plans are generally subject to the rules of the Employee
Retirement Income Security Act of 1974 ("ERISA"), and they are also subject to
requirements in the Code. Retirement plans may purchase preferred securities
in accordance with their governing documents. When they do, the fiduciaries
for these retirement plans (usually trustees and custodians) are required to
comply with fiduciary duties under ERISA and other requirements under the
Code. Retirement plans can be employer-sponsored plans like pension plans and
profit sharing plans, individual retirement accounts (IRAs), and other types
of plans which defer the receipt of income.
If a retirement plan is sponsored and/or contributed to by a party that is
affiliated in certain ways with the Company, it and/or its affiliate could be
a "party in interest" or a "disqualified person" for purposes of ERISA and the
Code. The rules regarding these relationships are very complex. These
relationships can arise if the Company or one of the banking subsidiaries is a
fiduciary to a retirement plan, such as a trustee or custodian. They can also
arise if the Company or one of the banking subsidiaries provides any services
to or for the retirement plan.
There are many other circumstances which can cause the relationship to
exist. When one of these relationships exists, the purchase of preferred
securities by the retirement plan is likely to result in a transaction that is
not permitted by ERISA and/or the Code. These transactions are referred to as
"prohibited transactions" or "disqualifying transactions." These could lead to
excise tax penalties and even tax disqualification of a retirement plan.
However, there may be ways to exempt prohibited transactions from the excise
tax penalties and tax disqualification. This may require application to a
governmental agency.
If the Company or one of the banking subsidiaries is a party in interest or
disqualified person as to a retirement plan, that retirement plan should not
acquire preferred securities without first establishing an exemption. Entities
like partnerships and limited liability companies which have a relationship
with the Company or one of the banking subsidiaries and that may be holding
assets of retirement plans also have to address these prohibited transaction
issues. All of these rules are very complicated. If you have a relationship of
any kind with the Company or one of its affiliates, you should consult with
your benefits counsel before acquiring preferred securities.
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UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement,
the Trust has agreed to sell to each of the underwriters named below, and each
of the underwriters, for whom Stephens Inc. and Morgan Keegan & Company, Inc.
are acting as representatives, has severally agreed to purchase the aggregate
number of preferred securities set forth opposite its name below, at the
public offering price less the underwriting discounts and commissions set
forth on the cover page of this prospectus. In the underwriting agreement, the
several underwriters have agreed, subject to the terms and conditions set
forth therein, to purchase all of the preferred securities offered hereby if
any are purchased. In the event of default by an underwriter, the underwriting
agreement provides that, in certain circumstances, purchase commitments of the
nondefaulting underwriters may be increased or the underwriting agreement may
be terminated.
<TABLE>
<CAPTION>
Number of
Preferred
Underwriter Securities
----------- ----------
<S> <C>
Stephens Inc...................................................... 630,000
Morgan Keegan & Company, Inc...................................... 420,000
Hoefer & Arnett, Inc.............................................. 150,000
Sterne, Agee & Leach, Inc......................................... 150,000
Stifel, Nicolaus & Company Incorporated........................... 150,000
---------
Total........................................................... 1,500,000
=========
</TABLE>
The Trust has granted the underwriters an option, exercisable in whole or in
part, from time to time, for thirty days after the date hereof, to purchase up
to an aggregate of an additional 15% of the shares of preferred securities
(225,000 additional preferred securities) to cover over-allotments, if any, at
the public offering price, less the underwriting discounts and commissions set
forth on the cover page of this prospectus. If the underwriters exercise this
option, each of the underwriters will have a firm commitment, subject to
certain conditions, to purchase approximately the same percentage thereof
which the number of preferred securities to be purchased by it shown in the
foregoing table bears to the 1,500,000 preferred securities offered hereby.
The underwriters have advised the Trust that sales of preferred securities
to certain dealers may be made at a concession of an amount not in excess of
$0.20 per share and that the underwriters may allow, and such dealers may re-
allow, discounts not in excess of $0.10 per share on sales to certain other
dealers. Following completion of this offering, the public offering price, the
concession and the re-allowance may be changed by the underwriters.
In view of the fact that the proceeds of the sale of the preferred
securities will be used to purchase the subordinated debentures of the
Company, the underwriting agreement provides that the Company will pay as
compensation to the underwriters $0.375 per preferred security (or $562,500 in
the aggregate).
The Trust, the Company and its executive officers and directors have agreed
with the underwriters not to offer, sell, contract to sell or otherwise
dispose of any shares of the preferred securities or any securities
convertible into, or exchangeable or exerciseable for shares of the preferred
securities with limited exceptions, for a period of 90 days from the date
following completion of this offering.
The preferred securities are new securities with no established trading
market. The Company has been advised by each underwriter that it intends to
make a market in the preferred securities, but it is not obligated to do so
and such market making may be interrupted or discontinued without notice. No
assurance can be given about the liquidity of the trading market for the
preferred securities.
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In connection with this offering, certain underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the preferred
securities during and after this offering. Such transactions may include
stabilization transactions pursuant to which such persons may bid for or
purchase preferred securities for the purpose of stabilizing its market price.
The underwriters also may create a short position for the account of the
underwriters by selling more preferred securities in connection with this
offering than they are committed to purchase from the Trust, and in such case
may purchase preferred securities in the open market following completion of
this offering to cover all or a portion of such short position. The
underwriters may also cover all or a portion of such short position by
exercising the underwriters' over-allotment option referred to above. In
addition the representatives may impose "penalty bids" under contractual
arrangements with the underwriters whereby they may reclaim from an
underwriter (or dealer participating in the offering) for the account of the
other underwriters, the selling concession with respect to preferred
securities that are distributed in this offering but subsequently purchased
for the account of the underwriters in the open market. Any of the
transactions described in this paragraph may result in the maintenance of the
price of the preferred securities at a level above that which might otherwise
prevail in the open market. None of the transactions described in this
paragraph are required, and, if they are undertaken, they may be discontinued
at any time.
The Company, the Trust and the underwriters have agreed to indemnify each
other against, and to afford certain rights of contribution to each other with
respect to, certain civil liabilities under the Securities Act.
TRANSFER AGENT
FMB Trust Company, National Association, a subsidiary of First Maryland
Bancorp, will act as registrar and transfer agent for the preferred
securities.
LEGAL MATTERS
The validity of the preferred securities offered hereby, and certain matters
relating to United States federal income tax consequences of the offering, are
being passed upon for the Company and the Trust by Kutak Rock, Little Rock,
Arkansas. Morris, James, Hitchens & Williams, Wilmington, Delaware will pass
upon certain matters relating to Delaware law for the Trust. Certain legal
matters will be passed upon for the underwriters by Giroir, Gregory, Holmes &
Hoover, PLC, Little Rock, Arkansas.
EXPERTS
The Consolidated Financial Statements of Bank of the Ozarks, Inc. at
December 31, 1998, and for the year then ended appearing in this prospectus
and Registration Statement have been audited by Ernst & Young LLP, independent
auditors, and at December 31, 1997, and for each of the two years in the
period ended December 31, 1997, by Moore Stephens Frost, independent
accountants, as set forth in their respective reports thereon appearing
elsewhere herein, and are included in reliance upon such reports given on the
authority of such firms as experts in accounting and auditing.
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WHERE YOU CAN FIND MORE INFORMATION
This prospectus is part of a registration statement (on Form S-1) filed by
Bank of the Ozarks and the Trust with the SEC relating to the preferred
securities registered under this prospectus. As permitted by SEC rules, this
prospectus does not contain all of the information contained in the
registration statement and accompanying exhibits and schedules filed by Bank
of the Ozarks and the Trust with the SEC. The registration statement, the
exhibits and schedules provide additional information about the Company, the
Trust and the preferred securities. The registration statement, exhibits and
schedules are also available at the SEC's public reference rooms or through
its EDGAR database on the internet.
The Company files annual, quarterly and current reports, proxy statements
and other information with the SEC. These documents are available for
inspection and copying, upon payment of a fee set by the SEC, at the public
reference rooms of the SEC in Washington, D.C. (450 Fifth Street, N.W.,
20549), New York, New York (Seven World Trade Center, Suite 1300, 10048) and
Chicago, Illinois (Citicorp Center, 500 West Madison Street, 14th Floor, Suite
1400, 60661). The SEC may be contacted at 1-800-432-0330 for more information
on the public reference rooms. The Company's filings are also available to the
public on the internet through the SEC's EDGAR database at the SEC's web site
at http://www.sec.gov.
There are not separate financial statements of the Trust in this prospectus
because:
. The Trust is a subsidiary of the Company and the Company files
consolidated financial information under the Exchange Act.
. The Trust does not have any independent operations other than issuing
the preferred and common securities and purchasing the subordinated
debentures of the Company.
. The Trust's only material assets will be the subordinated debentures of
the Company when issued.
. The combined obligations of the Company under the subordinated
debentures, the Guarantee, the Trust Agreement and the Indenture have
the effect of providing a full and unconditional guarantee of the
Trust's obligations under its preferred securities. See "Description of
Subordinated Securities," "Description of Preferred Securities,"
"Description of Guarantee" and "Relationship Among Preferred Securities,
the Subordinated Debentures and the Guarantee."
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Audited Financial Statements:
Report of Ernst & Young LLP, Independent Auditors.................... F-2
Report of Moore Stephens Frost, Independent Accountants.............. F-3
Consolidated Balance Sheets as of December 31, 1997 and 1998......... F-4
Consolidated Statements of Income for the Years Ended December 31,
1996, 1997
and 1998 ........................................................... F-5
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1996, 1997 and 1998 ................................... F-6
Consolidated Statements of Cash Flows for the Years Ended December
31, 1996, 1997 and 1998 ............................................ F-7
Notes to Consolidated Financial Statements for the Years Ended
December 31, 1996, 1997 and 1998.................................... F-8
Unaudited Financial Statements:
Consolidated Balance Sheets as of March 31, 1998 and 1999
(Unaudited)......................................................... F-27
Consolidated Statements of Income for the Three Months Ended March
31, 1998 and 1999 (Unaudited) ...................................... F-28
Consolidated Statements of Stockholders' Equity for the Three Months
Ended
March 31, 1998 and 1999 (Unaudited) ................................ F-29
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1998 and 1999 (Unaudited) ................................ F-30
Notes to Consolidated Financial Statements for the Three Months Ended
March 31, 1998 and 1999 (Unaudited)................................. F-31
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Bank of the Ozarks, Inc.
We have audited the accompanying consolidated balance sheet of Bank of the
Ozarks, Inc. and subsidiaries as of December 31, 1998, and the related
consolidated statements of income, stockholders' equity, and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The consolidated financial statements
of Bank of the Ozarks, Inc. and subsidiaries for the years ended December 31,
1996 and 1997, were audited by other auditors whose report dated January 28,
1998, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the 1998 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Bank of the Ozarks, Inc. and subsidiaries as of December 31, 1998, and the
consolidated results of their operations and their cash flows for the year
ended December 31, 1998, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Little Rock, Arkansas
January 20, 1999
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Bank of the Ozarks, Inc.
We have audited the accompanying consolidated balance sheet of Bank of the
Ozarks, Inc. as of December 31, 1997 and the related consolidated statements
of income, stockholders' equity, and cash flows for each of the two years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Bank of the Ozarks, Inc. as of December 31, 1997, and the consolidated
results of their operations and their cash flows for each of the two years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
MOORE STEPHENS FROST
Little Rock, Arkansas
January 28, 1998
F-3
<PAGE>
BANK OF THE OZARKS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
------------------
1997 1998
-------- --------
(Dollars in
thousands, except
per share
amounts)
<S> <C> <C>
ASSETS
Cash and due from banks.................................... $ 9,021 $ 14,168
Interest bearing deposits.................................. 6,607 856
-------- --------
Cash and cash equivalents................................ 15,628 15,024
Investment securities - available for sale................. 25,297 17,629
Investment securities - held to maturity
(estimated market value: $17,199 in 1997 and $159,050 in
1998)..................................................... 17,162 158,989
Federal funds sold......................................... 2,885 --
Loans, net of unearned income.............................. 275,463 387,526
Allowance for loan losses.................................. (3,737) (4,689)
-------- --------
Net loans................................................ 271,726 382,837
Premises and equipment, net................................ 13,439 27,155
Foreclosed assets held for sale, net....................... 148 314
Interest receivable........................................ 3,013 5,517
Intangible assets, net..................................... 1,393 3,665
Other...................................................... 1,402 1,301
-------- --------
Total assets........................................... $352,093 $612,431
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Demand - non-interest bearing............................ $ 31,091 $ 50,138
Savings and interest-bearing transaction................. 64,742 95,471
Time..................................................... 199,722 383,431
-------- --------
Total deposits.......................................... 295,555 529,040
Notes payable.............................................. 5,072 12,448
FHLB advances and federal funds purchased.................. 14,017 26,823
Repurchase agreements...................................... -- 1,408
Accrued interest and other liabilities..................... 1,783 2,357
-------- --------
Total liabilities....................................... 316,427 572,076
Commitments and contingencies
Stockholders' equity
Common stock; $0.01 par value; Authorized 10,000,000
shares;
3,779,555 shares issued and outstanding in 1997 and
1998..................................................... 38 38
Additional paid-in capital............................... 14,314 14,314
Retained earnings........................................ 21,162 25,922
Accumulated other comprehensive income................... 152 81
-------- --------
Total stockholders' equity.............................. 35,666 40,355
-------- --------
Total liabilities and stockholders' equity............. $352,093 $612,431
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
BANK OF THE OZARKS, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1996 1997 1998
------- ------- -------
(Dollars in thousands,
except per share
amounts)
<S> <C> <C> <C>
Interest income
Loans............................................ $19,089 $24,230 $31,168
Investment securities - taxable.................. 2,069 2,684 6,654
Investment securities - nontaxable............... 364 233 766
Federal funds sold............................... 145 108 89
Deposits with banks.............................. 169 213 205
------- ------- -------
Total interest income.......................... 21,836 27,468 38,882
------- ------- -------
Interest expense
Deposits......................................... 9,005 11,826 18,118
Notes payable.................................... 468 553 637
FHLB advances.................................... 557 597 1,415
Federal funds purchased.......................... 1 3 348
------- ------- -------
Total interest expense......................... 10,031 12,979 20,518
------- ------- -------
Net interest income................................ 11,805 14,489 18,364
Provision for loan losses........................ (1,486) (1,139) (2,026)
------- ------- -------
Net interest income after provision for loan
losses............................................ 10,319 13,350 16,338
------- ------- -------
Other income
Trust income..................................... 214 274 335
Service charges on deposit accounts.............. 806 957 1,372
Other income, charges and fees................... 537 1,136 2,792
Gain (loss) on sale of securities................ (77) 14 255
Other............................................ 385 544 277
------- ------- -------
Total other income............................. 1,865 2,925 5,031
------- ------- -------
Other expense
Salaries and employee benefits................... 4,263 5,330 7,197
Net occupancy and equipment...................... 998 1,305 1,961
Other operating expenses......................... 1,890 2,593 3,961
------- ------- -------
Total other expense............................ 7,151 9,228 13,119
------- ------- -------
Income before income taxes......................... 5,033 7,047 8,250
Provision for income taxes....................... 2,006 2,516 2,621
------- ------- -------
Net income......................................... $ 3,027 $ 4,531 $ 5,629
======= ======= =======
Basic earnings per common share.................... $ 1.05 $ 1.38 $ 1.49
======= ======= =======
Diluted earnings per common share.................. $ 1.05 $ 1.38 $ 1.47
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
BANK OF THE OZARKS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-In Retained Comprehensive
Stock Capital Earnings Income Total
------ ---------- -------- ------------- -------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Balance - January 1, 1996..... $ 29 $ 1,168 $15,088 $ 9 $16,294
Comprehensive income:
Net income.................. -- -- 3,027 -- 3,027
Other comprehensive income:
Change in unrealized
appreciation on investment
securities net of $46 tax
effect.................... -- -- -- 90 90
-------
Comprehensive income......... 3,117
-------
Dividends, $.30 per share.... -- -- (864) -- (864)
---- ------- ------- ---- -------
Balance - December 31, 1996... 29 1,168 17,251 99 18,547
Comprehensive income:
Net income.................. -- -- 4,531 -- 4,531
Other comprehensive income:
Unrealized gains on
available for sale
securities net of $37 tax
effect.................... -- -- -- 60 60
Less: reclassifications
adjustment for gains
included in income net of
$4 tax effect............. -- -- -- (7) (7)
-------
Comprehensive income......... 4,584
-------
Dividends, $.20 per share.... -- -- (620) -- (620)
Issuance of 899,755 shares of
common stock................ 9 13,146 -- -- 13,155
---- ------- ------- ---- -------
Balance - December 31, 1997... 38 14,314 21,162 152 35,666
Comprehensive income:
Net income.................. -- -- 5,629 -- 5,629
Other comprehensive income:
Unrealized losses on
available for sale
securities net of $35 tax
effect.................... -- -- -- 57 57
Less: reclassifications
adjustment for gains
included in income net of
$79 tax effect............ -- -- -- (128) (128)
-------
Comprehensive income......... 5,558
-------
Dividends, $.23 per share.... -- -- (869) -- (869)
---- ------- ------- ---- -------
Balance - December 31, 1998... $ 38 $14,314 $25,922 $ 81 $40,355
==== ======= ======= ==== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
BANK OF THE OZARKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1996 1997 1998
------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Cash flows from operating activities
Net income........................................ $ 3,027 $ 4,531 $ 5,629
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation..................................... 575 626 1,043
Amortization..................................... 74 74 173
Provision for loan losses........................ 1,486 1,139 2,026
Provision for losses on foreclosed assets........ 11 8 35
Amortization and accretion on investments........ 9 (39) (115)
(Gain) loss on disposition of investments........ 77 (14) (255)
Gain on sale of loans............................ (274) (57) --
Increase in mortgage loans held for sale......... (1,431) (1,504) (3,750)
Gain on disposition of premises and equipment.... (1) (76) (14)
Gain on disposition of foreclosed assets......... (14) (261) (98)
Deferred income taxes............................ (291) 59 222
Changes in assets and liabilities:
Interest receivable.............................. (563) (461) (2,502)
Other, net....................................... (255) 55 (305)
Accrued interest and other liabilities........... 374 (601) 74
------- ------- --------
Net cash provided by operating activities.......... 2,804 3,479 2,163
------- ------- --------
Cash flows from investing activities
Acquisitions, net of funds acquired............... -- -- 22,123
Proceeds from sales and maturities of investment
securities available for sale.................... 28,784 31,171 54,036
Purchases of investment securities available for
sale............................................. (32,904) (19,453) (20,260)
Proceeds from maturities of investment securities
held to maturity................................. 1,862 6,576 67,386
Purchases of investment securities held to
maturity......................................... -- (21,007) (234,804)
Decrease (increase) in federal funds sold......... 3,730 (2,535) 3,149
Net increase in loans............................ (62,577) (61,152) (110,019)
Proceeds from sale of loans...................... 2,252 811 --
Proceeds from dispositions of bank premises and
equipment....................................... 1 178 30
Purchase of bank premises and equipment.......... (997) (7,295) (14,109)
Proceeds from dispositions of foreclosed assets.. 221 632 525
------- ------- --------
Net cash used in investing activities.............. (59,628) (72,074) (231,943)
------- ------- --------
Cash flows from financing activities
Net increase in deposits.......................... 49,184 63,907 208,455
Net proceeds from FHLB advances and federal funds
purchased........................................ 4,780 1,290 14,214
Proceeds from notes payable....................... 1,500 10,000 14,410
Payments of notes payable......................... (24) (10,324) (7,034)
Dividends paid.................................... (864) (620) (869)
Proceeds from issuance of common stock............ -- 13,155 --
------- ------- --------
Net cash provided by financing activities.......... 54,576 77,408 229,176
------- ------- --------
Net (decrease) increase in cash and cash
equivalents....................................... (2,248) 8,813 (604)
Cash and cash equivalents - beginning of year...... 9,063 6,815 15,628
------- ------- --------
Cash and cash equivalents - end of year............ $ 6,815 $15,628 $ 15,024
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
BANK OF THE OZARKS, INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
1. Summary of Significant Accounting Policies
Organization - Bank of Ozarks, Inc. (the "Company") is a multi-bank holding
company headquartered in Little Rock, Arkansas, which operates under the rules
and regulations of the Board of Governors of the Federal Reserve System and
which, at December 31, 1998, owned two affiliate state chartered banks and a
federal savings bank - Bank of the Ozarks, wca; Bank of the Ozarks, nwa; and
Bank of the Ozarks. On January 7, 1999, the Company merged its federal savings
bank into Bank of the Ozarks, wca. The bank subsidiaries, which are subject to
the regulation of certain federal and state agencies and undergo periodic
examinations by those regulatory authorities, have offices located in
northern, western, and central Arkansas.
Principles of consolidation - The consolidated financial statements include
the accounts of the Company and its wholly owned bank subsidiaries.
Significant intercompany transactions and amounts have been eliminated in
consolidation.
Use of estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Cash and cash equivalents - For purposes of reporting cash flows, cash and
cash equivalents include cash on hand, amounts due from banks and interest
bearing deposits with banks.
Investment securities - Management determines the appropriate classification
of debt securities at the time of purchase and re-evaluates such designation
as of each balance sheet date. Debt securities are classified as held-to-
maturity when the Company has the positive intent and ability to hold the
securities to maturity. Held-to-maturity securities are stated at amortized
cost.
Debt securities not classified as held-to-maturity or trading and marketable
equity securities not classified as trading securities are classified as
available-for-sale. Available-for-sale securities are stated at fair value,
with the unrealized gains and losses, net of tax, reported as a separate
component of stockholders' equity.
The amortized cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity, or in the case of mortgage-backed securities, over the
estimated life of the security. Such amortization is included in interest
income from investments. Interest and dividends are included in interest
income from investments.
Fair values for investment securities are based on quoted market prices,
where available. If quoted market prices are not available, fair values are
based on quoted market prices of comparable instruments. Gains or losses on
the sale of securities are recognized on the specific identification method at
the time of sale.
Loans - Loans receivable that management has the intent and ability to hold
for the foreseeable future or until maturity or pay-off are reported at their
outstanding principal adjusted for any charge-offs, deferred fees or costs on
originated loans, and unamortized premiums or discounts on purchased loans.
Unearned discounts on installment loans are recognized as income over the
terms by the rule of 78's interest method which approximates the interest
method. Unearned purchased discounts are recorded as income over the life of
the loans utilizing the interest method to achieve a constant yield. Interest
on other loans is calculated by using the simple interest method on daily
balances of the principal amount outstanding. Loan origination fees and direct
origination costs are capitalized and recognized as adjustments to yields on
the related loans. Prior to July 1, 1998 loan origination fees and direct
origination costs were not deemed material and, therefore, were recorded as
actually received and paid.
F-8
<PAGE>
BANK OF THE OZARKS, INC.
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands)
Allowance for loan losses - The allowance for loan losses is established
through a provision for loan losses charged against income. Loans deemed to be
uncollectible are charged against the allowance for loan losses when
management believes that the collectibility of the principal is unlikely, and
subsequent recoveries, if any, are credited to the allowance.
The allowance is maintained at a level that management believes will be
adequate to absorb possible losses on existing loans that may become
uncollectible, based on evaluations of the collectibility of loans and prior
loan loss experience. The evaluations take into consideration such factors as
changes in the nature and volume of the loan portfolio, overall portfolio
quality, review of specific problem loans, historical loan loss experience and
current economic and business conditions that may affect the borrowers'
ability to pay or the value of the collateral securing the loans. The
Company's policy generally is to place a loan on nonaccrual status when
payment of principal or interest is contractually past due 90 days, or earlier
when 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.
The Company considers a loan to be impaired when, based on current
information and events, it is probable that the Company will be unable to
collect all amounts due according to the contractual terms thereof. The
Company applies this policy even if delays or shortfalls in payment are
expected to be insignificant. All nonaccrual loans, except consumer
installment loans, and all loans that have been restructured from their
original contractual terms are considered impaired loans. Nonaccrual consumer
installment loans are evaluated collectively since they are considered to be
small-balance, homogenous loans. The aggregate amount of impairment of loans
is utilized in evaluating the adequacy of the allowance for loan losses and
amount of provisions thereto. Losses on impaired loans are charged against the
allowance for loan losses when in the process of collection it appears likely
that such losses will be realized. The accrual of interest on impaired loans
is discontinued, when in management's opinion, the borrower may be unable to
meet payments as they become due. When interest accrual is discontinued, all
unpaid accrued interest is reversed. Interest income is subsequently
recognized only to the extent cash payments are received.
Premises and equipment - Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are
computed on a straight-line basis over the estimated useful lives of the
related assets. Accelerated methods are used for tax purposes.
Foreclosed assets held for sale - Real estate and personal properties
acquired through or in lieu of loan foreclosure are to be sold and are
initially recorded at fair value at the date of foreclosure establishing a new
cost basis. After foreclosure, real property is amortized over 60 months.
Valuations are periodically performed by management and the real estate is
carried at the lower of carrying amount or fair value less cost to sell. Gains
and losses from the sale of other real estate are recorded in other income,
and expenses used to maintain the properties are included as operating
expenses.
Income taxes - The Company utilizes the liability method in accounting for
income taxes. Under this method, deferred tax assets and liabilities are
determined based upon the difference between the values of the assets and
liabilities as reflected in the financial statement and their related tax
basis using enacted tax rates in effect for the year in which the differences
are expected to be recovered or settled. As changes in tax laws or rates are
enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
The Company and its subsidiaries file consolidated tax returns. The bank
subsidiaries provide for income taxes on a separate return basis, and remit to
the Company amounts determined to be currently payable.
F-9
<PAGE>
BANK OF THE OZARKS, INC.
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands)
Trust department income - Property, other than cash deposits, held by the
Company's trust department in fiduciary or agency capacities for its customers
are not included in the accompanying financial statements, since such items
are not assets of the Company. Trust department income has been recognized on
the cash basis in accordance with customary banking practice, which does not
differ materially from the accrual method.
Intangible assets - Intangible assets consist of goodwill and core deposit
intangibles. These assets are being amortized over periods ranging from 10 to
25 years. Goodwill represents the excess purchase price over the fair value of
net assets acquired in business acquisitions. Core deposit intangibles
represent premiums paid for deposits acquired. Accumulated amortization of
intangibles totaled $1,043 and $1,158 at December 31, 1997 and 1998,
respectively.
Earnings per share - Basic earnings per share has been calculated based on
the weighted average number of shares outstanding. Diluted earnings per share
has been calculated based on the weighted average number of shares outstanding
after consideration of the dilutive effect of the Company's outstanding stock
options.
Financial instruments - In the ordinary course of business, the Company has
entered into off-balance sheet financial instruments consisting of commitments
to extend credit, commitments under credit card arrangements, and letters of
credit. Such financial instruments are recorded in the financial statements
when they are funded or related fees are incurred or received.
Advertising and public relations expense - Advertising and public relations
expense is expensed as incurred and totaled $123, $332 and $566 for the years
ended December 31, 1996, 1997 and 1998, respectively.
Stock-based compensation - The Company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("ABP 25") and related interpretations in accounting for its employee stock
options. Under ABP 25, because the exercise price of employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recorded. The Company has adopted the disclosure-only
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS No. 123").
Segment Disclosures - On December 31, 1998, the Company adopted SFAS No.
131. "Disclosures about Segments of an Enterprise and Related Information".
SFAS 131 established standards for reporting information about operating
segments and related disclosures about products and services, geographic areas
and major customers. As the Company operates in only one segment--community
banking--the adoption of SFAS 131 did not have a material effect on the
primary financial statements or the disclosure of segment information. All the
Company's revenues result from services offered by its bank subsidiaries. No
revenues are derived from foreign countries and no single external customer
comprises more than 10% of the Company's revenues.
Derivatives and Hedging Activities - In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities". SFAS No. 133, which requires the Company to recognize
all derivatives on the balance sheet at fair value, was adopted by the Company
effective July 1, 1998. Derivatives that are not hedges must be adjusted to
fair value through income. If the derivative is a hedge, depending on the
nature of the hedge, changes in the fair value of derivatives are either
offset against the change in fair value of the assets, liabilities, or firm
commitments through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portions of a
derivative's change in fair value will be immediately recognized in earnings.
The adoption of SFAS No. 133 did not have a significant impact on the
Company's financial position or results of operations. In connection with the
adoption of SFAS No. 133, the Company transferred investment securities with a
carrying value of $25,795 and unrealized gains of $167 from its held-to-
maturity to available-for-sale portfolio.
F-10
<PAGE>
BANK OF THE OZARKS, INC.
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands)
Reclassifications - Certain reclassifications of 1996 and 1997 amounts have
been made to conform with the 1998 presentation.
2. Acquisitions
In August 1998 the Company completed the purchase of the Marshall, Arkansas
branch of Superior Federal Bank, FSB. The acquisition included the branch bank
building, related assets and deposit accounts totaling $16 million. The
transaction was accounted for as a purchase with the Company reporting the
results of the acquired branch's operations from the closing date. The
resulting core deposit intangible of $1.6 million is being amortized on a
straight line basis over 10 years.
In February 1998 the Company acquired the stock of Heartland Community Bank,
FSB, from its parent company - Heartland Community Bank, Camden - for $3.1
million in cash. The Company received the federal savings bank's charter,
approximately $9.4 million in customer deposits and the related banking
facility. All other assets and liabilities of the bank were purchased and
assumed by its parent company prior to closing. The transaction was accounted
for as a purchase and the excess of purchase price over net assets acquired of
$847 is being amortized straight-line over 25 yrs. The Company has reported
the results of operations of the acquired bank from the closing date.
Pro forma disclosures related to the above acquisitions have not been
provided as the entities acquired do not meet the criteria of significant
subsidiaries. Also, separate operating results related to the specific assets
acquired and liabilities assumed by the Company were not maintained by the
previous owners as this represented only a portion of their overall
operations.
3. Investment Securities
The following is a summary of the amortized cost and estimated market values
of investment securities:
<TABLE>
<CAPTION>
December 31, 1997
---------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Securities - available for sale:
Securities of United States
government and agencies............. $12,619 $ 39 $(18) $12,640
Mortgage-backed securities........... 9,340 256 (25) 9,571
State and political subdivisions..... 1,582 14 (20) 1,576
Other securities..................... 1,510 -- -- 1,510
------- ---- ---- -------
Total securities - available for sale.. $25,051 $309 $(63) $25,297
======= ==== ==== =======
Securities - held to maturity:
Securities of United States
government and agencies............. $11,943 $ 17 $ (4) $11,956
State and political subdivisions..... 5,219 27 (3) 5,243
------- ---- ---- -------
Total securities - held to maturity.. $17,162 $ 44 $ (7) $17,199
======= ==== ==== =======
</TABLE>
F-11
<PAGE>
BANK OF THE OZARKS, INC.
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31, 1998
----------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Securities - available for sale:
Securities of United States
government and agencies............ $ 1,000 $ 1 $ -- $ 1,001
Mortgage-backed securities.......... 2,107 17 (7) 2,117
State and political subdivisions.... 11,205 60 -- 11,265
Other securities.................... 3,185 61 -- 3,246
-------- ---- ----- --------
Total securities - available for
sale................................. $ 17,497 $139 $ (7) $ 17,629
======== ==== ===== ========
Securities - held to maturity:
Securities of United States
government and agencies............ $155,351 $196 $(217) $155,330
State and political subdivisions.... 3,537 82 -- 3,619
Other securities.................... 101 -- -- 101
-------- ---- ----- --------
Total securities - held to maturity... $158,989 $278 $(217) $159,050
======== ==== ===== ========
</TABLE>
The amortized cost and estimated market value by contractual maturity of
investment securities classified as available-for-sale and held-to-maturity at
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Available-for-Sale Held-to-Maturity
------------------- -------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Due in one year or less................ $ 20 $ 20 $ 142 $ 142
Due from one year to five years........ 1,847 1,850 1,949 1,992
Due from five years to ten years....... 1,033 1,035 131,902 131,986
Due after ten years.................... 14,597 14,724 24,996 24,930
------- ------- -------- --------
Totals................................. $17,497 $17,629 $158,989 $159,050
======= ======= ======== ========
</TABLE>
Expected maturities may differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
For purposes of the maturity table, mortgage-backed securities which are not
due at a single maturity date have been allocated over maturity groupings
based on anticipated maturities. The mortgage-backed securities may mature
earlier than their weighted average contractual maturities because of
principal prepayments.
During the years ended December 31, 1996, 1997, and 1998, investment
securities available-for-sale with a fair value at the date of sale of
$17,214, $3,407 and $41,613 respectively, were sold. The gross realized gains
on such sales totaled $79, $14 and $322, respectively. The gross realized
losses totaled $124, $-0- and $67, respectively. The income tax expenses
related to net security gains was $5 and $87 in 1997 and 1998, respectively.
The income tax benefit related to net securities losses in 1996 was $26.
The bank subsidiaries had no trading securities during 1997 or 1998. Gross
gains of $2 and gross losses of $34 were realized on trading securities during
1996.
Assets, principally investment securities, having a carrying value of
approximately $31,335 and $97,831 at December 31, 1997 and 1998, respectively,
were pledged to secure public deposits and for other purposes required or
permitted by law.
F-12
<PAGE>
BANK OF THE OZARKS, INC.
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands)
4. Loans
The following is a summary of the loan portfolio by principal categories:
<TABLE>
<CAPTION>
December 31,
-----------------
1997 1998
-------- --------
<S> <C> <C>
Real Estate:
Single family residential (1-4)......................... $ 96,943 $121,539
Non-farm/non-residential................................ 41,710 76,563
Agricultural............................................ 13,443 19,463
Construction/land development........................... 16,257 23,305
Multifamily residential................................. 3,897 6,207
Consumer.................................................. 53,233 66,407
Commercial and industrial................................. 37,470 52,192
Agricultural (non-real estate)............................ 10,824 20,068
Other..................................................... 1,686 1,782
-------- --------
Loans, net of unearned income............................. $275,463 $387,526
======== ========
</TABLE>
These loan categories are presented net of unearned discounts, unearned
purchase discounts and deferred costs totaling $3,759 at December 31, 1997 and
$4,961 at December 31, 1998. Loans on which the accrual of interest has been
discontinued aggregated $664 and $2,708 at December 31, 1997 and 1998,
respectively.
Mortgage loans held for resale of $2,935 and $6,685 at December 31, 1997 and
1998, respectively, are included in single family residential loans. The
carrying value of these loans approximates their fair value. Other income,
charges and fees include mortgage lending income of $68, $556 and $2,136
during 1996, 1997 and 1998, respectively.
5. Allowance for Loan Losses
The following is a summary of activity within the allowance for loan losses:
<TABLE>
<CAPTION>
Year Ended December
31,
----------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Balance - beginning of year.......................... $1,909 $3,019 $3,737
Loans charged-off.................................. (417) (469) (1,149)
Recoveries on loans previously charged-off......... 41 48 75
------ ------ ------
Net charge-offs...................................... (376) (421) (1,074)
Provision charged to operating expense............. (1,486) (1,139) (2,026)
------ ------ ------
Balance - end of year................................ $3,019 $3,737 $4,689
====== ====== ======
</TABLE>
Impairment of loans having carrying values of $581 and $2,461 at December
31, 1997 and 1998, respectively, have been recognized in conformity with SFAS
No. 114, as amended by SFAS No. 118. The average carrying value of impaired
loans was $1,042, $1,886, and $1,687 for the years ended December 31, 1996,
1997, and 1998, respectively, some of which, as a result of write-downs, did
not have an allowance for credit losses. The total allowance for credit losses
related to these loans was $105 and $443 at December 31, 1997 and 1998,
respectively. The Company does not segregate income recognized on a cash basis
in its financial
F-13
<PAGE>
BANK OF THE OZARKS, INC.
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands)
records, and thus, such disclosure is not practicable. For impairment
recognized in conformity with SFAS 114, as amended, the entire change in
present value of expected cash flows is reported as bad debt expense in the
same manner in which impairment initially was recognized or as a reduction in
the amount of bad debt expense that otherwise would be reported.
Real estate securing loans having a carrying value of $683 and $628 was
transferred to foreclosed assets held for sale in 1997 and 1998, respectively.
The bank subsidiaries are not committed to lend additional funds to debtors
whose loans have been modified.
6. Premises and Equipment
The following is a summary of premises and equipment:
<TABLE>
<CAPTION>
December 31,
----------------
1997 1998
------- -------
<S> <C> <C>
Land....................................................... $ 4,140 $ 6,691
Construction in process.................................... 985 437
Buildings and improvements................................. 5,274 15,113
Leasehold improvements..................................... 1,637 1,615
Equipment.................................................. 4,763 7,565
------- -------
16,799 31,421
Accumulated depreciation................................... (3,360) (4,266)
------- -------
Total premises and equipment............................... $13,439 $27,155
======= =======
</TABLE>
The Company capitalized $145 and $275 of interest on construction projects
during the years ended December 31, 1997 and 1998, respectively.
7. Deposits
The aggregate amount of time deposits with a minimum denomination of $100
was $57,981 and $143,540 at December 31, 1997 and 1998, respectively.
The following is a summary of the scheduled maturities of all time deposits:
<TABLE>
<CAPTION>
December 31,
-----------------
1997 1998
-------- --------
<S> <C> <C>
Zero to one year.......................................... $166,316 $359,218
One year to two years..................................... 25,344 14,471
Two years to three years.................................. 3,470 5,868
Three years to four years................................. 2,172 1,884
Four years to five years.................................. 1,354 997
Thereafter................................................ 1,066 993
-------- --------
Total time deposits....................................... $199,722 $383,431
======== ========
</TABLE>
F-14
<PAGE>
BANK OF THE OZARKS, INC.
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands)
8. Notes Payable
The following is a summary of notes payable:
<TABLE>
<CAPTION>
December 31,
--------------
1997 1998
------ -------
<S> <C> <C>
Note payable to a bank, interest at 8.804%, payable in
installments through December 2007. Note secured by stock
of the bank subsidiaries and paid in 1998.................. $5,000 $ --
Note payable to a bank, interest payable quarterly at a
variable rate equal to the prime rate minus 1.25% but not
to exceed 7.75% (rate was 6.5% at December 31, 1998). This
note payable is a revolving line of credit for up to $22
million maturing March 31, 2003. Note secured by stock of
the bank subsidiaries...................................... -- 12,340
Other....................................................... 72 108
------ -------
$5,072 $12,448
====== =======
</TABLE>
Maturities of notes payable at December 31, 1998 are as follows: 1999 - $24;
2000 - $24; and 2003 -$12,400.
The revolving line of credit 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 line of credit, 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 line of credit 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 line of credit not exceed 50.0% of
the tangible book value of all subsidiary bank stock pledged to secure such
borrowings. At December 31, 1998, the Company was in compliance with these
requirements.
9. FHLB Advances and Federal Funds Purchased
FHLB advances and federal funds purchased include short-term borrowings with
maturities ranging from one to thirty days. Certain additional FHLB advances
have maturities of over one year. The following is a summary of information
relating to the short-term borrowings:
<TABLE>
<CAPTION>
1997 1998
----- ------
<S> <C> <C>
FHLB advances:
Average..................................................... $ 244 $5,335
December 31................................................. -- --
Maximum month-end balance during year....................... 2,750 28,090
Interest rate:
Weighted average.......................................... 5.81% 5.45%
December 31............................................... -- --
Federal funds purchased:
Average..................................................... 52 6,799
December 31................................................. -- 3,830
Maximum month-end balance during year....................... 1,006 15,420
Interest rate:
Weighted average.......................................... 5.30% 5.12%
December 31............................................... -- 4.79
</TABLE>
F-15
<PAGE>
BANK OF THE OZARKS, INC.
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands)
FHLB advances with original maturities exceeding one year totaled $14,017
and $22,993 at December 31, 1997 and 1998, respectively. Interest rates on
these advances ranged from 4.96% to 6.90% at December 31, 1998. Aggregate
annual maturities of these long-term FHLB advances at December 31, 1998 are as
follows: 1999 -$5,268; 2000 - $2,144; 2001 - $4,198; 2002-2007 - $198; 2008 -
$10,195. FHLB advances of $10 million maturing in 2008 may be called
quarterly but the Company has the option to refinance on a long-term basis any
amounts called. The FHLB maintains as collateral a blanket lien on the
Company's 1-4 family mortgages. At December 31, 1998, the Company's bank
subsidiaries had an aggregate of $59.6 million of unused blanket FHLB
borrowing availability.
10. Income Taxes
The following is a summary of the components of the provision for income
taxes:
<TABLE>
<CAPTION>
Year Ended December
31,
---------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Current:
Federal............................................. $1,683 $2,180 $2,363
State............................................... 614 277 36
------ ------ ------
Total current......................................... 2,297 2,457 2,399
Deferred:
Federal............................................. (242) 55 180
State............................................... (49) 4 42
------ ------ ------
Total deferred........................................ (291) 59 222
------ ------ ------
Provision for income taxes............................ $2,006 $2,516 $2,621
====== ====== ======
</TABLE>
The reconciliation between the statutory federal income tax rate and
effective income tax rate is as follows:
<TABLE>
<CAPTION>
Year ended
December 31,
----------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate.......................... 34.0% 34.0% 34.0%
State income taxes, net of federal benefit................. 4.3 4.3 0.6
Effect of non-taxable interest income...................... (2.5) (2.7) (3.7)
Accrual for state income tax assessment.................... 6.5 -- --
Other...................................................... (2.4) .1 0.9
---- ---- ----
Effective income tax rate.................................. 39.9% 35.7% 31.8%
==== ==== ====
</TABLE>
During the year ended December 31, 1996, the Company was assessed
approximately $326 of additional state income taxes for the years ended
December 31, 1992 through 1995. This assessment related to the State of
Arkansas taking a different position than the federal income tax treatment
regarding dividends from less than 95% owned subsidiaries. The full assessment
was recorded as income tax expense during the year ended December 31, 1996 and
paid during the year ended December 31, 1997. In addition, approximately $93
of interest charged on this assessment was also recorded during the year ended
December 31, 1996.
F-16
<PAGE>
BANK OF THE OZARKS, INC.
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands)
The types of temporary differences between the tax basis of assets and
liabilities and their financial reporting amounts that give rise to deferred
income tax assets and liabilities and their approximate tax effects are as
follows:
<TABLE>
<CAPTION>
December 31,
-------------
1997 1998
------ ------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses................................... $1,151 $1,514
Valuation of foreclosed assets.............................. 293 2
------ ------
Gross deferred tax assets..................................... 1,444 1,516
------ ------
Deferred tax liabilities:
Unrealized appreciation on securities available for sale.... 94 51
Accelerated depreciation on premises and equipment.......... 311 599
Other....................................................... 139 145
------ ------
Gross deferred tax liabilities................................ 544 795
------ ------
Net deferred tax assets....................................... $ 900 $ 721
====== ======
</TABLE>
11. Employee Benefit Plans
Employee Stock Ownership Plan - The Company has an employee stock ownership
plan ("ESOP") to provide benefits to substantially all employees of the
Company. The Company has historically made annual contributions to the plan as
determined solely by the Board of Directors. Participants in the plan become
fully vested after seven years of service although cash or shares are not
distributed until retirement or employment is terminated. The Company made no
contributions in 1998 and contributed $95 and $64 to the plan for the years
ended December 31, 1996 and 1997, respectively. Management intends to merge
the ESOP into the 401(k) Plan in January 1999.
401(k) Plan - In May 1997 the Company established a qualified retirement
plan, with a salary deferral feature designed to qualify under Section 401 of
the Internal Revenue Code (the "401(k) Plan"). The 401(k) Plan permits the
employees of the Company to defer a portion of their compensation in
accordance with the provisions of Section 401(k) of the Code. Matching
contributions may be made in amounts and at times determined by the Company.
Certain other statutory limitations with respect to the Company's contribution
under the 401(k) Plan also apply. Amounts contributed by the Company for a
participant will vest over six years and will be held in trust until
distributed pursuant to the terms of the 401(k) Plan.
Employees of the Company are eligible to participate in the 401(k) Plan when
they meet certain requirements concerning minimum age and period of credited
service. All contributions to the 401(k) Plan will be invested in accordance
with participant elections among certain investment options. Distributions
from participant accounts will not be permitted before age 65, except in the
event of death, permanent disability, certain financial hardships or
termination of employment. The Company made matching contributions to the
401(k) plan during 1997 and 1998 of $32 and $99, respectively.
F-17
<PAGE>
BANK OF THE OZARKS, INC.
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands)
12. Stock Options
The Company has a nonqualified stock option plan for certain key employees
and officers of the Company. It also has a nonqualified stock option plan for
non-employee directors of the Company. These two plans provide for the
granting of incentive nonqualified options to purchase up to 365,000 shares of
common stock in the Company. No option may be granted under these plans for
less than the fair market value of the common stock at the date of the grant.
The exercise period and the termination date for the employee plan options is
determined when the options are actually granted. The non-employee director
plan calls for options to purchase 1,000 shares of common stock to be granted
to non-employee directors the day after the annual stockholders' meeting.
These options are exercisable immediately and expire ten years after issuance.
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------
1997 1998
------------------ ------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Options Price Options Price
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Outstanding - beginning of year....... -- $ -- 106,500 $16.42
Granted............................... 108,500 16.42 103,700 24.11
Exercised............................. -- -- -- --
Canceled.............................. (2,000) 16.00 (12,150) 16.00
------- ------ ------- ------
Outstanding--end of year.............. 106,500 $16.42 198,050 $20.42
======= ====== ======= ======
Exercisable at end of year............ 8,000 $16.00 17,000 $22.37
======= ====== ======= ======
</TABLE>
Exercise prices for options outstanding as of December 31, 1998 ranged from
$16.00 to $34.13. The weighted-average fair value of options granted during
1997 and 1998 was $6.20 and $8.36, respectively. The weighted-average
remaining contractual life of the options issued in 1998 was 5.5 years.
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-
average assumptions used for grants in 1998: dividend yield increasing 15% per
year from the current $0.24; expected volatility ranging from .342 to .407;
risk-free interest rates ranging from 4.56% to 5.68% and expected lives
ranging from 2.75 to 6.5 years. For 1997, the following weighted-average
assumptions were used: dividend yield increasing 15% per year from $0.20;
expected volatility ranging from .326 to .342; risk from interest rates
ranging from 5.77% to 6.19% and expected lives ranging from 5 to 7.5 years.
For purposes of pro forma disclosures as required by SFAS No. 123, the
estimated fair value of the options is amortized over the option's vesting
period. The following table represents the required pro forma disclosures for
options granted subsequent to December 31, 1996:
<TABLE>
<CAPTION>
1997 1998
------ ------
<S> <C> <C>
Pro forma net income.......................................... $4,462 $5,363
Pro forma earnings per share:
Basic....................................................... 1.36 1.42
Diluted..................................................... 1.36 1.40
</TABLE>
F-18
<PAGE>
BANK OF THE OZARKS, INC.
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands)
The following is a summary of currently outstanding and exercisable options
at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------ --------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Options Contractual Exercise Options Exercise
Prices Outstanding Life (in years) Price Exercisable Price
- ------------- ----------- --------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 16.00 89,800 6.7 $16.000 8,000 $16.000
21.50 - 27.75 100,250 5.7 23.283 1,000 22.313
34.125 8,000 9.3 34.125 8,000 34.125
------- ------
198,050 17,000
======= ======
</TABLE>
13. Commitments and Contingencies
The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. The
Company has the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since these commitments may expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. The Company evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation of the counterparty. Collateral held varies but
may include accounts receivable, inventory, property, plant and equipment, and
income-producing commercial properties.
The Company had outstanding commitments to extend credit of approximately
$20,004 and $27,409 at December 31, 1997 and 1998, respectively. The
commitments extend over varying periods of time with the majority to be
disbursed within a one-year period.
The Company had total outstanding standby letters of credit amounting to
$1,931 and $334 at December 31, 1997 and 1998, respectively. The commitment
terms generally expire within one year.
The Company grants agri-business, commercial, residential and consumer
installment loans to customers primarily in northern, western and central
Arkansas. The Company maintains a diversified loan portfolio.
F-19
<PAGE>
BANK OF THE OZARKS, INC.
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands)
14. Related Party Transactions
The bank subsidiaries have entered into transactions with their executive
officers, directors, principal shareholders, and their affiliates (related
parties). The aggregate amount of loans to such related parties at December
31, 1997 and 1998 was $210 and $1,019, respectively. New loans made to such
related parties were $169 and $1,169 for the years ended December 31, 1997 and
1998, respectively. Repayments of loans made by such related parties were
$1,571 and $360 for the years ended December 31, 1997 and 1998, respectively.
During 1998, the Company constructed four banking buildings. The majority
owner of the contractor on these construction projects is a member of the
Company's Board of Directors. Total payments to the contractor during the year
ended December 31, 1998, were approximately $7,424.
15. Regulatory Matters
Federal regulatory agencies generally require member banks to maintain core
(Tier 1) capital of at least 3% of total assets plus an additional cushion of
1% to 2%, depending upon capitalization classifications. Tier 1 capital
generally consists of total stockholders' equity. Additionally, these agencies
require member banks to maintain total risk-based capital of at least 8% of
risk-weighted assets, with at least one-half of that total capital amount
consisting of Tier 1 capital. Total capital for risk-based purposes includes
Tier 1 capital plus the lesser of the allowance for loan losses or 1.25% of
risk-weighted assets.
As of December 31, 1997 and 1998, the most recent notification from the
regulators categorized the bank subsidiaries as "Well Capitalized" under the
regulatory framework for prompt corrective action. There are no conditions or
events since that notification that management believes have changed the bank
subsidiaries' category.
At December 31, 1998, the bank subsidiaries exceeded their minimum capital
requirements. As of December 31, 1998, the state bank commissioner's approval
was required before the bank subsidiaries could declare and pay any dividend
of 75% or more of the net profits of the bank subsidiaries after all taxes for
the current year plus 75% of the retained net profits for the immediately
preceding year. Approximately $5,703 was available at December 31, 1998 for
payments of dividends by the bank subsidiaries without the approval of
regulatory authorities.
The bank subsidiaries are limited by federal law in the amount of credit
which they may extend to their non-bank affiliates, including the Corporation.
Loans and other extensions of credit (loans) to a single non-bank affiliate
may not exceed 10% nor shall loans to all non-bank affiliates exceed 20% of an
individual bank's capital plus its allowance for losses on loans. Such loans
must be collateralized by assets having market values of 100% to 130% of the
loan amount depending on the nature of the collateral. At December 31, 1998,
the maximum amount available for transfer from the bank subsidiaries to the
Company in the form of loans approximated $4,856. The law imposes no
restrictions upon extensions of credit between FDIC-insured banks which are
80%-owned subsidiaries of the Corporation.
F-20
<PAGE>
BANK OF THE OZARKS, INC.
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands)
The bank subsidiaries are required by regulatory agencies to maintain
certain minimum balances of cash or non-interest bearing deposits primarily
with the Federal Reserve. At December 31, 1997 and 1998, these required
balances aggregated approximately $1,395 and $2,621, respectively.
The Company's and bank subsidiaries' regulatory capital positions were as
follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1998
----------------- -----------------
Computed Computed Computed Computed
Capital Percent Capital Percent
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Bank of the Ozarks, Inc. (consolidated)
Total risk-based capital................. $37,465 14.27% $41,340 10.21%
Tier 1 risk-based capital................ 34,177 13.01 36,651 9.05
Leverage ratio........................... -- 9.86 -- 6.21
Bank of the Ozarks, wca:
Total risk-based capital................. $28,349 15.44% $36,700 12.57%
Tier 1 risk-based capital................ 26,050 14.19 33,117 11.34
Leverage ratio........................... -- 11.15 -- 8.51
Bank of the Ozarks, nwa:
Total risk-based capital................. $10,764 14.13% $11,732 11.35%
Tier 1 risk-based capital................ 9,810 11.88 10,625 10.28
Leverage ratio........................... -- 9.71 -- 6.57
Bank of the Ozarks
Total risk-based capital................. -- -- $ 5,180 44.11%
Tier 1 Risk-based capital................ -- -- 5,180 44.11
Leverage Ratio........................... -- -- -- 14.03
</TABLE>
16. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of financial instruments.
Cash and due from banks - For these short-term instruments, the carrying
amount is a reasonable estimate of fair value.
Investment securities - For securities held for investment purposes, fair
values are based on quoted market prices or dealer quotes. If a quoted
market price is not available, fair value is estimated using quoted market
prices for similar securities or the carrying amount.
Loans, net of unearned income - The fair value of loans is estimated by
discounting the future cash flows using the current rate at which similar
loans would be made to borrowers with similar credit ratings and for the
same remaining maturities.
Deposit liabilities - The fair value of demand deposits, savings accounts,
NOW accounts and certain money market deposits is the amount payable on
demand at the reporting date. The fair value of fixed maturity certificates
is estimated using the rate currently offered for deposits of similar
remaining maturities. The carrying amount of accrued interest payable
approximates its fair value.
F-21
<PAGE>
BANK OF THE OZARKS, INC.
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands)
Other borrowed funds - For these short-term instruments, the carrying
amount is a reasonable estimate of fair value. The fair value of long-term
debt is estimated based on the current rates available to the Company for
debt with similar terms and remaining maturities.
Accrued interest - The carrying amount of accrued interest payable
approximates its fair value.
Off-balance sheet instruments - Fair values for off-balance sheet lending
commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and
the counterparties' credit standing.
Commitments to extend credit and standby letters of credit - The fair value
of these commitments is estimated using the fees currently charged to enter
into similar agreements taking into account the remaining terms of the
agreements and the present credit-worthiness of the counter-parties. For
fixed-rate loan commitments, fair value also considers the difference
between current levels of interest rates and the committed rates. The fair
value of letters of credit is based on fees currently charged for similar
agreements or on the estimated cost to terminate them or otherwise settle
the obligations with the counter-parties at the reporting date.
The following table presents the estimated fair values of the Company's
financial instruments. The fair values of certain of these instruments were
calculated by discounting expected cash flows, which involves significant
judgments by management and uncertainties. Fair value is the estimated amount
at which financial assets or liabilities could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation
sale. Because no market exists for certain of these financial instruments and
because management does not intend to sell these financial instruments, the
Company does not know whether the fair values shown below represent values at
which the respective financial instruments could be sold individually or in
the aggregate.
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1997 1998
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks.............. $ 15,628 $ 15,628 $ 15,024 $ 15,024
Available-for-sale securities........ 25,297 25,297 17,629 17,629
Held-to-maturity securities.......... 17,162 17,199 158,989 159,050
Federal funds sold................... 2,885 2,885 -- --
Loans, net of allowance for loan
losses.............................. 271,726 270,794 382,837 382,720
Accrued interest receivable.......... 3,013 3,013 5,517 5,517
Financial liabilities:
Demand, NOW and savings account
deposits............................ $ 95,833 $ 95,833 $145,609 $145,609
Time deposits........................ 199,722 201,547 383,431 384,598
Notes Payable........................ 5,072 5,072 12,448 12,448
FHLB advances and federal funds
purchased........................... 14,017 13,983 26,823 27,430
Repurchase agreements................ -- -- 1,408 1,408
Accrued interest and other
liabilities......................... 1,783 1,783 2,357 2,357
Off balance sheet items:
Standby letters of credit............ -- $ 1,932 -- $ 334
Commitments to extend credit......... -- 19,913 -- 27,409
Unfunded credit card loans........... -- 1,352 -- 1,419
</TABLE>
F-22
<PAGE>
BANK OF THE OZARKS, INC.
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands)
17. Supplemental Cash Flow Information
Supplemental cash flow information is as follows:
<TABLE>
<CAPTION>
Year Ended December
31,
----------------------
1996 1997 1998
------ ------- -------
<S> <C> <C> <C>
Cash paid during the period for:
Interest.......................................... $9,682 $13,255 $20,466
Income taxes...................................... 1,984 2,752 2,333
Supplemental schedule of non-cash investing and
financing activities:
Transfer of loans to foreclosed assets held for
sale............................................. $ 236 $ 683 $ 628
Loans advanced for sales of foreclosed assets..... 72 203 251
</TABLE>
18. Other Operating Expenses
The following is a summary of other operating expenses:
<TABLE>
<CAPTION>
Year Ended December
31,
--------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Operating supplies..................................... $ 215 $ 405 $ 454
Advertising and public relations....................... 123 332 566
Other.................................................. 1,552 1,856 2,941
------ ------ ------
Total other operating expenses......................... $1,890 $2,593 $3,961
====== ====== ======
</TABLE>
19. Earnings Per Common Share
The following table sets forth the computation of basic and diluted earnings
per share ("EPS"):
<TABLE>
<CAPTION>
Year Ended December
31,
--------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Numerator:
Net income.......................................... $3,027 $4,531 $5,629
====== ====== ======
Denominator:
Denominator for basic EPS weighted average shares... 2,880 3,272 3,780
Effect of dilutive securities:
Stock options..................................... -- 9 39
------ ------ ------
Denominator for diluted EPS - adjusted weighted
average shares and assumed conversions............. 2,880 3,281 3,819
====== ====== ======
Basic EPS............................................. $ 1.05 $ 1.38 $ 1.49
====== ====== ======
Diluted EPS........................................... $ 1.05 $ 1.38 $ 1.47
====== ====== ======
</TABLE>
F-23
<PAGE>
BANK OF THE OZARKS, INC.
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands)
20. Parent Company Financial Information
The following condensed balance sheets, income statements and statements of
cash flows reflect the financial position and results of operations for the
parent company:
Condensed Balance Sheets
<TABLE>
<CAPTION>
December 31,
---------------
1997 1998
------- -------
<S> <C> <C>
Assets
Cash and cash equivalents..................................... $ 3,264 $ 51
Investment in subsidiaries.................................... 36,313 51,459
Premises and equipment, net................................... 31 25
Excess cost over fair value of net assets acquired, at
amortized cost............................................... 1,337 1,261
Other......................................................... 8 11
------- -------
Total assets.............................................. $40,953 $52,807
======= =======
Liabilities and Stockholders' Equity
Notes payable................................................. $ 5,072 $12,388
Accrued interest and other liabilities........................ 215 64
------- -------
Total liabilities......................................... 5,287 12,452
------- -------
Stockholders' equity
Common stock................................................ 38 38
Additional paid-in capital.................................. 14,314 14,314
Retained earnings........................................... 21,162 25,922
Accumulated other comprehensive income...................... 152 81
------- -------
Total stockholders' equity................................ 35,666 40,355
------- -------
Total liabilities and stockholders' equity................ $40,953 $52,807
======= =======
</TABLE>
F-24
<PAGE>
BANK OF THE OZARKS, INC.
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands)
Condensed Statements of Income
<TABLE>
<CAPTION>
Year Ended December
31,
---------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Income
Dividends from subsidiaries........................... $1,250 $ -- $3,317
Other................................................. 1 1 2
------ ------ ------
Total income............................................ 1,251 1 3,319
------ ------ ------
Expenses
Interest.............................................. 468 554 637
Salaries and employee benefits........................ 349 284 --
Net occupancy and equipment........................... 51 71 53
Other operating expenses.............................. 243 360 620
------ ------ ------
Total expenses.......................................... 1,111 1,269 1,310
------ ------ ------
Income (loss) before income tax benefit and equity in
undistributed earnings of subsidiaries................. 140 (1,268) 2,009
Income tax benefit.................................... 183 486 461
Equity in undistributed earnings of subsidiary........ 2,704 5,313 3,159
------ ------ ------
Net income.............................................. $3,027 $4,531 $5,629
====== ====== ======
</TABLE>
F-25
<PAGE>
BANK OF THE OZARKS, INC.
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands)
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December
31,
------------------------
1996 1997 1998
------ ------- -------
<S> <C> <C> <C>
Cash flows from operating activities
Net income......................................... $3,027 $ 4,531 $ 5,629
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation..................................... 16 18 13
Amortization..................................... 57 56 77
Equity in undistributed earnings of
subsidiaries.................................... (2,704) (5,313) (3,159)
Changes in assets and liabilities:
Accrued interest and other liabilities.......... 106 (199) (110)
Other, net...................................... (30) 18 (3)
------ ------- -------
Net cash provided by (used in) operating activities.. 472 (889) 2,447
------ ------- -------
Cash flows from investing activities
Purchases of premises and equipment................ (6) (22) (7)
Purchase 100% of the stock in Heartland Community
Bank, FSB......................................... -- -- (3,100)
Additional investment in subsidiaries and purchase
of minority shares of stock....................... (1,500) (9,000) (9,000)
------ ------- -------
Net cash used in investing activities................ (1,506) (9,022) (12,107)
------ ------- -------
Cash flows from financing activities
Proceeds from issuance of common stock............. -- 13,155 --
Proceeds from notes payable........................ 1,500 10,000 14,350
Payments of notes payable.......................... (24) (10,324) (7,034)
Dividends paid..................................... (864) (620) (869)
------ ------- -------
Net cash provided by financing activities............ 612 12,211 6,447
------ ------- -------
Net (decrease) increase in cash and cash
equivalents......................................... (422) 2,300 (3,213)
Cash and cash equivalents - beginning of period...... 1,386 964 3,264
------ ------- -------
Cash and cash equivalents - end of period............ $ 964 $ 3,264 $ 51
====== ======= =======
</TABLE>
F-26
<PAGE>
BANK OF THE OZARKS, INC.
CONSOLIDATED BALANCE SHEETS
Unaudited
<TABLE>
<CAPTION>
March 31,
------------------
1998 1999
-------- --------
(Dollars in
thousands,
except per share
amounts)
<S> <C> <C>
ASSETS
Cash and due from banks.................................... $ 14,021 $ 13,260
Interest bearing deposits.................................. 10,885 184
Investment securities - available for sale................. 18,461 44,778
Investment securities - held to maturity................... 51,790 170,271
Federal funds sold......................................... 7,780 2,180
Loans, net of unearned income.............................. 299,505 400,851
Allowance for loan losses.................................. (3,822) (4,850)
Premises and equipment, net................................ 16,951 27,939
Foreclosed assets held for sale, net....................... 248 855
Interest receivable........................................ 3,414 6,288
Intangible assets, net..................................... 2,162 3,520
Other...................................................... 1,260 1,645
-------- --------
Total assets........................................... $422,655 $666,921
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Demand - non-interest bearing............................ $ 39,259 $ 56,280
Savings and interest-bearing transaction................. 69,088 104,895
Time..................................................... 243,965 420,529
-------- --------
Total deposits.......................................... 352,312 581,704
Notes payable.............................................. 5,072 13,183
FHLB advances and federal funds purchased.................. 25,993 25,425
Repurchase agreements...................................... -- 2,124
Accrued interest and other liabilities..................... 2,485 2,855
-------- --------
Total liabilities....................................... 385,862 625,291
-------- --------
Stockholders' equity
Common stock; $0.01 par value; Authorized 10,000,000
shares; 3,779,555 shares issued and outstanding......... 38 38
Additional paid-in capital............................... 14,314 14,314
Retained earnings........................................ 22,347 27,070
Accumulated other comprehensive income................... 94 208
-------- --------
Total stockholders' equity.............................. 36,793 41,630
-------- --------
Total liabilities and stockholders' equity............. $422,655 $666,921
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-27
<PAGE>
BANK OF THE OZARKS, INC.
CONSOLIDATED STATEMENTS OF INCOME
Unaudited
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
1998 1999
------------ -------------
(Dollars in thousands,
except per share amounts)
<S> <C> <C>
Interest income
Loans.......................................... $ 6,921 $ 8,617
Investment securities - taxable................ 776 2,758
Investment securities - non-taxable............ 128 347
Federal funds sold............................. 54 3
Deposits with banks............................ 114 5
------------ -------------
Total interest income........................ 7,993 11,730
------------ -------------
Interest expense
Deposits....................................... 3,488 5,717
Notes payable.................................. 108 205
FHLB advances.................................. 240 334
Federal funds purchased and repurchase
agreements.................................... -- 165
------------ -------------
Total interest expense....................... 3,836 6,421
------------ -------------
Net interest income.............................. 4,157 5,309
Provision for loan losses...................... (225) (611)
------------ -------------
Net interest income after provision for loan
losses.......................................... 3,932 4,698
------------ -------------
Other income
Trust income................................... 78 128
Service charges on deposit accounts............ 281 502
Other income, charges and fees................. 557 602
Gains on sales of securities................... 51 25
Other.......................................... 127 12
------------ -------------
Total other income........................... 1,094 1,269
------------ -------------
Other expense
Salaries and employee benefits................. 1,677 2,000
Net occupancy and equipment.................... 426 636
Other operating expenses....................... 821 1,132
------------ -------------
Total other expense.......................... 2,924 3,768
------------ -------------
Income before income taxes....................... 2,102 2,199
Provision for income taxes..................... 728 673
------------ -------------
Net income....................................... $ 1,374 $ 1,526
============ =============
Basic and diluted earnings per common share...... $ 0.36 $ 0.40
============ =============
Cash dividends declared.......................... $ 0.05 $ 0.10
============ =============
</TABLE>
See accompanying notes to consolidated financial statements
F-28
<PAGE>
BANK OF THE OZARKS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Unaudited
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-In Retained Comprehensive
Stock Capital Earnings Income Total
------ ---------- -------- ------------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Beginning balance - January
1, 1998..................... $38 $14,314 $21,162 $152 $35,666
Comprehensive income:
Net income................. -- -- 1,374 -- 1,374
Other comprehensive income:
Unrealized gains on
available for sale
securities net of $1 tax
effect................... -- -- -- (2) (2)
Less: reclassification
adjustment for gains
included in income net of
$35 tax effect........... -- -- -- (56) (56)
-------
Comprehensive income........ -- -- -- -- 1,316
-------
Cash dividends.............. -- -- (189) -- (189)
--- ------- ------- ---- -------
Ending balance - March 31,
1998........................ $38 $14,314 $22,347 $ 94 $36,793
=== ======= ======= ==== =======
Beginning balance - January
1, 1999..................... $38 $14,314 $25,922 $ 81 $40,355
Comprehensive income:
Net income................. -- -- 1,526 -- 1,526
Other comprehensive income:
Unrealized gains on
available for sale
securities net of $113
tax effect............... -- -- -- 182 182
Less: reclassification
adjustment for gains
included in income net of
$35 tax effect........... -- -- -- (55) (55)
-------
Comprehensive income........ -- -- -- -- 1,653
-------
Cash dividends.............. -- -- (378) -- (378)
--- ------- ------- ---- -------
Ending balance - March 31,
1999........................ $38 $14,314 $27,070 $208 $41,630
=== ======= ======= ==== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-29
<PAGE>
BANK OF THE OZARKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1998 1999
----------- -----------
(Dollars in thousands)
<S> <C> <C>
Net income.......................................... $ 1,374 $ 1,526
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation....................................... 195 331
Amortization....................................... 22 67
Provision for loan losses.......................... 225 611
Provision for losses on foreclosed assets.......... -- 16
Gains on sales of securities....................... (51) (25)
(Increase) decrease in mortgage loans held for
sale.............................................. (365) 1,481
Gain on disposition of premises and equipment...... (4) (4)
(Gain) loss on disposition of foreclosed assets.... (84) 10
Deferred income taxes.............................. (22) (67)
Changes in assets and liabilities:
Interest receivable............................... (399) (771)
Other, net........................................ 468 (276)
Accrued interest and other liabilities............ 167 499
----------- -----------
Net cash provided by operating activities........... 1,526 3,398
----------- -----------
Cash flows from investing activities:
Purchase of subsidiaries, net of funds acquired.... 7,164 --
Proceeds from sales and maturities of investment
securities available for sale..................... 7,230 6,713
Purchases of investment securities available for
sale.............................................. (280) (33,634)
Proceeds from maturities of investment securities
held to maturity.................................. 3,145 26,111
Purchases of investment securities held to
maturity.......................................... (37,781) (37,393)
Increase in federal funds sold..................... (4,450) (2,180)
Net increase in loans.............................. (24,064) (16,153)
Proceeds from issuance of loans.................... -- --
Proceeds from dispositions of bank premises and
equipment......................................... 4 15
Purchase of bank premises and equipment............ (3,038) (1,126)
Proceeds from dispositions of foreclosed assets.... 210 330
----------- -----------
Net cash used by investing activities............... (51,860) (57,317)
----------- -----------
Cash flows from financing activities:
Net increase in deposits........................... 47,402 52,664
Net changes in FHLB advances and federal funds
purchased......................................... 12,399 (1,398)
Net increase in repurchase agreements.............. -- 716
Proceeds from notes payable........................ -- 735
Dividends paid..................................... (189) (378)
----------- -----------
Net cash provided by financing activities........... 59,612 52,339
----------- -----------
Net increase (decrease) in cash and cash
equivalents........................................ 9,278 (1,580)
Cash and cash equivalents - beginning of period..... 15,628 15,024
----------- -----------
Cash and cash equivalents - end of period........... $ 24,906 $ 13,444
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-30
<PAGE>
BANK OF THE OZARKS, INC.
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, wca and Bank of the Ozarks, nwa, (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 elsewhere in this prospectus.
In the opinion of management all adjustments considered necessary,
consisting of normal recurring items, have been included for a fair
presentation of the accompanying consolidated financial statements. Operating
results for the three months ended March 31, 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:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1998 1999
----------- -----------
(In thousands, except
per share amounts)
<S> <C> <C>
Common shares - weighted averages...................... 3,780 3,780
Common share equivalents - weighted averages........... 41 16
----------- -----------
3,821 3,796
=========== ===========
Net income............................................. $ 1,374 $ 1,526
Basic earnings per common share........................ $ 0.36 $ 0.40
Diluted earnings per common share...................... 0.36 0.40
</TABLE>
F-31
<PAGE>
BANK OF THE OZARKS, INC.
Notes to Consolidated Financial Statements (continued)
Unaudited
4. Federal Home Loan Bank ("FHLB") Advances
FHLB advances with original maturities exceeding one year totaled $25.4
million at March 31, 1999. Interest rates on these advances ranged from 4.16%
to 6.47% at March 31, 1999 with a weighted average rate of 5.28%. Aggregate
annual maturities (amounts in thousands) and weighted average interest rates
of FHLB advances with an original maturity of over one-year at March 31, 1999
are as follows:
<TABLE>
<CAPTION>
Weighted
Amounts Average Rate
------- ------------
<S> <C> <C>
1999....................................................... $ 2,700 6.47%
2000....................................................... 2,145 5.77
2001....................................................... 4,198 5.94
2002....................................................... 197 6.30
2003....................................................... 197 6.30
Thereafter................................................. 15,988 4.82
-------
$25,425
=======
</TABLE>
FHLB advances of $15.0 million maturing in 2008 and 2009 may be called
quarterly but the Company has the option to refinance on a long-term basis any
amounts called.
At March 31, 1999, the Company had no FHLB advances with original maturities
of one year or less.
5. Supplementary Data for Cash Flows
Cash payments for interest by the Company during the three months ended
March 31, 1998, amounted to $3.7 million and during the three months ended
March 31, 1999, amounted to $6.4 million. Cash payments for income taxes
during the three months ended March 31, 1998 and 1999 amounted to $72,000 and
$148,000, respectively.
F-32
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1,500,000 Preferred Securities
Ozark Capital Trust
9.0% Cumulative Trust Preferred Securities
(Liquidation Amount $10Per Preferred Security)
Guaranteed By
[LOGO OF BANK OF THE OZARKS APPEARS HERE]
----------------
PROSPECTUS
----------------
Stephens Inc.
Morgan Keegan & Company, Inc.
June 14, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
