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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2003 |
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to . |
Commission File Number 0-22759
BANK OF THE OZARKS, INC.
(Exact name of registrant as specified in its charter)
ARKANSAS | 71-0556208 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
12615 CHENAL PARKWAY, LITTLE ROCK, ARKANSAS |
72211 | |
(Address of principal executive offices) | (Zip Code |
Registrant’s telephone number, including area code: (501) 978-2265
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Act). Yes x No ¨
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practical date.
Class | Outstanding at September 30, 2003 | |||
Common Stock, $0.01 par value per share | 8,069,270 |
Table of Contents
FORM 10-Q
September 30, 2003
INDEX
PART I. Financial Information
Table of Contents
BANK OF THE OZARKS, INC.
(Dollars in thousands, except per share amounts)
Unaudited
September 30, | December 31, | |||||||||||
2003 | 2002 | 2002 | ||||||||||
ASSETS | ||||||||||||
Cash and due from banks | $ | 28,124 | $ | 23,728 | $ | 24,755 | ||||||
Interest bearing deposits | 425 | 421 | 427 | |||||||||
Investment securities—available for sale (“AFS”) | 289,936 | 211,699 | 222,965 | |||||||||
Investment securities—held to maturity (“HTM”) | — | 4,129 | 9,203 | |||||||||
Loans | 860,051 | 686,840 | 717,895 | |||||||||
Allowance for loan losses | (13,100 | ) | (10,308 | ) | (10,936 | ) | ||||||
Net loans | 846,951 | 676,532 | 706,959 | |||||||||
Premises and equipment, net | 48,009 | 36,641 | 39,050 | |||||||||
Foreclosed assets held for sale, net | 866 | 598 | 333 | |||||||||
Interest receivable | 6,610 | 6,058 | 6,029 | |||||||||
Goodwill | 4,936 | 1,808 | 1,808 | |||||||||
Intangible assets, net | 1,503 | 901 | 863 | |||||||||
Bank owned life insurance and other assets | 26,211 | 2,493 | 23,461 | |||||||||
Total assets | $ | 1,253,571 | $ | 965,008 | $ | 1,035,853 | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||
Deposits | ||||||||||||
Demand non-interest bearing | $ | 110,049 | $ | 87,504 | $ | 85,838 | ||||||
Savings and interest bearing transaction | 355,274 | 280,398 | 312,637 | |||||||||
Time | 529,248 | 389,278 | 391,698 | |||||||||
Total deposits | 994,571 | 757,180 | 790,173 | |||||||||
Repurchase agreements with customers | 43,390 | 20,325 | 20,739 | |||||||||
Other borrowings | 73,520 | 97,140 | 129,366 | |||||||||
Accrued interest and other liabilities | 5,419 | 4,128 | 5,407 | |||||||||
Total liabilities | 1,116,900 | 878,773 | 945,685 | |||||||||
Guaranteed preferred beneficial interest in the Company’s subordinated debentures | 45,250 | 17,250 | 17,250 | |||||||||
Stockholders’ equity | ||||||||||||
Preferred stock; $0.01 par value, 1,000,000 shares authorized, | ||||||||||||
no shares issued and outstanding | — | — | — | |||||||||
Common stock; $0.01 par value, 10,000,000 shares authorized, | ||||||||||||
8,069,270, 7,696,960 and 7,752,910 shares issued and | ||||||||||||
outstanding at September 30, 2003, September 30, 2002 | ||||||||||||
and December 31, 2002, respectively | 81 | 77 | 78 | |||||||||
Additional paid-in capital | 26,176 | 16,176 | 17,010 | |||||||||
Retained earnings | 66,733 | 51,347 | 54,755 | |||||||||
Accumulated other comprehensive income (loss) | (1,569 | ) | 1,385 | 1,075 | ||||||||
Total stockholders’ equity | 91,421 | 68,985 | 72,918 | |||||||||
Total liabilities and stockholders’ equity | $ | 1,253,571 | $ | 965,008 | $ | 1,035,853 | ||||||
See accompanying notes to consolidated financial statements.
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BANK OF THE OZARKS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
Unaudited
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||
Interest income | ||||||||||||||||
Loans | $ | 14,362 | $ | 12,560 | $ | 40,466 | $ | 36,364 | ||||||||
Investment securities—taxable | 2,626 | 2,931 | 8,593 | 8,085 | ||||||||||||
—nontaxable | 545 | 128 | 1,164 | 480 | ||||||||||||
Deposits with banks and federal funds sold | 4 | 6 | 19 | 15 | ||||||||||||
Total interest income | 17,537 | 15,625 | 50,242 | 44,944 | ||||||||||||
Interest expense | ||||||||||||||||
Deposits | 3,209 | 3,437 | 9,852 | 10,782 | ||||||||||||
Repurchase agreements with customers | 82 | 70 | 235 | 205 | ||||||||||||
Other borrowings | 1,168 | 1,267 | 3,618 | 3,577 | ||||||||||||
Total interest expense | 4,459 | 4,774 | 13,705 | 14,564 | ||||||||||||
Net interest income | 13,078 | 10,851 | 36,537 | 30,380 | ||||||||||||
Provision for loan losses | (1,050 | ) | (1,080 | ) | (2,895 | ) | (2,575 | ) | ||||||||
Net interest income after provision for loan losses | 12,028 | 9,771 | 33,642 | 27,805 | ||||||||||||
Other income | ||||||||||||||||
Service charges on deposit accounts | 2,043 | 1,770 | 5,698 | 5,081 | ||||||||||||
Mortgage lending income | 1,958 | 734 | 4,626 | 1,726 | ||||||||||||
Trust income | 493 | 177 | 1,042 | 501 | ||||||||||||
Bank owned life insurance income | 299 | — | 874 | — | ||||||||||||
Gain (loss) on sale of securities | 36 | — | 133 | (217 | ) | |||||||||||
Other | 306 | 277 | 854 | 769 | ||||||||||||
Total other income | 5,135 | 2,958 | 13,227 | 7,860 | ||||||||||||
Other expense | ||||||||||||||||
Salaries and employee benefits | 5,186 | 3,653 | 13,765 | 10,316 | ||||||||||||
Net occupancy and equipment | 1,179 | 872 | 3,268 | 2,609 | ||||||||||||
Other operating expenses | 2,264 | 1,857 | 6,104 | 5,152 | ||||||||||||
Total other expense | 8,629 | 6,382 | 23,137 | 18,077 | ||||||||||||
Income before income taxes and trust preferred distributions | 8,534 | 6,347 | 23,732 | 17,588 | ||||||||||||
Distributions on trust preferred securities | 408 | 397 | 1,201 | 1,190 | ||||||||||||
Provision for income taxes | 2,852 | 2,254 | 7,942 | 6,173 | ||||||||||||
Net income | $ | 5,274 | $ | 3,696 | $ | 14,589 | $ | 10,225 | ||||||||
Basic earnings per common share | $ | 0.65 | $ | 0.48 | $ | 1.84 | $ | 1.34 | ||||||||
Diluted earnings per common share | $ | 0.64 | $ | 0.47 | $ | 1.80 | $ | 1.31 | ||||||||
Dividends declared per common share | $ | 0.12 | $ | 0.08 | $ | 0.33 | $ | 0.21 | ||||||||
See accompanying notes to consolidated financial statements.
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BANK OF THE OZARKS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Dollars in thousands)
Unaudited
Common Stock | Additional Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total | |||||||||||||
Balance—January 1, 2002 | $38 | $ | 14,360 | $ | 42,718 | $(499 | ) | $ | 56,617 | ||||||||
Comprehensive income: | |||||||||||||||||
Net income | — | — | 10,225 | — | 10,225 | ||||||||||||
Other comprehensive income | |||||||||||||||||
Unrealized gains on AFS securities net of $1,169 tax effect | — | — | — | 1,780 | 1,780 | ||||||||||||
Reclassification adjustment for gains previously included in comprehensive income net of $65 tax effect | — | — | — | 104 | 104 | ||||||||||||
Comprehensive income | 12,109 | ||||||||||||||||
Issuance of 132,850 split adjusted shares of common stock from exercise of stock options | 1 | 1,271 | — | — | 1,272 | ||||||||||||
Tax benefits related to exercise of stock options | — | 583 | — | — | 583 | ||||||||||||
Cash dividends | — | — | (1,596 | ) | — | (1,596 | ) | ||||||||||
2-for-1 stock split in the form of a 100% stock dividend | 38 | (38 | ) | — | — | — | |||||||||||
Balance—September 30, 2002 | $77 | $ | 16,176 | $ | 51,347 | $1,385 | $ | 68,985 | |||||||||
Balance—January 1, 2003 | $78 | $ | 17,010 | $ | 54,755 | $1,075 | $ | 72,918 | |||||||||
Comprehensive income: | |||||||||||||||||
Net income | — | — | 14,589 | — | 14,589 | ||||||||||||
Other comprehensive income | |||||||||||||||||
Unrealized losses on AFS securities net of $1,771 tax effect | — | — | — | (2,745 | ) | (2,745 | ) | ||||||||||
Reclassification adjustment for gains previously included in comprehensive income net of $65 tax effect | — | — | — | 101 | 101 | ||||||||||||
Comprehensive income | 11,945 | ||||||||||||||||
Issuance of 184,760 shares pursuant to acquisition of RVB Bancshares, Inc. | 2 | 6,705 | — | — | 6,707 | ||||||||||||
Issuance of 131,600 shares of common stock from exercise of stock options | 1 | 1,384 | — | — | 1,385 | ||||||||||||
Tax benefits related to exercise of stock options | — | 1,077 | — | — | 1,077 | ||||||||||||
Cash dividends | — | — | (2,611 | ) | — | (2,611 | ) | ||||||||||
Balance—September 30, 2003 | $81 | $ | 26,176 | $ | 66,733 | $(1,569 | ) | $ | 91,421 | ||||||||
See accompanying notes to consolidated financial statements.
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BANK OF THE OZARKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Unaudited
Nine Months Ended September 30, | ||||||||
2003 | 2002 | |||||||
Cash flows from operating activities | ||||||||
Net income | $ | 14,589 | $ | 10,225 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation | 1,393 | 1,150 | ||||||
Amortization | 169 | 140 | ||||||
Provision for loan losses | 2,895 | 2,575 | ||||||
Provision for losses on foreclosed assets | 102 | 37 | ||||||
Amortization and accretion on investment securities | 456 | 72 | ||||||
(Gain) loss on sale of securities | (133 | ) | 217 | |||||
Net decrease in mortgage loans held for sale | 5,133 | 1,779 | ||||||
Gain on disposition of foreclosed assets | (10 | ) | (37 | ) | ||||
Deferred income taxes | 17 | (154 | ) | |||||
Increase in value of bank owned life insurance | (874 | ) | — | |||||
Changes in assets and liabilities: | ||||||||
Interest receivable | (274 | ) | (237 | ) | ||||
Other assets, net | (187 | ) | (444 | ) | ||||
Accrued interest and other liabilities | 1,167 | 845 | ||||||
Net cash provided by operating activities | 24,443 | 16,168 | ||||||
Cash flows from investing activities | ||||||||
Proceeds from sales and maturities of investment securities AFS | 305,745 | 69,440 | ||||||
Purchases of investment securities AFS | (367,150 | ) | (95,674 | ) | ||||
Proceeds from maturities of investment securities HTM | 2,985 | 841 | ||||||
Purchases of investment securities HTM | (2,171 | ) | (505 | ) | ||||
Net increase in loans held for portfolio | (109,092 | ) | (74,766 | ) | ||||
Purchases of premises and equipment | (8,673 | ) | (4,667 | ) | ||||
Proceeds from dispositions of foreclosed assets | 1,109 | 1,306 | ||||||
Cash and federal funds sold received in acquisition, net of cash paid | 8,969 | — | ||||||
Net cash used in investing activities | (168,278 | ) | (104,025 | ) | ||||
Cash flows from financing activities | ||||||||
Net increase in deposits | 154,252 | 79,438 | ||||||
Net repayments of other borrowings | (56,474 | ) | (2,552 | ) | ||||
Net increase in repurchase agreements with customers | 22,650 | 4,112 | ||||||
Proceeds from issuance of trust preferred securities | 28,000 | — | ||||||
Proceeds on exercise of stock options | 1,385 | 1,272 | ||||||
Dividends paid | (2,611 | ) | (1,596 | ) | ||||
Net cash provided by financing activities | 147,202 | 80,674 | ||||||
Net increase (decrease) in cash and cash equivalents | 3,367 | (7,183 | ) | |||||
Cash and cash equivalents—beginning of period | 25,182 | 31,332 | ||||||
Cash and cash equivalents—end of period | $ | 28,549 | $ | 24,149 | ||||
See accompanying notes to consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. | Principles of Consolidation |
The consolidated financial statements of Bank of the Ozarks, Inc. (the “Company”) include the accounts of the parent company, its wholly owned state chartered bank subsidiary – Bank of the Ozarks, and its wholly-owned business trusts—Ozark Capital Trust (“Ozark”), Ozark Capital Statutory Trust II (“Ozark II”), and Ozark Capital Statutory Trust III (“Ozark III”) (collectively the “Trusts”). All material intercompany accounts and transactions have been eliminated.
2. | Basis of Presentation |
The accompanying consolidated financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) in Article 10 of Regulation S-X and with the instructions to Form 10-Q, and in accordance with accounting principles generally accepted in the United States for interim financial information. Certain information, accounting policies and footnote disclosures normally included in complete financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted in accordance with such rules and regulations. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2002.
In the opinion of management all adjustments considered necessary, consisting of normal recurring items, have been included for a fair presentation of the accompanying consolidated financial statements. Operating results for the three and nine months ended September 30, 2003 are not necessarily indicative of the results that may be expected for the full year or future periods.
3. | Earnings Per Common Share |
Basic earnings per share (“EPS”) is computed by dividing reported earnings available to common stockholders by weighted average shares outstanding. Diluted EPS includes only the dilutive effect of stock options. In computing dilution for stock options, a simple average share price based on the daily ending trade as reported on Bloomberg is used for the reporting period. For the three and nine months ended September 30, 2003, all of the Company’s outstanding stock options were included in the diluted EPS calculation. For both the three and nine months ended September 30, 2002, options to purchase 34,300 shares of the Company’s common stock were excluded from the diluted EPS calculation because such shares would have been antidilutive.
Basic and diluted earnings per common share are computed as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||
(In thousands, except per share amounts) | ||||||||||||
Common shares—weighted average (basic) | 8,062 | 7,675 | 7,927 | 7,616 | ||||||||
Common share equivalents—weighted average | 179 | 212 | 177 | 203 | ||||||||
Common shares—diluted | 8,241 | 7,887 | 8,104 | 7,819 | ||||||||
Net income | $ | 5,274 | $ | 3,696 | $ | 14,589 | $ | 10,225 | ||||
Basic earnings per common share | $ | 0.65 | $ | 0.48 | $ | 1.84 | $ | 1.34 | ||||
Diluted earnings per common share | 0.64 | 0.47 | 1.80 | 1.31 |
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4. | Federal Home Loan Bank (“FHLB”) Advances |
FHLB advances with original maturities exceeding one year totaled $68.6 million at September 30, 2003. Interest rates on these advances ranged from 1.30% to 6.43% at September 30, 2003 with a weighted average rate of 5.82%. At September 30, 2003 aggregate annual maturities (dollars in thousands) and weighted average interest rates of FHLB advances with an original maturity of over one year were as follows:
Maturity | Amount | Weighted Average Rate | |||
2003 | $ | 17 | 1.58% | ||
2004 | 7,487 | 2.33 | |||
2005 | 481 | 3.55 | |||
2006 | 198 | 6.30 | |||
Thereafter | 60,395 | 6.27 | |||
$ | 68,578 | 5.82 | |||
FHLB advances of $60.0 million maturing in 2010 may be called quarterly. At September 30, 2003 the Company had no FHLB advances with original maturities of one year or less.
5. | Trust Preferred Securities |
On June 18, 1999 Ozark sold to investors in a public underwritten offering $17.3 million of 9% cumulative trust preferred securities (“9% Securities”). The proceeds were used to purchase an equal principal amount of 9% subordinated debentures (“9% Debentures”) of Bank of the Ozarks, Inc. On September 25, 2003 Ozark III sold to investors in a private placement offering $14 million of adjustable rate trust preferred securities, and on September 29, 2003 Ozark II sold to investors in a private placement offering $14 million of adjustable rate trust preferred securities (collectively, “Adjustable Rate Securities”). These Adjustable Rate Securities bear interest at 90-day LIBOR plus 2.95% for Ozark III and 90-day LIBOR plus 2.90% for Ozark II, adjustable quarterly, and on a combined basis have an initial weighted average rate of 4.07%. The aggregate proceeds of $28 million from the Adjustable Rate Securities were used to purchase an equal principal amount of adjustable rate subordinated debentures of Bank of the Ozarks, Inc., that adjust quarterly to 90-day LIBOR plus 2.95% for Ozark III and 90-day LIBOR plus 2.90% for Ozark II (“Adjustable Rate Debentures”). At September 30, 2003 the Company had an aggregate of $45.3 million of trust preferred securities outstanding, along with an equal amount of subordinated debentures held by the Trusts. Bank of the Ozarks, Inc. has, through various contractual arrangements, fully and unconditionally guaranteed all obligations of the Trusts with respect to the 9% Securities and the Adjustable Rate Securities. The sole asset of Ozark is the 9% Debentures, and the sole assets of Ozark II and Ozark III are the Adjustable Rate Debentures. Both the 9% Securities and the 9% Debentures will mature on June 18, 2029, while both the Adjustable Rate Securities and the Adjustable Rate Debentures mature in September 2033 (the thirtieth anniversary date of issuance). However, all of these trust preferred securities and the associated subordinated debentures may be prepaid, subject to regulatory approval, prior to maturity at any time on or after the fifth anniversary date of issuance (June 18, 2004 for the 9% Securities and 9% Debentures, and September 25 and 29, 2008 for the two issues of Adjustable Rate Securities and Adjustable Rate Debentures), or at an earlier date upon certain changes in tax laws, investment company laws or regulatory capital requirements.
In May 2003 the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 established standards for how entities classify and measure certain financial instruments with characteristics of both liabilities and equity. The provisions of SFAS No. 150 are effective for financial instruments entered into or modified after May 31, 2003, and otherwise are effective at the beginning of the first interim period beginning after June 15, 2003. In the Company’s earnings release issued October 9, 2003, the “Guaranteed preferred beneficial interest in the Company’s subordinated debentures” were reported as a liability in the Company’s balance sheet, and the distributions on these trust preferred securities on and after July 1, 2003 were included as interest expense in accordance with the provisions of SFAS No. 150. Subsequent to the earnings release, but prior to the filing of these financial statements, the Company’s independent auditors have advised that the FASB voted to defer indefinitely the provisions of SFAS No. 150 with respect to the financial reporting for trust preferred securities. Accordingly $408,000 of trust preferred distributions for the three months ended September 30, 2003 which were classified as interest expense in the October 9, 2003 earnings release have been reported in these financial statements as distributions on trust preferred securities (in the same manner as distributions to minority interest). Also these trust preferred securities are reported in the same manner as minority interest in the accompanying consolidated balance sheet. This reporting is consistent with the Company’s previous quarterly and annual financial reporting.
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In January 2003 the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”). FIN 46 requires a variable interest entity (“VIE”) to be consolidated when a company is subject to the majority of the risk of loss or entitled to a majority of the VIE’s residual returns. Conversely consolidation may be prohibited when a company is not subject to the majority of the risk of loss and is not entitled to a majority of the VIE’s residual returns. Each of the Trusts may be a VIE under the provisions of FIN 46; however, consolidation of the Trusts may be precluded upon the Company’s adoption of FIN 46, resulting in the trust preferred securities reported as liabilities and the distributions thereon reported as interest expense in the Company’s consolidated financial statements. This is an emerging financial reporting issue in the financial services industry, and the FASB has indicated it expects to have this issue resolved by the end of 2003. When the reporting under FIN 46 is resolved, it should not have a significant impact on the Company’s consolidated financial statements. Management will continue to monitor the financial reporting developments in this area during the fourth quarter of 2003.
6. | Supplementary Data for Cash Flows |
Cash payments for interest by the Company during the nine months ended September 30, 2003 and 2002 amounted to $13.7 million and $15.0 million, respectively. Cash payments for income taxes during the nine months ended September 30, 2003 and 2002 were $8.1 million and $6.4 million, respectively.
7. | Guarantees |
Outstanding standby letters of credit are contingent commitments issued by the Company generally to guarantee the performance of a customer in third party arrangements. The term of the guarantee generally is for a period of one year. The maximum amount of future payments the Company could be required to make under these guarantees at September 30, 2003 is $3.5 million. The Company holds collateral to support guarantees when deemed necessary. The total of collateralized commitments at September 30, 2003 was $453,000.
8. | Stock-Based Compensation |
In December 2002 the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure.” SFAS No. 148 amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based compensation. The Company adopted the fair value method of recording stock-based compensation in 2003 and will use the prospective transition method for all stock options granted after December 31, 2002. The Company recognized $8,000 of pretax non-interest expense for the quarter and $91,000 of pretax non-interest expense for the nine months ended September 30, 2003 as a result of applying the provisions of SFAS No. 148 using the prospective transition method.
The Company continues to apply APB Opinion No. 25 and related interpretations in accounting for stock options granted prior to January 1, 2003. Accordingly, no stock-based compensation cost is reflected in net income for stock options granted in periods prior to that date. The following table illustrates the effects on net income and EPS had the Company applied the fair value recognition provisions of SFAS No. 123 “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, to its stock-based compensation plans for the three and nine month periods ended September 30, 2003 and 2002:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||
(Dollars in thousands, except per share amounts) | ||||||||||||||||
Net income, as reported | $ | 5,274 | $ | 3,696 | $ | 14,589 | $ | 10,225 | ||||||||
Add: Total stock-based compensation expense net of related tax effects included in reported net income | 5 | — | 56 | — | ||||||||||||
Deduct: Total stock-based compensation expense net of related tax effects determined under fair value based method | (44 | ) | (44 | ) | (176 | ) | (195 | ) | ||||||||
Pro forma net income | $ | 5,235 | $ | 3,652 | $ | 14,469 | $ | 10,030 | ||||||||
EPS: | ||||||||||||||||
Basic—as reported | $ | 0.65 | $ | 0.48 | $ | 1.84 | $ | 1.34 | ||||||||
Basic—pro forma | 0.65 | 0.48 | 1.83 | 1.32 | ||||||||||||
Diluted—as reported | $ | 0.64 | $ | 0.47 | $ | 1.80 | $ | 1.31 | ||||||||
Diluted—pro forma | 0.64 | 0.46 | 1.79 | 1.28 |
The fair value of the options is amortized over the option’s vesting period. The pro forma disclosures may not be representative of the effects on net income and EPS in future periods.
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9. | Acquisition of RVB |
On June 13, 2003 the Company purchased RVB Bancshares, Inc. (“RVB”) and its River Valley Bank subsidiary in Russellville, Arkansas. The Company acquired approximately $41 million in loans and approximately $50 million in deposits in this transaction. The purchase price for the RVB acquisition was $7.8 million and consisted of cash of $1.1 million and 184,760 shares of the Company’s common stock valued at $6.7 million. This acquisition resulted in the recording of $3.1 million of goodwill and $784,000 of core deposit intangibles. The results of operations of RVB are included in the Company’s results from the date of acquisition. The pro forma effect of the acquisition is not material to the Company’s results for any of the periods presented.
10. | Comprehensive Income |
Unrealized gains and losses on investment securities available for sale are the only items included in accumulated other comprehensive income. Total comprehensive income (which consists of net income plus unrealized gains and losses on investment securities available for sale, net of income taxes) was $2.0 million and $4.0 million for the three months ended September 30, 2003 and 2002, respectively, and $11.9 million and $12.1 million for the nine months ended September 30, 2003 and 2002, respectively.
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Item 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
General
Net income was $5,274,000 for the third quarter of 2003, a 42.7% increase from net income of $3,696,000 for the comparable quarter in 2002. Diluted earnings per share increased 36.2% to $0.64 for the quarter ended September 30, 2003, compared to $0.47 for the comparable quarter in 2002. For the nine months ended September 30, 2003, net income totaled $14,589,000, a 42.7% increase over net income of $10,225,000 for the first nine months of 2002. Diluted earnings per share for the first nine months of 2003 were $1.80 compared to $1.31 for the comparable period in 2002, a 37.4% increase.
The Company’s annualized return on average assets was 1.68% for the third quarter of 2003, and its annualized return on average stockholders’ equity was 23.04% for the third quarter of 2003, compared with 1.57% and 21.96%, respectively, for the comparable quarter of 2002. For the nine months ended September 30, 2003, the Company’s annualized return on average assets was 1.70%, and its annualized return on average stockholders’ equity was 23.70%, compared to 1.53% and 22.08%, respectively, for the nine months ended September 30, 2002.
Total assets increased from $1.04 billion at December 31, 2002 to $1.25 billion at September 30, 2003. Loans were $860 million at September 30, 2003 compared to $718 million at December 31, 2002. Deposits were $995 million at September 30, 2003 compared to $790 million at December 31, 2002.
Stockholders’ equity increased from $72.9 million at December 31, 2002 to $91.4 million at September 30, 2003, resulting in book value per share increasing from $9.41 to $11.33.
Annualized results for these interim periods may not be indicative of those for the full year or future periods.
Analysis of Results of Operations
The Company’s results of operations depend primarily on net interest income, which is the difference between the interest income from earning assets, such as loans and investments, and the interest expense incurred on interest bearing liabilities, such as deposits and other borrowings. The Company also generates non-interest income, including service charges on deposit accounts, mortgage lending income, trust income, bank owned life insurance income, appraisal, credit life commissions and other credit related fees, safe deposit box rental, brokerage fees and other miscellaneous fees and net gains on sales of assets. The Company’s non-interest expenses primarily consist of employee compensation and benefits, occupancy, equipment, and other operating expenses. The Company’s results of operations are also impacted by its provision for loan losses. The following discussion provides a summary of the Company’s operations for the three and nine months ended September 30, 2003.
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Net Interest Income
Net interest income is analyzed in the discussion and tables below on a fully taxable equivalent (“FTE”) basis. The adjustment to convert certain income to an FTE basis consists of dividing tax-exempt income by one minus the statutory federal income tax rate (35% in 2003 and 2002 and 34% in 2001).
Net interest income (FTE) increased 22.3% to $13,390,000 for the three months ended September 30, 2003 compared to $10,946,000 for the three months ended September 30, 2002. Net interest income (FTE) increased 21.3% to $37,235,000 for the nine months ended September 30, 2003 from $30,708,000 for the nine months ended September 30, 2002. The growth in net interest income was primarily attributable to growth in average earning assets. Average earning assets for the three months ended September 30, 2003 grew 31.4% as compared to average earning assets for the same period in 2002, and average earning assets for the nine months ended September 30, 2003 grew 26.6% as compared to average earning assets for the same period in 2002.
Net interest margin, on a fully taxable equivalent basis, was 4.62% for the third quarter of 2003 compared to 4.96% for the third quarter of 2002, a decrease of 34 basis points. Net interest margin for the nine months ended September 30, 2003 was 4.70% compared with 4.91% for the same period in 2002, a decrease of 21 basis points. Net interest margin for the third quarter and first nine months of 2003 declined as a result of a decrease in earning asset yields which was only partially offset by the decrease in interest bearing deposit and liability cost for each of these periods. Both investment and loan yields declined during these periods, resulting in a decline in total earning asset yields of 97 basis points for the third quarter and 81 basis points for the first nine months of 2003 compared with the comparable periods in 2002. These declines were offset by a decline in interest bearing liability costs of 76 basis points for the quarter and 73 basis points for the nine months ended September 30, 2003 compared to the comparable periods in 2002.
Over the past two years, the Company has modified the composition of its loan portfolio such that the percentage of adjustable rate loans has increased, enabling it to better manage interest rate risk. The Company has been successful in increasing variable rate loans from 18% of total loans at September 30, 2002 to 31% of total loans at September 30, 2003. Since the Company typically prices variable rate loans at a lower rate than fixed rate loans, the Company believes this has reduced its net interest margin while also reducing interest rate risk in its loan portfolio.
The Financial Accounting Standards Board (“FASB”) issued Statement of Accounting Financial Standards (“SFAS”) No. 150 which was effective for the Company as of July 1, 2003. SFAS No. 150 establishes standards for accounting for certain financial instruments with characteristics of both debt and equity such as the trust preferred securities the Company has outstanding. Effective July 1, 2003 SFAS No. 150 required these securities to be reported as debt and the payments of dividends thereon to be reported as interest expense. These securities have previously been reported between liabilities and equity in the Company’s financial statements and the payment of dividends thereon had been reported as distributions on trust preferred securities in the same manner as distributions to minority interest.
In the Company’s earnings release of October 9, 2003, the Company reported its financial results by classifying the “Guaranteed preferred beneficial interest in the Company’s subordinated debentures” as an interest bearing liability and the distributions on trust preferred securities as interest expense in accordance with the provisions of SFAS No. 150. Subsequent to the earnings release, the Company’s independent auditors have advised that the FASB voted to defer indefinitely the provisions of SFAS No. 150 with respect to the financial reporting for trust preferred securities. Accordingly the Company has prepared this discussion and the accompanying financial statements treating the trust preferred securities and the distribution thereon in the same manner as in previous quarters. This resulted in the net interest income, net interest margin and efficiency ratios reported in the earnings release differing from those reported in this discussion. A summary of the efficiency ratio differences is contained in the “Non-Interest Expense” section of this discussion and a summary of the net interest income (FTE) and net interest margin differences is as follows:
Three Months Ended | Nine Months Ended | |||||||||||||
September 30, 2003 | September 30, 2003 | |||||||||||||
This discussion | Reported October 9, 2003 | This discussion | Reported October 9, 2003 | |||||||||||
(Dollars in thousands) | ||||||||||||||
Net interest income (FTE) | $ | 13,390 | $12,982 | $ | 37,235 | $36,827 | ||||||||
Net interest margin | 4.62 | % | 4.48 | % | 4.70 | % | 4.65 | % |
The classification change has no impact on the Company’s net income or earnings per share and the reporting used in the accompanying financial statements is consistent with that used in previous financial statements issued by the Company.
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Analysis of Net Interest Income
(FTE = Fully Taxable Equivalent)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Interest income | $ | 17,537 | $ | 15,625 | $ | 50,242 | $ | 44,944 | ||||||||
FTE adjustment | 312 | 95 | 698 | 328 | ||||||||||||
Interest income—FTE | 17,849 | 15,720 | 50,940 | 45,272 | ||||||||||||
Interest expense | 4,459 | 4,774 | 13,705 | 14,564 | ||||||||||||
Net interest income—FTE | $ | 13,390 | $ | 10,946 | $ | 37,235 | $ | 30,708 | ||||||||
Yield on interest earning assets—FTE | 6.16 | % | 7.13 | % | 6.43 | % | 7.24 | % | ||||||||
Cost of interest bearing liabilities | 1.72 | 2.48 | 1.92 | 2.65 | ||||||||||||
Net interest spread—FTE | 4.44 | 4.65 | 4.51 | 4.59 | ||||||||||||
Net interest margin—FTE | 4.62 | 4.96 | 4.70 | 4.91 |
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Average Consolidated Balance Sheet and Net Interest Analysis
(Dollars in thousands)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||||||||||||||||||||||
Average Balance | Income/ Expense | Yield/ Rate | Average Balance | Income/ Expense | Yield/ Rate | Average Balance | Income/ Expense | Yield/ Rate | Average Balance | Income/ Expense | Yield/ Rate | |||||||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||||||||||||||
Earnings assets: | ||||||||||||||||||||||||||||||||||||
Interest bearing deposits and federal funds sold | $ | 426 | $ | 4 | 4.19 | % | $ | 420 | $ | 6 | 5.36 | % | $ | 481 | $ | 20 | 5.42 | % | $ | 333 | $ | 15 | 5.95 | % | ||||||||||||
Investment securities: | ||||||||||||||||||||||||||||||||||||
Taxable | 249,488 | 2,626 | 4.18 | 198,509 | 2,931 | 5.86 | 243,049 | 8,593 | 4.73 | 186,595 | 8,085 | 5.79 | ||||||||||||||||||||||||
Tax-exempt—FTE | 47,078 | 839 | 7.07 | 10,553 | 198 | 7.44 | 33,143 | 1,790 | 7.22 | 13,061 | 738 | 7.55 | ||||||||||||||||||||||||
Loans—FTE | 852,483 | 14,380 | 6.69 | 665,244 | 12,585 | 7.51 | 781,950 | 40,537 | 6.93 | 636,049 | 36,434 | 7.66 | ||||||||||||||||||||||||
Total earning assets | 1,149,475 | 17,849 | 6.16 | 874,726 | 15,720 | 7.13 | 1,058,623 | 50,940 | 6.43 | 836,038 | 45,272 | 7.24 | ||||||||||||||||||||||||
Non-earning assets | 96,736 | 57,135 | 89,457 | 58,816 | ||||||||||||||||||||||||||||||||
Total assets | $ | 1,246,211 | $ | 931,861 | $ | 1,148,080 | $ | 894,854 | ||||||||||||||||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||||||||||||||
Interest bearing liabilities: | ||||||||||||||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||||||||||||||
Savings and interest bearing transaction | $ | 351,744 | $ | 723 | 0.82 | % | $ | 281,546 | $ | 1,175 | 1.66 | % | $ | 336,222 | $ | 2,716 | 1.08 | % | $ | 267,251 | $ | 3,252 | 1.63 | % | ||||||||||||
Time deposit of $100,000 or more | 316,815 | 1,435 | 1.80 | 182,491 | 1,156 | 2.51 | 274,195 | 3,961 | 1.93 | 182,405 | 3,741 | 2.74 | ||||||||||||||||||||||||
Other time deposits | 198,206 | 1,051 | 2.10 | 165,686 | 1,106 | 2.65 | 187,639 | 3,175 | 2.26 | 166,887 | 3,789 | 3.04 | ||||||||||||||||||||||||
Total interest bearing deposits | 866,765 | 3,209 | 1.47 | 629,723 | 3,437 | 2.17 | 798,056 | 9,852 | 1.65 | 616,543 | 10,782 | 2.34 | ||||||||||||||||||||||||
Repurchase agreements with customers | 33,508 | 82 | 0.97 | 19,877 | 70 | 1.39 | 29,739 | 235 | 1.06 | 18,519 | 205 | 1.48 | ||||||||||||||||||||||||
Other borrowings | 128,678 | 1,168 | 3.60 | 114,122 | 1,267 | 4.40 | 122,636 | 3,618 | 3.94 | 99,433 | 3,577 | 4.81 | ||||||||||||||||||||||||
Total interest bearing liabilities | 1,028,951 | 4,459 | 1.72 | 763,722 | 4,774 | 2.48 | 950,431 | 13,705 | 1.92 | 734,495 | 14,564 | 2.65 | ||||||||||||||||||||||||
Non-interest liabilities: | ||||||||||||||||||||||||||||||||||||
Non-interest bearing deposits | 102,910 | 78,967 | 92,757 | 76,563 | ||||||||||||||||||||||||||||||||
Other non-interest liabilities | 5,080 | 5,142 | 4,926 | 4,630 | ||||||||||||||||||||||||||||||||
Total liabilities | 1,136,941 | 847,831 | 1,048,114 | 815,688 | ||||||||||||||||||||||||||||||||
Guaranteed preferred beneficial interest in the Company’s subordinated debentures | 18,467 | 17,250 | 17,660 | 17,250 | ||||||||||||||||||||||||||||||||
Stockholders’ equity | 90,803 | 66,780 | 82,306 | 61,916 | ||||||||||||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 1,246,211 | $ | 931,861 | $ | 1,148,080 | $ | 894,854 | ||||||||||||||||||||||||||||
Interest rate spread—FTE | 4.44 | % | 4.65 | % | 4.51 | % | 4.59 | % | ||||||||||||||||||||||||||||
Net interest income—FTE | $ | 13,390 | $ | 10,946 | $ | 37,235 | $ | 30,708 | ||||||||||||||||||||||||||||
Net interest margin—FTE | 4.62 | % | 4.96 | % | 4.70 | % | 4.91 | % |
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Non-Interest Income
The Company’s non-interest income can be broken down into seven main sources: (1) service charges on deposit accounts, (2) mortgage lending income, (3) trust income, (4) bank owned life insurance income, (5) appraisal, credit life commissions and other credit related fees, (6) safe deposit box rental, brokerage fees and other miscellaneous fees and (7) net gains on sales of assets.
Non-interest income for the third quarter of 2003 was $5,135,000 compared with $2,958,000 for the third quarter of 2002, a 73.6% increase. Non-interest income for the nine months ended September 30, 2003 was $13,227,000 compared to $7,860,000 for the nine months ended September 30, 2002, a 68.3% increase. During the first nine months of 2002, the Company’s non-interest income was reduced by $217,000 of securities losses compared to $133,000 in securities gains during the first nine months of 2003. During the first nine months of 2003, the Company had $874,000 of income from bank owned life insurance purchased in the fourth quarter of 2002. Mortgage lending income was up 167% for the third quarter of 2003 and 168% for the first nine months of 2003 as compared to the corresponding periods in 2002. This increase is primarily attributable to high levels of refinance activity, a strong housing market and the Company’s continued expansion of its mortgage operation in new and existing markets. Trust income, which was up 179% in the third quarter of 2003 and 108% for the nine months ended September 30, 2003 as compared to the corresponding periods in 2002, has increased primarily as a result of corporate trustee fees generated by the high level of municipal bond issuance in Arkansas during recent months and the Company’s continued growth in trust customers. The Company’s service charges on deposit accounts increased primarily because of continued growth in its number of core deposit customers.
The table below shows non-interest income for the three and nine months ended September 30, 2003 and 2002.
Non-Interest Income
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||
2003 | 2002 | 2003 | 2002 | ||||||||||
(Dollars in thousands) | |||||||||||||
Service charges on deposit accounts | $ | 2,043 | $ | 1,770 | $ | 5,698 | $ | 5,081 | |||||
Mortgage lending income | 1,958 | 734 | 4,626 | 1,726 | |||||||||
Trust income | 493 | 177 | 1,042 | 501 | |||||||||
Bank owned life insurance income | 299 | — | 874 | — | |||||||||
Appraisal, credit life commissions and other credit related fees | 126 | 167 | 399 | 493 | |||||||||
Safe deposit box rental, brokerage fees and other miscellaneous fees | 172 | 102 | 445 | 238 | |||||||||
Gain on sale of other assets | 8 | 8 | 10 | 38 | |||||||||
Gain (loss) on sale of securities | 36 | — | 133 | (217 | ) | ||||||||
Total non-interest income | $ | 5,135 | $ | 2,958 | $ | 13,227 | $ | 7,860 | |||||
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Non-Interest Expense
Non-interest expense for the third quarter of 2003 was $8,629,000 compared with $6,382,000 for the comparable period in 2002, a 35.2% increase. Non-interest expense for the nine months ended September 30, 2003 was $23,137,000 compared to $18,077,000 for the nine months ended September 30, 2002, a 28.0% increase.
A number of factors contributed to the Company’s growth in non-interest expense in the quarter just ended. The Company’s record volume of mortgage business and trust income resulted in increased levels of variable compensation expense including commissions, incentives and bonuses. The Company estimates that variable compensation expense in its mortgage operation equaled approximately 33% of mortgage income for the third quarter of 2003. The Company’s high level of third quarter income allowed it to increase various discretionary expenditures including advertising and public relations. During the third quarter the Company also incurred certain expenses in connection with its conversion to a new trust computer system, the opening of a new loan production office in the Dallas, Texas area, and the opening of its third full service banking office in Fort Smith, Arkansas.
Non-interest expense for the first nine months of 2003 increased primarily as a result of the Company’s continued growth and expansion. During the nine months ended September 30, 2003, the Company has opened six new full service banking offices. Additionally, during 2003 the Company has opened three new loan production offices. In June 2003 the Company completed the acquisition of RVB Bancshares, Inc. (“RVB”) and its subsidiary bank in Russellville, Arkansas. In connection with the RVB acquisition, the Company incurred $121,000 of pretax expenses for contract termination charges, data processing conversion and other similar matters in connection with this acquisition.
Effective January 1, 2003 the Company adopted the prospective method of fair value recognition of stock option compensation expense as provided under SFAS No. 123, as amended by SFAS No. 148. As a result the Company recorded pretax expense of $8,000 during the third quarter and $91,000 during the nine months ended September 30, 2003 in connection with the issuance of options under stock-based compensation plans.
The table below shows non-interest expense for the three and nine months ended September 30, 2003 and 2002.
Non-Interest Expense
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||
(Dollars in thousands) | ||||||||||||
Salaries and employee benefits | $ | 5,186 | $ | 3,653 | $ | 13,765 | $ | 10,316 | ||||
Net occupancy and equipment expense | 1,179 | 872 | 3,268 | 2,609 | ||||||||
Other operating expense: | ||||||||||||
Professional and other outside services | 210 | 203 | 524 | 390 | ||||||||
Postage | 116 | 106 | 300 | 298 | ||||||||
Telephone | 170 | 130 | 464 | 380 | ||||||||
Data lines | 87 | 60 | 242 | 166 | ||||||||
Operating supplies | 252 | 184 | 787 | 487 | ||||||||
Advertising and public relations | 308 | 233 | 716 | 666 | ||||||||
Software expense | 146 | 95 | 423 | 274 | ||||||||
ATM expense | 157 | 113 | 422 | 297 | ||||||||
FDIC & state assessment | 111 | 72 | 270 | 228 | ||||||||
Other real estate and foreclosure expense | 137 | 76 | 245 | 235 | ||||||||
Business development, meals and travel | 40 | 39 | 126 | 107 | ||||||||
Amortization of deposit intangibles | 62 | 38 | 143 | 114 | ||||||||
OD/NSF check losses | 104 | 181 | 235 | 495 | ||||||||
Other | 364 | 327 | 1,207 | 1,015 | ||||||||
Total non-interest expense | $ | 8,629 | $ | 6,382 | $ | 23,137 | $ | 18,077 | ||||
The Company’s efficiency ratio (non-interest expenses divided by the sum of net interest income on a tax equivalent basis and non-interest income) was 46.6% for the third quarter and 45.9% for the nine months ended September 30, 2003, compared to 45.9% for the third quarter and 46.9% for the first nine months of 2002.
Effective July 1, 2003 SFAS No. 150 requires trust preferred securities to be reported as debt and the payment of distributions thereon to be reported as interest expense. As discussed above, subsequent to the Company’s October 9, 2003 earnings release, the FASB deferred the implementation of SFAS No. 150 with respect to accounting for trust preferred securities. Thus the efficiency ratio reported in the October 9, 2003 earnings release differs from that reported in this discussion.
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The following table presents the efficiency ratios as reported in the earnings release and the ratios reported in this discussion.
Three Months Ended September 30, 2003 | Nine Months Ended September 30, 2003 | |||||||||||
This discussion | Reported October 9, 2003 | This discussion | Reported October 9, 2003 | |||||||||
Efficiency ratio | 46.58 | % | 47.63 | % | 45.85 | % | 46.22 | % |
Income Taxes
The provision for income taxes was $2,852,000 for the quarter ended September 30, 2003 compared to $2,254,000 for the same period in 2002. The effective income tax rate was 35.1% for the third quarter of 2003 compared to 37.9% for the third quarter of 2002. The provision for income taxes was $7,942,000 for the nine months ended September 30, 2003 compared to $6,173,000 for the comparable nine months period in 2002. The effective income tax rate was 35.2% for the nine months ended September 30, 2003 and 37.1% for the comparable period of 2002. The reduction of approximately 2.8% and 1.9%, respectively, in the effective tax rates for the three and nine month periods of 2003 as compared to the corresponding periods in 2002 is principally attributable to the non-taxable increase in the cash surrender value of bank owned life insurance in 2003 and the increased earnings during 2003 on investments that are exempt from federal and state income taxes.
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Analysis of Financial Condition
Loan Portfolio
At September 30, 2003 the Company’s loan portfolio was $860 million, an increase from $718 million at December 31, 2002. As of September 30, 2003, the Company’s loan portfolio consisted of approximately 78.6% real estate loans, 7.4% consumer loans, 11.5% commercial and industrial loans and 2.0% agricultural loans (non-real estate).
The amount and type of loans outstanding at September 30, 2003 and 2002 and December 31, 2002 are reflected in the following table.
Loan Portfolio
September 30, | December 31, | ||||||||
2003 | 2002 | 2002 | |||||||
(Dollars in thousands) | |||||||||
Real Estate: | |||||||||
Residential 1-4 family | $ | 211,079 | $ | 177,690 | $ | 183,687 | |||
Non-farm/non-residential | 268,357 | 200,365 | 212,481 | ||||||
Agricultural | 59,388 | 56,183 | 57,525 | ||||||
Construction/land development | 105,421 | 62,346 | 65,474 | ||||||
Multifamily residential | 31,692 | 29,187 | 28,555 | ||||||
Total real estate | 675,937 | 525,771 | 547,722 | ||||||
Consumer | 63,491 | 53,428 | 54,097 | ||||||
Commercial and industrial | 98,923 | 86,876 | 95,951 | ||||||
Agricultural (non-real estate) | 16,779 | 15,753 | 15,388 | ||||||
Other | 4,921 | 5,012 | 4,737 | ||||||
Total loans | $ | 860,051 | $ | 686,840 | $ | 717,895 | |||
Nonperforming Assets
Nonperforming assets consist of (1) nonaccrual loans, (2) accruing loans 90 days or more past due, (3) certain restructured loans providing for a reduction or deferral of interest or principal because of a deterioration in the financial position of the borrower and (4) real estate or other assets that have been acquired in partial or full satisfaction of loan obligations or upon foreclosure.
The Company generally places a loan on nonaccrual status when payment of principal or interest is contractually past due 90 days, or earlier when doubt exists as to the ultimate collection of principal and interest. At the time a loan is placed on nonaccrual status, interest previously accrued but uncollected is generally reversed and charged against interest income. Nonaccrual loans are generally returned to accrual status when principal and interest payments are less than 90 days past due, the customer has established a consistent pattern of timely payments, and the Company reasonably expects to collect all principal and interest. If a loan is determined to be uncollectible, the portion of the loan principal determined to be uncollectible will be charged against the allowance for loan losses. Interest income on nonaccrual loans is recognized on a cash basis when and if actually collected.
Nonperforming loans as a percent of total loans were 0.50% as of September 30, 2003, compared to 0.53% at June 30, 2003 and 0.31% at December 31, 2002. Nonperforming assets as a percent of total assets were 0.41% as of September 30, 2003 compared to 0.42% at June 30, 2003 and 0.24% at December 31, 2002.
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The following table presents information concerning nonperforming assets, including nonaccrual and certain restructured loans and foreclosed assets held for sale.
Nonperforming Assets
September 30, | December 31, | ||||||||||
2003 | 2002 | 2002 | |||||||||
(Dollars in thousands) | |||||||||||
Nonaccrual loans | $ | 4,334 | $ | 2,670 | $2,194 | ||||||
Accruing loans 90 days or more past due | — | — | — | ||||||||
Restructured loans | — | — | — | ||||||||
Total nonperforming loans | 4,334 | 2,670 | 2,194 | ||||||||
Foreclosed assets held for sale and repossessions(1) | 866 | 598 | 333 | ||||||||
Total nonperforming assets | $ | 5,200 | $ | 3,268 | $2,527 | ||||||
Nonperforming loans to total loans | 0.50 | % | 0.39 | % | 0.31 | % | |||||
Nonperforming assets to total assets | 0.41 | 0.34 | 0.24 |
(1) Foreclosed assets held for sale and repossessions are generally written down to estimated market value at the time of transfer from the loan portfolio. The value of such assets is reviewed from time to time throughout the holding period with the value adjusted to the then estimated market value, if lower, until disposition.
Allowance and Provision for Loan Losses
Allowance for Loan Losses:The following table shows an analysis of the allowance for loan losses for the nine month periods ended September 30, 2003 and 2002 and the year ended December 31, 2002.
Nine Months Ended September 30, | Year Ended December 31, | ||||||||||
2003 | 2002 | 2002 | |||||||||
(Dollars in thousands) | |||||||||||
Balance, beginning of period | $ | 10,936 | $ | 8,712 | $8,712 | ||||||
Loans charged off: | |||||||||||
Real estate | 639 | 582 | 801 | ||||||||
Consumer | 340 | 444 | 626 | ||||||||
Commercial and industrial | 560 | 127 | 217 | ||||||||
Agricultural (non-real estate) | 23 | 24 | 29 | ||||||||
Total loans charged off | 1,562 | 1,177 | 1,673 | ||||||||
Recoveries of loans previously charged off: | |||||||||||
Real estate | 36 | 106 | 111 | ||||||||
Consumer | 95 | 83 | 112 | ||||||||
Commercial and industrial | 24 | 7 | 12 | ||||||||
Agricultural (non-real estate) | 16 | 2 | 2 | ||||||||
Total recoveries | 171 | 198 | 237 | ||||||||
Net loans charged off | 1,391 | 979 | 1,436 | ||||||||
Provision charged to operating expense | 2,895 | 2,575 | 3,660 | ||||||||
Allowance added in bank acquisition | 660 | — | — | ||||||||
Balance, end of period | $ | 13,100 | $ | 10,308 | $10,936 | ||||||
Net charge-offs to average loans outstanding during | |||||||||||
the periods indicated | 0.24 | %(1) | 0.21 | %(1) | 0.22 | % | |||||
Allowance for loan losses to total loans | 1.52 | 1.50 | 1.52 | ||||||||
Allowance for loan losses to nonperforming loans | 302.26 | 386.07 | 498.45 |
(1) | Annualized |
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The amounts of provisions to the allowance for loan losses are based on management’s judgment and evaluation of the loan portfolio utilizing objective and subjective criteria. The objective criteria utilized by the Company to assess the adequacy of its allowance for loan losses and required additions to such allowance are (1) an internal grading system, (2) a peer group analysis and (3) a historical analysis. In addition to these objective criteria, the Company subjectively assesses adequacy of the allowance for loan losses and the need for additions thereto, with consideration given to the mix and volume of the portfolio, overall portfolio quality, review of specific problem loans, national, regional and local business and economic conditions that may affect borrowers’ ability to pay or the value of collateral securing loans, and other relevant factors. The Company’s methodology for estimating the allowance for loan losses is considered to be a critical accounting policy.
The Company’s allowance for loan losses was $13.1 million at September 30, 2003, or 1.52% of total loans, compared with $10.9 million, or 1.52% of total loans, at December 31, 2002 and $10.3 million, or 1.50% of total loans, at September 30, 2002. The increase in the Company’s allowance for loan losses from September 30, 2002 reflects changes in the mix and volume of the Company’s loan portfolio. While management believes the current allowance is adequate, changing economic and other conditions may require future adjustments to the allowance for loan losses.
The Company’s annualized net charge-off ratio for the first nine months of 2003 was 0.24% compared to 0.21% for the first nine months of 2002.
Provision for Loan Losses:The loan loss provision reflects management’s ongoing assessment of the loan portfolio and is evaluated in light of factors mentioned above. The provision for loan losses was $2,895,000 for the nine months ended September 30, 2003 compared to $2,575,000 for the comparable nine month period in 2002.
Investments and Securities
The Company’s securities portfolio is the second largest component of earning assets and provides a significant source of revenue for the Company. The table below presents the book value and the fair value of investment securities for each of the dates indicated.
Investment Securities
September 30, 2003 | September 30, 2002 | December 31, 2002 | ||||||||||||||||
Book Value(1) | Fair Value(2) | Book Value(1) | Fair Value(2) | Book Value(1) | Fair Value(2) | |||||||||||||
(Dollars in thousands) | ||||||||||||||||||
Securities of U.S. Government Agencies | $ | — | $ | — | $ | 25,180 | $ | 25,180 | $ | 41,499 | $ | 41,499 | ||||||
Mortgage-backed securities | 217,297 | 217,297 | 172,184 | 172,184 | 156,710 | 156,710 | ||||||||||||
Obligations of state and political subdivisions | 57,870 | 57,870 | 10,758 | 10,802 | 21,492 | 21,517 | ||||||||||||
Other securities | 14,769 | 14,769 | 7,706 | 7,712 | 12,467 | 12,550 | ||||||||||||
Total | $ | 289,936 | $ | 289,936 | $ | 215,828 | $ | 215,878 | $ | 232,168 | $ | 232,276 | ||||||
(1) Book value for available-for-sale securities equals their original cost adjusted for unrealized gains or losses as reflected in the Company’s consolidated financial statements.
(2) The fair value of the Company’s investment securities is based on quoted market prices where available. If quoted market prices are not available, fair values are based on market prices for comparable securities.
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Liquidity and Capital Resources
Growth and Expansion. The Company expects to continue its growth andde novo branching strategy in the last quarter of 2003 by opening at least one new banking office in Benton. The Company has also decided to seek regulatory approval for conversion of its loan production office in Mountain Home to a temporary full service office. Subject to obtaining required approvals, this may occur in December 2003. Also in the fourth quarter of 2003, the Company may complete construction of a permanent facility in Cabot which will replace its temporary office there. Assuming the Benton office opens as expected and the Mountain Home office opens as a temporary full service office before year end, the Company will have added two new loan production offices and eight new full service banking offices in 2003, including the full service office acquired in the RVB purchase.
The Company has not finalized its plans for 2004 new office openings, but it expects the number of offices opened in 2004 will be approximately the same as opened in 2003. Opening new offices is subject to availability of suitable sites, hiring qualified personnel, obtaining regulatory approvals, and other conditions and contingencies.
During the first nine months of 2003, the Company spent $8.7 million on capital expenditures excluding assets acquired in the RVB acquisition. The Company expects its capital expenditures for the remainder of the year will be in the range of approximately $4 to $5 million including progress payments on construction projects expected to be completed in 2003 and 2004 and acquisition cost of sites for future development. Actual expenditures may vary significantly from those expected, primarily depending on the number and cost of additional sites acquired for future development and construction projects commenced.
As of September 30, 2003, the Company had 39 full-service banking offices serving 24 communities in 15 Arkansas counties. Twenty of these 39 offices were less than five years old. Based on the most recent available data, which is as of June 30, 2002, the Company had a weighted average deposit market share of approximately 6.0% in the counties in which it operates. Because of this relatively low market share and the capacity for growth in many of its offices, the Company believes it can significantly increase its weighted average market share in these counties over the next five years. In addition the Company plans to enter other selected Arkansas counties over the next five years and believes this will provide additional growth opportunities.
As the Company has expanded in recent years, it has focused on specific products in different markets, not offering all of its products in all markets. For example over the past two years the Company has achieved substantial core deposit growth in its central division with aggressive marketing of its MaxYield™ checking account. Based on the success of this product in the central division, the Company has recently begun aggressive marketing of this product in a number of its western and northern division markets. The Company believes this will contribute significantly to core deposit growth in 2004. In addition the Company has not aggressively marketed consumer lending products in its central division prior to 2003. In the first quarter of 2003, the Company began to offer its PrimeAccess home equity line of credit product through its central division offices. The Company also began offering leasing services during the third quarter of 2003. Certain indirect consumer lending programs will be offered by the Company in its central division markets in the fourth quarter of 2003. In connection with all of these lending programs, the Company expects to offer these products only within its existing markets and to utilize underwriting standards equivalent to those currently utilized by the Company. The Company believes these new lending programs will not have a material effect on its asset quality or net charge-off ratios. The Company expects these additional products may contribute 5% or more to annual loan growth for the next several years.
Issuance of Trust Preferred Securities. As discussed in Note 5 to the consolidated financial statements, in the third quarter of 2003 the Company closed two transactions in which it issued $28 million of adjustable rate trust preferred securities. These securities bear a weighted average interest rate of 90-day LIBOR plus 2.93%, adjustable quarterly. The initial weighted average interest rate is 4.07%. These securities have a 30-year final maturity and are prepayable at par by the Company on or after the fifth anniversary date or earlier in certain circumstances. These transactions provide additional regulatory capital giving the Company increased flexibility in implementing its continued growth and expansion. It is likely that $17.3 million of the proceeds will be used to prepay the Company’s previous issue of 9% trust preferred securities prepayable on or after June 18, 2004. If the Company elects to prepay its 9% trust preferred securities on June 18, 2004, it will have to expense approximately $852,000 pretax of unamortized issuance cost. Using the 4.07% initial weighted average rate on the new trust preferred securities, it would take approximately 11.5 months of interest savings to offset this expense.
Proposed Amendment to Articles of Incorporation and Stock Split. On September 16, 2003 the Company announced the approval by its board of directors of a 2-for-1 stock split to be effected by issuing one additional share of common stock for each outstanding share of common stock. This stock split is subject to shareholder approval of an amendment to the Company’s Amended and Restated Articles of Incorporation increasing the number of shares that the Company is authorized to issue of its $0.01 par value common stock from 10,000,000 shares to 50,000,000 shares. Voting on this issue will occur at a special stockholders’ meeting to be held on December 9, 2003. Subject to shareholder approval, the effective date of the stock split will be December 10, 2003 with a record date of November 26, 2003. Management of the Company believes this stock split will make shares of the Company’s common stock more affordable and accessible to individual shareholders while increasing the Company’s overall stockholder base and the market liquidity of its common stock.
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Bank Liquidity. Liquidity represents an institution’s ability to provide funds to satisfy demands from depositors and borrowers by either converting assets into cash or accessing new or existing sources of incremental funds. Generally the Company’s bank subsidiary relies on customer deposits and loan repayments as its primary sources of funds. The Company has used these funds, together with FHLB advances, brokered deposits and other borrowings, to make loans, acquire investment securities and other assets and to fund continuing operations.
Deposit levels may be affected by a number of factors, including rates paid by competitors, general interest rate levels, returns available to customers on alternative investments and general economic and market conditions. Loan repayments are a relatively stable source of funds but are subject to the ability of borrowers’ to repay the loans, which can be adversely affected by a number of factors including changes in general economic conditions, adverse trends or events affecting business industry groups, reductions in real estate values or markets, business closings or lay-offs, inclement weather and natural disasters. Furthermore, loans generally are not readily convertible to cash. Accordingly, the Company may be required from time to time to rely on secondary sources of liquidity to meet loan and withdrawal demands or otherwise fund operations. Such sources include FHLB advances, federal funds lines of credit from correspondent banks, Federal Reserve Bank borrowings and brokered deposits.
At September 30, 2003 the Company’s bank subsidiary had substantial unused borrowing availability. This availability was primarily comprised of the following three options: (1) $127.6 million from the Federal Home Loan Bank, (2) $23.5 million of securities available to pledge for federal funds borrowings, (3) $10.6 million of available unsecured federal funds borrowing lines and (4) up to $145.7 million from borrowing programs of the Federal Reserve Bank. As of September 30, 2003 the Company had outstanding brokered deposits of $31.8 million.
Management anticipates the Company’s bank subsidiary will continue to rely primarily on customer deposits and loan repayments to provide liquidity. Additionally, where necessary, the above described sources will be used to augment the Company’s primary funding sources.
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Capital Compliance. Bank regulatory authorities in the United States impose certain capital standards on all bank holding companies and banks. These capital standards require compliance with certain minimum “risk-based capital ratios” and a minimum “leverage ratio”. The risk-based capital ratios consist of (1) Tier 1 capital (i.e. common stockholders’ equity excluding goodwill, certain intangibles and net unrealized gains on available-for-sale securities, but including, subject to limitations, trust preferred securities and other qualifying items) to total risk-weighted assets and (2) total capital (Tier 1 capital plus Tier 2 capital which is the qualifying portion of the allowance for loan losses and the portion of trust preferred securities not counted as Tier 1 capital) to risk-weighted assets. The leverage ratio is measured as Tier 1 capital to adjusted quarterly average assets.
The Company’s risk-based and leverage capital ratios exceeded these minimum requirements at September 30, 2003 and December 31, 2002, and are presented below, followed by the capital ratios of the Company’s bank subsidiary at September 30, 2003.
Consolidated Capital Ratios
September 30, 2003 | December 31, 2002 | |||||||
(Dollars in thousands) | ||||||||
Tier 1 capital: | ||||||||
Stockholders’ equity | $ | 91,421 | $ | 72,918 | ||||
Allowed amount of guaranteed preferred beneficial interest in the Company’s subordinated debentures (trust preferred securities) | 30,997 | 17,250 | ||||||
Add (less) net unrealized loss (gains) on available for sale securities | 1,569 | (1,075 | ) | |||||
Less goodwill and certain intangible assets | (6,439 | ) | (2,671 | ) | ||||
Total tier 1 capital | 117,548 | 86,422 | ||||||
Tier 2 capital: | ||||||||
Remaining amount of guaranteed preferred beneficial interest in the Company’s subordinated debentures (trust preferred securities) | 14,253 | — | ||||||
Qualifying allowance for loan losses | 11,540 | 9,469 | ||||||
Total risk-based capital | $ | 143,341 | $ | 95,891 | ||||
Risk-weighted assets | $ | 921,624 | $ | 756,081 | ||||
Ratios at end of period: | ||||||||
Leverage capital | 9.48 | % | 8.64 | % | ||||
Tier 1 risk-based capital | 12.75 | 11.43 | ||||||
Total risk-based capital | 15.55 | 12.68 | ||||||
Minimum ratio guidelines: | ||||||||
Leverage capital(1) | 3.00 | % | 3.00 | % | ||||
Tier 1 risk-based capital | 4.00 | 4.00 | ||||||
Total risk-based capital | 8.00 | 8.00 |
(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.
Capital Ratios of Bank Subsidiary
September 30, 2003 | |||
(Dollars in thousands) | |||
Stockholders’ equity – Tier 1 | $101,552 | ||
Leverage capital | 8.20 | % | |
Tier 1 risk-based capital | 11.03 | ||
Total risk-based capital | 12.28 |
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Forward-Looking Information
This Management’s Discussion and Analysis of Financial Condition and Results of Operations, other filings made by the Company with the Securities and Exchange Commission and other oral and written statements or reports by the Company and its management, include certain forward-looking statements including, without limitation, statements with respect to net interest margin, net interest income, anticipated future operating and financial performance, asset quality and nonperforming loans, growth opportunities and growth rates, expectations for growth from offering new products and from offering existing products in new markets, planned new offices, expectations for growth in the Company’s market share, capital expenditures, the possible prepayment of certain trust preferred securities 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, including delays in identifying satisfactory sites, hiring qualified personnel and opening new offices; (2) the ability to attract new deposits and loans; (3) interest rate fluctuations; (4) competitive factors and pricing pressures; (5) general economic conditions; (6) changes in legal and regulatory requirements; (7) the demand for new Company products and services, including those offered by new loan production offices and through new departments such as leasing and indirect consumer lending; and (8) adoption of new accounting standards or changes in existing accounting 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.
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Selected and Supplemental Financial Data
The following table sets forth selected consolidated financial data concerning the Company for the three and nine months ended September 30, 2003 and 2002 and is qualified in its entirety by the consolidated financial statements, including the notes thereto, included elsewhere herein.
Selected Consolidated Financial Data
(Dollars in thousands, except per share amounts)
Unaudited
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||
Income statement data | ||||||||||||||||
Interest income | $ | 17,537 | $ | 15,625 | $ | 50,242 | $ | 44,944 | ||||||||
Interest expense | 4,459 | 4,774 | 13,705 | 14,564 | ||||||||||||
Net interest income | 13,078 | 10,851 | 36,537 | 30,380 | ||||||||||||
Provision for loan losses | 1,050 | 1,080 | 2,895 | 2,575 | ||||||||||||
Non-interest income | 5,135 | 2,958 | 13,227 | 7,860 | ||||||||||||
Non-interest expenses | 8,629 | 6,382 | 23,137 | 18,077 | ||||||||||||
Net income | 5,274 | 3,696 | 14,589 | 10,225 | ||||||||||||
Per common share data | ||||||||||||||||
Earnings—diluted | $ | 0.64 | $ | 0.47 | $ | 1.80 | $ | 1.31 | ||||||||
Book value | 11.33 | 8.96 | 11.33 | 8.96 | ||||||||||||
Dividends | 0.12 | 0.08 | 0.33 | 0.21 | ||||||||||||
Weighted avg. diluted shares outstanding (thousands) | 8,241 | 7,887 | 8,104 | 7,819 | ||||||||||||
Balance sheet data at period end | ||||||||||||||||
Total assets | $ | 1,253,571 | $ | 965,008 | $ | 1,253,571 | $ | 965,008 | ||||||||
Total loans | 860,051 | 686,840 | 860,051 | 686,840 | ||||||||||||
Allowance for loan losses | 13,100 | 10,308 | 13,100 | 10,308 | ||||||||||||
Total investment securities | 289,936 | 215,828 | 289,936 | 215,828 | ||||||||||||
Total deposits | 994,571 | 757,180 | 994,571 | 757,180 | ||||||||||||
Repurchase agreements with customers | 43,390 | 20,325 | 43,390 | 20,325 | ||||||||||||
Other borrowings | 73,520 | 97,140 | 73,520 | 97,140 | ||||||||||||
Total stockholders’ equity | 91,421 | 68,985 | 91,421 | 68,985 | ||||||||||||
Loan to deposit ratio | 86.47 | % | 90.71 | % | 86.47 | % | 90.71 | % | ||||||||
Average balance sheet data | ||||||||||||||||
Total average assets | $ | 1,246,211 | $ | 931,861 | $ | 1,148,080 | $ | 894,854 | ||||||||
Total average stockholders’ equity | 90,803 | 66,780 | 82,306 | 61,916 | ||||||||||||
Average equity to average assets | 7.29 | % | 7.17 | % | 7.17 | % | 6.92 | % | ||||||||
Performance ratios | ||||||||||||||||
Return on average assets* | 1.68 | % | 1.57 | % | 1.70 | % | 1.53 | % | ||||||||
Return on average stockholders’ equity* | 23.04 | 21.96 | 23.70 | 22.08 | ||||||||||||
Net interest margin FTE* | 4.62 | 4.96 | 4.70 | 4.91 | ||||||||||||
Efficiency | 46.58 | 45.90 | 45.85 | 46.87 | ||||||||||||
Dividend payout | 18.75 | 17.02 | 18.33 | 16.03 | ||||||||||||
Asset quality ratios | ||||||||||||||||
Net charge-offs as a percentage of average total loans* | 0.24 | % | 0.25 | % | 0.24 | % | 0.21 | % | ||||||||
Nonperforming loans to total loans | 0.50 | 0.39 | 0.50 | 0.39 | ||||||||||||
Nonperforming assets to total assets | 0.41 | 0.34 | 0.41 | 0.34 | ||||||||||||
Allowance for loan losses as a percentage of | ||||||||||||||||
Total loans | 1.52 | % | 1.50 | % | 1.52 | % | 1.50 | % | ||||||||
Nonperforming loans | 302.28 | 386.07 | 302.28 | 386.07 | ||||||||||||
Capital ratios at period end | ||||||||||||||||
Leverage capital | 9.48 | % | 8.84 | % | 9.48 | % | 8.84 | % | ||||||||
Tier 1 risk-based capital | 12.75 | 11.81 | 12.75 | 11.81 | ||||||||||||
Total risk-based capital | 15.55 | 13.06 | 15.55 | 13.06 |
* | Ratios annualized based on actual days |
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Bank of the Ozarks, Inc.
Supplemental Quarterly Financial Data
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
12/31/01 | 3/31/02 | 6/30/02 | 9/30/02 | 12/31/02 | 3/31/03 | 6/30/03 | 9/30/03 | |||||||||||||||||||||||||
Earnings Summary: | ||||||||||||||||||||||||||||||||
Net interest income | $ | 8,939 | $ | 9,334 | $ | 10,194 | $ | 10,851 | $ | 11,093 | $ | 11,274 | $ | 12,184 | $ | 13,078 | ||||||||||||||||
Federal tax (FTE) adjustment | 145 | 138 | 95 | 95 | 114 | 180 | 207 | 312 | ||||||||||||||||||||||||
Net interest income (FTE) | 9,084 | 9,472 | 10,289 | 10,946 | 11,207 | 11,454 | 12,391 | 13,390 | ||||||||||||||||||||||||
Loan loss provision | (1,479 | ) | (550 | ) | (945 | ) | (1,080 | ) | (1,085 | ) | (750 | ) | (1,095 | ) | (1,050 | ) | ||||||||||||||||
Non-interest income | 2,039 | 2,192 | 2,709 | 2,958 | 3,782 | 3,522 | 4,570 | 5,135 | ||||||||||||||||||||||||
Non-interest expense | (5,171 | ) | (5,636 | ) | (6,058 | ) | (6,382 | ) | (6,839 | ) | (6,754 | ) | (7,754 | ) | (8,629 | ) | ||||||||||||||||
Pretax income (FTE) | 4,473 | 5,478 | 5,995 | 6,442 | 7,065 | 7,472 | 8,112 | 8,846 | ||||||||||||||||||||||||
FTE adjustment | (145 | ) | (138 | ) | (95 | ) | (95 | ) | (114 | ) | (180 | ) | (207 | ) | (312 | ) | ||||||||||||||||
Provision for taxes | (1,348 | ) | (1,849 | ) | (2,068 | ) | (2,254 | ) | (2,374 | ) | (2,421 | ) | (2,668 | ) | (2,852 | ) | ||||||||||||||||
Distribution on trust preferred securities | (397 | ) | (397 | ) | (397 | ) | (397 | ) | (396 | ) | (396 | ) | (397 | ) | (408 | ) | ||||||||||||||||
Net income | $ | 2,583 | $ | 3,094 | $ | 3,435 | $ | 3,696 | $ | 4,181 | $ | 4,475 | $ | 4,840 | $ | 5,274 | ||||||||||||||||
Earnings per share—diluted* | $ | 0.34 | $ | 0.40 | $ | 0.44 | $ | 0.47 | $ | 0.53 | $ | 0.56 | $ | 0.60 | $ | 0.64 | ||||||||||||||||
Non-interest Income Detail: | ||||||||||||||||||||||||||||||||
Trust income | $ | 116 | $ | 162 | $ | 163 | $ | 177 | $ | 227 | $ | 237 | $ | 312 | $ | 493 | ||||||||||||||||
Service charges on deposit accounts | 1,035 | 1,505 | 1,806 | 1,770 | 1,859 | 1,674 | 1,981 | 2,043 | ||||||||||||||||||||||||
Mortgage lending income | 647 | 494 | 498 | 734 | 1,197 | 1,042 | 1,626 | 1,958 | ||||||||||||||||||||||||
Gain (loss) on sale of assets | (9 | ) | 9 | 21 | 8 | 4 | 11 | (8 | ) | 8 | ||||||||||||||||||||||
Security gains (losses) | 51 | (217 | ) | — | — | — | — | 97 | 36 | |||||||||||||||||||||||
Bank owned life insurance income | — | — | — | — | 236 | 284 | 291 | 299 | ||||||||||||||||||||||||
Other | 199 | 239 | 221 | 269 | 259 | 274 | 271 | 298 | ||||||||||||||||||||||||
Total non-interest income | $ | 2,039 | $ | 2,192 | $ | 2,709 | $ | 2,958 | $ | 3,782 | $ | 3,522 | $ | 4,570 | $ | 5,135 | ||||||||||||||||
Non-interest Expense Detail: | ||||||||||||||||||||||||||||||||
Salaries and employee benefits | $ | 2,894 | $ | 3,202 | $ | 3,461 | $ | 3,653 | $ | 4,078 | $ | 4,068 | $ | 4,511 | $ | 5,186 | ||||||||||||||||
Net occupancy expense | 795 | 859 | 878 | 872 | 887 | 994 | 1,095 | 1,179 | ||||||||||||||||||||||||
Other operating expenses | 1,422 | 1,537 | 1,681 | 1,819 | 1,836 | 1,654 | 2,105 | 2,202 | ||||||||||||||||||||||||
Goodwill charges | 22 | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Amortization of other intangibles—pretax | 38 | 38 | 38 | 38 | 38 | 38 | 43 | 62 | ||||||||||||||||||||||||
Total non-interest expense | $ | 5,171 | $ | 5,636 | $ | 6,058 | $ | 6,382 | $ | 6,839 | $ | 6,754 | $ | 7,754 | $ | 8,629 | ||||||||||||||||
Allowance for Loan Losses: | ||||||||||||||||||||||||||||||||
Balance beginning of period | $ | 7,754 | $ | 8,712 | $ | 8,963 | $ | 9,649 | $ | 10,308 | $ | 10,936 | $ | 11,124 | $ | 12,579 | ||||||||||||||||
Allowance added in bank acquisition | — | — | — | — | — | — | 660 | — | ||||||||||||||||||||||||
Net charge offs | (521 | ) | (299 | ) | (259 | ) | (421 | ) | (457 | ) | (562 | ) | (300 | ) | (529 | ) | ||||||||||||||||
Loan loss provision | 1,479 | 550 | 945 | 1,080 | 1,085 | 750 | 1,095 | 1,050 | ||||||||||||||||||||||||
Balance at end of period | $ | 8,712 | $ | 8,963 | $ | 9,649 | $ | 10,308 | $ | 10,936 | $ | 11,124 | $ | 12,579 | $ | 13,100 | ||||||||||||||||
Selected Ratios: | ||||||||||||||||||||||||||||||||
Net interest margin—FTE** | 4.62 | % | 4.78 | % | 4.97 | % | 4.96 | % | 4.81 | % | 4.81 | % | 4.70 | % | 4.62 | % | ||||||||||||||||
Overhead expense ratio** | 2.43 | 2.65 | 2.73 | 2.72 | 2.71 | 2.61 | 2.71 | 2.75 | ||||||||||||||||||||||||
Efficiency ratio | 46.49 | 48.32 | 46.60 | 45.90 | 45.63 | 45.10 | 45.72 | 46.58 | ||||||||||||||||||||||||
Nonperforming loans/total loans | 0.29 | 0.22 | 0.37 | 0.39 | 0.31 | 0.27 | 0.53 | 0.50 | ||||||||||||||||||||||||
Nonperforming assets/total assets | 0.28 | 0.22 | 0.31 | 0.34 | 0.24 | 0.21 | 0.42 | 0.41 | ||||||||||||||||||||||||
Loans past due 30 days or more, including past due non-accrual loans, to total loans | 0.72 | 0.79 | 0.69 | 0.83 | 0.75 | 0.77 | 0.76 | 0.64 |
* | Data prior to the second quarter of 2002 has been adjusted to give effect to 2-for-1 stock split on June 17, 2002 |
** | Annualized |
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PART I (continued)
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
The Company’s interest rate risk management is the responsibility of the Asset/Liability Management Committee, which reports to the Board of Directors. This committee establishes policies that monitor and coordinate the Company’s sources, uses and pricing of funds. The committee is also involved with management in the Company’s planning and budgeting process.
The Company regularly reviews its exposure to changes in interest rates. Among the factors considered are changes in the mix of earning assets and interest bearing liabilities, interest rate spreads and repricing periods. Typically the committee reviews at least quarterly the bank subsidiary’s relative ratio of rate sensitive assets (“RSA”) to rate sensitive liabilities (“RSL”) and the related cumulative gap for different time periods (“GAP”). Additionally the committee and management utilize a simulation model as their primary method of assessing the Company’s interest rate sensitivity.
This simulation modeling process projects a baseline net interest income (assuming no changes in market interest rate levels) and estimates changes to that baseline net interest income resulting from changes in interest rate levels. The Company relies primarily on the results of this model in evaluating its interest rate risk. In addition to the repricing data used to prepare the GAP table presented below, this model incorporates a number of assumptions and predictions regarding additional factors. These factors include: (1) the expected exercise of call features on various assets and liabilities, (2) the expected rates at which various RSA and RSL will reprice, (3) the expected growth in various interest earning assets and interest bearing liabilities and the expected rates on such new assets and liabilities, (4) the expected relative movements in different interest rate indexes which are used as the basis for pricing or repricing various assets and liabilities, (5) contractual cap and floor rates on various assets and liabilities, (6) expected changes in administered rates on interest bearing transaction, savings, money market and time deposit accounts and the expected impact of competition on the pricing or repricing of such accounts and (7) other factors. Inclusion of these factors in the model is intended to more accurately project the Company’s changes in net interest income resulting from an immediate and sustained parallel shift in interest rates of up 100 basis points (bps), up 200 bps and down 100 bps. Because of current interest rate levels, the data for an immediate and sustained parallel shift in interest rates of down 200 bps has been omitted because the Company believes the data is not meaningful. While the Company believes this model provides a more accurate projection of its interest rate risk, the model includes a number of assumptions and predictions which may not be accurate. These assumptions and predictions include inputs to compute baseline net interest income, growth rates, competition and a variety of other factors that are difficult to accurately predict. Accordingly, there can be no assurance the estimated results projected by the simulation model will reflect future results.
The following table presents the simulation model’s projected impact of an immediate and sustained parallel shift in interest rates on the projected baseline net interest income for a twelve month period commencing October 1, 2003. A parallel shift in interest rates is an arbitrary assumption which fails to take into account changes in the slope of the yield curve.
Shift in | % Change in | |
Interest Rates | Projected Baseline | |
(in bps) | Net Interest Income | |
+200 | (3.0)% | |
+100 | (1.5) | |
-100 | (1.6) | |
-200 | Not meaningful |
In the event of a shift in interest rates, management may take certain actions intended to mitigate the negative impact to net interest income or to maximize the positive impact to net interest income. These actions may include, but are not limited to, restructuring of earning assets and interest bearing liabilities, seeking alternative funding sources or investment opportunities and modifying the pricing or terms of loans and deposits.
The Company’s simple static GAP analysis is shown in the following table. At September 30, 2003 the cumulative ratios of RSA to RSL at six months and one year were 71.5% and 75.8%, 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 expectations may not reflect future results. As already noted the Company believes the simulation model results presented above are a more meaningful estimate of its interest rate risk.
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Rate Sensitive Assets and Liabilities
September 30, 2003 | ||||||||||||||||||||
RSA | RSL | Period GAP | Cumulative GAP | Cumulative GAP to Total RSA | Cumulative RSA to RSL | |||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Immediate to 6 months | $ | 414,917 | $ | 579,967 | $ | (165,050 | ) | $ | (165,050 | ) | (14.35 | )% | 71.54 | % | ||||||
7 – 12 months | 147,968 | 162,361 | (14,393 | ) | (179,443 | ) | (15.60 | ) | 75.83 | |||||||||||
1 – 2 years | 210,609 | 27,912 | 182,697 | 3,254 | 0.28 | 100.42 | ||||||||||||||
2 – 3 years | 133,584 | 5,087 | 128,497 | 131,751 | 11.45 | 116.99 | ||||||||||||||
3 – 5 years | 89,919 | 1,522 | 88,397 | 220,148 | 19.14 | 128.34 | ||||||||||||||
Over 5 years | 153,415 | 224,583 | (71,168 | ) | 148,980 | 12.95 | 114.88 | |||||||||||||
Total | $ | 1,150,412 | $ | 1,001,432 | $ | 148,980 | ||||||||||||||
The data used in the table above is based on contractual repricing dates for variable or adjustable rate instruments except for non-maturity interest bearing deposit accounts. With respect to non-maturity interest bearing deposit accounts, management believes these deposit accounts are “core” to the Company’s banking operations and may not reprice on a one-to-one basis as a result of interest rate movements. At September 30, 2003 management estimates the co-efficient for change in interest rates is approximately 75% for its interest bearing money market account balances, approximately 52% of its MaxYield™ account balances and approximately 50% for its other interest bearing Now and savings account balances. Accordingly management has included these portions of the non-maturity interest bearing deposit accounts as repricing immediately, with the remaining portions shown as repricing beyond five years. Callable investments or borrowings are scheduled on their contractual maturity unless the Company has received notification the investment or borrowing will be called. In the event the Company has received notification of call, the investment or borrowing is placed in the fixed rate category for the time period in which the call occurs or is expected to occur. Collateralized mortgage obligations and other mortgage-backed securities are scheduled over maturity periods based on Bloomberg consensus prepayment speeds. Other financial instruments are scheduled on their contractual maturity. At September 30, 2003 approximately 31% of the Company’s loan portfolio was adjustable rate loans. At September 30, 2003 approximately 44% of these adjustable rate loans were at their floor rate. These loans are included among RSA since their interest rate may adjust if interest rates increase.
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 among other things, 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.
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Item 4. | Controls and Procedures. |
(a) Evaluation of disclosure controls and procedures.
An evaluation as of the end of the period covered by this quarterly report was carried out under the supervision and with the participation of the Company’s management, including the Company’s Chairman and Chief Executive Officer and its Chief Financial Officer, of the effectiveness of the design and operation of the Company’s “disclosure controls and procedures,” which are defined under SEC rules as controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within required time periods. Based upon that evaluation, the Company’s Chairman and Chief Executive Officer and its Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.
(b) Changes in Internal Control over Financial Reporting.
The Company’s management, including the Company’s Chairman and Chief Executive Officer and its Chief Financial Officer, has evaluated any changes in the Company’s internal control over financial reporting that occurred during the quarterly period covered by this report, and has concluded that there was no change during the quarterly period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II
Other Information
Item 1. | Legal Proceedings |
On July 26, 2000 the case ofDavid Dodds, et. al. vs. Bank of the Ozarks and Jean Arehart was filed in the Circuit Court of Pulaski County, Arkansas, Fifth Division, which contained allegations that the Company’s bank subsidiary (the “Bank”) committed breach of contract, certain common law torts, fraud, and a violation of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961, et. seq. (“RICO”). The Bank made several residential construction loans related to houses built by the plaintiffs, and in 1998, the Bank commenced foreclosure of a house that was being constructed by one of the plaintiffs. The complaint related to such transactions. The Bank removed the case to the United States District Court for the Eastern District of Arkansas, Western Division. The original complaint sought alternative remedies of either (a) compensatory damages of $5 million and punitive damages of $10 million based on the common law tort claims or (b) compensatory damages of $5 million trebled to $15 million based on RICO. The Bank filed a Motion for Partial Summary Judgment in which the Bank asked the Court to dismiss with prejudice the plaintiffs’ RICO claims, as well as their state law claims of fraud, defamation and outrage/intentional infliction of emotional distress. On October 29, 2001 the Court granted the Bank’s Motion for Partial Summary Judgment and dismissed the plaintiffs’ RICO claims and state law claims of fraud, defamation and outrage/intentional infliction of emotional distress. The time for an appeal of the District Court’s award of partial summary judgment has passed. The District Court remanded the case back to the Circuit Court of Pulaski County, Arkansas, Fifth Division, where it is currently pending. The only surviving claims remanded were breach of contract and intentional interference with contract. In October of 2003 the Circuit Court of Pulaski County granted the Bank’s Motion for Summary Judgment on the breach of contract claim leaving the intentional interference with contract as the only pending claim. On September 5, 2003 plaintiffs filed a First Amended Complaint in which Jean Arehart was dismissed as a defendant. The plaintiffs added a count for breach of fiduciary duty. The Bank has filed a motion for summary judgment seeking dismissal of the breach of fiduciary duty claim. Mr. and Mrs. Dodds also filed a suit in the Circuit Court of Faulkner County, Arkansas attempting to set aside a foreclosure sale by Bank and alleging tort claims and seeking $2 million in compensatory damages and $5 million in punitive damages from Bank. The Faulkner County Circuit Court issued an order on July 18, 2003 granting the Bank’s Motion for Summary Judgment and Motion to Dismiss the plaintiffs’ First Amended Petition to Set Aside and Complaint at Law. This order effectively dismisses all claims pending against the Bank in the Faulkner County action. That order may not yet be appealable as another party’s foreclosure action against the plaintiffs in the Faulkner County case is still pending. The Company believes it has substantial defenses to the remaining claims and intends to vigorously defend the cases.
Item 2. | Changes in Securities and Use of Proceeds |
Not Applicable
Item 3. | Defaults Upon Senior Securities |
Not Applicable
Item 4. | Submission of Matters to a Vote of Security Holders |
Not Applicable
Item 5. | Other Information |
Not Applicable
Item 6. | Exhibits and Reports on Form 8-K |
Reference is made to the Exhibit Index contained at the end of this report.
Form 8-K dated July 10, 2003—Press Release Announcing Second Quarter 2003 Earnings Report
Form 8-K dated July 22, 2003—Notice of Blackout Period, dated July 22, 2003, to the Directors and Executive Officers of Bank of the Ozarks, Inc.
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Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Bank of the Ozarks, Inc. | ||||||||
DATE: November 7, 2003 | /s/ Paul E. Moore | |||||||
Paul E. Moore Chief Financial Officer (Chief Accounting Officer) |
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Bank of the Ozarks, Inc.
Exhibit Number | ||
3 (a) | Amended and Restated Articles of Incorporation of the Company, effective May 22, 1997, (previously filed as Exhibit 3.1 to the Company’s Form S-1 Registration Statement (File No. 333-27641) and incorporated herein by reference). | |
3 (b) | Amended and Restated Bylaws of the Company, dated as of March 13, 1997, (previously filed as Exhibit 3.2 to the Company’s Form S-1 Registration Statement (File No. 333-27641) and incorporated herein by reference). | |
4.1 | Amended and Restated Declaration of Trust, by and among U.S. Bank National Association, as Institutional Trustee, Bank of the Ozarks, Inc. as Sponsor, and George G. Gleason, Mark D. Ross and Paul E. Moore, as Administrators, dated as of September 29, 2003. | |
4.2 | Form of Capital Security Certificate (included as an exhibit to Item 4.1). | |
4.3 | Form of Common Security Certificate (included as an exhibit to Item 4.1). | |
4.4 | Indenture, by and between Bank of the Ozarks, Inc. and U.S. Bank National Association, as debenture trustee, dated as of September 29, 2003. | |
4.5 | Guarantee Agreement, by and among Bank of the Ozarks, Inc. and U.S. Bank National Association, dated as of September 29, 2003. | |
4.6 | Amended and Restated Declaration of Trust, by and among Wilmington Trust Company, as Delaware Trustee and as Institutional Trustee, Bank Of The Ozarks, Inc., as Sponsor, George G. Gleason, as Administrator, Mark D. Ross, as Administrator, and Paul E. Moore, as Administrator, dated as of September 25, 2003. | |
4.7 | Form of Capital Security Certificate (included as an exhibit to Item 4.6). | |
4.8 | Form of Common Security Certificate (included as an exhibit to Item 4.6). | |
4.9 | Indenture, by and between Bank of the Ozarks, Inc. and Wilmington Trust Company, as trustee, dated as of September 25, 2003. | |
4.10 | Guarantee Agreement, by and between Bank of the Ozarks, Inc. and Wilmington Trust Company, as trustee, dated as of September 25, 2003. | |
31.1 | Certification of Chairman and Chief Executive Officer | |
31.2 | Certification of Chief Financial Officer | |
32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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