<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
() TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________.
Commission File Number 0-22759
BANK OF THE OZARKS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
ARKANSAS 71-0556208
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
12615 CHENAL PARKWAY, P. O. BOX 8811, LITTLE ROCK, ARKANSAS 72231-8811
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (501) 978-2265
</TABLE>
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- --------------------
None N/A
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( )
State the aggregate market value of the Registrant's common stock held
by non-affiliates: $44,872,987 (based upon the average bid and asked prices
quoted on the Nasdaq National Market on March 10, 1999).
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practical date.
Class Outstanding at December 31, 1998
- --------------------------------------- --------------------------------
Common Stock, par value $0.01 per share 3,779,555
DOCUMENTS INCORPORATED BY REFERENCE: Parts I, II and III of this Form
10-K incorporate certain information by reference from the Registrant's Annual
Report to Stockholders for the year ended December 31, 1998 and the Proxy
Statement for its 1999 annual meeting.
<PAGE>
BANK OF THE OZARKS, INC.
FORM 10-K
December 31, 1998
INDEX
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Business 1
Item 2. Properties 9
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
PART II.
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters 11
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 11
Item 8. Financial Statements and Supplementary Data 11
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 11
PART III.
Item 10. Directors and Executive Officers of the Registrant 11
Item 11. Executive Compensation 12
Item 12. Security Ownership of Certain Beneficial Owners and
Management 12
Item 13. Certain Relationships and Related Transactions 12
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 12
Signatures 16
<PAGE>
Part I
Item 1. BUSINESS
--------
GENERAL
Bank of the Ozarks, Inc. (the "Company") is an Arkansas business
corporation registered under the Bank Holding Company Act of 1956. The Company
owns two state chartered banks, Bank of the Ozarks, wca and Bank of the Ozarks,
nwa, that conduct banking operations through 20 offices in 15 communities
throughout northern, western and central Arkansas. At December 31, 1998 the
Company had total assets of $612.4 million, total loans of $387.5 million and
total deposits of $529.0 million.
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 an expansion strategy, via de novo
branching, into target Arkansas markets. Since embarking on this strategy, the
Company has opened 15 new offices in northern, western and central Arkansas,
with 10 new offices being opened since January 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 a total of four additional full service offices including new
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.
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. The Company originally entered the Little Rock
market in 1995, when it opened its corporate headquarters and a small commercial
lending office. In 1996 the Company opened a residential mortgage lending
office. 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. The Company is continuing to expand its
presence in this market area with the January 1999 opening of an office in North
Little Rock. Subject to completion of site negotiations and receipt of
regultory approval, a second North Little Rock office is planned for the second
half of 1999. The Company pursued major expansion in a second metropolitan
market in September 1998 with the opening of a 22,500 square foot banking center
in Fort Smith. This full service facility replaced a temporary branch opened
less than a year earlier.
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.
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
1
<PAGE>
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.
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.
2
<PAGE>
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 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 December
31, 1998 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
opera tions. 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 December 31, 1998 total trust assets
under management were $36.7 million.
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 $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.
3
<PAGE>
EMPLOYEES
At December 31, 1998 the Company employed 266 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.
EXECUTIVE OFFICERS OF REGISTRANT
The following is a list of the executive officers of the Company for 1999:
George Gleason, age 45, 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, age 48, Vice Chairman since 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, age 43, 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.
Danny Criner, age 44, 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, age 52, 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, age 47, 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, age 55, Executive Vice President, Trust of Bank of the
Ozarks, wca since June 1998. From 1993 to June 1997 Mr. Avants served as Senior
Vice President, Trust Manager for First Bank of Arkansas, Jonesboro, Arkansas,
and from June 1997 to June 1998 he served as 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, age 50, 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.
Darrel Russell, age 45, 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.
4
<PAGE>
Randy Oates, age 55, 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.
Unless otherwise noted, each of the foregoing persons serves in the same
position with both the Company and each of its bank subsidiaries.
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 (the "FRB"), 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 FRB.
Bank Holding Company Act. The Company is subject to supervision by the FRB
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 FRB 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 FRB's notification and approval procedures. In reviewing these
notifications, the FRB 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 FRB approval before
engaging in acquisitions of banks or bank holding companies. In particular, the
FRB 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
. the merger or consolidation with another bank holding company
In considering any application for approval of an acquisition or merger, the FRB
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
5
<PAGE>
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 acquisition by the FRB, 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 FRB 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 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."
6
<PAGE>
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 FRB 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
FRB 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 FRB 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 FRB 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 FRB an annual report and such additional information as the FRB 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 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
7
<PAGE>
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, 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 availablity 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 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 subsidiaires 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.
8
<PAGE>
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.
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.
Item 2. PROPERTIES
----------
The Company serves its customers by offering a broad range of banking services
throughout northern, western and central Arkansas from the following locations:
9
<PAGE>
<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 22,200
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 "--Growth Strategy."
Item 3. 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.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No information is required in response to this Item as no matters were
submitted to a vote of Registrant's security holders during the fourth quarter
of the fiscal year covered by this report.
10
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
---------------------------------------------------------------------
The Company's Common Stock is listed on the Nasdaq National Market under the
symbol "OZRK". The other information required by Item 201 of Regulation S-K is
contained in the Management's Discussion and Analysis section of the Company's
1998 Annual Report under the heading "Summary of Quarterly Results of
Operations, Common Stock Market Prices and Dividends" on page 28, which
information is incorporated herein by reference.
Item 6 SELECTED FINANCIAL DATA
-----------------------
The information required by Item 301 of Regulation S-K is contained in the
Company's 1998 Annual Report under the heading "Selected Consolidated Financial
Data" on page 9, which information is incorporated herein by reference.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
----------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The information required by Item 303 of Regulation S-K is contained in the
Company's 1998 Annual Report under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on pages 10 through
28, which information is incorporated herein by reference.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
The information required by Item 305 of Regulation S-K is contained in the
Management's Discussion and Analysis section of the Company's 1998 Annual Report
under the heading "Interest Rate Sensitivity" and "Expected Maturity Dates of
Financial Instruments" on pages 21 through 23, which information is incorporated
herein by reference.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The information required by this Item and by Item 302 of Regulation S-K is
contained in the Company's 1998 Annual Report on pages 29 through 44 and in the
Management's Discussion and Analysis section of the 1998 Annual Report under the
heading "Summary of Quarterly Results of Operations, Common Stock Market Prices
and Dividends" on page 28, which information is incorporated herein by
reference.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
----------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
The information required in response to this item was previously reported by
the Company on a Current Report on Form 8-K dated July 21, 1998, as amended.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The information required by Item 401 of Regulation S-K regarding directors is
contained in the Company's Proxy Statement for the 1999 annual meeting under the
heading "Election of Directors" on pages 3 through 4, which information is
incorporated herein by reference. In accordance with Item 401(b) of Regulation
S-K, Instruction 3, information concerning the Company's executive officers is
furnished in a separate item captioned "Executive Officers of Registrant" in
Part I above. The information required by Item 405 of Regulation S-K is
contained in the Company's Proxy Statement for the 1999 annual meeting under the
heading "Section 16(a) Beneficial Ownership Reporting Compliance" on page 16,
which information is incorporated herein by reference.
11
<PAGE>
Item 11. EXECUTIVE COMPENSATION
----------------------
The information required by Item 402 of Regulation S-K is contained in the
Company's Proxy Statement for the 1999 annual meeting under the heading
"Executive Compensation and Other Information" on pages 9 through 11, which
information is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The information required by Item 403 of Regulation S-K is contained in the
Company's Proxy Statement for the 1999 annual meeting under the headings
"Principal Stockholders" and "Security Ownership of Management" on pages 7
through 8, which information is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The information required by Item 404 of Regulation S-K is contained in the
Company's Proxy Statement for the 1999 annual meeting under the heading "Certain
Transactions" on page 14, which information is incorporated herein by reference.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
----------------------------------------------------------------
(a) The following documents are filed as part of this report:
(1) The following consolidated financial statements of the Registrant
included on pages 30 to 44 in the Company's Annual Report for the fiscal
year ended December 31, 1998, and the Report of Independent Auditors on
page 29 of such Annual Report are incorporated herein by reference
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Income for the Years Ended December 31, 1998,
1997 and 1996
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
All schedules are omitted for the reasons that they are not required or
are not applicable, or the required information is shown in the
consolidated financial statements or the notes thereto.
(b) Reports on Form 8-K:
Registrant did not file any reports on Form 8-K during the fourth quarter
of 1998.
(c) Exhibits:
The exhibits to this report are listed in the Exhibit Index at the end of
this Item 14.
12
<PAGE>
(d) Financial Statement Schedules:
Not applicable.
13
<PAGE>
EXHIBIT INDEX
The following exhibits are filed with this report or are incorporated by
reference to previously filed material.
Exhibit No.
- -----------
3.1 Amended and Restated Articles of Incorporation of the Registrant, dated
May 22, 1997 (previously filed as Exhibit No. 3.1 to the Company's
Registration Statement on Form S-1 filed with the Commission on May 22,
1997, as amended, Commission File No. 333-27641, and incorporated herein
by this reference).
3.2 Amended and Restated By-Laws of the Registrant, dated March 13, 1997
(previously filed as Exhibit No. 3.2 to the Company's Registration
Statement on Form S-1 filed with the Commission on May 22, 1997, as
amended, Commission File No. 333-27641, and incorporated herein by this
reference).
10.1 Bank of the Ozarks, Inc. Stock Option Plan, dated May 22, 1997 (previously
filed as Exhibit No. 10.1 to the Company's Registration Statement on Form
S-1 filed with the Commission on May 22, 1997, as amended, Commission File
No. 333-27641, and incorporated herein by this reference).
10.2 Bank of the Ozarks, Inc. Non-Employee Director Stock Option Plan, dated
May 22, 1997 (previously filed as Exhibit No. 10.2 to the Company's
Registration Statement on Form S-1 filed with the Commission on May 22,
1997, as amended, Commission File No. 333-27641, and incorporated herein
by this reference).
10.3 Loan Agreement with Union Planters National Bank, Memphis, Tennessee,
dated March 25, 1998 (previously filed as Exhibit No. 10 to the Company's
Quarterly Report on Form 10-Q filed with the Commission for the period
ended March 31, 1998, and incorporated herein by this reference).
10.4 Real Estate Contract - Fort Smith (Sebastian County), dated February 6,
1997 (previously filed as Exhibit No. 10.4 to the Company's Registration
Statement on Form S-1 filed with the Commission on May 22, 1997, as
amended, Commission File No. 333-27641, and incorporated herein by this
reference).
10.5 Offer & Acceptance - (Chenal Parkway) Little Rock (Pulaski County), dated
December 12, 1996 (previously filed as Exhibit No. 10.5 to the Company's
Registration Statement on Form S-1 filed with the Commission on May 22,
1997, as amended, Commission File No. 333-27641, and incorporated herein
by this reference).
10.6 Ground Lease - Marshall (Searcy County), dated October 15, 1993
(previously filed as Exhibit No. 10.6 to the Company's Registration
Statement on Form S-1 filed with the Commission on May 22, 1997, as
amended, Commission File No. 333-27641, and incorporated herein by this
reference).
10.7 Ground Lease - Harrison (Boone County), dated December 22, 1994
(previously filed as Exhibit No. 10.7 to the Company's Registration
Statement on Form S-1 filed with the Commission on May 22, 1997, as
amended, Commission File No. 333-27641, and incorporated herein by this
reference).
10.8 Ground Lease - Clarksville (Johnson County), dated January 1, 1995
(previously filed as Exhibit No. 10.7 to the Company's Registration
Statement on Form S-1 filed with the Commission on May 22, 1997, as
amended, Commission File No. 333-27641, and incorporated herein by this
reference).
10.9 Employment Agreement, dated May 22, 1997, between the Registrant and
George Gleason (previously filed as Exhibit No. 10.9 to the Company's
Registration Statement on Form S-1 filed with the Commission on May 22,
1997, as amended, Commission File No. 333-27641, and incorporated herein
by this reference).
10.10 Form of Indemnification Agreement between the Registrant and its
directors and certain of its executive officers (previously filed as
Exhibit No. 10.10 to the Company's Registration Statement on Form S-1
filed with the Commission on May 22, 1997, as amended, Commission File No.
333-27641, and incorporated herein by this reference).
14
<PAGE>
10.11 Amendment to Employment Agreement, dated September 16, 1997, between the
Registrant and George Gleason (previously filed as exhibit 10 to the
Company's quarterly report on Form 10-Q filed with the Commission for the
period ended September 30, 1997, and incorporated herein by this
reference).
10.12 Second Amendment to Employment Agreement, dated July 21, 1998 between the
Registrant and George Gleason (previously filed as Exhibit 10 to the
Company's Quarterly Report on Form 10-Q filed with the Commission for the
period ended June 30, 1998, and incorporated herein by reference).
10.13 Stock Purchase Agreement, dated November 19, 1997, between the
Registrant, Heartland Community Bank, Camden, Arkansas, and HCB
Bancshares, Inc. (previously filed as Exhibit 10.12 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997, and
incorporated herein by reference).
10.14 Construction Contract, dated September 2, 1997, between Bank of the
Ozarks, wca and East-Harding, Inc. (Little Rock Office) (previously filed
as Exhibit No. 10.13 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997, and incorporated herein by this reference).
10.15 Construction Contract, dated December 24, 1997, between Bank of the
Ozarks, wca and East-Harding, Inc. (Fort Smith Office) (previously filed
as Exhibit No. 10.14 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997, and incorporated herein by this reference).
10.16 Ground Lease - North Little Rock (Pulaski County), dated November 20,
1998, between Bank of the Ozarks, wca. and Indian Hills Shopping Center
Partnership d/b/a Indian Hills Shopping Center, as amended December 8,
1998 (attached).
13 Portions of the Registrant's Annual Report to Stockholders for the year
ended December 31, 1998 which are incorporated herein by reference: pages
9 to 44 of such Annual Report (attached).
21 List of Subsidiaries of the Registrant (attached).
23.1 Consent of Ernst & Young LLP (attached).
23.2 Consent of Moore Stephens Frost (attached).
27.1 Financial Data Schedule (attached).
15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BANK OF THE OZARKS, INC.
By: /s/ George Gleason
------------------------------------
Chairman and Chief Executive Officer
Date: March 16, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ George Gleason Chairman of the Board, Chief Executive Officer March 16, 1999
- ------------------------------- and Director
George Gleason
/s/ James Patridge Vice Chairman and Director March 16, 1999
- -------------------------------
James Patridge
/s/ Mark Ross President and Director March 16, 1999
- -------------------------------
Mark Ross
/s/ Paul Moore Chief Financial Officer March 16, 1999
- ------------------------------- (Chief Accounting Officer)
Paul Moore
Director
- ------------------------------
Roger Collins
/s/ Jerry Davis Director March 16, 1999
- -------------------------------
Jerry Davis
Director
- ------------------------------
C. E. Dougan
</TABLE>
16
<PAGE>
<TABLE>
<S> <C> <C>
/s/ Robert East Director March 16, 1999
- -------------------------------
Robert East
/s/ Linda Gleason Director March 16, 1999
- -------------------------------
Linda Gleason
/s/ Porter Hillard Director March 16, 1999
- -------------------------------
Porter Hillard
/s/ Henry Mariani Director March 16, 1999
- -------------------------------
Henry Mariani
/s/ Dr. R. L. Qualls Director March 16, 1999
- ------------------------------
Dr. R. L. Qualls
/s/ Kennith Smith Director March 16, 1999
- ------------------------------
Kennith Smith
</TABLE>
17
<PAGE>
Exhibit 10.16
LEASE
THIS LEASE made this 20th day of November, 1998 by and between INDIAN
HILLS SHOPPING CENTER PARTNERSHIP D/B/A INDIAN HILLS SHOPPING CENTER an Arkansas
General Partnership, (Landlord), and BANK OF THE OZARKS WCA, (Tenant):
WITNESSETH THAT, in consideration of the rents, covenants and agreements
hereinafter set forth, such parties enter into the following agreement:
ARTICLE I
EXHIBITS
The exhibits listed below and attached to this Lease are incorporated
herein by this reference:
EXHIBIT "A" Legal description of real estate to be developed for a
shopping center (hereinafter called "Total Tract").
EXHIBIT "B" Plot Plan of Total Tract, showing existing and proposed
improvements and depicting Total Tract with existing and
future improvements being hereinafter called "the Center".
EXHIBIT "C" Description of Landlord's Work and Tenant's Work.
EXHIBIT "E" Sign criteria applicable to Tenant.
Notwithstanding Exhibit A, B or C or anything else in this Lease contained,
Landlord reserves the unlimited right to change or modify and add to or subtract
from the size and dimensions of the Center or any part thereof, the number,
location and dimensions of buildings and stores, dimensions of hallways, malls
and corridors, the number of floors in any building, the location, size and
number of tenants spaces and kiosks which may be erected in or fronting on any
mall or otherwise, the identity, type and location of other stores and tenants,
and the size, shape, location and arrangement of Common Areas (as defined in
Section 5.1), and to design and decorate any portion of the Center as it
desires, in Landlord's discretion reasonably exercised.
ARTICLE II
LEASED PREMISES AND TERM
Section 2.1. Leased Premises.
Landlord hereby leases to Tenant, and Tenant hereby rents from Landlord,
the space (in the Center) designated as Unit 6929 JFK, Ste. 4 outlined in red on
Exhibit "B" (herein called "the
<PAGE>
premises"), with a front width of approximately 30' and a depth of approximately
50', measured to the center line of all party or common walls, to the exterior
faces of all other walls, and to the building line where there is no wall,
containing approximately 1,500 square feet (the actual number of square feet,
when the premises are completed, being herein called the "Store floor area").
Section 2.2. Roof and Walls.
Landlord shall have the exclusive right to use all or any part of the roof,
side and rear walls of the premises for any purpose, including but not limited
to erecting signs or other structures on or over all or any part of the same,
erecting scaffolds and other aids to the construction and installation of the
same, and installing, maintaining, using, installing, repairing and replacing
pipes, ducts, conduits and wires leading through, to or from the premises and
serving other parts of the Center not materially interfere with Tenant's use of
the premises. Tenant shall have no right whatsoever in the exterior of exterior
or the roof of the premises or any portion of the Center outside the premises,
except as provided in Section 5.2 hereof.
Section 2.3. Lease Term.
The "Rental and Commencement" Date shall be the earlier to occur of (a) the
date that Tenant opens for business, or (b) December 1, 1998. Should that date
be other than the first day of the month, then the rent shall be prorated to the
first day of the following month (hereinafter called the "Commencement Date") so
that each month thereafter a full month's rent shall be due and payable on the
first day of each month and continuing for a period of one (1) year.
Section 2.4. Lease Year Defined.
"Lease Year" as used herein, means a period of twelve consecutive months
during the "Lease Year" commencing on the "Commencement Date" of any calendar
year.
ARTICLE III
LANDLORD'S WORK AND TENANT'S WORK
Section 3.1. Tenant's Work.
Tenant agrees to accept Unit 6929 JFK, Ste. 4 in its present "as is"
condition, except as provided in Exhibit "C" attached hereto. Further
alterations of this unit will be at the Tenant's sole expense and deemed to be
Tenant's Work, including but not limited to all work designated as Tenant's work
in Exhibit "C", and Tenant shall do and perform all Tenant's Work diligently and
promptly and in accordance with the following provisions.
Section 3.2. Tenant's Obligations Before Commencement Date.
Within 15 days hereafter, Tenant will submit to Landlord one (1) set of
plans and specifications for all of Tenant's Work to be done within the premises
("Tenant's Plans"). As soon as reasonably possible thereafter, Landlord shall
notify Tenant of any failures of Tenant's Plans to meet with Landlord's
approval. Tenant shall, within 15 days after receipt of any such
2
<PAGE>
notice cause Tenant's Plans to be revised to the extent necessary to obtain
Landlord's approval and resubmitted for Landlord's approval. When Landlord has
approved the original or revised Tenant's Plans, Landlord shall initial and
return one set of approved Tenant's Plans to Tenant and the same shall become a
part hereof by this reference.
Tenant shall commence such work promptly upon approval of its plans and
complete the same, install all store and trade fixtures, equipment, stock in
trade, merchandise and inventory, and open for business therein not later than
the 90th day after the date of this lease.
ARTICLE IV
RENT
Section 4.1. Minimum Rent.
Tenant covenants and agrees to pay to Landlord, without notice, demand or
set off, in lawful currency of the United States of America at the time of
payment for all debts, public and private, at Landlord's notice address
(Landlord's and Tenant's notice addresses being the addresses specified in
Section 24.7 hereof), as rent for the premises:
(i) Commencing upon the Commencement Date and continuing until the
last day of the first (1/st/) Lease Year "Minimum Annual Rent" of SEVENTEEN
THOUSAND THREE HUNDRED NINETY DOLLARS ($17,390.00) per annum, payable at
the rate of ONE THOUSAND FOUR HUNDRED FORTY NINE AND 17/100's DOLLARS
($1,449.17) per month, and payable on the first day of each month.
Section 4.2. Miscellaneous Rent Provisions.
Any rent or other amounts to be paid by Tenant which are not paid when due
shall bear interest from the date due until fully paid at the lesser of 10% per
annum or the highest legal rate which Tenant may be required to pay in the State
where the Center is located. If the Commencement Date is other than the first
day of a month, Tenant shall pay on the Commencement Date a prorated partial
Minimum Monthly Rent for the period prior to the first day of the next calendar
month, and thereafter Minimum Monthly Rent payments shall be made not later than
the first day of each calendar month.
Tenant will preserve for at least three (3) years at Tenant's Notice
Address all original books and records (including electronic data storage), tax
returns, federal and state, and state sales tax disclosing information
pertaining to gross sales and such other information respecting gross sales as
Landlord requires. Landlord and its agents shall have the right during business
hours to examine and audit such books and records. If such examination of audit
discloses a liability for Percentage Rent 2% or more in excess of the Percentage
Rent paid by Tenant for any period, Tenant shall promptly pay Landlord the cost
of said audit and the deficiency in rents, which deficiency shall be payable in
any event.
Section 4.5. Real Estate Taxes.
A. Definition. As used in this Section 4.5 the term "real estate taxes"
shall mean and include all real estate taxes, public and governmental charges
and assessments, including all
3
<PAGE>
extraordinary or special assessments, all costs and fees incurred by Landlord in
contesting or negotiating with public authorities as to any of the same and all
sewer and other taxes and charges, but shall not include taxes on Tenant's
machinery, equipment, inventory or other personal property or assets of Tenant,
Tenant agreeing to pay all taxes upon or attributable to such excluded property
without apportionment.
B. Tenant's Share. Tenant shall pay to Landlord, as additional rent, its
proportionate share of all real estate taxes upon the Center which become due or
payable during this Lease Term, such proportionate share to be prorated for
periods at the beginning and end of the Lease Term which do not constitute full
calendar months or year. Tenant's proportionate share of any such taxes shall
be that portion of such taxes which bears the same ratio to the total real
estate taxes on Landlord's Tract as the Store floor area bears to the rentable
floor area on the Center (hereinafter called "Rentable Floor Area") as of the
Commencement Date or the first day of the calendar year in which such taxes are
due or payable. Rentable Floor Area occupied by certain stores, and tenants in
free standing premises who are obligated to pay real estate taxes specifically
upon specific improvements or a specific parcel of land, and the real estate
taxes paid by them, shall not be included in computing Tenant's obligations
under this Section. Tenant's share of taxes for the first (1st) year shall be
THIRTY FIVE CENTS ($0.35) per square foot which equals FIVE HUNDRED TWENTY FIVE
DOLLARS ($525.00) per annum to be paid at a rate of FORTY THREE & 75/100's
DOLLARS ($43.75) per month.
C. Payment by Tenant. Tenant's proportionate share of real estate taxes
shall be paid in monthly installments commencing with the Commencement Date, in
amounts initially estimated by the Landlord, one such installment being due on
the first day of each full or partial month of each full or partial calendar
year during the Lease Term. Such monthly installments shall increase or
decrease upon notice from Landlord given after the actual or anticipated amounts
of real estate taxes due or payable in a particular calendar year are
determined. Following the close of each full or partial calendar year during
the Lease Term, the actual amount of real estate taxes due or payable shall be
computed by Landlord and any excess paid by Tenant during such calendar year
over the actual amount Tenant is obligated to pay hereunder shall be credited to
the next payment, and within ten (10) days after written notice from Landlord
any deficiency owed shall be paid by Tenant.
D. Other Taxes. Any tax, charge, impositions, or assessment of any
governmental, municipal, or other authority levied, assessed or imposed on
account of the payment by Tenant or receipt by Landlord or based in whole or in
part upon, the rents in this Lease reserved or upon the Center or the value
thereof shall be paid by Tenant.
Section 4.6. Sprinkler System.
Landlord in its sole discretion, may provide, install on a stand grid, and
maintain a sprinkler system in the premises.
Section 4.7. Additional Rent.
All amounts required or provided to be paid by Tenant under this Lease
shall be deemed rent, and the failure to pay the same shall be treated in all
events as the failure to pay rent.
4
<PAGE>
Section 4.8. Payments for Tenant.
If Landlord pays any monies or incurs any expense to correct a breach of
this Lease by Tenant or to do anything in this Lease required to be done by
Tenant, all amounts so paid or incurred shall, on notice to Tenant, be
considered additional rent payable by Tenant with the first installment of
Minimum Annual Rent thereafter becoming due and payable, and may be collected as
by law provided in the case of rent.
ARTICLE V
PARKING AND COMMON USE AND FACILITIES
Section 5.1 Common Areas.
All parking areas, access roads and facilities furnished, made available or
maintained by Landlord in or near the Center, including employee parking areas,
truck ways, driveways, loading docks and areas, delivery areas, multistory
parking facilities (if any), package pickup stations, pedestrian sidewalks,
mails, courts and ramps, landscaped areas, retaining walls, stairways, bus
stops, first-aid and comfort stations, lighting facilities and other areas and
improvements provided by Landlord for the general use in common of tenants and
their customers in the Center (all herein called "Common Areas") shall at all
times be subject to the exclusive control and management of Landlord, and
Landlord shall have the right, from time to time, to establish, modify and
enforce rules and regulations with respect to all common areas. Tenant agrees
to comply with all rules and regulations set forth in Exhibit "D" attached
hereto and all amendments thereto which are applicable to tenants at the Center.
Landlord shall have the right from time to time to: change the sizes,
locations, shapes and arrangements of parking areas and other Common Areas:
restrict parking by employees to designated areas; construct surface, subsurface
or elevated parking areas and facilities; establish and from time to time change
the level or grade of parking surfaces; and do and perform such other acts in
and to said areas and improvements as Landlord in its sole discretion,
reasonably applied, deems advisable for the use thereof by tenants and their
customers, business invitees and employees.
Section 5.2. Use of Common Areas.
Tenant and its business invitees, employees and customers shall have the
nonexclusive right in common with Landlord and all others to whom Landlord has
granted or any hereafter grant rights, to use the Common Areas subject to such
rules and regulations as Landlord may from time to time impose and the rights of
Landlord set forth above. Tenant shall pay Landlord, upon demand, $10.00 for
each car or other vehicle for each day on which such car or other vehicle of
Tenant, or a concessionaire, employee or agent of Tenant is parked outside any
areas designated by Landlord for employee parking. Tenant authorizes Landlord
to cause any such car to be towed from the Center and Tenant shall reimburse
Landlord for the cost thereof upon demand, and otherwise indemnify and hold
Landlord harmless with respect thereto. Tenant shall abide by all rules and
regulations and cause its concessionaires, officers, employees, agents,
customers and invitees to abide thereby. Landlord may at any time close
temporarily any
5
<PAGE>
Common Areas to make repairs or changes, prevent the acquisition of public
rights therein, discourage noncustomer parking, or for other reasonable
purposes. Tenant shall furnish Landlord license numbers and descriptions of cars
used by Tenant and its concessionaires, officers and employees. Tenant shall not
interfere with Landlord's or other tenants' rights to use any part of the Common
Areas.
ARTICLE VI
COST AND MAINTENANCE OF COMMON AREA
Section 6.1. Expense of Operating and Maintaining the Common Facilities.
Landlord will operate, maintain and repair or cause to be operated,
maintained or repaired, the Common Area of the Center. "Landlord's Common Area
Costs" shall mean all costs of operating and maintaining the Common Areas in a
manner deemed by Landlord appropriate for the best interests of tenants and
other occupants in the Center. Included among the costs and expenses which
constitute Landlord's Common Area Costs, but not limited thereto, shall be at
the option of Landlord, all costs and expenses of protecting, operating,
repairing, repaving, lighting, cleaning, painting, striping, maintaining
landscape and building sprinkler systems, insuring (including but not limited to
fire and extended coverage insurance on Common Areas, insurance against
liability for personal injury, death and property damage and workmen's
compensation insurance), removing of snow, ice and debris, police protection,
security and security patrol, fire protection, regulating traffic inspecting,
repairing and maintaining of machinery and equipment used with the operation of
the Common Areas, cost and expense of landscaping and shrubbery, expenses of
utilities together with an administrative and overhead charge equal to 15% of
all of the foregoing and all other of Landlord's Common Area Costs.
Section 6.2 Tenant to Bear Pro Rata Share of Expense.
Tenant will pay Landlord in addition to all other amounts in this Lease
provided, such portion of Landlord's Common Area Costs for each calendar year
during the Lease Term which bears the same ratio to the total of Landlord's
Common Area Costs as the Store floor area at the Commencement of such calendar
year bears to all Rentable Floor Area rented or occupied by tenants on the
Center.
Tenant's share of Landlord's Common Area costs shall be paid in monthly
installments in amounts estimated from time to time by Landlord, one such
installment being due on the first day of each month of each calendar year.
After the end of each calendar year the total Landlord's Common Area Costs for
such year (and at the end of the Lease Term, the total Landlord's Common Area
Costs for the period since the end of the immediately next preceding calendar
year) shall be determined by Landlord and Tenant's share paid for such period
shall immediately, upon such determination, be adjusted by credit to next
payment of any excess or payment of any deficiency by Tenant within ten days,
Landlord's records of Landlord's Common Area Costs for a period shall be
available for inspection by Tenant at Landlord's Notice Address for 6 months
after Landlord notifies Tenant of Tenant's share of Landlord's Common Area Costs
for such period. Tenant's share of the Common Area Maintenance for the first
(1/st/) lease year shall be THIRTY FIVE CENTS ($0.35) per square foot which
equals to FIVE HUNDRED TWENTY
6
<PAGE>
FIVE DOLLARS ($525.00) per annum to be paid at a rate of FORTY THREE & 75/100's
DOLLARS ($43.75) per month.
ARTICLE VII
UTILITIES AND SERVICES
Section 7.1. Utilities.
Tenant shall not install any equipment which can exceed the capacity of any
utility facilities and if any equipment installed by Tenant requires additional
utility facilities, the same shall be installed at Tenant's expense in
compliance with all code requirements and plans and specifications which must be
approved in writing by Landlord. Tenant shall be solely responsible for and
promptly pay all charges for use or consumption or sewer, gas, electricity,
water and all other utility services. If Landlord makes available electrical
service, Tenant agrees to purchase the same from Landlord and pay Landlord for
the electrical service (based upon Landlord's determination from time to time of
Tenant's consumption of electricity), as additional rent, on the first day of
each month in advance (and provided for partial months) commencing on the
commencement date as herein defined, at the same cost as would be charged to
Tenant from time to time by the utility company which otherwise would furnish
such services to the premises if it provided such services and metered the same
directly to the Premises, but in no event at a cost which is less than the cost
Landlord must pay in providing such electrical service. If Landlord elects to
supply water, Tenant shall pay Landlord at the same cost as would be charged to
Tenant by the utility company which otherwise would furnish such services to the
premises if it provided such services and metered the same directly to the
premises but in no event at a cost which is less than the cost Landlord must pay
in providing such service, and in no event less than the minimum monthly charge
which would have been charged by the water utility applicable to the size of
meter which would have been installed by Tenant in or for the premises. TENANT
SHALL PAY LANDLORD AN ADDITIONAL TEN DOLLARS ($10.00) PER MONTH FOR WATER.
ARTICLE VIII
CONDUCT OF BUSINESS BY TENANT
Section 8.1 Use of Premises.
The premises shall be occupied and used by Tenant solely for the purpose of
conducting therein the business of Banking & Related Services and for no other
purpose.
Section 8.2. Prompt Occupancy and Use.
Tenant will occupy the premises upon the Commencement Date and thereafter
continuously operate and conduct in 100% of the premises during each hour of the
entire Lease Term when Tenant is required under this Lease to be open for
business the business permitted under Section 8.1 hereof, with a full staff and
full stock of merchandise, using only such minor portions of the premises for
storage and office purposes as are reasonably required. In addition to all
other remedies, Landlord shall have the right to obtain specific performance by
Tenant upon Tenant's failure to comply with the provisions of this Section 8.2.
7
<PAGE>
Section 8.3. Conduct of Business.
Such business shall be conducted (a) in Tenant's own name or under the name
Bank of the Ozarks unless another name is previously approved in writing by the
Landlord; and (b) in such manner as shall assure the transaction of a maximum
volume of business in and at the premises.
Section 8.4. Operation by Tenant.
Tenant covenants and agrees that it will: (a) not place or maintain any
merchandise, vending machines or other articles in any vestibule or entry of the
premises or outside the premises; (b) store garbage, trash, rubbish and other
refuse in rat-proof and insect-proof containers inside the premises, and remove
the same from the rear of the premises frequently and regularly and, if directed
by Landlord, by such means and methods and at such times and intervals as are
designated by Landlord, all at Tenant's costs; (c) not permit any sound system
audible or objectionable advertising medium visible outside the premises; (d)
keep all mechanical equipment free of vibration and noise and in good working
order and condition; not commit or permit waste or a nuisance upon the premises;
(e) not permit or cause odors to emanate or be dispelled from the premises; not
solicit business in the Common Areas nor distribute advertising matter to, in or
upon any Common Area; (f) not permit the loading or unloading or the parking or
standing of delivery vehicles outside any area designated therefore, nor permit
any use of vehicles which will interfere with the use of any common area in the
center; (g) comply with all laws, recommendations, ordinances, rules and
regulations of governmental, public, private and other authorities and agencies,
including those with authority over insurance rates, with respect to the use or
occupancy of the premises, and including but not limited to the Williams-Steiger
Occupational Safety and Health Act; (h) light all signs each night of the year
for not less than one hour after the premises is permitted to be closed; (i) not
permit any noxious, toxic or corrosive fuel or gas, dust, dirt or fly ash on the
premises; (j) not place a load on any floor in the Shopping Center which exceeds
the floor load per square foot which such floor was designed to carry.
Section 8.5. Storage.
Tenant shall have in the premises only merchandise which Tenant intends to
sell at, in or from the premises.
Section 8.6. Painting, Decorating, Displays, Alterations.
Tenant will not paint, decorate or change the architectural treatment of
any part of the exterior of the premises nor any part of the interior of the
premises nor make any structural or nonstructural alterations, additions or
changes in or to the premises (interior or exterior) without Landlord's written
approval thereto, and will promptly remove any paint, decoration, alteration,
addition or changes applied or installed without Landlord's approval and restore
the premises to an acceptable condition or take such other action with respect
thereto as Landlord directs.
Section 8.7. Other Operations.
If during the Lease Term, Tenant (including subsidiaries, affiliates,
guarantors) directly or indirectly operates manages or has any interest
whatsoever in any other store or business operated for a purpose or business
similar to or in competition with all or part of the business
8
<PAGE>
permitted under Section 8.1 hereof within a radius of _____ miles of the center,
it will injure Landlord's ability and right to receive Percentage Rent (such
ability and right being a major consideration for this Lease and the
construction of the Center.) Accordingly, if Tenant operates, manages or has
such interest in any such store or business within radius, 50% of all sales made
from any such other store or business shall be included in the computation of
gross sales for the purpose of determining Percentage Rent under this Lease as
though said sales had actually been made at, in or from the premises. Landlord
shall have all rights of inspection of books and records with respect to such
store or business as it has with respect to the premises; and Tenant shall
furnish to Landlord such reports with respect to gross sales from such other
store or business as it is herein required to furnish with respect to premises.
Section 8.8. Sales and Dignified Use.
No public or private auction or any fire, "going out of business",
bankruptcy or similar sales or auctions shall be conducted in or from the
premises and the premises shall not be used except in a dignified and ethical
manner consistent with the general high standards of merchandising in the Center
and not in a disreputable or immoral manner or in violation of the national,
state or local laws.
ARTICLE IX
MAINTENANCE OF LEASED PREMISES
Section 9.1. Maintenance by Landlord.
Landlord shall keep or cause to be kept the foundations, roof and
structural portions of the walls of the premises in good order, repair and
condition except for damage thereto due to the acts or omissions of Tenant, its
employees or invitees. Landlord shall commence required repairs as soon as
reasonably practicable after receiving written notice from Tenant thereof. This
paragraph shall not apply in case of damage or destruction by fire or other
casualty or condemnation or eminent domain, in which events the obligations of
Landlord shall be controlled by Article XVI and XVII. Except as provided this
Section 9.1 Landlord shall not be obligated to make repairs, replacements or
improvements of any kind upon the premises, or to any equipment, merchandise,
stock in trade, facilities or fixtures therein, all of which shall be Tenant's
responsibility, but Tenant shall give Landlord prompt written notice of any
accident, casualty, damage or other similar occurrence in or to the premises or
the Common Areas of which Tenant has knowledge.
Section 9.2. Maintenance by Tenant.
Tenant shall at all times keep the premises (including all entrances and
vestibules) and all partitions, window and window frames and moldings, glass
doors, door openers, fixtures, equipment and appurtenances thereof (including
lighting, heating, electrical, plumbing, ventilating and air conditioning
fixtures and systems and other mechanical equipment and appurtenances
specifically including the sprinkler system, if any) not required herein to be
maintained by Landlord in good order, condition and repair and clean, orderly,
sanitary and safe, damage by unavoidable casualty excepted, (including but not
limited to doing such things as are necessary to cause the premises, not
required herein to be maintained by Landlord in good order, condition and repair
and clean, orderly, sanitary and safe, damage by unavoidable casualty
9
<PAGE>
excepted, (including but not limited to doing such things as are necessary to
cause the premises to comply with applicable laws, ordinances, rules,
regulations and orders of governmental and public bodies and agencies, such as
but not limited to the Williams-Steiger Occupational Safety and Health Act). If
replacement of equipment, fixtures and appurtenances thereto are necessary,
Tenant shall replace the same with equipment, fixtures and appurtenances of the
same quality, and repair all damages done in or by such replacement. If Tenant
fails to perform its obligations hereunder, Landlord without notice may, but
shall not be obligated to, perform Tenant's obligations or perform work
resulting from Tenant's acts, actions or omissions and add the cost of the same
to the next installment of Minimum Monthly Rent due hereunder.
Section 9.3. Surrender of Premises.
At the expiration of the tenancy hereby created, Tenant shall surrender the
premises in the same condition as they were required to be in on the Required
Completion Date, reasonable wear and tear and damage by unavoidable casualty
excepted, and deliver all keys for and all combinations on locks, safes and
vaults in, the premises to Landlord at Landlord's Notice Address.
ARTICLE X
SIGNS, AWNINGS, CANOPIES, FIXTURES, ALTERATIONS
Section 10.1. Fixtures.
All fixtures installed by Tenant shall be new or completely reconditioned,
free from all liens and encumbrances of any kind.
Section 10.2. Removal and Restoration by Tenant.
All alterations, changes and additions and all improvements, including
leasehold improvements, made by Tenant, or made by Landlord on Tenant's behalf,
whether part of Tenant's work or not and whether or not paid for wholly or in
part by Landlord, shall remain Tenant's property for the Lease Term. Any
alterations, changes, additions and improvements shall immediately upon the
termination of this Lease become Landlord's property, be considered part of the
premises, and not be removed at or prior to the end of the Lease Term without
Landlord's written consent unless Landlord requests Tenant to remove the same.
If Tenant fails to remove any shelving, decorations, equipment, trade fixtures
or personal property from the premises prior to the end of this Lease Term, they
shall become Landlord's property.
Section 10.3. Tenant Shall Discharge All Liens.
Tenant shall promptly pay all contractors and materialmen, and not permit
or suffer any lien to attach to the Shopping Center or any part thereof, and
indemnify and save harmless Landlord against the same. Landlord shall have the
right to require Tenant to furnish a bond or other indemnity satisfactory to
Landlord prior to the commencement of any work by Tenant on the premises, or if
any lien attaches or is claimed, to require such a bond or indemnity in addition
to all other remedies.
Section 10.4. Signs, Awning and Canopies.
10
<PAGE>
Tenant will not place or permit on any exterior door or window or any wall
of the premises or otherwise, any sign, awning, canopy, advertising matter,
decoration, lettering or other thing of any kind which do not comply with the
Sign Criteria set forth in Exhibit "E" attached hereto.
ARTICLE XI
INSURANCE
Section 11.1. By Landlord.
Landlord shall carry public liability insurance on the Common Area of the
Center providing coverage of not less than $1,000,000 against liability for
bodily injury including death and personal injury for any one occurrence and
$250,000 property damage insurance, or a combined single limit insurance in the
amount of $1,000,000.
Landlord shall also carry insurance for fire, extended coverage, vandalism,
malicious mischief and other endorsements deemed advisable by Landlord, insuring
all improvements on the Center, including the premises and all leasehold
improvements thereon and appurtenances thereto (excluding Tenant's merchandise,
trade fixtures, furnishings, equipment, personal property and excluding plate
glass) for the full insurable value thereof, with such deductibles as Landlord
deems advisable, such insurance coverage to include improvements provided by
Tenant as set forth in Exhibit "C" and "C-2" as the Tenant's Work (excluding
wall covering, floor covering, carpeting and drapes), and improvements erected
by Landlord in the Center. Tenant agrees to pay Landlord, as additional rent,
FIFTEEN CENTS ($0.15) per year for each square foot of Store floor area payable
in equal installments on the first day of every calendar month during this Lease
Term, as Tenant's share of the cost of the premiums for such insurance described
above in this sentence. At the end of the first Partial Lease Year and each
Lease Year thereafter, the amount thus to be paid by Tenant shall be adjusted
upward or downward (but shall never be less than the above amount) in direct
ratio to the increase or decrease in the cost of the premiums paid by Landlord
for such insurance coverage. Tenant's share of insurance for the first (1st)
year shall be FIFTEEN CENTS ($0.15) per square foot which equals to TWO HUNDRED
TWENTY FIVE DOLLARS ($225.00) per annum to be paid at a rate of EIGHTEEN AND
75/100's DOLLARS ($18.75) per month.
Section 11.2. By Tenant.
Tenant agrees to carry public liability on the premises during the term
hereof, covering the Tenant and naming the Landlord as an additional named
insured with terms and companies satisfactory to Landlord, for limits of not
less than $1,000,000.00 for bodily injury, including death, and personal injury
for any one occurrence, $250,000.00 property damage insurance or a combined
single limit of $1,000,000.00. Tenant's insurance will include contractual
liability coverage recognizing this Lease, products and/or completed operations
liability and providing that Landlord and Tenant shall be given a minimum of
thirty (30) days' written notice by the insurance company prior to cancellation,
termination or change in such insurance. Tenant also agrees to carry insurance
against fire and such other risks as are from time to time included in standard
Fire and Extended Coverage insurance, for the full insurable value, covering all
of Tenant's merchandise, trade fixtures, furnishings, wall covering, floor
covering, carpeting,
11
<PAGE>
drapes, equipment and all items of personal property of Tenant located on or
within the premises. Tenant shall provide Landlord with copies of the policies
or certificates evidencing that such insurance is in full force and effect and
stating the terms thereof. The minimum limits of the comprehensive general
liability policy of insurance shall in no way limit or diminish Tenant's
liability under Section 11.6 hereof and shall be subject to increase at any
time, and from time to time. Within thirty (30) days after demand therefor by
Landlord, Tenant shall furnish Landlord with evidence that such demand has been
complied with.
Section 11.3. Mutual Waiver of Subrogation Rights.
Landlord and Tenant and all parties claiming under them mutually release
and discharge each other from all claims and liabilities arising from or caused
by any casualty or hazard covered or required hereunder to be covered in whole
or in part by insurance on the premises, or in connection with property on or
activities conducted on the premises and waive any right of subrogation which
might otherwise exist in or accrue to any person on account thereof, provided
that such release shall not operate in any case where the effect is to
invalidate or increase the cost of such insurance coverage (provided, that in
the case of increased cost, the other party shall have the right, within thirty
(30) days following written notice, to pay such increased cost, thereby keeping
such release and waiver in full force and effect).
Section 11.4. Waiver.
Landlord, its agents and employees, shall not be liable for, and Tenant
waives all claims for, damage, including, but not limited to consequential
damages to person, property or otherwise, sustained by Tenant or any person
claiming through Tenant resulting from any accident or occurrence in or upon any
part of the Center including, but not limited to, claims for damage resulting
from: (a) any equipment or appurtenances becoming out of repair; (b) Landlord's
failure to keep any part of the Center in repair; (c) injury done or caused by
wind, water, or other natural element; (d) any defect in or failure of plumbing,
heating or air conditioning equipment, electrical wiring or installation
thereof, gas, water, and steam pipes, stairs, porches, railings or walks; (e)
broken glass; (f) the backing up of any sewer pipe or down spout; (g) the
bursting, leaking or running of any tank, tub, washstand, water closet, waste
pipe, drain or any other pipe or tank in, upon or about such building or
premises; (h) the escape of steam or hot water; (i) water, snow or ice upon the
premises; (j) the falling of any fixture, plaster or stucco; (k) damage to or
loss by theft or otherwise of property of Tenant or others; (l) acts or
omissions of persons in the premises, other tenants in the Center, occupants of
nearby properties, or any other persons; and (m) any act or omission of owners
of adjacent or contiguous property, or of Landlord, its agents or employees.
All property of Tenant kept in the premises shall be so kept at Tenant's risk.
Section 11.5. Insurance--Tenant's Operation.
Tenant will not do or suffer to be done anything which will contravene
Landlord's insurance policies or prevent Landlord from procuring such policies
in amounts and companies selected by Landlord. If anything done, omitted to be
done or suffered to be done by Tenant in, upon or about the premises shall cause
the rates of any insurance effected or carried by Landlord on the premises or
other property to be increased beyond the regular rate from time to time
applicable to the premises for use for the purpose permitted under this Lease,
or such other
12
<PAGE>
property for the use or uses made thereof, Tenant will pay the amount of such
increase promptly upon Landlord's demand and Landlord shall have the right to
correct any such condition at Tenant's expense. In the event that this lease so
permits and Tenant engages in the preparation of food or packaged foods or
engages in the use, sale or storage of inflammable or combustible material,
Tenant shall install chemical extinguishing devices (such as Ansul) approved by
Underwriters Laboratories and Factory Mutual and the installation thereof must
be approved by the local Insurance Service Office or its equivalent. Tenant
shall keep such devices under service as required by such organizations. If gas
is used in the premises, Tenant shall install gas cut-off devices (manual and
automatic).
Section 11.6. Indemnification.
Tenant shall indemnify and save harmless Landlord from and against any and
all liability, liens, claims, demands, damages, expenses, fees, costs, fines,
penalties, suits, proceedings, actions and causes of action of any and every
kind and nature arising or growing out of or in any way connected with Tenant's
use, occupancy, management or control of the premises or Tenant's operations,
conduct or activities in the Center.
ARTICLE XII
OFFSET STATEMENT, ATTORNMENT, SUBORDINATION
Section 12.1. Offset Statement.
Within ten days after Landlord's request, Tenant shall deliver, executed in
recordable form a declaration to Landlord and/or any person designated by
Landlord (a) ratifying this Lease; (b) stating the Commencement and termination
dates; and (c) certifying (i) that this Lease is in full force and effect and
has not been assigned, modified, supplemented or amended (except by such
writings as shall be stated), (ii) that all conditions under this Lease to be
performed by Landlord have been satisfied (stating exceptions, if any), (iii) no
defenses or offsets against the enforcement of this Lease by Landlord exist (or
stating those claimed), (iv) advance rent, if any, paid by Tenant, (v) the date
to which rent has been paid, (vi) the amount of security deposited with
Landlord, such other information as Landlord reasonably requires. Persons
receiving such statements shall be entitled to rely upon them.
Section 12.2. Attornment.
Tenant shall, in the event of a sale or assignment of Landlord's interest
in the premises or the building in which the premises is located or this Lease
or the Center, or in the premises or such building comes into the hands of a
mortgagee, ground lessor or any other person whether because of a mortgage,
foreclosure, exercise of a power of sale under a mortgage, termination of the
ground lease, or otherwise, not disaffirm this Lease and attorn to the purchaser
or such mortgagee, or other person and recognize the same as Landlord hereunder.
Tenant shall execute, at Landlord's request any attornment agreement required by
any mortgagee, ground lessor or other such person to be executed, containing
such provisions as such mortgagee, ground lessor or other person requires.
13
<PAGE>
Section 12.3. Subordination.
A. Mortgage. The Lease shall be junior and inferior at all times to the
lien of any mortgage or mortgages which now or hereafter are a lien upon any
part of the Center and Tenant shall execute such instruments as Landlord
requests to evidence such subordination.
B. Construction, Operation and Reciprocal Easement Agreements. This
Lease is subject and subordinate to one or more construction, operation,
reciprocal easement or similar agreements (hereinafter referred to as "Operating
Agreements") entered into or hereafter to be entered into between Landlord and
other owners or lessees of real estate within or near the Center (which
Operating Agreements may have been or may be recorded in the official records of
the County wherein the Center is located) and to any and all easements and
easement agreements which may be or have been entered into with or granted to
any persons hereto fore or hereafter, whether such persons are located within or
upon the Center or not, and Tenant shall execute such instruments as Landlord
requests to evidence such subordination.
Section 12.4. Failure To Execute Instruments.
Tenant's failure to execute instruments or certificates provided for in
this Article XII within fifteen (15) days after the mailing by Landlord of a
written request shall be an event of Default under this Lease.
ARTICLE XIII
ASSIGNMENT, SUBLETTING AND CONCESSIONS
Section 13.1. Consent Required.
Tenant will not sell, assign, mortgage, pledge or in any manner transfer
this lease or any interest therein nor sublet all or any part of the premises,
nor license concessions nor lease departments therein, without Landlord's
written consent. Consent by Landlord to any assignment or subletting shall not
waive the necessity for consent to any subsequent assignment or subletting.
This prohibition shall include a prohibition against any subletting or
assignment by operation of law. If this Lease is assigned or the premises or
any part underlet or occupied by anybody other than Tenant, Landlord may collect
rent from the assignee, under-tenant or occupant and apply the same to the rent
herein reserved, and Landlord shall be entitled to retain any increases in rent
resulting from such assignment or underlettings, but no such assignment,
underletting occupancy or collection of rent shall be deemed a waiver of this
covenant or the acceptance of the assignee, under-tenant or occupant as tenant,
or release of Tenant from the performance by Tenant of any covenants on the part
of Tenant herein contained. Notwithstanding any assignment or subletting,
Tenant shall remain fully liable on this Lease and for the performance of all
terms, covenants and provisions of this Lease.
Section 13.2. Corporate Ownership.
If any corporate stock of Tenant is transferred by sale, assignment,
bequest, inheritance, operation of law or other disposition so as to result in a
change in the effective voting control of
14
<PAGE>
Tenant as it exists on the date hereof, Tenant shall promptly give Landlord
written notice of such change and Landlord may terminate this Lease at any time
after such change in control by giving Tenant ninety (90) days written notice of
such termination.
ARTICLE XIV
MERCHANTS' ASSOCIATION AND ADVERTISING
Section 14.1. Provisions Relating to Merchants' Association.
INTENTIONALLY DELETED
Section 14.2. Advertising.
INTENTIONALLY DELETED
ARTICLE XV
SECURITY DEPOSIT
Section 15.1. Amount of Deposit. NONE - INTENTIONALLY DELETED.
ARTICLE XVI
DAMAGE AND DESTRUCTION
Section 16.1. Damage to Premises.
If the premises are hereafter damaged or destroyed or rendered partially
untenantable for their accustomed use by fire or other casualty insured under
the coverage which Landlord carries pursuant to Section 11.1 hereof, Landlord
shall promptly repair the same to substantially the condition which they were in
immediately prior to the happening of such casualty (excluding stock in trade,
fixtures, furniture, furnishings, carpeting, floor coverings, wall covering,
drapes and equipment), and from the date of such casualty until the premises are
so repaired and restored, the Minimum Monthly Rent payments payable hereunder
shall abate in such proportion as the part of said premises thus destroyed or
rendered untenantable bears to the total premises; PROVIDED, HOWEVER, that
-----------------
Landlord shall not be obligated to repair and restore if such casualty is caused
directly or indirectly by the negligence of Tenant, its agents and employees and
no portion of the Minimum Monthly Rent and other payments payable hereunder
shall abate, and PROVIDED, FURTHER, that Landlord shall not be obligated to
-----------------
expend for such repair or restoration an amount in excess of the insurance
proceeds recovered as a result of such damage, and PROVIDED, FURTHER, that if
-----------------
the premises be damaged, destroyed or rendered untenantable for their accustomed
uses by fire or other casualty to the extent of more than 50% of the cost to
replace the premises or if the premises shall be damaged, destroyed or rendered
untenantable in any respect during the last three Lease years of the Term, then
Landlord shall have the right to terminate this Lease effective as of the date
of such casualty by giving to Tenant, within 60 days after the happening of such
casualty, written notice of such termination.
15
<PAGE>
If such notice be given, this Lease shall terminate and Landlord shall promptly
repay to Tenant any rent theretofore paid in advance which was not earned at the
date of such casualty. Any time that Landlord repairs or restores the premises
after damage or destruction, then Tenant shall promptly repair or replace its
stock in trade, fixtures, furnishings, furniture, carpeting, wall covering,
floor covering, drapes and equipment to the same condition as they were in
immediately prior to the casualty, and if Tenant has closed its business, Tenant
shall promptly reopen for business upon the completion of such repairs.
ARTICLE XVII
EMINENT DOMAIN
Section 17.1. Condemnation.
If 10% or more of the Premises or 15% or more of the Center shall be
acquired or condemned by right of eminent domain for any public or quasi public
use or purpose, is terminated as a result of such an acquisition or
condemnation, then Landlord at its election, may terminate this Lease by giving
notice to Tenant of its election, and in such event rentals shall be apportioned
and adjusted as of the date of termination. If the Lease shall not be
terminated as aforesaid, then it shall continue in full force and effect, and
Landlord shall within a reasonable time after possession is physically taken
(subject to delays due to shortage or labor, materials or equipment, labor
difficulties, breakdown of equipment, government restrictions, fires, other
casualties or other causes beyond the reasonable control of Landlord) repair or
rebuild what remains of the premises which together with the remaining portions
of the building for Tenant's occupancy; and a just proportion of the Minimum
Annual Rent shall be abated, according to the nature and extent of the injury to
the premises, until such repairs and rebuilding are completed, and thereafter
for the balance of the Lease Term.
Section 17.2. Damages.
Landlord reserves, and Tenant assigns to Landlord, all rights to damages on
account of any taking or condemnation or any act of any public or quasi public
authority for which damages are payable. Tenant shall execute such instruments
of assignment as Landlord requires, join with Landlord in any action for the
recovery of damages, if requested by Landlord, and turn over to Landlord any
damages recovered in any proceeding. However, Landlord does not reserve any
damages payable for trade fixtures installed by Tenant at its own cost which are
not part of the realty.
ARTICLE XVIII
DEFAULT BY TENANT
Section 18.1. Right To Re-Enter.
The following shall be considered for all purposes to be defaults under and
breaches of this lease: (a) any failure of Tenant to pay any rent or other
amount due hereunder; (b) any failure of Tenant to perform or observe any other
of the terms, provisions, conditions and covenants of this Lease for more than
ten days after written notice of such failure; (c) Landlord determining
16
<PAGE>
that Tenant has submitted any false report required to be furnished hereunder;
(d) Tenant shall do anything upon or in connection with the premises or the
construction of any part thereof which directly or indirectly interferes in any
way with, or results in a work stoppage in connection with, construction of any
part of the Center or any other tenant's space; (e) Tenant shall become bankrupt
or insolvent or file or have filed against it a petition in bankruptcy or for
reorganization or arrangement or for the appointment of a receiver or trustee of
all or a portion of Tenant's property, or Tenant makes an assignment for the
benefit of creditors; (f) if Tenant abandons or vacates or does not do business
in the premises for ten (10) days, or (g) this Lease or Tenant's interest herein
or in the premises or any improvements thereon or any property of Tenant are
executed upon or attached; or (h) the premises come into the hands of any person
other than expressly permitted under this Lease. In any such event, and without
grace period, demand or notice (the same being hereby waived by Tenant),
Landlord, in addition to all other rights or remedies it may have hereunder at
law or in equity shall have the right thereupon or at any time thereafter to
terminate this Lease by giving notice to Tenant stating the date upon which such
termination shall be effective, and shall have the right, either before or after
any such termination, to re-enter and take possession of the premises, remove
all persons and property from the premises, store such property at Tenant's
expenses, and without notice or resort to legal process and without being deemed
guilty of trespass or becoming liable for any loss or damage occasioned thereby.
Nothing herein shall be construed to require Landlord to give any notice before
exercising any of its rights and remedies provided for in Section 3.4 of this
Lease. Notwithstanding anything to the contrary herein contained, if Tenant
commits any default hereunder for or precedent to which or with respect to which
notice is herein required, and commits such defaults within twelve (12) months
thereafter, no notice shall thereafter be required to be given by Landlord as to
or precedent to any such subsequent default during such twelve (12) month period
(as Tenant hereby waiving the same) before exercising any or all remedies
available to Landlord.
Section 18.2. Right To Relet.
If Landlord re-enters as above provided, or if it takes possession pursuant
to legal proceedings or otherwise, it may either terminate this Lease or it may
from time to time, without terminating this Lease, make such alterations and
repairs as it deems advisable to relet the premises, and relet the premises or
any part thereof for such term or terms (which may extend beyond the Lease Term)
and at such rentals and upon such other terms and conditions as Landlord in its
sole discretion deems advisable; upon each such reletting all rentals received
by Landlord therefrom shall be applied, first, to any indebtedness other than
rent due hereunder from Tenant to Landlord; second, to pay any costs and
expenses of reletting, including brokers and attorneys' fees and cost of
alterations and repairs; third, to rent due hereunder and the residue, if any,
shall be held by Landlord and applied in payment of future rent as it becomes
due hereunder.
If rentals received from such reletting during any month are less than that
to be paid during that month by Tenant hereunder, Tenant shall immediately pay
any such deficiency to Landlord. No re-entry or taking possession of the
premises by Landlord shall be construed as an election to terminate this Lease
unless a written notice of such termination is given by Landlord.
17
<PAGE>
Notwithstanding any such reletting without termination, Landlord may at any
time thereafter terminate this Lease for any prior breach or. If Landlord
terminates this Lease for any breach, in addition to any other remedies it may
have it may recover from Tenant all damages incurred by reason of such breach or
default, including all costs of retaking the premises and including the excess,
if any, of the total rent and charges reserved in this Lease for the remainder
of this Lease Term over the then reasonable rental value of the premises for the
remainder of the Lease Term, all of which shall be immediately due and payable
by Tenant to Landlord.
Section 18.3. Counterclaim.
If Landlord commences any proceedings for non-payment of rent (minimum
rent, percentage rent or additional rent), Tenant will not interpose any
counterclaim of any nature of description in such proceedings. This shall not,
however, be construed as a waiver of Tenant's right to assert such claims in a
separate action brought by Tenant. The covenants to pay rent and other amounts
hereunder are independent covenants and Tenant shall have no right to hold back,
offset or fail to pay any such amounts for default by Landlord or any other
reason whatsoever.
Section 18.4. Waiver of Rights of Redemption.
To the extent permitted by law, Tenant waives any and all rights of
redemption granted by or under any present or future laws if Tenant is evicted
or dispossessed for any cause, or if Landlord obtains possession of the premises
due to Tenant's default hereunder or otherwise.
ARTICLE XIX
NOTICE TO MORTGAGEE
Section 19.1.
If the holder of any mortgage covering the premises shall have given
written notice to Tenant of the address to which notices to such holder are to
be sent, Tenant shall give such holder written notice simultaneously with any
notice given to Landlord of any default of Landlord, and said holder shall have
the right but not the obligation, to cure such default before Tenant may take
any action by reason of such default.
ARTICLE XX
TENANT'S PROPERTY
Section 20.1. Taxes on Leasehold.
Tenant shall be responsible for and shall pay before delinquent all
municipal, county, federal or state taxes coming due during or after the term of
this Lease against Tenant's interest in this Lease or against personal property
of any kind owned or placed in, upon or about the premises by Tenant.
Section 20.2. Assets of Tenant.
To secure the performance of Tenant' obligations under this lease, Tenant
hereby grants to landlord a security interest in an express contractual lien
upon all of Tenant's equipment,
18
<PAGE>
furniture, furnishings, appliances, goods, trade fixtures, inventory, chattels,
and persona property which will be brought upon the premises by Tenant, and all
after acquired property, replacements and proceeds. Landlord is authorized to
prepare and file financing statements signed only by Landlord (as secured party)
covering the security described above (but Tenant hereby agrees to sign the same
upon request). Upon any default under this lease by Tenant as defined in Section
18.1 hereof, any or all of Tenant's obligations to Landlord secured hereby
shall, at Landlord's option, be immediately due and payable without notice or
demand. In addition to all rights or remedies of Landlord under this Lease and
the law, including the right to a judicial foreclosure, Landlord shall have all
the rights and remedies of a secured part under the Arkansas Uniform Commercial
Code. Landlord's security interest shall be subordinate to the lien or security
interest of any vendor or lessor of equipment or chattels upon the premises or
of any lender taking or succeeding to a purchase money security interest
thereon, and upon Tenant's written request, if no default exists hereunder,
Landlord shall execute an instrument confirming such subordination. Upon
execution of this Lease, Tenant shall execute and deliver a separate Financing
Statement reflecting Landlord's security interest. This security agreement and
the security interest hereby created shall survive the termination of this Lease
if such termination results from Tenant's default. The above described security
interest and lien are in addition to and cumulative of the Landlord's lien
provided by the laws of the state in which the Center is located.
ARTICLE XXI
ACCESS BY LANDLORD
Section 21.1. Right of Entry.
Landlord, its agents and employees shall have the right to enter the
premises from time to time at reasonable times to examine the same, show them to
prospective purchasers and other persons, and make such repairs, alterations,
improvements or additions as Landlord deems desirable. Rent shall abate while
any such repairs, alterations, improvements or additions are being made. During
the last six (6) months of this Lease Term, Landlord may exhibit the premises to
prospective tenants and maintain upon the premises notices deemed advisable by
Landlord. In addition, during any apparent emergency, Landlord or its agents
may enter the premises forcibly without liability therefor and without in any
manner affecting Tenant's obligations under this Lease. Nothing herein
contained, however, shall be deemed to impose upon Landlord any obligations,
responsibility or liability whatsoever, for any care, maintenance or repair
except as otherwise herein expressly provided.
ARTICLE XXII
HOLDING OVER, SUCCESSORS
Section 22.1. Holding Over.
If Tenant holds over or occupies the premises beyond this Lease Term (it
being agreed there shall be no such holding over or occupancy without Landlord's
written consent), Tenant shall pay Landlord for each day of such holding over as
the charge for and value of the use and occupancy of the premises a sum equal to
the greater of (a) the Minimum Annual Rent prorated
19
<PAGE>
for the number of days of such holding over, plus a prorata portion of all other
amounts which Tenant would have been required to pay hereunder had this Lease
been in effect. If Tenant holds over with or without Landlord's written consent
Tenant shall occupy the premises on a tenancy from month to month and all other
terms and provisions of this Lease shall be applicable to such period except
that the monthly rental shall be increased by 25%.
Section 22.2. Successors.
All rights and liabilities herein given to or imposed upon the respective
parties hereto shall bind and inure to the several respective heirs, successors,
administrators, executors and assigns of the parties and if Tenant is more than
one person, they shall be bound jointly and severally by this Lease except that
no rights shall inure to the benefit of any assignee or subtenant of Tenant
unless the assignment or sublease was approved by Landlord in writing provided
in Section 13.1 hereof. Landlord, at any time and from time to time, may make
an assignment of its interest in this Lease and, in the event of such
assignment, Landlord and its successors and assigns (other than the assignee of
Landlord's interest in this Lease) shall be released from any and all liability
thereafter accruing hereunder.
ARTICLE XXIII
QUIET ENJOYMENT
Section 23.1. Landlord's Covenant.
If Tenant pays the rents and other amounts herein provided, observes and
performs all the covenants, terms and conditions, Tenant shall peaceably and
quietly hold and enjoy the premises for the Lease Term without interruption by
Landlord or any person or persons, subject, nevertheless, to the terms and
conditions of this Lease.
ARTICLE XXIV
MISCELLANEOUS
Section 24.1. Waiver.
No waiver by Landlord or Tenant of any breach of any term, covenant or
condition hereof shall be deemed a waiver of the same or any subsequent breach
of the same or any other term, covenant or condition. The acceptance of rent by
Landlord shall not be deemed a waiver of any earlier breach by Tenant of any
term, covenant or condition hereof, regardless of Landlord's knowledge of such
breach when such rent is accepted. No covenant, term or condition of this Lease
shall be deemed waived by Landlord or Tenant unless waived in writing.
Section 24.2. Accord and Satisfaction.
Landlord is entitled to accept, receive and cash or deposit any payment
made by Tenant for any reason or purpose or in any amount whatsoever, and apply
the same at Landlord's option to any obligation of Tenant and the same shall not
constitute payment of any amount owed except that to which Landlord has applied
the same. No endorsement or statement on any check
20
<PAGE>
or letter of Tenant shall be deemed an accord and satisfaction or otherwise
recognized for any purpose whatsoever. The acceptance of any such check or
payment shall be without prejudice to Landlord's right to recover any and all
amounts owed by Tenant hereunder and Landlord's right to pursue any other
available remedy.
Section 24.3. Entire Agreement.
There are no representations, covenants, warranties, promises, agreements,
conditions or undertakings, oral or written, between Landlord and Tenant other
than as herein set forth. Except as herein otherwise provided, no subsequent
alteration, amendment, change or addition to this Lease shall be binding upon
Landlord or Tenant unless in writing and signed by them.
Section 24.4. No Partnership.
Landlord is not and shall not, in any way or for any purpose, become a
partner, employer, principal, master, agent or joint venturer of or with Tenant.
Section 24.5. Force Majeure.
If either party hereto shall be delayed or hindered in or prevented from
the performance of any act required hereunder by reason of strikes, lockouts,
labor troubles, inability to procure material, failure of power, restrictive
governmental laws or regulations, riots, insurrection, war or other reason of a
like nature not the fault of the party delayed in performing work or doing acts
required under this Lease, the period for the performance of any such act shall
be extended for a period equivalent to the period of such delay.
Notwithstanding the foregoing, the provisions of this Section 24.5 shall at no
time operate to excuse Tenant from any obligations for payment or rent,
additional rent or any other payments required by the terms of this Lease when
the same are due, and all such amounts shall be paid when due.
Section 24.6. Submission of Lease.
Submission of this Lease to Tenant does not constitute an offer to lease;
this Lease shall become effective only upon execution and delivery thereof by
Landlord and Tenant. Upon execution of this Lease by Tenant, Landlord is
granted an irrevocable option for sixty (60) days to execute this Lease within
said period and thereafter return a fully executed copy to Tenant. The
effective date of this Lease shall be the date filled in on Page 1 hereof by
Landlord, which shall be the date of execution by the last of the parties to
execute the Lease.
Section 24.7. Notices.
All notices from Tenant to Landlord required or permitted by any provision
of this agreement shall be directed as follows:
INDIAN HILLS SHOPPING CENTER
2851 LAKEWOOD VILLAGE DRIVE
NORTH LITTLE ROCK, AR 72116
(501) 758-9492 FAX (501) 758-0835
All notices from Landlord to Tenant required or permitted hereunder shall
be directed as follows, namely:
21
<PAGE>
BANK OF THE OZARKS
ATTENTION: MELVIN EDWARDS 978-2204
POST OFFICE BOX 8811
LITTLE ROCK, AR 72231-8811
All notices to be given hereunder by either party shall be written and sent
by registered or certified mail, postage pre-paid, addressed to the party
intended to be notified at the address set forth above. Either party may, at
any time, or from time to time, notify the other in writing of a substitute
address for that above set forth, and thereafter notices shall be directed to
such substitute address. Notice given as aforesaid shall be sufficient service
thereof and shall be deemed given as of the date received, as evidenced by the
return receipt of the registered or certified mail. A duplicate copy of all
notices from Tenant shall be sent to any mortgagee as provided for in Section
19.2.
Section 24.8. Captions and Section Numbers.
This Lease shall be construed without reference to titles of Articles and
Sections, which are inserted only for convenience of reference.
Section 24.9. Number and Gender.
The use herein of a singular term shall include the plural and use of the
masculine, feminine or neuter genders shall include all others.
Section 24.10. Joint and Several Liability.
If Tenant is a partnership or other business organization the members of
which are subject to personal liability, the liability of each such member shall
be deemed to be joint and several.
Section 24.11. Limitation of Liability.
Anything to the contrary herein contained, notwithstanding, there shall be
absolutely no personal liability on persons, firms or entities who constitute
Landlord with respect to any of the terms, covenants, conditions and provisions
of this Lease, and Tenant shall subject to the rights of any first mortgagee,
look solely to the interest of Landlord, its successors and assigns, in the
Center for the satisfaction of each and every remedy of Tenant in the event of
default by Landlord hereunder; such exculpation of personal liability is
absolute and without any exception whatsoever.
Section 24.12. Broker's Commission.
Each party represents and warrants that it has caused or incurred no claim
for brokerage commissions or finder's fees in connection with the execution of
this Lease, and each party shall indemnify and hold the other harmless against
and from all liabilities arising from any such claims caused or incurred by it
(including without limitation, the cost of attorney fees in connection
herewith).
Section 24.13. Partial Invalidity.
If any provisions of this Lease or the application thereof to any person or
circumstance shall to any extent be invalid or unenforceable, the remainder of
this Lease, or the application of
22
<PAGE>
such provision to persons or circumstances other than those as to which it is
invalid or unenforceable, shall not be affected thereby and each provision of
this Lease shall be valid and enforceable to the fullest extent permitted by
law.
Section 24.14. Recording.
The parties agree not to place this Lease or record but each party shall,
at the request of the other, execute and acknowledge so that the same may be
recorded a Short Form Lease or Memorandum of Lease, indicating the Lease Term,
but omitting rent and other terms and an agreement specifying the date of the
commencement and termination of the Lease Term; PROVIDED, HOWEVER, that the
failure to record said Short Form Lease, Memorandum of Lease Agreement shall not
affect or impair the validity and effectiveness of this Lease. Tenant shall pay
all costs, taxes fees and other expenses in connection with or prerequisite to
recording.
Section 24.15. Applicable Law.
This Lease shall be construed under the laws of the State wherein the
premises are situated.
Section 24.16. Option To Renew.
Landlord hereby grants to Tenant the option to renew this Lease for FIVE
(5) additional term(s) of TWO (2) years each, which shall commence upon the
expiration of the next preceding term. Such option, with respect to any renewal
term, shall only be exercised by Tenant mailing to Landlord, at Landlord's
Notice Address by United States mail, postage prepaid, certified or registered,
return receipt requested, notice of the exercise of such option, not later than
180 prior to the expiration of the then current term. No exercise of any
option herein granted shall be effective if any event of default under this
Lease (a) exists either at the time of exercise or on the expiration of this
Lease Term during which it was exercised, or (b) occurs after the exercise and
before the commencement of the renewal term.
In the event any such option is effectively exercised with respect to any
renewal term, all terms and conditions of this Lease shall be applicable to such
renewal term except the Minimum Annual Rent during the renewal term shall be:
OPTION 1 YEAR 1 $17,911.70 PER ANNUM, PAYABLE MONTHLY AT $1,492.64
- --------
YEAR 2 $18,449.05 PER ANNUM, PAYABLE MONTHLY AT $1,537.42
OPTION 2 YEAR 1 $19,002.52 PER ANNUM, PAYABLE MONTHLY AT $1,583.54
- --------
YEAR 2 $19,572.60 PER ANNUM, PAYABLE MONTHLY AT $1,631.05
OPTION 3 YEAR 1 $20,159.78 PER ANNUM, PAYABLE MONTHLY AT $1,679.98
- --------
YEAR 2 $20,764.57 PER ANNUM, PAYABLE MONTHLY AT $1,730.38
OPTION 4 YEAR 1 $21,387.51 PER ANNUM, PAYABLE MONTHLY AT $1,782.29
- --------
YEAR 2 $22,029.14 PER ANNUM, PAYABLE MONTHLY AT $1,835.76
23
<PAGE>
OPTION 5 YEAR 1 $22,690.01 PER ANNUM, PAYABLE MONTHLY AT $1,890.83
- --------
YEAR 2 $23,370.71 PER ANNUM, PAYABLE MONTHLY AT $1,947.56
Notwithstanding anything to the contrary in this Lease contained, the term
"Lease Term" whenever used in this Lease, shall be defined to include the
original term and all renewals and extensions thereof.
IN WITNESS WHEREOF, Landlord and Tenant have signed and sealed this Lease
as of the day and year first above written.
(Landlord) By /s/ J. D. Ashley, Sr.
---------------------
(Tenant) Bank of the Ozarks, wca
By /s/ James C. Patridge
---------------------
Vice Chairman
Attest /s/ Melvin L. Edwards
---------------------
24
<PAGE>
STATE OF )
) ss:
COUNTY OF )
Before me, a Notary Public and and for said County and State, appeared
James C. Patridge and Melvin L. Edwards, to me personally known, and
acknowledged the execution of the foregoing instrument.
Witness my hand and notarial seal the 20th day of November, 1998.
/s/ Cheri R. Rolett
-------------------
Notary Public in and for Pulaski County, State
of Arkansas
My commission expires 9-28-2005
(SEAL)
STATE OF ARKANSAS )
) ss:
COUNTY OF PULASKI )
Before me, a Notary Public and and for said County and State, appeared J.
D. Ashley, Sr., to me personally known, and acknowledged the execution of the
foregoing instrument.
Witness my hand and notarial seal the 19th day of November, 1998.
/s/ Melinda G. Baird
--------------------
Notary Public in and for Pulaski County, State
of Arkansas
My commission expires March 7, 2001
(SEAL)
25
<PAGE>
EXHIBIT A
LEGAL DESCRIPTION
INDIAN HILLS BLK-100 LOT-004; BLK-100 LOT-001; BLK-200 LOT-002 INDIAN HILLS
<PAGE>
AMENDMENT TO LEASE
------------------
WHEREAS, the parties:
INDIAN HILLS SHOPPING CENTER PARTNERSHIP
D/B/A INDIAN HILLS SHOPPING CENTER (LANDLORD)
AND
BANK OF THE OZARKS WCA (TENANT)
on NOVEMBER 20, 1998 entered into a lease on a property known as:
INDIAN HILLS SHOPPING CENTER
6929 JFK, SUITE 4
NORTH LITTLE ROCK, ARKANSAS
now wish to incorporate the following clause as a part of the original lease
agreement:
Notwithstanding any other provisions contained in this lease, in the event
the Tenant is closed or taken over by the banking authority of the State of
Arkansas, or other bank supervisory authority, the Landlord may terminate
the lease only with the concurrence of such banking authority or other bank
supervisory authority; and any such authority shall in any event have the
election either to continue or to terminate the lease: Provided, that in
the event this lease is terminated, the maximum claim of Landlord for
damages or indemnity for injury resulting from the rejection or abandonment
of the unexpired term of the lease shall in no event be in an amount not
exceeding the rent reserved by the lease, without acceleration, for the
year next succeeding the date of the surrender of the premises to the
Landlord, or the date of re-entry of the Landlord, whichever first occurs,
whether before or after the closing of the bank, plus an amount equal to
the unpaid rent accrued, without acceleration up to such date.
Dated this eighth day of December, 1998.
____________________________ ___________________________________________
Attest Bank of the Ozarks, Tenant
Marnie B. Oldner, Executive Vice President
____________________________ ___________________________________________
Attest Indian Hills Shopping Center, Landlord
<PAGE>
EXHIBIT 13
[LOGO APPEARS HERE]
FINANCIAL INFORMATION
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest income..................................... $ 38,882 $ 27,468 $ 21,836 $ 15,703 $ 12,645
Interest expense.................................... 20,518 12,979 10,031 7,391 4,651
Net interest income................................. 18,364 14,489 11,805 8,312 7,994
Provision for loan losses........................... 2,026 1,139 1,486 360 339
Non-interest income................................. 5,031 2,925 1,865 1,168 2,713/(1)/
Non-interest expense................................ 13,119 9,228 7,151 5,996 5,735
Net income.......................................... 5,629 4,531 3,027 2,170 2,954/(1)/
PER COMMON SHARE DATA:
Earnings - diluted.................................. $ 1.47 $ 1.38 $ 1.05 $ 0.75 $ 0.99/(1)/
Book value.......................................... 10.68 9.44 6.44 5.66 5.07
Dividends........................................... 0.23 0.20 0.30 0.30 0.30
Weighted avg. shares outstanding (thousands)........ 3,819 3,281 2,880 2,894 2,975
BALANCE SHEET DATA AT PERIOD END:
Total assets........................................ $ 612,431 $ 352,093 $ 270,600 $ 212,476 $ 165,030
Total loans......................................... 387,526 275,463 214,462 153,198 112,806
Allowance for loan losses........................... 4,689 3,737 3,019 1,909 1,649
Total investment securities......................... 176,618 42,459 39,608 37,137 40,521
Total deposits...................................... 529,040 295,555 231,648 182,463 148,453
FHLB advances & Fed Funds........................... 26,823 14,017 12,517 7,947 --
Notes payable....................................... 12,448 5,072 5,396 3,920 --
Total stockholders' equity.......................... 40,355 35,666 18,547 16,294 15,076
Loan to deposit ratio............................... 73.25% 93.20% 92.58% 83.96% 75.99%
AVERAGE BALANCE SHEET DATA:
Total average assets................................ $ 486,729 $ 314,489 $ 240,208 $ 185,160 $ 167,333
Total average stockholders' equity.................. 37,951 26,328 17,144 15,392 14,287
Average equity to total average assets.............. 7.80% 8.37% 7.14% 8.31% 8.54%
PERFORMANCE RATIOS:
Return on average assets............................ 1.16% 1.44% 1.26% 1.17% 1.77%/(1)/
Return on average stockholders' equity.............. 14.83 17.21 17.66 14.09 20.67/(1)/
Net interest margin................................. 4.19 4.98 5.36 4.95 5.24
Efficiency ratio.................................... 54.98 52.55 51.60 61.83 60.19/(2)/
Dividend payout ratio............................... 15.65 14.49 28.57 40.00 30.30
ASSETS QUALITY RATIOS:
Net charge-offs as a percentage of average total
loans.............................................. 0.33% 0.17% 0.21% 0.08% 0.09%
Nonperforming loans to total loans.................. 0.70 0.25 1.08 0.85 0.57
Nonperforming assets to total assets................ 0.50 0.24 0.88 0.63 0.50
ALLOWANCE FOR LOAN LOSSES AS A PERCENTAGE OF:
Total loans......................................... 1.21% 1.36% 1.41% 1.25% 1.46%
Nonperforming loans................................. 171.82 534.62 130.69 146.28 258.46
CAPITAL RATIOS AT PERIOD END:
Leverage capital ratio.............................. 6.21% 9.86% 6.42% 7.49% 9.10%
Tier I risk-based capital........................... 9.05 13.01 8.45 9.80 12.71
Total risk-based capital............................ 10.21 14.27 9.70 11.05 13.96
</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.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Net income was $5.6 million for the year ended December 31, 1998, a 24.2%
increase over net income of $4.5 million in 1997. Net income in 1996 was $3.0
million. 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>
% CHANGE
---------------------
DECEMBER 31, 1998 1997
----------------------------------------------
1998 1997 1996 FROM 1997 FROM 1996
-------- -------- -------- ---------- ----------
(Dollars in thousands except per share amounts)
<S> <C> <C> <C> <C> <C>
Assets.................. $612,431 $352,093 $270,600 73.9% 30.1%
Loans................... 387,526 275,463 214,462 40.7 28.4
Deposits................ 529,040 295,555 231,648 79.0 27.6
Stockholders' equity.... 40,355 35,666 18,547 13.1 92.3
Book value per share.... 10.68 9.44 6.44 13.1 46.6
</TABLE>
Two measures of performance by banking institutions are return on average
assets and return on average equity. Return on average assets ("ROA") measures
net earnings in relation to average total assets and indicates a company's
ability to employ its resources profitably. For the year ended December 31,
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 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.
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%).
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 CD rates
10
<PAGE>
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.
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>
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Interest income......................... $38,882 $27,468 $21,836
FTE adjustment.......................... 466 144 187
-------- -------- --------
Interest income -- FTE.................. 39,348 27,612 22,023
Interest expense........................ 20,518 12,979 10,031
-------- -------- --------
Net interest income -- FTE.............. $18,830 $14,633 $11,992
======== ======== ========
Yield on interest earning assets -- FTE. 8.76% 9.40% 9.84%
Cost of interest bearing liabilities.... 5.06 5.02 5.02
Net interest spread -- FTE.............. 3.70 4.38 4.82
Net interest margin -- FTE.............. 4.19 4.98 5.36
</TABLE>
The following table sets forth certain information relating to the
Company's net interest income for the years ended December 31, 1998, 1997 and
1996. 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.
11
<PAGE>
Average Consolidated Balance Sheets and Net Interest Analysis
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------------
1998 1997 1996
--------------------------- ------------------------ --------------------------
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------- ------- ------ ------- ------- ------ ---------- ------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Earning assets:
Interest bearing deposits................... $ 3,730 $ 205 5.50% $ 3,883 $ 213 5.49% $ 3,077 $ 169 5.49%
Federal funds sold.......................... 1,659 89 5.36 2,021 108 5.34 2,720 145 5.33
Investment securities:
Taxable................................... 99,840 6,654 6.66 39,413 2,684 6.81 32,526 2,069 6.36
Tax-exempt--FTE........................... 15,790 1,160 7.35 3,520 353 10.03 5,215 551 10.57
Loans--FTE (net of unearned income) 328,394 31,240 9.51 244,757 24,254 9.91 180,334 19,089 10.59
-------- ------ ------- ------ ------- ------
Total earning assets..................... 449,413 39,348 8.76 293,594 27,612 9.40 223,872 22,023 9.84
Non-earning assets............................ 37,316 20,895 16,336
-------- -------- --------
Total assets.................................. $486,729 $314,489 $240,208
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
Deposits:
Savings and interest bearing transaction $ 74,354 $ 2,054 2.76% $ 61,184 $ 1,786 2.92% $ 48,989 $ 1,311 2.68%
Time deposits of $100,000 or more....... 87,751 4,899 5.58 48,919 2,753 5.63 34,689 1,975 5.69
Other time deposits..................... 198,268 11,165 5.63 129,969 7,287 5.61 102,076 5,719 5.60
-------- ------- -------- ------ -------- ------
Total interest bearing deposits..... 360,373 18,118 5.03 240,072 11,826 4.93 185,754 9,005 4.85
FHLB advances and federal funds............ 36,402 1,759 4.83/(1)/ 12,347 599 4.85/(1)/ 9,564 558 5.83
Repurchase agreements...................... 108 4 3.70 - - - - - -
Notes payable/(2)/......................... 8,811 637 7.23 6,125 554 9.04 4,315 468 10.85
-------- ------ -------- ------ -------- ------
Total interest bearing liabilities.. 405,694 20,518 5.06 258,544 12,979 5.02 199,633 10,031 5.02
Non-interest liabilities:
Non-interest bearing deposits.............. 40,583 26,981 20,129
Other non-interest liabilities............. 2,501 2,636 3,302
------- -------- --------
Total liabilities........................ 448,778 288,161 223,064
Stockholders' equity.......................... 37,951 26,328 17,144
-------- -------- --------
Total liabilities and stockholders' equity $486,729 $314,489 $240,208
======== ======== ========
Interest rate spread--FTE .................... 3.70% 4.38% 4.82%
------- ------- -------
Net interest income--FTE ..................... $18,830 $14,633 $11,992
======= ======= =======
Net interest margin--FTE ..................... 4.19% 4.98% 5.36%
</TABLE>
(1) This rate is impacted by the capitalization of interest on construction
projects in the amount of $275,000 and $145,000 for the years ended December 31,
1998 and 1997, respectively. In the absence of this capitalization these
percentages would have been 5.59% and 6.03% for the years ended December 31,
1998 and 1997, respectively.
(2) The interest expense on notes payable includes interest accrued for the
years ended December 31, 1997 and 1996 for a tax dispute related to the years
1992-1995. Such interest accruals were $25,000 and $93,000 and were recorded
during the years ended December 31, 1997 and 1996, respectively.
The following table reflects how changes in the volume of interest earning
assets and interest bearing liabilities and changes in interest rates have
affected the Comany'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.
12
<PAGE>
ANALYSIS OF CHANGES IN NET INTEREST INCOME
<TABLE>
<CAPTION>
1998 OVER 1997 1997 OVER 1996
--------------------------------- -----------------------------
YIELD/ YIELD/
VOLUME RATE TOTAL VOLUME RATE TOTAL
-------- -------- -------- -------- ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in:
Interest income--FTE:
Interest bearing deposits................ $ (8) $ - $ (8) $ 44 $ - $ 44
Federal funds sold....................... (19) - (19) (37) - (37)
Investment securities:
Taxable................................ 4,027 (57) 3,970 469 146 615
Tax-exempt--FTE........................ 901 (94) 807 (170) (28) (198)
Loans, net of unearned income............ 7,956 (970) 6,986 6,384 (1,219) 5,165
-------- -------- -------- ------- -------- -------
Total interest income--FTE........... 12,857 (1,121) 11,736 6,690 (1,101) 5,589
-------- -------- -------- ------- -------- -------
Interest expense:
Savings and interest bearing transaction. 364 (96) 268 356 119 475
Time deposits of $100,000 or more........ 2,168 (22) 2,146 801 (23) 778
Other time deposits...................... 3,846 32 3,878 1,564 4 1,568
Federal funds and FHLB advances.......... 1,167 (3) 1,164 135 (94) 41
Notes payable............................ 194 (111) 83 164 (78) 86
-------- -------- -------- ------- -------- -------
Total interest expense............... 7,739 (200) 7,539 3,020 (72) 2,948
-------- -------- -------- ------- -------- -------
Increase (decrease) in net interest
income--FTE.......................... $ 5,118 $ (921) $ 4,197 $3,670 $(1,029) $2,641
======== ======== ======== ======= ======== =======
</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 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 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.
The table below shows non-interest income for the years ended December 31,
1998, 1997 and 1996.
NON-INTEREST INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Service charges on deposit accounts ........... $ 1,372 $ 957 $ 806
Mortgage lending income ....................... 2,136 566 68
Other charges and fees ........................ 656 570 469
Trust income .................................. 335 274 214
Gain on sale of loans ......................... -- 57 274
Gain on sale of foreclosed real estate......... 98 261 14
Gain on sale of other assets .................. 15 76 --
Gain (loss) on sale of securities ............. 255 14 (77)
Printed check sales ........................... 118 127 90
Other ......................................... 46 23 7
------- ------- -------
Total non-interest income ..................... $ 5,031 $ 2,925 $ 1,865
======= ======= =======
</TABLE>
13
<PAGE>
NON-INTEREST EXPENSE
Non-interest expense consists of salaries and employee benefits, occupancy,
equipment and other operating expenses. Non-interest expense for the year ended
December 31, 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 183 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 54.98%
for the year ended December 31, 1998 compared to 52.55% in 1997 and 51.60% in
1996.
The table below shows non-interest expense for the years ended December 31,
1998, 1997 and 1996.
NON-INTEREST EXPENSE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
-------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Salaries and employee benefits........................ $ 7,197 $5,330 $4,263
Net occupancy expense................................. 877 584 457
Equipment expense..................................... 1,084 721 541
Other real estate and foreclosure expense............. 130 40 49
Other operating expense:
Professional services................................ 211 102 60
Postage.............................................. 243 178 140
Telephone............................................ 314 221 125
Data lines........................................... 139 41 25
Operating supplies................................... 454 405 215
Advertising and public relations..................... 566 332 123
Directors' fees...................................... 114 116 96
Software expense..................................... 190 119 69
Check printing charges............................... 147 137 102
ATM expense.......................................... 118 53 36
FDIC & state assessments............................. 166 112 47
Amortization of intangibles.......................... 173 75 75
Other................................................ 996 662 728
-------- -------- ---------
Total non-interest expense...................... $13,119 $9,228 $7,151
======== ======== =========
</TABLE>
INCOME TAXES
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 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.
14
<PAGE>
ANALYSIS OF FINANCIAL CONDITION
LOAN PORTFOLIO
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,
--------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Real estate:
Single family residential...... $121,539 $ 96,943 $ 78,124 $ 55,609 $ 41,494
Non-farm/non-residential....... 76,563 41,710 35,258 36,603 22,978
Agricultural................... 19,463 13,443 11,583 9,274 8,373
Construction/land development.. 23,305 16,257 8,808 3,471 4,668
Multi-family residential....... 6,207 3,897 3,743 4,388 3,806
-------- -------- -------- -------- --------
Total real estate......... 247,077 172,250 137,516 109,345 81,319
Consumer......................... 66,407 53,233 39,868 25,372 17,583
Commercial and industrial........ 52,192 37,470 28,154 11,077 6,191
Agricultural (non-real estate)... 20,068 10,824 8,363 6,963 6,889
Other............................ 1,782 1,686 561 441 824
-------- -------- -------- -------- --------
Total loans............... $387,526 $275,463 $214,462 $153,198 $112,806
======== ======== ======== ======== ========
</TABLE>
The following table reflects remaining maturities at December 31, 1998 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................................ $ 75,190 $134,570 $37,317 $247,077
Consumer................................... 15,260 48,127 3,020 66,407
Commercial, industrial and agricultural.... 33,919 35,686 2,655 72,260
Other...................................... 162 586 1,034 1,782
-------- -------- ------- --------
$124,531 $218,969 $44,026 $387,526
======== ======== ======= ========
Fixed rate................................. $117,383 $213,187 $23,531 $354,101
Floating rate.............................. 7,148 5,782 20,495 33,425
-------- -------- ------- --------
$124,531 $218,969 $44,026 $387,526
======== ======== ======= ========
</TABLE>
15
<PAGE>
NONPERFORMING ASSETS
Nonperforming assets consist of (1) nonaccrual loans, (2) restructured loans
providing for a reduction or deferral of interest or principal because of a
deterioration in the financial position of the borrower and (3) 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.
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 is 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.
In addition to the nonperforming loans and net charge-offs described in the
tables below, as of December 31, 1998, loans in the amount of $1.7 million were,
in management's opinion, subject to potential future classification as
nonperforming. Such loans are to a single borrower and were placed on non-
accrual status in February 1999. These loans will result in a partial charge-off
in the first quarter of 1999, thereby increasing the Company's net charge-offs
as a percentage of average loans. 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 operation or financial condition.
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,
------------------------------------------
1998 1997 1996 1995 1994
-------- ------ ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans....................................... $2,708 $ 664 $2,057 $1,181 $ 571
Accruing loans 90 days or more past due................ 21 35 253 124 67
Restructured loans..................................... - - - - -
------ ----- ------ ------ -----
Total nonperforming loans......................... 2,729 699 2,310 1,305 638
Foreclosed assets held for sale and repossessions/(1)/. 314 136 78 29 189
------ ----- ------ ------ -----
Total nonperforming assets........................ $3,043 $ 835 $2,388 $1,334 $ 827
====== ===== ====== ====== =====
Nonperforming loans to total loans..................... 0.70% 0.25% 1.08% 0.85% 0.57%
Nonperforming assets to total assets................... 0.50 0.24 0.88 0.63 0.50
</TABLE>
(1) 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.
16
<PAGE>
An analysis of the allowance for loan losses for the periods indicated is shown
in the table below.
ALLOWANCE AND PROVISION FOR LOAN LOSSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance of allowance for loan losses
at beginning of period............................. $3,737 $3,019 $1,909 $1,649 $1,716
Loans charged off:
Real estate:
Single family residential................ 75 35 73 14 58
Non-farm/non-residential................. 18 - - 51 34
Agricultural............................. - - - - -
------ ------ ------ ------ ------
Total real estate................... 93 35 73 65 92
Consumer...................................... 633 434 216 44 31
Commercial and industrial..................... 423 - 128 47 3
Agricultural (non-real estate)................ - - - - -
------ ------ ------ ------ ------
Total loans charged off............. 1,149 469 417 156 126
------ ------ ------ ------ ------
Recoveries of loans previously charged off:
Real estate:
Single family residential................ 9 5 2 33 7
Non-farm/non-residential................. - - - - -
Agricultural............................. - 2 - - -
------ ------ ------ ------ ------
Total real estate................... 9 7 2 33 7
Consumer...................................... 55 39 35 23 12
Commercial and industrial..................... 11 2 4 - -
Agricultural (non-real estate)................ - - - - 2
------ ------ ------ ------ ------
Total recoveries.................... 75 48 41 56 21
------ ------ ------ ------ ------
Net loans charged off.............................. 1,074 421 376 100 105
Provision charged to operating expense............. 2,026 1,139 1,486 360 339
Sale of subsidiary................................. - - - - (301)
------ ------ ------ ------ ------
Balance, end of period............................. $4,689 $3,737 $3,019 $1,909 $1,649
====== ====== ====== ====== ======
Net charge-offs to average loans outstanding
during the periods indicated.................. 0.33% 0.17% 0.21% 0.08% 0.09%
Allowance for loan losses to total loans........... 1.21 1.36 1.41 1.25 1.46
Allowance for loan losses to nonperforming loans... 171.82 534.62 130.69 146.28 258.46
</TABLE>
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.
17
<PAGE>
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.
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>
1 Excellent 0.10%
2 Good 0.50
3 Moderate 1.00
4 Fair 2.00
5 Watch 7.00
6(a) Substandard 15.00
6(b) Impaired-SFAS Impaired Amount
114 or 15%,
whichever is greater
7 Doubtful 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:
RESERVE
PAST DUE STATUS ALLOCATION PERCENTAGE
- --------------- ---------------------
Current 0.225%
Overdue 30 to 89 days 7.500
Overdue 90 days or more 37.500
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 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; (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.
18
<PAGE>
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, 1998 and 1997. 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>
PERCENT OF PERCENT OF
LOANS IN LOANS IN
ALLOWANCE CATEGORY TO ALLOWANCE CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
---------- ------------- ----------- -------------
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------------- -------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate:
Single family residential.................................... $1,618 31.4% $1,116 35.2%
Non-farm/non-residential..................................... 794 19.7 423 15.2
Agriculture.................................................. 242 5.0 152 4.9
Construction/land development................................ 291 6.0 163 5.9
Multifamily.................................................. 63 1.6 41 1.4
Consumer....................................................... 534 17.1 372 19.3
Commercial and industrial...................................... 640 13.5 412 13.6
Agriculture (non-real estate).................................. 270 5.2 114 3.9
Other.......................................................... 15 0.5 15 0.6
Unfunded items (letters of credit, outstanding loan
commitments and unadvanced loan balances).................. 206 N/A 233 N/A
Unallocated reserves........................................... 16 N/A 696 N/A
------- ------- ------- -------
$4,689 100.0% $3,737 100.0%
======= ======= ======= =======
</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 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
19
<PAGE>
nonperforming loan ratios and comparisons to industry averages.
Based on these procedures, management believes that the allowance of $4.7
million at December 31, 1998 is adequate. The allowance for loan losses is 1.21%
of loans at December 31, 1998 compared to 1.36% at December 31, 1997.
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 1998 was
$2.0 million compared to $1.1 million in 1997 and $1.5 million in 1996.
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,
------------------------------------------------------------------------------
1998 1997 1996
--------------------- ----------------------- -------------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE/(1)/ COST VALUE/(1)/ COST VALUE/(1)/
--------------------- ----------------------- -------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities of U.S. Government agencies..... $156,351 $156,331 $24,562 $24,596 $23,881 $23,896
Mortgage-backed securities................. 2,107 2,117 9,340 9,571 10,119 10,256
Obligations of states and political
subdivisions............................. 14,742 14,884 6,801 6,819 4,094 4,119
Other securities........................... 3,286 3,347 1,510 1,510 1,353 1,353
-------- -------- ------- ------- ------- -------
Total................................. $176,486 $176,679 $42,213 $42,496 $39,447 $39,624
======== ======== ======= ======= ======= =======
</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 December 31, 1998 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 YEAR OVER
OR THRU 5 THRU 10 10 FAIR
LESS YEARS YEARS YEARS TOTAL VALUE
------- ------- --------- -------- ------------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities of U.S. Government agencies.................... $ - $2,001 $130,825 $23,525 $156,351/(1)/ $156,331
Mortgage-backed securities................................ - - 92 2,015 2,107/(2)/ 2,117
Obligations of states and political subdivisions.......... 162 1,795 2,018 10,767 14,742/(3)/ 14,884
Other securities.......................................... - - - 3,286 3,286 3,347
------ ------ -------- ------- -------- --------
Total...................................... $ 162 $3,796 $132,935 $39,593 $176,486 $176,679
====== ====== ======== ======= ======== ========
Percentage of total....................................... 0.09% 2.15% 75.33% 22.43% 100.00%
Weighted average yield (FTE)/(4)/......................... 9.15 7.07 6.54 6.72 6.59
</TABLE>
(1) At December 31, 1998 all federal agency securities held by the Company have
certain rights which allow the issuer to call or prepay the obligation without
prepayment penalties.
(2) At December 31, 1998 approximately $1.9 million of these securities earned
interest at floating rates repricing monthly or semi-annually.
(3) At December 31, 1998 approximately $1.0 million of these securities earned
interest at floating rates repricing semi-annually.
(4) The weighted average yields (FTE) are based on book value.
20
<PAGE>
DEPOSITS
The Company's bank subsidiaries' lending and investing activities are
funded primarily by deposits, approximately 72.5% of which were time deposits
and 27.5% of which were demand and savings deposits at December 31, 1998.
Interest bearing deposits other than time deposits consist of transaction,
savings and money market accounts. These deposits comprise 18.0% of total
deposits at December 31, 1998. Non-interest bearing demand deposits at December
31, 1998, constituted approximately 9.5% of total deposits. The Company had no
brokered deposits at December 31, 1998.
AVERAGE DEPOSIT BALANCES AND RATES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1998 1997 1996
------------------ ------------------ ------------------
AVERAGE AVERAGE AVERAGE
AVERAGE RATE AVERAGE RATE AVERAGE RATE
AMOUNT PAID AMOUNT PAID AMOUNT PAID
------------------ ------------------ ------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing accounts............ $ 40,583 - $ 26,981 - $ 20,129 -
Interest bearing accounts:
Transaction (NOW)..................... 32,419 2.25% 25,469 2.19% 22,209 2.20%
Savings............................... 12,002 2.11 8,734 2.13 8,238 2.14
Money market.......................... 29,933 3.58 26,981 3.86 18,542 3.49
Time deposits less than $100,000...... 198,268 5.63 129,969 5.61 102,076 5.60
Time deposits $100,000 or more........ 87,751 5.58 48,919 5.63 34,689 5.69
--------- --------- ---------
Total deposits..................... $ 400,956 $ 267,053 $ 205,883
========= ========= =========
</TABLE>
The following table sets forth by time remaining to maturity, time deposits
in amounts of $100,000 or more at December 31, 1998.
MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100,000 AND OVER
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------
(Dollars in thousands)
<S> <C>
MATURITY
--------
3 months or less...................... $ 64,262
3 to 6 months......................... 44,127
6 to 12 months........................ 29,705
Over 12 months........................ 5,446
</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.
Using a simple static GAP analysis as shown in the following table, at
December 31, 1998 the cumulative ratios of rate sensitive assets to rate
sensitive liabilities at six months and one year were 58.1% and 59.8%,
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.
21
<PAGE>
RATE SENSITIVE ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------------------------------------------------
RATE RATE CUMULATIVE CUMULATIVE
SENSITIVE SENSITIVE PERIOD CUMMULATIVE GAP TO RSA TO
ASSETS LIABILITIES GAP GAP TOTAL RSA RSL
--------- ----------- --------- ----------- ----------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Floating rate.............................. $ 40,252 $ 50,083 $ (9,831) $ (9,831) (1.74)% 80.37%
Fixed rate repricing in:
1 month.................................. 53,536 66,652 (13,116) (22,947) (4.06) 80.34
2 month.................................. 22,346 56,317 (33,971) (56,918) (10.07) 67.11
3 month.................................. 19,004 49,108 (30,104) (87,022) (15.40) 60.83
4 month.................................. 17,999 31,169 (13,170) (100,192) (17.73) 60.45
5 month.................................. 17,339 34,644 (17,305) (117,497) (20.80) 59.20
6 month.................................. 16,071 33,341 (17,270) (134,767) (23.85) 58.06
6 months - 1 year........................ 72,239 111,493 (39,254) (174,021) (30.80) 59.79
1--2 years............................... 70,767 33,230 37,537 (136,484) (24.16) 70.71
2--3 years............................... 28,935 9,432 19,503 (116,981) (20.70) 75.40
3--4 years............................... 28,681 16,862 11,819 (105,162) (18.61) 78.64
4--5 years............................... 20,842 12,525 8,317 (96,845) (17.14) 80.82
Over 5 years............................. 156,989 14,725 142,264 45,419 8.04 108.74
-------- -------- --------
Total................................. $565,000 $519,581 $ 45,419
======== ======== ========
</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 December 31, 1998 this model reflected a one-year ratio of rate
sensitive assets to rate sensitive liabilities of 75.0%. The earnings change
ratio analysis is subject to a number of limitations, including the other
limitations discussed above.
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 FTE as of December 31, 1998
and 1997.
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 are 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 are 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.
22
<PAGE>
EXPECTED MATURITY DATES OF FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
DEC. 31, DEC. 31, DEC. 31,
DECEMBER 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 yield - - - - - - - -
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% 7.23%
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>
23
<PAGE>
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and related Notes presented elsewhere
in the report 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.
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 average assets for the most recent
quarter.
The Company's risk-based and leverage capital ratios exceeded these minimum
requirements at December 31, 1998 and December 31, 1997 and are presented below,
followed by the capital ratios of each of the bank subsidiaries at December 31,
1998.
CONSOLIDATED CAPITAL RATIOS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1997
--------- ----------
(Dollars in thousands)
<S> <C> <C>
Tier 1 capital:
Stockholders' equity............................................................... $ 40,355 $ 35,666
Add (less) net unrealized losses (gains) on available for sale securities.......... (81) (152)
Less goodwill and certain intangibles.............................................. (3,623) (1,337)
--------- ---------
Total Tier 1 capital............................................................ $ 36,651 $ 34,177
========= =========
Tier 2 capital:
Qualifying allowance for loan losses............................................... 4,689 3,288
--------- ---------
Total risk-based capital........................................................ $ 41,340 $ 37,465
========= =========
Risk-weighted assets................................................................. $ 404,879 $ 262,592
========= =========
Ratios at end of period:
Leverage........................................................................... 6.21% 9.86%
Tier 1 risk-based capital.......................................................... 9.05 13.01
Total risk-based capital........................................................... 10.21 14.27
Minimum ratio guidelines:
Leverage........................................................................... 3.00%/(1)/ 3.00%
Tier 1 risk-based capital.......................................................... 4.00 4.00
Total risk-based capital........................................................... 8.00 8.00
</TABLE>
CAPITAL RATIOS OF BANK SUBSIDIARIES
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------------------
BANK OF THE BANK OF THE BANK OF THE
OZARKS, WCA OZARKS, NWA OZARKS/(2)/
----------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C>
Stockholders' equity - Tier 1..................................... $ 33,117 $ 10,625 $ 5,180
Leverage ratio.................................................... 8.51% 6.57% 14.03%
Risk-based capital ratios:
Tier 1.......................................................... 11.34% 10.28% 44.11%
Total capital................................................... 12.57 11.35 44.11
</TABLE>
/(1)/ Regulatory authorities require institutions to operate at varying levels
(ranging from 100-200 basis points) above a minimum leverage ratio of 3%
depending upon capitalization classification.
/(2)/ A federal savings bank acquired by the Company in February 1998 and
merged into Bank of the Ozarks, wca effective January 7, 1999.
24
<PAGE>
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 Bank of the Ozarks, wca and Bank of the Ozarks, nwa. As
of December 31, 1998 $12.3 million was outstanding under the line of credit.
The line of credit requires the Company's bank subsidiaries to maintain (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 the
Company's 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 December
31, 1998 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. A third
Harrison area branch is under construction and expected to open during the first
half of 1999.
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
expects to open additional branches in 1999, capital expenditures are expected
to be substantially less than 1998.
The Company is seeking regulatory approval to merge Bank of the Ozarks, wca
and Bank of the Ozarks, nwa. This merger is expected to be completed late in the
second quarter of 1999. This merger is expected to eliminate certain duplicate
corporate operations and expenses while improving customer service.
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.
The Company has experienced significant growth in its loan and deposit
portfolio. While scheduled loan repayments are a relatively stable source of
funds, such loans generally are not readily convertible to cash. Additionally,
deposit levels may be affected by a number of factors, including rates paid by
competitors, general interest rate levels, returns available to customers on
alternative investments and general economic conditions. Accordingly, the
Company may be required from time to time to rely on secondary sources of
liquidity to meet withdrawal demands or otherwise fund operations 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 December 31, 1998 the Company's bank subsidiaries had an aggregate of
$59.6 million of unused blanket FHLB borrowing availability. Additionally at
December 31, 1998 the bank subsidiaries had available substantial federal funds
borrowing capacity.
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
25
<PAGE>
liquidity demands, management is planning 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 dividend for the first quarter of 1999 has been
increased 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.
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 has been 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 related to
this project and will continue to incur expenses over the next 12 months. The
Company currently estimates that the cost to remediate both its Year 2000
hardware and software issues to be less than $130,000 with approximately 75% of
the costs having already been expended through December 31, 1998. 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.
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
26
<PAGE>
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 is developing 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.
FORWARD-LOOKING INFORMATION
This Management's Discussion and Analysis of Financial Condition and
Results of Operations, other filings made by the Company with the Securities and
Exchange Commission and other oral and written statements or reports by the
Company and its management, include certain forward-looking statements
including, without limitation, statements with respect to anticipated future
operating and financial performance, growth opportunities and growth rates,
acquisition opportunities and other similar forecasts and statements of
expectation. Words such as "anticipate," "believe," "estimate," "expect,"
"intend" and similar expressions, as they relate to the Company or its
management, identify forward-looking statements. Forward-looking statements made
by the Company and its management are based on estimates, projections, beliefs
and assumptions of management at the time of such statements and are not
guarantees of future performance. The Company disclaims any obligation to update
or revise any forward-looking statement based on the occurrence of future
events, the receipt of new information, or otherwise.
Actual future performance, outcomes and results may differ materially from
those expressed in forward-looking statements made by the Company and its
management due to certain risks, uncertainties and assumptions. Certain factors
that may affect operating results of the Company include, but are not limited
to, the following: (1) potential delays or other problems in implementing the
Company's growth and expansion strategy; (2) the ability to attract new deposits
and loans; (3) interest rate fluctuations; (4) competitive factors and pricing
pressures; (5) general economic conditions and (6) changes in legal and
regulatory requirements, as well as, other factors described in this and other
Company reports and statements. Should one or more of the foregoing risks
materialize, or should underlying assumptions prove incorrect, actual results or
outcomes may vary materially from those described in the forward-looking
statements.
27
<PAGE>
SUMMARY OF QUARTERLY RESULTS OF
OPERATIONS, COMMON STOCK MARKET PRICES AND DIVIDENDS
<TABLE>
<CAPTION>
1998 - THREE MONTHS ENDED
------------------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31
------- ------- -------- -------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Total interest income......................... $7,993 $9,000 $10,423 $11,466
Total interest expense........................ 3,836 4,570 5,782 6,330
------ ------ ------- -------
Net interest income....................... 4,157 4,430 4,641 5,136
Provision for loan losses..................... 225 255 742 804
Non-interest income........................... 1,094 1,152 1,333 1,452
Non-interest expense.......................... 2,924 3,329 3,267 3,599
Income Taxes.................................. 728 611 544 738
------ ------ ------- -------
Net income................................ $1,374 $1,387 $ 1,421 $ 1,447
====== ====== ======= =======
Per share:
Earnings - diluted........................ $ 0.36 $ 0.36 $ 0.37 $ 0.38
Cash dividends............................ 0.05 0.06 0.06 0.06
Bid price per common share:
Low....................................... $21.94 $30.00 $ 20.00 $ 18.50
High...................................... 30.00 34.75 30.75 24.00
</TABLE>
<TABLE>
<CAPTION>
1997 - THREE MONTHS ENDED
------------------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31
------- ------- -------- -------
(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 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 Note 15 to Consolidated Financial Statements for discussion of dividend
restrictions.
28
<PAGE>
REPORT OF INDEPENDENT AUDITORS
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,
1997 and 1996, 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.
/s/ Ernest & Young LLP
Little Rock, Arkansas
January 20, 1999
29
<PAGE>
BANK OF THE OZARKS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1998 1997
---------- ----------
(Dollars in thousands, except per share amounts)
<S> <C> <C>
ASSETS
------
Cash and due from banks $ 14,168 $ 9,021
Interest bearing deposits 856 6,607
--------- ----------
Cash and cash equivalents 15,024 15,628
Investment securities - available for sale 17,629 25,297
Investment securities - held to maturity (estimated market value:
$159,050 in 1998 and $17,199 in 1997) 158,989 17,162
Federal funds sold - 2,885
Loans, net of unearned income 387,526 275,463
Allowance for loan losses (4,689) (3,737)
--------- ----------
Net loans 382,837 271,726
Premises and equipment, net 27,155 13,439
Foreclosed assets held for sale, net 314 148
Interest receivable 5,517 3,013
Intangible assets, net 3,665 1,393
Other 1,301 1,402
--------- ----------
Total assets $ 612,431 $ 352,093
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits
Demand - non-interest bearing $ 50,138 $ 31,091
Savings and interest-bearing transaction 95,471 64,742
Time 383,431 199,722
--------- ----------
Total deposits 529,040 295,555
Notes payable 12,448 5,072
FHLB advances and federal funds purchased 26,823 14,017
Repurchase agreements 1,408 -
Accrued interest and other liabilities 2,357 1,783
--------- ----------
Total liabilities 572,076 316,427
Commitments and contingencies
Stockholders' equity
Common stock; $0.01 par value; Authorized 10,000,000 shares;
3,779,555 shares issued and outstanding in 1998 and 1997 38 38
Additional paid-in capital 14,314 14,314
Retained earnings 25,922 21,162
Accumulated other comprehensive income 81 152
--------- ----------
Total stockholders' equity 40,355 35,666
--------- ----------
Total liabilities and stockholders' equity $ 612,431 $ 352,093
========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
30
<PAGE>
BANK OF THE OZARKS, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1998 1997 1996
------- -------- --------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C>
Interest income
Loans $31,168 $24,230 $19,089
Investment securities - taxable 6,654 2,684 2,069
- nontaxable 766 233 364
Federal funds sold 89 108 145
Deposits with banks 205 213 169
------- ------- -------
Total interest income 38,882 27,468 21,836
------- ------- -------
Interest expense
Deposits 18,118 11,826 9,005
Notes payable 637 553 468
FHLB advances 1,415 597 557
Federal funds purchased 348 3 1
------- ------- -------
Total interest expense 20,518 12,979 10,031
------- ------- -------
Net interest income 18,364 14,489 11,805
Provision for loan losses (2,026) (1,139) (1,486)
------- ------- -------
Net interest income after provision for loan losses 16,338 13,350 10,319
------- ------- -------
Other income
Trust income 335 274 214
Service charges on deposit accounts 1,372 957 806
Other income, charges and fees 2,792 1,136 537
Gain (loss) on sale of securities 255 14 (77)
Other 277 544 385
------- ------- -------
Total other income 5,031 2,925 1,865
------- ------- -------
Other expense
Salaries and employee benefits 7,197 5,330 4,263
Net occupancy and equipment 1,961 1,305 998
Other operating expenses 3,961 2,593 1,890
------- ------- -------
Total other expense 13,119 9,228 7,151
------- ------- -------
Income before income taxes 8,250 7,047 5,033
Provision for income taxes 2,621 2,516 2,006
------- ------- -------
Net income $ 5,629 $ 4,531 $ 3,027
======= ======= =======
Basic earnings per common share $ 1.49 $ 1.38 $ 1.05
======= ======= =======
Diluted earnings per common share $ 1.47 $ 1.38 $ 1.05
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
31
<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
32
<PAGE>
Bank of the Ozarks, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 5,629 $ 4,531 $ 3,027
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,043 626 575
Amortization 173 74 74
Provision for loan losses 2,026 1,139 1,486
Provision for losses on foreclosed assets 35 8 11
Amortization and accretion on investment securities (115) (39) 9
(Gain) loss on disposition of investments (255) (14) 77
Gain on sale of loans - (57) (274)
Increase in mortgage loans held for sale (3,750) (1,504) (1,431)
Gain on disposition of premises and equipment (14) (76) (1)
Gain on disposition of foreclosed assets (98) (261) (14)
Deferred income taxes (222) (11) (292)
Changes in assets and liabilities:
Interest receivable (2,502) (461) (563)
Other, net (305) 55 (255)
Accrued interest and other liabilities 518 (531) 375
-------- ------- -------
Net cash provided by operating activities 2,163 3,479 2,804
-------- ------- -------
Cash flows from investing activities
Acquisitions, net of funds acquired 22,123 - -
Proceeds from sales and maturities of investment
securities available for sale 54,036 31,171 28,784
Purchases of investment securities available for sale (20,260) (19,453) (32,904)
Proceeds from maturities of investment securities held to maturity 67,386 6,576 1,862
Purchases of investment securities held to maturity (234,804) (21,007) -
Decrease (increase) in federal funds sold 3,149 (2,535) 3,730
Net increase in loans (110,019) (61,152) (62,577)
Proceeds from sale of loans - 811 2,252
Proceeds from dispositions of bank premises and equipment 30 178 1
Purchase of bank premises and equipment (14,109) (7,295) (997)
Proceeds from dispositions of foreclosed assets 525 632 221
-------- ------- -------
Net cash used in investing activities (231,943) (72,074) (59,628)
-------- ------- -------
Cash flows from financing activities
Net increase in deposits 208,455 63,907 49,184
Net proceeds from FHLB advances and federal funds purchased 14,214 1,290 4,780
Proceeds from notes payable 14,410 10,000 1,500
Payments of notes payable (7,034) (10,324) (24)
Dividends paid (869) (620) (864)
Proceeds from issuance of common stock - 13,155 -
-------- ------- -------
Net cash provided by financing activities 229,176 77,408 54,576
-------- ------- -------
Net (decrease) increase in cash and cash equivalents (604) 8,813 (2,248)
Cash and cash equivalents - beginning of year 15,628 6,815 9,063
-------- ------- -------
Cash and cash equivalents - end of year $ 15,024 $15,628 $ 6,815
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
33
<PAGE>
BANK OF THE OZARKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
1. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Organization - Bank of 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.
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
34
<PAGE>
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 bank 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.
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 $1,158 and $1,043 at December 31, 1998 and 1997, 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 $566, $332 and $123 for the years
ended December 31, 1998, 1997 and 1996, 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
No. 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 No. 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
35
<PAGE>
Notes to Consolidated Financial Statements, Dollars in thousands
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.
Reclassifications - Certain reclassifications of 1997 and 1996 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 years. 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, 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>
<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>
36
<PAGE>
Notes to Consolidated Financial Statements, Dollars in Thousands
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, 1998, 1997, and 1996, investment
securities available-for-sale with a fair value at the date of sale of $41,613,
$3,407 and $17,214, respectively, were sold. The gross realized gains on such
sales totaled $322, $14 and $79, respectively. The gross realized losses totaled
$67, $-0- and $124, respectively. The income tax expense related to net security
gains was $87 and $5 in 1998 and 1997, respectively. The income tax benefit
related to net securities losses in 1996 was $26.
The bank subsidiaries had no trading securities during 1998 or 1997. 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 $97,831 and $31,335 at December 31, 1998 and 1997, respectively,
were pledged to secure public deposits and for other purposes required or
permitted by law.
4. LOANS
The following is a summary of the loan portfolio by principal categories:
<TABLE>
<CAPTION>
December 31,
--------------------
1998 1997
--------------------
<S> <C> <C>
Real Estate:
Single family residential (1-4) $121,539 $ 96,943
Non-farm/non-residential 76,563 41,710
Agricultural 19,463 13,443
Construction/land development 23,305 16,257
Multifamily residential 6,207 3,897
Consumer 66,407 53,233
Commercial and industrial 52,192 37,470
Agricultural (non-real estate) 20,068 10,824
Other 1,782 1,686
-------- --------
Loans, net of unearned income $387,526 $275,463
======== ========
</TABLE>
These loan categories are presented net of unearned discounts, unearned
purchase discounts and deferred costs totaling $4,961 at December 31, 1998 and
$3,759 at December 31, 1997. Loans on which the accrual of interest has been
discontinued aggregated $2,708 and $664 at December 31, 1998 and 1997,
respectively.
Mortgage loans held for resale of $6,685 and $2,935 at December 31, 1998
and 1997, 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 $2,136, $556 and $68 during
1998, 1997 and 1996, 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,
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Balance - beginning of year $ 3,737 $3,019 $1,909
Loans charged-off (1,149) (469) (417)
Recoveries on loans
previously charged-off 75 48 41
------- ------ ------
Net charge-offs (1,074) (421) (376)
Provision charged to
operating expense 2,026 1,139 1,486
------- ------ ------
Balance - end of year $ 4,689 $3,737 $3,019
======= ====== ======
</TABLE>
Impairment of loans having carrying values of $2,461 and $581 at December
31, 1998 and 1997, respectively, have been recognized in conformity with SFAS
No. 114, as amended by SFAS No. 118. The average carrying value of impaired
loans was $1,687, $1,886, and $1,042 for the years ended December 31, 1998, 1997
and 1996, 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 $443 and $105 at December 31, 1998 and 1997, respectively. The
Company does not segregate income recognized on a cash basis in its financial
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 $628 and $683 was
transferred to foreclosed assets held for sale in 1998 and 1997, respectively.
The bank subsidiaries are not committed to lend additional funds to debtors
whose loans have been modified.
37
<PAGE>
Notes to Consolidated Financial Statements, Dollars in Thousands
6. PREMISES AND EQUIPMENT
The following is a summary of premises and equipment:
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1997
------- --------
<S> <C> <C>
Land $ 6,691 $ 4,140
Construction in process 437 985
Buildings and improvements 15,113 5,274
Leasehold improvements 1,615 1,637
Equipment 7,565 4,763
------- -------
31,421 16,799
Accumulated depreciation (4,266) (3,360)
------- -------
Total premises and equipment $27,155 $13,439
======= =======
</TABLE>
The Company capitalized $275 and $145 of interest on construction projects
during the years ended December 31, 1998 and 1997.
7. DEPOSITS
The aggregate amount of time deposits with a minimum denomination of $100
was $143,540 and $57,981 at December 31, 1998 and 1997, respectively. The
following is a summary of the scheduled maturities of all time deposits:
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1997
--------- ---------
<S> <C> <C>
Zero to one year $359,218 $166,316
One year to two years 14,471 25,344
Two years to three years 5,868 3,470
Three years to four years 1,884 2,172
Four years to five years 997 1,354
Thereafter 993 1,066
-------- --------
Total time deposits $383,431 $199,722
======== ========
</TABLE>
8. NOTES PAYABLE
The following is a summary of notes payable:
<TABLE>
<CAPTION>
1998 1997
--------- --------
<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 subsidiary banks. 12,340 -
Other 108 72
-------- --------
$ 12,448 $ 5,072
======== ========
</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>
1998 1997
--------- --------
<S> <C> <C>
FHLB advances:
Average $ 5,335 $ 244
December 31 - -
Maximum month-end
balance during year 28,090 2,750
Interest rate:
Weighted average 5.45% 5.81%
December 31 - -
Federal funds purchased:
Average $ 6,799 $ 52
December 31 3,830 -
Maximum month-end
balance during year 15,420 1,006
Interest rate:
Weighted average 5.12% 5.30%
December 31 4.79 -
</TABLE>
FHLB advances with original maturities exceeding one year totaled $22,993
and $14,017 at December 31, 1998 and 1997, 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.
38
<PAGE>
Notes to Consolidated Financial Statements, Dollars in Thousands
10. INCOME TAXES
The following is a summary of the components of the provision for income
taxes:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1998 1997 1996
------ ------ -------
<S> <C> <C> <C>
Current:
Federal $2,363 $2,180 $1,683
State 36 277 614
------ ------ ------
Total current 2,399 2,457 2,297
------ ------ ------
Deferred:
Federal 180 55 (242)
State 42 4 (49)
------ ------ ------
Total deferred 222 59 (291)
------ ------ ------
Provision for income taxes $2,621 $2,516 $2,006
====== ====== ======
</TABLE>
The reconciliation between the statutory federal income tax rate and
effective income tax rate is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1998 1997 1996
------- ------- --------
<S> <C> <C> <C>
Statutory federal
income tax rate 34.0% 34.0% 34.0%
State income taxes,
net of federal benefit 0.6 4.3 4.3
Effect of non-taxable
interest income (3.7) (2.7) (2.5)
Accrual for state income
tax assessment - - 6.5
Other .9 .1 (2.4)
----- ----- -----
Effective income tax rate 31.8% 35.7% 39.9%
===== ===== =====
</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.
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,
-----------------
1998 1997
------- -------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 1,514 $ 1,151
Valuation of foreclosed assets 2 293
------- -------
Gross deferred tax assets 1,516 1,444
------- -------
Deferred tax liabilities:
Unrealized appreciation on
securities available for sale 51 94
Accelerated depreciation on
premises and equipment 599 311
Other 145 139
------- -------
Gross deferred tax liabilities 795 544
------- -------
Net deferred tax assets $ 721 $ 900
======= =======
</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 $64 and $95 to the plan for the years ended December 31,
1997 and 1996, 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 1998 and 1997 of $99 and $32, respectively.
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.
39
<PAGE>
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------
1998 1997
-------------------- ---------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Options Price Options Price
------- --------- ------- --------
<S> <C> <C> <C> <C>
Outstanding -
beginning of year 106,500 $ 16.42 - $ -
Granted 103,700 24.11 108,500 16.42
Exercised
Canceled (12,150) 16.00 (2,000) 16.00
------- ------
Outstanding -
end of year 198,050 20.42 106,500 16.42
======= =======
Exercisable at
end of year 17,000 $ 22.37 8,000 $16.00
======= =======
</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 1998
and 1997 was $8.36 and $6.20, 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>
1998 1997
------ ------
<S> <C> <C>
Pro forma net income $5,363 $4,462
Pro forma earnings per share:
Basic 1.42 1.36
Diluted 1.40 1.36
</TABLE>
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
$27,409 and $20,004 at December 31, 1998 and 1997, 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 $334 and $1,931 at December 31, 1998 and 1997, 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.
40
<PAGE>
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,
1998 and 1997 was $1,019 and $210, respectively. New loans made to such related
parties were $1,169 and $169 for the years ended December 31, 1998 and 1997,
respectively. Repayments of loans made by such related parties were $360 and
$1,571 for the years ended December 31, 1998 and 1997, 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, 1998 and 1997, 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.
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, 1998 and 1997, these required balances
aggregated approximately $2,621 and $1,395, respectively.
The Company's and bank subsidiaries' regulatory capital positions were as
follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
---------------------------- ----------------------------
Computed Computed Computed Computed
Capital Percent Capital Percent
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Bank of the Ozarks, Inc. (consolidated):
Total risk-based capital $41,340 10.21% $ 37,465 14.27%
Tier 1 risk-based capital 36,651 9.05 34,177 13.01
Leverage ratio -- 6.21 -- 9.86
Bank of the Ozarks, wca:
Total risk-based capital $36,700 12.57% $ 28,349 15.44%
Tier 1 risk-based capital 33,117 11.34 26,050 14.19
Leverage ratio -- 8.51 -- 11.15
Bank of the Ozarks, nwa:
Total risk-based capital $11,732 11.35% $ 10,764 14.13%
Tier 1 risk-based capital 10,625 10.28 9,810 11.88
Leverage ratio -- 6.57 -- 9.71
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>
41
<PAGE>
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.
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>
1998 1997
----------------------- -----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 15,024 $ 15,024 $ 15,628 $ 15,628
Available-for-sale securities 17,629 17,629 25,297 25,297
Held-to-maturity securities 158,989 159,050 17,162 17,199
Federal funds sold -- -- 2,885 2,885
Loans, net of allowance for loan losses 382,837 382,720 271,726 270,794
Accrued interest receivable 5,517 5,517 3,013 3,013
Financial liabilities:
Demand, NOW and savings account deposits $145,609 $145,609 $ 95,833 $ 95,833
Time deposits 383,431 384,598 199,722 201,547
Notes Payable 12,448 12,448 5,072 5,072
FHLB advances and federal funds purchased 26,823 27,430 14,017 13,983
Repurchase agreements 1,408 1,408 -- --
Accrued interest and other liabilities 2,357 2,357 1,783 1,783
Off balance sheet items:
Standby letters of credit -- $ 334 -- $ 1,932
Commitments to extend credit -- 27,409 -- 19,913
Unfunded credit card loans -- 1,419 -- 1,352
</TABLE>
42
<PAGE>
Notes to Consolidated Financial Statements, Dollars in thousands
17. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Cash paid during the period for:
Interest $20,466 $13,255 $ 9,682
Income taxes 2,333 2,752 1,984
Supplemental schedule of non-cash investing and financing activities:
Transfer of loans to foreclosed assets held for sale $ 628 $ 683 $ 236
Loans advanced for sales of foreclosed assets 251 203 72
</TABLE>
18. OTHER OPERATING EXPENSES
The following is a summary of other operating expenses:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Operating supplies $ 454 $ 405 $ 215
Advertising and public relations 566 332 123
Other 2,941 1,856 1,552
------ ------ ------
Total other operating expenses $3,961 $2,593 $1,890
====== ====== ======
</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,
-------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Numerator:
Net income $5,629 $4,531 $3,027
====== ====== ======
Denominator:
Denominator for basic EPS weighted average shares 3,780 3,272 2,880
Effect of dilutive securities:
Stock options 39 9 --
------ ------ ------
Denominator for diluted EPS - adjusted weighted average
shares and assumed conversions 3,819 3,281 2,880
====== ====== ======
Basic EPS $ 1.49 $ 1.38 $ 1.05
====== ====== ======
Diluted EPS $ 1.47 $ 1.38 $ 1.05
====== ====== ======
</TABLE>
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,
-------------------
1998 1997
------- -------
<S> <C> <C>
Assets
------
Cash and cash equivalents $ 51 $ 3,264
Investment in subsidiaries 51,459 36,313
Premises and equipment, net 25 31
Excess cost over fair value of net assets acquired, at amortized cost 1,261 1,337
Other 11 8
------- -------
Total assets $52,807 $40,953
======= =======
Liabilities and Stockholders' Equity
------------------------------------
Notes payable $12,388 $ 5,072
Accrued interest and other liabilities 64 215
------- -------
Total liabilities 12,452 5,287
------- -------
Stockholders' equity
Common stock 38 38
Additional paid-in capital 14,314 14,314
Retained earnings 25,922 21,162
Accumulated other comprehensive income 81 152
------- -------
Total stockholders' equity 40,355 35,666
------- -------
Total liabilities and stockholders' equity $52,807 $40,953
======= =======
</TABLE>
43
<PAGE>
Notes to Consolidated Financial Statements, Dollars in thousands
Condensed Statements of Income
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Income
Dividends from subsidiaries $3,317 $ - $1,250
Other 2 1 1
------ ------ ------
Total income 3,319 1 1,251
------ ------ ------
Expenses
Interest 637 554 468
Salaries and employee benefits - 284 349
Net occupancy and equipment 53 71 51
Other operating expenses 620 360 243
------ ------ ------
Total expenses 1,310 1,269 1,111
------ ------ ------
Income (loss) before income tax benefit
and equity in undistributed earnings of subsidiaries 2,009 (1,268) 140
Income tax benefit 461 486 183
Equity in undistributed earnings of subsidiary 3,159 5,313 2,704
------ ------ ------
Net income $5,629 $4,531 $3,027
====== ====== ======
</TABLE>
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 5,629 $ 4,531 $ 3,027
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 13 18 16
Amortization 77 56 57
Equity in undistributed earnings of
subsidiaries (3,159) (5,313) (2,704)
Changes in assets and liabilities:
Accrued interest and other liabilities (110) (199) 106
Other, net (3) 18 (30)
------- ------- -------
Net cash provided by (used in) operating activities 2,447 (889) 472
------- ------- -------
Cash flows from investing activities
Purchases of premises and equipment (7) (22) (6)
Purchase 100% of the stock in Heartland
Community Bank, FSB (3,100) -- --
Additional investment in subsidiaries and
purchase of minority shares of stock (9,000) (9,000) (1,500)
------- ------- -------
Net cash used in investing activities (12,107) (9,022) (1,506)
------- ------- -------
Cash flows from financing activities
Proceeds from issuance of common stock -- 13,155 --
Proceeds from notes payable 14,350 10,000 1,500
Payments of notes payable (7,034) (10,324) (24)
Dividends paid (869) (620) (864)
------- ------- -------
Net cash provided by financing activities 6,447 12,211 612
------- ------- -------
Net (decrease) increase in cash and cash equivalents (3,213) 2,300 (422)
Cash and cash equivalents - beginning of period 3,264 964 1,386
------- ------- -------
Cash and cash equivalents - end of period $ 51 $ 3,264 $ 964
======= ======= =======
</TABLE>
44
<PAGE>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
1. Bank of the Ozarks, wca, an Arkansas state chartered bank, which also does
business as Bank of the Ozarks.
2. Bank of the Ozarks, nwa, an Arkansas state chartered bank, which also does
business as Bank of the Ozarks.
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Bank of the Ozarks, Inc. of our report dated January 20, 1999, included in
the 1998 Annual Report to Stockholders of Bank of the Ozarks, Inc.
We also consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 333-32173) pertaining to the Bank of the Ozarks, Inc. Stock Option
Plan, Form S-8 (No. 333-32177) pertaining to the Stock Ownership Plan and Trust
of Bank of the Ozarks, Inc. and Form S-8 (No. 333-32175) pertaining to the Bank
of the Ozarks, Inc. Non-employee Director Stock Option Plan of our report dated
January 20, 1999, with respect to the consolidated financial statements
incorporated herein by reference in this Annual Report (Form 10-K) of Bank of
the Ozarks, Inc. for the year ended December 31, 1998.
/s/ Ernst & Young LLP
Little Rock, Arkansas
March 15, 1999
<PAGE>
Exhibit 23.2
CONSENT OF MOORE STEPHENS FROST, INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Annual Report (Form 10-
K) of Bank of the Ozarks, Inc. (the "Company") of the consolidated financial
statements for the years ended December 31, 1997 and 1996 (the "Financial
Statements") included in the 1998 Annual Report to Stockholders of the Company.
We also consent to the incorporation by reference in the Registration
Statements (Form S-8 Nos. 333-32177, 333-32175 and 333-32173), pertaining to
certain employee benefit plans of the Company of the Financial Statements
included in or incorporated by reference in this Annual Report (Form 10-K).
/s/ Moore Stephens Frost
Moore Stephens Frost
Little Rock, Arkansas
March 15, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCORPORATED BY REFERENCE IN
THE ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 14,168
<INT-BEARING-DEPOSITS> 856
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 17,629
<INVESTMENTS-CARRYING> 158,989
<INVESTMENTS-MARKET> 159,050
<LOANS> 387,526
<ALLOWANCE> 4,689
<TOTAL-ASSETS> 612,431
<DEPOSITS> 529,040
<SHORT-TERM> 5,238
<LIABILITIES-OTHER> 2,357
<LONG-TERM> 35,441
0
0
<COMMON> 38
<OTHER-SE> 40,317
<TOTAL-LIABILITIES-AND-EQUITY> 612,431
<INTEREST-LOAN> 31,168
<INTEREST-INVEST> 7,420
<INTEREST-OTHER> 294
<INTEREST-TOTAL> 38,882
<INTEREST-DEPOSIT> 18,118
<INTEREST-EXPENSE> 20,518
<INTEREST-INCOME-NET> 18,364
<LOAN-LOSSES> 2,026
<SECURITIES-GAINS> 255
<EXPENSE-OTHER> 13,119
<INCOME-PRETAX> 8,250
<INCOME-PRE-EXTRAORDINARY> 8,250
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,629
<EPS-PRIMARY> 1.49
<EPS-DILUTED> 1.47
<YIELD-ACTUAL> 4.19
<LOANS-NON> 2,708
<LOANS-PAST> 21
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,529
<ALLOWANCE-OPEN> 3,737
<CHARGE-OFFS> 1,149
<RECOVERIES> 75
<ALLOWANCE-CLOSE> 4,689
<ALLOWANCE-DOMESTIC> 4,689
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
