Table of Contents
A Message to Our Shareholders
Our Senior Management Team
Selected Consolidated Financial Data
Management’s Discussion and Analysis
Report of Management on the Company’s Internal Control
Over Financial Reporting
Reports of Independent Registered Public Accounting Firms
Consolidated Financial Statements
1
7
11
12
36
37
40
This report contains forward-looking statements and reflects management’s
current views of future economic circumstances, industry conditions, Company
performance and financial results. These forward-looking statements are subject
to a number of factors and uncertainties which could cause the Company’s
actual results and experience to materially differ from anticipated results and
expectations expressed in such forward-looking statements. A description of
certain factors which may affect operating results may be found in Management’s
Discussion and Analysis of Financial Condition and Results of Operations under
the caption “Forward-Looking Information” contained elsewhere in this report.
All scenic photographs from Bank of the Ozarks’ trade area.
Net Income (Millions)
Earnings Per Share (Diluted)
$31.5
$31.7
$31.7
$25.9
$20.2
$1.88
$1.89
$1.89
$1.56
$14.4
$1.24
$9.0
$0.92
$4.5
$0.35
$5.6
$0.37
$6.6
$6.0
$0.59
$0.44
$0.40
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Over the past ten years as a public company, we have achieved compounded annual
growth rates of 21.5% in net income and 18.4% in diluted earnings per share.
A Message to Our Shareholders
We are pleased to report record net income of $31,746,000 for 2007. This was our seventh consecutive
year of record net income. While our 2007 net income increased only slightly compared to 2006, we were
very encouraged by the favorable trends achieved in
several important revenue categories including net
interest income, service charges on deposit accounts
and trust income and our effective control of growth
in non-interest expense.
Our four key goals for 2007 were (i) accelerating
our rate of revenue growth as compared to 2006,
(ii) decelerating our rate of increase in non-interest
expense as compared to 2006, (iii) maintaining or
improving net interest margin from the level achieved
in the fourth quarter of 2006 and (iv) maintaining
good asset quality. We also wanted to get back on a
record earnings pace after pursuing our significant
deposit, branching and corporate growth initiatives
in 2006.
We are pleased to report significant progress in
achieving each of these key goals in 2007. This
progress was realized in spite of challenging, and
sometimes volatile, conditions in housing, mortgage
and financial markets and a slowing U.S. economy.
1
Mark Ross, George Gleason
Accelerating Our Rate of Revenue Growth
Our first key goal for 2007 was to accelerate our rate of revenue growth compared to 2006. Total revenue,
consisting of net interest income and non-interest income combined, increased 7.1% in 2007, only slightly
more than our 7.0% year-over-year revenue growth in 2006. However, we were very pleased with the
quality and composition of our 2007 revenue growth.
For example, net interest income, or “spread”
income as it is often called, was by far our
largest revenue component in 2007, accounting
for 77.2% of our total revenue. In each quarter
of 2007, we achieved record net interest income,
giving us our seventh consecutive year of record
net interest income. The 9.8% growth in net
interest income in 2007 was a significant
improvement from the 3.1% growth in 2006.
Our second largest revenue component, and
traditionally our largest source of non-interest
income, was service charges on deposit accounts
which increased 19.3% in 2007 after increasing
3.5% in 2006. We have now achieved 12
consecutive years of record income from
service charges on deposit accounts.
Net Interest Income (Millions)
One of our key goals for 2008 is
to further improve net interest
income by growing earning
assets, primarily loans and
leases, and maintaining or
improving our net
interest margin.
$48.8
$77.6
$70.7
$68.6
$60.6
$39.8
$28.1
$22.9 $22.0
$18.4
$14.5
1997 1998
1999 2000 2001 2002
2003
2004
2005
2006
2007
Trust income, another important source of non-interest income, increased 14.2% in 2007 after increasing
16.4% in 2006. This was our third consecutive year of record trust income.
Our growth in the important revenue categories of net interest income, deposit account service charges and
trust income was partially offset by a decrease in mortgage lending income, which declined 8.6% in 2007
compared to 2006, and by a significantly lower level of net gains from sales of investment securities and
other assets. Since these later two sources of revenue, both of which declined in 2007, are more cyclical and
less predictable than revenue sources such as net interest income, service charges on deposit accounts and
trust income, each of which increased in 2007, we feel very positive about the quality of our revenue growth.
Service Charge Income (Millions)
Income from service charges
on deposit accounts
has grown at a
compounded
annual rate of
29.0% over
the past
ten years.
$9.5
$7.8
$6.9
$12.2
$10.2
$9.9
Trust Income (Millions)
Over the past ten years,
trust income has grown
at a compounded
annual rate
of 23.3%.
$1.6
$1.5
$2.2
$1.9
$1.7
Mortgage Lending Income (Millions)
In the past ten years, mortgage
lending income
has grown at a
compounded
annual rate
of 16.8%.
$5.5
$2.9
$3.3
$3.0
$2.9
$2.7
$3.8
$3.4
$2.5
$1.4
$1.0
$0.7
$0.6
$0.6
$0.5
$0.3
$0.3
$2.1
$1.9
$1.3
$0.8
$0.6
1997 1998
1999 2000 2001 2002
2003
2004
2005
2006
2007
1997 1998
1999 2000 2001 2002
2003
2004
2005
2006
2007
1997 1998
1999 2000 2001 2002
2003
2004
2005
2006
2007
2
Decelerating Our Rate of Increase in
Non-Interest Expense
Our second key goal for 2007 was to decelerate
our rate of increase in non-interest expense, which was
significantly impacted in 2006 by our deposit, branching
and corporate growth initiatives. In 2007, we probably
exceeded almost everyone’s expectations in this regard as
our non-interest expense increased only 4.0% compared
to a 15.7% increase in 2006.
We have placed great emphasis on carefully controlling
non-interest expense and achieving a favorable efficiency
ratio, and we were very pleased to see our efficiency ratio
improve to 46.3% in 2007 from 47.1% in 2006.
Improving Our Net Interest Margin
Our third key goal for 2007 was to maintain or
improve our net interest margin from the 3.22% level
achieved in the fourth quarter of 2006. For the full year
of 2007, our net interest margin was 3.44%, and it
showed a generally improving trend during the year.
The 3.47% net interest margin achieved in the fourth
quarter of 2007 was our best in the last six quarters.
Maintaining Good Asset Quality
Our fourth key goal for 2007 was to maintain good asset
Efficiency Ratios
One of our key goals for 2008 is to achieve
further positive operating leverage by
increasing our total revenue at a faster rate
than non-interest expense.
58.9%
58.2% 59.1%
52.6%
52.5%
47.9%
47.5 %
46.2%
43.4%
47.1%
46.3%
1997 1998
1999 2000 2001 2002
2003
2004
2005
2006
2007
Charge-Off Ratios
Our net charge-off ratio has consistently
compared favorably with the ratio for all FDIC
insured institutions as a group.
FDIC Insured Financial Institutions
Bank of the Ozarks, Inc.
quality. Since the inception of our growth and de novo
branching strategy in 1994, a strong commitment to asset
quality has been one of our keys to success. This focus
and the results of our efforts were evident throughout 2007 in our ratios of nonperforming loans and leases,
nonperforming assets, past due loans and leases and net charge-offs. While such ratios at year-end 2007
Source: Data from the FDIC Quarterly Banking Profile for 3Q07.
*FDIC data for 2007 is annualized September 30, 2007 data.
2007*
2000
2003
2004
2005
2006
2001
2002
1998
1999
1997
Nonperforming Loans &
Leases/Total Loans & Leases
Nonperforming Assets/
Total Assets
Loans & Leases Past Due 30 Days
Or More/Total Loans & Leases
0.70%
2.07%
0.57%
0.47%
0.53%
0.50%
0.42%
0.42%
0.37%
0.31%
0.29%
0.25%
0.34%
0.35%
0.25%
0.24%
0.39%
0.36%
0.36%
1.25%
1.23%
1.14%
0.28%
0.24%
0.24%
0.18%
0.88%
0.72%
0.75%
0.77%
0.76%
0.60%
0.39%
1997 1998
1999 2000 2001 2002 2003 2004 2005 2006
2007
1997 1998
1999 2000 2001 2002 2003 2004 2005 2006
2007
1997 1998
1999 2000 2001 2002 2003 2004 2005 2006
2007
Maintaining good asset quality has been an important contributor to our historically favorable net income.
3
were higher than at year-end 2006, they were still favorable. Although we were not immune to the effects
of the slowing U.S. economy and deteriorating housing and mortgage market conditions, our Arkansas, Texas
and North Carolina markets appear to have held up relatively well compared to many others.
Loan and Lease Growth
The growth in our 2007 net interest income was principally due to growth in loans and leases. Our
ability to generate a good volume of quality loans and leases has been one of the hallmarks of our Company.
During 2007, our loans and leases grew 11.6%, which was below our expectations and historical growth
rates. Slower economic conditions and our continued efforts to maintain appropriate pricing and credit
discipline restrained our loan and lease growth in 2007. While maintaining discipline in pricing and credit
standards cost us some business in recent years, we are now seeing many new business opportunities as
a number of the more aggressive competitors in regard to credit terms and loan pricing appear to have
retreated from the market. Accordingly, we are cautiously optimistic that our lending and leasing teams
will produce good loan and lease growth in 2008.
Deposit Growth
After achieving record deposit growth in 2006 as a result of our aggressive 2006 deposit initiative,
we pursued a less aggressive approach to deposit marketing and pricing in 2007. This contributed to the
improvement in our net interest margin.
The most recently available FDIC market share data reflects continued good growth in our deposit market
share even with our less aggressive strategy in 2007. Our combined deposit market share in the 16 Arkansas
counties in which we have operated for at least four years increased from 9.51% at June 30, 2006 to 10.44%
at June 30, 2007. Our overall Arkansas deposit market share increased from 4.13% at June 30, 2006 to
4.34% at June 30, 2007. These gains were consistent with our longer-term goals and expectations for growth
in these markets.
Loans & Leases (Millions)
Over the past ten years, our
loans and leases have
grown at a compounded
annual rate
of 21.1%.
$1,871
$1,677
$1,371
Deposits (Millions)
Over the past ten years,
our deposits have grown
at a compounded
annual rate
of 21.4%.
$1,135
$909
$718
$616
$511
$467
$388
$275
$790
$678
$678
$596
$529
$296
$2,045
$2,057
$1,592
$1,380
$1,062
1997 1998
1999 2000 2001 2002
2003
2004
2005
2006
2007
1997 1998
1999 2000 2001 2002
2003
2004
2005
2006
2007
4
Growth and De Novo Branching
In 1994 we launched our growth and de novo branching strategy by opening the first of our de novo
branches. We have opened new offices in each of the last 13 years, and we have grown from just five original
offices to 70 banking offices and two loan production offices at year-end 2007.
In the past five years alone, we have added a total of 38 new banking offices, or 54% of our total banking
offices. These additions included a number of offices in four new markets in which we expanded in 2006 and
2007. These new markets are Benton and Washington counties in northwest Arkansas; Hot Springs in Garland
County, Arkansas; the Texarkana market (both Bowie County, Texas and Miller County, Arkansas); and Frisco
in Collin County, Texas which is part of the metro-Dallas area. This large number of new offices and new
markets gives us substantial capacity for future growth. Because of this capacity, we expect to add only three
new banking offices in 2008. This slower rate of expansion should help us minimize increases in non-interest
expense, while allowing us to capitalize on business opportunities with our current staff at existing offices.
Our Arkansas branch network is almost complete with our current 65 Arkansas offices. We presently plan
to open no more than seven additional offices in Arkansas, with such offices to be opened from 2008 through
2011. At the same time we expect to shift the majority of our expansion efforts to new office openings in
Texas. We already have five Texas banking offices, and we are achieving substantial growth there. During
2007, loans and leases originated by our Texas offices increased from 7.5% of our total loans and leases to
16.9%, and deposits at our Texas offices increased from 5.0% of our total deposits to 6.5%. Considering the
favorable economic conditions and demographics in Texas, we believe our prospects for continued growth
there are very positive.
Banking Offices
With 38 of our 70 banking
offices added in the last
five years, we have
substantial capacity
for growth.
Rogers
Pleasant
Grove
Frisco
Lebanon
& Tollway
Bella Vista
Sugar
Creek
Bella Vista
Highlands
Springdale
Sunset
Avenue
Sherwood
Little Rock
Rodney
Parham
Markham
Mountain
Home
Main
Texarkana
Summerhill
Benton
Military
Road
Dallas
Texas
Fort Smith
Phoenix
North
Little Rock
East McCain
Bentonville
Hwy 102
Hot Springs
Albert Pike
Ozark
Westside
Altus
Western
Grove
Ozark
Main
Little Rock
Cantrell
Little Rock
Hwy 10
Russellville
Main
Van Buren
Pointer Trail
Russellville
West
Bellefonte
Fort Smith
Rogers
Avenue
North
Little Rock
North Hills
Hot
Springs
Village
Little Rock
Taylor
Loop
Russellville
East
Benton
North
Texarkana
Arkansas
Blvd
Texarkana
Richmond
Road
Van
Buren
Clarksville
Rogers
Avenue
Alma
Little Rock
Chenal
Clinton
Lonoke
Conway
North
Cabot
Main
Conway
East
Fayetteville
Crossover
Bentonville
Walton &
Dodson
Rogers
New Hope
Road
Paris
Little Rock
Rodney
Parham
Harrison
Downtown
Little Rock
Otter
Creek
Conway
Downtown
Bryant
Hwy. 5
Frisco
Preston
Mountain
Home
East
Hot Springs
Central
Avenue
Fayetteville
Wedington
Jasper
Clarksville
Main St.
Marshall
Harrison
North
Mulberry
Little Rock
Chester
North
Little Rock
Indian Hills
Yellville
Fort Smith
Zero St.
Maumelle
Conway
Prince
& Salem
Cabot
South
North
Little Rock
Levy
Rogers
I-540
& Olive
Hot Springs
Malvern
Original
2000
2007
Chart reflects only full-service banking offices and does not include loan production offices opened in Charlotte, North Carolina in 2001 and Little Rock, Arkansas in 2004.
2006
2002
2003
2004
2005
1995
1996
1998
2001
1997
1999
1994
5
Summary
In 2007 our goal was to improve profitability by increasing revenue, maintaining or improving net
interest margin, carefully controlling non-interest expense and maintaining good asset quality. While our
2007 growth in net income was not up to our expectations, we achieved very favorable revenue growth in
net interest income, service charges on deposit accounts and trust income, and we did an excellent job in
minimizing the increase in our non-interest expense.
While we expect slower economic conditions and some challenges in the year ahead, our goal for 2008 is
to build on the positive accomplishments of 2007 and achieve meaningful earnings growth.
As substantial shareholders ourselves, creating shareholder value is an important goal to us. With the
substantial branch network we have in place, our excellent staff and the favorable markets in which we
operate, we believe we are well positioned for the future. We continue to be optimistic about our prospects
for earnings growth and creation of shareholder value.
George Gleason
Chairman and Chief Executive Officer
Mark Ross
Vice Chairman, President and Chief Operating Officer
6
Our Senior Management Team
George Gleason Chairman of the Board and Chief Executive Officer
George Gleason has led the Company and its predecessors for 29 years.
The Company owns a state-chartered subsidiary bank that conducts
banking operations through 65 offices in 34 communities throughout
northern, western and central Arkansas, five Texas banking offices, and
loan production offices in Little Rock, Arkansas and Charlotte, North Carolina.
Mark Ross Vice Chairman, President and Chief Operating Officer
Mark Ross joined the Company in 1980. Mr. Ross is responsible for
oversight of a number of operational and administrative functions of
the Company including internal audit, compliance, loan review, facilities,
technology, human resources, training, marketing, treasury management,
branch administration, deposit services and trust services.
Paul Moore Chief Financial Officer and Chief Accounting Officer
Paul Moore joined the Company as Chief Financial Officer in 1995 and
oversees all accounting, tax, financial reporting and regulatory reporting
functions for the Company. He has been a Certified Public Accountant
for 29 years.
Greg McKinney Executive Vice President and Controller
Greg McKinney oversees and manages a wide range of audit, accounting
and financial reporting functions for the Company. Mr. McKinney has 16
years of accounting and financial reporting experience and joined Bank of
the Ozarks in 2003. Mr. McKinney is also a Certified Public Account.
Dan Rolett Executive Vice President
Dan Rolett oversees a broad range of duties including the Company’s
investment portfolio, public funds deposits, deposit pricing, funds
management, Community Reinvestment Act initiatives, and business
development activities. Mr. Rolett has 26 years of banking experience
and joined the Company in 1996.
Ron Kuykendall Chief Information Officer
Ron Kuykendall joined the Company in 1989 and is responsible for the
oversight of information systems, branch support, e-banking and item
processing. Mr. Kuykendall has 24 years of experience in banking.
Note: George Gleason, Mark Ross, Paul Moore, Greg McKinney, Dan Rolett and Ron Kuykendall serve in the same officer
capacity for both the Company and its bank subsidiary. All other officers shown in this article serve as officers only of the
bank subsidiary in the capacities indicated.
7
Fred Campbell President, Eastern Division
Fred Campbell joined the Company in 2002 and has a total of 36 years of
banking experience. In 2003 he was named President of the Eastern Division
which consists of two offices in Cabot and one office in Lonoke.
Ronnie Capelle President, Crawford County
Ronnie Capelle joined Bank of the Ozarks in 1997 and has 26 years of
banking experience. Mr. Capelle oversees the Company’s operations in the
Crawford County market, which includes four offices in Van Buren (2),
Alma and Mulberry.
Keith Cox President, Little Rock
Keith Cox joined Bank of the Ozarks in 2007 and has 26 years of banking
experience. Mr. Cox oversees the Company’s operations in the Little
Rock area.
Danny Criner President, Northern Division
Danny Criner has 32 years of banking experience, all with the Company
or its predecessors. Since 1991, Mr. Criner has served as President of the
Northern Division, which consists of ten offices in Harrison (2), Bellefonte,
Western Grove, Jasper, Marshall, Clinton, Yellville and Mountain Home (2).
John Davis President, Hot Springs Division
John Davis has 26 years of banking experience and joined the Company in
2005 as President of the Hot Springs Division which consists of three offices
in Hot Springs and one in Hot Springs Village.
Larry Dicks President, Pope County
Larry Dicks was named President of Pope County in 2007. Mr. Dicks has
30 years of banking experience and oversees business operations at the
Company’s three offices in Russellville. Mr. Dicks has been with Bank of
the Ozarks for 22 years.
8
C.E. Dougan President, Western Division
C.E. Dougan has 38 years of banking experience and joined the Company
as a director in 1997. In 2000 he resigned his directorship and joined the
management team as President of the Western Division. The Western
Division consists of 16 offices in Fort Smith (3), Russellville (3), Van Buren
(2), Alma, Mulberry, Ozark (2), Altus, Clarksville (2) and Paris.
Susan Grobmyer President, Fort Smith
Susan Grobmyer joined Bank of the Ozarks in 1997 and has 31 years of
banking experience. Mrs. Grobmyer oversees the Company’s operations
in the Fort Smith market.
Scott Hastings President, Leasing Division
Scott Hastings joined the Company in 2003 to establish a Leasing Division.
Mr. Hastings has 25 years experience in leasing, including serving as
president of a leasing division with $800 million in assets for a large
diversified national financial services firm.
Gene Holman President, Mortgage Division
Gene Holman has 34 years of mortgage banking and real estate experience
in Arkansas including six years of managing Texas and Tennessee mortgage
banking operations. He joined the Company in 2004 as President of the
Mortgage Division.
Rex Kyle President, Trust Division
Rex Kyle has 29 years experience in banking as a trust professional.
Mr. Kyle joined the Company in 2004 as President of the Trust Division,
which offers a wide array of asset management and trust services for
individuals, businesses and government entities.
Dennis James President, Metro Dallas Division
Dennis James has 35 years of experience in finance and management and
joined the Company in 2005. As President of the Metro Dallas Division,
Mr. James leads our retail banking expansion in the metro-Dallas area
where we have two full service offices and plan to open four or more new
offices over the next four years.
9
Darrel Russell President, Central Division & Co-Chairman of Loan Committee
Darrel Russell has 27 years of banking experience and has been with the
Company since 1983. In 2001 he was named President of the Central Division
which consists of 17 offices in Little Rock (8), North Little Rock (4), Sherwood,
Maumelle, Benton (2) and Bryant. Mr. Russell is also responsible for oversight
of the Company’s loan production office in Charlotte, North Carolina.
Sarah Shaw President, Conway Division
Sarah Shaw has 23 years of banking experience and joined the Company
in 2002. In 2006 she was named President of the Conway Division which
consists of four offices in Conway.
Dan Thomas President, Real Estate Specialties Group
Dan Thomas has over 20 years experience in structuring, financing and
managing commercial real estate transactions. He joined Bank of the Ozarks
in 2003 and opened a Dallas loan production office in order to establish a
commercial lending presence in Texas. The Company converted the Dallas
loan production office to a banking office in 2004.
Shannon White President, Northwest Division
Shannon White has 17 years of banking experience and joined the Company
in 2005. He leads our Northwest Arkansas Division which consists of ten
offices in Fayetteville (2), Springdale, Rogers (3), Bentonville (2) and
Bella Vista (2).
Joe Willis President, Searcy and Van Buren Counties
Joe Willis joined Bank of the Ozarks in 1989 and has 18 years of banking
experience. Mr. Willis oversees the Company’s operations in three offices
in Searcy and Van Buren counties.
Rick Wisdom President, Southwest Division
Rick Wisdom has 26 years of banking experience and joined the Company
in 2004 as President of the Southwest Division, which consists of two
offices in Texarkana, Texas and one office in Texarkana, Arkansas.
10
Financial Information
Selected Consolidated Financial Data
2007
Year Ended December 31,
2005
2004
2006
2003
Income statement data:
(Dollars in thousands, except per share amounts)
Interest income .................................................... $ 176,970 $ 155,198 $ 112,881 $ 85,231 $ 68,883
20,115
99,352
Interest expense ..................................................
48,768
77,618
Net interest income ..............................................
3,865
6,150
Provision for loan and lease losses .....................
17,391
22,975
Non-interest income ............................................
31,992
48,252
Non-interest expense ...........................................
20,201
31,746
Net income ..........................................................
84,478
70,720
2,450
23,231
46,390
31,693
44,305
68,576
2,300
19,252
40,080
31,489
24,608
60,623
3,330
18,225
37,605
25,883
Share and per share data:
Earnings - diluted ................................................ $ 1.89 $ 1.89 $ 1.88 $ 1.56 $ 1.24
6.07
Book value ..........................................................
Dividends ............................................................
0.23
Weighted-average diluted shares
outstanding (thousands) ....................................
End of period shares outstanding (thousands) ......
16,834
16,818
16,803
16,747
16,766
16,665
16,635
16,494
16,287
16,233
11.35
0.43
10.43
0.40
7.36
0.30
8.97
0.37
Balance sheet data at period end:
Total assets ..........................................................
1,871,135
Total loans and leases .........................................
19,557
Allowance for loan and lease losses ....................
578,348
Total investment securities ..................................
Total deposits ...................................................... 2,057,061
46,086
Repurchase agreements with customers ..............
336,533
Other borrowings .................................................
64,950
Subordinated debentures .....................................
190,829
Total stockholders’ equity ....................................
Loan and lease to deposit ratio ............................
$2,710,875 $2,529,400 $2,134,882 $1,726,840 $1,386,529
909,147
1,370,723
13,820
17,007
364,320
574,120
1,062,064
1,591,643
29,898
35,671
145,541
304,865
46,651
44,331
98,486
149,403
1,677,389
17,699
620,132
2,045,092
41,001
194,661
64,950
174,633
1,134,591
16,133
434,512
1,379,930
33,223
144,065
44,331
121,406
82.02%
86.12%
82.22%
85.60%
90.96%
Average balance sheet data:
Total average assets ............................................ $2,601,299 $2,365,316 $1,912,961 $1,547,184 $1,197,346
85,471
184,819
Total average stockholders’ equity ......................
Average equity to average assets ........................
137,185
108,419
158,194
6.69%
7.17%
7.01%
7.10%
7.14%
Performance ratios:
Return on average assets ....................................
Return on average stockholders’ equity ..............
Net interest margin - FTE ....................................
Efficiency .............................................................
Dividend payout ..................................................
1.22%
1.34%
1.65%
1.67%
1.69 %
17.18
3.44
46.33
22.75
20.03
3.49
47.07
21.16
22.95
4.18
43.43
19.68
23.87
4.43
46.23
19.23
23.63
4.52
47.51
18.55
Asset quality ratios:
Net charge-offs to average loans and leases .......
Nonperforming loans and leases to total
loans and leases ...............................................
Nonperforming assets to total assets ...................
Allowance for loan and lease losses as a
percentage of:
0.24%
0.12%
0.11%
0.10%
0.20%
0.35
0.36
0.34
0.24
0.25
0.18
0.57
0.39
0.47
0.36
Total loans and leases .........................................
Nonperforming loans and leases .........................
1.05%
295%
1.06%
310%
1.24%
502%
1.42%
248%
1.52%
326%
Capital ratios at period end:
Leverage ..............................................................
Tier 1 risk-based capital ......................................
Total risk-based capital .......................................
9.80%
9.39%
9.11%
9.41%
9.33%
11.79
12.67
11.71
12.76
11.94
13.02
12.34
13.74
12.41
14.89
11
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
Net income for Bank of the Ozarks, Inc. (the “Company”) was $31.75 million for the year ended December
31, 2007, a 0.2% increase from net income of $31.69 million in 2006. Net income in 2005 was $31.49
million. Diluted earnings per share were $1.89 for both 2007 and 2006. Diluted earnings per share in 2005
were $1.88.
The table below shows total assets, loans and leases, deposits, stockholders’ equity, net income, diluted
earnings per share and book value per share at December 31, 2007, 2006 and 2005 and the percentage
changes year over year.
% Change
December 31,
2006
2007
(Dollars in thousands, except per share amounts)
Total assets .............................. $2,710,875 $2,529,400 $2,134,882
1,370,723
Loans and leases .....................
1,591,643
Deposits ...................................
149,403
Stockholders’ equity ................
31,489
Net income ..............................
1.88
Diluted earnings per share ......
8.97
Book value per share ...............
1,871,135
2,057,061
190,829
31,746
1.89
11.35
1,677,389
2,045,092
174,633
31,693
1.89
10.43
2005
2007
2006
from 2006 from 2005
7.2%
11.6
0.6
9.3
0.2
-
8.8
18.5%
22.4
28.5
16.9
0.6
0.5
16.3
Two measures used to assess performance by banking institutions are return on average assets (“ROA”)
and return on average equity (“ROE”). ROA measures net income in relation to average total assets. It is
calculated by dividing annual net income by average total assets and indicates a company’s ability to employ
its resources profitably. For the year ended December 31, 2007, the Company’s ROA was 1.22% compared
with 1.34% and 1.65%, respectively, for the years ended December 31, 2006 and 2005. ROE measures net
income in relation to average stockholders’ equity. It is calculated by dividing annual net income by average
stockholders’ equity and indicates how effectively a company can generate net income on the capital invested
by its stockholders. For the year ended December 31, 2007, the Company’s ROE was 17.18% compared with
20.03% and 22.95%, respectively, for the years ended December 31, 2006 and 2005.
Analysis of Results of Operations
The Company is a bank holding company whose primary business is commercial banking conducted
through its wholly-owned state chartered bank subsidiary - Bank of the Ozarks (the “Bank”). 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, leases and investments, and the interest expense incurred on
interest bearing liabilities, such as deposits, other borrowings and subordinated debentures. The Company
also generates non-interest income, including service charges on deposit accounts, mortgage lending income,
trust income, bank owned life insurance (“BOLI”) income, other charges and fees, and gains and losses on
sales of assets.
The Company’s non-interest expense consists primarily of employee compensation and benefits, net
occupancy and equipment expense and other operating expenses. The Company’s results of operations
are significantly affected by its provision for loan and lease losses and its provision for income taxes. The
following discussion provides a summary of the Company’s operations for the past three years and should
be read in conjunction with the consolidated financial statements and related notes presented elsewhere in
the report.
Net Interest Income
Net interest income and net interest margin are analyzed in this discussion on a fully taxable equivalent
(“FTE”) basis. The adjustment to convert net interest income to a FTE basis consists of dividing tax-exempt
income by one minus the statutory federal income tax rate of 35%. The FTE adjustments to net interest
income were $3.6 million in 2007, $4.6 million in 2006 and $4.5 million in 2005.
12
2007 compared to 2006
Net interest income (FTE) for 2007 increased 7.8% to $81.2 million compared to $75.3 million for 2006.
Net interest margin (FTE) was 3.44% in 2007 compared to 3.49% in 2006, a decrease of 5 basis points
(“bps”). The growth in net interest income (FTE) was primarily a result of the 9.6% growth in earning
assets from 2006 to 2007. The relatively flat to inverted yield curve between short-term and long-term
interest rates and the competitive environment for pricing loans and deposits during 2007 contributed
to the decline in net interest margin (FTE) for the full year of 2007 compared to 2006. However, the
Company’s net interest margin (FTE) improved over the course of 2007, increasing from a recent quarterly
low of 3.22% in the fourth quarter of 2006, to 3.35%, 3.46%, 3.45% and 3.47%, respectively, in each
succeeding quarter of 2007.
Yields on earning assets increased 23 bps in 2007 compared to 2006. This increase was due primarily
to an increase in loan and lease yields of 22 bps and an increase in loans and leases as a percentage of
earning assets from 70.4% in 2006 to 74.9% in 2007. The increased loan and lease yields were due in part
to the repricing of a portion of the Company’s fixed rate loans and leases at higher interest rates during
2007. From June 2004 through June 2006, the Federal Open Market Committee (“FOMC”) increased its
federal funds target rate a total of 425 basis points, and during 2007 the Company benefited as fixed rate
loans and leases originated prior to June 2006 either renewed at current rates or paid off and were replaced
with new loans and leases at current rates. This increased repricing of fixed rate loans and leases was
partially offset by declines in yields on variable rate loans due to the FOMC lowering its federal funds target
rate starting in September 2007.
The Company’s aggregate yield on its investment securities portfolio decreased 13 bps in 2007 compared
to 2006. This was the result of a 13 basis point decrease in yield on taxable investment securities, an 18
basis point increase in yield on tax-exempt investment securities and a shift in the composition of the
portfolio to include a higher proportion of taxable investment securities that generally have a lower FTE
yield than do the Company’s tax-exempt investment securities. Additionally, the Company’s average balance
of investment securities declined by $45 million for 2007 compared to 2006, resulting in a smaller percentage
of its average earning assets being comprised of investment securities in 2007 compared to 2006.
A 32 bps increase in the rate on interest bearing liabilities more than offset the 23 bps increase in earning
asset yields in 2007 compared to 2006 resulting in the overall 5 bps decline in net interest margin (FTE).
The increase in the rates on interest bearing liabilities was primarily attributable to a 46 bps increase in
the rates of interest bearing deposits. This increase in the rates on interest bearing deposits, the largest
component of the Company’s interest bearing liabilities, was attributable to both the increase in the
Company’s time deposits, which generally pay higher rates than its other interest bearing deposits, to
72.7% of average interest bearing deposits in 2007 compared to 68.7% in 2006 and the increase in rates
paid on time deposits as such deposits were renewed at higher rates as a result of FOMC federal funds rate
increases through June of 2006.
The increase in the rates on interest bearing deposits was partially offset by a decline in rates on the
Company’s other borrowings, comprised primarily of Federal Home Loan Bank of Dallas (“FHLB”) advances
and federal funds purchased, which decreased 41 bps in 2007 compared to 2006. This decline in rates on
other borrowings was primarily due to the decline in the federal funds target rate, to which a portion of the
Company’s other borrowings are tied, starting in September 2007, the increased utilization of lower cost
FHLB advances in 2007 compared to 2006, and the increase in capitalized interest on construction projects
in 2007 compared to 2006.
13
2006 compared to 2005
Net interest income (FTE) for 2006 increased 3.1% to $75.3 million compared to $73.0 million for 2005.
Net interest margin (FTE) was 3.49% in 2006 compared to 4.18% in 2005, a decrease of 69 bps. The relatively
flat to inverted yield curve between short-term and long-term interest rates and the competitive environment
for pricing loans and deposits during 2006 were significant contributors to the decline in the Company’s net
interest margin (FTE) in 2006 compared to 2005. The Company’s net interest margin (FTE) declined
throughout 2006, reaching a recent quarterly low of 3.22% in the fourth quarter of 2006.
Yields on earning assets increased 69 bps in 2006 compared to 2005. This increase was due primarily to
an increase in loan and lease yields of 96 bps. The increased loan and lease yields were attributable to overall
increases in general interest rate levels during 2006 as a result of the FOMC raising its federal funds target
rate a total of 425 basis points from June 2004 through June 2006. The Company’s variable rate loans and
leases benefited the Company in 2006 as the yields on such loans and leases adjusted more quickly than the
yields on fixed rate loans and leases to increases in the prime rate and other interest rates which followed
the FOMC’s increases in the federal funds target rate.
The Company’s aggregate yield on its investment securities portfolio increased 11 bps in 2006 compared
to 2005. This was the result of a 28 basis point increase in yield on taxable investment securities, an 11
basis point increase in yield on tax-exempt investment securities and a shift in the composition of the
portfolio to include a higher proportion of taxable investment securities that generally have a lower FTE
yield than do the Company’s tax-exempt investment securities. The increases in the yields on the Company’s
taxable and tax-exempt investment securities were primarily a result of new purchases during 2006 with
weighted-average yields above the weighted-average yields of the taxable and tax-exempt investment
securities portfolios at the beginning of the year.
The 69 bps increase in earning asset yields in 2006 compared to 2005 was more than offset by a 141
bps increase in the rates on interest bearing liabilities, resulting in the overall net interest margin (FTE)
compression. The increase in the rates on interest bearing liabilities was primarily attributable to a 151
bps increase in the rates of interest bearing deposits. This increase in the rates on interest bearing deposits,
the largest component of the Company’s interest bearing liabilities, was attributable to overall increases in
general interest rate levels and more aggressive deposit pricing by the Company in 2006. Additionally, the
Company’s time deposits, which generally pay higher rates than its other interest bearing deposits, increased
to 68.7% of the Company’s average interest bearing deposits in 2006 compared to 64.3% in 2005.
The rates on the Company’s other borrowings increased 102 bps in 2006 compared to 2005. The rates
on the Company’s subordinated debentures adjust quarterly at various margins above the 90-day London
Interbank Offered Rate (“LIBOR”) and increased 171 bps in 2006 compared to 2005.
Analysis of Net Interest Income
(FTE = Fully Taxable Equivalent)
Year Ended December 31,
Interest income ......................................................................... $176,970
3,559
FTE adjustment ........................................................................
180,529
Interest income - FTE ...............................................................
99,352
Interest expense ........................................................................
Net interest income - FTE ......................................................... $ 81,177
2007
2006
(Dollars in thousands)
$155,198
4,596
159,794
84,478
$ 75,316
2005
$112,881
4,465
117,346
44,305
$ 73,041
Yield on interest earning assets - FTE ......................................
Rate on interest bearing liabilities ............................................
Net interest margin - FTE .........................................................
7.64%
4.45
3.44
7.41%
4.13
3.49
6.72%
2.72
4.18
14
The following table sets forth certain information relating to the Company’s net interest income (FTE) for
the years ended December 31, 2007, 2006 and 2005. The yields and rates are derived by dividing interest
income or interest expense by the average balance of the related assets or liabilities, respectively, for the
periods shown except where otherwise noted. Average balances are derived from daily average balances for
such assets and liabilities. The average balance of loans and leases includes loans and leases on which the
Company has discontinued accruing interest. The average balances of investment securities are computed
based on amortized cost adjusted for unrealized gains and losses on investment securities available for
sale (“AFS”). The yields on loans and leases include late fees and amortization of certain deferred fees and
origination costs, which are considered adjustments to yields. Interest expense and rates on other borrowings
are presented net of interest capitalized on construction projects.
Average Consolidated Balance Sheets and Net Interest Analysis
2007
Year Ended December 31,
2006
2005
Average
Balance
Income/ Yield/
Expense Rate
Average
Balance
Income/ Yield/
Expense Rate
Average
Balance
Income/ Yield/
Expense Rate
(Dollars in thousands)
ASSETS
Earning assets:
Interest earning deposits
and federal funds sold ........... $ 311 $ 19 6.08% $ 287 $ 10 3.44% $ 332 $ 11 3.44%
Investment securities:
452,831
Taxable ................................
139,724
Tax-exempt - FTE ................
1,770,283
Loans and leases - FTE ............
2,363,149
Total earning assets - FTE ...
Non-interest earning assets........
238,150
Total assets .................. $2,601,299
452,943
184,779
1,517,818
2,155,827
209,489
$2,365,316
319,234
181,386
1,245,779
1,746,731
166,230
$1,912,961
24,775 5.47
10,011 7.16
145,724 8.23
180,529 7.64
25,346 5.60
12,894 6.98
121,544 8.01
159,794 7.41
16,998 5.32
12,468 6.87
87,869 7.05
117,346 6.72
1,908,923
752,765
398,178
899,666
487,382
35,120 4.67
16,531 4.15
45,858 5.10
23,567 4.84
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest bearing liabilities:
Deposits:
Savings and interest
bearing transaction ............ $ 521,875 $ 13,715 2.63% $ 523,324 $ 13,694 2.62% $ 466,609 $ 7,041 1.51%
Time deposits of
$100,000 or more ..............
Other time deposits ...............
Total interest
bearing deposits .............
Repurchase agreements
with customers .......................
Other borrowings .....................
Subordinated debentures..........
Total interest
bearing liabilities ............
Non-interest bearing liabilities:
Non-interest bearing deposits ....
Other non-interest
bearing liabilities ....................
Total liabilities ...................
Stockholders’ equity ...................
Total liabilities and
stockholders’ equity ..... $2,601,299
1,312 3.35
13,953 4.93(1)
3,868 7.79
1,603 3.64
9,543 4.42(1)
5,066 7.80
450 1.69
9,848 3.91(1)
2,693 6.08
7,073
1,775,776
137,185
13,878
2,416,480
184,819
8,795
2,207,122
158,194
39,213
282,925
49,641
26,620
251,589
44,331
44,071
215,872
64,950
16,265 3.00
8,008 2.68
542,378
299,104
99,352 4.45
84,478 4.13
83,140 4.36
65,345 3.90
44,305 2.72
31,314 2.39
$2,365,316
$1,912,961
2,233,816
2,046,046
1,630,631
1,674,267
1,308,091
152,281
168,786
138,072
Net interest income - FTE ...........
Net interest margin - FTE ...........
$ 81,177
$ 75,316
3.44%
3.49%
$ 73,041
4.18%
(1) The interest expense and rates for other borrowings are impacted by interest capitalized on construction projects
in the amount of $1.3 million, $1.0 million and $0.4 million, respectively, for the years ended December 31, 2007,
2006 and 2005. In the absence of this capitalization, these rates would have been 5.03%, 5.28% and 4.09%,
respectively, for the years ended December 31, 2007, 2006 and 2005.
15
The following table reflects how changes in the volume of interest earning assets and interest bearing
liabilities and changes in interest rates have affected the Company’s interest income (FTE), interest expense
and net interest income (FTE) for the periods indicated. Information is provided in each category with
respect to changes attributable to (1) changes in volume (changes in volume multiplied by prior yield/rate);
(2) changes in yield/rate (changes in yield/rate multiplied by prior volume); and (3) changes in both
yield/rate and volume (changes in yield/rate multiplied by changes in volume). The changes attributable
to the combined impact of volume and yield/rate have all been allocated to the changes due to volume.
Analysis of Changes in Net Interest Income
2007 over 2006
Yield/
Rate
Net
Change
Volume
2006 over 2005
Yield/
Rate
Net
Change
Volume
(Dollars in thousands)
$ 8
$ 9
Increase (decrease) in:
Interest income - FTE:
Interest earning deposits
and federal funds sold ............................ $ 1
Investment securities:
Taxable ...................................................
Tax-exempt - FTE ....................................
Loans and leases - FTE .............................
Total interest income - FTE ...................
Interest expense:
21
Savings and interest bearing transaction ....
10,738
Time deposits of $100,000 or more ............
7,036
Other time deposits ...................................
291
Repurchase agreements with customers .....
(4,410)
Other borrowings ......................................
1,198
Subordinated debentures ...........................
Total interest expense ...........................
14,874
Increase (decrease) in net interest income - FTE ... $ 7,379 $(1,518) $ 5,861
(37)
7,488
4,313
177
(2,965)
1,194
10,170
58
3,250
2,723
114
(1,445)
4
4,704
(571)
(2,883)
24,180
20,735
(6)
(3,228)
20,782
17,549
(565)
345
3,398
3,186
$ (2) $ 1 $ (1)
7,482
237
21,784
29,501
866
189
11,891
12,947
8,348
426
33,675
42,448
1,484
9,816
4,113
421
1,545
414
17,793
6,653
5,169
18,855
9,039
8,523
4,410
862
441
4,105
2,560
1,175
761
40,173
22,380
$11,708 $(9,433) $ 2,275
Non-Interest Income
The Company’s non-interest income consists primarily of (1) service charges on deposit accounts,
(2) mortgage lending income, (3) trust income, (4) BOLI income, (5) appraisal fees, credit life commissions
and other credit related fees, (6) safe deposit box rental, operating lease income, brokerage fees and other
miscellaneous fees and (7) gains and losses on sales of assets.
2007 compared to 2006
Non-interest income for the year ended December 31, 2007 decreased 1.1% to $23.0 million compared to
$23.2 million in 2006.
Service charges on deposit accounts are the Company’s largest source of non-interest income and increased
19.3% to $12.2 million in 2007 compared to $10.2 million in 2006. This increase was primarily attributable
to enhancements made during late 2006 to the Company’s processes for applying and collecting service
charges, the large increase in the number of deposit accounts from the Company’s 2006 deposit growth
initiative and some small adjustments in early 2007 to the Company’s service charge fee schedule.
Trust income increased 14.2% to $2.2 million in 2007 compared to $1.9 million in 2006. This increase
was primarily the result of growth in both personal trust and investment management business.
Mortgage lending income declined 8.6% to $2.7 million in 2007 compared to $2.9 million in 2006.
Originations of mortgage loans for sale decreased 7.2% to $161.2 million in 2007 compared to $173.7
million in 2006. Refinancing of existing mortgages accounted for 36% of the Company’s 2007 originations
of mortgage loans for sale compared to 32% in 2006. Mortgage originations for home purchases were 64%
of 2007 originations compared to 68% in 2006.
Net gains on sales of investment securities AFS were $0.5 million in 2007 compared to $3.9 million in
2006. The Company sold approximately $56 million of its AFS investment securities in 2007 and approximately
$154 million of its AFS investment securities in 2006. Net gains on sales of other assets were $0.5 million in
2007 compared to net losses of $0.1 million in 2006.
16
2006 compared to 2005
Non-interest income for the year ended December 31, 2006 increased 20.7% to $23.2 million compared
to $19.3 million in 2005.
Service charges on deposit accounts increased 3.5% to $10.2 million in 2006 compared to $9.9 million
in 2005. This increase was primarily attributable to growth in the number of deposit customers.
Trust income increased 16.4% to $1.9 million in 2006 compared to $1.7 million in 2005. This increase
was primarily the result of growth in both corporate and personal trust business.
Mortgage lending income declined 3.8% to $2.9 million in 2006 compared to $3.0 million in 2005.
Originations of mortgage loans for sale decreased 1.1% to $173.7 million in 2006 compared to $175.6
million in 2005. Refinancing of existing mortgages accounted for 32% of the Company’s 2006 originations
of mortgage loans for sale compared to 39% in 2005. Mortgage originations for home purchases were 68%
of 2006 originations compared to 61% in 2005.
Net gains on sales of investment securities AFS were $3.9 million in 2006 compared to $0.2 million
in 2005. The Company sold approximately $154 million of its AFS investment securities in 2006 and
approximately $9 million of its AFS investment securities in 2005. Net losses on sales of other assets
were $0.1 million in 2006 compared to net gains of $0.6 million in 2005.
The table below shows non-interest income for the years ended December 31, 2007, 2006 and 2005.
Non-Interest Income
Year Ended December 31,
2007
(Dollars in thousands)
2006
2005
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, operating lease income, brokerage fees and
1,160
other miscellaneous fees ...................................................................
520
Gains on sales of investment securities ................................................
487
Gains (losses) on sales of other assets .................................................
Other .....................................................................................................
1,307
Total non-interest income ............................................................... $22,975
$12,193
2,668
2,223
1,919
498
$10,217
2,918
1,947
1,832
521
1,125
3,917
(90)
844
$23,231
$ 9,875
3,034
1,673
1,816
505
1,099
213
567
470
$19,252
Non-Interest Expense
Non-interest expense consists of salaries and employee benefits, net occupancy and equipment expense
and other operating expenses.
2007 compared to 2006
Non-interest expense for the year ended December 31, 2007 increased 4.0% to $48.3 million compared to
$46.4 million in 2006 as a result of the Company’s continued growth and expansion. Salaries and employee
benefits, the Company’s largest component of non-interest expense, increased 4.2% to $28.7 million in 2007
from $27.5 million in 2006. During 2007 the Company added three new banking offices and replaced one
temporary banking office with a new permanent facility. At December 31, 2007, the Company had 70 full
service banking offices compared to 67 full-service banking offices at December 31, 2006. The Company’s
full-time equivalent employees were 689 at December 31, 2007, a decrease of 1.4% from 699 full-time
equivalent employees at December 31, 2006.
The Company’s efficiency ratio for 2007 was 46.3% compared to 47.1% in 2006. This improvement in
the effeciency ratio resulted from the Company’s total revenue (the sum of net interest income - FTE and
non-interest income) increasing at a faster rate than its non-interest expense in 2007.
17
2006 compared to 2005
Non-interest expense for the year ended December 31, 2006 increased 15.7% to $46.4 million compared
to $40.1 million in 2005 as a result of the Company’s continued growth and expansion. Salaries and
employee benefits increased 17.2% from $23.5 million in 2005 to $27.5 million in 2006. During 2006 the
Company added 11 new banking offices, closed one banking office, replaced one temporary banking office
with a new permanent facility, and replaced one of its oldest banking offices with a new permanent banking
facility. At December 31, 2006, the Company had 67 full service banking offices compared to 57 at December
31, 2005, and its full-time equivalent employees increased 11.1% from 629 at December 31, 2005 to 699 at
December 31, 2006.
In 2006 the Company pursued a broad range of actions intended to build its staff and corporate
infrastructure to support future growth. Staff additions included adding more production staff such as loan
officers, mortgage loan counselors and private bankers at existing offices, adding corporate staff members
and giving certain salary increases to help retain and develop the next generation of supervisors and
managers. The corporate infrastructure improvements included development and implementation of a
number of new policies, procedures and processes related to risk management and business operations.
The Company’s efficiency ratio for 2006 was 47.1% compared to 43.4% for 2005. This increase was
primarily attributable to expenses incurred in connection with the Company’s significant growth and
expansion efforts during 2006.
The following table shows non-interest expense for the years ended December 31, 2007, 2006 and 2005.
Non-Interest Expense
2007
Salaries and employee benefits .................................................. $28,661
8,098
Net occupancy and equipment expense ......................................
Other operating expenses:
1,620
Postage and supplies .............................................................
1,415
Telephone and data lines .......................................................
1,057
Advertising and public relations ............................................
1,077
Professional and outside services ..........................................
1,201
Software expense ...................................................................
624
FDIC and state assessments ...................................................
701
FDIC insurance ......................................................................
674
ATM expense .........................................................................
368
Other real estate and foreclosure expense ..............................
262
Amortization of intangibles ...................................................
Other .....................................................................................
2,494
Total non-interest expense ............................................... $48,252
Income Taxes
Year Ended December 31,
2006
(Dollars in thousands)
$27,506
7,030
1,910
1,651
1,545
1,129
1,068
628
-
598
261
262
2,802
$46,390
2005
$23,477
6,254
1,620
1,371
1,325
886
828
506
-
611
213
262
2,727
$40,080
The Company’s provision for income taxes was $14.4 million for the year ended December 31, 2007
compared to $13.4 million in 2006 and $14.0 million in 2005. Its effective income tax rates were 31.3%,
29.7% and 30.7%, respectively, for 2007, 2006 and 2005. The increase in the effective tax rate of 160 bps
in 2007 compared to 2006 was due primarily to a decline in investment securities which are exempt from
state income taxes or both federal and state income taxes. During 2007 such tax-exempt investment
securities declined, both in absolute dollar volume and as a percentage of earning assets. The decline in
effective tax rate of 100 bps in 2006 compared to 2005 was due primarily to an increase in the amount
of such tax-exempt investment securities during 2006 compared to 2005. The effective tax rates were
also affected by various other factors including the levels of BOLI and other non-taxable income and
non-deductible expenses. Additionally, the effective tax rates were affected by the impact of certain tax
credit investments, which reduced combined federal and state income taxes by $0.4 million in 2007, $0.3
million in 2006 and $0.2 million in 2005.
18
Loan and Lease Portfolio
Analysis of Financial Condition
At December 31, 2007 the Company’s loan and lease portfolio was $1.87 billion, an increase of 11.6%
from $1.68 billion at December 31, 2006. As of December 31, 2007, the Company’s loan and lease portfolio
consisted of 81.9% real estate loans, 9.3% commercial and industrial loans, 4.7% consumer loans, 2.8%
direct financing leases and 1.2% agricultural loans (non-real estate). Real estate loans, the Company’s largest
category of loans, include all loans made to finance the development of real property construction projects,
provided such loans are secured by real estate, and all other loans secured by real estate as evidenced by
mortgages or other liens. Total real estate loans increased 12.0% from $1.37 billion at December 31, 2006
to $1.53 billion at December 31, 2007. This increase is primarily attributable to the Company’s continued
expansion into markets with significant commercial and residential development, including Texas and
North Carolina.
The amount and type of loans and leases outstanding are reflected in the following table.
Loan and Lease Portfolio
2007
2006
December 31,
2005
(Dollars in thousands)
2004
2003
Real estate:
Residential 1-4 family ................ $ 279,375
445,303
Non-farm/non-residential ..........
684,775
Construction/land development ...
91,810
Agricultural ................................
31,414
Multifamily residential ...............
1,532,677
Total real estate .......................
173,128
Commercial and industrial .............
87,867
Consumer .......................................
53,446
Direct financing leases ...................
22,439
Agricultural (non-real estate) ........
1,578
Other ..............................................
Total loans and leases ............. $1,871,135
$ 281,400
433,998
514,899
88,021
50,202
1,368,520
148,853
86,048
49,705
22,298
1,965
$1,677,389
$ 271,989
375,628
366,827
74,644
31,142
1,120,230
109,459
78,916
38,060
20,605
3,453
$1,370,723
$ 248,435
330,442
244,898
66,061
29,300
919,136
100,642
73,420
19,320
18,520
3,553
$1,134,591
$218,851
285,451
117,835
61,500
23,657
707,294
111,978
64,831
3,622
15,266
6,156
$909,147
The amount and percentage of the Company’s loan and lease portfolio by state are reflected in the
following table.
Loan and Lease Portfolio by State
Loans and Leases
Attributable to Offices In
2007
Amount
%
Arkansas ......................................... $1,461,657
315,960
Texas ...............................................
North Carolina .................................
93,518
Total ......................................... $1,871,135 100.0%
78.1%
16.9
5.0
December 31,
2006
Amount
(Dollars in thousands)
%
$1,478,471
126,458
72,460
88.2%
7.5
4.3
2005
Amount
%
$1,244,188
77,248
49,287
90.8%
5.6
3.6
$1,677,389 100.0%
$1,370,723 100.0%
19
Loan and Lease Maturities
The following table reflects loans and leases grouped by remaining maturities at December 31, 2007
by type and by fixed or floating interest rates. This table is based on actual maturities and does not reflect
amortizations, projected paydowns or the earliest repricing for floating rate loans. Many loans have principal
paydowns scheduled in periods prior to the period in which they mature. In addition many variable rate loans
are subject to repricing in periods prior to the period in which they mature.
Loan and Lease Maturities
1 Year
or Less
Over 1
Through
5 Years
Over
5 Years
Total
(Dollars in thousands)
Real estate ............................................................... $739,141
99,132
Commercial, industrial and agricultural ...................
22,028
Consumer .................................................................
1,717
Direct financing leases .............................................
Other ........................................................................
885
Total ................................................................. $862,903
Fixed rate ................................................................. $348,761
353,860
Floating rate (not at a floor or ceiling rate) ..............
153,922
Floating rate (at floor rate) ......................................
Floating rate (at ceiling rate) ...................................
6,360
Total ................................................................. $862,903
$689,506
82,385
59,496
50,512
640
$882,539
$509,743
230,997
119,279
22,520
$882,539
$104,030
14,050
6,343
1,217
53
$125,693
$ 80,365
36,815
3,702
4,811
$125,693
$1,532,677
195,567
87,867
53,446
1,578
$1,871,135
$ 938,869
621,672
276,903
33,691
$1,871,135
The following table reflects loans and leases as of December 31, 2007 grouped by expected amortizations,
expected paydowns or the earliest repricing opportunity for floating rate loans. This cash flow or repricing
schedule approximates the Company’s ability to reprice the outstanding principal of loans and leases either
by adjusting rates on existing loans and leases or reinvesting principal cash flow in new loans and leases.
Loan and Lease Cash Flows or Repricing
Over 3
Through
5 Years
(Dollars in thousands)
Over 1
Through
2 Years
Over 2
Through
3 Years
1 Year
or Less
Over
5 Years
Total
Fixed rate ................................... $ 403,493 $212,044
Floating rate (not at a floor
5,267
or ceiling rate) ........................
477
Floating rate (at floor rate) .........
-
Floating rate (at ceiling rate) ......
Total .................................... $1,328,761 $217,788
615,151
276,426
33,691
$143,002 $127,183 $53,147 $ 938,869
455
-
-
621,672
276,903
33,691
$143,457 $127,565 $53,564 $1,871,135
417
-
-
382
-
-
Percentage of total .....................
Cumulative percentage of total ...
71.0%
71.0
11.7%
82.7
7.6%
90.3
6.8%
97.1
2.9%
100.0
100.0%
Nonperforming Assets
Nonperforming assets consist of (1) nonaccrual loans and leases, (2) accruing loans and leases 90 days
or more past due, (3) certain restructured loans and leases providing for a reduction or deferral of interest
or principal because of a deterioration in the financial position of the borrower or lessee and (4) real estate
or other assets that have been acquired in partial or full satisfaction of loan or lease obligations or upon
foreclosure.
The Company generally places a loan or lease on nonaccrual status when payments are contractually
past due 90 days, or earlier when doubt exists as to the ultimate collection of payments. The Company may
continue to accrue interest on certain loans or leases contractually past due 90 days or more if such loans
or leases are both well secured and in the process of collection. At the time a loan or lease is placed on
nonaccrual status, interest previously accrued but uncollected is generally reversed and charged against
interest income. Nonaccrual loans and leases are generally returned to accrual status when payments are
20
less than 90 days past due and the Company reasonably expects to collect all payments. If a loan or lease
is determined to be uncollectible, the portion of the principal determined to be uncollectible will be charged
against the allowance for loan and lease losses. Income on nonaccrual loans or leases is recognized on a
cash basis when and if actually collected.
The following table presents information concerning nonperforming assets including nonaccrual and
restructured loans and leases, foreclosed assets held for sale and repossessions.
Nonperforming Assets
2007
2006
December 31,
2005
(Dollars in thousands)
2004
Nonaccrual loans and leases ........................................ $6,610
26
Accruing loans and leases 90 days or more past due ...
-
Restructured loans and leases .....................................
6,636
Total nonperforming loans and leases ..................
Foreclosed assets held for sale and repossessions(1) .........
3,112
Total nonperforming assets .................................. $9,748
$5,713
-
-
5,713
407
$6,120
$3,385
-
-
3,385
356
$3,741
$6,497
-
-
6,497
157
$6,654
2003
$4,235
-
-
4,235
780
$5,015
Nonperforming loans and leases
to total loans and leases ...........................................
Nonperforming assets to total assets ...........................
0.35%
0.36
0.34%
0.24
0.25%
0.18
0.57%
0.39
0.47%
0.36
(1) Foreclosed assets held for sale and repossessions are written down to estimated market value net of estimated selling
costs at the time of transfer from the loan and lease 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 net of estimated selling
costs, if lower, until disposition.
Allowance and Provision for Loan and Lease Losses
The Company’s allowance for loan and lease losses was $19.6 million at December 31, 2007, or 1.05%
of total loans and leases, compared with $17.7 million, or 1.06% of total loans and leases, at December 31,
2006. The allowance for loan and lease losses was $17.0 million, or 1.24% of loans and leases, at December
31, 2005. The increase in the allowance for loan and lease losses in recent years primarily reflects the
growth in the Company’s loan and lease portfolio. While the Company believes the current allowance is
adequate, changing economic and other conditions may require future adjustments to the allowance for
loan and lease losses.
Recent events in local and national real estate markets have increased certain lenders’ loss exposure. In
particular, many institutions participating in “subprime” lending products have experienced losses which, in
some cases, have been material to operating results. The Company’s loan portfolio is believed to have little
direct exposure to “subprime” lending products because it does not typically originate loans for its portfolio
which are “subprime” in nature. However lenders, such as the Company, engaged in financing construction
and development of residential houses and lots may be affected indirectly by conditions in the “subprime”
lending market to the extent that deterioration of this market has disqualified many potential home buyers
and reduced the availability of credit for home purchases.
The Company’s net charge-offs to average loans and leases were 24 bps in 2007 compared to 12 bps in
2006 and 11 bps in 2005. The relatively low level of net charge-offs in recent years has resulted in a decline
in the historical loss percentages used in the analysis of the adequacy of the allowance for loan and lease
losses. This has contributed to the decline in the Company’s allowance for loan and lease losses as a
percentage of outstanding loans and leases.
The amounts of provision to the allowance for loan and lease losses are based on the Company’s
analysis of the adequacy of the allowance for loan and lease losses utilizing the criteria discussed below.
The provision for loan and lease losses for 2007 was $6.2 million compared to $2.5 million in 2006 and
$2.3 million in 2005.
The Company’s increase in its provision for loan and lease losses and its net charge-offs for 2007
compared to 2006 were significantly impacted by generally slower economic conditions, including the
effects of higher energy prices, a slowdown in commercial real estate activity, deterioration in the residential
housing and mortgage markets and other factors. In addition, approximately $1.0 million, or 24% of net
charge-offs in 2007, and $1.3 million, or 21% of the provision for loan and lease losses during 2007,
21
related to inappropriate and unusual activity in the loan portfolio of a former loan officer who resigned in
lieu of termination in the fourth quarter of 2007. The problem assets identified in this former loan officer’s
portfolio also contributed to increases in the Company’s ratios of non-performing loans and leases to total
loans and leases, nonperforming assets to total assets and past due loans and leases at year end 2007.
An analysis of the allowance for loan and lease losses for the periods indicated is shown in the
following table.
Analysis of the Allowance for Loan and Lease Losses
Year Ended December 31,
2007
2006
2005
(Dollars in thousands)
2004
2003
Balance, beginning of period ....................................... $17,699 $17,007 $16,133 $13,820 $10,936
Loans and leases charged off:
Real estate:
Residential 1-4 family .......................................
Non-farm/non-residential ..................................
Construction/land development .........................
Agricultural .......................................................
Total real estate ............................................
Commercial and industrial ......................................
Consumer ...............................................................
Direct financing leases ............................................
Agricultural (non-real estate) .................................
Total loans and leases charged off ................
124
132
58
-
314
872
709
63
107
2,065
215
182
796
37
1,230
1,798
1,046
367
203
4,644
196
47
-
-
243
706
785
-
50
1,784
167
201
29
-
397
346
503
-
31
1,277
288
433
44
5
770
632
450
-
23
1,875
Recoveries of loans and leases previously charged off:
Real estate:
20
Residential 1-4 family .......................................
6
Non-farm/non-residential ..................................
8
Construction/land development .........................
6
Agricultural .......................................................
40
Total real estate ............................................
35
Commercial and industrial ......................................
141
Consumer ...............................................................
-
Direct financing leases ............................................
18
Agricultural (non-real estate) .................................
234
Total recoveries .............................................
1,641
Net loans and leases charged off .................................
3,865
Provision charged to operating expense ......................
Allowance added in bank acquisition ..........................
660
Balance, end of period ................................................. $19,557 $17,699 $17,007 $16,133 $13,820
25
3
-
19
47
62
209
27
7
352
4,292
6,150
-
5
4
4
-
13
47
234
13
-
307
1,758
2,450
-
53
17
23
-
93
102
152
-
11
358
1,426
2,300
-
32
48
1
-
81
35
142
-
2
260
1,017
3,330
-
Net charge-offs to average loans and leases ................
Allowance for loan and lease losses to total
loans and leases .......................................................
Allowance for loan and lease losses to
nonperforming loans and leases ...............................
0.24%
0.12%
0.11% 0.10%
0.20%
1.05%
1.06%
1.24% 1.42%
1.52%
295%
310%
502%
248%
326%
Provisions to and the adequacy of the allowance for loan and lease losses are determined in accordance
with Statement of Financial Accounting Standards (“SFAS”) No. 114, “Accounting by Creditors for Impairment
of a Loan,” and SFAS No. 5, “Accounting for Contingencies,” and are based on the Company’s judgment
and evaluation of the loan and lease portfolio utilizing objective and subjective criteria. The objective criteria
utilized by the Company to assess the adequacy of its allowance for loan and lease losses and required
additions to such allowance consists primarily of an internal grading system and specific allowances
determined in accordance with SFAS No. 114. The Company also utilizes a peer group analysis and an
historical analysis in an effort to validate the overall adequacy of its allowance for loan and lease losses.
In addition to these objective criteria, the Company subjectively assesses the adequacy of the allowance for
loan and lease losses and the need for additions thereto, with consideration given to the nature and volume
of the portfolio, overall portfolio quality, review of specific problem loans and leases, national, regional and
22
local business and economic conditions that may affect borrowers’ or lessees’ ability to pay, the value of
collateral securing the loans and leases, and other relevant factors.
The Company’s internal grading system analysis assigns grades to all loans and leases except residential
1-4 family loans and consumer loans. Graded loans and leases are assigned to one of seven risk grades, with
each grade being assigned a specific allowance allocation percentage. The grade for each individual loan or
lease is determined by the account officer and other approving officers at the time the loan or lease is made
and changed from time to time to reflect an ongoing assessment of loan or lease risk. Grades are reviewed on
specific loans and leases from time to time by senior management and as part of the Company’s internal loan
review process. Residential 1-4 family and consumer loans are assigned an allowance allocation percentage
based on past due status. Allowance allocation percentages for the various risk grades and past due categories
are determined by management and are adjusted periodically. In determining these allowance allocation
percentages, management considers, among other factors, historical loss percentages for risk-rated loans
and leases, consumer loans and residential 1-4 family loans. Additionally, management considers a variety
of subjective criteria in determining the allowance allocation percentages.
All loans deemed to be impaired are evaluated individually. The majority of the Company’s impaired loans
are dependent upon collateral for repayment. Accordingly, impairment is generally measured by comparing
collateral value, net of holding and selling costs, to the current investment in the loan. For all other impaired
loans, the Company compares estimated discounted cash flows to the current investment in the loan. To the
extent that the Company’s current investment in a particular loan exceeds its estimated net collateral value
or its estimated discounted cash flows, the impaired amount is specifically considered in the determination
of the allowance for loan and lease losses, or is immediately charged off as a reduction of the allowance for
loan and lease losses.
The sum of all allowance amounts derived as described above, combined with a reasonable unallocated
allowance determined by management that reflects inherent but undetected losses in the portfolio and
imprecision in the allowance methodology, is utilized as the primary indicator of the appropriate level
of allowance for loan and lease losses. The portion of the allowance that is not derived by the allowance
allocation percentages compensates for the uncertainty and complexity in estimating loan and lease losses
including factors and conditions that may not be fully reflected in the determination and application of the
allowance allocation percentages. The factors and conditions evaluated in determining the unallocated
portion of the allowance may include the following: (1) general economic and business conditions affecting
key lending areas, (2) credit quality trends (including trends in nonperforming loans and leases expected to
result from existing conditions), (3) trends that could affect collateral values, (4) seasoning of the loan and
lease portfolio, (5) specific industry conditions affecting portfolio segments, (6) recent loss experience in
particular segments of the portfolio, (7) concentrations of credit to single borrowers or related borrowers or
to specific industries, or in specific collateral types in the loan and lease portfolio, including concentrations
of credit in commercial real estate loans, (8) the Company’s ongoing expansion into new markets, (9) the
offering of new loan and lease products, (10) expectations regarding the current business cycle, (11) bank
regulatory examination results and (12) findings of the internal loan review department. At December 31,
2007 management believed it was appropriate to maintain an unallocated portion of the allowance not
derived by the allowance allocation percentages that ranges from 15% to 25% of the total allowance for
loan and lease losses.
In addition to the internal grading system and specific impairment analysis, the Company compares
the allowance for loan and lease losses (as a percentage of total loans and leases) maintained by the Bank
to the peer group average percentage as shown on the most recently available Federal Deposit Insurance
Corporation’s (“FDIC”) Uniform Bank Performance Report and the Federal Reserve Bank’s (“FRB”) Bank
Holding Company Performance Report. The Company also compares the allowance for loan and lease losses
to its historical cumulative net charge-offs for the five preceding calendar years.
The Company’s allowance for loan and lease losses exceeds its cumulative historical net charge-off experience
for the last five years. However, the allowance is considered reasonable given the significant growth in the
loan and lease portfolio during recent years, key allowance and nonperforming loan and lease ratios, comparisons
to industry averages, current economic conditions in the Company’s market area and other factors.
Although the Company does not determine the overall allowance based upon the amount of loans or
leases in a particular type or category (except in the case of residential 1-4 family and consumer loans), risk
elements attributable to particular loan or lease types or categories are considered in assigning loan and lease
grades to individual loans and leases. These risk elements include the following: (1) for non-farm/non-
23
residential, multifamily residential, and agricultural real estate loans, the debt service coverage ratio (income
from the property in excess of operating expenses compared to loan repayment requirements), operating
results of the owner in the case of owner-occupied properties, the loan-to-value ratio, the age, condition,
value and marketability of the collateral and the specific risks and volatility of income, property value and
operating results typical of properties of that type; (2) for construction and land development loans, the
perceived feasibility of the project including the ability to sell developed lots or improvements constructed
for resale or ability to lease property constructed for lease, the quality and nature of contracts for presale or
preleasing, if any, experience and ability of the developer and loan-to-value ratios; (3) for commercial and
industrial loans and leases, the operating results of the commercial, industrial or professional enterprise,
the borrower’s or lessee’s business, professional and financial ability and expertise, the specific risks and
volatility of income and operating results typical for businesses in the applicable industry and the age, value,
nature and marketability of collateral; and (4) for non-real estate agricultural loans and leases, the operating
results, experience and ability of the borrower or lessee, historical and expected market conditions and the
age, value, nature and marketability of collateral. In addition, for each category the Company considers
secondary sources of income and the financial strength of the borrower or lessee and any guarantors.
The Board of Directors reviews the analysis of the adequacy of the allowance for loan and lease losses on
a quarterly basis to determine whether the amount of monthly provisions are adequate or whether additional
provisions should be made to the allowance. While the allowance is determined by (i) management’s
assessment and grading of individual loans and leases in the case of loans and leases other than residential
1-4 family loans and consumer loans, (ii) the past due status of residential 1-4 family loans and consumer
loans and (iii) allowances made for specific loans and leases, the total allowance amount is available to
absorb losses across the Company’s entire loan and lease portfolio.
The following table sets forth the sum of the amounts of the allowance for loan and lease losses attributable
to individual loans and leases within each category, or loan and lease categories in general, and the
unallocated allowance. The table also reflects the percentage of loans and leases in each category to the
total portfolio of loans and leases for each of the periods indicated. These allowance amounts have been
computed using the Company’s internal grading system and specific impairment analysis. The amounts
shown are not necessarily indicative of the actual future losses that may occur within particular categories.
Allocation of the Allowance for Loan and Lease Losses
2007
2006
% of
Loans
and
% of
Loans
and
December 31,
2005
% of
Loans
and
2004
2003
% of
Loans
and
% of
Loans
and
Allowance Leases Allowance Leases
Allowance Leases Allowance Leases Allowance Leases
Real estate:
Residential 1-4 family ................... $ 2,217
3,470
Non-farm/non-residential ..............
5,192
Construction/land development ......
791
Agricultural ...................................
198
Multifamily residential ...................
1,439
Commercial and industrial ...............
2,280
Consumer ........................................
335
Direct financing leases .....................
142
Agricultural (non-real estate) ..........
65
Other ...............................................
Unallocated allowance .....................
3,428
Total ......................................... $19,557
(Dollars in thousands)
14.9% $ 3,052
3,085
23.8
3,381
36.6
765
4.9
272
1.7
1,373
9.3
2,179
4.7
305
2.8
150
1.2
77
0.1
3,060
$17,699
16.8% $ 3,423
3,368
25.9
2,820
30.7
562
5.2
235
3.0
1,111
8.9
2,062
5.1
286
3.0
200
1.3
41
0.1
2,899
$17,007
19.8% $ 3,427
3,107
27.4
1,881
26.8
510
5.5
226
2.2
1,004
8.0
1,752
5.8
170
2.8
164
1.5
25
0.2
3,867
$16,133
21.9% $ 1,393
3,790
29.1
1,301
21.6
756
5.8
261
2.6
1,600
8.9
1,083
6.5
72
1.7
195
1.6
952
0.3
2,417
$13,820
24.1%
31.4
12.9
6.8
2.6
12.3
7.1
0.4
1.7
0.7
The Company maintains an internally classified loan and lease list that, along with the list of nonaccrual
loans and leases and the list of impaired loans and leases, helps management assess the overall quality of
the loan and lease portfolio and the adequacy of the allowance. Loans and leases classified as “substandard”
have clear and defined weaknesses such as highly leveraged positions, unfavorable financial ratios, uncertain
repayment sources or poor financial condition which may jeopardize collectability of the loan or lease. Loans
and leases classified as “doubtful” have characteristics similar to substandard loans and leases, but also
have an increased risk that a loss may occur or at least a portion of the loan or lease may require a charge-
off if liquidated. Although loans and leases classified as substandard do not duplicate loans and leases
24
classified as doubtful, both substandard and doubtful loans and leases may include some that are past due
at least 90 days, are on nonaccrual status or have been restructured. Loans and leases classified as “loss”
are charged off. At December 31, 2007 substandard loans and leases not designated as nonaccrual or 90
days past due totaled $10.0 million compared to $5.4 million at December 31, 2006. No loans or leases
were designated as doubtful or loss at December 31, 2007 or 2006.
Administration of the Bank’s lending function is the responsibility of the Chief Executive Officer and
certain senior lenders. Such officers perform their lending duties subject to the oversight and policy direction
of the Board of Directors and the loan committee. Loan or lease authority is granted to the Chief Executive
Officer and certain other senior officers as determined by the Board of Directors. Loan or lease authorities
of other lending officers are assigned by the Chief Executive Officer.
Loans or leases and aggregate loan and lease relationships exceeding $3.0 million up to the legal lending
limit of the Bank are authorized by the loan committee, which during 2007 consisted of any five or more
directors and three of the Bank’s senior officers. The Company’s loan committee, at least quarterly, reviews
various loan and lease concentration reports and various other loan and lease reports. At least quarterly the
Board of Directors reviews reports of loan and lease originations and commitments over $100,000, past due
loans and leases, internally classified and watch list loans and leases, a summary of the activity in the
Company’s allowance for loan and lease losses and various other loan and lease reports.
The Company’s compliance and loan review officers are responsible for the Bank’s compliance and loan
review areas. Periodic reviews are scheduled for the purpose of evaluating asset quality and effectiveness
of loan and lease administration. The compliance and loan review officers prepare reports which identify
deficiencies, establish recommendations for improvement and outline management’s proposed action plan
for curing the identified deficiencies. These reports are provided to and reviewed by the Company’s audit
committee. Additionally, the reports issued by the Company’s loan review function are provided to and
reviewed by the Company’s loan committee.
Investment Securities
The Company’s investment securities portfolio provides a significant source of revenue for the Company.
At December 31, 2007, 2006 and 2005, the Company classified all of its investment securities portfolio as
available for sale. Accordingly, its investment securities are stated at estimated fair value in the consolidated
financial statements with the unrealized gains and losses, net of tax, reported as a separate component of
stockholders’ equity and included in other comprehensive income (loss). The Company’s investments in
FHLB and Arkansas Bankers’ Bancorporation, Inc. (“ABB”) stock do not have readily determinable fair
values and are carried at cost.
The following table presents the amortized cost and the fair value of investment securities for the
dates indicated.
Investment Securities
2007
December 31,
2006
2005
Amortized
Cost
Fair
Value(1)
Amortized
Cost
Fair
Value(1)
Amortized
Cost
Fair
Value(1)
(Dollars in thousands)
Mortgage-backed securities .................... $370,061 $344,346 $406,611 $397,964 $266,722 $258,540
Obligations of states and political
231,681
subdivisions .......................................
65,503
Securities of U.S. Government agencies ..
16,020
FHLB and ABB stock ................................
Other securities .......................................
2,376
Total ............................................ $603,179 $578,348 $628,230 $620,132 $578,355 $574,120
227,286
66,027
16,020
2,300
135,149
74,530
11,489
1,000
133,255
75,875
11,489
1,000
166,467
49,738
16,753
1,044
163,339
51,982
16,753
1,044
(1) The fair value of the Company’s investment securities is obtained from an independent pricing service and 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 or other pricing methodologies.
25
The Company’s mortgage-backed securities portfolio consists of collateralized mortgage obligations
(“CMOs”) issued by either the Federal National Mortgage Association (“FNMA”) or the Federal Home Loan
Mortgage Corporation (“FHLMC”). Each CMO is “AAA”-rated with no underlying collateral consisting of
“subprime” or “Alt-A” mortgages. The Company’s portfolio of state and political subdivision investment
securities consists of both revenue and general obligation bonds issued by municipalities or other political
subdivisions, 95.8% of which are in the State of Arkansas and 4.2% of which are in other states. The
Company’s portfolio of U.S. Government agency investment securities consists primarily of callable Federal
Home Loan Bank bonds which are being called in the first quarter of 2008.
The following table reflects the maturity distribution of the Company’s investment securities, at fair value,
as of December 31, 2007 and weighted-average yields (for tax-exempt obligations on a FTE basis) of such
securities. The maturity for all investment securities is shown based on each security’s contractual maturity
date, except (1) equity securities with no contractual maturity date which are shown in the longest maturity
category, (2) mortgage-backed securities which are allocated among various maturities based on an estimated
repayment schedule utilizing Bloomberg median prepayment speeds based on interest rate levels at December
31, 2007 and (3) callable investment securities for which the Company has received notification of call are
included in the maturity category in which the call occurs or is expected to occur. Actual maturities will differ
from contractual maturities because issuers may have the right to call or prepay obligations with or without
call or prepayment penalties.
Maturity Distribution of Investment Securities
1 Year
or
Less
Over 1
Through
5 Years
Over 5
Through
10 Years
Over
10
Years
(Dollars in thousands)
Total
Mortgage-backed securities .............................. $32,044 $124,788 $187,514
27,056
Obligations of states and political subdivisions ...
Securities of U.S. Government agencies(1) .........
7,647
Other securities(2) .............................................
-
Total ............................................................ $72,763 $146,017 $222,217
17,257
3,972
-
2,600
38,119
-
$ - $344,346
166,467
119,554
49,738
-
17,797
17,797
$137,351 $578,348
Percentage of total ...........................................
Weighted-average yield - FTE(3) ........................
12.58%
5.16
25.25%
5.41
38.42%
5.52
23.75% 100.00%
7.25
5.86
(1) Includes approximately $28.7 million of callable Federal Home Loan Bank bonds, which contain contractual
maturity dates after December 31, 2008 where the Company has received notification of call to occur during the
first quarter of 2008. Accordingly, these bonds are shown in the “1 Year or Less” category.
(2) Includes approximately $16.7 million of FHLB stock which has historically paid quarterly dividends at a variable
rate approximating the federal funds rate.
(3) The weighted-average yields - FTE are based on amortized cost.
Deposits
The Company’s lending and investing activities are funded primarily by deposits. The Company’s total
deposits increased 0.6% to $2.06 billion at December 31, 2007, compared to $2.05 billion at December 31,
2006. These deposit totals included brokered deposits of $381.3 million at December 31, 2007 and $309.2
million at December 31, 2006.
Total deposits at December 31, 2007 consisted of 67.0% time deposits and 33.0% demand and savings
deposits. Total deposits at December 31, 2006 consisted of 66.4% time deposits and 33.6% demand and
savings deposits. Interest bearing deposits other than time deposits consist of transaction, savings and
money market accounts. These deposits comprised 25.1% of total deposits at December 31, 2007 and
25.4% at December 31, 2006. Non-interest bearing demand deposits constituted 7.9% of total deposits
at December 31, 2007 compared to 8.2% at December 31, 2006.
26
The following table reflects the average balance and average rate paid for each deposit category shown
for the years ended December 31, 2007, 2006 and 2005.
Average Deposit Balances and Rates
2007
Average Average
Balance Rate Paid
Year Ended December 31,
2006
Average Average
Balance Rate Paid
(Dollars in thousands)
2005
Average Average
Balance Rate Paid
Non-interest bearing accounts .......... $ 168,786
Interest bearing accounts:
403,288
Transaction (NOW) ........................
25,746
Savings ..........................................
92,841
Money market ................................
487,382
Time deposits less than $100,000 ....
Time deposits $100,000 or more .....
899,666
Total deposits ............................. $2,077,709
-
$ 152,281
-
$ 138,072
-
2.48%
0.22
3.95
4.84
5.10
404,433
27,107
91,784
398,178
752,765
$1,826,548
2.55%
0.20
3.65
4.15
4.67
375,361
27,265
63,983
299,104
542,378
$1,446,163
1.48%
0.20
2.23
2.68
3.00
The following table sets forth, by time remaining to maturity, time deposits in amounts of $100,000 and
over at December 31, 2007.
Maturity Distribution of Time Deposits of $100,000 and Over
December 31, 2007
(Dollars in thousands)
3 months or less ................................................... $353,974
166,992
Over 3 to 6 months ...............................................
310,858
Over 6 to 12 months .............................................
74,851
Over 12 months ....................................................
$906,675
The amount and percentage of the Company’s deposits by state are reflected in the following table.
Deposits by State
Deposits Attributable
to Offices In
2007
Amount
%
December 31,
2006
Amount
(Dollars in thousands)
%
2005
Amount
%
Arkansas ......................................... $1,922,746
134,315
Texas ...............................................
Total .......................................... $2,057,061 100.0%
93.5%
6.5
$1,943,638
101,454
95.0%
5.0
$1,482,752
108,891
93.2%
6.8
$2,045,092 100.0%
$1,591,643 100.0%
Other Interest Bearing Liabilities
The Company also relies on other interest bearing liabilities to fund its lending and investing activities.
Such liabilities consist of repurchase agreements with customers, other borrowings (primarily FHLB advances
and federal funds purchased) and subordinated debentures.
Total other interest bearing liabilities were $447.6 million at December 31, 2007, an increase of $147.0
million from $300.6 million at December 31, 2006. Repurchase agreements with customers increased to $46.1
million at December 31, 2007 from $41.0 million at December 31, 2006. Subordinated debentures totaled
$64.9 million at both December 31, 2007 and 2006. Other borrowings, including FHLB advances and federal
funds purchased, increased to $336.5 million at December 31, 2007 from $194.7 million at December 31,
2006 as the Company utilized lower cost FHLB advances to fund growth in earning assets during 2007.
27
Interest Rate Risk
Interest rate risk results from timing differences in the repricing of assets and liabilities or from changes
in relationships between interest rate indexes. The Company’s interest rate risk management is the
responsibility of the ALCO and Investments Committee (“ALCO”) which reports to the Board of Directors.
The ALCO oversees the asset/liability (interest rate risk) position, liquidity and funds management, and
investment portfolio functions of the Company.
The Company regularly reviews its exposure to changes in interest rates. Among the factors considered
are changes in the mix of interest earning assets and interest bearing liabilities, interest rate spreads and
repricing periods. Typically, the ALCO reviews on at least a quarterly basis the Company’s relative ratio of
rate sensitive assets (“RSA”) to rate sensitive liabilities (“RSL”) and the related cumulative gap for different
time periods. However, the primary tool used by ALCO to analyze the Company’s interest rate risk and
interest rate sensitivity is an earnings simulation model.
This earnings simulation modeling process projects a baseline net interest income (assuming no changes
in 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. This model incorporates a number of factors including: (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 interest
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) existing
and expected 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 relevant
factors. Inclusion of these factors in the model is intended to more accurately project the Company’s
expected changes in net interest income resulting from interest rate changes. The Company models its
change in net interest income assuming interest rates go up 100 bps, up 200 bps, down 100 bps and down
200 bps. For purposes of this model, the Company has assumed that the change in interest rates phases in
over a 12-month period. While the Company believes this model provides a reasonably accurate projection
of its interest rate risk, the model includes a number of assumptions and predictions which may or may not
be correct and may impact the model results. These assumptions and predictions include inputs to compute
baseline net interest income, growth rates, expected changes in administered rates on interest bearing
deposit accounts, competition and a variety of other factors that are difficult to accurately predict.
Accordingly, there can be no assurance the earnings simulation model will accurately reflect future results.
The following table presents the earnings simulation model’s projected impact of a change in interest
rates on the projected baseline net interest income for the 12-month period commencing January 1, 2008.
This change in interest rates assumes parallel shifts in the yield curve and does not take into account
changes in the slope of the yield curve.
Earnings Simulation Model Results
Change in
Interest Rates
(in bps)
% Change in
Projected Baseline
Net Interest Income
+200
+100
-100
-200
1.4%
1.0
(2.1)
(4.4)
In the event of a shift in interest rates, the Company 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 interest earning assets and interest bearing
liabilities, seeking alternative funding sources or investment opportunities and modifying the pricing or
terms of loans and leases and deposits.
28
Impact of Inflation and Changing Prices
The consolidated financial statements and related notes presented elsewhere in the report have been
prepared in accordance with accounting principles generally accepted in the United States. This requires the
measurement of financial position and operating results in terms of historical dollars without considering the
changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies,
nearly all the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a
greater impact on the Company’s performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the prices of goods and services.
Capital Compliance
Bank regulatory authorities in the United States impose certain capital standards on all bank holding
companies and banks. These capital standards require compliance with certain minimum “risk-based capital
ratios” and a minimum “leverage ratio.” The risk-based capital ratios consist of (1) Tier 1 capital (common
stockholders’ equity excluding goodwill, certain intangibles and net unrealized gains and losses on available-
for-sale investment securities, but including, subject to limitations, trust preferred securities and other
qualifying items) to risk-weighted assets and (2) total capital (Tier 1 capital plus Tier 2 capital which
includes the qualifying portion of the allowance for loan and lease 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 consolidated risk-based capital and leverage ratios exceeded these minimum requirements
at December 31, 2007 and 2006 and are presented in the following table, followed by the capital ratios of the
Bank at December 31, 2007 and 2006.
Consolidated Capital Ratios
December 31,
2006
2007
(Dollars in thousands)
Tier 1 capital:
Stockholders’ equity ................................................................................... $ 190,829
63,000
Allowed amount of trust preferred securities ..............................................
15,091
Net unrealized losses on available-for-sale investment securities...............
(5,877)
Less goodwill and certain intangible assets ................................................
263,043
Total Tier 1 capital ...................................................................................
$ 174,633
59,851
4,922
(6,140)
233,266
Tier 2 capital:
3,149
Remaining amount of trust preferred securities ..........................................
Qualifying allowance for loan and lease losses ...........................................
17,699
Total risk-based capital ........................................................................... $ 282,600 $ 254,114
Risk-weighted assets ....................................................................................... $2,230,309 $1,991,570
Adjusted quarterly average assets - fourth quarter .......................................... $2,683,323 $2,485,450
Ratios at end of period:
-
19,557
Leverage .....................................................................................................
Tier 1 risk-based capital ..............................................................................
Total risk-based capital ...............................................................................
Minimum ratio guidelines:
Leverage(1) ..................................................................................................
Tier 1 risk-based capital ..............................................................................
Total risk-based capital ...............................................................................
9.80%
11.79
12.67
3.00%
4.00
8.00
9.39%
11.71
12.76
3.00%
4.00
8.00
(1) Regulatory authorities require institutions to operate at varying levels (ranging from 100-200 bps) above a
minimum leverage ratio of 3% depending upon capitalization classification.
Bank Capital Ratios
December 31,
2007
(Dollars in thousands)
2006
Stockholders’ equity - Tier 1 capital .................................................................
Leverage ratio ..................................................................................................
Tier 1 risk-based capital ratio ..........................................................................
Total risk-based capital ratio ............................................................................
$236,122
$196,816
8.82%
10.63
11.51
7.95%
9.94
10.83
29
Liquidity and Capital Resources
Growth and Expansion. During 2007 the Company added three new Arkansas banking offices, including
offices in Hot Springs, Fayetteville and Rogers. In addition to these three permanent banking offices, the
Company replaced a temporary office in Frisco, Texas with a new permanent facility. During 2006 the
Company added nine Arkansas and two Texas banking offices, replaced a temporary office with a new
permanent facility, replaced one of its oldest banking offices with a new facility, and closed one facility.
At December 31, 2007, the Company had 65 Arkansas banking offices, five Texas banking offices and
loan production offices in Little Rock, Arkansas and Charlotte, North Carolina.
The Company expects to continue its growth and de novo branching strategy. During 2008 the Company
expects to add approximately three new banking offices, including its new corporate headquarters which is
expected to open late in the fourth quarter of 2008. Opening new offices is subject to availability of suitable
sites, hiring qualified personnel, obtaining regulatory and other approvals and many other conditions and
contingencies that the Company cannot predict with certainty. The Company may increase or decrease its
expected number of new offices as a result of a variety of factors including the Company’s financial results,
changes in economic or competitive conditions or other factors.
During 2007 the Company spent $18.8 million on capital expenditures for premises and equipment. The
Company’s capital expenditures for 2008 are expected to be in the range of $20 to $26 million, including
progress payments on construction projects expected to be completed in 2008 or 2009, furniture and
equipment costs and acquisition of sites for future development. Actual expenditures may vary significantly
from those expected, depending on the number and cost of additional branch offices constructed and sites
acquired for future development, progress or delays encountered on ongoing and new construction projects,
delays in or inability to obtain required approvals and other factors.
Subordinated Debentures. At December 31, 2007, the Company had an aggregate of $64.9 million of
subordinated debentures and related trust preferred securities outstanding consisting of $20.6 million of
subordinated debentures and securities issued in 2006 that bear interest, adjustable quarterly, at LIBOR plus
1.60%, $15.4 million of subordinated debentures and securities issued in 2004 that bear interest, adjustable
quarterly, at LIBOR plus 2.22% and $28.9 million of subordinated debentures and securities issued in 2003
that bear interest, adjustable quarterly, at a weighted-average rate of LIBOR plus 2.925%. These subordinated
debentures and securities generally mature 30 years after issuance and may be prepaid at par, subject to
regulatory approval, on or after approximately five years from the date of issuance, or at an earlier date upon
certain changes in tax laws, investment company laws or regulatory capital requirements. These subordinated
debentures and the related trust preferred securities provide the Company additional regulatory capital to
support its expected future growth and expansion.
Bank Liquidity. Liquidity represents an institution’s ability to provide funds to satisfy demands from
depositors, borrowers and lessees by either converting assets into cash or accessing new or existing sources
of incremental funds. Liquidity risk arises from the possibility the Company may be unable to satisfy current
or future financial commitments. The ALCO has primary oversight for the Company’s liquidity and funds
management.
The objective of managing liquidity risk is to ensure the cash flow requirements resulting from depositor,
borrower and lessee demands, as well as operating cash needs of the Company, are met, and the cost of
funding such requirements and needs is reasonable. The Company maintains a liquidity risk management
policy and a contingency funding plan that include policies and procedures for managing liquidity risk.
Generally the Company relies on deposits, loan and lease repayments and repayments of its investment
securities as its primary sources of funds. The principal deposit sources utilized by the Company include
consumer, commercial and public funds customers in the Company’s markets and brokered deposits. The
Company has used these funds, together with FHLB advances and other borrowings, to make loans and
leases, acquire investment securities and other assets and to fund continuing operations.
30
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 and lease repayments are a relatively stable source of funds but are subject to the
borrowers’ and lessees’ ability to repay the loans and leases, which can be adversely affected by a number
of factors including changes in general economic conditions, adverse trends or events affecting business
industry groups or specific businesses, declines in real estate values or markets, business closings or lay-
offs, inclement weather, natural disasters and other factors. Furthermore, loans and leases 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, lease and deposit withdrawal demands or otherwise fund
operations. Such secondary sources include FHLB advances, secured and unsecured federal funds lines
of credit from correspondent banks and FRB borrowings.
At December 31, 2007 the Company had substantial unused borrowing availability. This availability was
primarily comprised of the following four options: (1) $236 million of available blanket borrowing capacity
with the FHLB, (2) $59 million of investment securities available to pledge for federal funds or other
borrowings, (3) $57 million of available unsecured federal funds borrowing lines and (4) up to $168
million from borrowing programs of the FRB.
The Company anticipates it will continue to rely primarily on deposits, loan and lease repayments and
repayments of its investment securities to provide liquidity. Additionally, where necessary, the sources
of borrowed funds described above will be used to augment the Company’s primary funding sources.
Net cash provided by operating activities totaled $42.7 million, $22.6 million and $32.1 million,
respectively, for the years ended December 31, 2007, 2006 and 2005. Net cash provided by operating
activities is comprised primarily of net income, adjusted for certain non-cash items and for changes in
operating assets and liabilities.
Net cash used by investing activities was $190.6 million in 2007, $384.7 million in 2006 and $404.7
million in 2005. The Company’s primary uses of cash for investing activities include net loan fundings,
which used $207.0 million, $306.6 million and $242.7 million, respectively, in 2007, 2006 and 2005,
purchases of premises and equipment in conjunction with its growth and de novo branching strategy,
which used $18.8 million, $31.0 million and $27.0 million, respectively, in 2007, 2006 and 2005 and
net activity in its investment securities portfolio, which provided $26.5 million in 2007, used $47.0 million
in 2006 and used $139.7 million in 2005.
Net cash provided by financing activities totaled $152.7 million, $364.2 million and $371.6 million,
respectively, for the years ended December 31, 2007, 2006 and 2005. The Company’s primary financing
activities include net increases in deposit accounts, which provided $12.0 million, $453.5 million and $211.7
million, respectively, in 2007, 2006 and 2005, and net proceeds from or repayments of other borrowings and
repurchase agreements with customers, which provided $147.0 million in 2007, used $104.9 million in 2006
and provided $163.2 million in 2005. In addition the Company paid cash dividends of $7.2 million, $6.7
million and $6.2 million, respectively, in 2007, 2006 and 2005. The Company’s financing activities for 2006
were also impacted by $20.6 million of proceeds received from the issuance of subordinated debentures.
Dividend Policy. In 2007 the Company paid dividends of $0.43 per share. In 2006 and 2005 the Company
paid dividends of $0.40 and $0.37 per share, respectively. In 2006 the per share dividend was $0.10 in each
of the quarters. In 2007 the per share dividend was $0.10 per quarter in the first and second quarters, $0.11
in the third quarter and $0.12 in the fourth quarter. In the first quarter of 2008, the Company paid a dividend
of $0.12 per share. The determination of future dividends on the Company’s common stock will depend on
conditions existing at that time. The Company’s goal is to continue at approximately the current level of
quarterly dividend with consideration given to future changes depending on the Company’s earnings, capital
and liquidity needs.
31
Contractual Obligations. The following table presents, as of December 31, 2007, significant fixed and
determinable contractual obligations to third parties by contractual date with no consideration given to
earlier call or prepayment features. Other obligations consist primarily of contractual obligations for capital
expenditures and other contractual obligations.
Contractual Obligations
1 Year
Over 1
Over 3
or
Through Through
Less
5 Years
3 Years
Over
5
Years
(Dollars in thousands)
Total
Time deposits(1) .................................................. $1,373,414 $101,277 $ 1,979 $ 81 $1,476,751
Deposits without a stated maturity(2) .................
679,530
Repurchase agreements with customers(1) .........
46,088
Other borrowings(1) ............................................
447,031
Subordinated debentures(1) ................................
190,248
3,920
Lease obligations ...............................................
Other obligations ...............................................
23,713
Total contractual obligations ......................... $2,158,037 $199,483 $32,795 $479,966 $2,867,281
679,530
46,088
31,056
5,309
534
22,106
-
-
309,078
165,557
2,250
-
-
-
86,219
9,684
696
1,607
-
-
20,678
9,698
440
-
(1) Includes unpaid interest through the contractual maturity on both fixed and variable rate obligations. The interest
associated with variable rate obligations is based upon interest rates in effect at December 31, 2007. The contractual
amounts to be paid on variable rate obligations are affected by changes in market rates. Future changes in market
interest rates could materially affect the contractual amounts to be paid.
(2) Includes interest accrued and unpaid through December 31, 2007.
Off-Balance Sheet Commitments. The following table details the amounts and expected maturities of
significant off-balance sheet commitments as of December 31, 2007. Commitments to extend credit do not
necessarily represent future cash requirements as these commitments may expire without being drawn.
Off-Balance Sheet Commitments
1 Year
or
Less
Commitments to extend credit(1) ... $218,772
6,635
Standby letters of credit ...............
Total commitments ............... $225,407
Over 1
Through
3 Years
$147,011
814
$147,825
Over 3
Through
5 Years
(Dollars in thousands)
$29,822
119
$29,941
Over
5
Years
$25,497
-
$25,497
Total
$421,102
7,568
$428,670
(1) Includes commitments to extend credit under mortgage interest rate locks of $8.4 million that expire in one year or less.
Critical Accounting Policy
The preparation of financial statements in conformity with accounting principles generally accepted in the
United States requires management to make estimates, assumptions and judgments that affect the amounts
reported in the consolidated financial statements. The Company’s determination of the adequacy of the
allowance for loan and lease losses involves a higher degree of judgment and complexity than its other
significant accounting policies discussed in Note 1 to the Notes to the Company’s Consolidated Financial
Statements. Accordingly, the Company considers the allowance for loan and lease losses to be a critical
accounting policy.
Provisions to and the adequacy of the allowance for loan and lease losses are determined in accordance
with SFAS No. 114 and SFAS No. 5, and are based on the Company’s evaluation of the loan and lease
portfolio utilizing objective and subjective criteria as described in this report. See the “Analysis of Financial
Condition” section of Management’s Discussion and Analysis for a detailed discussion of the Company’s
allowance for loan and lease losses. Changes in the criteria used in this evaluation or the availability of
new information could cause the allowance to be increased or decreased in future periods. In addition bank
regulatory agencies, as part of their examination process, may require adjustments to the allowance for loan
and lease losses based on their judgments and estimates.
32
See Note 1 of the Notes to the Consolidated Financial Statements for a discussion of recently issued
accounting pronouncements.
Recently Issued Accounting Standards
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 about economic, competitive and interest rate conditions, plans,
goals, beliefs, expectations and outlook for revenue growth, growth in income and earnings per share, net
interest margin, including the effects of the relatively flat to inverted yield curve and intense competition
and the goal of maintaining or improving net interest margin, net interest income, non-interest income,
including service charges on deposit accounts, mortgage lending and trust income, gains (losses) on sales
of investment securities and other assets, non-interest expense, including the cost of opening new offices,
achieving positive operating leverage by growing revenue at a faster rate than non-interest expense,
efficiency ratio, anticipated future operating results and financial performance, asset quality, nonperforming
loans and leases, nonperforming assets, net charge-offs, past due loans and leases, interest rate sensitivity,
including the effects of possible interest rate changes, future growth and expansion opportunities,
opportunities and goals for future market share growth, plans for opening new offices including a new
corporate headquarters, expected capital expenditures, loan, lease and deposit growth, changes in the
Company’s investment securities portfolio and other similar forecasts and statements of expectation. Words
such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan” 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, plans 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, potential delays or other problems in implementing the Company’s growth and expansion strategy
including delays in identifying satisfactory sites, hiring qualified personnel, obtaining regulatory or other
approvals, obtaining permits and designing, constructing and opening new offices; the ability to attract new
deposits, loans and leases; the ability to generate future revenue growth or to control future growth in non-
interest expense; interest rate fluctuations, including continued interest rate changes and/or changes in the
yield curve between short-term and long-term interest rates; competitive factors and pricing pressures,
including their effect on the Company’s net interest margin; general economic conditions, including their
effect on investment securities values, the creditworthiness of borrowers and lessees, collateral values and
the value of investment securities; changes in legal and regulatory requirements; adoption of new accounting
standards or changes in existing standards; and adverse results in future litigation 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.
33
Summary of Quarterly Results of
Operations, Common Stock Market Prices and Dividends
Unaudited
2007 - Three Months Ended
Mar. 31
June 30
Sept. 30
Dec. 31
(Dollars in thousands, except per share amounts)
Total interest income ........................................... $42,828
24,579
Total interest expense .........................................
18,249
Net interest income ......................................
1,100
Provision for loan and lease losses .....................
5,959
Non-interest income ............................................
12,138
Non-interest expense ..........................................
Income taxes .......................................................
3,449
Net income ................................................... $ 7,521
$44,128
24,837
19,291
1,250
5,623
11,876
3,702
$ 8,086
$44,917
25,246
19,671
1,100
5,419
11,732
3,856
$ 8,402
$45,096
24,690
20,406
2,700
5,975
12,507
3,437
$ 7,737
Per share:
Earnings - diluted ........................................ $ 0.45
0.10
Cash dividends .............................................
$ 0.48
0.10
$ 0.50
0.11
$ 0.46
0.12
Bid price per common share:
Low .............................................................. $ 28.55
32.67
High .............................................................
$ 27.53
30.68
$ 26.79
33.48
$ 26.11
33.00
2006 - Three Months Ended
Mar. 31
June 30
Sept. 30
Dec. 31
(Dollars in thousands, except per share amounts)
Total interest income ........................................... $33,781
16,343
Total interest expense .........................................
17,438
Net interest income ......................................
500
Provision for loan and lease losses .....................
6,164
Non-interest income ............................................
11,160
Non-interest expense ..........................................
Income taxes .......................................................
3,545
Net income ................................................... $ 8,397
$37,854
19,869
17,985
500
4,954
11,017
3,491
$ 7,931
$41,467
23,693
17,774
550
5,680
11,707
3,187
$ 8,010
$42,096
24,573
17,523
900
6,434
12,506
3,196
$ 7,355
Per share:
Earnings - diluted ........................................ $ 0.50
0.10
Cash dividends .............................................
$ 0.47
0.10
$ 0.48
0.10
$ 0.44
0.10
Bid price per common share:
Low .............................................................. $ 34.44
37.69
High .............................................................
$ 31.74
37.20
$ 29.96
34.63
$ 30.99
34.53
See Note 14 to Consolidated Financial Statements for discussion of dividend restrictions.
34
Company Performance
The graph below shows a comparison for the period commencing December 31, 2002 through December
31, 2007 of the cumulative total stockholder returns (assuming reinvestment of dividends) for the common
stock of the Company, the S&P Smallcap Index and the NASDAQ Financial Index, assuming a $100
investment on December 31, 2002.
Cumulative Return Comparison
$350
$300
$250
$200
$150
$100
$50
12/31/2002
12/31/2003
12/31/2004
12/31/2005
12/31/2006
12/31/2007
OZRK (Bank of the Ozarks, Inc.)
SML (S&P Smallcap Index)
NDF (NASDAQ Financial Index)
12/31/2002 12/31/2003 12/31/2004 12/31/2005 12/31/2006 12/31/2007
OZRK (Bank of the Ozarks, Inc.)
SML (S&P Smallcap Index)
NDF (NASDAQ Financial Index)
$100
$100
$100
$195
$139
$131
$297
$170
$151
$326
$183
$155
$295
$211
$177
$237
$210
$164
35
Report of Management on the Company’s
Internal Control Over Financial Reporting
February 22, 2008
Management of Bank of the Ozarks, Inc. is responsible for establishing and
maintaining adequate internal control over financial reporting. Internal control
over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with accounting principles
generally accepted in the United States. Internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of assets; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance
with accounting principles generally accepted in the United States, and that
receipts and expenditures are made only in accordance with authorizations of
management and directors; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, have been
detected. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies and procedures
may deteriorate.
Management of Bank of the Ozarks, Inc., including the Chief Executive Officer
and the Chief Financial Officer and Chief Accounting Officer, has assessed the
Company’s internal control over financial reporting as of December 31, 2007,
based on criteria for effective internal control over financial reporting described in
“Internal Control - Integrated Framework” issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, management
has concluded that the Company’s internal control over financial reporting was
effective as of December 31, 2007, based on the specified criteria.
The effectiveness of Bank of the Ozarks, Inc.’s internal control over financial
reporting has been audited by Crowe Chizek and Company LLC, an independent
registered public accounting firm, as stated in their report which is included herein.
George Gleason
Chairman and Chief Executive Officer
Paul Moore
Chief Financial Officer and Chief Accounting Officer
36
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Bank of the Ozarks, Inc.
We have audited Bank of the Ozarks, Inc.’s internal control over financial reporting as of
December 31, 2007, based on criteria established in Internal Control-Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria).
Bank of the Ozarks, Inc.’s management is responsible for maintaining effective internal control
over financial reporting, and for its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Report of Management on the Company’s
Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles and that
receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Bank of the Ozarks, Inc. maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2007, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet of Bank of the Ozarks, Inc. as of
December 31, 2007, and the related consolidated statements of income, stockholders’ equity and
cash flows for the year ended December 31, 2007, and our report dated February 22, 2008,
expressed an unqualified opinion thereon.
Brentwood, Tennessee
February 22, 2008
37
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Bank of the Ozarks, Inc.
We have audited the accompanying consolidated balance sheets of Bank
of the Ozarks, Inc. (the “Company”) as of December 31, 2007 and 2006 and
the related consolidated statements of income, stockholders’ equity, and cash
flows for each of the two years in the period ended December 31, 2007. These
financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Bank of the
Ozarks, Inc. at December 31, 2007 and 2006 and the results of its operations
and its cash flows for each of the two years in the period ended December 31,
2007, in conformity with accounting principles generally accepted in the
United States.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness
of Bank of the Ozarks, Inc.’s internal control over financial reporting as of
December 31, 2007, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated February 22, 2008, expressed an
unqualified opinion thereon.
Brentwood, Tennessee
February 22, 2008
38
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Bank of the Ozarks, Inc.
We have audited the accompanying consolidated statements of income,
stockholders’ equity, and cash flows for the year ended December 31, 2005.
These financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of operations
and cash flows of Bank of the Ozarks, Inc. for the year ended December 31,
2005, in conformity with accounting principles generally accepted in the
United States.
Dallas, Texas
March 9, 2006
39
Bank of the Ozarks, Inc.
CONSOLIDATED BALANCE SHEETS
ASSETS
Cash and due from banks
Interest earning deposits
Cash and cash equivalents
Investment securities - available for sale (“AFS”)
Loans and leases
Allowance for loan and lease losses
Net loans and leases
Premises and equipment, net
Foreclosed assets held for sale, net
Accrued interest receivable
Bank owned life insurance
Intangible assets, net
Other, net
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Demand non-interest bearing
Savings and interest bearing transaction
Time
Total deposits
Repurchase agreements with customers
Other borrowings
Subordinated debentures
Accrued interest payable and other liabilities
Total liabilities
Minority interest
Stockholders’ equity:
Preferred stock; $0.01 par value; 1,000,000 shares authorized;
no shares issued and outstanding
Common stock; $0.01 par value; 50,000,000 shares authorized;
16,818,240 and 16,746,540 shares issued and outstanding at
December 31, 2007 and 2006, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to the consolidated financial statements.
40
December 31,
2007
2006
(Dollars in thousands, except per share amounts)
$ 47,192
329
47,521
578,348
1,871,135
(19,557)
1,851,578
130,048
3,112
17,420
46,148
5,877
30,823
$2,710,875
$ 162,995
516,312
1,377,754
2,057,061
46,086
336,533
64,950
11,984
2,516,614
3,432
-
168
38,613
167,139
(15,091)
190,829
$2,710,875
$ 42,531
203
42,734
620,132
1,677,389
(17,699)
1,659,690
116,679
407
17,384
44,229
6,140
22,005
$2,529,400
$ 167,841
519,427
1,357,824
2,045,092
41,001
194,661
64,950
9,063
2,354,767
-
-
167
36,779
142,609
(4,922)
174,633
$2,529,400
Bank of the Ozarks, Inc.
CONSOLIDATED STATEMENTS OF INCOME
Interest income:
Loans and leases
Investment securities:
Taxable
Tax-exempt
Deposits with banks and federal funds sold
Total interest income
Interest expense:
Deposits
Repurchase agreements with customers
Other borrowings
Subordinated debentures
Total interest expense
Net interest income
Provision for loan and lease losses
Net interest income after provision
for loan and lease losses
Non-interest income:
Service charges on deposit accounts
Mortgage lending income
Trust income
Bank owned life insurance income
Gains on sales of investment securities
Other
Total non-interest income
Non-interest expense:
Salaries and employee benefits
Net occupancy and equipment
Other operating expenses
Total non-interest expense
Income before taxes
Provision for income taxes
Net income
Basic earnings per share
Diluted earnings per share
Year Ended December 31,
2007
2006
2005
(Dollars in thousands, except per share amounts)
$145,669
$121,462
$ 87,768
24,775
6,507
19
176,970
83,140
1,603
9,543
5,066
99,352
77,618
6,150
71,468
12,193
2,668
2,223
1,919
520
3,452
22,975
28,661
8,098
11,493
48,252
46,191
14,445
$ 31,746
$ 1.89
$ 1.89
25,346
8,380
10
155,198
16,998
8,104
11
112,881
65,345
1,312
13,953
3,868
84,478
70,720
2,450
68,270
10,217
2,918
1,947
1,832
3,917
2,400
23,231
27,506
7,030
11,854
46,390
31,314
450
9,848
2,693
44,305
68,576
2,300
66,276
9,875
3,034
1,673
1,816
213
2,641
19,252
23,477
6,254
10,349
40,080
45,111
13,418
$ 31,693
$ 1.90
$ 1.89
45,448
13,959
$ 31,489
$ 1.89
$ 1.88
See accompanying notes to the consolidated financial statements.
41
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Bank of the Ozarks, Inc.
Balances - January 1, 2005
Comprehensive income:
Common
Stock
Additional
Paid-In
Capital
Accumulated
Other
Retained Comprehensive
Income (Loss)
Earnings
Total
(Dollars in thousands, except per share amounts)
$165
$30,760
$ 92,262
$ (1,781)
$121,406
31,489
-
31,489
-
-
(639)
(154)
-
-
-
-
(2,574)
(639)
(154)
30,696
(6,151)
974
1,864
614
149,403
31,693
-
31,693
-
167
614
34,210
-
117,600
-
167
865
36,779
-
142,609
31,746
-
31,746
Net income
Other comprehensive income (loss):
Unrealized gains and losses on AFS investment
securities, net of $412 tax effect
Reclassification adjustment for gains and losses
included in income, net of $100 tax effect
Total comprehensive income
Cash dividends paid, $0.37 per share
Issuance of 170,250 shares of common
stock for exercise of stock options
Tax benefit on exercise of stock options
Compensation expense under stock-based
compensation plans
Balances - December 31, 2005
Comprehensive income:
Net income
Other comprehensive income (loss):
Unrealized gains and losses on AFS investment
securities, net of $21 tax effect
Reclassification adjustment for gains and losses
included in income, net of $1,537 tax effect
Total comprehensive income
Cash dividends paid, $0.40 per share
Issuance of 81,900 shares of common
stock for exercise of stock options
Tax benefit on exercise of stock options
Compensation expense under stock-based
compensation plans
Balances - December 31, 2006
Comprehensive income:
Net income
Other comprehensive income (loss):
Unrealized gains and losses on AFS investment
securities, net of $6,359 tax effect
Reclassification adjustment for gains and losses
included in income, net of $204 tax effect
Total comprehensive income
Cash dividends paid, $0.43 per share
Issuance of 71,700 shares of common
stock for exercise of stock options
Tax benefit on exercise of stock options
Compensation expense under stock-based
compensation plans
Balances - December 31, 2007
-
-
-
-
2
-
-
-
-
-
972
1,864
-
-
-
-
-
-
-
-
-
-
824
880
-
-
-
-
1
-
-
-
-
-
545
420
(6,151)
-
-
-
-
(6,684)
-
-
-
-
(7,216)
-
-
-
$168
869
$38,613
-
$167,139
See accompanying notes to the consolidated financial statements.
42
32
32
(2,380)
-
-
-
-
(4,922)
(2,380)
29,345
(6,684)
824
880
865
174,633
(9,853)
(9,853)
(316)
-
-
-
-
$(15,091)
(316)
21,577
(7,216)
546
420
869
$190,829
Bank of the Ozarks, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation
Amortization
Provision for loan and lease losses
Provision for losses on foreclosed assets
Net accretion of investment securities
Gains on sales of investment securities
Originations of mortgage loans for sale
Proceeds from sales of mortgage loans for sale
(Gains) losses on dispositions of premises and
equipment and other assets
Deferred income tax (benefit) expense
Increase in cash surrender value of bank owned
life insurance
Tax benefits on exercise of stock options
Compensation expense under stock-based compensation plans
Changes in assets and liabilities:
Accrued interest receivable
Other assets, net
Accrued interest payable and other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Proceeds from sales of investment securities AFS
Proceeds from maturities of investment securities AFS
Purchases of investment securities AFS
Net increase in loans and leases
Purchases of premises and equipment
Proceeds from disposition of premises and equipment
and other assets
Assets acquired for lease under operating leases
Cash received from (paid for) interests
in unconsolidated investments
Net cash used by investing activities
Cash flows from financing activities:
Net increase in deposits
Net proceeds from (repayments of) other borrowings
Net increase in repurchase agreements with customers
Proceeds from issuance of subordinated debentures
Proceeds from exercise of stock options
Tax benefits on exercise of stock options
Cash dividends paid
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents - beginning of year
Cash and cash equivalents - end of year
Year Ended December 31,
2007
2006
2005
(Dollars in thousands)
$ 31,746
$ 31,693
$ 31,489
3,286
262
6,150
122
(900)
(520)
(161,223)
163,296
(487)
(1,057)
(1,919)
(420)
869
(36)
88
3,413
42,670
56,240
40,383
(70,153)
(206,969)
(18,848)
6,949
-
3,024
262
2,450
75
(1,159)
(3,917)
(173,689)
170,485
89
(352)
(1,832)
(880)
865
(3,583)
(3,013)
2,098
22,616
157,954
51,469
(256,389)
(306,556)
(31,017)
1,561
-
2,770
262
2,300
32
(980)
(213)
(175,558)
176,439
(567)
21
(1,816)
(1,864)
614
(5,241)
(551)
4,917
32,054
9,013
124,721
(273,449)
(242,721)
(26,966)
5,553
(141)
1,839
(190,559)
(1,704)
(384,682)
(674)
(404,664)
11,969
141,872
5,085
-
546
420
(7,216)
152,676
4,787
42,734
$ 47,521
453,450
(110,205)
5,330
20,619
824
880
(6,684)
364,214
2,148
40,586
$ 42,734
211,713
160,800
2,448
-
974
1,864
(6,151)
371,648
(962)
41,548
$ 40,586
See accompanying notes to the consolidated financial statements.
43
Bank of the Ozarks, Inc.
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
1. Summary of Significant Accounting Policies
Organization - Bank of the Ozarks, Inc. (the “Company”) is a bank holding company headquartered in Little Rock,
Arkansas, which operates under the rules and regulations of the Board of Governors of the Federal Reserve System.
The Company owns a wholly-owned state chartered bank subsidiary - Bank of the Ozarks (the “Bank”), four 100%-
owned finance subsidiary business trusts - Ozark Capital Statutory Trust II (“Ozark II”), Ozark Capital Statutory
Trust III (“Ozark III”), Ozark Capital Statutory Trust IV (“Ozark IV”) and Ozark Capital Statutory Trust V (“Ozark V”)
(collectively, the “Trusts”) and, indirectly through the Bank, a subsidiary engaged in the development of real estate.
The Bank is subject to the regulation of certain federal and state agencies and undergoes periodic examinations by
those regulatory authorities. The Bank has banking offices located in northern, western, and central Arkansas, Frisco,
Dallas and Texarkana, Texas and loan production offices in Little Rock, Arkansas and Charlotte, North Carolina.
Basis of presentation, use of estimates and principles of consolidation - The preparation of financial statements
in conformity with accounting principles generally accepted in the United States requires management to make
estimates, assumptions and judgments that affect the amounts reported in the consolidated financial statements
and accompanying notes. Actual results could differ materially from those estimates. The consolidated financial
statements include the accounts of the Company, the Bank and the real estate investment subsidiary. Significant
intercompany transactions and amounts have been eliminated.
Subsidiaries in which the Company has majority voting interest (principally defined as owning a voting or
economic interest greater than 50%) or where the Company exercises control over the operating and financial
policies of the subsidiary through an operating agreement or other means are consolidated. Investments in
companies in which the Company has significant influence over voting and financing decisions (principally
defined as owning a voting or economic interest of 20% to 50%) and investments in limited partnerships
and limited liability companies where the Company does not exercise control over the operating and financial
policies are generally accounted for by the equity method of accounting. Investments in limited partnerships
and limited liability companies in which the Company’s interest is so minor such that it has virtually no
influence over operating and financial policies are generally accounted for by the cost method of accounting.
The Company, through investments in certain limited partnerships and limited liability companies, has
invested in (i) a venture capital fund to promote economic development in Arkansas and surrounding states
and (ii) low-income housing and new market tax credit projects to promote economic development and to
contribute to the enhancement of the communities it serves. Investments primarily consist of real estate
projects and providing working capital. The carrying value of these investments was $6.5 million and $6.6
million, respectively, at December 31, 2007 and 2006. As a limited partner or member in these investments,
the Company is allocated tax credits and deductions associated with the underlying projects. During 2007,
2006 and 2005 the Company’s aggregate federal and state income tax liability was reduced by $440,000,
$330,000 and $235,000, respectively, as a result of the allocation of such credits and deductions. The
Company evaluates the carrying value of these investments for impairment, which is generally based on
total credits and deductions allocated to date and total estimated credits and deductions remaining to be
allocated. As a result of such evaluation, the Company recorded impairment charges of $203,000, $223,000
and $191,000, respectively, during 2007, 2006 and 2005.
The voting interest approach is not applicable for entities that are not controlled through voting interests or
in which the equity investors do not bear the residual economic risk. In such instances, Financial Accounting
Standards Board (“FASB”) Interpretation No. 46 (Revised) (“FIN 46R”), “Consolidation of Variable Interest
Entities,” provides guidance on when the assets, liabilities and activities of a variable interest entity (“VIE”)
should be included in the Company’s consolidated financial statements. The provisions of FIN 46R require
a VIE to be consolidated by a company if that company is considered the primary beneficiary of the VIE’s
activities. The Company has determined that the 100%-owned finance subsidiary Trusts are VIEs, but that
the Company is not the primary beneficiary of the Trusts. Accordingly, the Company does not consolidate
the activities of the Trusts into its financial statements, but instead reports its ownership interests in the
Trusts as other assets and reports the subordinated debentures as a liability in the consolidated balance
sheets. The distributions on the subordinated debentures are reported as interest expense in the accompanying
consolidated statements of income.
Cash and cash equivalents - For cash flow purposes, cash and cash equivalents include cash on hand, amounts
due from banks and interest bearing deposits with banks.
Investment securities - Management determines the appropriate classification of investment securities at the
time of purchase and reevaluates such designation as of each balance sheet date. At December 31, 2007 and 2006,
the Company has classified all of its investment securities as available for sale (“AFS”).
44
AFS investment securities are stated at estimated fair value, with the unrealized gains and losses
determined on a specific identification basis. Such unrealized gains and losses, net of tax, are reported as a
separate component of stockholders’ equity and included in other comprehensive income (loss). Fair values
are obtained from an independent pricing service and are based on quoted market prices, where available.
If quoted market prices are not available, fair values are based on quoted market prices of comparable
instruments or other pricing methodologies. The Company also owns stock in the Federal Home Loan Bank
of Dallas (“FHLB”) and the Arkansas Bankers’ Bancorporation, Inc. (“ABB”). These securities do not have
readily determinable fair values and are carried at cost.
Declines in the fair value of investment securities below their cost are reviewed by the Company for other-
than-temporary impairment. Factors considered during such review include the length of time and extent
that fair value has been less than cost, the financial condition and near term prospects of the issuer, and
the Company’s ability and intent to hold the investment security for a period sufficient to allow for any
anticipated recovery in fair value.
Interest and dividends on investment securities, including the amortization of premiums and accretion
of discounts through maturity, or in the case of mortgage-backed securities, over the estimated life of the
security are included in interest income. Realized gains or losses on the sale of investment securities are
recognized on the specific identification method at the time of sale and are included in non-interest income.
Purchases and sales of investment securities are recognized on a trade-date basis.
Loans and leases - Loans that management has the intent and ability to hold for the foreseeable future or until
maturity or payoff are reported at their outstanding principal balance adjusted for any charge-offs, deferred fees
or costs on originated loans, and unamortized premiums or discounts on purchased loans. Interest on loans is
recognized on an accrual basis and is calculated using the simple interest method on daily balances of the
principal amount outstanding. Loan origination fees and costs are generally deferred and recognized as an
adjustment to yield on the related loan.
Leases are classified as either direct financing leases or operating leases, based on the terms of the
agreement. Direct financing leases are reported as the sum of (i) total future lease payments to be received,
net of unearned income, and (ii) estimated residual value of the leased property. Operating leases are
recorded at the cost of the leased property, net of accumulated depreciation. Income on direct financing
leases is included in interest income and is recognized on a basis that achieves a constant periodic rate
of return on the outstanding investment. Income on operating leases is recognized as non-interest income
on a straight-line basis over the lease term.
In the ordinary course of business, the Company has entered into off-balance sheet financial instruments
consisting of commitments to extend credit and letters of credit. Such financial instruments are recorded in
the financial statements when they are funded. Related fees are generally recognized when collected.
Mortgage loans held for sale are included in the Company’s loans and leases and totaled $5.4 million and
$6.7 million, respectively, at December 31, 2007 and 2006. Mortgage loans held for sale are carried at the
lower of cost or fair value. Gains and losses from the sales of mortgage loans are the difference between the
selling price of the loan and its carrying value, net of discounts and points, and are recognized when the
loan is sold to investors and servicing rights are released.
As part of its standard mortgage lending practice, the Company issues a written put option, in the form
of an interest rate lock commitment (“IRLC”), such that the interest rate on the mortgage loan is established
prior to funding. In addition to the IRLC, the Company also enters into a forward sale commitment (“FSC”)
for the sale of its mortgage loans originations to reduce its market risk on such originations in process.
The IRLC on mortgage loans held for sale and the FSC have been determined to be derivatives as defined
by Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments
and Hedging Activities,” as amended. Accordingly, the fair values of derivative assets and liabilities for the
Company’s IRLC and FSC are based primarily on the fluctuation of interest rates between the date on which
the IRLC and FSC were entered and year-end. At December 31, 2007 and 2006, the Company had recorded
IRLC and FSC derivative assets of $80,000 and $68,000, respectively, and had recorded corresponding
derivative liabilities of $80,000 and $68,000, respectively. The notional amounts of loan commitments
under the IRLC were $8.4 million and $8.2 million, respectively, at December 31, 2007 and 2006.
Allowance for loan and lease losses (“ALLL”) - The ALLL is established through a provision for such losses
charged against income. All or portions of loans or leases deemed to be uncollectible are charged against the
ALLL when management believes that collectibility of all or some portion of outstanding principal is unlikely.
Subsequent recoveries, if any, of loans or leases previously charged off are credited to the ALLL.
The ALLL is maintained at a level management believes will be adequate to absorb losses on existing loans
and leases that may become uncollectible. Provision to and the adequacy of the ALLL are determined in
45
accordance with SFAS No. 114, “Accounting by Creditors for Impairment of a Loan,” and SFAS No. 5, “Accounting
for Contingencies,” and are based on evaluations of the loan and lease portfolio utilizing objective and
subjective criteria. The objective criteria primarily include an internal grading system and specific allowances
determined in accordance with SFAS No. 114. The Company also utilizes a peer group analysis and an historical
analysis in an effort to validate the overall adequacy of its ALLL. The subjective criteria take into consideration
such factors as the nature, mix and volume of the portfolio, overall portfolio quality, review of specific problem
loans and leases, national, regional and local business and economic conditions that may affect the borrowers’
or lessees’ ability to pay, the value of collateral securing the loans and leases and other relevant factors.
Changes in any of these criteria or the availability of new information could require adjustment of the ALLL
in future periods. Except for the ALLL calculated under SFAS No. 114 for impaired loans and leases, no portion
of the Company’s ALLL is restricted to any individual loan or lease or group of loans or leases, and the entire
ALLL is available to absorb losses from any and all loans and leases.
The Company’s policy generally is to place a loan or lease on nonaccrual status when payment of principal
or interest is contractually past due 90 days, or earlier when concern exists as to the ultimate collection of
principal and interest. Nonaccrual loans or leases are generally returned to accrual status when principal and
interest payments are less than 90 days past due and the Company reasonably expects to collect all principal
and interest. The Company may continue to accrue interest on certain loans and leases contractually past due
90 days if such loans or leases are both well secured and in the process of collection.
All loans and leases deemed to be impaired are evaluated individually. The Company considers a loan or
lease to be impaired when, based on current information and events, it is probable that the Company will be
unable to collect all amounts due according to the contractual terms thereof. Substantially all nonaccrual loans
or leases and all loans or leases that have been restructured from their original contractual terms are considered
impaired. The majority of the Company’s impaired loans and leases are dependent upon collateral for repayment.
Accordingly, impairment is generally measured by comparing collateral value, net of holding and selling costs,
to the current investment in the loan or lease. For all other impaired loans and leases, the Company compares
estimated discounted cash flows to the current investment in the loan or lease. To the extent that the Company’s
current investment in a particular loan or lease exceeds its estimated net collateral value or its estimated
discounted cash flows, the impaired amount is specifically considered in the determination of the allowance for
loan and lease losses, or is immediately charged off as a reduction of the allowance for loan and lease losses.
The accrual of interest on impaired loans and leases is discontinued when, in management’s opinion, the
borrower or lessee may be unable to meet payments as they become due. When interest accrual is discontinued,
all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash
payments are received.
Premises and equipment - Premises and equipment are reported at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed on a straight-line basis over the estimated useful
lives of the related assets. Depreciable lives for the major classes of assets are generally 45 years for buildings
and 3 to 25 years for furniture, fixtures, equipment and certain building improvements. Leasehold improvements
are amortized over the shorter of the asset’s estimated useful life or the term of the lease. Accelerated depreciation
methods are used for income tax purposes. Maintenance and repair charges are expensed as incurred.
Foreclosed assets held for sale - Repossessed personal properties and real estate acquired through or in lieu
of foreclosure are initially recorded at the lesser of current principal investment or fair value less estimated
cost to sell at the date of repossession or foreclosure. Valuations of these assets are periodically reviewed by
management with the carrying value of such assets adjusted to the then estimated fair value net of estimated
selling costs, if lower, until disposition. Gains and losses from the sale of repossessions, foreclosed assets, and
other real estate are recorded in non-interest income, and expenses to maintain the properties are included in
non-interest expense.
Income taxes - The Company utilizes the asset and liability method in accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based upon the difference between the values of
the assets and liabilities as reflected in the financial statements and their related tax basis using enacted tax rates
in effect for the year or years in which the differences are expected to be recovered or settled. As changes in
tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
The Company files consolidated tax returns. The Bank provides for income taxes on a separate return basis
and remits to the Company amounts determined to be currently payable.
Bank owned life insurance (“BOLI”) - BOLI consists of life insurance purchased by the Company on a
qualifying group of officers with the Company designated as owner and beneficiary of the policies. The
earnings on BOLI policies is used to offset a portion of employee benefit costs. BOLI is carried at the policies’
cash surrender values with changes in cash surrender values reported in non-interest income.
46
Intangible assets - Intangible assets consist of goodwill, bank charter costs and core deposit intangibles.
Goodwill represents the excess purchase price over the fair value of net assets acquired in business
acquisitions. The Company had goodwill of $5.2 million at both December 31, 2007 and 2006. As required
by SFAS No. 142, the Company performed its annual impairment test of goodwill as of October 1, 2007.
This test indicated no impairment of the Company’s goodwill.
Bank charter costs represent costs paid to acquire a Texas bank charter and are being amortized over
20 years. Bank charter costs totaled $239,000 at both December 31, 2007 and 2006, less accumulated
amortization of $46,000 and $33,000 at December 31, 2007 and 2006, respectively.
Core deposit intangibles represent premiums paid for deposits acquired via acquisition and are being
amortized over 8 to 10 years. Core deposit intangibles totaled $2.3 million at both December 31, 2007 and
2006, less accumulated amortization of $1.9 million and $1.6 million at December 31, 2007 and 2006, respectively.
The aggregate amount of amortization expense for the Company’s core deposit and bank charter intangibles is
expected to be $214,000 in 2008; $110,000 per year in years 2009 - 2010; $56,000 in 2011; and $12,000 in 2012.
Earnings per share - Basic earnings per share is computed by dividing reported earnings available to
common stockholders by the weighted-average number of shares outstanding. Diluted earnings per share is
computed by dividing reported earnings available to common stockholders by the weighted-average number
of shares outstanding after consideration of the dilutive effect of the Company’s outstanding stock options.
Stock-based compensation - The Company has an employee stock option plan and a non-employee director
stock option plan, which are described more fully in Note 11. Effective January 1, 2006, the Company adopted
SFAS No. 123 (Revised 2004) (“SFAS No. 123R”) “Share-Based Payment,” to account for these stock option
plans. SFAS No. 123R eliminated the alternative to use the intrinsic value method of accounting for stock-
based compensation that was provided for under the provisions of Accounting Principles Board Opinion
No. 25. SFAS No. 123R requires entities to measure the cost of employee services received in exchange for
an award of equity instruments based on the grant-date fair value of the award. Such cost is to be recognized
over the vesting period of the award.
As allowed by SFAS No. 123R, the Company is using the modified prospective application. Accordingly,
the provisions of SFAS No. 123R apply to all new awards granted subsequent to December 31, 2005 and to
all awards outstanding on January 1, 2006 for which the requisite service had not been rendered. Since the
Company had previously adopted the fair value provisions of SFAS No. 123, as amended by SFAS No. 148,
in accounting for its stock options, the adoption of SFAS No. 123R did not have a material impact on the
Company’s financial position, results of operations or liquidity.
For the years ended December 31, 2007 and 2006, the Company recognized $869,000 and $865,000,
respectively, of non-interest expense as a result of applying the provisions of SFAS No. 123R to its stock
option plans. For the year ended December 31, 2005, the Company recognized $614,000 of non-interest
expense as a result of applying the provisions of SFAS No. 123, as amended by SFAS No. 148, to its stock
option plans. The effect on net income and earnings per share if the Company had applied the fair value
provisions of accounting for all of its stock-based employee compensation prior to the adoption of SFAS
No. 123R and SFAS No. 123, as amended, is provided in Note 11.
Segment disclosures - SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,”
establishes standards for reporting information about operating segments and related disclosures about
products and services, geographic areas and major customers. As the Company operates in only one segment
- community banking - SFAS No. 131 has no impact on the Company’s financial statements or its disclosure
of segment information. No revenues are derived from foreign countries and no single external customer
comprises more than 10% of the Company’s revenues.
Recent accounting pronouncements - In December 2007, the FASB issued SFAS No. 160, “Noncontrolling
Interests in Consolidated Financial Statements - an amendment of ARB No. 51.” SFAS No. 160 was issued
to improve the relevance, comparability, and transparency of consolidated financial information relative to
noncontrolling, or minority, interest. The provisions of SFAS No. 160 establish accounting and reporting
standards that clearly identify and distinguish between the interests of the parent and the noncontrolling
owners. SFAS No. 160 is effective for fiscal years, and interim periods within the fiscal years, beginning on
or after December 15, 2008. Management has not yet determined the impact, if any, that adoption of SFAS
No. 160 will have on the Company’s financial position, results of operations or liquidity.
In December 2007, the FASB issued SFAS No. 141 (revised 2007) (“SFAS No. 141R”), “Business Combinations.”
SFAS No. 141R replaces SFAS No. 141 and was issued to improve the comparability of the information that a
reporting entity provides in its financial reports about business combinations. The provisions of SFAS No. 141R
apply prospectively to business combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. Management has not yet determined the
47
impact, if any, that adoption of SFAS No. 141R will have on the Company’s financial position, results of
operations or liquidity in the event an acquisition is made by the Company on or after its effective date.
In December 2007, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin
(“SAB”) No. 110. SAB No. 110 amends and replaces Question 6 of Section D.2 of Topic 14, “Share-Based
Payments,” as amended, and expresses the views of the SEC staff regarding the use of a “simplified” method
in developing an estimate of expected term of “plain vanilla” share options in accordance with SFAS No.
123R. In particular, SAB No. 110 states that the SEC staff will continue to accept the use of a “simplified”
method beyond December 31, 2007 in situations where a company does not have sufficient data to provide a
reasonable basis upon which to estimate share option expected term. Management expects to continue to use
a “simplified” method, as allowed by SAB No. 110, in developing an estimate of expected term of its options
to purchase shares of the Company’s common stock until such time as sufficient historical data is available
to appropriately measure such expected share option term.
In November 2007, the SEC issued SAB No. 109, which amends and replaces Section DD of Topic 5,
“Miscellaneous Accounting.” SAB No. 109 expresses the views of the SEC staff regarding written loan
commitments that are accounted for at fair value through earnings in accordance with SAB No. 105 and
SFAS No. 133, as amended. SAB No. 109 requires the expected net future cash flows related to the associated
servicing of the loan be included in the measurement of such written loan commitments. The provisions of
SAB No. 109 are effective on a prospective basis to derivative loan commitments issued or modified in fiscal
quarters beginning after December 15, 2007. Management has determined the adoption of SAB No. 109 will
not have a material impact on the Company’s financial position, results of operations or liquidity.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities - Including an amendment of FASB Statement No. 115.” SFAS No. 159 permits entities
to choose to measure many financial instruments and certain other items at fair value with the objective of
improving financial reporting. The provisions of SFAS No. 159 provide entities the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and liabilities differently without having
to apply complex hedge accounting provisions. SFAS No. 159 is effective as of the beginning of an entity’s
first fiscal year that begins after November 15, 2007. Management does not expect SFAS No. 159 will have
a material impact on the Company’s financial position, results of operations or liquidity.
In September 2006 the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines
fair value, establishes a framework for measuring fair value in accounting principles generally accepted in
the United States, and expands disclosures about fair value measurements, with the intent of increasing
consistency and comparability in fair value measures and providing financial users with better information
about the extent to which fair value is used and their effect on earnings for the periods reported. The
provisions of SFAS No. 157 are effective for fiscal years beginning after November 15, 2007. Management
has not yet determined the impact, if any, that adoption of SFAS No. 157 will have on the Company’s
financial position, results of operations or liquidity.
In September 2006, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 06-5
(“EITF 06-5”), “Accounting for Purchases of Life Insurance - Determining the Amount That Could Be
Realized in Accordance with FASB Technical Bulletin No. 85-4.” The provisions of EITF 06-5 require that a
policyholder of a BOLI contract should (i) consider separately any additional amounts or limitations included
in the contractual terms of the policy other than the cash surrender value in determining the amount that
could be realized under the contract in accordance with Technical Bulletin No. 85-4, (ii) determine the
amount that could be realized under multiple contracts assuming surrender of each contract individually for
situations where surrender of all contracts provides the policyholder an amount greater than does surrender
of each contract individually, and (iii) not discount the cash surrender value component to be realized under
the contract when contractual restrictions or the ability to surrender a policy exist, as long as the policyholder
continues to participate in changes in the cash surrender value. EITF 06-5 was effective for fiscal years
beginning after December 15, 2006, and did not have a material impact on the Company’s financial position,
results of operations or liquidity.
In June 2006 the FASB issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes.”
FIN 48, as amended, clarifies the accounting for uncertainty in income taxes recognized in financial statements
by prescribing a recognition threshold and measurement attributes for the financial statement recognition
and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance
on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
The provisions of FIN 48 were effective for fiscal years beginning after December 15, 2006, and did not have
a material impact on the Company’s financial position, results of operations or liquidity.
Reclassifications - Certain reclassifications of 2006 and 2005 amounts have been made to conform with
the 2007 financial statements presentation. These reclassifications had no impact on prior years’ net income,
as previously reported.
48
2. Investment Securities
The following is a summary of the amortized cost and estimated fair values of investment securities, all
of which are classified as AFS:
Amortized
Cost
Gross
Gross
Unrealized Unrealized
Gains
(Dollars in thousands)
Losses
Estimated
Fair
Value
December 31, 2007:
Mortgage-backed securities ..................................... $370,061
163,339
Obligations of states and political subdivisions .......
51,982
Securities of U.S. Government agencies ...................
16,753
FHLB and ABB stock ...............................................
Other securities ........................................................
1,044
Total investment securities AFS ......................... $603,179
December 31, 2006:
Mortgage-backed securities ..................................... $406,611
133,255
Obligations of states and political subdivisions .......
75,875
Securities of U.S. Government agencies ...................
11,489
FHLB and ABB stock ...............................................
Other securities ........................................................
1,000
Total investment securities AFS ......................... $628,230
$ -
3,695
67
-
-
$3,762
$1,014
2,416
-
-
-
$3,430
$(25,715)
(567)
(2,311)
-
-
$(28,593)
$ (9,661)
(522)
(1,345)
-
-
$(11,528)
$344,346
166,467
49,738
16,753
1,044
$578,348
$397,964
135,149
74,530
11,489
1,000
$620,132
The following shows gross unrealized losses and estimated fair value of investment securities AFS,
aggregated by investment category and length of time that individual investment securities have been in a
continuous unrealized loss position:
Less than 12 Months
Estimated Unrealized
Fair Value
Losses
12 Months or More
Estimated Unrealized
Fair Value
Losses
(Dollars in thousands)
Total
Estimated Unrealized
Fair Value
Losses
December 31, 2007:
Mortgage-backed securities .... $167,457
Obligations of states and
political subdivisions .........
Securities of U.S. Government
agencies .............................
Total temporarily
impaired securities ......... $188,105
16,676
3,972
December 31, 2006:
Mortgage-backed securities .... $161,430
Obligations of states and
political subdivisions .........
Securities of U.S. Government
agencies .............................
Total temporarily
impaired securities ......... $189,191
18,022
9,739
$10,418
$176,830
$15,297
$344,287
$25,715
308
4
15,497
259
32,173
567
7,646
2,307
11,618
2,311
$10,730
$199,973
$17,863
$388,078
$28,593
$ 2,131
$180,914
$ 7,530
$342,344
$ 9,661
176
80
14,387
346
32,409
522
64,791
1,265
74,530
1,345
$ 2,387
$260,092
$ 9,141
$449,283
$11,528
In evaluating the Company’s unrealized loss positions for other-than-temporary impairment, management
considers the credit quality of the issuer, the nature and cause of the unrealized loss and the severity and
duration of the impairments. At December 31, 2007 and 2006, management determined the unrealized
losses were the result of fluctuations in interest rates and did not reflect deteriorations of the credit quality of
the investments. Accordingly, management believes that all of its unrealized losses on investment securities
are temporary in nature, and the Company has both the ability and intent to hold these investments until
maturity or until such time as fair value recovers above amortized cost.
49
A maturity distribution of investment securities AFS reported at amortized cost and estimated fair value as
of December 31, 2007 is as follows:
Amortized
Cost
(Dollars in thousands)
Estimated
Fair Value
Due in one year or less .........................................
Due after one year to five years ...........................
Due after five years to ten years ..........................
Due after ten years ..............................................
Total .................................................................
$ 44,026
186,234
238,045
134,874
$603,179
$ 41,646
177,134
222,217
137,351
$578,348
For purposes of this maturity distribution, all investment securities are shown based on their contractual
maturity date, except FHLB and ABB stock with no contractual maturity date which are shown in the longest
maturity category and mortgage-backed securities which are allocated among various maturities based on
an estimated repayment schedule utilizing Bloomberg median prepayment speeds and interest rate levels at
December 31, 2007. Expected maturities will differ from contractual maturities because issuers may have
the right to call or prepay obligations with or without call or prepayment penalties.
Sales activities of the Company’s investment securities AFS are summarized as follows:
2007
Year Ended December 31,
2006
(Dollars in thousands)
2005
Sales proceeds ...............................
$56,240
$157,954
$9,013
Gross realized gains .......................
Gross realized losses ......................
Net gains on sales .......................
$ 530
(10)
$ 520
$ 3,924
(7)
$ 3,917
$ 213
-
$ 213
Investment securities with carrying values of $502.8 million and $566.5 million at December 31, 2007
and 2006, respectively, were pledged to secure public funds and trust deposits and for other purposes
required or permitted by law.
3. Loans and Leases
The Company maintains a diversified loan and lease portfolio. The following is a summary of the loan
and lease portfolio by principal category:
Real estate:
Residential 1-4 family .....................................
Non-farm/non-residential ...............................
Construction/land development .........................
Agricultural ....................................................
Multifamily residential ....................................
Commercial and industrial .................................
Consumer ...........................................................
Direct financing leases .......................................
Agricultural (non-real estate) ............................
Other ..................................................................
Total loans and leases ..................................
December 31,
2007
2006
(Dollars in thousands)
$ 279,375
445,303
684,775
91,810
31,414
173,128
87,867
53,446
22,439
1,578
$1,871,135
$ 281,400
433,998
514,899
88,021
50,202
148,853
86,048
49,705
22,298
1,965
$1,677,389
The Company’s direct financing leases include estimated residual values of $1.8 million at December 31,
2007 and $2.3 million at December 31, 2006, and are presented net of unearned income totaling $8.2 million
and $8.3 million at December 31, 2007 and 2006, respectively. The above table includes deferred costs, net of
deferred fees, that totaled $1.8 million and $1.4 million at December 31, 2007 and 2006, respectively. Loans
and leases on which the accrual of interest has been discontinued aggregated $6.6 million and $5.7 million
at December 31, 2007 and 2006, respectively. Interest income recorded during 2007, 2006 and 2005 for non-
accrual loans and leases at December 31, 2007, 2006 and 2005 was $300,000, $264,000 and $126,000,
respectively. Under the original terms, these loans and leases would have reported $574,000, $486,000 and
$233,000 of interest income during 2007, 2006 and 2005, respectively.
50
4. Allowance for Loan and Lease Losses (“ALLL”)
The following is a summary of activity within the ALLL:
Balance - beginning of year ...........................................
Loans and leases charged off .........................................
Recoveries of loans and leases previously charged off....
Net loans and leases charged off ...................................
Provision charged to operating expense ........................
Balance - end of year .....................................................
2007
2005
Year Ended December 31,
2006
(Dollars in thousands)
$17,007
(2,065)
307
(1,758)
2,450
$17,699
$17,699
(4,644)
352
(4,292)
6,150
$19,557
$16,133
(1,784)
358
(1,426)
2,300
$17,007
Impairment of loans and leases having carrying values of $6.8 million ($6.6 million of which were on non-
accrual basis) at December 31, 2007 and $5.7 million (all of which were on a non-accrual basis) at December
31, 2006 has been recognized in conformity with SFAS No. 114. Impaired loans and leases had an allowance
allocated which totaled $1.1 million and $0.9 million at December 31, 2007 and 2006, respectively. The
average carrying value of these impaired loans and leases was $4.8 million, $3.9 million and $3.9 million
for the years ended December 31, 2007, 2006 and 2005, respectively.
Real estate and other collateral securing loans having a carrying value of $8.3 million and $1.5 million
were transferred to foreclosed assets held for sale in 2007 and 2006, respectively. The Company is not
committed to lend additional funds to debtors whose loans have been transferred to foreclosed assets.
5. Premises and Equipment
The following is a summary of premises and equipment:
Land .....................................................................
Construction in process .........................................
Buildings and improvements ................................
Leasehold improvements ......................................
Equipment ............................................................
Accumulated depreciation .....................................
Premises and equipment, net .............................
December 31,
2007
2006
(Dollars in thousands)
$ 55,722
6,124
62,376
5,786
18,963
148,971
(18,923)
$130,048
$ 53,837
2,432
53,371
5,904
17,114
132,658
(15,979)
$116,679
The Company capitalized $1.3 million, $1.0 million and $0.4 million of interest on construction projects
during the years ended December 31, 2007, 2006 and 2005, respectively. Included in occupancy expense is
rent of $657,000, $696,000 and $691,000 incurred under noncancelable operating leases in 2007, 2006 and
2005, respectively, for leases of real estate in connection with buildings and premises. These leases contain
certain renewal and purchase options according to the terms of the agreements. Future amounts due under
noncancelable operating leases at December 31, 2007 are as follows: $534,000 in 2008, $389,000 in 2009,
$307,000 in 2010, $220,000 in 2011, $220,000 in 2012 and $2,250,000 thereafter. Rental income
recognized during 2007, 2006 and 2005 for leases of buildings and premises and for equipment leased
under operating leases was $517,000, $638,000 and $624,000, respectively.
6. Deposits
The aggregate amount of time deposits with a minimum denomination of $100,000 was $906.7 million
and $877.9 million at December 31, 2007 and 2006, respectively.
The following is a summary of the scheduled maturities of all time deposits:
December 31,
2007
2006
(Dollars in thousands)
Up to one year ................................................. $1,284,475
89,860
Over one to two years ......................................
1,694
Over two to three years ....................................
651
Over three to four years ...................................
1,015
Over four to five years .....................................
Thereafter ........................................................
59
Total time deposits ........................................ $1,377,754
$1,324,361
28,262
3,830
645
693
33
$1,357,824
51
7. Borrowings
Short-term borrowings with original maturities less than one year include FHLB advances, Federal Reserve
Bank (“FRB”) borrowings, treasury, tax and loan note accounts and federal funds purchased. The following
is a summary of information relating to these short-term borrowings:
Average annual balance ......................................
December 31 balance ..........................................
Maximum month-end balance during year ..........
Interest rate:
Weighted-average - year ..................................
Weighted-average - December 31 .....................
December 31,
2007
2006
(Dollars in thousands)
$ 74,192
15,461
122,427
$221,300
133,427
280,784
5.06%
3.58
4.99%
5.23
At December 31, 2007 and 2006, the Company had FHLB advances with original maturities exceeding one
year of $321.1 million and $61.2 million, respectively. These advances bear interest at rates ranging from
3.16% to 6.43% at December 31, 2007, with a weighted-average rate of 4.34%, and are collateralized by a
blanket lien on a substantial portion of the Company’s real estate loans. At December 31, 2007, the Bank
had $236.3 million of unused FHLB borrowing availability.
FHLB advances of $60 million maturing in 2010 at a weighted-average rate of 6.27% and FHLB advances
of $105 million maturing in 2017 at a weighted-average rate of 3.93% are callable on a quarterly basis. FHLB
advances of $110 million maturing in 2017 at a weighted-average rate of 3.81% are callable quarterly beginning
in the first quarter of 2008. FHLB advances of $25 million maturing in 2017 at a weighted-average rate of
3.94% are callable quarterly beginning in the second quarter of 2008. FHLB advances of $20 million maturing
in 2017 at a weighted-average rate of 4.10% are callable quarterly beginning in the third quarter of 2008.
At December 31, 2007, aggregate annual maturities and weighted-average rates of FHLB advances with an
original maturity of over one year were as follows:
Maturity
2008
2009
2010
2011
2012
Thereafter
Amount
(Dollars in thousands)
$ 229
33
60,034
31
21
260,724
$321,072
Weighted-Average Rate
6.10%
4.81
6.27
4.80
4.64
3.90
4.34
8. Subordinated Debentures
At December 31, 2007 the Company had the following issues of trust preferred securities outstanding and
subordinated debentures owed to the Trusts:
Description
Ozark III
Ozark II
Ozark IV
Ozark V
Subordinated
Debentures
Owed to Trusts
Trust Preferred
Securities
of the Trusts
Interest Rate
at
December 31, 2007
$14,434
14,433
15,464
20,619
$64,950
(Dollars in thousands)
$14,000
14,000
15,000
20,000
$63,000
8.19%
7.73
7.24
6.59
Final Maturity Date
September 25, 2033
September 29, 2033
September 28, 2034
December 15, 2036
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, “2003 Securities”). The 2003
Securities bear interest, adjustable quarterly, at 90-day London Interbank Offered Rate (“LIBOR”) plus 2.95%
for Ozark III and 90-day LIBOR plus 2.90% for Ozark II. The aggregate proceeds of $28 million from the 2003
Securities were used to purchase an equal principal amount of adjustable rate subordinated debentures of the
Company that bear interest, adjustable quarterly, at 90-day LIBOR plus 2.95% for Ozark III and 90-day LIBOR
plus 2.90% for Ozark II (collectively,“2003 Debentures”).
On September 28, 2004, Ozark IV sold to investors in a private placement offering $15 million of adjustable
rate trust preferred securities (“2004 Securities”). The 2004 Securities bear interest, adjustable quarterly,
52
at 90-day LIBOR plus 2.22%. The $15 million proceeds from the 2004 Securities were used to purchase an
equal principal amount of adjustable rate subordinated debentures of the Company that bear interest,
adjustable quarterly, at 90-day LIBOR plus 2.22% (“2004 Debentures”).
On September 29, 2006 Ozark V sold to investors in a private placement offering $20 million of adjustable
rate trust preferred securities (“2006 Securities”). The Securities bear interest, adjustable quarterly, at 90-day
LIBOR plus 1.60%. The $20 million proceeds from the 2006 Securities were used to purchase an equal
principal amount of adjustable rate subordinated debentures of the Company that bear interest, adjustable
quarterly, at 90-day LIBOR plus 1.60% (“2006 Debentures”).
In addition to the issuance of these adjustable rate securities, Ozark II and Ozark III collectively sold $0.9
million, Ozark IV sold $0.4 million and Ozark V sold $0.6 million of trust common equity to the Company.
The proceeds from the sales of the trust common equity were used, respectively, to purchase $0.9 million of
2003 Debentures, $0.4 million of 2004 Debentures and $0.6 million of 2006 Debentures issued by the Company.
At both December 31, 2007 and 2006, the Company had an aggregate of $64.9 million of subordinated
debentures outstanding and had an asset of $1.9 million representing its investment in the common equity
issued by the Trusts. The sole assets of the Trusts are the respective adjustable rate debentures and the
liabilities of the respective Trusts are the 2003 Securities, the 2004 Securities, the 2006 Securities and the
aggregate trust common equity of $1.9 million. At both December 31, 2007 and 2006, the Trusts did not
have any restricted net assets. The Company has, through various contractual arrangements, fully and
unconditionally guaranteed all obligations of the Trusts with respect to the 2003 Securities, the 2004
Securities and the 2006 Securities. Additionally, there are no restrictions on the ability of the Trusts to
transfer funds to the Company in the form of cash dividends, loans or advances.
These securities mature at or near the thirtieth anniversary date of each issuance. However, these securities
and debentures may be prepaid at par, subject to regulatory approval, prior to maturity at any time on or after
September 25 and 29, 2008 for the two issues of 2003 Securities and 2003 Debentures, on or after September
28, 2009 for the 2004 Securities and 2004 Debentures, and on or after December 15, 2011 for the 2006
Securities and 2006 Debentures, or at an earlier date upon certain changes in tax laws, investment company
laws or regulatory capital requirements.
9. Income Taxes
The following is a summary of the components of the provision (benefit) for income taxes:
Current:
Federal .....................................................................
State .........................................................................
Total current .................................................................
Deferred:
Federal .....................................................................
State .........................................................................
Total deferred ...............................................................
Provision for income taxes ...........................................
2007
Year Ended December 31,
2006
(Dollars in thousands)
2005
$13,332
2,170
15,502
$12,100
1,670
13,770
$11,574
2,364
13,938
(938)
(119)
(1,057)
$14,445
(412)
60
(352)
$13,418
24
(3)
21
$13,959
The reconciliation between the statutory federal income tax rate and effective income tax rate is as follows:
Statutory federal income tax rate .................................
Increase (decrease) in taxes resulting from:
State income taxes, net of federal benefit .................
Effect of non-taxable interest income .......................
Effect of BOLI and other non-taxable income ...........
Other, net .................................................................
Effective income tax rate ......................................
Year Ended December 31,
2006
35.0%
2007
35.0%
2005
35.0%
2.9
(4.2)
(1.6)
(0.8)
31.3%
2.5
(5.6)
(1.6)
(0.6)
29.7%
3.4
(5.8)
(1.5)
(0.4)
30.7%
Income tax benefits from the exercise of stock options in the amount of $0.4 million, $0.9 million and
$1.9 million in 2007, 2006 and 2005, respectively, were recorded as an increase to additional paid-in capital.
At December 31, 2007 and 2006, income taxes refundable of $0.7 million and $1.9 million, respectively,
were included in other assets.
53
The types of temporary differences between the tax basis of assets and liabilities and their financial
reporting amounts that give rise to deferred income tax assets and liabilities and their approximate tax
effects are as follows:
December 31,
Deferred tax assets:
Allowance for loan and lease losses ................................................ $ 7,671
940
Stock-based compensation under the fair value method .................
9,740
Unrealized depreciation of investment securities AFS .....................
Gross deferred tax assets ....................................................................
18,351
Deferred tax liabilities:
2007
2006
(Dollars in thousands)
$ 6,942
673
3,176
10,791
4,415
Accelerated depreciation on premises and equipment .....................
736
Direct financing leases ....................................................................
875
FHLB stock dividends .....................................................................
655
Other, net ........................................................................................
Gross deferred tax liabilities ...............................................................
6,681
Net deferred tax assets ....................................................................... $11,670
4,116
897
1,034
590
6,637
$ 4,154
10. Employee Benefit Plans
The Company maintains a qualified retirement plan (the “401(k) Plan”) with a salary deferral feature
designed to qualify under Section 401 of the Internal Revenue Code (the “Code”). The 401(k) Plan permits
the employees of the Company to defer a portion of their compensation in accordance with the provisions of
Section 401(k) of the Code. Matching contributions may be made in amounts and at times determined by the
Company. Certain other statutory limitations with respect to the Company’s contribution under the 401(k)
Plan also apply. Amounts contributed by the Company for a participant will vest over six years and will be
held in trust until distributed pursuant to the terms of the 401(k) Plan.
Contributions to the 401(k) Plan are invested in accordance with participant elections among certain
investment options. Distributions from participant accounts are not permitted before age 65, except in the
event of death, permanent disability, certain financial hardships or termination of employment. The Company
made matching cash contributions to the 401(k) Plan during 2007, 2006 and 2005 of $311,000, $483,000
and $419,000, respectively.
Prior to January 1, 2005, all full-time employees of the Company were eligible to participate in the 401(k)
Plan. Beginning January 1, 2005, certain key employees of the Company have been excluded from further
salary deferrals to the 401(k) Plan, but may make salary deferrals through participation in the Bank of the
Ozarks, Inc. Deferred Compensation Plan (the “Plan”). The Plan, an unfunded deferred compensation
arrangement for the group of employees designated as key employees, including certain of the Company’s
executive officers, was adopted by the Company’s board of directors on December 14, 2004 and became
effective January 1, 2005. Under the terms of the Plan, eligible participants may elect to defer a portion of
their compensation. Such deferred compensation will be distributable in lump sum or specified installments
upon separation from service with the Company or upon other specified events as defined in the Plan. The
Company has the ability to make a contribution to each participant’s account, limited to one half of the first
6% of compensation deferred by the participant and subject to certain other limitations. Amounts deferred
under the Plan are to be invested in certain approved investments (excluding securities of the Company or its
affiliates). Company contributions to the Plan in 2007 and 2006 totaled $103,000 and $84,000, respectively.
At December 31, 2007 and 2006, the Company had Plan assets, along with an equal amount of liabilities,
totaling $1.4 million and $0.8 million, respectively, recorded on the accompanying consolidated balance sheet.
11. Stock-Based Compensation
The Company has a nonqualified stock option plan for certain key employees and officers of the Company.
This plan provides for the granting of nonqualified options to purchase up to 1.5 million shares of common
stock in the Company. No option may be granted under this plan for less than the fair market value of the
common stock, defined by the plan as the average of the highest reported asked price and the lowest reported
bid price, on the date of the grant. While the vesting period and the termination date for the employee plan
options is determined when options are granted, all such employee options outstanding at December 31, 2007
were issued with a vesting period of three years and an expiration of seven years after issuance. The Company
also has a nonqualified stock option plan for non-employee directors. The non-employee director plan calls
for options to purchase 1,000 shares of common stock to be granted to each non-employee director the day
after the annual stockholders’ meeting. Additionally, a non-employee director elected or appointed for the first
time as a director on a date other than an annual meeting shall be granted an option to purchase 1,000 shares
54
of common stock. These options are exercisable immediately and expire ten years after issuance. All shares
issued in connection with options exercised under both the employee and non-employee director stock option
plans are in the form of newly-issued shares.
The following table summarizes stock option activity for the year ended December 31, 2007:
Outstanding - January 1, 2007 ........
Granted ............................................
Exercised .........................................
Forfeited ..........................................
Outstanding - December 31, 2007 ...
Options
489,550
122,600
(71,700)
(19,800)
520,650
Exercisable - December 31, 2007 ....
222,200
Weighted-Average
Exercise
Price/Share
Weighted-Average
Remaining
Contractual Life
(in years)
Aggregate
Intrinsic Value
(in thousands)
$23.43
30.97
7.62
27.76
$27.22
$19.76
4.9
3.8
$1,761(1)
$1,761(1)
(1) Based on average trade value of $26.20 per share on December 29, 2007.
Intrinsic value for stock options is defined as the difference between the current market value and the
exercise price. The total intrinsic value of options exercised during 2007, 2006 and 2005 was $1.6 million,
$2.0 million and $4.8 million, respectively.
Options to purchase 122,600 shares, 111,800 shares and 128,200 shares, respectively, were granted during
2007, 2006 and 2005. The weighted-average fair value of options granted during 2007, 2006 and 2005 were
$7.37, $9.10 and $10.62, respectively. The fair value for each option grant is estimated on the date of grant
using the Black-Scholes option pricing model that uses the assumptions shown below. The Company uses the
U.S. Treasury yield curve in effect at the time of the grant to determine the risk-free interest rate. The expected
dividend yield is estimated using the current annual dividend level and recent stock price of the Company’s
common stock at the date of grant. Expected stock volatility is based on historical volatilities of the Company’s
common stock. The expected life of the options is calculated based on the “simplified” method as provided for
under SAB No. 110 as management continues to gather sufficient historical experience data to appropriately
estimate the expected term of options to purchase shares of the Company’s common stock outstanding.
The weighted-average assumptions used in the Black-Scholes option pricing model for the years indicated
were as follows:
Risk-free interest rate ..........................
Expected dividend yield .......................
Expected stock volatility ......................
Expected life (years) ............................
2007
4.40%
1.54%
22.4%
5.0
2006
4.76%
1.23%
26.2%
5.0
2005
4.27%
1.16%
30.7%
5.0
The total fair value of options to purchase shares of the Company’s common stock that vested during
the years ended 2007, 2006 and 2005 was $0.6 million, $0.6 million and $0.3 million, respectively.
Total unrecognized compensation cost related to nonvested stock-based compensation was $1.4 million
at December 31, 2007 and is expected to be recognized over a weighted-average period of 2.1 years.
The following table illustrates the effects on net income and EPS for the years indicated had the Company
applied the fair value provisions of accounting for its stock options granted prior to January 1, 2003:
Year Ended December 31,
2005
2007
2006
(Dollars in thousands, except per share data)
$31,489
$31,693
Net income, as reported ....................................................................... $31,746
Add: Total stock-based compensation expense,
net of related tax effects included in reported net income ...............
Deduct: Total stock-based compensation expense determined under
fair value based method for all awards, net of related tax effects ....
(528)
Pro forma net income .......................................................................... $31,746
Earnings per share:
Basic - as reported ........................................................................
Basic - pro forma ..........................................................................
Diluted - as reported .....................................................................
Diluted - pro forma .......................................................................
$ 1.89
1.89
$ 1.89
1.89
528
526
373
(526)
$31,693
(393)
$31,469
$ 1.90
1.90
$ 1.89
1.89
$ 1.89
1.89
$ 1.88
1.88
55
12. Commitments and Contingencies
The Company is a party to financial instruments with off-balance sheet risk in the normal course of
business to meet the financing needs of its customers. These financial instruments include commitments to
extend credit and standby letters of credit.
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial
instrument for commitments to extend credit is represented by the contractual amount of those instruments.
The Company has the same credit policies in making commitments and conditional obligations as it does for
on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since these commitments may expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates
each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Company upon extension of credit, is based on management’s credit evaluation of the
counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and
equipment, and income-producing commercial properties.
The Company had outstanding commitments to extend credit, excluding mortgage IRLCs, of $412.7 million
and $441.7 million at December 31, 2007 and 2006, respectively. The commitments extend over varying
periods of time with the majority to be disbursed or to expire within a one-year period.
Outstanding standby letters of credit are contingent commitments issued by the Company generally to
guarantee the performance of a customer in third party borrowing arrangements. The term of the letters of
credit are generally for a period of one year. The maximum amount of future payments the Company could
be required to make under these letters of credit at December 31, 2007 and 2006 is $7.6 million and $10.0
million, respectively. The Company holds collateral to support letters of credit when deemed necessary.
The total of collateralized commitments at December 31, 2007 and 2006 was $5.2 million and $7.4
million, respectively.
13. Related Party Transactions
The Company has had, in the ordinary course of business, lending transactions with certain of its officers,
directors, director nominees and their related and affiliated parties (related parties). The aggregate amount
of loans to such related parties at December 31, 2007 and 2006 was $17.8 million and $39.8 million,
respectively. New loans and advances on prior commitments made to such related parties were $3.3 million,
$22.1 million and $3.5 million for the years ended December 31, 2007, 2006 and 2005, respectively.
Repayments of loans made by such related parties were $25.3 million, $7.6 million and $9.6 million for
the years ended December 31, 2007, 2006 and 2005, respectively. Also, during 2006 and 2005, advances
totaling $0.8 million and $12.9 million, respectively, were added to the Company’s related party loans as a
result of changes in the composition of the Company’s related parties.
14. Regulatory Matters
The Company is subject to various regulatory capital requirements administered by federal banking
agencies. Failure to meet minimum capital requirements can initiate certain mandatory and discretionary
actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial
condition and results of operations. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company must meet specific capital guidelines that involve quantitative
measures of the Company’s assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. The Company’s capital amounts and classification are also subject to
qualitative judgments by the regulators about component risk weightings and other factors.
Federal regulatory agencies generally require the Company and the Bank to maintain minimum Tier 1
and total capital to risk-weighted assets of 4.0% and 8.0%, respectively, and Tier 1 capital to average
quarterly assets (leverage ratio) of at least 3.0%. Tier 1 capital generally consists of common equity, retained
earnings, certain types of preferred stock, qualifying minority interest and trust preferred securities, subject
to limitations, and excludes goodwill and various intangible assets. Total capital includes Tier 1 capital, any
amounts of trust preferred securities excluded from Tier 1 capital, and the lesser of the ALLL or 1.25% of risk-
weighted assets. At December 31, 2007 the Company’s and the Bank’s Tier 1 and total capital ratios and their
leverage ratios exceeded minimum requirements.
56
The actual and required capital amounts and ratios of the Company and the Bank at December 31, 2007
and 2006 were as follows:
Required
To Be Well
Actual
For Capital
Adequacy
Purposes
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
Capitalized Under
Prompt Corrective
Action Provisions
Ratio
Amount
255,679 11.51
263,043 11.79
236,122 10.63
December 31, 2007:
Total capital (to risk-weighted assets):
Company ........................................... $282,600 12.67% $178,425
Bank .................................................
177,683
Tier 1 capital (to risk-weighted assets):
Company ...........................................
Bank .................................................
Tier 1 capital (to average assets):
Company ...........................................
Bank .................................................
December 31, 2006:
Total capital (to risk-weighted assets):
Company ........................................... $254,114 12.76% $159,326
Bank .................................................
158,453
Tier 1 capital (to risk-weighted assets):
Company ...........................................
Bank .................................................
Tier 1 capital (to average assets):
Company ...........................................
Bank .................................................
233,266 11.71
9.94
196,816
263,043
236,122
233,266
196,816
214,515 10.83
89,212
88,841
80,500
80,280
79,663
79,227
74,564
74,225
9.80
8.82
9.39
7.95
8.00% $223,031 10.00%
8.00
222,104 10.00
4.00
4.00
3.00
3.00
133,819
133,262
134,166
133,800
6.00
6.00
5.00
5.00
8.00% $199,159 10.00%
8.00
198,066 10.00
4.00
4.00
3.00
3.00
119,494
118,840
124,273
123,709
6.00
6.00
5.00
5.00
As of December 31, 2007 and 2006, the most recent notification from the regulators categorized the
Company and the Bank as well capitalized under the regulatory framework for prompt corrective action.
There are no conditions or events since that notification that management believes have changed the
Company’s or the Bank’s category.
As of December 31, 2007, the state bank commissioner’s approval was required before the Bank could
declare and pay any dividend of 75% or more of the net profits of the bank after all taxes for the current
year plus 75% of the retained net profits for the immediately preceding year. At December 31, 2007 and
2006, $38.1 million and $38.8 million, respectively, was available for payment of dividends by the Bank
without the approval of regulatory authorities.
Under FRB regulation, the Bank is also limited as to the amount it may loan to its affiliates, including the
Company, and such loans must be collateralized by specific obligations. The maximum amount available for
loan from the Bank to the Company is limited to 10% of the Bank’s capital and surplus or approximately
$22.6 million and $19.7 million, respectively, at December 31, 2007 and 2006.
The Bank is required by bank regulatory agencies to maintain certain minimum balances of cash or non-
interest bearing deposits primarily with the FRB. At December 31, 2007 and 2006, these required balances
aggregated $3.3 million and $8.1 million, respectively.
15. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of financial instruments.
Cash and due from banks - For these short-term instruments, the carrying amount is a reasonable estimate
of fair value.
Investment securities - For securities held for investment purposes, fair values are obtained from an
independent pricing service and are based on quoted market prices, where available. If quoted market prices
are not available, fair values are based on quoted market prices of comparable instruments or other pricing
methodologies. Investments in FHLB and ABB stock do not have readily determinable fair values and are
carried at costs.
57
Loans and leases - The fair value of loans and leases is estimated by discounting the future cash flows
using the current rate at which similar loans or leases would be made to borrowers or lessees with similar
credit ratings and for the same remaining maturities.
Deposit liabilities - The fair value of demand deposits, savings accounts, money market deposits and other
transaction accounts is the amount payable on demand at the reporting date. The fair value of fixed maturity
certificates is estimated using the rate currently available for deposits of similar remaining maturities.
Repurchase Agreements - For these short-term instruments, the carrying amount is a reasonable estimate
of fair value.
Other borrowed funds - For these short-term instruments, the carrying amount is a reasonable estimate
of fair value. The fair value of long-term instruments is estimated based on the current rates available to the
Company for borrowings with similar terms and remaining maturities.
Subordinated debentures - The carrying values of these instruments approximate their fair values as the
interest rates on these instruments adjust quarterly based on 90-day LIBOR.
Accrued interest - The carrying amounts of accrued interest receivable and payable approximate their fair values.
Off-balance sheet instruments - The fair values of commercial loan commitments and letters of credit
are based on fees currently charged to enter into similar agreements, taking into account the remaining
terms of the agreements. The fair values of IRLC and FSC derivative assets and liabilities are based primarily
on the fluctuation of interest rates between the date on which the IRLC and FSC were entered and year-end.
The fair values of certain of these instruments were calculated by discounting expected cash flows,
which contain numerous uncertainties and involve significant judgments by management. Fair value is
the estimated amount at which financial assets or liabilities could be exchanged in a current transaction
between willing parties other than in a forced or liquidation sale. Because no market exists for certain of
these financial instruments and because management does not intend to sell these financial instruments,
the Company does not know whether the fair values shown below represent values at which the respective
financial instruments could be sold individually or in the aggregate.
The following table presents the estimated fair values of the Company’s financial instruments:
2007
2006
Carrying
Amount
Estimated
Fair Value
Carrying
Amount
Estimated
Fair Value
(Dollars in thousands)
Financial assets:
Cash and cash equivalents .................................... $ 47,521 $ 47,521
578,348
Investment securities AFS .....................................
578,348
1,841,815
Loans and leases, net of ALLL .............................. 1,851,578
17,420
17,420
Accrued interest receivable ...................................
80
80
Derivative assets - IRLC and FSC ..........................
Financial liabilities:
Demand, NOW, savings and money market
account deposits ................................................ $ 679,307 $ 679,307
1,377,836
Time deposits ........................................................ 1,377,754
46,086
46,086
Repurchase agreements with customers ...............
321,514
336,533
Other borrowings ..................................................
64,908
64,950
Subordinated debentures ......................................
6,684
6,684
Accrued interest payable .......................................
80
80
Derivative liabilities - IRLC and FSC .....................
$ 42,734 $ 42,734
620,132
1,637,170
17,384
68
620,132
1,659,690
17,384
68
$ 687,268 $ 687,268
1,354,908
1,357,824
41,001
41,001
197,564
194,661
64,950
64,950
5,182
5,182
68
68
16. Supplemental Cash Flow Information
Supplemental cash flow information is as follows:
Cash paid during the period for:
Interest .......................................................................................... $97,867
12,917
Income taxes ..................................................................................
Supplemental schedule of non-cash investing and financing activities:
Transfer of loans to foreclosed assets held for sale ........................
Loans advanced for sales of foreclosed assets ...............................
Net change in unrealized gains and losses on
investment securities AFS .........................................................
8,345
1,487
(16,733)
Year Ended December 31,
2007
2006
2005
(Dollars in thousands)
$82,653
15,415
$43,191
8,887
1,504
168
4,664
265
(3,863)
(1,305)
58
17. Other Operating Expenses
The following is a summary of other operating expenses:
Postage and supplies ...................................................... $ 1,620
1,415
Telephone and data lines ................................................
1,057
Advertising and public relations .....................................
1,077
Professional and outside services ...................................
1,201
Software .........................................................................
Other ..............................................................................
5,123
Total other operating expenses .................................. $11,493
2007
2005
Year Ended December 31,
2006
(Dollars in thousands)
$ 1,910
1,651
1,545
1,129
1,068
4,551
$11,854
$ 1,620
1,371
1,325
886
823
4,324
$10,349
18. Earnings Per Share (“EPS”)
The following table sets forth the computation of basic and diluted EPS:
2007
Year Ended December 31,
2006
(In thousands, except per share amounts)
$31,489
$31,693
2005
Numerator:
Net income .................................................................. $31,746
Denominator:
Denominator for basic EPS - weighted-average shares ...
Effect of dilutive securities - stock options ..................
Denominator for diluted EPS - weighted-average
shares and assumed conversions ..........................
16,834
Basic EPS ....................................................................... $ 1.89
Diluted EPS .................................................................... $ 1.89
16,789
45
16,723
80
16,640
126
16,803
$ 1.90
$ 1.89
16,766
$ 1.89
$ 1.88
Options to purchase 340,150 shares, 120,750 shares and 85,400 shares, respectively, of the Company’s
common stock at a weighted-average exercise price of $32.62 per share, $34.86 per share and $35.42
per share, respectively, were outstanding during 2007, 2006 and 2005, but were not included in the
computation of diluted EPS because the options’ exercise price was greater than the average market
price of the common shares and inclusion would have been antidilutive.
19. Parent Company Financial Information
The following condensed balance sheets, income statements and statements of cash flows reflect the
financial position, results of operations and cash flows for the parent company:
Assets
Condensed Balance Sheets
December 31,
2007
2006
(Dollars in thousands)
$ 31,677
196,941
1,950
4,348
-
1,852
1,092
1,411
828
$240,099
Cash .............................................................................................. $ 20,081
225,816
Investment in consolidated bank subsidiary .................................
1,950
Investment in unconsolidated Trusts .............................................
2,143
Other investments, net ..................................................................
2,438
Loans ............................................................................................
1,855
Land for future branch site ...........................................................
1,092
Excess cost over fair value of net assets acquired .........................
Income taxes refundable ...............................................................
-
1,073
Other, net ......................................................................................
Total assets .............................................................................. $256,448
Liabilities and Stockholders’ Equity
Accounts payable and other liabilities ........................................... $ 29 $ 41
475
Accrued interest payable ...............................................................
Income taxes payable ....................................................................
-
64,950
Subordinated debentures ..............................................................
Total liabilities ..........................................................................
65,466
Stockholders’ equity:
168
Common stock ............................................................................
38,613
Additional paid-in capital ...........................................................
167,139
Retained earnings ......................................................................
(15,091)
Accumulated other comprehensive income (loss) ......................
190,829
Total stockholders’ equity ........................................................
Total liabilities and stockholders’ equity ................................ $256,448
167
36,779
142,609
(4,922)
174,633
$240,099
453
187
64,950
65,619
59
Condensed Statements of Income
2007
Year Ended December 31,
2006
(Dollars in thousands)
2005
Income:
Dividends from Bank ................................................................
Dividends from Trusts ..............................................................
Interest .....................................................................................
Other ........................................................................................
Total income ...............................................................................
Expenses:
Interest .....................................................................................
Other operating expenses .........................................................
Total expenses ............................................................................
Income before income tax benefit and
equity in undistributed earnings of Bank ..............................
Income tax benefit ......................................................................
Equity in undistributed earnings of Bank ...................................
Net income ..................................................................................
$12,600
152
94
180
13,026
5,066
2,072
7,138
5,888
2,814
23,044
$31,746
$ 8,300
116
-
374
8,790
3,867
2,108
5,975
2,815
2,296
26,582
$31,693
$ 6,100
81
-
220
6,401
2,693
1,911
4,604
1,797
1,840
27,852
$31,489
Condensed Statements of Cash Flows
Cash flows from operating activities:
Net income ...........................................................................
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of Bank ......................
Deferred income tax benefit ...........................................
Compensation expense under stock-based
compensation plans ....................................................
Tax benefits on exercise of stock options .......................
Changes in other assets and other liabilities ..................
Net cash provided by operating activities ...................................
Cash flows from investing activities:
Net increase in loans ............................................................
Purchase of premises and equipment ...................................
Proceeds from sales of other investments ............................
Purchase of other investments .............................................
Cash paid for interest in unconsolidated Trusts ...................
Equity contributed to Bank ..................................................
Net cash used by investing activities ..........................................
Cash flows from financing activities:
Proceeds from exercise of stock options ...............................
Proceeds from issuance of subordinated debentures............
Tax benefits on exercise of stock options .............................
Cash dividends paid .............................................................
Net cash (used) provided by financing activities ........................
Net (decrease) increase in cash ..................................................
Cash - beginning of year .............................................................
Cash - end of year .......................................................................
Year Ended December 31,
2007
2006
(Dollars in thousands)
2005
$31,746
$31,693
$31,489
(23,044)
(341)
869
(420)
2,013
10,823
(2,438)
-
2,269
-
-
(16,000)
(16,169)
546
-
420
(7,216)
(6,250)
(11,596)
31,677
$20,081
(26,582)
(353)
(27,852)
(245)
865
(880)
(2,522)
2,221
-
-
-
(1,000)
(619)
(10,000)
(11,619)
824
20,619
880
(6,684)
15,639
6,241
25,436
$31,677
614
(1,864)
3,586
5,728
-
(1,853)
-
-
-
-
(1,853)
974
-
1,864
(6,151)
(3,313)
562
24,874
$25,436
60
Our Board of Directors’ outstanding
leadership and vision has moved
the Company forward and created
a solid foundation for strong
future growth and profitability.
Board of Directors
Back row, left to right:
John Mills
Chairman and Chief Executive Officer - Affiliated Foods Southwest, Inc., Little Rock, Arkansas
James Matthews
Executive Vice President - General Properties, Inc., North Little Rock, Arkansas
Jean Arehart
Retired Banker, Newport, Arkansas
Henry Mariani
Owner, Chairman and Chief Executive Officer - NLC Products, Inc., Little Rock, Arkansas
Ian Arnof
Retired Chief Executive Officer - First Commerce Corporation, New Orleans, Louisiana
Robert Trevino
Commissioner of Arkansas Rehabilitation Services, Little Rock, Arkansas
Robert East
Chairman and Chief Executive Officer - East-Harding, Inc., Little Rock, Arkansas
Kennith Smith
Retired Lumber Company President, Ozark, Arkansas
R.L. Qualls
Retired President and Chief Executive Officer - Baldor Electric Company, Fort Smith, Arkansas
Front row, left to right:
Steven Arnold
Senior Pastor - St. Mark Baptist Church, Little Rock, Arkansas
Richard Cisne
Founding Partner - Hudson, Cisne & Co., LLP, Little Rock, Arkansas
George Gleason
Chairman and Chief Executive Officer - Bank of the Ozarks, Inc., Little Rock, Arkansas
Mark Ross
Vice Chairman, President and Chief Operating Officer - Bank of the Ozarks, Inc., Little Rock, Arkansas
Linda Gleason
Retired Banker, Little Rock, Arkansas
Little Rock, Arkansas
(501) 978-2265, Fax (501) 978-2224
NASDAQ: OZRK
www.bankozarks.com
For additional information or a copy
of the Company’s Form 10-K filed with the
Securities and Exchange Commission contact:
Investor Relations, Bank of the Ozarks, Inc.
P.O. Box 8811, Little Rock, AR 72231-8811
Independent Auditors:
Crowe Chizek and Company LLC, Certified Public Accountants
105 Continental Place, Suite 200, Brentwood, Tennessee 37027
Transfer Agent:
Bank of the Ozarks Trust Division
P.O. Box 8811, Little Rock, AR 72231-8811