e10vk
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
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Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Fiscal Year Ended December 31, 2006
or
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 |
For the Transition period from to
Commission File Number: 000-51904
HOME BANCSHARES, INC.
(Exact Name of Registrant as Specified in Its Charter)
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Arkansas
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71-0682831 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.) |
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719 Harkrider, Suite 100, Conway, Arkansas
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72032 |
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(Address of principal executive offices)
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(Zip Code) |
(501) 328-4770
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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None
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N/A |
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Title of each class
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Name of each exchange on which registered |
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(§229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer o Non-accelerated filer þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
The aggregate market value of the registrants common stock, par value $0.01 per share, held by
non-affiliates on June 30, 2006, was $199.3 million based upon the last trade price as reported on
the Nasdaq National Market® of $22.70.
Indicate the number of shares outstanding of each of the registrants classes of common stock, as
of the latest practical date.
Common Stock Issued and Outstanding: 17,218,240 shares as of March 1, 2007.
Documents incorporated by reference: Part III is incorporated by reference from the registrants
Proxy Statement relating to its 2007 Annual Meeting to be held on May 9, 2007.
HOME BANCSHARES, INC.
FORM 10-K
December 31, 2006
INDEX
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of our statements contained in this document, including matters discussed under the
caption Managements Discussion and Analysis of Financial Condition and Results of Operation are
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking
statements relate to future events or our future financial performance and include statements about
the competitiveness of the banking industry, potential regulatory obligations, our entrance and
expansion into other markets, our other business strategies and other statements that are not
historical facts. Forward-looking statements are not guarantees of performance or results. When we
use words like may, plan, contemplate, anticipate, believe, intend, continue,
expect, project, predict, estimate, could, should, would, and similar expressions,
you should consider them as identifying forward-looking statements, although we may use other
phrasing. These forward-looking statements involve risks and uncertainties and are based on our
beliefs and assumptions, and on the information available to us at the time that these disclosures
were prepared. These forward-looking statements involve risks and uncertainties and may not be
realized due to a variety of factors, including, but not limited to, the following:
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the effects of future economic conditions, including inflation or a decrease in residential housing values; |
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governmental monetary and fiscal policies, as well as legislative and regulatory changes; |
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the risks of changes in interest rates or the level and composition of deposits, loan
demand and the values of loan collateral, securities and interest sensitive assets and
liabilities; |
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the effects of terrorism and efforts to combat it; |
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credit risks; |
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the effects of competition from other commercial banks, thrifts, mortgage banking firms,
consumer finance companies, credit unions, securities brokerage firms, insurance companies,
money market and other mutual funds and other financial institutions operating in our
market area and elsewhere, including institutions operating regionally, nationally and
internationally, together with competitors offering banking products and services by mail,
telephone and the Internet; |
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the effect of any mergers, acquisitions or other transactions to which we or our
subsidiaries may from time to time be a party, including our ability to successfully
integrate any businesses that we acquire; and |
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the failure of assumptions underlying the establishment of our allowance for loan
losses. |
All written or oral forward-looking statements attributable to us are expressly qualified in
their entirety by this Cautionary Note. Our actual results may differ significantly from those we
discuss in these forward-looking statements. For other factors, risks and uncertainties that could
cause our actual results to differ materially from estimates and projections contained in these
forward-looking statements, see Risk Factors.
PART I
Item 1. BUSINESS
Home BancShares
We are a Conway, Arkansas based financial holding company registered under the federal Bank
Holding Company Act of 1956. We have five wholly owned community bank subsidiaries which provide a
broad range of commercial and retail banking and related financial services to businesses, real
estate developers and investors, individuals, and municipalities. Three of our bank subsidiaries
are located in the central Arkansas market area, a fourth serves Stone County in north central
Arkansas, and a fifth serves the Florida Keys and southwestern Florida.
We were established when an investor group led by John W. Allison, our Chairman and Chief
Executive Officer, and Robert H. Adcock, Jr., our former Vice Chairman and the current Arkansas
State Bank Commissioner, formed
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Home BancShares, Inc. After obtaining a bank charter, we
established First State Bank in Conway, Arkansas, in 1999. We or members of our management team have
also been involved in the formation of two of
our other bank subsidiaries, Twin City Bank and Marine Bank, both of which we acquired in 2005. We
have also acquired and integrated our two other bank subsidiaries, Community Bank and Bank of
Mountain View, in 2003 and 2005, respectively.
We have achieved significant growth through acquisitions, organic growth and establishing new
(also commonly referred to as de novo) branches. We acquire, organize and invest in community banks
that serve attractive markets, and build our community banks around experienced bankers with strong
local relationships.
Our common stock began trading on the Nasdaq National Market under the symbol HOMB on June
23, 2006 upon completion of our Initial Public Offering. The net proceeds of the offering,
including the exercise of the over-allotment option, to the Company (after deducting sales
commissions and expenses) were $47.2 million.
Our Bank Subsidiaries and Investments
We believe that many individuals and businesses prefer banking with a locally managed
community bank capable of providing flexibility and quick decisions. The execution of our community
banking strategy has allowed us to rapidly build our network of bank subsidiaries.
First
State Bank In October 1998, we acquired Holly Grove Bancshares, Inc. for the purpose
of obtaining a bank charter. Following the purchase, we changed the name of the bank subsidiary to
First State Bank and relocated the charter to Conway, Arkansas, to serve the central Arkansas
market. At December 31, 2006, First State Bank had total assets of $563.3 million, total loans of
$410.2 million and total deposits of $416.5 million.
Twin
City Bank In May 2000, we were the largest investor in a group that formed a holding
company (subsequently renamed TCBancorp), acquired an existing bank charter, and relocated the
charter to North Little Rock, Arkansas. The holding company named its subsidiary Twin City Bank,
which had been used by North Little Rocks largest bank until its sale in 1994, and hired Robert F.
Birch, Jr., who had been president of the former Twin City Bank. Twin City Bank grew quickly in
North Little Rock and, in 2003, expanded into the adjacent Little Rock market. In January 2005, we
acquired through merger the 68% of TCBancorps common stock we did not already own. At December 31,
2006, Twin City Bank had total assets of $687.8 million, total loans of $413.9 million and total
deposits of $529.3 million.
Community
Bank In December 2003, we acquired Community Financial Group, Inc., the holding
company for Community Bank of Cabot. At December 31, 2006, Community Bank had total assets of
$356.6 million, total loans of $227.3 million and total deposits of $265.9 million.
Marine
Bank In June 2005, we acquired Marine Bancorp, Inc., and its subsidiary, Marine Bank,
in Marathon, Florida. Marine Bank was established in 1995. Our Chairman and Chief Executive
Officer, John W. Allison, was a founding board member and the largest shareholder of Marine
Bancorp, owning approximately 13.9% of its stock at the time of our acquisition. At December 31,
2006, Marine Bank had total assets of $354.3 million, total loans of $283.3 million and total
deposits of $281.9 million.
Bank
of Mountain View In September 2005, we acquired Mountain View Bancshares, Inc., and its
subsidiary, Bank of Mountain View. At December 31, 2006, Bank of Mountain View had total assets of
$214.4 million, total loans of $81.5 million and total deposits of $158.5 million.
Investment
in White River Bancshares In May 2005, we invested $9.0 million to acquire 20% of
the common stock of White River Bancshares, Inc., the holding company for Signature Bank in
Fayetteville, Arkansas. In January 2006, we invested an additional $3.0 million to maintain this
20% ownership position. Signature Bank serves the growing northwest Arkansas market. At December
31, 2006, Signature Bank had total assets of $342.9 million, total loans of $283.0 million and
total deposits of $269.4 million.
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Our Management Team
The following table sets forth, as of December 31, 2006, information concerning the
individuals who are our executive officers.
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Positions Held with |
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Position Held |
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Bank Subsidiaries |
John W. Allison
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60 |
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Chairman of the Board
and Chief Executive
Officer
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Chairman of the Board,
First State Bank;
Director, Community Bank,
Twin City Bank, Bank of
Mountain View, and Marine
Bank |
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Ron W. Strother
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58 |
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President, Chief
Operating Officer,
and Director
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Director, First State
Bank, Community Bank,
Twin City Bank, and Bank
of Mountain View |
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Randy E. Mayor
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41 |
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Chief Financial Officer and Treasurer
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Director, First State Bank |
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Brian S. Davis
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Director of Financial
Reporting and
Investor Relations
Officer
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C. Randall Sims
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52 |
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Director and Secretary
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President, Chief
Executive Officer, and
Director, First State Bank; Director, Community
Bank |
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Robert Hunter Padgett
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President, Chief
Executive Officer, and
Director, Marine Bank |
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Robert F. Birch, Jr.
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56 |
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President, Chief
Executive Officer, and
Director, Twin City Bank |
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Tracy M. French
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45 |
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President, Chief
Executive Officer, and
Director, Community Bank |
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Michael L.
Waddington
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63 |
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Chief Executive Officer and Director,
Bank of Mountain View |
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Our Growth Strategy
Our goals are to achieve growth in earnings per share and to create and build shareholder
value. Our growth strategy entails the following:
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Organic growth We believe that our current branch network provides us with the
capacity to grow significantly within our existing market areas. Twenty-six of our 50
branches (including branches of banks we have acquired) have been opened since the
beginning of 2001. |
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De novo branching We intend to continue to open de novo branches in our current
markets and in other attractive market areas if opportunities arise. During 2006, we opened
six de novo branch locations including Arkansass only mobile branch. These branch
locations are located in the Arkansas communities of Searcy and Beebe, and Port Charlotte,
Marco Island and Punta Gorda, Florida. Presently, we have two pending Florida de novo
branch locations in Key West and Key Largo. Currently we have plans for two additional de
novo branch locations in Searcy, Arkansas and one in Saline County, Arkansas. |
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Strategic acquisitions We will continue to consider strategic acquisitions, with a
primary focus on Arkansas and southwestern Florida. When considering a potential
acquisition, we assess a combination of factors, but concentrate on the strength of
existing management, the growth potential of the bank and the market, the profitability of
the bank, and the valuation of the bank. We believe that potential sellers consider us an
acquirer of choice, largely due to our community banking philosophy. With each acquisition
we seek to maintain continuity of management and the board of directors, consolidate back
office operations, add product lines, and implement our credit policy. |
Community Banking Philosophy
Our community banking philosophy consists of four basic principles:
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operate largely autonomous community banks managed by experienced bankers and a local
board of directors, who are empowered to make customer-related decisions quickly; |
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provide exceptional service and develop strong customer relationships; |
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pursue the business relationships of our boards of directors, management, shareholders,
and customers to actively promote our community banks; and |
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maintain our commitment to the communities we serve by supporting their civic and
nonprofit organizations. |
Operating Strategy
Our operating strategies focus on improving credit quality, increasing profitability, finding
experienced bankers, and leveraging our infrastructure:
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Emphasis on credit quality Credit quality is our first priority in the management of
our bank subsidiaries. We employ a set of credit standards across our bank subsidiaries
that are designed to ensure the proper management of credit risk. Our management team plays
an active role in monitoring compliance with these credit standards at each of our bank
subsidiaries. We have a centralized loan review process and regularly monitor each of our
bank subsidiaries loan portfolios, which we believe enables us to take prompt action on
potential problem loans. |
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Continue to improve profitability We intend to improve our profitability as we
leverage the available capacity of our newer branches and employees. We believe our
investments in our branch network and centralized technology infrastructure are sufficient
to support a larger organization, and therefore believe increases in our expenses should be
lower than the corresponding increases in our revenues. |
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Attract and motivate experienced bankers We believe a major factor in our success has
been our ability to attract and retain bankers who have experience in and knowledge of
their local communities. For example,
in January 2006, we hired eight experienced bankers in the Searcy, Arkansas, market (located
approximately 50 miles northeast of Little Rock), where we subsequently opened a new branch.
Hiring and retaining experienced relationship bankers has been integral to our ability to
grow quickly when entering new markets. |
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Leveraging our infrastructure The support services we provide to our bank subsidiaries
are generally centralized in Conway, Arkansas. These services include finance and
accounting, internal audit, compliance, loan review, human resources, training, and data
processing. |
Our Market Areas
As of December 31, 2006, we conducted business principally through 40 branches in five
counties in Arkansas, seven branches in the Florida Keys and three branches in southwestern
Florida. Our branch footprint includes markets in which we are the deposit market share leader as
well as markets where we believe we have significant opportunities for deposit market share growth.
Lending Activities
We originate loans primarily secured by single and multi-family real estate, residential
construction and commercial buildings. In addition, we make loans to small and medium-sized
commercial businesses, as well as to consumers for a variety of purposes.
Our loan portfolio as of December 31, 2006, was comprised as follows:
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Percentage |
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Amount |
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of portfolio |
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(Dollars in thousands) |
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Real estate: |
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Commercial real estate loans: |
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Non-farm/non-residential |
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465,306 |
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32.8 |
% |
Construction/land development |
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393,410 |
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27.8 |
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Agricultural |
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11,659 |
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0.8 |
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Residential real estate loans: |
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Residential 1-4 family |
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229,588 |
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16.2 |
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Multifamily residential |
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37,440 |
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2.6 |
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Total real estate |
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1,137,403 |
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80.2 |
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Consumer |
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45,056 |
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3.2 |
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Commercial and industrial |
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206,559 |
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14.6 |
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Agricultural |
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13,520 |
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1.0 |
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Other |
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13,757 |
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1.0 |
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Total loans receivable |
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$ |
1,416,295 |
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100.0 |
% |
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Real Estate Non-farm/Non-residential. Non-farm/non-residential loans consist primarily of
loans secured by real estate mortgages on income-producing properties. We make commercial mortgage
loans to finance the purchase of real property as well as loans to smaller business ventures,
credit lines for working capital and inventory financing, including letters of credit, that are
also secured by real estate. Commercial mortgage lending typically
involves higher loan principal amounts, and the repayment of loans is dependent, in large
part, on sufficient income from the properties collateralizing the loans to cover operating
expenses and debt service.
Real Estate Construction/Land Development. We also make construction and development loans
to residential and commercial contractors and developers located primarily within our market areas.
Construction loans generally are secured by first liens on real estate.
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Real Estate Residential Mortgage. Our residential mortgage loan program primarily originates
loans to individuals for the purchase of residential property. We generally do not retain
long-term, fixed-rate residential real estate loans in our portfolio due to interest rate and
collateral risks and low levels of profitability. Residential loans to individuals retained in our
loan portfolio primarily consist of shorter-term first liens on 1-4 family residential mortgages,
home equity loans and lines of credit.
Consumer. While our focus is on service to small and medium-sized businesses, we also make a
variety of loans to individuals for personal, family and household purposes, including secured and
unsecured installment and term loans.
Commercial and Industrial. Our commercial loan portfolio includes loans to smaller business
ventures, credit lines for working capital and short-term inventory financing, as well as letters
of credit that are generally secured by collateral other than real estate. Commercial borrowers
typically secure their loans with assets of the business, personal guaranties of their principals
and often mortgages on the principals personal residences.
Credit Risks. The principal economic risk associated with each category of the loans that we
make is the creditworthiness of the borrower and the ability of the borrower to repay the loan.
General economic conditions and the strength of the services and retail market segments affect
borrower creditworthiness. General factors affecting a commercial borrowers ability to repay
include interest rates, inflation and the demand for the commercial borrowers products and
services, as well as other factors affecting a borrowers customers, suppliers and employees.
Risks associated with real estate loans also include fluctuations in the value of real estate,
new job creation trends, tenant vacancy rates and, in the case of commercial borrowers, the quality
of the borrowers management. Consumer loan repayments depend upon the borrowers financial
stability and are more likely to be adversely affected by divorce, job loss, illness and other
personal hardships.
Lending Policies. We have established common documentation and policies, based on the type of
loan, for all of our bank subsidiaries. The board of directors of each bank subsidiary supplements
our standard policies to meet local needs and establishes loan approval procedures for that bank.
Each banks board periodically reviews their lending policies and procedures. There are legal
restrictions on the dollar amount of loans available for each lending relationship. The Arkansas
Banking Code provides that no loan relationship may exceed 20% of a banks capital. The Florida
Banking Code provides that no loan relationship may exceed 15% of a banks capital, or 25% on a
fully secured basis.
Loan Approval Procedures. Our bank subsidiaries have supplemented our common loan policies to
establish their own loan approval procedures as follows:
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Individual Authorities. The board of directors of each bank establishes the
authorization levels for individual loan officers on a case-by-case basis. Generally, the
more experienced a loan officer, the higher the authorization level. The approval authority
for individual loan officers range from $10,000 to $500,000 for secured loans and from
$1,000 to $100,000 for unsecured loans. |
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Officer Loan Committees. Most of our bank subsidiaries also give their Officer Loan
Committees loan approval authority. In those banks, credits in excess of individual loan
limits are submitted to the appropriate banks Officer Loan Committee. The Officer Loan
Committees consist of members of the senior management team of that bank and are chaired by
that banks chief lending officer. The Officer Loan Committees have approval authority up
to $750,000 at First State Bank, $750,000 at Community Bank, and $1.0 million at Twin City
Bank. At Marine Bank, certain officers are allowed to combine limits on secured loans up to
$1.0 million for certain grades of credits. |
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Directors Loan Committee. Each of our bank subsidiaries has a Directors Loan Committee
consisting of outside directors and senior lenders of the bank. Generally, each bank
requires a majority of outside
directors be present to establish a quorum. Generally, this committee is chaired either by
the chief lending officer or the chief executive officer of the bank. Each banks board of
directors establishes the approval authority for this committee, which may be up to that
banks legal lending limit. |
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Deposits and Other Sources of Funds
Our principal source of funds for loans and investing in securities is core deposits. We offer
a wide range of deposit services, including checking, savings, money market accounts and
certificates of deposit. We obtain most of our deposits from individuals and small businesses, and
municipalities in our market areas. We believe that the rates we offer for core deposits are
competitive with those offered by other financial institutions in our market areas. Additionally,
our policy also permits the acceptance of brokered deposits. Secondary sources of funding include
advances from the Federal Home Loan Banks of Dallas and Atlanta and other borrowings. These
secondary sources enable us to borrow funds at rates and terms, which, at times, are more
beneficial to us.
Other Banking Services
Given customer demand for increased convenience and account access, we offer a range of
products and services, including 24-hour Internet banking and voice response information, cash
management, overdraft protection, direct deposit, travelers checks, safe deposit boxes, United
States savings bonds and automatic account transfers. We earn fees for most of these services. We
also receive ATM transaction fees from transactions performed by our customers participating in a
shared network of automated teller machines and a debit card system that our customers can use
throughout the United States, as well as in other countries.
Insurance
Community Insurance Agency, Inc. is an independent insurance agency, originally founded in
1959 and purchased July 1, 2000, by Community Bank. Community Insurance Agency writes policies for
commercial and personal lines of business, with approximately 60% and 40% of the business coming
from commercial and personal lines, respectively. It is subject to regulation by the Arkansas
Insurance Department. The offices of Community Insurance Agency are located in Jacksonville, Cabot,
and Conway, Arkansas.
Trust Services
FirsTrust Financial Services, Inc. provides trust services, focusing primarily on personal
trusts, corporate trusts and employee benefit trusts. In the fourth quarter of 2006, we made a
strategic decision to enter into agent agreement for the management of our trust services to a
non-affiliated third party. This change was caused by our aspiration to improve the overall
profitability of our trust efforts. FirsTrust Financial Services still has ownership rights to the
trust assets under management.
Competition
As of December 31, 2006, we conducted business through 50 branches in our primary market areas
of Pulaski, Faulkner, Lonoke, Stone, and White Counties in Arkansas and Monroe, Charlotte and
Collier Counties in Florida. Many other commercial banks, savings institutions and credit unions
have offices in our primary market areas. These institutions include many of the largest banks
operating in Arkansas and Florida, including some of the largest banks in the country. Many of our
competitors serve the same counties we do. Our competitors often have greater resources, have
broader geographic markets, have higher lending limits, offer various services that we may not
currently offer and may better afford and make broader use of media advertising, support services
and electronic technology than we do. To offset these competitive disadvantages, we depend on our
reputation as having greater personal service, consistency, and flexibility and the ability to make
credit and other business decisions quickly.
Employees
On December 31, 2006, we had 562 full-time equivalent employees. We expect that our staff will
increase as a result of our increased branching activities anticipated in 2007. We consider our
employee relations to be good, and we have no collective bargaining agreements with any employees.
9
SUPERVISION AND REGULATION
General
We and our subsidiary banks are subject to extensive state and federal banking regulations
that impose restrictions on and provide for general regulatory oversight of our company and its
operations. These laws generally are intended to protect depositors, the deposit insurance fund of
the FDIC and the banking system as a whole, and not shareholders. The following discussion
describes the material elements of the regulatory framework that applies to us.
Home BancShares
We are a financial holding company registered under the federal Bank Holding Company Act of
1956 (the Bank Holding Company Act) and are subject to supervision, regulation and examination by
the Federal Reserve Board. We have elected under the Gramm-Leach-Bliley Act to become a financial
holding company. The Bank Holding Company Act and other federal laws subject bank holding companies
to particular restrictions on the types of activities in which they may engage, and to a range of
supervisory requirements and activities, including regulatory enforcement actions for violations of
laws and regulations.
Acquisitions of Banks. The Bank Holding Company Act requires every bank holding company to
obtain the Federal Reserve Boards prior approval before:
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acquiring direct or indirect ownership or control of any voting shares of any bank
if, after the acquisition, the bank holding company will directly or indirectly own or
control more than 5% of the banks voting shares; |
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acquiring all or substantially all of the assets of any bank; or |
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merging or consolidating with any other bank holding company. |
Additionally, the Bank Holding Company Act provides that the Federal Reserve Board may not
approve any of these transactions if it would result in or tend to create a monopoly, substantially
lessen competition or otherwise function as a restraint of trade, unless the anti-competitive
effects of the proposed transaction are clearly outweighed by the public interest in meeting the
convenience and needs of the community to be served. The Federal Reserve Board is also required to
consider the financial and managerial resources and future prospects of the bank holding companies
and banks concerned and the convenience and needs of the community to be served. The Federal
Reserve Boards consideration of financial resources generally focuses on capital adequacy, which
is discussed below.
Under the Bank Holding Company Act, if adequately capitalized and adequately managed, we, as
well as other banks located within Arkansas or Florida, may purchase a bank located outside of
Arkansas or Florida. Conversely, an adequately capitalized and adequately managed bank holding
company located outside of Arkansas or Florida may purchase a bank located inside Arkansas or
Florida. In each case, however, restrictions may be placed on the acquisition of a bank that has
only been in existence for a limited amount of time or will result in specified concentrations of
deposits. For example, Florida law prohibits a bank holding company from acquiring control of a
Florida financial institution until the target institution has been incorporated for three years.
Change in Bank Control. Subject to various exceptions, the Bank Holding Company Act and the
Change in Bank Control Act, together with related regulations, require Federal Reserve Board
approval prior to any person or company acquiring control of a bank holding company. Control is
conclusively presumed to exist if an individual or company acquires 25% or more of any class of
voting securities of the bank holding company. Control is rebuttably presumed to exist if a person
or company acquires 10% or more, but less than 25%, of any class of voting securities and either:
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the bank holding company has registered securities under Section 12 of the Securities
Exchange Act of 1934; or |
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no other person owns a greater percentage of that class of voting securities
immediately after the transaction. |
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Our common stock is registered under the Securities Exchange Act of 1934, as amended. The
regulations provide a procedure for challenging any rebuttable presumption of control.
Permitted Activities. A bank holding company is generally permitted under the Bank Holding
Company Act to engage in or acquire direct or indirect control of more than 5% of the voting shares
of any company engaged in the following activities:
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banking or managing or controlling banks; and |
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any activity that the Federal Reserve Board determines to be so closely related to
banking as to be a proper incident to the business of banking. |
Activities that the Federal Reserve Board has found to be so closely related to banking as to
be a proper incident to the business of banking include:
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factoring accounts receivable; |
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making, acquiring, brokering or servicing loans and usual related activities; |
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leasing personal or real property; |
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operating a non-bank depository institution, such as a savings association; |
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trust company functions; |
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financial and investment advisory activities; |
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conducting discount securities brokerage activities; |
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underwriting and dealing in government obligations and money market instruments; |
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providing specified management consulting and counseling activities; |
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performing selected data processing services and support services; |
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acting as agent or broker in selling credit life insurance and other types of
insurance in connection with credit transactions; and |
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performing selected insurance underwriting activities. |
Despite prior approval, the Federal Reserve Board may order a bank holding company or its
subsidiaries to terminate any of these activities or to terminate its ownership or control of any
subsidiary when it has reasonable cause to believe that the bank holding companys continued
ownership, activity or control constitutes a serious risk to the financial safety, soundness or
stability of it or any of its bank subsidiaries.
Gramm-Leach-Bliley Act; Financial Holding Companies. The Gramm-Leach-Bliley Financial
Modernization Act of 1999 revised and expanded the provisions of the Bank Holding Company Act by
including a new section that permits a bank holding company to elect to become a financial holding
company to engage in a full range of activities that are financial in nature. The qualification
requirements and the process for a bank holding company that elects to be treated as a financial
holding company require that all of the subsidiary banks controlled by the bank holding company at
the time of election to become a financial holding company must be and remain at all times
well-capitalized and well managed.
The Gramm-Leach-Bliley Act further requires that, in the event that the bank holding company
elects to become a financial holding company, the election must be made by filing a written
declaration with the appropriate Federal Reserve Bank that:
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states that the bank holding company elects to become a financial holding company; |
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provides the name and head office address of the bank holding company and each
depository institution controlled by the bank holding company; |
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certifies that each depository institution controlled by the bank holding company is
well-capitalized as of the date the bank holding company submits its declaration; |
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provides the capital ratios for all relevant capital measures as of the close of the
previous quarter for each depository institution controlled by the bank holding company;
and |
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certifies that each depository institution controlled by the bank holding company is
well managed as of the date the bank holding company submits its declaration. |
The bank holding company must have also achieved at least a rating of satisfactory record of
meeting community credit needs under the Community Reinvestment Act during the institutions most
recent examination.
Financial holding companies may engage, directly or indirectly, in any activity that is determined
to be:
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financial in nature; |
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incidental to such financial activity; or |
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complementary to a financial activity provided it does not pose a substantial risk to
the safety and soundness of depository institutions or the financial system generally. |
The Gramm-Leach-Bliley Act specifically provides that the following activities have been
determined to be financial in nature: lending, trust and other banking activities; insurance
activities; financial or economic advisory services; securitization of assets; securities
underwriting and dealing; existing bank holding company domestic activities; existing bank holding
company foreign activities, and merchant banking activities. In addition, the Gramm-Leach-Bliley
Act specifically gives the Federal Reserve Board the authority, by regulation or order, to expand
the list of financial or incidental activities, but requires consultation with the United
States Treasury Department, and gives the Federal Reserve Board authority to allow a financial
holding company to engage in any activity that is complementary to a financial activity and does
not pose a substantial risk to the safety and soundness of depository institutions or the
financial system generally.
Support of Subsidiary Institutions. Under Federal Reserve Board policy, we are expected to act
as a source of financial strength for our subsidiary banks and are required to commit resources to
support them. Our obligation to act as a source of financial strength extends to White River
Bancshares, Inc., despite the fact that we are a minority owner of that company and thus have no
ability to control its operations. Moreover, an obligation to support our bank subsidiaries and
White River Bancshares may be required at times when, without this Federal Reserve Board policy, we
might not be inclined to provide it. In addition, any capital loans made by us to our subsidiary
banks will be repaid only after their deposits and various other obligations are repaid in full. In
the unlikely event of our bankruptcy, any commitment by us to a federal bank regulatory agency to
maintain the capital of our subsidiary banks and White River Bancshares will be assumed by the
bankruptcy trustee and entitled to a priority of payment.
Safe and Sound Banking Practices. Bank holding companies are not permitted to engage in unsafe
and unsound banking practices. The Federal Reserve Boards Regulation Y, for example, generally
requires a holding company to give the Federal Reserve Board prior notice of any redemption or
repurchase of its own equity securities, if the consideration to be paid, together with the
consideration paid for any repurchases or redemptions in the preceding year, is equal to 10% or
more of the companys consolidated net worth. The Federal Reserve Board may oppose the transaction
if it believes that the transaction would constitute an unsafe or unsound practice or would violate
any law or regulation. Depending upon the circumstances, the Federal Reserve Board could take the
position that paying a dividend would constitute an unsafe or unsound banking practice.
The Federal Reserve Board has broad authority to prohibit activities of bank holding companies
and their non-banking subsidiaries which represent unsafe and unsound banking practices or which
constitute violations of laws or regulations, and can assess civil money penalties for certain
activities conducted on a knowing and reckless basis, if
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those activities caused a substantial loss
to a depository institution. The penalties can be as high as $1 million for each day the activity
continues.
Annual Reporting; Examinations. We are required to file annual reports with the Federal
Reserve Board, and such additional information as the Federal Reserve Board may require pursuant to
the Bank Holding Company Act. The Federal Reserve Board may examine a bank holding company or any
of its subsidiaries, and charge the company for the cost of such examination.
Capital Adequacy Requirements. The Federal Reserve Board has adopted a system using risk-based
capital guidelines to evaluate the capital adequacy of bank holding companies having $500 million
or more in assets on a consolidated basis. We currently have consolidated assets in excess of $500
million, and are therefore subject to the Federal Reserve Boards capital adequacy guidelines.
Under the guidelines, specific categories of assets are assigned different risk weights, based
generally on the perceived credit risk of the asset. These risk weights are multiplied by
corresponding asset balances to determine a risk-weighted asset base. The guidelines require a
minimum total risk-based capital ratio of 8.0% (of which at least 4.0% is required to consist of
Tier 1 capital elements). Total capital is the sum of Tier 1 and Tier 2 capital. To be considered
well-capitalized, a bank holding company must maintain, on a consolidated basis, (i) a Tier 1
risk-based capital ratio of at least 6.0%, and (ii) a total risk-based capital ratio of 10.0% or
greater. As of December 31, 2006, our Tier 1 risk-based capital ratio was 14.57% and our total
risk-based capital ratio was 15.83%. Thus, we are considered well-capitalized for regulatory
purposes.
In addition to the risk-based capital guidelines, the Federal Reserve Board uses a leverage
ratio as an additional tool to evaluate the capital adequacy of bank holding companies. The
leverage ratio is a companys Tier 1 capital divided by its average total consolidated assets.
Certain highly-rated bank holding companies may maintain a minimum leverage ratio of 3.0%, but
other bank holding companies are required to maintain a leverage ratio of at least 4.0%. As of
December 31, 2006, our leverage ratio was 11.29%.
The federal banking agencies risk-based and leverage ratios are minimum supervisory ratios
generally applicable to banking organizations that meet certain specified criteria. The federal
bank regulatory agencies may set capital requirements for a particular banking organization that
are higher than the minimum ratios when circumstances warrant. Federal Reserve Board guidelines
also provide that banking organizations experiencing internal growth or making acquisitions will be
expected to maintain strong capital positions, substantially above the minimum supervisory levels,
without significant reliance on intangible assets.
Cross-guarantees. Under the Federal Deposit Insurance Act, or FDIA, a depository institution
(which definition includes both banks and savings associations), the deposits of which are insured
by the FDIC, can be held liable for any loss incurred by, or reasonably expected to be incurred by,
the FDIC in connection with (1) the default of a commonly controlled FDIC-insured depository
institution or (2) any assistance provided by the FDIC to any commonly controlled FDIC-insured
depository institution in danger of default. Default is defined generally as the appointment of
a conservator or a receiver and in danger of default is defined generally as the existence of
certain conditions indicating that default is likely to occur in the absence of regulatory
assistance. In some circumstances (depending upon the amount of the loss or anticipated loss
suffered by the FDIC), cross-guarantee liability may result in the ultimate failure or insolvency
of one or more insured depository institutions in a holding company structure. Any obligation or
liability owed by a subsidiary bank to its parent company is subordinated to the subsidiary banks
cross-guarantee liability with respect to commonly controlled insured depository institutions.
Because we are a legal entity separate and distinct from our subsidiary banks, our right to
participate in the distribution of assets of any subsidiary upon the subsidiarys liquidation or
reorganization will be subject to the prior claims of the subsidiarys creditors. In the event of a
liquidation or other resolution of any of our subsidiary banks, the claims of depositors and other
general or subordinated creditors of such bank would be entitled to a priority of payment over the
claims of holders of any obligation of such bank to its shareholders, including any depository
institution holding company (such as Home BancShares) or any shareholder or creditor of such
holding company.
Subsidiary Banks
General. First State Bank, Community Bank, Bank of Mountain View and Twin City Bank are
chartered as Arkansas state banks and are members of the Federal Reserve System, making them
primarily subject to regulation
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and supervision by both the Federal Reserve Board and the Arkansas State Bank Department.
Marine Bank, which is chartered as a Florida state bank, is a member of the Federal Reserve System,
making it primarily subject to regulation and supervision by both the Federal Reserve Board and the
Florida Office of Financial Regulation. In addition, our subsidiary banks are subject to various
requirements and restrictions under federal and state law, including requirements to maintain
reserves against deposits, restrictions on the types and amounts of loans that may be granted and
the interest that they may charge, and limitations on the types of investments they may make and on
the types of services they may offer. Various consumer laws and regulations also affect the
operations of our subsidiary banks.
Prompt Corrective Action. The Federal Deposit Insurance Corporation Improvement Act of 1991
establishes a system of prompt corrective action to resolve the problems of undercapitalized
financial institutions. Under this system, the federal banking regulators have established five
capital categories (well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized) in which all institutions are placed. Federal
banking regulators are required to take various mandatory supervisory actions and are authorized to
take other discretionary actions with respect to institutions in the three undercapitalized
categories. The severity of the action depends upon the capital category in which the institution
is placed. Generally, subject to a narrow exception, the banking regulator must appoint a receiver
or conservator for an institution that is critically undercapitalized. The federal banking agencies
have specified by regulation the relevant capital level for each category.
An institution that is categorized as undercapitalized, significantly undercapitalized or
critically undercapitalized is required to submit an acceptable capital restoration plan to its
appropriate federal banking agency. A bank holding company must guarantee that a subsidiary
depository institution meets its capital restoration plan, subject to various limitations. The
controlling holding companys obligation to fund a capital restoration plan is limited to the
lesser of 5% of an undercapitalized subsidiarys assets at the time it became undercapitalized or
the amount required to meet regulatory capital requirements. An undercapitalized institution is
also generally prohibited from increasing its average total assets, making acquisitions,
establishing any branches or engaging in any new line of business, except under an accepted capital
restoration plan or with FDIC approval. The regulations also establish procedures for downgrading
an institution to a lower capital category based on supervisory factors other than capital.
FDIC Insurance Assessments. The FDIC has adopted a risk-based assessment system for insured
depository institutions that takes into account the risks attributable to different categories and
concentrations of assets and liabilities. The system assigns an institution to one of three capital
categories: (1) well capitalized; (2) adequately capitalized; and (3) undercapitalized. These three
categories are substantially similar to the prompt corrective action categories described above,
with the undercapitalized category including institutions that are undercapitalized,
significantly undercapitalized and critically undercapitalized for prompt corrective action
purposes. The FDIC also assigns an institution to one of three supervisory subgroups based on a
supervisory evaluation that the institutions primary federal regulator provides to the FDIC and
information that the FDIC determines to be relevant to the institutions financial condition and
the risk posed to the deposit insurance funds. Assessments range from 5 to 43 cents per $100 of
deposits, depending on the institutions capital group and supervisory subgroup. In recent years,
the assessment had been set at zero for well-capitalized banks in the top supervisory subgroup, but
beginning in 2007, these institutions will be charged between 5 and 7 cents. The overall level of
assessments depends primarily upon claims against the deposit insurance fund. If bank failures were
to increase, assessments could rise significantly. In addition, the FDIC imposes assessments to
help pay off the $780 million in annual interest payments on the $8 billion Financing Corporation
bonds issued in the late 1980s as part of the government rescue of the thrift industry. This
assessment rate is adjusted quarterly and is set at 1.22 cents per $100 of deposits for the first
quarter of 2007. The FDIC may terminate its insurance of deposits if it finds that the institution
has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, regulation, rule, order or condition imposed by the
FDIC.
Legislative reforms to modernize the Federal Deposit Insurance System were enacted in February
2006. As part of these reforms, effective March 31, 2006, the Bank Insurance Fund (BIF) and the
Savings Association Insurance Fund (SAIF) were merged into a new Deposit Insurance Fund. In
addition to merging the insurance funds, the legislation:
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effective April 1, 2006, raised the deposit insurance limit on certain retirement
accounts to $250,000 and indexed that limit for inflation; |
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requires the FDIC and National Credit Union Administration boards, starting in 2010
and every succeeding five years, to consider raising the standard maximum deposit
insurance; and |
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effective January 1, 2007, eliminated the current fixed 1.25 percent Designated
Reserve Ratio and provided the FDIC with the discretion to set the DRR within a range of
1.15 to 1.50 percent for any given year. |
Community Reinvestment Act. The Community Reinvestment Act requires, in connection with
examinations of financial institutions, that federal banking regulators evaluate the record of each
financial institution in meeting the credit needs of its local community, including low and
moderate-income neighborhoods. These facts are also considered in evaluating mergers, acquisitions
and applications to open a branch or facility. Failure to adequately meet these criteria could
impose additional requirements and limitations on our subsidiary banks. Additionally, we must
publicly disclose the terms of various Community Reinvestment Act-related agreements. Each of our
subsidiary banks received satisfactory CRA ratings from their applicable federal banking
regulatory at their last examinations.
Other Regulations. Interest and other charges collected or contracted for by our subsidiary
banks are subject to state usury laws and federal laws concerning interest rates.
Federal Laws Applicable to Credit Transactions. The loan operations of our subsidiary banks
are also subject to federal laws applicable to credit transactions, such as the:
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Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers; |
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Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide
information to enable the public and public officials to determine whether a financial
institution is fulfilling its obligation to help meet the housing needs of the community
it serves; |
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Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed
or other prohibited factors in extending credit; |
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Fair Credit Reporting Act of 1978, governing the use and provision of information to
credit reporting agencies; |
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Fair Debt Collection Act, governing the manner in which consumer debts may be
collected by collection agencies; |
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Service members Civil Relief Act, which amended the Soldiers and Sailors Civil
Relief Act of 1940, governing the repayment terms of, and property rights underlying,
secured obligations of persons in military service; and |
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the rules and regulations of the various federal agencies charged with the
responsibility of implementing these federal laws. |
Federal Laws Applicable to Deposit Operations. The deposit operations of our subsidiary banks
are subject to:
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the Right to Financial Privacy Act, which imposes a duty to maintain confidentiality
of consumer financial records and prescribes procedures for complying with
administrative subpoenas of financial records; and |
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the Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve
Board to implement that act, which govern automatic deposits to and withdrawals from
deposit accounts and customers rights and liabilities arising from the use of automated
teller machines and other electronic banking services. |
Loans to Insiders. Sections 22(g) and (h) of the Federal Reserve Act and its implementing
regulation, Regulation O, place restrictions on loans by a bank to executive officers, directors,
and principal shareholders. Under Section 22(h), loans to a director, an executive officer and to a
greater than 10% shareholder of a bank and certain of their
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related interests, or insiders, and insiders of affiliates, may not exceed, together with all other outstanding loans to
such person and related interests, the banks loans-to-one-borrower limit (generally equal to
15% of the institutions unimpaired capital and surplus). Section 22(h) also requires that loans to
insiders and to insiders of affiliates be made on terms substantially the same as offered in
comparable transactions to other persons, unless the loans are made pursuant to a benefit or
compensation program that (i) is widely available to employees of the bank and (ii) does not give
preference to insiders over other employees of the bank. Section 22(h) also requires prior Board of
Directors approval for certain loans, and the aggregate amount of extensions of credit by a bank to
all insiders cannot exceed the institutions unimpaired capital and surplus. Furthermore, Section
22(g) places additional restrictions on loans to executive officers.
Capital Requirements. Our subsidiary banks are also subject to certain restrictions on the
payment of dividends as a result of the requirement that it maintain adequate levels of capital in
accordance with guidelines promulgated from time to time by applicable regulators.
The Federal Reserve Bank, with respect to our bank subsidiaries that are members of the
Federal Reserve System, monitor the capital adequacy of our subsidiary banks by using a combination
of risk-based guidelines and leverage ratios. The agencies consider each of the banks capital
levels when taking action on various types of applications and when conducting supervisory
activities related to the safety and soundness of individual banks and the banking system.
Under the risk-based capital guidelines, a risk weight factor of 0% to 100% is assigned to
each category of assets based generally on the perceived credit risk of the asset class. The risk
weights are then multiplied by the corresponding asset balances to determine a risk-weighted
asset base. At least half of the risk-based capital must consist of core (Tier 1) capital, which is
comprised of:
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common shareholders equity (includes common stock and any related surplus, undivided
profits, disclosed capital reserves that represent a segregation of undivided profits,
and foreign currency translation adjustments; less net unrealized losses on marketable
equity securities); |
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certain non-cumulative perpetual preferred stock and related surplus; and |
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minority interests in the equity capital accounts of consolidated subsidiaries, and
excludes goodwill and various intangible assets. |
The remainder, supplementary (Tier 2) capital, may consist of:
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allowance for loan losses, up to a maximum of 1.25% of risk-weighted assets; |
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certain perpetual preferred stock and related surplus; |
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hybrid capital instruments; |
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perpetual debt; |
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mandatory convertible debt securities; |
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term subordinated debt; |
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intermediate-term preferred stock; and |
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certain unrealized holding gains on equity securities. |
Total risk-based capital is determined by combining core capital and supplementary capital.
Under the regulatory capital guidelines, our subsidiary banks must maintain a total risk-based
capital to risk-weighted assets ratio of at least 8.0%, a Tier 1 capital to risk-weighted assets
ratio of at least 4.0%, and a Tier 1 capital to adjusted total assets ratio of at least 4.0% (3.0%
for banks receiving the highest examination rating) to be considered adequately capitalized. See
discussion in the section below entitled The FDIC Improvement Act.
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FIRREA. The Financial Institutions Reform, Recovery and Enforcement Act of 1989, or FIRREA,
includes various provisions that affect or may affect our subsidiary banks. Among other matters,
FIRREA generally permits bank holding companies to acquire healthy thrifts as well as failed or failing thrifts. FIRREA
removed certain cross-marketing prohibitions previously applicable to thrift and bank subsidiaries
of a common holding company. Furthermore, a multi-bank holding company may now be required to
indemnify the federal deposit insurance fund against losses it incurs with respect to such
companys affiliated banks, which in effect makes a bank holding companys equity investments in
healthy bank subsidiaries available to the FDIC to assist such companys failing or failed bank
subsidiaries.
In addition, pursuant to FIRREA, any depository institution that has been chartered less than
two years, is not in compliance with the minimum capital requirements of its primary federal
banking regulator, or is otherwise in a troubled condition must notify its primary federal banking
regulator of the proposed addition of any person to the Board of Directors or the employment of any
person as a senior executive officer of the institution at least 30 days before such addition or
employment becomes effective. During such 30-day period, the applicable federal banking regulatory
agency may disapprove of the addition of employment of such director or officer. Our subsidiary
banks are not subject to any such requirements.
FIRREA also expanded and increased civil and criminal penalties available for use by the
appropriate regulatory agency against certain institution-affiliated parties primarily including
(i) management, employees and agents of a financial institution, as well as (ii) independent
contractors such as attorneys and accountants and others who participate in the conduct of the
financial institutions affairs and who caused or are likely to cause more than minimum financial
loss to or a significant adverse affect on the institution, who knowingly or recklessly violate a
law or regulation, breach a fiduciary duty or engage in unsafe or unsound practices. Such practices
can include the failure of an institution to timely file required reports or the submission of
inaccurate reports. Furthermore, FIRREA authorizes the appropriate banking agency to issue cease
and desist orders that may, among other things, require affirmative action to correct any harm
resulting from a violation or practice, including restitution, reimbursement, indemnifications or
guarantees against loss. A financial institution may also be ordered to restrict its growth,
dispose of certain assets or take other action as determined by the ordering agency to be
appropriate.
The FDIC Improvement Act. The Federal Deposit Insurance Corporation Improvement Act of 1991,
or FDICIA, made a number of reforms addressing the safety and soundness of the deposit insurance
system, supervision of domestic and foreign depository institutions, and improvement of accounting
standards. This statute also limited deposit insurance coverage, implemented changes in consumer
protection laws and provided for least-cost resolution and prompt regulatory action with regard to
troubled institutions.
FDICIA requires every bank with total assets in excess of $500 million to have an annual
independent audit made of the banks financial statements by a certified public accountant to
verify that the financial statements of the bank are presented in accordance with generally
accepted accounting principles and comply with such other disclosure requirements as prescribed by
the FDIC.
FDICIA also places certain restrictions on activities of banks depending on their level of
capital. FDICIA divides banks into five different categories, depending on their level of capital.
Under regulations adopted by the FDIC, a bank is deemed to be well-capitalized if it has a total
Risk-Based Capital Ratio of 10.00% or more, a Tier 1 Capital Ratio of 6.00% or more and a Leverage
Ratio of 5.00% or more, and the bank is not subject to an order or capital directive to meet and
maintain a certain capital level. Under such regulations, a bank is deemed to be adequately
capitalized if it has a total Risk-Based Capital Ratio of 8.00% or more, a Tier 1 Capital Ratio of
4.00% or more and a Leverage Ratio of 4.00% or more (unless it receives the highest composite
rating at its most recent examination and is not experiencing or anticipating significant growth,
in which instance it must maintain a Leverage Ratio of 3.00% or more). Under such regulations, a
bank is deemed to be undercapitalized if it has a total Risk-Based Capital Ratio of less than
8.00%, a Tier 1 Capital Ratio of less than 4.00% or a Leverage Ratio of less than 4.00%. Under such
regulations, a bank is deemed to be significantly undercapitalized if it has a Risk-Based Capital
Ratio of less than 6.00%, a Tier 1 Capital Ratio of less than 3.00% and a Leverage Ratio of less
than 3.00%. Under such regulations, a bank is deemed to be critically undercapitalized if it has
a Leverage Ratio of less than or equal to 2.00%. In addition, the FDIC has the ability to downgrade
a banks classification (but not to critically undercapitalized) based on other considerations
even if the bank meets the capital guidelines. According to these guidelines, each of our
subsidiary banks were classified as well-capitalized as of December 31, 2006.
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In addition, if a bank is classified as undercapitalized, the bank is required to submit a
capital restoration plan to the federal banking regulators. Pursuant to FDICIA, an undercapitalized
bank is prohibited from increasing its assets, engaging in a new line of business, acquiring any
interest in any company or insured depository institution, or opening or acquiring a new branch office, except under certain circumstances, including the
acceptance by the federal banking regulators of a capital restoration plan for the bank.
Furthermore, if a bank is classified as undercapitalized, the federal banking regulators may
take certain actions to correct the capital position of the bank; if a bank is classified as
significantly undercapitalized or critically undercapitalized, the federal banking regulators would
be required to take one or more prompt corrective actions. These actions would include, among other
things, requiring: sales of new securities to bolster capital, improvements in management, limits
on interest rates paid, prohibitions on transactions with affiliates, termination of certain risky
activities and restrictions on compensation paid to executive officers. If a bank is classified as
critically undercapitalized, FDICIA requires the bank to be placed into conservatorship or
receivership within 90 days, unless the federal banking regulators determine that other action
would better achieve the purposes of FDICIA regarding prompt corrective action with respect to
undercapitalized banks.
The capital classification of a bank affects the frequency of examinations of the bank and
impacts the ability of the bank to engage in certain activities and affects the deposit insurance
premiums paid by such bank. Under FDICIA, the federal banking regulators are required to conduct a
full-scope, on-site examination of every bank at least once every 12 months. An exception to this
requirement, however, provides that a bank that (i) has assets of less than $250 million, (ii) is
categorized as well-capitalized, (iii) during its most recent examination, was found to be well
managed and its composite rating was outstanding or, in the case of a bank with total assets of not
more than $100 million, outstanding or good, (iv) is not currently subject to a formal enforcement
proceeding or order by the FDIC or the appropriate federal banking agency and (v) has not been
subject to a change in control during the last 12 months, need only be examined once every 18
months.
Brokered Deposits. Under FDICIA, banks may be restricted in their ability to accept brokered
deposits, depending on their capital classification. Well-capitalized banks are permitted to
accept brokered deposits, but all banks that are not well-capitalized are not permitted to accept
such deposits. The FDIC may, on a case-by-case basis, permit banks that are adequately capitalized
to accept brokered deposits if the FDIC determines that acceptance of such deposits would not
constitute an unsafe or unsound banking practice with respect to the bank.
Federal Limitations on Activities and Investments. The equity investments and activities as a
principal of FDIC-insured state-chartered banks are generally limited to those that are permissible
for national banks. Under regulations dealing with equity investments, an insured state bank
generally may not directly or indirectly acquire or retain any equity investment of a type, or in
an amount, that is not permissible for a national bank.
Check Clearing for the 21st Century Act. On October 28, 2003, President Bush signed into law
the Check Clearing for the 21st Century Act, also known as Check 21. The new law gives substitute
checks, such as a digital image of a check and copies made from that image, the same legal
standing as the original paper check. Some of the major provisions include:
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allowing check truncation without making it mandatory; |
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demanding that every financial institution communicate to accountholders in writing a
description of its substitute check processing program and their rights under the law; |
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legalizing substitutions for and replacements of paper checks without agreement from
consumers; |
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retaining in place the previously mandated electronic collection and return of checks
between financial institutions only when individual agreements are in place; |
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requiring that when accountholders request verification, financial institutions
produce the original check (or a copy that accurately represents the original) and
demonstrate that the account debit was accurate and valid; and |
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requiring recrediting of funds to an individuals account on the next business day
after a consumer proves that the financial institution has erred.
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This new legislation will likely affect bank capital spending as many financial institutions
assess whether technological or operational changes are necessary to stay competitive and take
advantage of the new opportunities presented by Check 21.
Interstate Branching. Effective June 1, 1997, the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 amended the FDIA and certain other statutes to permit state and national
banks with different home states to merge across state lines, with approval of the appropriate
federal banking agency, unless the home state of a participating bank had passed legislation prior
to May 31, 1997 expressly prohibiting interstate mergers. Under the Riegle-Neal Act amendments,
once a state or national bank has established branches in a state, that bank may establish and
acquire additional branches at any location in the state at which any bank involved in the
interstate merger transaction could have established or acquired branches under applicable federal
or state law. If a state opts out of interstate branching within the specified time period, no bank
in any other state may establish a branch in the state which has opted out, whether through an
acquisition or de novo.
Federal Home Loan Bank System. The Federal Home Loan Bank system, of which each of our
subsidiary banks is a member, consists of 12 regional FHLBs governed and regulated by the Federal
Housing Finance Board, or FHFB. The FHLBs serve as reserve or credit facilities for member
institutions within their assigned regions. They are funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB system. They make loans (i.e., advances) to
members in accordance with policies and procedures established by the FHLB and the Boards of
directors of each regional FHLB.
As a system member, our subsidiary banks are entitled to borrow from the FHLB of their
respective region and is required to own a certain amount of capital stock in the FHLB. Each of our
subsidiary banks is in compliance with the stock ownership rules described above with respect to
such advances, commitments and letters of credit and home mortgage loans and similar obligations.
All loans, advances and other extensions of credit made by the FHLB to our subsidiary banks are
secured by a portion of the their respective loan portfolio, certain other investments and the
capital stock of the FHLB held by such bank.
Mortgage Banking Operations. Each of our subsidiary banks is subject to the rules and
regulations of FHA, VA, FNMA, FHLMC and GNMA with respect to originating, processing, selling and
servicing mortgage loans and the issuance and sale of mortgage-backed securities. Those rules and
regulations, among other things, prohibit discrimination and establish underwriting guidelines
which include provisions for inspections and appraisals, require credit reports on prospective
borrowers and fix maximum loan amounts, and, with respect to VA loans, fix maximum interest rates.
Mortgage origination activities are subject to, among others, the Equal Credit Opportunity Act,
Federal Truth-in-Lending Act and the Real Estate Settlement Procedures Act and the regulations
promulgated thereunder which, among other things, prohibit discrimination and require the
disclosure of certain basic information to mortgagors concerning credit terms and settlement costs.
Our subsidiary banks are also subject to regulation by the Arkansas State Bank Department or the
Florida Department of Financial Regulation, as applicable, with respect to, among other things, the
establishment of maximum origination fees on certain types of mortgage loan products.
Payment of Dividends
We are a legal entity separate and distinct from our subsidiary banks and other affiliated
entities. The principal sources of our cash flow, including cash flow to pay dividends to our
shareholders, are dividends that our subsidiary banks pay to us as their sole shareholder.
Statutory and regulatory limitations apply to the dividends that our subsidiary banks can pay to
us, as well as to the dividends we can pay to our shareholders.
The policy of the Federal Reserve Board that a bank holding company should serve as a source
of strength to its subsidiary banks also results in the position of the Federal Reserve Board that
a bank holding company should not maintain a level of cash dividends to its shareholders that
places undue pressure on the capital of its bank subsidiaries or that can be funded only through
additional borrowings or other arrangements that may undermine the bank holding companys ability
to serve as such a source of strength. Our ability to pay dividends is also subject to the
provisions of Arkansas law.
There are certain state-law limitations on the payment of dividends by our bank subsidiaries.
First State Bank, Community Bank, Twin City Bank and Bank of Mountain View, which are subject to
Arkansas banking laws, may not declare or pay a dividend of 75% or more of the net profits of such
bank after all taxes for the current year plus 75% of the retained net profits for the immediately
preceding year without the prior approval of the Arkansas State
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Bank Commissioner. Marine Bank, which is subject to Florida banking laws, may not declare or pay a dividend in excess of 100% of
current year earnings and 100% of retained earnings for the prior two years. Members of the Federal
Reserve System must also comply with the dividend restrictions with which a national bank would be
required to comply. Among other things, these restrictions require that if losses have at any time
been sustained by a bank equal to or exceeding its undivided profits then on hand, no dividend may
be paid. Although we have regularly paid dividends on our common stock beginning with the second quarter of 2003, there can be no
assurances that we will be able to pay dividends in the future under the applicable regulatory
limitations.
The payment of dividends by us, or by our subsidiary banks, may also be affected by other
factors, such as the requirement to maintain adequate capital above regulatory guidelines. The
federal banking agencies have indicated that paying dividends that deplete a depository
institutions capital base to an inadequate level would be an unsafe and unsound banking practice.
Under the Federal Deposit Insurance Corporation Improvement Act of 1991, a depository institution
may not pay any dividend if payment would result in the depository institution being
undercapitalized.
Restrictions on Transactions with Affiliates
We and our subsidiary banks are subject to the provisions of Section 23A of the Federal
Reserve Act. Section 23A places limits on the amount of:
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a banks loans or extensions of credit to affiliates; |
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a banks investment in affiliates; |
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assets a bank may purchase from affiliates, except for real and personal property
exempted by the Federal Reserve Board; |
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loans or extensions of credit to third parties collateralized by the securities or
obligations of affiliates; and |
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a banks guarantee, acceptance or letter of credit issued on behalf of an affiliate. |
The total amount of the above transactions is limited in amount, as to any one affiliate, to
10% of a banks capital and surplus and, as to all affiliates combined, to 20% of a banks capital
and surplus. In addition to the limitation on the amount of these transactions, each of the above
transactions must also meet specified collateral requirements. Our subsidiary banks must also
comply with other provisions designed to avoid the taking of low-quality assets. We and our
subsidiary banks are also subject to the provisions of Section 23B of the Federal Reserve Act
which, among other things, prohibit an institution from engaging in the above transactions with
affiliates unless the transactions are on terms substantially the same, or at least as favorable to
the institution or its subsidiaries, as those prevailing at the time for comparable transactions
with nonaffiliated companies.
Our subsidiary banks are also subject to restrictions on extensions of credit to their
executive officers, directors, principal shareholders and their related interests. These extensions
of credit (1) must be made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with third parties, and (2)
must not involve more than the normal risk of repayment or present other unfavorable features.
Privacy
Under the Gramm-Leach-Bliley Act, financial institutions are required to disclose their
policies for collecting and protecting confidential information. Customers generally may prevent
financial institutions from sharing nonpublic personal financial information with nonaffiliated
third parties except under narrow circumstances, such as the processing of transactions requested
by the consumer or when the financial institution is jointly sponsoring a product or service with a
nonaffiliated third party. Additionally, financial institutions generally may not disclose consumer
account numbers to any nonaffiliated third party for use in telemarketing, direct mail marketing or
other marketing to consumers. We and all of our subsidiaries have established policies and
procedures to assure our compliance with all privacy provisions of the Gramm-Leach- Bliley Act.
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Consumer Credit Reporting
On December 4, 2003, President Bush signed the Fair and Accurate Credit Transactions Act
amending the federal Fair Credit Reporting Act. These amendments to the Fair Credit Reporting Act
(the FCRA Amendments) became effective in 2004. The FCRA Amendments include, among other things:
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requirements for financial institutions to develop policies and procedures to
identify potential identity theft and, upon the request of a consumer, place a fraud
alert in the consumers credit file stating that the consumer may be the victim of
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consumer notice requirements for lenders that use consumer report information in
connection with risk-based credit pricing programs; |
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for entities that furnish information to consumer reporting agencies (which would
include our subsidiary banks), requirements to implement procedures and policies
regarding the accuracy and integrity of the furnished information and regarding the
correction of previously furnished information that is later determined to be
inaccurate; and |
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a requirement for mortgage lenders to disclose credit scores to consumers. |
The FCRA Amendments also prohibit a business that receives consumer information from an
affiliate from using that information for marketing purposes unless the consumer is first provided
a notice and an opportunity to direct the business not to use the information for such marketing
purposes (the opt-out), subject to certain exceptions. We do not share consumer information among
our affiliated companies for marketing purposes, except as allowed under exceptions to the notice
and opt-out requirements. Because no affiliate of Home BancShares is currently sharing consumer
information with any other affiliate of Home BancShares for marketing purposes, the limitations on
sharing of information for marketing purposes do not have a significant impact on us.
Anti-Terrorism and Money Laundering Legislation
Our subsidiary banks are subject to the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism of 2001 (the USA PATRIOT Act), the
Bank Secrecy Act and rules and regulations of the Office of Foreign Assets Control (the OFAC).
These statutes and related rules and regulations impose requirements and limitations on specific
financial transactions and account relationships intended to guard against money laundering and
terrorism financing. Our subsidiary banks have established a customer identification program
pursuant to Section 326 of the USA PATRIOT Act and the Bank Secrecy Act, and otherwise have
implemented policies and procedures intended to comply with the foregoing rules.
Proposed Legislation and Regulatory Action
New regulations and statutes are regularly proposed that contain wide-ranging proposals for
altering the structures, regulations and competitive relationships of financial institutions
operating and doing business in the United States. We cannot predict whether or in what form any
proposed regulation or statute will be adopted or the extent to which our business may be affected
by any new regulation or statute.
Effect of Governmental Monetary Polices
Our earnings are affected by domestic economic conditions and the monetary and fiscal policies
of the United States government and its agencies. The Federal Reserve Boards monetary policies
have had, and are likely to continue to have, an important impact on the operating results of
commercial banks through its power to implement national monetary policy in order, among other
things, to curb inflation or combat a recession. The monetary policies of the Federal Reserve Board
affect the levels of bank loans, investments and deposits through its control over the issuance of
United States government securities, its regulation of the discount rate applicable to banks and
its influence over reserve requirements to which banks are subject. We cannot predict the nature or
impact of future changes in monetary and fiscal policies.
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Item 1A. RISK FACTORS
Our business exposes us to certain risks. Risks and uncertainties that management is not aware
of or focused on may also adversely affect our business and operation. The following is a
discussion of the most significant risks and uncertainties that may affect our business, financial
condition and future results.
Risks Related to Our Business
Our decisions regarding credit risk could be inaccurate and our allowance for loan losses may be
inadequate, which would materially and adversely affect our business, financial condition, results
of operations and future prospects.
Management makes various assumptions and judgments about the collectibility of our loan
portfolio, including the creditworthiness of our borrowers and the value of the real estate and
other assets serving as collateral for the repayment of our secured loans. We maintain an allowance
for loan losses that we consider adequate to absorb future losses which may occur in our loan
portfolio. In determining the size of the allowance, we analyze our loan portfolio based on our
historical loss experience, volume and classification of loans, volume and trends in delinquencies
and non-accruals, national and local economic conditions, and other pertinent information. As of
December 31, 2006, our allowance for loan losses was approximately $26.1 million, or 1.8% of our
total loans receivable.
If our assumptions are incorrect, our current allowance may be insufficient to cover future
loan losses, and increased loan loss reserves may be needed to respond to different economic
conditions or adverse developments in our loan portfolio. In addition, federal and state regulators
periodically review our allowance for loan losses and may require us to increase our allowance for
loan losses or recognize further loan charge-offs based on judgments different than those of our
management. Any increase in our allowance for loan losses or loan charge-offs could have a negative
effect on our operating results.
Because we have a high concentration of loans secured by real estate, a downturn in the real estate
market could result in losses and materially and adversely affect business, financial condition,
results of operations and future prospects.
A significant portion of our loan portfolio is dependent on real estate. As of December 31,
2006, approximately 80.2% of our loans had real estate as a primary or secondary component of
collateral. The real estate collateral in each case provides an alternate source of repayment in
the event of default by the borrower and may deteriorate in value during the time the credit is
extended. An adverse change in the economy affecting values of real estate generally or in our
primary markets specifically could significantly impair the value of our collateral and our ability
to sell the collateral upon foreclosure. Furthermore, it is likely that we would be required to
increase our provision for loan losses. If we are required to liquidate the collateral securing a
loan to satisfy the debt during a period of reduced real estate values or to increase our allowance
for loan losses, our profitability and financial condition could be adversely impacted.
In Northwest Arkansas, the number of residential real estate lots and commercial real estate
projects available exceed the current demand. For example, The Skyline Report published in
February 2007 by the University of Arkansas, reported that the current absorption rate implies that
the supply of remaining lots in northwest Arkansas active subdivisions is sufficient for 47.0
months. Managements failure to monitor the status of the market and make the necessary changes
could have a negative effect on operating results. At December 31, 2006, we had
approximately $21.3 million in loan participations with our unconsolidated affiliate White River
Bancshares, Inc. in northwest Arkansas.
Because we have a concentration of exposure to a number of individual borrowers, a significant loss
on any of those loans could materially and adversely affect our business, financial condition,
results of operations, and future prospects.
We have a concentration of exposure to a number of individual borrowers. Under applicable law,
each of our bank subsidiaries is generally permitted to make loans to one borrowing relationship up
to 20% of their respective capital in the case of our Arkansas bank subsidiaries, and 15% of
capital (25% on secured loans) in the case of our Florida bank subsidiary. Historically, when our
bank subsidiaries have lending relationships that exceed their individual loan to one
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borrower limitation, the overline, or amount in excess of the subsidiary banks legal lending limit, is
participated to our other bank subsidiaries. As a result, on a consolidated basis we may have
aggregate exposure to individual or related borrowers in excess of each individual bank
subsidiarys legal lending limit. As of December 31, 2006, the aggregate legal lending limit of our
bank subsidiaries for secured loans was approximately $38.7 million. Currently, our board of
directors has established an in-house consolidated lending limit of $16.0 million to any one
borrowing relationship without obtaining the approval of our Chairman and our Vice Chairman.
As of December 31, 2006, we had 14 borrowing relationships where we had a commitment to loan
in excess of $10.0 million, with the aggregate amount of those commitments totaling approximately
$240.8 million. The largest of those commitments to one borrowing relationship was $27.3 million,
which is 11.8% of our consolidated shareholders equity. Given the size of these loan relationships
relative to our capital levels and earnings, a significant loss on any one of these loans could
materially and adversely affect our business, financial condition, results of operations, and
future prospects.
The unexpected loss of key officers may materially and adversely affect our business, financial
condition, results of operations and future prospects.
Our success depends significantly on our executive officers, especially John W. Allison, Ron
W. Strother, Randy E. Mayor, and on the presidents of our bank subsidiaries. Our bank subsidiaries,
in particular, rely heavily on their management teams relationships in their local communities to
generate business. Because we do not have employment agreements or non-compete agreements with our
employees, our executive officers and bank presidents are free to resign at any time and accept an
employment offer from another company, including a competitor. The loss of services from a member
of our current management team may materially and adversely affect our business, financial
condition, results of operations and future prospects.
Our growth and expansion strategy may not be successful and our market value and profitability may
suffer.
Growth through the acquisition of banks, de novo branching, and the organization of new banks
represents an important component of our business strategy. Although we have no present plans to
acquire any financial institution or financial services provider, any future acquisitions we might
make will be accompanied by the risks commonly encountered in acquisitions. These risks include,
among other things:
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credit risk associated with the acquired banks loans and investments; |
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difficulty of integrating operations and personnel; and |
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potential disruption of our ongoing business. |
We expect that competition for suitable acquisition candidates may be significant. We may
compete with other banks or financial service companies with similar acquisition strategies, many
of which are larger and have greater financial and other resources. We cannot assure you that we
will be able to successfully identify and acquire suitable acquisition targets on acceptable terms
and conditions.
In addition to the acquisition of existing financial institutions, we plan to continue de novo
branching, and we may consider the organization of new banks in new market areas. We do not,
however, have any current plans to organize a new bank. De novo branching and any acquisition or
organization of a new bank carries with it numerous risks, including the following:
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the inability to obtain all required regulatory approvals; |
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significant costs and anticipated operating losses associated with establishing a de novo branch or a new
bank; |
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the inability to secure the services of qualified senior management; |
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the local market may not accept the services of a new bank owned and managed by a bank holding
company headquartered outside of the market area of the new bank; |
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the inability to obtain attractive locations within a new market at a reasonable cost; and |
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the additional strain on management resources and internal systems and controls. |
We cannot assure that we will be successful in overcoming these risks or any other problems
encountered in connection with acquisitions, de novo branching and the organization of new banks.
Our inability to overcome these risks could have an adverse effect on our ability to achieve our
business strategy and maintain our market value and profitability.
We expect to continue to grow our assets and deposits, the products and services we offer, and
the scale of our operations, generally, both internally and through acquisitions. If we continue to
grow rapidly, we may not be able to control costs and maintain our asset quality. Our ability to
manage our growth successfully will depend on our ability to maintain cost controls and asset
quality while attracting additional loans and deposits on favorable terms. If we grow too quickly
and are not able to control costs and maintain asset quality, this rapid growth could materially
and adversely affect our financial performance.
There may be undiscovered risks or losses associated with our acquisitions of bank subsidiaries
which would have a negative impact upon our future income.
Our growth strategy includes strategic acquisitions of bank subsidiaries. We acquired three
bank subsidiaries in 2005, and will continue to consider strategic acquisitions, with a primary
focus on Arkansas and southwestern Florida. In most cases, our acquisition of a bank includes the
acquisition of all of the target banks assets and liabilities, including its loan portfolio. There
may be instances when we, under our normal operating procedures, may find after the acquisition
that there may be additional losses or undisclosed liabilities with respect to the assets and
liabilities of the target bank, and, with respect to its loan portfolio, that the ability of a
borrower to repay a loan may have become impaired, the quality of the value of the collateral
securing a loan may fall below our standards, or the allowance for loan losses may not be adequate.
One or more of these factors might cause us to have additional losses or liabilities, additional
loan charge-offs, or increases in allowances for loan losses, which would have a negative impact
upon our future income.
An economic downturn, natural disaster or act of terrorism, especially one affecting our market
areas, could adversely affect our business, financial condition, results of operations and future
prospects.
Our business is affected by prevailing economic conditions in the United States, including
inflation and unemployment rates, but is particularly subject to the local economies in Arkansas,
the Florida Keys and southwestern Florida. Our relatively small size and our geographic
concentration expose us to greater risk of unfavorable local economic conditions than the larger
national or regional banks in our market areas. Adverse changes in local economic factors, such as
population growth trends, income levels, deposits and housing starts, may adversely affect our
operations.
We are at risk of natural disaster or acts of terrorism, even if our market areas are not
primarily affected. Our Florida market, in particular, is subject to risks from hurricanes, which
may damage or dislocate our facilities, damage or destroy collateral, adversely affect the
livelihood of borrowers or otherwise cause significant economic dislocation in areas we serve.
If and when economic conditions deteriorate, either in our local market areas or nationwide,
we may experience a reduction in the demand for our products and services and deterioration in the
quality of our loan portfolio and consequently have a material and adverse effect on our business,
financial condition, results of operations and future prospects.
Competition from other financial institutions may adversely affect our profitability.
The banking business is highly competitive. We experience strong competition, not only from
commercial banks, savings and loan associations, and credit unions, but also from mortgage banking
firms, consumer finance companies, securities brokerage firms, insurance companies, money market
funds, and other financial institutions operating in or near our market areas. We compete with
these institutions both in attracting deposits and in making loans.
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Many of our competitors are much larger national and regional financial institutions. We may
face a competitive disadvantage against them as a result of our smaller size and resources and our
lack of geographic diversification.
We also compete against community banks that have strong local ties. These smaller
institutions are likely to cater to the same small and mid-sized businesses that we target and to
use a relationship-based approach similar to ours. In addition, our competitors may seek to gain
market share by pricing below the current market rates for loans and paying higher rates for
deposits. Competitive pressures can adversely affect our profitability.
Our recent results do not indicate our future results, and may not provide guidance to assess the
risk of an investment in our common stock.
We are unlikely to sustain our historical rate of growth, and may not even be able to expand
our business at all. Further, our recent growth may distort some of our historical financial ratios
and statistics. In the future, we may not have the benefit of several recently favorable factors,
such as a strong residential housing market or the ability to find suitable expansion
opportunities. Various factors, such as economic conditions, regulatory and legislative
considerations and competition, may also impede or prohibit our ability to expand our market
presence. If we are not able to successfully grow our business, our financial condition and results
of operations could be adversely affected.
We may not be able to raise the additional capital we need to grow and, as a result, our ability to
expand our operations could be materially impaired.
Federal and state regulatory authorities require us and our bank subsidiaries to maintain
adequate levels of capital to support our operations. While we believe that our capital will be
sufficient to support our current operations and anticipated expansion, factors such as faster than
anticipated growth, reduced earning levels, operating losses, changes in economic conditions,
revisions in regulatory requirements, or additional acquisition opportunities may lead us to seek
additional capital.
Our ability to raise additional capital, if needed, will depend on our financial performance
and on conditions in the capital markets at that time, which are outside our control. If we need
additional capital but cannot raise it on terms acceptable to us, our ability to expand our
operations could be materially impaired.
We are considered by the Federal Reserve Board to be a source of financial strength for White
River Bancshares and may be required to support its capital.
We hold a 20% ownership interest in White River Bancshares, Inc., a bank holding company
headquartered in Fayetteville, Arkansas. Our minority ownership means that we lack effective power
to control the operations of the holding company. We are, nevertheless, considered by the Federal
Reserve Board to be a source of financial strength for that holding company. As a result, we may be
required to contribute sufficient funds for White River Bancshares to meet regulatory capital
requirements if it is unable to raise funds from other sources. An obligation to support White
River Bancshares may be required at times when, in the absence of this Federal Reserve Board
policy, we might not be inclined to provide it. As of and for the year ended December 31, 2006,
White River Bancshares had total assets of $343.2 million, total shareholders equity of $55.5
million, and a net operating loss of $2.0 million. The capital ratios for White River Bancshares
wholly-owned bank subsidiary, Signature Bank of Arkansas, at year-end and the minimum ratios
required to be considered well capitalized were: leverage ratio, 15.66% (5.0% required); Tier 1
capital ratio, 17.25% (6.0% required); and total risk-based capital ratio, 18.48% (10.0% required).
We may be unable to, or choose not to, pay dividends on our common stock.
Although we have paid a quarterly dividend on our common stock since the second quarter of
2003 and expect to continue this practice, we cannot assure you of our ability to continue. Our
ability to pay dividends depends on the following factors, among others:
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We may not have sufficient earnings since our primary source of income, the payment of
dividends to us by our bank subsidiaries, is subject to federal and state laws that limit
the ability of these banks to pay dividends.
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Federal Reserve Board policy requires bank holding companies to pay cash dividends on
common stock only out of net income available over the past year and only if prospective
earnings retention is consistent with the organizations expected future needs and
financial condition. |
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Before dividends may be paid on our common stock in any year, payments must be made on
our subordinated debentures. |
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Our board of directors may determine that, even though funds are available for dividend
payments, retaining the funds for internal uses, such as expansion of our operations, is a
better strategy. |
If we fail to pay dividends, capital appreciation, if any, of our common stock may be the sole
opportunity for gains on an investment in our company.
Our directors and executive officers own a significant portion of our common stock and can exert
significant control over our business and corporate affairs.
Our directors and executive officers, as a group, beneficially own approximately 33.3% of our
common stock. Consequently, if they vote their shares in concert, they can significantly influence
the outcome of all matters submitted to our shareholders for approval, including the election of
directors. The interests of our officers and directors may conflict with the interests of other
holders of our common stock, and they may take actions affecting our company with which you
disagree.
The holders of our subordinated debentures have rights that are senior to those of our
shareholders.
We have $44.8 million of subordinated debentures issued in connection with trust preferred
securities. Payments of the principal and interest on the trust preferred securities are
unconditionally guaranteed by us. The subordinated debentures are senior to our shares of common
stock. As a result, we must make payments on the subordinated debentures (and the related trust
preferred securities) before any dividends can be paid on our common stock and, in the event of our
bankruptcy, dissolution or liquidation, the holders of the debentures must be satisfied before any
distributions can be made to the holders of our common stock. We have the right to defer
distributions on the subordinated debentures (and the related trust preferred securities) for up to
five years, during which time no dividends may be paid to holders of our common stock.
Risks Related to Our Industry
Our profitability is vulnerable to interest rate fluctuations and monetary policy.
Most of our assets and liabilities are monetary in nature, and thus subject us to significant
risks from changes in interest rates. Consequently, our results of operations can be significantly
affected by changes in interest rates and our ability to manage interest rate risk. Changes in
market interest rates, or changes in the relationships between short-term and long-term market
interest rates, or changes in the relationship between different interest rate indices can affect
the interest rates charged on interest-earning assets differently than the interest paid on
interest-bearing liabilities. This difference could result in an increase in interest expense
relative to interest income or a decrease in interest rate spread. In addition to affecting our
profitability, changes in interest rates can impact the valuation of our assets and liabilities.
As of December 31, 2006, our one-year ratio of interest-rate-sensitive assets to
interest-rate-sensitive liabilities was 99.2% and our cumulative gap
position was -1.1% of total
earning assets, resulting in a minimum impact on earnings for various interest rate change
scenarios. Floating rate loans made up 38.8% of our $1.42 billion loan portfolio. In addition,
71.1% of our loans receivable and 85.0% of our time deposits were scheduled to reprice within 12
months and our other rate sensitive asset and rate sensitive liabilities composition is subject to
change. Significant composition changes in our rate sensitive assets or liabilities could result in
a more unbalanced position and interest rate changes would have more of an impact to our earnings.
Our results of operations are also affected by the monetary policies of the Federal Reserve
Board. Actions by the Federal Reserve Board involving monetary policies could have an adverse
effect on our deposit levels, loan demand or business and earnings.
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We are subject to extensive regulation that could limit or restrict our activities and impose
financial requirements or limitations on the conduct of our business, which limitations or
restrictions could adversely affect our profitability.
We are a registered financial holding company primarily regulated by the Federal Reserve
Board. Our bank subsidiaries are also primarily regulated by the Federal Reserve Board, the Federal
Deposit Insurance Corporation, and the Arkansas State Bank Department or Florida Office of
Financial Regulation.
Complying with banking industry regulations is costly and may limit our growth and restrict
certain of our activities, including payment of dividends, mergers and acquisitions, investments,
loans and interest rates charged, interest rates paid on deposits and locations of offices. We are
also subject to capital requirements by our regulators.
Violations of various laws, even if unintentional, may result in significant fines or other
penalties, including restrictions on branching or bank acquisitions. Recently, banks generally have
faced increased regulatory sanctions and scrutiny, particularly under the USA Patriot Act and
statutes that promote customer privacy or seek to prevent money laundering. As regulation of the
banking industry continues to evolve, we expect the costs of compliance to continue to increase
and, thus, to affect our ability to operate profitably.
We are subject to the many requirements of the Securities Exchange Act of 1934, the
Sarbanes-Oxley Act of 2002, and the related rules and regulations promulgated by the Securities and
Exchange Commission and Nasdaq. These laws and regulations increased the scope, complexity and cost
of our corporate governance, reporting and disclosure practices. Although we are accustomed to
conducting business in a highly regulated environment, these laws and regulations have different
requirements for compliance than we have previously experienced. Our expenses for accounting, legal
and consulting services have increased because of the new obligations we are facing as a public
company. In addition, the sudden application of these requirements to our business has resulted in
some cultural adjustments and may strain our management resources.
To date, we have not conducted a comprehensive review and confirmation of the adequacy of our
existing systems and controls as will be required under Section 404 of the Sarbanes-Oxley Act. We
may discover deficiencies in existing systems and controls. If that is the case, we intend to take
the necessary steps to correct any deficiencies. These steps may be costly and strain our
resources. A decline in the market price for our common stock may result if we are unable to comply
with the Sarbanes-Oxley Act.
Risks Associated With Our Stock
Our stock price is affected by a variety of factors, many of which are outside of our control.
Stock price volatility may make it more difficult for investors to resell shares of our common
stock at times and prices they find attractive. Our common stock price can fluctuate significantly
in response to a variety of factors, including, among other things:
|
|
|
actual or anticipated variations in quarterly results of operations; |
|
|
|
|
recommendations by securities analysts; |
|
|
|
|
operating and stock price performance of other companies that investors deem comparable to us; |
|
|
|
|
news reports relating to trends, concerns and other issues in the financial services industry; and |
|
|
|
|
perceptions in the marketplace regarding us and/or our competitors. |
Our stock trading volume may not provide adequate liquidity for investors.
Although shares of our common stock are listed for trade on the Nasdaq Stock Market, the
average daily trading volume in the common stock is less than that of other larger financial
services companies. A public trading market having the desired characteristics of depth, liquidity
and orderliness depends on the presence in the marketplace of a sufficient number of willing buyers
and sellers of the common stock at any given time. This presence depends on the individual
decisions of investors and general economic and market conditions over which we have no control.
Given
27
the daily average trading volume of our common stock, significant sales of the common stock in
a brief period of time, or the expectation of these sales, could cause a decline in the price of
our common stock.
Our common stock is not an insured deposit.
Our common stock is not a bank deposit and, therefore, losses in its value are not insured by
the FDIC, any other deposit insurance fund or by any other public or private entity. Investment in
our common stock is inherently risky for the reasons described in this Risk Factors section and
elsewhere in this report, and is subject to the same market forces that affect the price of common
stock in any other company.
Item 1B. UNRESOLVED STAFF COMMENTS
There are currently no unresolved Commission staff comments.
Item 2. PROPERTIES
As of December 31, 2006, our bank subsidiaries operated a total of 40 branches in
Arkansas and ten branches in Florida, and were in various stages of opening an additional two
branches, as shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned or |
|
Date |
|
Square |
Office Address |
|
City |
|
Leased |
|
Constructed |
|
Feet |
First State Bank |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
620 Chestnut |
|
Conway, AR |
|
Owned |
|
|
1999 |
|
|
|
9,000 |
|
2500 Dave Ward Drive |
|
Conway, AR |
|
Owned |
|
|
2002 |
|
|
|
2,640 |
|
1815 East Oak Street |
|
Conway, AR |
|
Owned |
|
|
2001 |
|
|
|
2,640 |
|
2690 Donaghey |
|
Conway, AR |
|
Leased |
|
|
2001 |
|
|
|
2,600 |
|
1445 Hogan Lane |
|
Conway, AR |
|
Leased |
|
|
2004 |
|
|
|
3,200 |
|
945 Salem Road |
|
Conway, AR |
|
Owned |
|
|
1999 |
|
|
|
4,200 |
|
1208 Oak |
|
Conway, AR |
|
Owned |
|
|
1999 |
|
|
|
2,500 |
|
582 Highway 365 South |
|
Mayflower, AR |
|
Leased |
|
|
2000 |
|
|
|
800 |
|
1044 Main Street |
|
Vilonia, AR |
|
Owned |
|
|
1999 |
|
|
|
2,640 |
|
#8 Business Park Drive |
|
Greenbrier, AR |
|
Owned |
|
|
2002 |
|
|
|
2,640 |
|
1300 West Beebe-Capps Expwy |
|
Searcy, AR |
|
Owned |
|
|
2006 |
|
|
|
5,000 |
|
Community Bank |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
218 West Main |
|
Cabot, AR |
|
Owned |
|
|
1977 |
|
|
|
1,200 |
|
2171 West Main |
|
Cabot, AR |
|
Owned |
|
|
1999 |
|
|
|
20,500 |
|
3111 Bill Foster Memorial Hwy |
|
Cabot, AR |
|
Leased (2) |
|
|
2004 |
|
|
|
3,500 |
|
One City Plaza |
|
Cabot, AR |
|
Owned |
|
|
1978 |
|
|
|
22,150 |
|
1204 S. Pine Street |
|
Cabot, AR |
|
Owned |
|
|
1990 |
|
|
|
3,300 |
|
707 Dewitt Henry Drive |
|
Beebe, AR |
|
Owned |
|
|
1998 |
|
|
|
2,924 |
|
10 Crestview Plaza |
|
Jacksonville, AR |
|
Leased |
|
|
1997 |
|
|
|
2,600 |
|
1900 John Hardin Drive |
|
Jacksonville, AR |
|
Owned |
|
|
2000 |
|
|
|
3,807 |
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned or |
|
Date |
|
Square |
Office Address |
|
City |
|
Leased |
|
Constructed |
|
Feet |
Community Bank |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1816 West Main |
|
Jacksonville, AR |
|
Owned |
|
|
2005 |
|
|
|
5,000 |
|
902 North Street |
|
Ward, AR |
|
Owned |
|
|
1973 |
|
|
|
2,400 |
|
30 Hwy 64 West |
|
Beebe, AR |
|
Owned |
|
|
2006 |
|
|
|
3,425 |
|
Twin City Bank |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2716 Lakewood Village Place |
|
North Little Rock, AR |
|
Leased |
|
|
2000 |
|
|
|
3,579 |
|
650 Main |
|
North Little Rock, AR |
|
Leased |
|
|
2000 |
|
|
|
1,344 |
|
4308 Broadway |
|
North Little Rock, AR |
|
Owned |
|
|
2001 |
|
|
|
2,060 |
|
3811 MacArthur Drive |
|
North Little Rock, AR |
|
Owned |
|
|
2000 |
|
|
|
1,360 |
|
4515 Camp Robinson Road |
|
North Little Rock, AR |
|
Owned |
|
|
2004 |
|
|
|
3,700 |
|
9501 Maumelle Boulevard |
|
Maumelle, AR |
|
Owned |
|
|
2005 |
|
|
|
4,000 |
|
7213 Hwy. 107 |
|
Sherwood, AR |
|
Owned |
|
|
2002 |
|
|
|
3,700 |
|
301 East Kiehl |
|
Sherwood, AR |
|
Owned |
|
|
1998 |
|
|
|
2,898 |
|
2922 South University |
|
Little Rock, AR |
|
Leased |
|
|
2003 |
|
|
|
3,511 |
|
10315 Interstate 30 |
|
Little Rock, AR |
|
Owned |
|
|
2003 |
|
|
|
3,700 |
|
718 Broadway |
|
Little Rock, AR |
|
Owned |
|
|
2005 |
|
|
|
2,500 |
|
520 Bowman |
|
Little Rock, AR |
|
Leased |
|
|
2003 |
|
|
|
4,664 |
|
5100 Kavanaugh Avenue |
|
Little Rock, AR |
|
Leased |
|
|
2003 |
|
|
|
893 |
|
2610 Cantrell Road |
|
Little Rock, AR |
|
Leased |
|
|
2003 |
|
|
|
5,000 |
|
13910 Cantrell Road |
|
Little Rock, AR |
|
Owned |
|
|
2003 |
|
|
|
3,700 |
|
9712 Rodney Parham |
|
Little Rock, AR |
|
Owned |
|
|
2003 |
|
|
|
3,700 |
|
Bank of Mountain View |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121 East Main Street |
|
Mountain View, AR |
|
Owned |
|
|
1968 |
|
|
|
1,354 |
|
Oak and Main Street |
|
Mountain View, AR |
|
Owned |
|
|
1992 |
|
|
|
1,958 |
|
Marine Bank |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11290 Overseas Highway |
|
Marathon, FL |
|
Owned |
|
|
1995 |
|
|
|
7,414 |
|
25000 Overseas Highway |
|
Summerland Key, FL |
|
Leased |
|
|
1998 |
|
|
|
296 |
|
82787 Overseas Highway |
|
Islamorada, FL |
|
Owned |
|
|
1988 |
|
|
|
705 |
|
101 Wilder Road |
|
Marathon, FL |
|
Owned |
|
|
1998 |
|
|
|
3,456 |
|
4594 Overseas Highway |
|
Marathon, FL |
|
Owned |
|
|
2000 |
|
|
|
1,450 |
|
2514 N. Roosevelt Blvd |
|
Key West, FL |
|
Leased (2) |
|
|
2001 |
|
|
|
3,756 |
|
789 Duck Key Lane |
|
Marathon, FL |
|
Leased |
|
|
2001 |
|
|
|
850 |
|
22627 Bayshore Road |
|
Port Charlotte, FL |
|
Leased |
|
|
2006 |
|
|
|
3,384 |
|
615 Elkham Circle |
|
Marco Island, FL |
|
Leased |
|
|
2006 |
|
|
|
8,000 |
|
401 Taylor Street |
|
Punta Gorda, FL |
|
Owned |
|
|
2006 |
|
|
|
5,871 |
|
100290 Overseas Highway |
|
Key Largo, FL |
|
Leased |
|
Pending |
|
|
4,500 |
(1) |
1229 Simonton Street |
|
Key West, FL |
|
Leased |
|
Pending |
|
|
3,440 |
(1) |
|
|
|
(1) |
|
Sizes of pending offices are estimated. |
|
(2) |
|
Office is located on land that we lease. |
29
In addition to the branches listed above, we and our non-bank subsidiaries had offices as
shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned or |
|
Date |
|
Square |
Office Address |
|
City |
|
Leased |
|
Constructed |
|
Feet |
719 Harkrider Street |
|
Conway, AR |
|
Owned |
|
|
1984 |
|
|
|
33,000 |
|
203 Dakota Drive, Suites A and C |
|
Cabot, AR |
|
Leased |
|
|
2000 |
|
|
|
2,000 |
|
1515 N. Center, Suite 9 |
|
Lonoke, AR |
|
Leased |
|
|
2000 |
|
|
|
600 |
|
#3 Crestview Plaza |
|
Jacksonville, AR |
|
Leased |
|
|
2000 |
|
|
|
1,600 |
|
715 Chestnut |
|
Conway, AR |
|
Leased |
|
|
1999 |
|
|
|
2,100 |
|
81011 Overseas Highway |
|
Islamorada, FL |
|
Leased |
|
|
2002 |
|
|
|
2,500 |
|
1638 Overseas Highway |
|
Marathon, FL |
|
Owned |
|
|
2003 |
|
|
|
1,960 |
|
We believe that our banking and other offices are in good condition and are suitable to our
needs.
Item 3. LEGAL PROCEEDINGS
While we and our bank subsidiaries and other affiliates are from time to time parties to
various legal proceedings arising in the ordinary course of their business, management believes,
after consultation with legal counsel, that there are no proceedings threatened or pending against
us or our bank subsidiaries or other affiliates that will, individually or in the aggregate, have a
material adverse affect on our business or consolidated financial condition.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security-holders, through the solicitation of proxies
or otherwise, during the fourth quarter of the fiscal year covered by this report.
PART II
|
|
|
Item 5. |
|
MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES |
Our common stock began trading on the Nasdaq National Market under the symbol HOMB on June
23, 2006 upon completion of our initial public offering. Prior to our initial public offering
there had been no public market for our common stock. Shares of our common stock were sold for
$18.00 per share in the initial public offering on June 22, 2006. The stocks price at the close
of the market on June 23, 2006 was $20.00.The following table sets forth, for all the periods
indicated, cash dividends declared, and the high and low closing bid prices for our common stock
including the initial public offering.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly |
|
|
|
|
|
|
|
|
|
|
Dividends |
|
|
Price per Common Share |
|
Per Common |
|
|
High |
|
Low |
|
Share |
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
1st Quarter |
|
|
N/A |
|
|
|
N/A |
|
|
|
0.020 |
|
2nd Quarter (June 22 - 30) |
|
|
22.70 |
|
|
|
18.00 |
|
|
|
0.020 |
|
3rd Quarter |
|
|
23.00 |
|
|
|
20.52 |
|
|
|
0.025 |
|
4th Quarter |
|
|
25.15 |
|
|
|
21.02 |
|
|
|
0.025 |
|
Our policy is to declare regular quarterly dividends based upon our earnings, financial
position, capital improvements and such other factors deemed relevant by the Board of Directors.
The dividend policy is subject to change, however, and the payment of dividends is necessarily
dependent upon the availability of earnings and future financial condition.
30
There were no sales of our unregistered securities during the period covered by this report
that have not been previously disclosed in our quarterly reports on Form 10-Q.
On June 22, 2006, the Companys Registration Statement on Form S-1 covering the offering of
2,500,000 shares of the Companys common stock, Commission file number 333-132427 was declared
effective. The Company signed the underwriting agreement on June 22, 2006 and the offering closed
on June 28, 2006. As of the date of the filing of this report, all offered securities have been
sold and the offering has terminated. The offering was managed by Stephens Inc. (the principal
Underwriter).
On July 21, 2006, the principal Underwriter exercised an over-allotment option to purchase an
additional 375,000 shares of the Companys common stock. The total price to the public for the
shares offered and sold by the Company, including the over-allotment, was $51.8 million. The amount
of expenses incurred for the Companys account in connection with the offering includes
approximately $3.6 million of underwriting discounts and commissions and offering expenses of
approximately $1.0 million.
All of the foregoing expenses were direct or indirect payments to persons other than (i)
directors, officers or their associates; (ii) persons owning ten percent (10%) or more of the
Companys common stock; or (iii) affiliates of the Company.
The net proceeds of the offering, including the exercise of the over-allotment option, to the
Company (after deducting the foregoing expenses) were $47.2 million. Presently, the net proceeds
are temporarily being held as available cash in our banking subsidiaries, which in turn allows them
to use the proceeds in their normal day to day funding needs. There has been no material change in
the planned use of proceeds from this initial public offering as described in the Companys final
prospectus filed with the SEC.
We currently maintain one compensation plan, Home BancShares, Inc. 2006 Stock Option and
Performance Incentive Plan, that provides for the issuance of stock-based compensation to
directors, officers and other employees. This plan has been approved by the shareholders. The
following table sets forth information regarding outstanding options and shares reserved for future
issuance under the foregoing plan as of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
Number of securities |
|
|
securities to be |
|
|
|
|
|
remaining available for |
|
|
issued |
|
Weighted-avergage |
|
future issuance under |
|
|
upon exercise of |
|
exercise price of |
|
equity compensation plans |
|
|
outstanding options, |
|
outstanding options, |
|
(excluding shares |
|
|
warrants and rights |
|
warrants and rights |
|
reflected in column (a) |
Plan Category |
|
(a) |
|
(b) |
|
(c) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans
approved by the shareholders |
|
|
1,031,884 |
|
|
$ |
11.39 |
|
|
|
126,590 |
|
|
Equity compensation plans |
|
|
|
|
|
|
|
|
|
|
|
|
not approved by the
shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
Performance Graph
Below is a graph which summarizes the cumulative return earned by the Companys stockholders
since its shares of common stock were registered under Section 12 of the Exchange Act on June 22,
2006, compared with the cumulative total return on the Russell 2000 Index and SNL Bank and Thrift
Index. This presentation assumes that the value of the investment in the Companys common stock and
each index was $100.00 on June 22, 2006 and that subsequent cash dividends were reinvested.
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Ending |
Index |
|
06/22/06 |
|
08/31/06 |
|
09/30/06 |
|
10/31/06 |
|
11/30/06 |
|
12/31/06 |
|
Home BancShares, Inc. |
|
|
100.00 |
|
|
|
117.64 |
|
|
|
122.81 |
|
|
|
122.70 |
|
|
|
123.53 |
|
|
|
133.86 |
|
Russell 2000 |
|
|
100.00 |
|
|
|
104.98 |
|
|
|
105.85 |
|
|
|
111.95 |
|
|
|
114.89 |
|
|
|
115.28 |
|
SNL Bank and Thrift |
|
|
100.00 |
|
|
|
104.61 |
|
|
|
107.06 |
|
|
|
108.00 |
|
|
|
107.91 |
|
|
|
112.35 |
|
32
Item 6. SELECTED FINANCIAL DATA.
Summary Consolidated Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of or for the Years Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
|
(Dollars and shares in thousands, except per share data) |
|
Income statement data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
$ |
123,763 |
|
|
$ |
85,458 |
|
|
$ |
36,681 |
|
|
$ |
21,538 |
|
|
$ |
20,361 |
|
Total interest expense |
|
|
60,940 |
|
|
|
36,002 |
|
|
|
11,580 |
|
|
|
8,240 |
|
|
|
7,490 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
62,823 |
|
|
|
49,456 |
|
|
|
25,101 |
|
|
|
13,298 |
|
|
|
12,871 |
|
Provision for loan losses |
|
|
2,307 |
|
|
|
3,827 |
|
|
|
2,290 |
|
|
|
807 |
|
|
|
2,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses |
|
|
60,516 |
|
|
|
45,629 |
|
|
|
22,811 |
|
|
|
12,491 |
|
|
|
10,651 |
|
Non-interest income |
|
|
19,127 |
|
|
|
15,222 |
|
|
|
13,681 |
|
|
|
6,739 |
|
|
|
5,354 |
|
Gain on sale of equity investment |
|
|
|
|
|
|
465 |
|
|
|
4,410 |
|
|
|
|
|
|
|
|
|
Non-interest expense |
|
|
56,478 |
|
|
|
44,935 |
|
|
|
26,131 |
|
|
|
13,070 |
|
|
|
10,052 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest |
|
|
23,165 |
|
|
|
16,381 |
|
|
|
14,771 |
|
|
|
6,160 |
|
|
|
5,953 |
|
Provision for income taxes |
|
|
7,247 |
|
|
|
4,935 |
|
|
|
5,030 |
|
|
|
2,343 |
|
|
|
2,076 |
|
Minority interest |
|
|
|
|
|
|
|
|
|
|
582 |
|
|
|
48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
15,918 |
|
|
$ |
11,446 |
|
|
$ |
9,159 |
|
|
$ |
3,769 |
|
|
$ |
3,877 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings |
|
$ |
1.07 |
|
|
$ |
0.92 |
|
|
$ |
1.08 |
|
|
$ |
0.66 |
|
|
$ |
0.78 |
|
Diluted earnings |
|
|
1.00 |
|
|
|
0.82 |
|
|
|
0.94 |
|
|
|
0.63 |
|
|
|
0.77 |
|
Diluted cash earnings (1) |
|
|
1.07 |
|
|
|
0.89 |
|
|
|
0.98 |
|
|
|
0.64 |
|
|
|
0.77 |
|
Book value per common share |
|
|
13.45 |
|
|
|
11.45 |
|
|
|
10.75 |
|
|
|
9.79 |
|
|
|
8.36 |
|
Book value per share with preferred converted to
common (2) |
|
|
13.45 |
|
|
|
11.63 |
|
|
|
11.07 |
|
|
|
10.29 |
|
|
|
8.36 |
|
Tangible book value per common share (3) (6) |
|
|
10.72 |
|
|
|
7.43 |
|
|
|
7.89 |
|
|
|
6.63 |
|
|
|
8.36 |
|
Tangible book value per share with preferred
converted to common (2) (3) (6) |
|
|
10.72 |
|
|
|
8.21 |
|
|
|
8.70 |
|
|
|
7.68 |
|
|
|
8.36 |
|
Dividends Common |
|
|
0.09 |
|
|
|
0.07 |
|
|
|
0.04 |
|
|
|
0.01 |
|
|
|
|
|
Average common shares outstanding |
|
|
14,497 |
|
|
|
11,862 |
|
|
|
7,986 |
|
|
|
5,721 |
|
|
|
4,956 |
|
Average diluted shares outstanding |
|
|
15,923 |
|
|
|
13,889 |
|
|
|
9,783 |
|
|
|
5,964 |
|
|
|
5,019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets |
|
|
0.78 |
% |
|
|
0.69 |
% |
|
|
1.17 |
% |
|
|
0.85 |
% |
|
|
1.14 |
% |
Cash return on average assets (7) |
|
|
0.86 |
|
|
|
0.76 |
|
|
|
1.26 |
|
|
|
0.87 |
|
|
|
1.14 |
|
Return on average equity |
|
|
8.12 |
|
|
|
7.27 |
|
|
|
8.61 |
|
|
|
8.88 |
|
|
|
9.87 |
|
Cash return on average tangible equity (3) (8) |
|
|
11.46 |
|
|
|
10.16 |
|
|
|
11.54 |
|
|
|
9.44 |
|
|
|
9.87 |
|
Net interest margin (10) |
|
|
3.51 |
|
|
|
3.37 |
|
|
|
3.75 |
|
|
|
3.47 |
|
|
|
4.12 |
|
Efficiency ratio (4) |
|
|
64.99 |
|
|
|
64.94 |
|
|
|
57.65 |
|
|
|
64.61 |
|
|
|
55.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset quality: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming assets as a percentage of total assets |
|
|
0.23 |
% |
|
|
0.47 |
% |
|
|
1.18 |
% |
|
|
1.24 |
% |
|
|
0.58 |
% |
Nonperforming loans as a percentage of total loans |
|
|
0.32 |
|
|
|
0.69 |
|
|
|
1.73 |
|
|
|
1.73 |
|
|
|
0.64 |
|
Allowance for loan losses to nonperforming loans |
|
|
574.37 |
|
|
|
291.62 |
|
|
|
182.40 |
|
|
|
170.10 |
|
|
|
314.73 |
|
Allowance for loans losses to total loans |
|
|
1.84 |
|
|
|
2.01 |
|
|
|
3.16 |
|
|
|
2.94 |
|
|
|
2.00 |
|
Net charge-offs as a percentage of average total loans |
|
|
0.03 |
|
|
|
0.38 |
|
|
|
0.13 |
|
|
|
0.16 |
|
|
|
0.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet data (period end): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,190,648 |
|
|
$ |
1,911,491 |
|
|
$ |
805,186 |
|
|
$ |
803,103 |
|
|
$ |
368,983 |
|
Investment securities |
|
|
531,891 |
|
|
|
530,302 |
|
|
|
190,466 |
|
|
|
161,951 |
|
|
|
44,317 |
|
Loans receivable |
|
|
1,416,295 |
|
|
|
1,204,589 |
|
|
|
516,655 |
|
|
|
500,055 |
|
|
|
284,764 |
|
Allowance for loan losses |
|
|
26,111 |
|
|
|
24,175 |
|
|
|
16,345 |
|
|
|
14,717 |
|
|
|
5,706 |
|
Intangible assets |
|
|
46,985 |
|
|
|
48,727 |
|
|
|
22,816 |
|
|
|
25,252 |
|
|
|
|
|
Non-interest-bearing deposits |
|
|
215,142 |
|
|
|
209,974 |
|
|
|
86,186 |
|
|
|
76,508 |
|
|
|
31,027 |
|
Total deposits |
|
|
1,607,194 |
|
|
|
1,427,108 |
|
|
|
552,878 |
|
|
|
572,218 |
|
|
|
279,228 |
|
Subordinated debentures (trust preferred securities) |
|
|
44,663 |
|
|
|
44,755 |
|
|
|
24,219 |
|
|
|
24,238 |
|
|
|
|
|
Shareholders equity |
|
|
231,419 |
|
|
|
165,857 |
|
|
|
106,610 |
|
|
|
99,472 |
|
|
|
46,753 |
|
33
Summary Consolidated Financial Data Continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of or for the Years Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
|
(Dollars and shares in thousands, except per share data) |
|
Capital ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity to assets |
|
|
10.56 |
% |
|
|
8.68 |
% |
|
|
13.24 |
% |
|
|
12.39 |
% |
|
|
12.67 |
% |
Tangible equity to tangible assets (3) (9) |
|
|
8.60 |
|
|
|
6.29 |
|
|
|
10.71 |
|
|
|
9.54 |
|
|
|
12.67 |
|
Tier 1 leverage ratio (5) |
|
|
11.29 |
|
|
|
9.22 |
|
|
|
13.47 |
|
|
|
13.06 |
|
|
|
13.42 |
|
Tier 1 risk-based capital ratio |
|
|
14.57 |
|
|
|
12.25 |
|
|
|
17.39 |
|
|
|
16.35 |
|
|
|
14.17 |
|
Total risk-based capital ratio |
|
|
15.83 |
|
|
|
13.51 |
|
|
|
17.39 |
|
|
|
16.35 |
|
|
|
15.42 |
|
Dividend payout common |
|
|
8.46 |
|
|
|
7.30 |
|
|
|
3.71 |
|
|
|
2.46 |
|
|
|
|
|
|
|
|
(1) |
|
Diluted cash earnings per share reflect diluted earnings per share plus per share intangible
amortization expense, net of the corresponding tax effect. See Managements Discussion and
Analysis of Financial Condition and Results of Operations
Table 20, on page 63, for the
non-GAAP tabular reconciliation. |
|
(2) |
|
Shares of Class A preferred stock and Class B preferred stock outstanding on the indicated
dates are assumed to have been converted to shares of common stock. See Managements
Discussion and Analysis of Financial Condition and Results of Operations Table 21, on page
64. |
|
(3) |
|
Tangible calculations eliminate the effect of goodwill and acquisition-related intangible
assets and the corresponding amortization expense on a tax-effected basis. |
|
(4) |
|
The efficiency ratio is calculated by dividing non-interest expense less amortization of core
deposit intangibles by the sum of net interest income on a tax equivalent basis and
non-interest income. |
|
(5) |
|
Leverage ratio is Tier 1 capital to quarterly average total assets less intangible assets and
gross unrealized gains/losses on available-for-sale investment securities. |
|
(6) |
|
See Managements Discussion and Analysis of Financial Condition and Results of Operations
Table 21, on page 64, for the non-GAAP tabular reconciliation. |
|
(7) |
|
See Managements Discussion and Analysis of Financial Condition and Results of Operations
Table 22, on page 64, for the non-GAAP tabular reconciliation. |
|
(8) |
|
See Managements Discussion and Analysis of Financial Condition and Results of Operations
Table 23, on page 64, for the non-GAAP tabular reconciliation. |
|
(9) |
|
See Managements Discussion and Analysis of Financial Condition and Results of Operations
Table 24, on page 65, for the non-GAAP tabular reconciliation. |
|
(10) |
|
Fully taxable equivalent (assuming an income tax rate of 39.23% for 2006, 2005 and 2004 and
38.29% for 2003 and 2002). |
34
|
|
|
Item 7: |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS |
The following discussion and analysis presents our consolidated financial condition and
results of operations for the years ended December 31, 2006, 2005 and 2004. This discussion should
be read together with the Summary Consolidated Financial Data, our financial statements and the
notes thereto, and other financial data included in this document. In addition to the historical
information provided below, we have made certain estimates and forward-looking statements that
involve risks and uncertainties. Our actual results could differ significantly from those
anticipated in these estimates and in the forward-looking statements as a result of certain
factors, including those discussed in the section of this document captioned Risk Factors, and
elsewhere in this document. Unless the context requires otherwise, the terms us, we, and our
refer to Home BancShares, Inc. on a consolidated basis.
General
We are a financial holding company headquartered in Conway, Arkansas, offering a broad array
of financial services through our five wholly owned bank subsidiaries. As of December 31, 2006, we
had, on a consolidated basis, total assets of $2.19 billion, loans receivable of $1.42 billion,
total deposits of $1.61 billion, and shareholders equity of $231.4 million.
We generate most of our revenue from interest on loans and investments, service charges, and
mortgage banking income. Deposits are our primary source of funding. Our largest expenses are
interest on these deposits and salaries and related employee benefits. We measure our performance
by calculating our return on average equity, return on average assets, and net interest margin. We
also measure our performance by our efficiency ratio, which is calculated by dividing non-interest
expense less amortization of core deposit intangibles by the sum of net interest income on a tax
equivalent basis and non-interest income.
Key Financial Measures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Years Ended December 31, |
|
|
2006 |
|
2005 |
|
2004 |
|
|
(Dollars in thousands, except per share data) |
Total assets |
|
$ |
2,190,648 |
|
|
$ |
1,911,491 |
|
|
$ |
805,186 |
|
Loans receivable |
|
|
1,416,295 |
|
|
|
1,204,589 |
|
|
|
516,655 |
|
Total deposits |
|
|
1,607,194 |
|
|
|
1,427,108 |
|
|
|
552,878 |
|
Net income |
|
|
15,918 |
|
|
|
11,446 |
|
|
|
9,159 |
|
Basic earnings per share |
|
|
1.07 |
|
|
|
0.92 |
|
|
|
1.08 |
|
Diluted earnings per share |
|
|
1.00 |
|
|
|
0.82 |
|
|
|
0.94 |
|
Diluted cash earnings per share (1) |
|
|
1.07 |
|
|
|
0.89 |
|
|
|
0.98 |
|
Net interest margin FTE |
|
|
3.51 |
% |
|
|
3.37 |
% |
|
|
3.75 |
% |
Efficiency ratio |
|
|
64.99 |
|
|
|
64.94 |
|
|
|
57.65 |
|
Return on average assets |
|
|
0.78 |
|
|
|
0.69 |
|
|
|
1.17 |
|
Return on average equity |
|
|
8.12 |
|
|
|
7.27 |
|
|
|
8.61 |
|
|
|
|
(1) |
|
See Table 20 Diluted Cash Earnings Per Share for a reconciliation to GAAP for diluted cash
earnings per share. |
2006 Overview
Our net income increased $4.5 million, or 39.1%, to $15.9 million for the year ended December
31, 2006, from $11.4 million for the same period in 2005. Diluted earnings per share increased
$0.18, or 22.0%, to $1.00 for the year ended December 31, 2006, from $0.82 for 2005. The increase
in earnings is primarily associated with our acquisitions during 2005, combined with organic growth
of our bank subsidiaries.
Our return on average equity was 8.12% for the year ended December 31, 2006, compared to 7.27%
for 2005. Our return on average assets was 0.78% for the year ended December 31, 2006, compared to
0.69% for 2005. The increases were primarily due to the $4.5 million increase in net income for
2006 compared to 2005.
35
Our net interest margin on a fully tax equivalent basis was 3.51% for the year ended
December 31, 2006, compared to 3.37% for 2005. Competitive pressures and a slightly inverted yield
curve have put pressure on our net interest margin. Yet, we were able to improve the net interest
margin. The improvements were due to organic loan growth and the net proceeds from our initial
public offering combined with the acquisitions during 2005.
Our efficiency ratio (calculated by dividing non-interest expense less amortization of core
deposit intangibles by the sum of net interest income on a tax equivalent basis and non-interest
income) was 64.99% for the year ended December 31, 2006, compared to 64.94% for 2005.
Our total assets increased $279.2 million, or 14.6%, to $2.19 billion as of December 31, 2006,
compared to $1.91 billion as of December 31, 2005. Our loan portfolio increased $211.7 million, or
17.6%, to $1.42 billion as of December 31, 2006, from $1.20 billion as of December 31, 2005.
Shareholders equity increased $65.6 million, or 39.5%, to $231.4 million as of December 31, 2006,
from $165.9 million as of December 31, 2005. Asset and loan increases are primarily associated with
organic growth of our bank subsidiaries. The increase in stockholders equity was primarily the
result of the $47.2 million proceeds from our initial public offering and retained earnings during
2006.
As of December 31, 2006, our asset quality improved as non-performing loans declined to $4.5
million, or 0.32%, of total loans from $8.3 million, or 0.69%, of total loans as of the prior
year-end. The allowance for loan losses as a percent of non-performing loans improved to 574.4% as
of December 31, 2006, compared to 291.6% from the prior year-end. These ratios reflect the
continuing commitment of our management to improve and maintain sound asset quality.
2005 Overview
Our net income increased $2.3 million, or 25.0%, to $11.4 million for the year ended December
31, 2005, from $9.2 million for the same period in 2004. The increase in earnings is primarily
associated with our acquisitions during 2005, combined with organic growth of our bank
subsidiaries earnings. In 2004, our net income included a gain on the sale of our equity
investment in Russellville Bancshares. Excluding this after-tax gain of $2.7 million, net income
for 2005 would have increased by $5.0 million, or 75.4%, over 2004. Diluted earnings per share
decreased $0.12, or 12.8%, to $0.82 for the year ended December 31, 2005, from $0.94 for 2004. This
decrease was primarily the result of the gain of $0.27 per diluted share during 2004, and a 42.0%
increase in the average diluted shares outstanding for the year ended December 31, 2005, versus the
same period in 2004, resulting from the shares issued in connection with our 2005 acquisitions.
Excluding the gain, diluted earnings per share would have increased $0.15, or 22.4%, to $0.82 per
diluted share for the year ended December 31, 2005, from $0.67 per diluted share for 2004.
Our return on average equity was 7.27% for the year ended December 31, 2005, compared to 8.61%
for 2004. The decrease was primarily due to: (i) the $59.2 million, or 55.6%, increase in
shareholders equity to $165.9 million as of December 31, 2005, compared to $106.6 million as of
December 31, 2004; and (ii) a gain of $2.7 million in 2004. Return on average equity for 2004 would
have been 6.07%, excluding this gain. The increase in shareholders equity was primarily due to the
acquisitions of TCBancorp and Marine Bancorp.
Our return on average assets was 0.69% for the year ended December 31, 2005, compared to 1.17%
for 2004. The decrease was primarily due to: (i) the $1.1 billion, or 137.4%, increase in total
assets to $1.9 billion as of December 31, 2005, compared to $805.2 million as of December 31, 2004;
and (ii) a gain of $2.7 million in 2004. Return on average assets would have been 0.83% excluding
this gain. The increase in total assets was primarily due to the acquisitions of TCBancorp, Marine
Bancorp, and Mountain View Bancshares.
Our net interest margin was 3.37% for the year ended December 31, 2005, compared to 3.75% for
2004. The decrease was primarily due to the relatively lower net interest margin of 2.77% for Twin
City Bank for the year ended December 31, 2005.
Our efficiency ratio (calculated by dividing non-interest expense less amortization of core
deposit intangibles by the sum of net interest income on a tax equivalent basis and non-interest
income) was 64.94% for the year ended December 31, 2005, compared to 57.65% for 2004. The
efficiency ratio for 2004 would have been 64.06% excluding our gain of $2.7 million.
36
Our total assets increased $1.1 billion, or 137.4%, to $1.9 billion as of December 31, 2005,
compared to $805.2 million as of December 31, 2004. Our loan portfolio increased $687.9 million, or
133.2%, to $1.2 billion as of December 31, 2005, from $516.7 million as of December 31, 2004.
Shareholders equity increased $59.2 million, or 55.6%, to $165.9 million as of December 31, 2005, from $106.6 million as of December 31, 2004.
All of these increases were primarily associated with our acquisitions during 2005.
As of December 31, 2005, our asset quality improved as non-performing loans declined to $8.3
million, or 0.69%, of total loans from $9.0 million, or 1.73%, of total loans as of the prior year
end. The allowance for loan losses as a percent of non-performing loans improved to 291.6% as of
December 31, 2005, compared to 182.4% from the prior year end. These ratios reflect the continuing
commitment of our management to maintain sound asset quality.
Critical Accounting Policies
Overview. We prepare our consolidated financial statements based on the selection of certain
accounting policies, generally accepted accounting principles and customary practices in the
banking industry. These policies, in certain areas, require us to make significant estimates and
assumptions. Our accounting policies are described in detail in the notes to our consolidated
financial statements included as part of this document.
We consider a policy critical if (i) the accounting estimate requires assumptions about
matters that are highly uncertain at the time of the accounting estimate; and (ii) different
estimates that could reasonably have been used in the current period, or changes in the accounting
estimate that are reasonably likely to occur from period to period, would have a material impact on
our financial statements. Using these criteria, we believe that the accounting policies most
critical to us are those associated with our lending practices, including the accounting for the
allowance for loan losses, investments, intangible assets, income taxes and stock options.
Investments. Securities available for sale are reported at fair value with unrealized holding
gains and losses reported as a separate component of shareholders equity and other comprehensive
income (loss), net of taxes. Securities that are held as available for sale are used as a part of
our asset/liability management strategy. Securities that may be sold in response to interest rate
changes, changes in prepayment risk, the need to increase regulatory capital, and other similar
factors are classified as available for sale.
Loans Receivable and Allowance for Loan Losses. Substantially all of our loans receivable are
reported at their outstanding principal balance adjusted for any charge-offs, as it is managements
intent to hold them for the foreseeable future or until maturity or payoff. Interest income on
loans is accrued over the term of the loans based on the principal balance outstanding.
The allowance for loan losses is established through a provision for loan losses charged
against income. The allowance represents an amount that, in managements judgment, will be adequate
to absorb probable credit losses on identifiable loans that may become uncollectible and probable
credit losses inherent in the remainder of the loan portfolio. The amounts of provisions for loan
losses are based on managements analysis and evaluation of the loan portfolio for identification
of problem credits, internal and external factors that may affect collectibility, relevant credit
exposure, particular risks inherent in different kinds of lending, current collateral values and
other relevant factors.
We consider a loan to be impaired when, based on current information and events, it is
probable that we will be unable to collect all amounts due according to the contractual terms
thereof. We apply this policy even if delays or shortfalls in payments are expected to be
insignificant. All non-accrual loans and all loans that have been restructured from their original
contractual terms are considered impaired loans. The aggregate amount of impaired loans is used in
evaluating the adequacy of the allowance for loan losses and amount of provisions thereto. Losses
on impaired loans are charged against the allowance for loan losses when in the process of
collection it appears likely that losses will be realized. The accrual of interest on impaired
loans is discontinued when, in managements opinion, the borrower may be unable to meet payments as
they become due. When accrual of interest is discontinued, all unpaid accrued interest is reversed.
Loans are placed on non-accrual status when management believes that the borrowers financial
condition, after giving consideration to economic and business conditions and collection efforts,
is such that collection of interest is doubtful, or generally when loans are 90 days or more past
due. Loans are charged against the allowance for loan
37
losses when management believes that the collectibility of the principal is unlikely. Accrued interest related to non-accrual loans is
generally charged against the allowance for loan losses when accrued in prior years and reversed
from interest income if accrued in the current year. Interest income on non-accrual loans may be
recognized to the extent cash payments are received, although the majority of payments received are
usually applied to principal. Non-accrual loans are generally returned to accrual status when
principal and interest payments are less than 90 days past due, the customer has made required
payments for at least six months, and we reasonably expect to collect all principal and interest.
Intangible Assets. Intangible assets consist of goodwill and core deposit intangibles.
Goodwill represents the excess purchase price over the fair value of net assets acquired in
business acquisitions. The core deposit intangible represents the excess intangible value of
acquired deposit customer relationships as determined by valuation specialists. The core deposit
intangibles are being amortized over 84 to 114 months on a straight-line basis. Goodwill is not
amortized but rather is evaluated for impairment on at least an annual basis. We perform an annual
impairment test of goodwill and core deposit intangibles as required by SFAS No. 142, Goodwill and
Other Intangible Assets, in the fourth quarter.
Income Taxes. We use the liability method in accounting for income taxes. Under this method,
deferred tax assets and liabilities are determined based upon the difference between the values of
the assets and liabilities as reflected in the financial statements and their related tax basis
using enacted tax rates in effect for the year in which the differences are expected to be
recovered or settled. As changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes. Any estimated tax exposure items
identified would be considered in a tax contingency reserve. Changes in any tax contingency reserve
would be based on specific development, events, or transactions.
We and our subsidiaries file consolidated tax returns. Our subsidiaries provide for income
taxes on a separate return basis, and remit to us amounts determined to be currently payable.
Stock Options. Prior to 2006, we elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB 25), and related interpretations in accounting
for employee stock options using the fair value method. Under APB 25, because the exercise price of
the options equals the estimated market price of the stock on the issuance date, no compensation
expense is recorded. On January 1, 2006, we adopted SFAS No. 123, Share-Based Payment (Revised
2004) which establishes standards for the accounting for transactions in which an entity (i)
exchanges its equity instruments for goods and services, or (ii) incurs liabilities in exchange for
goods and services that are based on the fair value of the entitys equity instruments or that may
be settled by the issuance of the equity instruments. SFAS 123R eliminates the ability to account
for stock-based compensation using APB 25 and requires that such transactions be recognized as
compensation cost in the income statement based on their fair values on the measurement date, which
is generally the date of the grant.
Acquisitions and Equity Investments
On September 1, 2005, we acquired Mountain View Bancshares, Inc., an Arkansas bank holding
company. Mountain View Bancshares owned The Bank of Mountain View, located in Mountain View,
Arkansas which had total assets of $202.5 million, loans of $68.8 million and total deposits of
$158.0 million on the date of the acquisition. The consideration for the merger was $44.1 million,
which was paid approximately 90%, or $39.8 million, in cash and 10%, or $4.3 million, in shares of
our common stock. As a result of this transaction, we recorded goodwill of $13.2 million and a core
deposit intangible of $3.0 million.
On June 1, 2005, we acquired Marine Bancorp, Inc., a Florida bank holding company. Marine
Bancorp owned Marine Bank of the Florida Keys (subsequently renamed Marine Bank), located in
Marathon, Florida, which had total assets of $257.6 million, loans of $215.2 million and total
deposits of $200.7 million on the date of the acquisition. We also assumed debt obligations with
carrying values of $39.7 million, which approximated their fair market values because the rates
being paid on the obligations were at or near estimated current market rates. The consideration for
the merger was $15.6 million comprised of approximately 60.5%, or $9.4 million, in cash and 39.5%,
or $6.2 million, in shares of our Class B preferred stock. As a result of this transaction, we
recorded goodwill of $4.6 million and a core deposit intangible of $2.0 million.
On January 3, 2005, we purchased 20% of the common stock of White River Bancshares, Inc. of
Fayetteville, Arkansas for $9.1 million. White River Bancshares is a newly formed corporation,
which owns all of the stock of
38
Signature Bank of Arkansas, with branch locations in northwest Arkansas. In January 2006, White River Bancshares issued an additional $15.0 million of common
stock. To maintain our 20% ownership, we invested an additional $3.0 million in White River
Bancshares at that time. As of December 31, 2006, White River Bancshares had total assets of $343.2
million, loans of $283.0 million, and total deposits of $268.9 million.
White River Bancshares, Inc has filed an application with Federal Reserve to acquire 100% of
the stock of Brinkley Bancshares, Inc., in connection with the merger of Bank of Brinkley with
Signature Bank. The Bank of Brinkley in Brinkley, Arkansas has assets of $140.2 million, loans of
$32.7 million and deposits of $118.8 million as of December 31, 2006. The merger is expected to
take place in the second quarter of 2007.
Effective January 1, 2005, we purchased the remaining 67.8% of TCBancorp that we did not
previously own. TCBancorp owned Twin City Bank, with branch locations in the Little Rock/North
Little Rock metropolitan area. The purchase brought our ownership of TCBancorp to 100%. TCBancorp
had total assets of $633.4 million, loans of $261.9 million and total deposits of $500.1 million at
the effective date of the acquisition. We also assumed debt obligations with carrying values of
$20.9 million, which approximated their fair market values because the rates being paid on the
obligations were at or near estimated current market rates. The purchase price for the TCBancorp
acquisition was $43.9 million, which consisted of approximately $110,000 of cash and the issuance
of 3,750,813 shares (split adjusted) of our common stock. As a result of this transaction, we
recorded goodwill of $1.1 million and a core deposit intangible of $3.3 million. This transaction
also increased our ownership of CB Bancorp and FirsTrust Financial Services to 100%, both of which
we had previously co-owned with TCBancorp.
In February 2005, CB Bancorp merged into Home BancShares, and Community Bank thus became our
wholly owned subsidiary.
In our continuing evaluation of our growth plans, we believe our best prospects include bank
acquisitions and de novo branching. Bank acquisitions provide us the greatest opportunity for
immediate earnings per share improvement. However, the current market multiples for bank
acquisitions make it difficult to accomplish an acquisition without dilution to tangible book
value. In comparison, de novo branching usually creates dilution to earnings per share in the
short term but does not create the burden of tangible book value dilution. We will continue to
evaluate what is in our best interest. Our goal in making these decisions is to maximize the
return to our investors.
Sale of Equity Investment in Russellville Bancshares
On September 3, 2004, Russellville Bancshares repurchased the 21.7% equity interest that we
had originally acquired in 2001. As a result of this sale, we recorded a pre-tax gain of $4.4
million or an after-tax gain of $2.7 million. This gain increased diluted earnings per share by
$0.27 for the year ended December 31, 2004.
Excluding the gain associated with the sale of our interest in Russellville Bancshares, our
net income for the year ended December 31, 2004, was $6.5 million, or $0.67 diluted earnings per
share.
De Novo Branching
We intend to continue to open new (commonly referred to de novo) branches in our current
markets and in other attractive market areas if opportunities arise. During 2006, we opened five
de novo branch locations plus Arkansass only mobile branch. These branch locations are located in
the Arkansas communities of Searcy and Beebe plus Port Charlotte, Marco Island and Punta Gorda,
Florida. Presently, we have two pending Florida de novo branch locations in Key West and Key Largo
scheduled to open in 2007. Currently we have plans for two additional de novo branch locations in
Searcy, Arkansas and one in Saline County, Arkansas.
Results of Operations for the Years Ended December 31, 2006, 2005 and 2004
Our net income increased $4.5 million, or 39.1%, to $15.9 million for the year ended December
31, 2006, from $11.4 million for the same period in 2005. Diluted earnings per share increased
$0.18, or 22.0%, to $1.00 for the year ended December 31, 2006, from $0.82 for 2005. The increase
in earnings is primarily associated with our acquisitions during 2005, combined with organic growth
of our bank subsidiaries.
39
Our net income increased $2.3 million, or 25.0%, to $11.4 million for the year ended December
31, 2005, from $9.2 million for the same period in 2004. The increase in earnings is primarily
associated with our acquisitions during 2005, combined with organic growth of our bank
subsidiaries earnings. In 2004, our net income included a gain on the sale of our equity
investment in Russellville Bancshares. Excluding this after-tax gain of $2.7 million, net income
for 2005 would have increased by $5.0 million, or 75.4%, over 2004. Diluted earnings per share
decreased $0.12, or 12.8%, to $0.82 for the year ended December 31, 2005, from $0.94 for 2004. This
decrease was primarily the result of the gain of $0.27 per diluted share during 2004, and a 42.0%
increase in the average diluted shares outstanding for the year ended December 31, 2005, versus the
same period in 2004, resulting from the shares issued in connection with our 2005 acquisitions.
Excluding the gain, diluted earnings per share would have increased $0.15, or 22.4%, to $0.82 per
diluted share for the year ended December 31, 2005, from $0.67 per diluted share for 2004.
Net Interest Income. Net interest income, our principal source of earnings, is the difference
between the interest income generated by earning assets and the total interest cost of the deposits
and borrowings obtained to fund those assets. Factors affecting the level of net interest income
include the volume of earning assets and interest-bearing liabilities, yields earned on loans and
investments and rates paid on deposits and other borrowings, the level of non-performing loans and
the amount of non-interest-bearing liabilities supporting earning assets. Net interest income is
analyzed in the discussion and tables below on a fully taxable equivalent basis. The adjustment to
convert certain income to a fully taxable equivalent basis consists of dividing tax-exempt income
by one minus the combined federal and state income tax rate.
Net interest income on a fully taxable equivalent basis increased $13.8 million, or 26.9%, to
$65.1 million for the year ended December 31, 2006, from $51.2 million for 2005. This increase in
net interest income was the result of a $38.7 million increase in interest income offset by $24.9
million increase in interest expense. The $38.7 million increase in interest income was primarily
the result of organic growth of our bank subsidiaries and a $267.6 million increase in average
earning assets associated with our acquisitions of Marine Bancorp, Inc. and Mountain View
Bancshares, Inc. during 2005, combined with higher interest rates as a result of the rising rate
environment. The higher level of earning assets resulted in an improvement in interest income of
$24.1 million, and the rising rate environment resulted in a $14.6 million increase in interest
income during 2006. The $24.9 million increase in interest expense for the year ended December 31,
2006, is primarily the result of organic growth of our bank subsidiaries and a $197.4 million
increase in average interest-bearing liabilities associated with our acquisitions of Marine
Bancorp, Inc. and Mountain View Bancshares, Inc. during 2005, combined with higher interest rates
during 2005 as a result of the rising rate environment. The higher level of interest-bearing
liabilities resulted in additional interest expense of $9.9 million. The rising rate environment
resulted in a $15.1 million increase in interest expense during 2006.
Net interest income on a fully taxable equivalent basis increased $25.3 million, or 97.3%, to
$51.2 million for the year ended December 31, 2005, from $26.0 million for 2004. This increase in
net interest income was the result of a $49.7 million increase in interest income offset by $24.4
million increase in interest expense. The $49.7 million increase in interest income for the year
ended December 31, 2005, is primarily the result of a $788.5 million increase in average earning
assets associated with our acquisitions during 2005, combined with higher short-term interest rates
as a result of the rising rate environment. The higher level of earning assets resulted in an
improvement in interest income of $46.3 million. The rising rate environment resulted in a $3.4
million increase in interest income during 2005. The $24.4 million increase in interest expense for
the year ended December 31, 2005, is primarily the result of a $686.5 million increase in average
interest-bearing liabilities associated with our acquisitions during 2005, combined with higher
interest rates during 2005 as a result of the rising rate environment. The higher level of
interest-bearing liabilities resulted in additional interest expense of $17.3 million. The rising
rate environment resulted in a $7.1 million increase in interest expense during 2005.
40
Tables 1 and 2 reflect an analysis of net interest income on a fully taxable equivalent basis
for the years ended December 31, 2006, 2005 and 2004, as well as changes in fully taxable
equivalent net interest margin for the years 2006 compared to 2005 and 2005 compared to 2004.
Table 1: Analysis of Net Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(Dollars in thousands) |
|
Interest income |
|
$ |
123,763 |
|
|
$ |
85,458 |
|
|
$ |
36,681 |
|
Fully taxable equivalent adjustment |
|
|
2,229 |
|
|
|
1,790 |
|
|
|
874 |
|
|
|
|
|
|
|
|
|
|
|
Interest income fully taxable equivalent |
|
|
125,992 |
|
|
|
87,248 |
|
|
|
37,555 |
|
Interest expense |
|
|
60,940 |
|
|
|
36,002 |
|
|
|
11,580 |
|
|
|
|
|
|
|
|
|
|
|
Net interest income fully taxable equivalent |
|
$ |
65,052 |
|
|
$ |
51,246 |
|
|
$ |
25,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yield on earning assets fully taxable equivalent |
|
|
6.80 |
% |
|
|
5.74 |
% |
|
|
5.42 |
% |
Cost of
interest-bearing liabilities |
|
|
3.79 |
|
|
|
2.75 |
|
|
|
2.00 |
|
Net interest spread fully taxable equivalent |
|
|
3.01 |
|
|
|
2.99 |
|
|
|
3.42 |
|
Net interest margin fully taxable equivalent |
|
|
3.51 |
|
|
|
3.37 |
|
|
|
3.75 |
|
Table 2: Changes in Fully Taxable Equivalent Net Interest Margin
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 vs. 2005 |
|
|
2005 vs. 2004 |
|
|
|
(In thousands) |
|
Increase in interest income due to change in earning assets |
|
$ |
24,119 |
|
|
$ |
46,333 |
|
Increase in interest income due to change in earning asset
yields |
|
|
14,625 |
|
|
|
3,360 |
|
Increase in
interest expense due to change in interest-bearing
liabilities |
|
|
9,856 |
|
|
|
17,339 |
|
Increase in interest expense due to change in interest rates
paid on interest-bearing liabilities |
|
|
15,082 |
|
|
|
7,083 |
|
|
|
|
|
|
|
|
Increase in net interest income |
|
$ |
13,806 |
|
|
$ |
25,271 |
|
|
|
|
|
|
|
|
41
Table 3 shows, for each major category of earning assets and interest-bearing liabilities, the
average amount outstanding, the interest income or expense on that amount and the average rate
earned or expensed for the years ended December 31, 2006, 2005 and 2004. The table also shows the
average rate earned on all earning assets, the average rate expensed on all interest-bearing
liabilities, the net interest spread and the net interest margin for the same periods. The analysis
is presented on a fully taxable equivalent basis. Non-accrual loans were included in average loans for the purpose of calculating the rate earned on total loans.
Table 3: Average Balance Sheets and Net Interest Income Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
Average |
|
|
Income / |
|
|
Yield / |
|
|
Average |
|
|
Income / |
|
|
Yield / |
|
|
Average |
|
|
Income / |
|
|
Yield / |
|
|
|
Balance |
|
|
Expense |
|
|
Rate |
|
|
Balance |
|
|
Expense |
|
|
Rate |
|
|
Balance |
|
|
Expense |
|
|
Rate |
|
|
|
(Dollars in thousands) |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing balances
due from banks |
|
$ |
2,939 |
|
|
$ |
139 |
|
|
|
4.73 |
% |
|
$ |
3,159 |
|
|
$ |
101 |
|
|
|
3.20 |
% |
|
$ |
2,788 |
|
|
$ |
38 |
|
|
|
1.36 |
% |
Federal funds sold |
|
|
16,870 |
|
|
|
840 |
|
|
|
4.98 |
|
|
|
8,048 |
|
|
|
284 |
|
|
|
3.53 |
|
|
|
16,902 |
|
|
|
158 |
|
|
|
0.93 |
|
Investment
securities
taxable |
|
|
427,696 |
|
|
|
18,879 |
|
|
|
4.41 |
|
|
|
442,168 |
|
|
|
17,103 |
|
|
|
3.87 |
|
|
|
144,446 |
|
|
|
5,764 |
|
|
|
3.99 |
|
Investment securities non-taxable |
|
|
91,232 |
|
|
|
5,814 |
|
|
|
6.37 |
|
|
|
66,960 |
|
|
|
4,301 |
|
|
|
6.42 |
|
|
|
34,945 |
|
|
|
2,331 |
|
|
|
6.67 |
|
Loans receivable |
|
|
1,314,611 |
|
|
|
100,320 |
|
|
|
7.63 |
|
|
|
1,000,906 |
|
|
|
65,459 |
|
|
|
6.54 |
|
|
|
493,969 |
|
|
|
29,264 |
|
|
|
5.92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning
assets |
|
|
1,853,348 |
|
|
|
125,992 |
|
|
|
6.80 |
|
|
|
1,521,241 |
|
|
|
87,248 |
|
|
|
5.74 |
|
|
|
693,050 |
|
|
|
37,555 |
|
|
|
5.42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-earning assets |
|
|
177,170 |
|
|
|
|
|
|
|
|
|
|
|
137,601 |
|
|
|
|
|
|
|
|
|
|
|
89,355 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,030,518 |
|
|
|
|
|
|
|
|
|
|
$ |
1,658,842 |
|
|
|
|
|
|
|
|
|
|
$ |
782,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing transaction
and savings deposits |
|
$ |
530,219 |
|
|
$ |
13,179 |
|
|
|
2.49 |
% |
|
$ |
447,433 |
|
|
$ |
8,267 |
|
|
|
1.85 |
% |
|
$ |
192,426 |
|
|
$ |
1,435 |
|
|
|
0.75 |
% |
Time deposits |
|
|
763,291 |
|
|
|
33,034 |
|
|
|
4.33 |
|
|
|
624,692 |
|
|
|
18,616 |
|
|
|
2.98 |
|
|
|
281,391 |
|
|
|
6,171 |
|
|
|
2.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing
deposits |
|
|
1,293,510 |
|
|
|
46,213 |
|
|
|
3.57 |
|
|
|
1,072,125 |
|
|
|
26,883 |
|
|
|
2.51 |
|
|
|
473,817 |
|
|
|
7,606 |
|
|
|
1.61 |
|
Federal funds purchased |
|
|
13,889 |
|
|
|
689 |
|
|
|
4.96 |
|
|
|
13,996 |
|
|
|
399 |
|
|
|
2.85 |
|
|
|
10,773 |
|
|
|
159 |
|
|
|
1.48 |
|
Securities sold under
agreement to repurchase |
|
|
111,635 |
|
|
|
4,420 |
|
|
|
3.96 |
|
|
|
85,876 |
|
|
|
2,657 |
|
|
|
3.09 |
|
|
|
23,068 |
|
|
|
407 |
|
|
|
1.76 |
|
FHLB and other borrowed
funds |
|
|
144,074 |
|
|
|
6,627 |
|
|
|
4.60 |
|
|
|
109,323 |
|
|
|
4,046 |
|
|
|
3.70 |
|
|
|
46,837 |
|
|
|
1,840 |
|
|
|
3.93 |
|
Subordinated debentures |
|
|
44,710 |
|
|
|
2,991 |
|
|
|
6.69 |
|
|
|
29,408 |
|
|
|
2,017 |
|
|
|
6.86 |
|
|
|
24,219 |
|
|
|
1,568 |
|
|
|
6.47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing
liabilities |
|
|
1,607,818 |
|
|
|
60,940 |
|
|
|
3.79 |
|
|
|
1,310,728 |
|
|
|
36,002 |
|
|
|
2.75 |
|
|
|
578,714 |
|
|
|
11,580 |
|
|
|
2.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing
liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing
deposits |
|
|
215,075 |
|
|
|
|
|
|
|
|
|
|
|
177,511 |
|
|
|
|
|
|
|
|
|
|
|
79,907 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
11,611 |
|
|
|
|
|
|
|
|
|
|
|
13,125 |
|
|
|
|
|
|
|
|
|
|
|
17,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,834,504 |
|
|
|
|
|
|
|
|
|
|
|
1,501,364 |
|
|
|
|
|
|
|
|
|
|
|
675,989 |
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
196,014 |
|
|
|
|
|
|
|
|
|
|
|
157,478 |
|
|
|
|
|
|
|
|
|
|
|
106,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity |
|
$ |
2,030,518 |
|
|
|
|
|
|
|
|
|
|
$ |
1,658,842 |
|
|
|
|
|
|
|
|
|
|
$ |
782,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread |
|
|
|
|
|
|
|
|
|
|
3.01 |
% |
|
|
|
|
|
|
|
|
|
|
2.99 |
% |
|
|
|
|
|
|
|
|
|
|
3.42 |
% |
Net interest income
and margin |
|
|
|
|
|
$ |
65,052 |
|
|
|
3.51 |
|
|
|
|
|
|
$ |
51,246 |
|
|
|
3.37 |
|
|
|
|
|
|
$ |
25,975 |
|
|
|
3.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
Table 4 shows changes in interest income and interest expense resulting from changes in volume
and changes in interest rates for the year ended December 31, 2006, compared to 2005, and 2005
compared to 2004, on a fully taxable basis. The changes in interest rate and volume have been
allocated to changes in average volume and changes in average rates, in proportion to the
relationship of absolute dollar amounts of the changes in rates and volume.
Table 4: Volume/Rate Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2006 over 2005 |
|
|
2005 over 2004 |
|
|
|
Volume |
|
|
Yield/Rate |
|
|
Total |
|
|
Volume |
|
|
Yield/Rate |
|
|
Total |
|
|
|
(In thousands) |
|
Increase (decrease) in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing balances due
from banks |
|
$ |
(7 |
) |
|
$ |
45 |
|
|
$ |
38 |
|
|
$ |
6 |
|
|
$ |
57 |
|
|
$ |
63 |
|
Federal funds sold |
|
|
404 |
|
|
|
152 |
|
|
|
556 |
|
|
|
(120 |
) |
|
|
246 |
|
|
|
126 |
|
Investment securities taxable |
|
|
(575 |
) |
|
|
2,351 |
|
|
|
1,776 |
|
|
|
11,521 |
|
|
|
(182 |
) |
|
|
11,339 |
|
Investment securities non-taxable |
|
|
1,547 |
|
|
|
(34 |
) |
|
|
1,513 |
|
|
|
2,059 |
|
|
|
(89 |
) |
|
|
1,970 |
|
Loans receivable |
|
|
22,750 |
|
|
|
12,111 |
|
|
|
34,861 |
|
|
|
32,867 |
|
|
|
3,328 |
|
|
|
36,195 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
24,119 |
|
|
|
14,625 |
|
|
|
38,744 |
|
|
|
46,333 |
|
|
|
3,360 |
|
|
|
49,693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing transaction
and savings deposits |
|
|
1,714 |
|
|
|
3,198 |
|
|
|
4,912 |
|
|
|
3,231 |
|
|
|
3,601 |
|
|
|
6,832 |
|
Time deposits |
|
|
4,745 |
|
|
|
9,673 |
|
|
|
14,418 |
|
|
|
9,616 |
|
|
|
2,829 |
|
|
|
12,445 |
|
Federal funds purchased |
|
|
(3 |
) |
|
|
293 |
|
|
|
290 |
|
|
|
59 |
|
|
|
181 |
|
|
|
240 |
|
Securities sold under
agreement to repurchase |
|
|
912 |
|
|
|
851 |
|
|
|
1,763 |
|
|
|
1,762 |
|
|
|
488 |
|
|
|
2,250 |
|
FHLB and other borrowed funds |
|
|
1,463 |
|
|
|
1,118 |
|
|
|
2,581 |
|
|
|
2,319 |
|
|
|
(113 |
) |
|
|
2,206 |
|
Subordinated debentures |
|
|
1,025 |
|
|
|
(51 |
) |
|
|
974 |
|
|
|
352 |
|
|
|
97 |
|
|
|
449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
9,856 |
|
|
|
15,082 |
|
|
|
24,938 |
|
|
|
17,339 |
|
|
|
7,083 |
|
|
|
24,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in net
interest income |
|
$ |
14,263 |
|
|
$ |
(457 |
) |
|
$ |
13,806 |
|
|
$ |
28,994 |
|
|
$ |
(3,723 |
) |
|
$ |
25,271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for Loan Losses. Our management assesses the adequacy of the allowance for loan
losses by applying the provisions of Statement of Financial Accounting Standards No. 5 and No. 114.
Specific allocations are determined for loans considered to be impaired and loss factors are
assigned to the remainder of the loan portfolio to determine an appropriate level in the allowance
for loan losses. The allowance is increased, as necessary, by making a provision for loan losses.
The specific allocations for impaired loans are assigned based on an estimated net realizable value
after a thorough review of the credit relationship. The potential loss factors associated with the
remainder of the loan portfolio are based on an internal net loss experience, as well as
managements review of trends within the portfolio and related industries.
Generally, commercial, commercial real estate, and residential real estate loans are assigned
a level of risk at origination. Thereafter, these loans are reviewed on a regular basis. The
periodic reviews generally include loan payment and collateral status, the borrowers financial
data, and key ratios such as cash flows, operating income, liquidity, and leverage. A material
change in the borrowers credit analysis can result in an increase or decrease in the loans
assigned risk grade. Aggregate dollar volume by risk grade is monitored on an ongoing basis.
Our management reviews certain key loan quality indicators on a monthly basis, including
current economic conditions, delinquency trends and ratios, portfolio mix changes, and other
information management deems necessary. This review process provides a degree of objective
measurement that is used in conjunction with periodic internal evaluations. To the extent that this
review process yields differences between estimated and actual observed
43
losses, adjustments are made to the loss factors used to determine the appropriate level of the allowance for loan losses.
The provision for loan losses represents managements determination of the amount necessary to
be charged against the current periods earnings, to maintain the allowance for loan losses at a
level that is considered adequate in relation to the estimated risk inherent in the loan portfolio.
The provision was $2.3 million for the year ended December 31, 2006, $3.8 million for 2005, and
$2.3 million for 2004.
Our provision for loan losses decreased $1.5 million, or 39.7%, to $2.3 million for the year
ended December 31, 2006, from $3.8 million for 2005. The decrease in the provision is primarily
associated with the improvement in non-performing loans and net charge-off from 2005 to 2006. The
allowance for loan losses to nonperforming loans improved from 292% in 2005 to 574% in 2006. While
the net charge-off ratio improved from 0.38% in 2005 to 0.03% in 2006.
Our provision increased $1.5 million, or 67.1%, to $3.8 million for the year ended December
31, 2005, from $2.3 million in 2004. The increase in the provision is primarily associated with our
acquisitions during 2005 as a result of their continued loan growth, combined with a charge of
$450,000 to the provision expense due to Hurricane Wilma that affected the Florida Keys during the
fourth quarter of 2005.
Non-Interest Income. Total non-interest income was $19.1 million in 2006, compared to $15.7
million in 2005 and $18.1 million in 2004. Our non-interest income includes service charges on
deposit accounts, other service charges and fees, trust fees, data processing fees, mortgage
banking income, insurance commissions, income from title services, equity in income (loss) of
unconsolidated affiliates and other income.
Table 5 measures the various components of our non-interest income for the years ended
December 31, 2006, 2005, and 2004, respectively, as well as changes for the years 2006 compared to
2005 and 2005 compared to 2004.
Table 5: Non-Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
2006 Change |
|
|
2005 Change |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
from 2005 |
|
|
from 2004 |
|
|
(Dollars in thousands) |
|
|
Service charges on deposit
accounts |
|
$ |
9,447 |
|
|
$ |
8,319 |
|
|
$ |
5,914 |
|
|
$ |
1,128 |
|
|
|
13.6 |
% |
|
$ |
2,405 |
|
|
|
40.7 |
% |
Other service charges and fees |
|
|
2,642 |
|
|
|
2,099 |
|
|
|
959 |
|
|
|
543 |
|
|
|
25.9 |
|
|
|
1,140 |
|
|
|
118.9 |
|
Trust fees |
|
|
671 |
|
|
|
458 |
|
|
|
158 |
|
|
|
213 |
|
|
|
46.5 |
|
|
|
300 |
|
|
|
189.9 |
|
Data processing fees |
|
|
799 |
|
|
|
668 |
|
|
|
1,564 |
|
|
|
131 |
|
|
|
19.6 |
|
|
|
(896 |
) |
|
|
(57.3 |
) |
Mortgage banking income |
|
|
1,736 |
|
|
|
1,651 |
|
|
|
1,188 |
|
|
|
85 |
|
|
|
5.1 |
|
|
|
463 |
|
|
|
39.0 |
|
Insurance commissions |
|
|
782 |
|
|
|
674 |
|
|
|
631 |
|
|
|
108 |
|
|
|
16.0 |
|
|
|
43 |
|
|
|
6.8 |
|
Income from title services |
|
|
957 |
|
|
|
823 |
|
|
|
1,110 |
|
|
|
134 |
|
|
|
16.3 |
|
|
|
(287 |
) |
|
|
(25.9 |
) |
Increase in cash value of life
insurance |
|
|
304 |
|
|
|
256 |
|
|
|
244 |
|
|
|
48 |
|
|
|
18.8 |
|
|
|
12 |
|
|
|
4.9 |
|
Dividends from FHLB, FRB &
bankers bank |
|
|
659 |
|
|
|
315 |
|
|
|
91 |
|
|
|
344 |
|
|
|
109.2 |
|
|
|
224 |
|
|
|
246.2 |
|
Equity in income (loss) of
unconsolidated affiliates |
|
|
(379 |
) |
|
|
(592 |
) |
|
|
1,560 |
|
|
|
213 |
|
|
|
(36.0 |
) |
|
|
(2,152 |
) |
|
|
(137.9 |
) |
Gain on sale of equity
investment |
|
|
|
|
|
|
465 |
|
|
|
4,410 |
|
|
|
(465 |
) |
|
|
(100.0 |
) |
|
|
(3,945 |
) |
|
|
(89.5 |
) |
Gain on sale of SBA loans |
|
|
72 |
|
|
|
529 |
|
|
|
26 |
|
|
|
(457 |
) |
|
|
(86.4 |
) |
|
|
503 |
|
|
|
1,934.6 |
|
Gain (loss) on sale of
premises and equipment |
|
|
163 |
|
|
|
324 |
|
|
|
|
|
|
|
(161 |
) |
|
|
(49.7 |
) |
|
|
324 |
|
|
|
100.0 |
|
(Loss) gain on securities, net |
|
|
1 |
|
|
|
(539 |
) |
|
|
(249 |
) |
|
|
540 |
|
|
|
(100.2 |
) |
|
|
(290 |
) |
|
|
116.5 |
|
Other income |
|
|
1,273 |
|
|
|
237 |
|
|
|
485 |
|
|
|
1,036 |
|
|
|
437.1 |
|
|
|
(248 |
) |
|
|
(51.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income |
|
$ |
19,127 |
|
|
$ |
15,687 |
|
|
$ |
18,091 |
|
|
$ |
3,440 |
|
|
|
21.9 |
% |
|
$ |
(2,404 |
) |
|
|
(13.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
Non-interest income increased $3.4 million, or 21.9%, to $19.1 million for the year ended
December 31, 2006 from $15.7 million in 2005. The primary factors that resulted in the increase
from 2005 to 2006 include:
|
|
|
The $1.7 million aggregate increase in service charges on deposit accounts and other
service charges and fees was primarily a result of our acquisitions completed during 2005
combined with organic growth of our other bank subsidiaries service charges. More
specifically, during the fourth quarter of 2006, we were able to negotiate with a new
vendor the processing of interchange fees associated with our electronic banking
transactions. This improved position is allowing us to retain more of the interchange fees
by leveraging our in-house technology. |
|
|
|
|
The $131,000 increase in data processing fees was related to the data processing fees
associated with White River Bancshares, which began banking operations in May 2005. |
|
|
|
|
The $455,000 aggregate increase in trust fees, insurance commissions and title fees was
primarily a result of our organic growth in those product lines. |
|
|
|
|
The $344,000 increase in dividends was primarily associated with the Federal Reserve
Bank (FRB) stock our bank subsidiaries bought in connection with their change to
supervision of the Federal Reserve Board combined with additional stock they bought in
Federal Home Loan Bank (FHLB) to increase the their borrowing capacity with FHLB. |
|
|
|
|
The equity in loss of unconsolidated affiliate is related to the 20% interest in White
River Bancshares that we purchased during 2005. Because the investment in White River
Bancshares is accounted for on the equity method, we recorded our share of White River
Bancshares operating loss. White River Bancshares is currently operating at a loss as a
result of their status as a start up company. |
|
|
|
|
The $163,000 gain on sale of premises and equipment is the result of our banking
subsidiary acquired in 2003 disposing of excess premises and equipment no longer needed as
a result of synergies achieved from the combined entities. |
|
|
|
|
The $1.0 million increase in other income is primarily a result of the recognized
income from the sale of one branch banking location in 2005, gains on sales of foreclosed
assets held for sale and the 2005 acquisitions. Due to contingencies associated with the
sale of the branch banking location, income is being recognized over the thirty-month life
of the contingencies of which $426,000 was recognized in 2006. |
Bank owned life insurance consists of life insurance purchased by the subsidiary banks on
qualifying groups of officers with the bank designated as owner and beneficiary of the policies.
The return on investment in the bank owned life insurance policies is used to offset a portion of
future employee benefit costs. On July 21, 2006, the Board of Directors approved for our community
banking subsidiaries to collectively purchase $35 million of additional bank owned life insurance.
As a result, the banks purchased the additional bank owned life insurance on December 14, 2006. The
significant increases in cash surrender value from these policies will result in additional
tax-free non-interest income. However, shifting these funds from interest earning assets to
non-interest income producing assets will have the effect of reducing our net interest margin in
future periods.
In the fourth quarter of 2006, we made a strategic decision to enter into an agent agreement
for the management of our trust services to a non-affiliated third party. This change was caused
by our aspiration to improve the overall profitability of the trust efforts. Neither non-interest
income nor non-interest expense was materially affected by this decision for 2006. Going forward,
we will not have salary expense associated with trust services and the vendor will retain a
significant portion of our trust fees resulting in an expected improvement of our diluted earnings
per share of approximately one cent on an annual basis.
Non-interest income decreased $2.4 million, or 13.3%, to $15.7 million for the year ended
December 31, 2005 from $18.1 million in 2004. The primary factors that resulted in the decrease
from 2004 to 2005 include:
|
|
|
The $3.8 million aggregate increase in service charges on deposit accounts, other
service charges and fees, and trust fees was primarily a result of our acquisitions during
2005, combined with organic growth of our bank subsidiaries earnings.
|
45
|
|
|
The $896,000 decrease in data processing fees was primarily associated with the
acquisition of TCBancorp. Prior to acquiring complete ownership of TCBancorp, we performed
its data processing functions and received fees for this service. We continue to receive data processing fees from White River
Bancshares and certain other non-affiliated banks. |
|
|
|
|
The rising interest rate environment during 2005 resulted in decreased mortgage
production volumes for the mortgage industry as compared to 2004. While we experienced an
increase of $463,000 in this revenue source, the increase primarily resulted from the
additional $757,000 mortgage banking revenues associated with the acquisitions of TCBancorp
and Marine Bancorp during 2005. |
|
|
|
|
The $287,000 decrease in title fees is primarily associated with lower demand for title
fees as a result of the decrease in mortgage production volume associated with the rising
interest rate environment in 2005. |
|
|
|
|
The $2.2 million decrease in equity in income of unconsolidated affiliates is the result
of acquiring 100% ownership in TCBancorp effective as of January 1, 2005, combined with the
$592,000 loss associated with the 20% interest in White River Bancshares that we purchased
during 2005. |
|
|
|
|
The $3.9 million decrease in gain on sale of equity investment for 2005 is primarily
associated with a $4.4 million pre-tax gain recorded in the third quarter of 2004 from the
sale of our equity ownership in Russellville Bancshares. During the third quarter of 2005,
we recognized a $465,000 gain on sale of an equity investment. This gain was deferred as a
result of our financing the purchase price for this transaction. The gain became
recognizable during 2005 as a result of the financing being paid off. |
|
|
|
|
The difference in the loss on securities and loans between 2004 and 2005 is primarily
associated with specific transactions for each year. During 2004, a loss of $313,000 was
recorded for write-downs for other-than-temporary losses in our investment portfolio,
offset by $64,000 of gains from the sale of investment securities and a $26,000 gain
resulting from the sale of our SBA loan product. In 2005, we made a strategic decision to
sell lower-yielding investment securities, resulting in a loss of approximately $539,000.
This loss was largely offset by approximately $529,000 in gains resulting from the sale of
our SBA loan product. |
Non-Interest Expense. Non-interest expense consists of salary and employee benefits, occupancy
and equipment, data processing, and other expenses such as advertising, amortization of
intangibles, legal and accounting fees, other professional fees, operating supplies and postage.
46
Table 6 below sets forth a summary of non-interest expense for the years ended December 31,
2006, 2005, and 2004, as well as changes for the years ended 2006 compared to 2005 and 2005
compared to 2004.
Table 6: Non-Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
2006 Change |
|
|
2005 Change |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
from 2005 |
|
|
From 2004 |
|
|
|
(Dollars in thousands) |
|
Salaries and employee benefits |
|
$ |
29,313 |
|
|
$ |
23,901 |
|
|
$ |
14,123 |
|
|
$ |
5,412 |
|
|
|
22.6 |
% |
|
$ |
9,778 |
|
|
|
69.2 |
% |
Occupancy and equipment |
|
|
8,712 |
|
|
|
6,869 |
|
|
|
3,750 |
|
|
|
1,843 |
|
|
|
26.8 |
|
|
|
3,119 |
|
|
|
83.2 |
|
Data processing expense |
|
|
2,506 |
|
|
|
1,991 |
|
|
|
1,170 |
|
|
|
515 |
|
|
|
25.9 |
|
|
|
821 |
|
|
|
70.2 |
|
Other operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising |
|
|
2,383 |
|
|
|
2,067 |
|
|
|
900 |
|
|
|
316 |
|
|
|
15.3 |
|
|
|
1,167 |
|
|
|
129.7 |
|
Amortization of intangibles |
|
|
1,742 |
|
|
|
1,466 |
|
|
|
728 |
|
|
|
276 |
|
|
|
18.8 |
|
|
|
738 |
|
|
|
101.4 |
|
Electronic banking expense |
|
|
789 |
|
|
|
427 |
|
|
|
372 |
|
|
|
362 |
|
|
|
84.8 |
|
|
|
55 |
|
|
|
14.8 |
|
Directors fees |
|
|
774 |
|
|
|
505 |
|
|
|
210 |
|
|
|
269 |
|
|
|
53.3 |
|
|
|
295 |
|
|
|
140.5 |
|
Due from bank service
charges |
|
|
331 |
|
|
|
284 |
|
|
|
197 |
|
|
|
47 |
|
|
|
16.5 |
|
|
|
87 |
|
|
|
44.2 |
|
FDIC and state assessment |
|
|
527 |
|
|
|
503 |
|
|
|
301 |
|
|
|
24 |
|
|
|
4.8 |
|
|
|
202 |
|
|
|
67.1 |
|
Insurance |
|
|
1,030 |
|
|
|
504 |
|
|
|
344 |
|
|
|
526 |
|
|
|
104.4 |
|
|
|
160 |
|
|
|
46.5 |
|
Legal and accounting |
|
|
1,025 |
|
|
|
941 |
|
|
|
452 |
|
|
|
84 |
|
|
|
8.9 |
|
|
|
489 |
|
|
|
108.2 |
|
Other professional fees |
|
|
771 |
|
|
|
534 |
|
|
|
493 |
|
|
|
237 |
|
|
|
44.4 |
|
|
|
41 |
|
|
|
8.3 |
|
Operating supplies |
|
|
940 |
|
|
|
745 |
|
|
|
530 |
|
|
|
195 |
|
|
|
26.2 |
|
|
|
215 |
|
|
|
40.6 |
|
Postage |
|
|
663 |
|
|
|
580 |
|
|
|
404 |
|
|
|
83 |
|
|
|
14.3 |
|
|
|
176 |
|
|
|
43.6 |
|
Telephone |
|
|
975 |
|
|
|
669 |
|
|
|
377 |
|
|
|
306 |
|
|
|
45.7 |
|
|
|
292 |
|
|
|
77.5 |
|
Other expense |
|
|
3,997 |
|
|
|
2,949 |
|
|
|
1,780 |
|
|
|
1,048 |
|
|
|
35.5 |
|
|
|
1,169 |
|
|
|
65.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expense |
|
$ |
56,478 |
|
|
$ |
44,935 |
|
|
$ |
26,131 |
|
|
$ |
11,543 |
|
|
|
25.7 |
% |
|
$ |
18,804 |
|
|
|
72.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expense increased $11.5 million, or 25.7%, to $56.5 million for the year ended
December 31, 2006, from $44.9 million in 2005. The increase in non-interest expense is the result
of the acquisitions completed during 2005 combined with our continued expansion. The most
significant component of the increase was the $5.4 million increase in salaries and employee
benefits for 2006. The $5.4 million increase was primarily the result of $5.0 million of additional
staffing and $380,000 of options-related expense due to the adoption of SFAS 123R.
Non-interest expense increased $18.8 million, or 72.0%, to $44.9 million for the year ended
December 31, 2005, from $26.1 million in 2004. The increase is related to our acquisitions of
TCBancorp, Marine Bancorp and Mountain View Bancshares combined with a modest increase in staffing,
particularly at the holding company level.
Amortization of intangibles expense was $1.7 million for the year ended December 31, 2006,
$1.5 million for 2005, and $728,000 for 2004. The increase was caused by our increase in core
deposit intangibles created when we completed each of our acquisitions. Our estimated amortization
expense for each of the following five years is: 2007
$1.7 million; 2008 $1.7 million; 2009
$1.7 million; 2010 $1.6 million; and 2011 $981,000.
Income Taxes. The provision for income taxes increased $2.3 million, or 46.8%, to $7.2 million
for the year ended December 31, 2006, from $4.9 million for 2005. The provision for income taxes
decreased $95,000, or 1.9%, to $4.9 million for the year ended December 31, 2005, from $5.0 million
in 2004. The effective tax rate for the years ended December 31, 2006, 2005 and 2004 were 31.3%,
30.1%, and 34.1%, respectively. The declining effective income tax rate for 2005 was primarily
associated with the lower effective income tax rate associated with the acquisitions of Community
Financial Group, TCBancorp, and Mountain View Bancshares during 2005.
47
Financial Conditions as of and for the Years Ended December 31, 2006 and 2005
Our total assets increased $279.2 million, or 14.6%, to $2.19 billion as of December 31, 2006,
from $1.91 billion as of December 31, 2005. Our loans receivable increased $211.7 million, or
17.6%, to $1.42 billion as of December 31, 2006, from $1.20 billion as of December 31, 2005.
Shareholders equity increased $65.6 million, or 39.5%, to $231.4 million as of December 31, 2006,
compared to $165.9 million as of December 31, 2005. Asset and loan increases are primarily
associated with organic growth of our bank subsidiaries. The increase in stockholders equity was
primarily the result of the $47.2 million proceeds from the Companys initial public offering and
retained earnings during 2006.
Loan Portfolio
Our loan portfolio averaged $1.31 billion during 2006, $1.00 billion during 2005 and $494.0
million during 2004. Net loans were $1.39 billion, $1.18 billion and $500.3 million as of December
31, 2006, 2005 and 2004, respectively. The most significant components of the loan portfolio were
commercial and residential real estate, real estate construction, consumer, and commercial and
industrial loans. These loans are primarily originated within our market areas of central Arkansas,
north central Arkansas, northwest Arkansas, southwest Florida and the Florida Keys and are
generally secured by residential or commercial real estate or business or personal property within
our market areas.
Table 7 presents our period end loan balances by category as of the dates indicated.
Table 7: Loan Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
|
(In thousands) |
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-farm/non-residential |
|
$ |
465,306 |
|
|
$ |
411,839 |
|
|
$ |
181,995 |
|
|
$ |
173,743 |
|
|
$ |
91,352 |
|
Construction/land
development |
|
|
393,410 |
|
|
|
291,515 |
|
|
|
116,935 |
|
|
|
74,138 |
|
|
|
37,969 |
|
Agricultural |
|
|
11,659 |
|
|
|
13,112 |
|
|
|
12,912 |
|
|
|
5,065 |
|
|
|
5,024 |
|
Residential real estate loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
1-4 family |
|
|
229,588 |
|
|
|
221,831 |
|
|
|
86,497 |
|
|
|
79,246 |
|
|
|
58,899 |
|
Multifamily residential |
|
|
37,440 |
|
|
|
34,939 |
|
|
|
17,708 |
|
|
|
16,654 |
|
|
|
6,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate |
|
|
1,137,403 |
|
|
|
973,236 |
|
|
|
416,047 |
|
|
|
348,846 |
|
|
|
199,499 |
|
Consumer |
|
|
45,056 |
|
|
|
39,447 |
|
|
|
24,624 |
|
|
|
31,546 |
|
|
|
22,632 |
|
Commercial and industrial |
|
|
206,559 |
|
|
|
175,396 |
|
|
|
69,345 |
|
|
|
102,350 |
|
|
|
46,555 |
|
Agricultural |
|
|
13,520 |
|
|
|
8,466 |
|
|
|
6,275 |
|
|
|
14,409 |
|
|
|
16,078 |
|
Other |
|
|
13,757 |
|
|
|
8,044 |
|
|
|
364 |
|
|
|
2,904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans receivable |
|
|
1,416,295 |
|
|
|
1,204,589 |
|
|
|
516,655 |
|
|
|
500,055 |
|
|
|
284,764 |
|
Less: Allowance for loan losses |
|
|
26,111 |
|
|
|
24,175 |
|
|
|
16,345 |
|
|
|
14,717 |
|
|
|
5,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans receivable, net |
|
$ |
1,390,184 |
|
|
$ |
1,180,414 |
|
|
$ |
500,310 |
|
|
$ |
485,338 |
|
|
$ |
279,058 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate Loans. We originate non-farm and non-residential loans (primarily
secured by commercial real estate), construction/land development loans, and agricultural loans,
which are generally secured by real estate located in our market areas. Our commercial mortgage loans are generally
collateralized by first liens on real estate and amortized over a 10 to 20 year period with balloon
payments due at the end of one to five years. These loans are generally underwritten by addressing
cash flow (debt service coverage), primary and secondary source of repayment, the financial
strength of any guarantor, the strength of the tenant (if any), the borrowers liquidity and
leverage, management experience, ownership structure, economic conditions and industry specific
trends and collateral. Generally, we will loan up to 85% of the value of improved property, 65% of
the value of raw land and 75% of the value of land to be acquired and developed. A first lien on
the property and assignment of lease is required if the collateral is rental property, with second
lien positions considered on a case-by-case basis.
48
As of December 31, 2006, commercial real estate loans totaled $870.3 million, or 61.5% of our
loan portfolio, compared to $716.5 million, or 59.5% of our loan portfolio, as of December 31,
2005. This increase is primarily the result of strong demand for this type of loan product which
resulted in organic growth of our loan portfolio.
Residential Real Estate Loans. We originate one to four family, owner occupied residential
mortgage loans generally secured by property located in our primary market area. The majority of
our residential mortgage loans consist of loans secured by owner occupied, single family
residences. Residential real estate loans generally have a loan-to-value ratio of up to 90%. These
loans are underwritten by giving consideration to the borrowers ability to pay, stability of
employment or source of income, debt-to-income ratio, credit history and loan-to-value ratio.
As of December 31, 2006, we had $267.0 million, or 18.9% of our loan portfolio, in residential
real estate loans, which is comparable to $256.8 million, or 21.3% of our loan portfolio, as of
December 31, 2005.
Consumer Loans. Our consumer loan portfolio is composed of secured and unsecured loans
originated by our banks. The performance of consumer loans will be affected by the local and
regional economy as well as the rates of personal bankruptcies, job loss, divorce and other
individual-specific characteristics.
As of December 31, 2006, our installment consumer loan portfolio totaled $45.1 million, or
3.2% of our total loan portfolio, which is comparable to $39.4 million, or 3.3% of our loan
portfolio, as of December 31, 2005.
Commercial and Industrial Loans. Commercial and industrial loans are made for a variety of
business purposes, including working capital, inventory, equipment and capital expansion. The terms
for commercial loans are generally one to seven years. Commercial loan applications must be
supported by current financial information on the borrower and, where appropriate, by adequate
collateral. Commercial loans are generally underwritten by addressing cash flow (debt service
coverage), primary and secondary sources of repayment, the financial strength of any guarantor, the
borrowers liquidity and leverage, management experience, ownership structure, economic conditions
and industry specific trends and collateral. The loan to value ratio depends on the type of
collateral. Generally speaking, accounts receivable are financed at between 50% to 80% of accounts
receivable less than 60 days past due. Inventory financing will range between 50% and 60% (with no
work in process) depending on the borrower and nature of inventory. We require a first lien
position for those loans.
As of December 31, 2006, commercial and industrial loans outstanding totaled $206.6 million,
or 14.6% of our loan portfolio, compared to $175.4 million, or 14.6% of our loan portfolio, as of
December 31, 2005. This increase is primarily the result of organic growth of our loan portfolio.
49
Table 8 presents the distribution of the maturity of our loans as of December 31, 2006. The
table also presents the portion of our loans that have fixed interest rates versus interest rates
that fluctuate over the life of the loans based on changes in the interest rate environment.
Table 8: Maturity of Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Over One |
|
|
|
|
|
|
|
|
|
|
|
|
|
Year |
|
|
|
|
|
|
|
|
|
One Year |
|
|
Through |
|
|
Over Five |
|
|
|
|
|
|
or Less |
|
|
Five Years |
|
|
Years |
|
|
Total |
|
|
|
(In thousands) |
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-farm/non-residential |
|
$ |
116,224 |
|
|
$ |
245,519 |
|
|
$ |
103,563 |
|
|
$ |
465,306 |
|
Construction/land development |
|
|
264,111 |
|
|
|
111,129 |
|
|
|
18,170 |
|
|
|
393,410 |
|
Agricultural |
|
|
6,682 |
|
|
|
3,556 |
|
|
|
1,421 |
|
|
|
11,659 |
|
Residential real estate loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1-4 family |
|
|
85,143 |
|
|
|
72,603 |
|
|
|
71,842 |
|
|
|
229,588 |
|
Multifamily residential |
|
|
10,660 |
|
|
|
23,005 |
|
|
|
3,775 |
|
|
|
37,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate |
|
|
482,820 |
|
|
|
455,812 |
|
|
|
198,771 |
|
|
|
1,137,403 |
|
Consumer |
|
|
19,814 |
|
|
|
24,757 |
|
|
|
485 |
|
|
|
45,056 |
|
Commercial and industrial |
|
|
91,251 |
|
|
|
98,654 |
|
|
|
16,654 |
|
|
|
206,559 |
|
Agricultural |
|
|
9,431 |
|
|
|
2,898 |
|
|
|
1,191 |
|
|
|
13,520 |
|
Other |
|
|
60 |
|
|
|
11,925 |
|
|
|
1,772 |
|
|
|
13,757 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans receivable |
|
$ |
603,376 |
|
|
$ |
594,046 |
|
|
$ |
218,873 |
|
|
$ |
1,416,295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With fixed interest rates |
|
$ |
350,093 |
|
|
$ |
460,702 |
|
|
$ |
55,901 |
|
|
$ |
866,696 |
|
With floating interest rates |
|
|
253,283 |
|
|
|
133,344 |
|
|
|
162,972 |
|
|
|
549,599 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
603,376 |
|
|
$ |
594,046 |
|
|
$ |
218,873 |
|
|
$ |
1,416,295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Performing Assets
We classify our problem loans into three categories: past due loans, special mention loans and
classified loans (accruing and non-accruing).
When management determines that a loan is no longer performing, and that collection of
interest appears doubtful, the loan is placed on non-accrual status. Loans that are 90 days past
due are placed on non-accrual status unless they are adequately secured and there is reasonable
assurance of full collection of both principal and interest. Our management closely monitors all
loans that are contractually 90 days past due, treated as special mention or otherwise classified
or on non-accrual status. Generally, non-accrual loans that are 120 days past due without assurance
of repayment are charged off against the allowance for loan losses.
50
Table 9 sets forth information with respect to our non-performing assets as of December
31, 2006, 2005, 2004, 2003, and 2002. As of these dates, we did not have any restructured loans
within the meaning of Statement of Financial Accounting Standards No. 15.
Table 9: Non-performing Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
|
(Dollars in thousands) |
|
Non-accrual loans |
|
$ |
3,905 |
|
|
$ |
7,864 |
|
|
$ |
8,959 |
|
|
$ |
8,600 |
|
|
$ |
1,671 |
|
Loans past due 90 days or more
(principal or interest payments) |
|
|
641 |
|
|
|
426 |
|
|
|
2 |
|
|
|
52 |
|
|
|
142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans |
|
|
4,546 |
|
|
|
8,290 |
|
|
|
8,961 |
|
|
|
8,652 |
|
|
|
1,813 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-performing assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosed assets held for sale |
|
|
435 |
|
|
|
758 |
|
|
|
458 |
|
|
|
1,274 |
|
|
|
169 |
|
Other non-performing assets |
|
|
13 |
|
|
|
11 |
|
|
|
53 |
|
|
|
62 |
|
|
|
151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other non-performing assets |
|
|
448 |
|
|
|
769 |
|
|
|
511 |
|
|
|
1,336 |
|
|
|
320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets |
|
$ |
4,994 |
|
|
$ |
9,059 |
|
|
$ |
9,472 |
|
|
$ |
9,988 |
|
|
$ |
2,133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to non-performing loans |
|
|
574.37 |
% |
|
|
291.62 |
% |
|
|
182.40 |
% |
|
|
170.10 |
% |
|
|
314.73 |
% |
Non-performing loans to total loans |
|
|
0.32 |
|
|
|
0.69 |
|
|
|
1.73 |
|
|
|
1.73 |
|
|
|
0.64 |
|
Non-performing assets to total assets |
|
|
0.23 |
|
|
|
0.47 |
|
|
|
1.18 |
|
|
|
1.24 |
|
|
|
0.58 |
|
Our non-performing loans are comprised of non-accrual loans and loans that are contractually
past due 90 days. Our bank subsidiaries recognize income principally on the accrual basis of
accounting. When loans are classified as non-accrual, the accrued interest is charged off and no
further interest is accrued, unless the credit characteristics of the loan improves. If a loan is
determined by management to be uncollectible, the portion of the loan determined to be
uncollectible is then charged to the allowance for loan losses.
Total non-performing loans were $4.5 million as of December 31, 2006, compared to $8.3 million
as of December 31, 2005. This decrease reflects the continuing commitment of our management to
improve and maintain sound asset quality.
Total non-performing loans were $8.3 million as of December 31, 2005, compared to $9.0 million
as of December 31, 2004. The acquisitions completed in 2005 had a minimal impact on non-performing
loans as a result of their favorable asset quality.
If the non-accrual loans had been accruing interest in accordance with the original terms of
their respective agreements, interest income of approximately $450,000 for the year ended December
31, 2006, $550,000 in 2005, and $520,000 in 2004 would have been recorded. Interest income
recognized on the non-accrual loans for the years ended December 31, 2006, 2005, and 2004 was
considered immaterial.
A loan is considered impaired when it is probable that we will not receive all amounts due
according to the contracted terms of the loans. Impaired loans include non-performing loans (loans
past due 90 days or more and non-accrual loans) and certain other loans identified by management
that are still performing. As of December 31, 2006 and 2005, average impaired loans were $7.2
million and $8.5 million, respectively. At December 31, 2006 and 2005, impaired loans totaled
$11.2 million and $5.1 million, respectively. While the year end impaired loans have increased $6.1
million from 2005 to 2006, these impaired loans only result in a slight increase in loss exposure.
As a result reserves relative to impaired loans at December 31, 2006, were $2.1 million and $1.8
million at December 31, 2005.
51
As a result of the building boom in northwest Arkansas, this market is beginning to show signs
of over-development. More specifically, the number of residential real estate lots and commercial
real estate projects available exceed the current demand. For example, The Skyline Report
published in February 2007 by the University of Arkansas, reported that the current absorption rate
implies that the supply of remaining lots in northwest Arkansas active subdivisions is sufficient
for 47.0 months. Management will actively monitor the status of this market as it relates to our
real estate loans and make changes to the allowance for loan losses if necessary. At December 31,
2006, we had approximately $21.3 million in loan participations with our unconsolidated affiliate
White River Bancshares, Inc. in northwest Arkansas.
Allowance for Loan Losses
Overview. The allowance for loan losses is maintained at a level which our management
believes is adequate to absorb all probable losses on loans in the loan portfolio. The amount of
the allowance is affected by: (i) loan charge-offs, which decrease the allowance; (ii) recoveries
on loans previously charged off, which increase the allowance; and (iii) the provision of possible
loan losses charged to income, which increases the allowance. In determining the provision for
possible loan losses, it is necessary for our management to monitor fluctuations in the allowance
resulting from actual charge-offs and recoveries and to periodically review the size and
composition of the loan portfolio in light of current and anticipated economic conditions. If
actual losses exceed the amount of allowance for loan losses, our earnings could be adversely
affected.
As we evaluate the allowance for loan losses, we categorize it as follows: (i) specific
allocations; (ii) allocations for classified assets with no specific allocation; (iii) general
allocations for each major loan category; and (iv) miscellaneous allocations.
Specific Allocations. As a general rule, if a specific allocation is warranted, it is the
result of an analysis of a previously classified credit or relationship. Our evaluation process in
specific allocations includes a review of appraisals or other collateral analysis. These values are
compared to the remaining outstanding principal balance. If a loss is determined to be reasonably
possible, the possible loss is identified as a specific allocation. If the loan is not collateral
dependent, the measurement of loss is based on the expected future cash flows of the loan.
Allocations for Classified Assets with No Specific Allocation. We establish allocations for
loans rated special mention through loss in accordance with the guidelines established by the
regulatory agencies. A percentage rate is applied to each loan category to determine the level of
dollar allocation.
General Allocations. We establish general allocations for each major loan category. This
section also includes allocations to loans, which are collectively evaluated for loss such as
residential real estate, commercial real estate consumer loans and commercial and industrial loans.
The allocations in this section are based on a historical review of loan loss experience and past
due accounts. We give consideration to trends, changes in loan mix, delinquencies, prior losses,
and other related information.
Miscellaneous Allocations. Allowance allocations other than specific, classified, and general
are included in our miscellaneous section.
Charge-offs and Recoveries. Total charge-offs decreased $3.1 million, or 67.2%, to $1.5
million for the year ended December 31, 2006, from $4.6 million in 2005. Total recoveries increased
$293,000, or 34.5%, to $1.1 million for the year ended December 31, 2006 from $850,000 in 2005.
Total charge-offs increased $2.4 million, or 111.4%, to $4.6 million for the year ended December
31, 2005, from $2.2 million in 2004. Total recoveries decreased $669,000, or 44.0%, to $850,000 for
the year ended December 31, 2005 from $1.5 million in 2004. The changes in net charge-offs are due
to our conservative stance on asset quality. The acquisitions completed in 2005 had a minimal
impact on net charge-offs.
52
Table 10 shows the allowance for loan losses, charge-offs and recoveries as of and for the
years ended December 31, 2006, 2005, 2004, 2003, and 2002.
Table 10: Analysis of Allowance for Loan Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
|
(Dollars in thousands) |
|
Balance, beginning of year |
|
$ |
24,175 |
|
|
$ |
16,345 |
|
|
$ |
14,717 |
|
|
$ |
5,706 |
|
|
$ |
3,847 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans charged off |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commerical real estate loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-farm/non-residential |
|
|
322 |
|
|
|
2,448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction/land
development |
|
|
125 |
|
|
|
405 |
|
|
|
5 |
|
|
|
23 |
|
|
|
32 |
|
Agricultural |
|
|
18 |
|
|
|
15 |
|
|
|
|
|
|
|
17 |
|
|
|
|
|
Residential real estate loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1-4 family |
|
|
143 |
|
|
|
515 |
|
|
|
404 |
|
|
|
138 |
|
|
|
19 |
|
Multifamily residential |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate |
|
|
608 |
|
|
|
3,383 |
|
|
|
409 |
|
|
|
178 |
|
|
|
51 |
|
Consumer |
|
|
243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
626 |
|
|
|
758 |
|
|
|
499 |
|
|
|
114 |
|
|
|
173 |
|
Agricultural |
|
|
|
|
|
|
30 |
|
|
|
786 |
|
|
|
80 |
|
|
|
|
|
Other |
|
|
37 |
|
|
|
440 |
|
|
|
487 |
|
|
|
304 |
|
|
|
277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans charged off |
|
|
1,514 |
|
|
|
4,611 |
|
|
|
2,181 |
|
|
|
676 |
|
|
|
501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries of loans previously
charged off |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-farm/non-residential |
|
|
102 |
|
|
|
294 |
|
|
|
1,057 |
|
|
|
1 |
|
|
|
|
|
Construction/land
development |
|
|
122 |
|
|
|
15 |
|
|
|
13 |
|
|
|
19 |
|
|
|
17 |
|
Agricultural |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1-4 family |
|
|
346 |
|
|
|
115 |
|
|
|
47 |
|
|
|
31 |
|
|
|
|
|
Multifamily residential |
|
|
66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate |
|
|
636 |
|
|
|
424 |
|
|
|
1,117 |
|
|
|
51 |
|
|
|
48 |
|
Consumer |
|
|
104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
157 |
|
|
|
102 |
|
|
|
254 |
|
|
|
10 |
|
|
|
10 |
|
Agricultural |
|
|
|
|
|
|
|
|
|
|
17 |
|
|
|
45 |
|
|
|
|
|
Other |
|
|
246 |
|
|
|
324 |
|
|
|
131 |
|
|
|
44 |
|
|
|
82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries |
|
|
1,143 |
|
|
|
850 |
|
|
|
1,519 |
|
|
|
150 |
|
|
|
140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (recoveries) loans
charged off |
|
|
371 |
|
|
|
3,761 |
|
|
|
662 |
|
|
|
526 |
|
|
|
361 |
|
Allowance for loan losses of
acquired institution |
|
|
|
|
|
|
7,764 |
|
|
|
|
|
|
|
8,730 |
|
|
|
|
|
Provision for loan losses |
|
|
2,307 |
|
|
|
3,827 |
|
|
|
2,290 |
|
|
|
807 |
|
|
|
2,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year |
|
$ |
26,111 |
|
|
$ |
24,175 |
|
|
$ |
16,345 |
|
|
$ |
14,717 |
|
|
$ |
5,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (recoveries) charge-offs to average loans |
|
|
0.03 |
% |
|
|
0.38 |
% |
|
|
0.13 |
% |
|
|
0.16 |
% |
|
|
0.14 |
% |
Allowance for loan losses
to period-end loans |
|
|
1.84 |
|
|
|
2.01 |
|
|
|
3.16 |
|
|
|
2.94 |
|
|
|
2.00 |
|
Allowance for loan losses to net
(recoveries) charge-offs |
|
|
7,038 |
|
|
|
642 |
|
|
|
2,469 |
|
|
|
2,798 |
|
|
|
1,581 |
|
53
Allocated Allowance for Loan Losses. We use a risk rating and specific reserve methodology in
the calculation and allocation of our allowance for loan losses. While the allowance is allocated
to various loan categories in assessing and evaluating the level of the allowance, the allowance is
available to cover charge-offs incurred in all loan categories. The unallocated portion of the
allowance, although unassigned to a particular credit relationship or product segment, is vital to
safeguard against the imprecision inherent in estimating credit losses.
The changes for the year 2006 in the allocation of the allowance for loan losses for the
individual types of loans for the most part are consistent with the changes in the outstanding loan
portfolio for those products from December 31, 2005. In the opinion of management, any allocation
changes not consistent with the changes in the loan portfolio product would be considered normal
operating changes, not downgrading or upgrading of any one particular type of loans in the loan
portfolio.
Table 11 presents the allocation of allowance for loan losses as of the dates indicated.
Table 11: Allocation of Allowance for Loan Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
|
Allowance |
|
|
% of |
|
|
Allowance |
|
|
% of |
|
|
Allowance |
|
|
% of |
|
|
Allowance |
|
|
% of |
|
|
Allowance |
|
|
% of |
|
|
|
Amount |
|
|
loans (1) |
|
|
Amount |
|
|
loans (1) |
|
|
Amount |
|
|
loans (1) |
|
|
Amount |
|
|
loans (1) |
|
|
Amount |
|
|
loans (1) |
|
|
|
(Dollars in thousands) |
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real
estate loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-farm/non-
residential |
|
$ |
9,130 |
|
|
|
32.8 |
% |
|
$ |
7,202 |
|
|
|
34.1 |
% |
|
$ |
6,212 |
|
|
|
35.3 |
% |
|
$ |
5,505 |
|
|
|
34.8 |
% |
|
$ |
1,786 |
|
|
|
32.1 |
% |
Construction/land
development |
|
|
7,494 |
|
|
|
27.8 |
|
|
|
5,544 |
|
|
|
24.2 |
|
|
|
1,690 |
|
|
|
22.6 |
|
|
|
1,407 |
|
|
|
14.8 |
|
|
|
862 |
|
|
|
13.3 |
|
Agricultural |
|
|
505 |
|
|
|
0.8 |
|
|
|
407 |
|
|
|
1.1 |
|
|
|
493 |
|
|
|
2.5 |
|
|
|
491 |
|
|
|
1.0 |
|
|
|
123 |
|
|
|
1.8 |
|
Residential real
estate loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1-4
family |
|
|
3,091 |
|
|
|
16.2 |
|
|
|
3,317 |
|
|
|
18.4 |
|
|
|
2,185 |
|
|
|
16.7 |
|
|
|
2,710 |
|
|
|
15.8 |
|
|
|
1,005 |
|
|
|
20.7 |
|
Multifamily
residential |
|
|
909 |
|
|
|
2.6 |
|
|
|
423 |
|
|
|
2.9 |
|
|
|
156 |
|
|
|
3.4 |
|
|
|
85 |
|
|
|
3.3 |
|
|
|
107 |
|
|
|
2.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate |
|
|
21,129 |
|
|
|
80.2 |
|
|
|
16,893 |
|
|
|
80.7 |
|
|
|
10,736 |
|
|
|
80.5 |
|
|
|
10,198 |
|
|
|
69.7 |
|
|
|
3,883 |
|
|
|
70.1 |
|
Consumer |
|
|
861 |
|
|
|
3.2 |
|
|
|
682 |
|
|
|
3.3 |
|
|
|
526 |
|
|
|
4.8 |
|
|
|
724 |
|
|
|
6.3 |
|
|
|
440 |
|
|
|
7.9 |
|
Commercial and
industrial |
|
|
3,237 |
|
|
|
14.6 |
|
|
|
4,059 |
|
|
|
14.6 |
|
|
|
2,025 |
|
|
|
13.4 |
|
|
|
2,241 |
|
|
|
20.5 |
|
|
|
908 |
|
|
|
16.4 |
|
Agricultural |
|
|
456 |
|
|
|
1.0 |
|
|
|
505 |
|
|
|
0.7 |
|
|
|
316 |
|
|
|
1.2 |
|
|
|
572 |
|
|
|
2.9 |
|
|
|
475 |
|
|
|
5.6 |
|
Other |
|
|
11 |
|
|
|
1.0 |
|
|
|
|
|
|
|
0.7 |
|
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
Unallocated |
|
|
417 |
|
|
|
|
|
|
|
2,036 |
|
|
|
|
|
|
|
2,742 |
|
|
|
|
|
|
|
982 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
26,111 |
|
|
|
100.0 |
% |
|
$ |
24,175 |
|
|
|
100.0 |
% |
|
$ |
16,345 |
|
|
|
100.0 |
% |
|
$ |
14,717 |
|
|
|
100.0 |
% |
|
$ |
5,706 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Percentage of loans in each category to loans receivable. |
54
Investments and Securities
Our securities portfolio is the second largest component of earning assets and provides a
significant source of revenue. Securities within the portfolio are classified as held-to-maturity,
available-for-sale, or trading based on the intent and objective of the investment and the ability
to hold to maturity. Fair values of securities are based on quoted market prices where available.
If quoted market prices are not available, estimated fair values are based on quoted market prices
of comparable securities. As of December 31, 2006, we had no held-to-maturity or trading
securities.
Securities available-for-sale are reported at fair value with unrealized holding gains and
losses reported as a separate component of shareholders equity as other comprehensive income.
Securities that are held as available-for-sale are used as a part of our asset/liability management
strategy. Securities may be sold in response to interest rate changes, changes in prepayment risk,
the need to increase regulatory capital, and other similar factors are classified as available for
sale. Available-for-sale securities were $531.9 million as of December 31, 2006, compared to $530.3
million as of December 31, 2005. The estimated duration of our securities portfolio was 2.6 years
as of December 31, 2006.
As of December 31, 2006, $219.8 million, or 41.3%, of the available-for-sale securities were
invested in mortgage-backed securities, compared to $256.5 million, or 48.4%, of the
available-for-sale securities in the prior year. To reduce our income tax burden, $103.4 million,
or 19.4%, of the available-for-sale securities portfolio as of December 31, 2006, was primarily
invested in tax-exempt obligations of state and political subdivisions, compared to $103.5 million,
or 19.5%, of the available-for-sale securities as of December 31, 2005. Also, we had approximately
$196.2 million, or 36.9%, in obligations of U.S. Government-sponsored enterprises in the
available-for-sale securities portfolio as of December 31, 2006, compared to $157.5 million, or
29.7%, of the available-for-sale securities in the prior year.
Certain investment securities are valued at less than their historical cost. These declines
primarily resulted from recent increases in market interest rates. Based on evaluation of available
evidence, we believe the declines in fair value for these securities are temporary. It is our
intent to hold these securities to maturity. Should the impairment of any of these securities
become other than temporary, the cost basis of the investment will be reduced and the resulting
loss recognized in net income in the period the other-than temporary impairment is identified.
55
Table 12 presents the carrying value and fair value of investment securities for each of
the years indicated.
Table 12: Investment Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated |
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
|
|
(In thousands) |
|
Held-to-Maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and political
subdivisions |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government
sponsored
enterprises |
|
$ |
199,085 |
|
|
$ |
79 |
|
|
$ |
(2,927 |
) |
|
$ |
196,237 |
|
|
$ |
162,165 |
|
|
$ |
27 |
|
|
$ |
(4,723 |
) |
|
$ |
157,469 |
|
Mortgage-backed
securities |
|
|
225,747 |
|
|
|
41 |
|
|
|
(5,988 |
) |
|
|
219,800 |
|
|
|
264,666 |
|
|
|
16 |
|
|
|
(8,209 |
) |
|
|
256,473 |
|
State and political
subdivisions |
|
|
102,536 |
|
|
|
1,360 |
|
|
|
(496 |
) |
|
|
103,400 |
|
|
|
102,928 |
|
|
|
1,279 |
|
|
|
(746 |
) |
|
|
103,461 |
|
Other securities |
|
|
12,631 |
|
|
|
|
|
|
|
(177 |
) |
|
|
12,454 |
|
|
|
13,571 |
|
|
|
|
|
|
|
(672 |
) |
|
|
12,899 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
539,999 |
|
|
$ |
1,480 |
|
|
$ |
(9,588 |
) |
|
$ |
531,891 |
|
|
$ |
543,330 |
|
|
$ |
1,322 |
|
|
$ |
(14,350 |
) |
|
$ |
530,302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2004 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
|
|
(In thousands) |
|
Held-to-Maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and political
subdivisions |
|
$ |
100 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
100 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government
sponsored
enterprises |
|
$ |
15,646 |
|
|
$ |
18 |
|
|
$ |
(86 |
) |
|
$ |
15,578 |
|
Mortgage-backed
securities |
|
|
127,316 |
|
|
|
249 |
|
|
|
(898 |
) |
|
|
126,667 |
|
State and political
subdivisions |
|
|
39,564 |
|
|
|
717 |
|
|
|
(147 |
) |
|
|
40,134 |
|
Other securities |
|
|
8,010 |
|
|
|
15 |
|
|
|
(38 |
) |
|
|
7,987 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
190,536 |
|
|
$ |
999 |
|
|
$ |
(1,169 |
) |
|
$ |
190,366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
Table 13 reflects the amortized cost and estimated fair value of debt securities as of
December 31, 2006, by contractual maturity and the weighted average yields (for tax-exempt
obligations on a fully taxable equivalent basis) of those securities. Expected maturities will
differ from contractual maturities because borrowers may have the right to call or prepay
obligations, with or without call or prepayment penalties.
Table 13: Maturity Distribution of Investment Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006 |
|
|
|
|
|
|
1 Year |
|
|
5 Years |
|
|
|
|
|
|
Total |
|
|
|
|
|
|
1 Year |
|
|
Through |
|
|
Through |
|
|
Over |
|
|
Amortized |
|
|
Total Fair |
|
|
|
or Less |
|
|
5 Years |
|
|
10 Years |
|
|
10 Years |
|
|
Cost |
|
|
Value |
|
|
|
(Dollars in thousands) |
Available-for-Sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government
sponsored enterprises |
|
$ |
140,385 |
|
|
$ |
31,660 |
|
|
$ |
10,062 |
|
|
$ |
16,978 |
|
|
$ |
199,085 |
|
|
$ |
196,237 |
|
Mortgage-backed
securities |
|
|
40,239 |
|
|
|
100,214 |
|
|
|
46,042 |
|
|
|
39,252 |
|
|
|
225,747 |
|
|
|
219,800 |
|
State and political
subdivisions |
|
|
22,999 |
|
|
|
59,373 |
|
|
|
12,834 |
|
|
|
7,330 |
|
|
|
102,536 |
|
|
|
103,400 |
|
Other securities |
|
|
3,005 |
|
|
|
8,009 |
|
|
|
1,432 |
|
|
|
185 |
|
|
|
12,631 |
|
|
|
12,454 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
206,628 |
|
|
$ |
199,256 |
|
|
$ |
70,370 |
|
|
$ |
63,745 |
|
|
$ |
539,999 |
|
|
$ |
531,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total |
|
|
38.3 |
% |
|
|
36.9 |
% |
|
|
13.0 |
% |
|
|
11.8 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average yield |
|
|
4.69 |
% |
|
|
4.84 |
% |
|
|
5.22 |
% |
|
|
5.22 |
% |
|
|
4.88 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
Our deposits averaged $1.51 billion for the year ended December 31, 2006, and $1.25 billion
for 2005. Total deposits increased $180.1 million, or 12.6%, to $1.61 billion as of December 31,
2006, from $1.43 billion as of December 31, 2005. Deposits are our primary source of funds. We
offer a variety of products designed to attract and retain deposit customers. Those products
consist of checking accounts, regular savings deposits, NOW accounts, money market accounts and
certificates of deposit. Deposits are gathered from individuals, partnerships and corporations in
our market areas. In addition, we obtain deposits from state and local entities and, to a lesser
extent, U.S. Government and other depository institutions. Since our policy also permits the
acceptance of brokered deposits; during 2006 we increased our brokered deposit by $34.9 million to
$50.2 million as of December 31, 2006, from $15.3 million as of December 31, 2005.
The interest rates paid are competitively priced for each particular deposit product and
structured to meet our funding requirements. We will continue to manage interest expense through
deposit pricing and do not anticipate a significant change in total deposits unless our liquidity
position changes. We believe that additional funds can be attracted and deposit growth can be
accelerated through deposit pricing if we experience increased loan demand or other liquidity
needs. The increase in interest rates paid from 2004 to 2006 is reflective of the Federal Reserve
increasing the Federal Funds rate beginning in 2004 and the associated repricing of deposits during
those years combined with the acquisition of Marine Bancorp. The acquisition of Marine Bancorp
increased our average rate as a result of the higher interest rate environment in the Florida Keys.
57
Table 14 reflects the classification of the average deposits and the average rate paid on each
deposit category which is in excess of 10 percent of average total deposits, for the years ended
December 31, 2006, 2005, and 2004.
Table 14: Average Deposit Balances and Rates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
Average |
|
|
Average |
|
|
Average |
|
|
Average |
|
|
Average |
|
|
Average |
|
|
|
Amount |
|
|
Rate Paid |
|
|
Amount |
|
|
Rate Paid |
|
|
Amount |
|
|
Rate Paid |
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
Non-interest-bearing
transaction accounts |
|
$ |
215,075 |
|
|
|
|
% |
|
$ |
177,511 |
|
|
|
|
% |
|
$ |
79,907 |
|
|
|
|
% |
Interest-bearing
transaction accounts |
|
|
458,463 |
|
|
|
2.63 |
|
|
|
389,291 |
|
|
|
1.94 |
|
|
|
164,538 |
|
|
|
0.81 |
|
Savings deposits |
|
|
71,756 |
|
|
|
1.59 |
|
|
|
58,142 |
|
|
|
1.24 |
|
|
|
27,888 |
|
|
|
0.37 |
|
Time deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$100,000 or more |
|
|
418,903 |
|
|
|
4.61 |
|
|
|
357,464 |
|
|
|
3.16 |
|
|
|
135,902 |
|
|
|
2.11 |
|
Other time deposits |
|
|
344,388 |
|
|
|
3.99 |
|
|
|
267,228 |
|
|
|
2.74 |
|
|
|
145,489 |
|
|
|
2.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,508,585 |
|
|
|
3.06 |
% |
|
$ |
1,249,636 |
|
|
|
2.15 |
% |
|
$ |
553,724 |
|
|
|
1.37 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 15 presents our maturities of large denomination time deposits as of December 31, 2006
and 2005.
Table 15: Maturities of Large Denomination Time Deposits ($100,000 or more)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
Balance |
|
|
Percent |
|
|
Balance |
|
|
Percent |
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
Maturing |
Three months or less |
|
$ |
230,126 |
|
|
|
47.3 |
% |
|
$ |
164,233 |
|
|
|
40.8 |
% |
Over three months to six months |
|
|
85,327 |
|
|
|
17.6 |
|
|
|
76,664 |
|
|
|
19.0 |
|
Over six months to 12 months |
|
|
103,810 |
|
|
|
21.3 |
|
|
|
87,792 |
|
|
|
21.8 |
|
Over 12 months |
|
|
67,083 |
|
|
|
13.8 |
|
|
|
74,341 |
|
|
|
18.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
486,346 |
|
|
|
100.0 |
% |
|
$ |
403,030 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB and Other Borrowings
Our FHLB and other borrowings were $151.8 million as of December 31, 2006, and $117.1
million as of December 31, 2005. The outstanding balance for December 31, 2006, includes $5.0
million of short-term advances and $146.8 million of long-term advances. The outstanding balance
for December 31, 2005, includes $4.0 million of short-term advances and $113.1 million of long-term
advances. Short-term borrowings consist primarily of short-term FHLB borrowings. Long-term
borrowings consist of long-term FHLB borrowings for 2006 and 2005 and a line of credit with another
financial institution for 2005. Our remaining FHLB borrowing capacity was $323.6 million as of
December 31, 2006, and $222.3 million as of December 31, 2005.
We increased our long-term borrowings $33.7 million, or 29.7%, to $146.8 million as of
December 31, 2006, from $113.1 million as of December 31, 2005. This increase is primarily a result
of a $47.7 million increase in FHLB borrowings in our other bank subsidiaries offset by our holding
company paying off the $14.0 million line of credit with another financial institution. The FHLB
borrowings increase in our other bank subsidiaries is associated with a strategic decision to
better manage interest rate risk primarily associated with new loan fundings and commitments made
during 2006.
58
Subordinated Debentures
Subordinated debentures, which consist of guaranteed payments on trust preferred securities,
were $44.7 million and $44.8 million as of December 31, 2006 and 2005, respectively.
On November 10, 2005, we completed a private placement of trust preferred securities in an
aggregate net principal amount of $15.0 million. We used the $15.0 million of net proceeds from the
offering to retire a portion of the financing received in connection with the third quarter
acquisition of Mountain View Bancshares.
Table 16 reflects subordinated debentures as of December 31, 2006 and 2005, which consisted of
guaranteed payments on trust preferred securities with the following components:
Table 16: Subordinated Debentures
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
Subordinated debentures, due 2033, fixed at 6.40%, during the first five
years and at a floating rate of 3.15% above the three-month LIBOR rate,
reset quarterly, thereafter, callable in 2008 without penalty |
|
$ |
20,619 |
|
|
$ |
20,619 |
|
Subordinated debentures, due 2030, fixed at 10.60%, callable beginning in
2010 with a prepayment penalty declining from 5.30% to 0.53% depending
on the year of prepayment, callable in 2020 without penalty |
|
|
3,424 |
|
|
|
3,516 |
|
Subordinated debentures, due 2033, floating rate of 3.15% above the
three-month LIBOR rate, reset quarterly, callable in 2008 without penalty |
|
|
5,155 |
|
|
|
5,155 |
|
Subordinated debentures, due 2035, fixed rate of 6.81% during the first ten
years and at a floating rate of 1.38% above the three-month LIBOR rate,
reset quarterly, thereafter, callable in 2010 without penalty |
|
|
15,465 |
|
|
|
15,465 |
|
|
|
|
|
|
|
|
Total |
|
$ |
44,663 |
|
|
$ |
44,755 |
|
|
|
|
|
|
|
|
The trust preferred securities are tax-advantaged issues that qualify for Tier 1 capital
treatment subject to certain limitations. Distributions on these securities are included in
interest expense. Each of the trusts is a statutory business trust organized for the sole purpose
of issuing trust securities and investing the proceeds in our subordinated debentures, the sole
asset of each trust. The trust preferred securities of each trust represent preferred beneficial
interests in the assets of the respective trusts and are subject to mandatory redemption upon
payment of the subordinated debentures held by the trust. We wholly own the common securities of
each trust. Each trusts ability to pay amounts due on the trust preferred securities is solely
dependent upon our making payment on the related subordinated debentures. Our obligations under the
subordinated securities and other relevant trust agreements, in aggregate, constitute a full and
unconditional guarantee by us of each respective trusts obligations under the trust securities
issued by each respective trust.
Presently, the funds raised from the trust preferred offerings will qualify as Tier 1 capital
for regulatory purposes, subject to the applicable limit, with the balance qualifying as Tier 2
capital.
Shareholders Equity
Stockholders equity was $231.4 million at December 31, 2006 compared to $165.9 million at
December 31, 2005, an increase of 39.5%. As of December 31, 2006 our equity to asset ratio was
10.6%, compared to 8.7% as of December 31, 2005. Book value per common share was $13.45 at December
31, 2006 compared to book value per common share with preferred converted to common of $11.63 at
December 31, 2005, an 15.6% increase. The increases in stockholders equity and book value per
share were primarily the result of the proceeds from our initial public offering and retained
earnings during the prior twelve months.
59
Initial Public Offering. On June 22, 2006, we priced our initial public offering of 2.5
million shares of common stock at $18.00 per share. We received net proceeds of approximately
$40.9 million from its sale of shares after deducting sales commissions and expenses. The
underwriters of our initial public offering exercised and completed their option to purchase an
additional 375,000 shares of common stock to cover over-allotments effective July 26, 2006. We
received net proceeds of approximately $6.3 million from this sale of shares after deducting sales
commissions.
Preferred Stock Conversion. During the third quarter of 2006, our Board of Directors
authorized the redemption and conversion of the issued and outstanding shares of Home BancSharess
Class A Preferred Stock and Class B Preferred Stock into Home BancShares Common Stock, effective as
of August 1, 2006.
The holders of shares of Class A Preferred Stock, received 0.789474 of Home BancShares Common
Stock for each share of Class A Preferred Stock owned, plus a check for the pro rata amount of the
third quarter Class A Preferred Stock dividend accrued through July 31, 2006. The Class A
Preferred shareholders did not receive fractional shares, instead they received cash at a rate of
$12.67 times the fraction of a share they otherwise would be entitled to.
The holders of shares of Class B Preferred Stock, received three shares of Home BancShares
Common Stock for each share of Class B Preferred Stock owned, plus a check for the pro rata amount
of the third quarter Class B Preferred Stock dividend accrued through July 31, 2006.
After the exercise of the over-allotment and the conversion of the preferred stock, Home
BancShares outstanding common stock increased to approximately 17.2 million shares.
Stock Split. On May 31, 2005, we completed a three-for-one stock split effected in the form
of a stock dividend. This resulted in issuing two additional shares of stock to the common
shareholders for each share previously held. As a result of the stock split, the accompanying
consolidated financial statements reflect an increase in the number of outstanding shares of common
stock and the $78,000 transfer of the par value of these additional shares from capital surplus.
All share and per share amounts have been restated to reflect the retroactive effect of the stock
split, except for our capitalization.
Cash Dividends. We declared cash dividends on our common stock, Class A preferred stock, and
Class B preferred stock of $0.090, $0.1458 and $0.3325 per share, respectively, for the year ended
December 31, 2006, and $0.070, $0.250 and $0.330 per share, respectively, for 2005. The common per
share amounts are reflective of the three-for-one stock split during 2005.
Liquidity and Capital Adequacy Requirements
Parent Company Liquidity. The primary sources for payment of our operating expenses and
dividends are current cash on hand ($44.4 million as of December 31, 2006) and dividends received
from our bank subsidiaries.
Dividend payments by our bank subsidiaries are subject to various regulatory limitations. As
the result of special dividends paid by our bank subsidiaries during 2006 and 2005, as of December
31, 2006, our bank subsidiaries did not have any significant undivided profits available for
payment of dividends to us, without prior approval of the regulatory agencies. We used the special
dividends to provide cash for the Marine Bancorp acquisition, Mountain View Bancshares acquisition,
to repay the $14.0 million advance on our line of credit and to fund our additional investment of
$3.0 million in White River Bancshares.
Risk-Based Capital. We, as well as our bank subsidiaries, are subject to various regulatory
capital requirements administered by the federal banking agencies. Furthermore, we are deemed by
federal regulators to be a source of financial strength for White River Bancshares, despite owning
only 20% of its equity. Failure to meet minimum capital requirements can initiate certain mandatory
and other discretionary actions by regulators that, if enforced, could have a direct material
effect on our financial statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, we must meet specific capital guidelines that involve quantitative
measures of our assets, liabilities and certain off-balance-sheet items as calculated under
regulatory accounting practices. Our capital amounts and classifications are also subject to
qualitative judgments by the regulators as to components, risk weightings and other factors.
60
Quantitative measures established by regulation to ensure capital adequacy require us to
maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to
risk-weighted assets, and of Tier 1 capital to average assets. Management believes that, as of
December 31, 2006 and 2005, we met all regulatory capital adequacy requirements to which we were
subject.
Table 17 presents our risk-based capital ratios as of December 31, 2006 and 2005.
Table 17: Risk-Based Capital
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(Dollars in thousands) |
|
Tier 1 capital |
|
|
|
|
|
|
|
|
Shareholders equity |
|
$ |
231,419 |
|
|
$ |
165,857 |
|
Qualifying trust preferred securities |
|
|
43,000 |
|
|
|
43,000 |
|
Goodwill and core deposit intangibles, net |
|
|
(43,433 |
) |
|
|
(44,516 |
) |
Qualifying minority interest |
|
|
|
|
|
|
|
|
Unrealized loss on available-for-sale securities |
|
|
4,892 |
|
|
|
7,903 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Tier 1 capital |
|
|
235,878 |
|
|
|
172,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 2 capital |
|
|
|
|
|
|
|
|
Qualifying allowance for loan losses |
|
|
20,308 |
|
|
|
17,658 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Tier 2 capital |
|
|
20,308 |
|
|
|
17,658 |
|
|
|
|
|
|
|
|
Total risk-based capital |
|
$ |
256,186 |
|
|
$ |
189,902 |
|
|
|
|
|
|
|
|
Average total assets for leverage ratio |
|
$ |
2,089,130 |
|
|
$ |
1,868,143 |
|
|
|
|
|
|
|
|
Risk weighted assets |
|
$ |
1,618,849 |
|
|
$ |
1,406,131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios at end of year |
|
|
|
|
|
|
|
|
Leverage ratio |
|
|
11.29 |
% |
|
|
9.22 |
% |
Tier 1 risk-based capital |
|
|
14.57 |
|
|
|
12.25 |
|
Total risk-based capital |
|
|
15.83 |
|
|
|
13.51 |
|
Minimum guidelines |
|
|
|
|
|
|
|
|
Leverage ratio |
|
|
4.00 |
% |
|
|
4.00 |
% |
Tier 1 risk-based capital |
|
|
4.00 |
|
|
|
4.00 |
|
Total risk-based capital |
|
|
8.00 |
|
|
|
8.00 |
|
As of the most recent notification from regulatory agencies, our bank subsidiaries were
well-capitalized under the regulatory framework for prompt corrective action. To be categorized
as well-capitalized, our banking subsidiaries and we must maintain minimum leverage, Tier 1
risk-based capital, and total risk-based capital ratios as set forth in the table. There are no
conditions or events since that notification that we believe have changed the bank subsidiaries
categories.
61
Table 18 presents actual capital amounts and ratios as of December 31, 2006 and 2005, for our
bank subsidiaries and us.
Table 18: Capital and Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To Be Well |
|
|
|
|
|
|
|
|
|
|
For Capital |
|
Capitalized Under |
|
|
Actual |
|
Adequacy Purposes |
|
Prompt Corrective |
|
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
|
(Dollars in thousands) |
As of December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home BancShares |
|
$ |
235,878 |
|
|
|
11.29 |
% |
|
$ |
83,571 |
|
|
|
4.00 |
% |
|
$ |
N/A |
|
|
|
N/A |
% |
First State Bank |
|
|
46,811 |
|
|
|
8.69 |
|
|
|
21,547 |
|
|
|
4.00 |
|
|
|
26,934 |
|
|
|
5.00 |
|
Community Bank |
|
|
26,235 |
|
|
|
7.94 |
|
|
|
13,217 |
|
|
|
4.00 |
|
|
|
16,521 |
|
|
|
5.00 |
|
Twin City Bank |
|
|
50,375 |
|
|
|
7.51 |
|
|
|
26,831 |
|
|
|
4.00 |
|
|
|
33,539 |
|
|
|
5.00 |
|
Marine Bank |
|
|
27,317 |
|
|
|
8.08 |
|
|
|
13,523 |
|
|
|
4.00 |
|
|
|
16,904 |
|
|
|
5.00 |
|
Bank of Mountain View |
|
|
15,230 |
|
|
|
7.73 |
|
|
|
7,881 |
|
|
|
4.00 |
|
|
|
9,851 |
|
|
|
5.00 |
|
Tier 1 capital ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home BancShares |
|
$ |
235,878 |
|
|
|
14.57 |
% |
|
$ |
64,757 |
|
|
|
4.00 |
% |
|
$ |
N/A |
|
|
|
N/A |
% |
First State Bank |
|
|
46,811 |
|
|
|
10.29 |
|
|
|
18,197 |
|
|
|
4.00 |
|
|
|
27,295 |
|
|
|
6.00 |
|
Community Bank |
|
|
26,235 |
|
|
|
10.31 |
|
|
|
10,178 |
|
|
|
4.00 |
|
|
|
15,268 |
|
|
|
6.00 |
|
Twin City Bank |
|
|
50,375 |
|
|
|
10.15 |
|
|
|
19,852 |
|
|
|
4.00 |
|
|
|
29,778 |
|
|
|
6.00 |
|
Marine Bank |
|
|
27,317 |
|
|
|
9.59 |
|
|
|
11,394 |
|
|
|
4.00 |
|
|
|
17,091 |
|
|
|
6.00 |
|
Bank of Mountain View |
|
|
15,230 |
|
|
|
14.09 |
|
|
|
4,324 |
|
|
|
4.00 |
|
|
|
6,485 |
|
|
|
6.00 |
|
Total risk-based capital ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home BancShares |
|
$ |
256,186 |
|
|
|
15.83 |
% |
|
$ |
129,469 |
|
|
|
8.00 |
% |
|
$ |
N/A |
|
|
|
N/A |
% |
First State Bank |
|
|
52,519 |
|
|
|
11.54 |
|
|
|
36,408 |
|
|
|
8.00 |
|
|
|
45,510 |
|
|
|
10.00 |
|
Community Bank |
|
|
29,471 |
|
|
|
11.58 |
|
|
|
20,360 |
|
|
|
8.00 |
|
|
|
25,450 |
|
|
|
10.00 |
|
Twin City Bank |
|
|
56,586 |
|
|
|
11.40 |
|
|
|
39,709 |
|
|
|
8.00 |
|
|
|
49,637 |
|
|
|
10.00 |
|
Marine Bank |
|
|
30,582 |
|
|
|
10.74 |
|
|
|
22,780 |
|
|
|
8.00 |
|
|
|
28,475 |
|
|
|
10.00 |
|
Bank of Mountain View |
|
|
16,316 |
|
|
|
15.09 |
|
|
|
8,650 |
|
|
|
8.00 |
|
|
|
10,812 |
|
|
|
10.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home BancShares |
|
$ |
172,244 |
|
|
|
9.22 |
% |
|
$ |
74,726 |
|
|
|
4.00 |
% |
|
$ |
N/A |
|
|
|
N/A |
% |
First State Bank |
|
|
38,572 |
|
|
|
8.44 |
|
|
|
18,281 |
|
|
|
4.00 |
|
|
|
22,851 |
|
|
|
5.00 |
|
Community Bank |
|
|
23,129 |
|
|
|
7.59 |
|
|
|
12,189 |
|
|
|
4.00 |
|
|
|
15,236 |
|
|
|
5.00 |
|
Twin City Bank |
|
|
51,679 |
|
|
|
8.07 |
|
|
|
25,615 |
|
|
|
4.00 |
|
|
|
32,019 |
|
|
|
5.00 |
|
Marine Bank |
|
|
20,050 |
|
|
|
7.28 |
|
|
|
11,016 |
|
|
|
4.00 |
|
|
|
13,771 |
|
|
|
5.00 |
|
Bank of Mountain View |
|
|
29,468 |
|
|
|
16.35 |
|
|
|
7,209 |
|
|
|
4.00 |
|
|
|
9,012 |
|
|
|
5.00 |
|
Tier 1 capital ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home BancShares |
|
$ |
172,244 |
|
|
|
12.25 |
% |
|
$ |
56,243 |
|
|
|
4.00 |
% |
|
$ |
N/A |
|
|
|
N/A |
% |
First State Bank |
|
|
38,572 |
|
|
|
10.01 |
|
|
|
15,413 |
|
|
|
4.00 |
|
|
|
23,120 |
|
|
|
6.00 |
|
Community Bank |
|
|
23,129 |
|
|
|
10.25 |
|
|
|
9,026 |
|
|
|
4.00 |
|
|
|
13,539 |
|
|
|
6.00 |
|
Twin City Bank |
|
|
51,679 |
|
|
|
11.53 |
|
|
|
17,929 |
|
|
|
4.00 |
|
|
|
26,893 |
|
|
|
6.00 |
|
Marine Bank |
|
|
20,050 |
|
|
|
9.08 |
|
|
|
8,833 |
|
|
|
4.00 |
|
|
|
13,249 |
|
|
|
6.00 |
|
Bank of Mountain View |
|
|
29,468 |
|
|
|
29.75 |
|
|
|
3,962 |
|
|
|
4.00 |
|
|
|
5,943 |
|
|
|
6.00 |
|
Total risk-based capital ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home BancShares |
|
$ |
189,902 |
|
|
|
13.51 |
% |
|
$ |
112,451 |
|
|
|
8.00 |
% |
|
$ |
N/A |
|
|
|
N/A |
% |
First State Bank |
|
|
43,362 |
|
|
|
11.26 |
|
|
|
30,808 |
|
|
|
8.00 |
|
|
|
38,510 |
|
|
|
10.00 |
|
Community Bank |
|
|
26,010 |
|
|
|
11.53 |
|
|
|
18,047 |
|
|
|
8.00 |
|
|
|
22,559 |
|
|
|
10.00 |
|
Twin City Bank |
|
|
57,248 |
|
|
|
12.77 |
|
|
|
35,864 |
|
|
|
8.00 |
|
|
|
44,830 |
|
|
|
10.00 |
|
Marine Bank |
|
|
22,815 |
|
|
|
10.33 |
|
|
|
17,669 |
|
|
|
8.00 |
|
|
|
22,086 |
|
|
|
10.00 |
|
Bank of Mountain View |
|
|
30,094 |
|
|
|
30.38 |
|
|
|
7,925 |
|
|
|
8.00 |
|
|
|
9,906 |
|
|
|
10.00 |
|
62
Off-Balance Sheet Arrangements and Contractual Obligations
In the normal course of business, we enter into a number of financial commitments. Examples of
these commitments include but are not limited to operating lease obligations, FHLB advances, lines
of credit, subordinated debentures, unfunded loan commitments and letters of credit.
Commitments to extend credit and letters of credit are legally binding, conditional agreements
generally having certain expiration or termination dates. These commitments generally require
customers to maintain certain credit standards and are established based on managements credit
assessment of the customer. The commitments may expire without being drawn upon. Therefore, the
total commitment does not necessarily represent future requirements.
Table 19 presents the funding requirements of our most significant financial commitments,
excluding interest, as of December 31, 2006.
Table 19: Funding Requirements of Financial Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
One- |
|
Three- |
|
Greater |
|
|
|
|
Less than |
|
Three |
|
Five |
|
than Five |
|
|
|
|
One Year |
|
Years |
|
Years |
|
Years |
|
Total |
|
|
(In thousands) |
Operating lease obligations |
|
$ |
693 |
|
|
$ |
1,207 |
|
|
$ |
1,084 |
|
|
$ |
1,054 |
|
|
$ |
4,038 |
|
FHLB advances |
|
|
52,810 |
|
|
|
58,990 |
|
|
|
12,000 |
|
|
|
22,968 |
|
|
|
146,768 |
|
Subordinated debentures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,663 |
|
|
|
44,663 |
|
Loan commitments |
|
|
159,939 |
|
|
|
45,082 |
|
|
|
757 |
|
|
|
21,669 |
|
|
|
227,447 |
|
Letters of credit |
|
|
10,777 |
|
|
|
521 |
|
|
|
|
|
|
|
4,759 |
|
|
|
16,057 |
|
Non-GAAP Financial Measurements
We had $47.0 million, $48.7 million, and $22.8 million total goodwill, core deposit intangibles and other intangible assets as of December 31, 2006, 2005 and 2004, respectively. Because of our level of intangible assets and related amortization expenses, management believes diluted cash earnings per share, tangible book value per share, cash return on average assets, cash return on average tangible
equity and tangible equity to tangible assets are useful in evaluating our company. These calculations, which are similar to the GAAP calculation of diluted earnings per share, book value, return on average assets, return on average shareholders equity, and equity to assets, are presented in Tables 20 through 24, respectively.
Table 20: Diluted Cash Earnings Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP net income |
|
$ |
15,918 |
|
|
$ |
11,446 |
|
|
$ |
9,159 |
|
Intangible amortization after-tax |
|
|
1,059 |
|
|
|
891 |
|
|
|
442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash earnings |
|
$ |
16,977 |
|
|
$ |
12,337 |
|
|
$ |
9,601 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP diluted earnings per share |
|
$ |
1.00 |
|
|
$ |
0.82 |
|
|
$ |
0.94 |
|
Intangible amortization after-tax |
|
|
0.07 |
|
|
|
0.07 |
|
|
|
0.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted cash earnings per share |
|
$ |
1.07 |
|
|
$ |
0.89 |
|
|
$ |
0.98 |
|
|
|
|
|
|
|
|
|
|
|
63
Table 21: Tangible Book Value Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
2006 |
|
2005 |
|
2004 |
|
|
(Dollars in thousands, except per share data) |
Book value per common share: (A-B-C)/D |
|
$ |
13.45 |
|
|
$ |
11.45 |
|
|
$ |
10.75 |
|
Book value per common share with preferred
converted to common: A/(D+E+F) |
|
|
13.45 |
|
|
|
11.63 |
|
|
|
11.07 |
|
Tangible
book value per common share: (A-B-C-G-H)/D |
|
|
10.72 |
|
|
|
7.43 |
|
|
|
7.89 |
|
Tangible book value per share with preferred
converted to common: (A-G-H)/(D+E+F) |
|
|
10.72 |
|
|
|
8.21 |
|
|
|
8.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) Total shareholders equity |
|
$ |
231,419 |
|
|
$ |
165,857 |
|
|
$ |
106,610 |
|
(B) Total preferred A shareholders equity |
|
|
|
|
|
|
20,760 |
|
|
|
20,770 |
|
(C) Total preferred B shareholders equity |
|
|
|
|
|
|
6,422 |
|
|
|
|
|
(D) Common shares outstanding |
|
|
17,206 |
|
|
|
12,114 |
|
|
|
7,987 |
|
(E) Preferred A shares converted to common |
|
|
|
|
|
|
1,639 |
|
|
|
1,640 |
|
(F) Preferred B shares converted to common |
|
|
|
|
|
|
507 |
|
|
|
|
|
(G) Goodwill |
|
|
37,527 |
|
|
|
37,527 |
|
|
|
18,555 |
|
(H) Core deposit and other intangibles |
|
|
9,458 |
|
|
|
11,200 |
|
|
|
4,261 |
|
Table 22: Cash Return on Average Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
2006 |
|
2005 |
|
2004 |
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets: A/C |
|
|
0.78 |
% |
|
|
0.69 |
% |
|
|
1.17 |
% |
Cash return on average assets: B/(C-D) |
|
|
0.86 |
|
|
|
0.76 |
|
|
|
1.26 |
|
(A) Net income |
|
$ |
15,918 |
|
|
$ |
11,446 |
|
|
$ |
9,159 |
|
(B) Cash earnings |
|
|
16,977 |
|
|
|
12,337 |
|
|
|
9,601 |
|
(C) Average assets |
|
|
2,030,518 |
|
|
|
1,658,842 |
|
|
|
782,405 |
|
(D) Average goodwill, core deposits and other
intangible assets |
|
|
47,870 |
|
|
|
36,035 |
|
|
|
23,247 |
|
Table 23: Cash Return on Average Tangible Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
2006 |
|
2005 |
|
2004 |
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average shareholders equity: A/C |
|
|
8.12 |
% |
|
|
7.27 |
% |
|
|
8.61 |
% |
Return on average tangible equity: B/(C-D) |
|
|
11.46 |
|
|
|
10.16 |
|
|
|
11.54 |
|
(A) Net income |
|
$ |
15,918 |
|
|
$ |
11,446 |
|
|
$ |
9,159 |
|
(B) Cash earnings |
|
|
16,977 |
|
|
|
12,337 |
|
|
|
9,601 |
|
(C) Average shareholders equity |
|
|
196,014 |
|
|
|
157,478 |
|
|
|
106,416 |
|
(D) Average goodwill, core deposits and other
intangible assets |
|
|
47,870 |
|
|
|
36,035 |
|
|
|
23,247 |
|
64
Table 24: Tangible Equity to Tangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
2006 |
|
2005 |
|
2004 |
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
Equity to assets: B/A |
|
|
10.56 |
% |
|
|
8.68 |
% |
|
|
13.24 |
% |
Tangible equity to tangible
assets: (B-C-D)/(A-C-D) |
|
|
8.60 |
|
|
|
6.29 |
|
|
|
10.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) Total assets |
|
$ |
2,190,648 |
|
|
$ |
1,911,491 |
|
|
$ |
805,186 |
|
(B) Total shareholders equity |
|
|
231,419 |
|
|
|
165,857 |
|
|
|
106,610 |
|
(C) Goodwill |
|
|
37,527 |
|
|
|
37,527 |
|
|
|
18,555 |
|
(D) Core deposit and other intangibles |
|
|
9,458 |
|
|
|
11,200 |
|
|
|
4,261 |
|
Quarterly Results
Table 25 presents selected unaudited quarterly financial information for 2006 and 2005.
Table 25: Quarterly Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 Quarter |
|
|
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
|
Total |
|
|
|
|
|
|
|
(In thousands, except per share data) |
|
|
|
|
|
Income statement data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
$ |
27,734 |
|
|
$ |
29,886 |
|
|
$ |
32,458 |
|
|
$ |
33,685 |
|
|
$ |
123,763 |
|
Total interest expense |
|
|
12,928 |
|
|
|
14,523 |
|
|
|
16,022 |
|
|
|
17,467 |
|
|
|
60,940 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
14,806 |
|
|
|
15,363 |
|
|
|
16,436 |
|
|
|
16,218 |
|
|
|
62,823 |
|
Provision for loan losses |
|
|
484 |
|
|
|
590 |
|
|
|
649 |
|
|
|
584 |
|
|
|
2,307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after
provision for loan losses |
|
|
14,322 |
|
|
|
14,773 |
|
|
|
15,787 |
|
|
|
15,634 |
|
|
|
60,516 |
|
Non-interest income |
|
|
4,401 |
|
|
|
4,598 |
|
|
|
4,698 |
|
|
|
5,429 |
|
|
|
19,126 |
|
Gain (loss) on securities, net |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Non-interest expense |
|
|
13,619 |
|
|
|
14,143 |
|
|
|
14,237 |
|
|
|
14,479 |
|
|
|
56,478 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
5,104 |
|
|
|
5,229 |
|
|
|
6,248 |
|
|
|
6,584 |
|
|
|
23,165 |
|
Provision for income taxes |
|
|
1,588 |
|
|
|
1,593 |
|
|
|
1,960 |
|
|
|
2,106 |
|
|
|
7,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,516 |
|
|
$ |
3,636 |
|
|
$ |
4,288 |
|
|
$ |
4,478 |
|
|
$ |
15,918 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings |
|
$ |
0.28 |
|
|
$ |
0.28 |
|
|
$ |
0.26 |
|
|
$ |
0.25 |
|
|
$ |
1.07 |
|
Diluted earnings |
|
|
0.24 |
|
|
|
0.25 |
|
|
|
0.25 |
|
|
|
0.26 |
|
|
|
1.00 |
|
Diluted cash earnings |
|
|
0.26 |
|
|
|
0.27 |
|
|
|
0.26 |
|
|
|
0.28 |
|
|
|
1.07 |
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 Quarter |
|
|
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
|
Total |
|
|
|
|
|
|
|
(In thousands, except per share data) |
|
|
|
|
|
Income statement data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
$ |
16,361 |
|
|
$ |
18,824 |
|
|
$ |
23,605 |
|
|
$ |
26,668 |
|
|
$ |
85,458 |
|
Total interest expense |
|
|
6,355 |
|
|
|
7,628 |
|
|
|
10,139 |
|
|
|
11,880 |
|
|
|
36,002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
10,006 |
|
|
|
11,196 |
|
|
|
13,466 |
|
|
|
14,788 |
|
|
|
49,456 |
|
Provision for loan losses |
|
|
1,051 |
|
|
|
863 |
|
|
|
934 |
|
|
|
979 |
|
|
|
3,827 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after
provision for loan losses |
|
|
8,955 |
|
|
|
10,333 |
|
|
|
12,532 |
|
|
|
13,809 |
|
|
|
45,629 |
|
Non-interest income |
|
|
3,856 |
|
|
|
3,452 |
|
|
|
4,417 |
|
|
|
4,036 |
|
|
|
15,761 |
|
Gain on sale of
equity investment |
|
|
|
|
|
|
|
|
|
|
465 |
|
|
|
|
|
|
|
465 |
|
Gain (loss) on securities, net |
|
|
(43 |
) |
|
|
(110 |
) |
|
|
(386 |
) |
|
|
|
|
|
|
(539 |
) |
Non-interest expense |
|
|
9,636 |
|
|
|
10,374 |
|
|
|
12,186 |
|
|
|
12,739 |
|
|
|
44,935 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
3,132 |
|
|
|
3,301 |
|
|
|
4,842 |
|
|
|
5,106 |
|
|
|
16,381 |
|
Provision for income taxes |
|
|
943 |
|
|
|
929 |
|
|
|
1,512 |
|
|
|
1,551 |
|
|
|
4,935 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,189 |
|
|
$ |
2,372 |
|
|
$ |
3,330 |
|
|
$ |
3,555 |
|
|
$ |
11,446 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings |
|
$ |
0.18 |
|
|
$ |
0.19 |
|
|
$ |
0.27 |
|
|
$ |
0.28 |
|
|
$ |
0.92 |
|
Diluted earnings |
|
|
0.16 |
|
|
|
0.17 |
|
|
|
0.24 |
|
|
|
0.25 |
|
|
|
0.82 |
|
Diluted cash earnings |
|
|
0.18 |
|
|
|
0.18 |
|
|
|
0.26 |
|
|
|
0.27 |
|
|
|
0.89 |
|
Recent Accounting Pronouncements
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin
(SAB) 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements, expressing the staffs view regarding the process of quantifying
financial statement misstatements. SAB 108 requires that when quantifying misstatements for the
purposes of evaluating materiality, the effects on both the income statement and balance sheet
should be considered. The Company has evaluated the requirements of SAB 108, and it did not have a
material effect on the Companys financial position or results of operations.
In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, Fair
Value Measurements, which defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles (GAAP), and expands disclosures about fair value
measurements. This Statement applies under other accounting pronouncements that require or permit
fair value measurements, FASB having previously concluded in those accounting pronouncements that
fair value is the relevant measurement attribute. Accordingly, this Statement does not require any
new fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal years. The Company
is currently evaluating the impact of the adoption of this standard, but does not expect it to have
a material effect on the Companys financial position or results of operations.
In September 2006, the FASB Emerging Issue Task Force (EITF) issued EITF 06-4, Accounting for
Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements. The EITF determined that for an endorsement split-dollar life insurance arrangement
within the scope of the Issue, the employer should recognize a liability for future benefits in
accordance with SFAS No. 106, Employers Accounting for Postretirement Benefits Other Than
Pensions, or APB Opinion 12, Omnibus Opinion-1967, based on the substantive agreement with the
employee. The Issue is effective for fiscal years beginning after December 15, 2007, with earlier
application permitted. Entities should recognize the effects of applying EITF 06-4 through either
(a) a change in accounting principle through a cumulative-effect adjustment to retained earnings or
to other components of equity or net assets in the statement of financial position as of the
beginning of the year of adoption or (b) a change in accounting principle through retrospective
application to all prior periods. As of December 31, 2006, the Company has split-dollar life
insurance arrangements with two executives of the Company that have death benefits.
66
The Company is currently evaluating the impact that the adoption of EITF 06-4 will have on the financial position
and results of operation of the Company.
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, which provides clarification for uncertainty in income taxes recognized in an enterprises
financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. This
Interpretation prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be taken in a tax
return. This Interpretation also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and transition. The
Interpretation is effective for fiscal years beginning after December 31, 2006. The Company expects
to adopt the Interpretation during the first quarter of 2007 without material effect on the
Companys financial position or results of operations.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets,
which amends SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, with respect to the accounting for servicing of financial assets.
SFAS No. 156 requires that all separately recognized servicing rights be initially measured at fair
value, if practicable. SFAS No. 156 permits an entity to choose either of the following subsequent
measurement methods: (1) the amortization of servicing assets or liabilities in proportion to and
over the net servicing income period or net servicing loss or (2) the reporting of servicing assets
or liabilities at fair value at each reporting date and reporting changes in fair value in earnings
in the periods in which the change occur. SFAS No. 156 is effective the earlier of the date an
entity adopts the requirements of SFAS No. 156, or as of the beginning of its first fiscal year
beginning after September 15, 2006. The Company will adopt the Statement beginning January 1, 2007
and will choose the amortization of servicing assets over the net servicing income period which is
its current practice; therefore there will be minimal impact to the Company.
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial
Instruments, which amends SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. The Statement resolves issues addressed in SFAS No. 133
Implementation Issue No. D1, Application of Statement to Beneficial Interest in Securitized
Financial Assets. This Statement is effective for all financial instruments acquired or issued
after the beginning of the Companys first fiscal year that begins after September 15, 2006 and is
expected to have minimal impact on the Company.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Liquidity and Market Risk Management
Liquidity Management. Liquidity refers to the ability or the financial flexibility to manage
future cash flows to meet the needs of depositors and borrowers and fund operations. Maintaining
appropriate levels of liquidity allows us to have sufficient funds available for reserve
requirements, customer demand for loans, withdrawal of deposit balances and maturities of deposits
and other liabilities. Our primary source of liquidity at our holding company is dividends paid by
our bank subsidiaries. Applicable statutes and regulations impose restrictions on the amount of
dividends that may be declared by our bank subsidiaries. Further, any dividend payments are subject
to the continuing ability of the bank subsidiary to maintain compliance with minimum federal
regulatory capital requirements and to retain its characterization under federal regulations as a
well-capitalized institution.
Each of our bank subsidiaries have potential obligations resulting from the issuance of
standby letters of credit and commitments to fund future borrowings to our loan customers. Many of
these obligations and commitments to fund future borrowings to our loans customers are expected to
expire without being drawn upon, therefore the total commitment amounts do not necessarily
represent future cash requirements affecting our liquidity position.
Liquidity needs can be met from either assets or liabilities. On the asset side, our primary
sources of liquidity include cash and cash equivalents, federal funds sold, maturities of
investment securities and scheduled repayments and maturities of loans. We maintain adequate levels
of cash and equivalents to meet our day-to-day needs. As of December 31, 2006, our cash and cash
equivalents balances were $59.7 million, or 2.7% of total assets, compared to $44.7 million, or
2.3% of total assets, as of December 31, 2005. Our investment securities and Fed funds sold were
$540.9 million as of December 31, 2006 and $537.4 million as of December 31, 2005.
67
As of December 31, 2006, $166.4 million, or 53.3%, of our securities portfolio, excluding
mortgage-backed securities, matured within one year, and $99.0 million, or 31.7%, excluding
mortgage-backed securities, matured after one year but within five years. As of December 31, 2006
and 2005, $287.2 million and $276.1 million, respectively, of securities were pledged as collateral
for various public fund deposits and securities sold under agreements to repurchase.
Our commercial and real estate lending activities are concentrated in loans with maturities of
less than five years with both fixed and adjustable rates. As of December 31, 2006, approximately
$899.7 million, or 63.5%, of our loans matured within one year and/or had adjustable interest
rates. Additionally, we maintain loan participation agreements with other financial institutions in
which we could participate out loans for additional liquidity should the need arise.
On the liability side, our principal sources of liquidity are deposits, borrowed funds, and
access to capital markets. Customer deposits are our largest sources of funds. As of December 31,
2006, our total deposits were $1.61 billion, or 73.4% of total assets, compared to $1.43 billion,
or 74.7% of total assets, as of December 31, 2005, and $552.9 million, or 68.7% of total assets, as
of December 31, 2004. We attract our deposits primarily from individuals, business, and
municipalities located in our market areas.
We may occasionally use our Fed funds lines of credit in order to temporarily satisfy
short-term liquidity needs. We have Fed funds lines with three other financial institutions
pursuant to which we could have borrowed up to $62.1 million and $46.5 million on an unsecured
basis as of December 31, 2006 and 2005, respectively. These lines may be terminated by the
respective lending institutions at any time.
We also maintain lines of credit with the Federal Home Loan Bank. Our FHLB borrowings were
$151.8 million as of December 31, 2006, $102.9 million as of December 31, 2005, and $74.9 million
as of December 31, 2004. The outstanding balance for December 31, 2006, included $5.0 million of
short-term advances and $146.8 million of FHLB long-term advances. The outstanding balance for
December 31, 2005, included $3.8 million of short-term advances and $99.1 million of FHLB long-term
advances. Our FHLB borrowing capacity was $323.6 million and $222.3 million as of December 31, 2006
and 2005, respectively.
We believe that we have sufficient liquidity to satisfy our current operations.
Market Risk Management. Our primary component of market risk is interest rate volatility.
Fluctuations in interest rates will ultimately impact both the level of income and expense recorded
on a large portion of our assets and liabilities, and the market value of all interest-earning
assets and interest-bearing liabilities, other than those which possess a short term to maturity.
We do not hold market risk sensitive instruments for trading purposes. The information provided
should be read in connection with our audited consolidated financial statements.
Asset/Liability Management. Our management actively measures and manages interest rate risk.
The asset/liability committees of the boards of directors of our holding company and bank
subsidiaries are also responsible for approving our asset/liability management policies, overseeing
the formulation and implementation of strategies to improve balance sheet positioning and earnings,
and reviewing our interest rate sensitivity position.
One of the tools that our management uses to measure short-term interest rate risk is a net
interest income simulation model. This analysis calculates the difference between net interest
income forecasted using base market rates and using a rising and a falling interest rate scenario.
The income simulation model includes various assumptions regarding the re-pricing relationships for
each of our products. Many of our assets are floating rate loans, which are assumed to re-price
immediately, and proportional to the change in market rates, depending on their contracted index.
Some loans and investments include the opportunity of prepayment (embedded options), and
accordingly the simulation model uses indexes to estimate these prepayments and reinvest their
proceeds at current yields. Our non-term deposit products re-price more slowly, usually changing
less than the change in market rates and at our discretion.
This analysis indicates the impact of changes in net interest income for the given set of rate
changes and assumptions. It assumes the balance sheet remains static and that its structure does
not change over the course of the year. It does not account for all factors that impact this
analysis, including changes by management to mitigate the impact of interest rate changes or
secondary impacts such as changes to our credit risk profile as interest rates change.
68
Furthermore, loan prepayment rate estimates and spread relationships change regularly.
Interest rate changes create changes in actual loan prepayment rates that will differ from the
market estimates incorporated in this analysis. Changes that vary significantly from the
assumptions may have significant effects on our net interest income.
For the rising and falling interest rate scenarios, the base market interest rate forecast was
increased and decreased over twelve months by 200 and 100 basis points, respectively. At December
31, 2006, our net interest margin exposure related to these hypothetical changes in market interest
rates was within the current guidelines established by us.
Table 26 presents our sensitivity to net interest income as of December 31, 2006.
Table 26: Sensitivity of Net Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
Adjusted Net |
|
Change |
Interest Rate Scenario |
|
Interest Income |
|
from Base |
|
|
(In millions) |
|
|
|
|
Up 200 basis points |
|
$ |
63.7 |
|
|
|
(4.6 |
)% |
Up 100 basis points |
|
|
65.4 |
|
|
|
(2.0 |
) |
BASE |
|
|
66.8 |
|
|
|
|
|
Down 100 basis points |
|
|
67.5 |
|
|
|
1.1 |
|
Down 200 basis points |
|
|
66.5 |
|
|
|
(0.3 |
) |
Interest Rate Sensitivity. Our primary business is banking and the resulting earnings,
primarily net interest income, are susceptible to changes in market interest rates. It is
managements goal to maximize net interest income within acceptable levels of interest rate and
liquidity risks.
A key element in the financial performance of financial institutions is the level and type of
interest rate risk assumed. The single most significant measure of interest rate risk is the
relationship of the repricing periods of earning assets and interest-bearing liabilities. The more
closely the repricing periods are correlated, the less interest rate risk we assume. We use
repricing gap and simulation modeling as the primary methods in analyzing and managing interest
rate risk.
Gap analysis attempts to capture the amounts and timing of balances exposed to changes in
interest rates at a given point in time. As of December 31, 2006, our gap position was relatively
neutral with a one-year cumulative repricing gap of -1.1%, compared to 0.6% as of December 31,
2005. During these periods, the amount of change our asset base realizes in relation to the total
change in market interest rates is approximately that of the liability base. As a result, our net
interest income should not have a material positive or negative affect in the current environment
of rising rates.
We have a portion of our securities portfolio invested in mortgage-backed securities.
Mortgage-backed securities are included based on their final maturity date. Expected maturities may
differ from contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
69
Table 27 presents a summary of the repricing schedule of our interest-earning assets and
interest-bearing liabilities (gap) as of December 31, 2006.
Table 27: Interest Rate Sensitivity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Sensitivity Period |
|
|
|
030 |
|
|
3190 |
|
|
91180 |
|
|
181365 |
|
|
12 |
|
|
25 |
|
|
Over 5 |
|
|
|
|
|
|
Days |
|
|
Days |
|
|
Days |
|
|
Days |
|
|
Years |
|
|
Years |
|
|
Years |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits
due from banks |
|
$ |
6,696 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
6,696 |
|
Federal funds sold |
|
|
9,003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,003 |
|
Investment securities |
|
|
49,815 |
|
|
|
32,932 |
|
|
|
37,385 |
|
|
|
45,491 |
|
|
|
106,049 |
|
|
|
116,938 |
|
|
|
143,281 |
|
|
|
531,891 |
|
Loans receivable |
|
|
615,665 |
|
|
|
69,887 |
|
|
|
127,717 |
|
|
|
193,783 |
|
|
|
173,409 |
|
|
|
198,700 |
|
|
|
37,134 |
|
|
|
1,416,295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets |
|
|
681,179 |
|
|
|
102,819 |
|
|
|
165,102 |
|
|
|
239,274 |
|
|
|
279,458 |
|
|
|
315,638 |
|
|
|
180,415 |
|
|
|
1,963,885 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing transaction and savings deposits |
|
|
288,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,665 |
|
|
|
107,648 |
|
|
|
145,823 |
|
|
|
582,425 |
|
Time deposits |
|
|
110,769 |
|
|
|
212,330 |
|
|
|
168,628 |
|
|
|
196,781 |
|
|
|
81,154 |
|
|
|
39,428 |
|
|
|
537 |
|
|
|
809,627 |
|
Federal funds
purchased |
|
|
25,270 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,270 |
|
Securities sold under
repurchase agreements |
|
|
93,236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,554 |
|
|
|
10,662 |
|
|
|
11,373 |
|
|
|
118,825 |
|
FHLB and other
borrowed funds |
|
|
73,167 |
|
|
|
10,856 |
|
|
|
2,254 |
|
|
|
22,678 |
|
|
|
18,044 |
|
|
|
13,028 |
|
|
|
11,741 |
|
|
|
151,768 |
|
Subordinated debentures |
|
|
2 |
|
|
|
5,158 |
|
|
|
5 |
|
|
|
10 |
|
|
|
20,641 |
|
|
|
81 |
|
|
|
18,766 |
|
|
|
44,663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing
liabilities |
|
|
590,733 |
|
|
|
228,344 |
|
|
|
170,887 |
|
|
|
219,469 |
|
|
|
164,058 |
|
|
|
170,847 |
|
|
|
188,240 |
|
|
|
1,732,578 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate sensitivity gap |
|
$ |
90,446 |
|
|
$ |
(125,525 |
) |
|
$ |
(5,785 |
) |
|
$ |
19,805 |
|
|
$ |
115,400 |
|
|
$ |
144,791 |
|
|
$ |
(7,825 |
) |
|
$ |
231,307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative interest rate
sensitivity gap |
|
$ |
90,446 |
|
|
$ |
(35,079 |
) |
|
$ |
(40,864 |
) |
|
$ |
(21,059 |
) |
|
$ |
94,341 |
|
|
$ |
239,132 |
|
|
$ |
231,307 |
|
|
|
|
|
Cumulative rate sensitive
assets to rate sensitive
liabilities |
|
|
115.3 |
% |
|
|
95.7 |
% |
|
|
95.9 |
% |
|
|
98.3 |
% |
|
|
106.9 |
% |
|
|
115.5 |
% |
|
|
113.4 |
% |
|
|
|
|
Cumulative gap as a % of
total earning assets |
|
|
4.6 |
% |
|
|
(1.8 |
)% |
|
|
(2.1 |
)% |
|
|
(1.1 |
)% |
|
|
4.8 |
% |
|
|
12.2 |
% |
|
|
11.8 |
% |
|
|
|
|
70
Item 8: CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
Audit Committee, Board of Directors and Stockholders
Home BancShares, Inc.
Conway, Arkansas
We have audited the accompanying consolidated balance sheets of Home BancShares, Inc. as of
December 31, 2006 and 2005, and the related consolidated statements of income, stockholders equity
and cash flows for the years then ended. These financial statements are the responsibility of the
Companys 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 Home BancShares, Inc. as of December 31, 2006 and
2005, and the results of its operations and its cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America.
Little Rock, Arkansas
March 15, 2007
71
Report of Independent Registered Public Accounting Firm
The Board of Directors and
Stockholders of Home BancShares, Inc.
We have audited the accompanying consolidated statements of income, stockholders equity, and cash
flows of Home BancShares, Inc. and subsidiaries for the year ended December 31, 2004. These
financial statements are the responsibility of the Companys 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. We
were not engaged to perform an audit of the Companys internal control over financial reporting.
Our audit included consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated results of operations and cash flows of Home BancShares, Inc. and
subsidiaries for the year ended December 31, 2004, in conformity with U.S. generally accepted
accounting principles.
Dallas, Texas
March 11, 2005
72
Home BancShares, Inc.
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
(In thousands, except share data) |
|
2006 |
|
|
2005 |
|
Assets |
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
53,004 |
|
|
$ |
39,248 |
|
Interest-bearing deposits with other banks |
|
|
6,696 |
|
|
|
5,431 |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
59,700 |
|
|
|
44,679 |
|
Federal funds sold |
|
|
9,003 |
|
|
|
7,055 |
|
Investment securities available for sale |
|
|
531,891 |
|
|
|
530,302 |
|
Loans receivable |
|
|
1,416,295 |
|
|
|
1,204,589 |
|
Allowance for loan losses |
|
|
(26,111 |
) |
|
|
(24,175 |
) |
|
|
|
|
|
|
|
Loans receivable, net |
|
|
1,390,184 |
|
|
|
1,180,414 |
|
Bank premises and equipment, net |
|
|
57,339 |
|
|
|
51,762 |
|
Foreclosed assets held for sale |
|
|
435 |
|
|
|
758 |
|
Cash value of life insurance |
|
|
42,149 |
|
|
|
6,850 |
|
Investments in unconsolidated affiliates |
|
|
12,449 |
|
|
|
9,813 |
|
Accrued interest receivable |
|
|
13,736 |
|
|
|
11,158 |
|
Deferred tax asset, net |
|
|
8,361 |
|
|
|
8,821 |
|
Goodwill |
|
|
37,527 |
|
|
|
37,527 |
|
Core deposit and intangibles |
|
|
9,458 |
|
|
|
11,200 |
|
Other assets |
|
|
18,416 |
|
|
|
11,152 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,190,648 |
|
|
$ |
1,911,491 |
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity |
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
Demand and non-interest-bearing |
|
$ |
215,142 |
|
|
$ |
209,974 |
|
Savings and interest-bearing transaction accounts |
|
|
582,425 |
|
|
|
512,184 |
|
Time deposits |
|
|
809,627 |
|
|
|
704,950 |
|
|
|
|
|
|
|
|
Total deposits |
|
|
1,607,194 |
|
|
|
1,427,108 |
|
Federal funds purchased |
|
|
25,270 |
|
|
|
44,495 |
|
Securities sold under agreements to repurchase |
|
|
118,825 |
|
|
|
103,718 |
|
FHLB and other borrowed funds |
|
|
151,768 |
|
|
|
117,054 |
|
Accrued interest payable and other liabilities |
|
|
11,509 |
|
|
|
8,504 |
|
Subordinated debentures |
|
|
44,663 |
|
|
|
44,755 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,959,229 |
|
|
|
1,745,634 |
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Preferred stock A, par value $0.01 in 2006 and 2005; 2,500,000 shares authorized
in 2006 and 2005; 0 and 2,076,195 shares issued and outstanding in
2006 and 2005, respectively |
|
|
|
|
|
|
21 |
|
Preferred stock B, par value $0.01 in 2006 and 2005; 3,000,000 shares authorized
in 2006 and 2005; 0 and 169,079 shares issued and outstanding in 2006
and 2005, respectively |
|
|
|
|
|
|
2 |
|
Common stock, par value $0.01 in 2006 and 2005; 25,000,000 shares authorized
in 2006 and 2005; shares issued and outstanding 17,205,649 in 2006 and
12,113,865 in 2005 |
|
|
172 |
|
|
|
121 |
|
Capital surplus |
|
|
194,595 |
|
|
|
146,285 |
|
Retained earnings |
|
|
41,544 |
|
|
|
27,331 |
|
Accumulated other comprehensive loss |
|
|
(4,892 |
) |
|
|
(7,903 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
231,419 |
|
|
|
165,857 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
2,190,648 |
|
|
$ |
1,911,491 |
|
|
|
|
|
|
|
|
See accompanying notes.
73
Home BancShares, Inc.
Consolidated Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
(In thousands, except per share data) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
100,152 |
|
|
$ |
65,244 |
|
|
$ |
29,264 |
|
Investment securities |
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
18,879 |
|
|
|
17,103 |
|
|
|
5,764 |
|
Tax-exempt |
|
|
3,753 |
|
|
|
2,726 |
|
|
|
1,457 |
|
Deposits other banks |
|
|
139 |
|
|
|
101 |
|
|
|
38 |
|
Federal funds sold |
|
|
840 |
|
|
|
284 |
|
|
|
158 |
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
123,763 |
|
|
|
85,458 |
|
|
|
36,681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest on deposits |
|
|
46,213 |
|
|
|
26,883 |
|
|
|
7,606 |
|
Federal funds purchased |
|
|
689 |
|
|
|
399 |
|
|
|
159 |
|
FHLB and other borrowed funds |
|
|
6,627 |
|
|
|
4,046 |
|
|
|
1,840 |
|
Securities sold under agreements to repurchase |
|
|
4,420 |
|
|
|
2,657 |
|
|
|
407 |
|
Subordinated debentures |
|
|
2,991 |
|
|
|
2,017 |
|
|
|
1,568 |
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
60,940 |
|
|
|
36,002 |
|
|
|
11,580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
62,823 |
|
|
|
49,456 |
|
|
|
25,101 |
|
Provision for loan losses |
|
|
2,307 |
|
|
|
3,827 |
|
|
|
2,290 |
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses |
|
|
60,516 |
|
|
|
45,629 |
|
|
|
22,811 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts |
|
|
9,447 |
|
|
|
8,319 |
|
|
|
5,914 |
|
Other services charges and fees |
|
|
2,642 |
|
|
|
2,099 |
|
|
|
959 |
|
Trust fees |
|
|
671 |
|
|
|
458 |
|
|
|
158 |
|
Data processing fees |
|
|
799 |
|
|
|
668 |
|
|
|
1,564 |
|
Mortgage banking income |
|
|
1,736 |
|
|
|
1,651 |
|
|
|
1,188 |
|
Insurance commissions |
|
|
782 |
|
|
|
674 |
|
|
|
631 |
|
Income from title services |
|
|
957 |
|
|
|
823 |
|
|
|
1,110 |
|
Increase in cash value of life insurance |
|
|
304 |
|
|
|
256 |
|
|
|
244 |
|
Dividends from FHLB, FRB & bankers bank |
|
|
659 |
|
|
|
315 |
|
|
|
91 |
|
Equity in (loss) income of unconsolidated affiliates |
|
|
(379 |
) |
|
|
(592 |
) |
|
|
1,560 |
|
Gain on sale of equity investment |
|
|
|
|
|
|
465 |
|
|
|
4,410 |
|
Gain on sale of SBA loans |
|
|
72 |
|
|
|
529 |
|
|
|
26 |
|
Gain (loss) on sale of premises and equipment |
|
|
163 |
|
|
|
324 |
|
|
|
|
|
Gain (loss) on securities, net |
|
|
1 |
|
|
|
(539 |
) |
|
|
(249 |
) |
Other income |
|
|
1,273 |
|
|
|
237 |
|
|
|
485 |
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income |
|
|
19,127 |
|
|
|
15,687 |
|
|
|
18,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
29,313 |
|
|
|
23,901 |
|
|
|
14,123 |
|
Occupancy and equipment |
|
|
8,712 |
|
|
|
6,869 |
|
|
|
3,750 |
|
Data processing expense |
|
|
2,506 |
|
|
|
1,991 |
|
|
|
1,170 |
|
Other operating expenses |
|
|
15,947 |
|
|
|
12,174 |
|
|
|
7,088 |
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expense |
|
|
56,478 |
|
|
|
44,935 |
|
|
|
26,131 |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
23,165 |
|
|
|
16,381 |
|
|
|
14,771 |
|
Income tax expense |
|
|
7,247 |
|
|
|
4,935 |
|
|
|
5,030 |
|
Minority interest in earnings of subsidiaries, net |
|
|
|
|
|
|
|
|
|
|
582 |
|
|
|
|
|
|
|
|
|
|
|
Net income available to all shareholders |
|
|
15,918 |
|
|
|
11,446 |
|
|
|
9,159 |
|
Less: Preferred stock dividends |
|
|
359 |
|
|
|
574 |
|
|
|
529 |
|
|
|
|
|
|
|
|
|
|
|
Income available to common shareholders |
|
$ |
15,559 |
|
|
$ |
10,872 |
|
|
$ |
8,630 |
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
1.07 |
|
|
$ |
0.92 |
|
|
$ |
1.08 |
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
1.00 |
|
|
$ |
0.82 |
|
|
$ |
0.94 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
74
Home BancShares, Inc.
Consolidated Statements of Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Preferred |
|
|
Preferred |
|
|
Common |
|
|
Capital |
|
|
Retained |
|
|
Comprehensive |
|
|
Treasury |
|
|
|
|
(In thousands, except share data (1)) |
|
Stock A |
|
|
Stock B |
|
|
Stock |
|
|
Surplus |
|
|
Earnings |
|
|
Income (Loss) |
|
|
Stock |
|
|
Total |
|
Balances at January 1, 2004 |
|
$ |
21 |
|
|
$ |
|
|
|
$ |
266 |
|
|
$ |
90,431 |
|
|
$ |
9,005 |
|
|
$ |
(231 |
) |
|
$ |
(20 |
) |
|
$ |
99,472 |
|
Comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,159 |
|
|
|
|
|
|
|
|
|
|
|
9,159 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on investment securities
available for sale, net of tax effect of $109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(153 |
) |
|
|
|
|
|
|
(153 |
) |
Reclassification adjustment for gains included
in income, net of tax effect of $27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(40 |
) |
|
|
|
|
|
|
(40 |
) |
Unconsolidated affiliates unrecognized loss
on investment securities available for sale, net of
taxes recorded by the unconsolidated affiliate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(434 |
) |
|
|
|
|
|
|
(434 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,532 |
|
Issuance of 2,418 shares of convertible preferred stock at
$10 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24 |
|
Purchase of 54,937 shares of convertible preferred stock at
$10 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(549 |
) |
|
|
(549 |
) |
Cash dividends Preferred Stock A, $0.25 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(529 |
) |
|
|
|
|
|
|
|
|
|
|
(529 |
) |
Cash dividends Common Stock, $0.043 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(340 |
) |
|
|
|
|
|
|
|
|
|
|
(340 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2004 |
|
|
21 |
|
|
|
|
|
|
|
266 |
|
|
|
90,455 |
|
|
|
17,295 |
|
|
|
(858 |
) |
|
|
(569 |
) |
|
|
106,610 |
|
Comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,446 |
|
|
|
|
|
|
|
|
|
|
|
11,446 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on investment securities
available for sale, net of tax effect of $5,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,566 |
) |
|
|
|
|
|
|
(7,566 |
) |
Reclassification adjustment for losses included
in income, net of tax effect of $382 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
539 |
|
|
|
|
|
|
|
539 |
|
Unconsolidated affiliates unrecognized loss
on investment securities available for sale, net of
taxes recorded by the unconsolidated affiliate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18 |
) |
|
|
|
|
|
|
(18 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,401 |
|
Three for one stock split |
|
|
|
|
|
|
|
|
|
|
78 |
|
|
|
(78 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification for change in par value from $0.10 to
$0.01 per share |
|
|
|
|
|
|
|
|
|
|
(352 |
) |
|
|
352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of 3,750,813 common shares pursuant to
acquisition of TC Bancorp |
|
|
|
|
|
|
|
|
|
|
125 |
|
|
|
45,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,311 |
|
Issuance of 162,039 Preferred B shares pursuant to
acquisition of Marine Bancorp, Inc. |
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
6,267 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,269 |
|
Issuance of 335,526 common shares pursuant to
acquisition of Mountain View Bancshares, Inc. |
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
4,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,250 |
|
Net issuance of 40,041 shares of common stock from
exercise of stock options |
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
456 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
457 |
|
Issuance of 15,366 shares of preferred stock A from
exercise of stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
Issuance of 7,040 shares of preferred stock B from
exercise of stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
130 |
|
Purchase of 16,289 shares of preferred stock A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(163 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(163 |
) |
Retirement of treasury stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(569 |
) |
|
|
|
|
|
|
|
|
|
|
569 |
|
|
|
|
|
Cash dividends Preferred Stock A, $0.25 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(520 |
) |
|
|
|
|
|
|
|
|
|
|
(520 |
) |
Cash dividends Preferred Stock B, $0.33 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(54 |
) |
|
|
|
|
|
|
|
|
|
|
(54 |
) |
Cash dividends Common Stock, $0.07 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(836 |
) |
|
|
|
|
|
|
|
|
|
|
(836 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2005 |
|
|
21 |
|
|
|
2 |
|
|
|
121 |
|
|
|
146,285 |
|
|
|
27,331 |
|
|
|
(7,903 |
) |
|
|
|
|
|
|
165,857 |
|
See accompanying notes.
75
Home BancShares, Inc.
Consolidated Statements of Stockholders Equity Continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other |
|
|
|
|
|
|
|
|
|
Preferred |
|
|
Preferred |
|
|
Common |
|
|
Capital |
|
|
Retained |
|
|
Comprehensive |
|
|
Treasury |
|
|
|
|
(In thousands, except share data (1)) |
|
Stock A |
|
|
Stock B |
|
|
Stock |
|
|
Surplus |
|
|
Earnings |
|
|
Income (Loss) |
|
|
Stock |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,918 |
|
|
|
|
|
|
|
|
|
|
|
15,918 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on investment securities
available for sale, net of tax effect of $1,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,994 |
|
|
|
|
|
|
|
2,994 |
|
Unconsolidated affiliates unrecognized gain
on investment securities available for sale, net of
taxes recorded by the unconsolidated affiliate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17 |
|
|
|
|
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,929 |
|
Conversion of 2,090,812 shares of preferred stock A to
1,650,489 shares of common stock, net of fractional shares |
|
|
(21 |
) |
|
|
|
|
|
|
17 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2 |
) |
Conversion of 169,760 shares of preferred stock B to
509,280 shares of common stock |
|
|
|
|
|
|
(2 |
) |
|
|
5 |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of 2,875,000 shares of common stock from
Initial Public Offering, net of offering costs
of $4,545 |
|
|
|
|
|
|
|
|
|
|
29 |
|
|
|
47,176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,205 |
|
Issuance of 14,617 shares of preferred stock A from
exercise of stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
Net issuance of 681 shares of preferred stock B from
exercise of stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8 |
|
Net issuance of 57,016 shares of common stock from
exercise of stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
534 |
|
Tax benefit from stock options exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
211 |
|
Share-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
380 |
|
Cash dividends Preferred Stock A, $0.1458 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(303 |
) |
|
|
|
|
|
|
|
|
|
|
(303 |
) |
Cash dividends Preferred Stock B, $0.3325 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(56 |
) |
|
|
|
|
|
|
|
|
|
|
(56 |
) |
Cash dividends Common Stock, $0.09 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,346 |
) |
|
|
|
|
|
|
|
|
|
|
(1,346 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2006 |
|
$ |
|
|
|
$ |
|
|
|
$ |
172 |
|
|
$ |
194,595 |
|
|
$ |
41,544 |
|
|
$ |
(4,892 |
) |
|
$ |
|
|
|
$ |
231,419 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
All share and per share amounts have been restated to reflect the effect of the 2005 three for one stock split. |
See accompanying notes.
76
Home BancShares, Inc.
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
(In thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
15,918 |
|
|
$ |
11,446 |
|
|
$ |
9,159 |
|
Adjustments to reconcile net income to net cash provided by (used in)
operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
4,541 |
|
|
|
3,624 |
|
|
|
2,323 |
|
Amortization/Accretion |
|
|
2,490 |
|
|
|
2,582 |
|
|
|
1,715 |
|
Share-based compensation |
|
|
380 |
|
|
|
|
|
|
|
|
|
Tax benefits from stock options exercised |
|
|
211 |
|
|
|
|
|
|
|
|
|
Gain on sale of assets |
|
|
(616 |
) |
|
|
(605 |
) |
|
|
(86 |
) |
Gain on sale of equity investment |
|
|
|
|
|
|
(465 |
) |
|
|
(4,410 |
) |
Minority interest |
|
|
|
|
|
|
|
|
|
|
582 |
|
Provision for loan losses |
|
|
2,307 |
|
|
|
3,827 |
|
|
|
2,290 |
|
Deferred income tax benefit |
|
|
(1,466 |
) |
|
|
(128 |
) |
|
|
(1,562 |
) |
Equity in (income) loss of unconsolidated affiliates |
|
|
379 |
|
|
|
592 |
|
|
|
(1,560 |
) |
Increase in cash value of life insurance |
|
|
(304 |
) |
|
|
(254 |
) |
|
|
(244 |
) |
Originations of mortgage loans held for sale |
|
|
(87,611 |
) |
|
|
(89,638 |
) |
|
|
(50,431 |
) |
Proceeds from sales of mortgage loans held for sale |
|
|
88,224 |
|
|
|
88,939 |
|
|
|
50,473 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest receivable |
|
|
(2,578 |
) |
|
|
(741 |
) |
|
|
222 |
|
Other assets |
|
|
(7,259 |
) |
|
|
4,788 |
|
|
|
3,562 |
|
Accrued interest payable and other liabilities |
|
|
3,216 |
|
|
|
(3,549 |
) |
|
|
(18,973 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
17,832 |
|
|
|
20,418 |
|
|
|
(6,940 |
) |
|
|
|
|
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net (increase) decrease in federal funds sold |
|
|
(1,948 |
) |
|
|
3,556 |
|
|
|
39,660 |
|
Net (increase) decrease in loans |
|
|
(215,356 |
) |
|
|
(152,155 |
) |
|
|
(28,720 |
) |
Purchases of investment securities available for sale |
|
|
(187,144 |
) |
|
|
(157,440 |
) |
|
|
(84,299 |
) |
Proceeds from maturities of investment securities available for sale |
|
|
188,638 |
|
|
|
201,472 |
|
|
|
51,209 |
|
Proceeds from sales of investment securities available for sale |
|
|
1,000 |
|
|
|
58,945 |
|
|
|
2,936 |
|
Proceeds from maturities of investment securities held to maturity |
|
|
|
|
|
|
100 |
|
|
|
|
|
Proceeds from sale of loans |
|
|
1,250 |
|
|
|
6,042 |
|
|
|
4,238 |
|
Proceeds from foreclosed assets held for sale |
|
|
2,191 |
|
|
|
1,077 |
|
|
|
2,436 |
|
Proceeds from sale of premises and equipment |
|
|
1,454 |
|
|
|
|
|
|
|
694 |
|
Proceeds from sale of investment in RBI |
|
|
|
|
|
|
|
|
|
|
13,546 |
|
Purchases of premises and equipment, net |
|
|
(11,409 |
) |
|
|
(5,973 |
) |
|
|
(7,846 |
) |
Paid on sale of branch, net of cash paid |
|
|
|
|
|
|
|
|
|
|
(9,333 |
) |
Purchase of bank owned life insurance |
|
|
(35,000 |
) |
|
|
|
|
|
|
(4,800 |
) |
Acquisition of financial institution, net funds disbursed |
|
|
|
|
|
|
(31,349 |
) |
|
|
|
|
Investments in unconsolidated affiliates |
|
|
(3,000 |
) |
|
|
(9,091 |
) |
|
|
(180 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(259,324 |
) |
|
|
(84,816 |
) |
|
|
(20,459 |
) |
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
77
Home BancShares, Inc.
Consolidated Statements of Cash Flows (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
(In thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in deposits |
|
|
180,086 |
|
|
|
15,332 |
|
|
|
(2,257 |
) |
Net increase (decrease) in securities sold under agreements to repurchase |
|
|
15,107 |
|
|
|
36,705 |
|
|
|
(2,187 |
) |
Net increase (decrease) in federal funds purchased |
|
|
(19,225 |
) |
|
|
36,545 |
|
|
|
(1,285 |
) |
Net increase (decrease) in FHLB and other borrowed funds |
|
|
34,714 |
|
|
|
(13,333 |
) |
|
|
36,346 |
|
Net proceeds from preferred stock issuance |
|
|
|
|
|
|
|
|
|
|
24 |
|
Proceeds from issuance of subordinated debentures |
|
|
|
|
|
|
15,000 |
|
|
|
|
|
Repurchase of stock |
|
|
|
|
|
|
(163 |
) |
|
|
(549 |
) |
Proceeds from initial public offering, net |
|
|
47,205 |
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options |
|
|
544 |
|
|
|
588 |
|
|
|
|
|
Tax benefits from stock options exercised |
|
|
(211 |
) |
|
|
|
|
|
|
|
|
Conversion of preferred stock A fractional shares |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
Dividends paid |
|
|
(1,705 |
) |
|
|
(1,410 |
) |
|
|
(869 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
256,513 |
|
|
|
89,264 |
|
|
|
29,223 |
|
|
|
|
|
|
|
|
|
|
|
Net change
in cash and due from banks |
|
|
15,021 |
|
|
|
24,866 |
|
|
|
1,824 |
|
Cash and cash equivalents beginning of year |
|
|
44,679 |
|
|
|
19,813 |
|
|
|
17,989 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents end of year |
|
$ |
59,700 |
|
|
$ |
44,679 |
|
|
$ |
19,813 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
78
Home BancShares, Inc.
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Home BancShares, Inc. (the Company or HBI) is a financial holding company headquartered in
Conway, Arkansas. The Company is primarily engaged in providing a full range of banking services to
individual and corporate customers through its five wholly owned community bank subsidiaries.
Three of our bank subsidiaries are located in the central Arkansas market area, a fourth serves
Stone County in north central Arkansas, and a fifth serves the Florida Keys and southwestern
Florida. The Company is subject to competition from other financial institutions. The Company also
is subject to the regulation of certain federal and state agencies and undergoes periodic
examinations by those regulatory authorities.
Operating Segments
The Company is organized on a subsidiary bank-by-bank basis upon which management makes
decisions regarding how to allocate resources and assess performance. Each of the subsidiary banks
provides a group of similar community banking services, including such products and services as
loans, time deposits, checking and savings accounts. The individual bank segments have similar
operating and economic characteristics and have been reported as one aggregated operating segment.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change relate to the
determination of the allowance for loan losses and the valuation of foreclosed assets. In
connection with the determination of the allowance for loan losses and the valuation of foreclosed
assets, management obtains independent appraisals for significant properties.
Principles of Consolidation
The consolidated financial statements include the accounts of HBI and its subsidiaries.
Significant intercompany accounts and transactions have been eliminated in consolidation.
Reclassifications
Various items within the accompanying financial statements for previous years have been
reclassified to provide more comparative information. These reclassifications had no effect on net
earnings or stockholders equity.
Cash and Cash Equivalents
Cash and cash equivalents consists of cash on hand, demand deposits with banks and
interest-bearing deposits with other banks.
79
Investment Securities
Interest on investment securities is recorded as income as earned. Amortization of premiums
and accretion of discounts are recorded as interest income from securities. Realized gains and
losses are recorded as net security gains (losses). Gains or losses on the sale of securities are
determined using the specific identification method.
Management determines the classification of securities as available for sale, held to
maturity, or trading at the time of purchase based on the intent and objective of the investment
and the ability to hold to maturity. Fair values of securities are based on quoted market prices
where available. If quoted market prices are not available, estimated fair values are based on
quoted market prices of comparable securities. The Company has no trading securities.
Securities available for sale are reported at fair value with unrealized holding gains and
losses reported as a separate component of stockholders equity and other comprehensive income
(loss), net of taxes. Securities that are held as available for sale are used as a part of HBIs
asset/liability management strategy. Securities that may be sold in response to interest rate
changes, changes in prepayment risk, the need to increase regulatory capital, and other similar
factors are classified as available for sale.
Securities held to maturity are reported at amortized historical cost. Securities that
management has the intent and ability to hold until maturity or on a long-term basis are classified
as held to maturity.
Loans Receivable and Allowance for Loan Losses
Loans receivable 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. Interest income on loans is accrued over
the term of the loans based on the principal balance outstanding. Loan origination fees and direct
origination costs are capitalized and recognized as adjustments to yield on the related loans.
The allowance for loan losses is established through a provision for loan losses charged
against income. The allowance represents an amount that, in managements judgment, will be adequate
to absorb probable credit losses on existing loans that may become uncollectible and probable
credit losses inherent in the remainder of the loan portfolio. The amounts of provisions to the
allowance for loan losses are based on managements analysis and evaluation of the loan portfolio
for identification of problem credits, internal and external factors that may affect
collectibility, relevant credit exposure, particular risks inherent in different kinds of lending,
current collateral values and other relevant factors.
Loans considered impaired, under SFAS No. 114, Accounting by Creditors for Impairment of a
Loan, as amended by SFAS No. 118, Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosures, are loans for which, 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 of the loan agreement. The Company applies this policy even if delays or shortfalls in
payment are expected to be insignificant. All non-accrual loans and all loans that have been
restructured from their original contractual terms are considered impaired loans. The aggregate
amount of impairment of loans is utilized in evaluating the adequacy of the allowance for loan
losses and amount of provisions thereto. Losses on impaired loans are charged against the allowance
for loan losses when in the process of collection it appears likely that such losses will be
realized. The accrual of interest on impaired loans is discontinued when, in managements opinion,
the borrower may be unable to meet payments as they become due. When accrual of interest is
discontinued, all unpaid accrued interest is reversed.
80
Loans are placed on non-accrual status when management believes that the borrowers financial
condition, after giving consideration to economic and business conditions and collection efforts,
is such that collection of interest is doubtful, or generally when loans are 90 days or more past
due. Loans are charged against the allowance for loan losses when management believes that the
collectibility of the principal is unlikely. Accrued interest related to non-accrual loans is
generally charged against the allowance for loan losses when accrued in prior years and reversed
from interest income if accrued in the current year. Interest income on non-accrual loans may be
recognized to the extent cash payments are received, but payments received are usually applied to
principal. Non-accrual loans are generally returned to accrual status when principal and interest
payments are less than 90 days past due, the customer has made required payments for at least six
months, and the Company reasonably expects to collect all principal and interest.
Foreclosed Assets Held for Sale
Real estate and personal properties acquired through or in lieu of loan foreclosure are to be
sold and are initially recorded at the lower of carrying amount or fair value at the date of
foreclosure, establishing a new cost basis.
Valuations are periodically performed by management, and the real estate and personal
properties are carried at the lower of book value or fair value less cost to sell. Gains and losses
from the sale of other real estate and personal properties are recorded in non-interest income, and
expenses used to maintain the properties are included in non-interest expenses.
Bank Premises and Equipment
Bank premises and equipment are carried at cost or fair market value at the date of
acquisition less accumulated depreciation. Depreciation expense is computed using the straight-line
method over the estimated useful lives of the assets. Accelerated depreciation methods are used for
tax purposes. Leasehold improvements are capitalized and amortized by the straight-line method over
the terms of the respective leases or the estimated useful lives of the improvements whichever is
shorter. The assets estimated useful lives for book purposes are as follows:
|
|
|
|
|
Bank premises |
|
15-40 years |
Furniture, fixtures, and equipment |
|
3-15 years |
Investments in Unconsolidated Affiliates
The Company has a 20.0% investment in White River Bancshares, Inc. (WRBI), which at December
31, 2006 and 2005 totaled $11.1 million and $8.5 million, respectively. The investment in WRBI is
accounted for on the equity method. The Companys share of WRBI operating loss included in
non-interest income in 2006 and 2005 totaled $379,000 and $592,000, respectively. The Companys
share of WRBI unrealized loss on investment securities available for sale at December 31, 2006 and
2005 amounted to $2,000 and $18,000, respectively. Although the Company purchased 20% of the
common stock of WRBI on January 3, 2005, WRBI did not begin operations until May 1, 2005. See the
Acquisitions footnote related to the Companys acquisition of WRBI during 2005.
The Company had a 32.2% investment in TCBancorp, Inc. (TCB), which at December 31, 2004
totaled $19.4 million. The investment in TCBC was accounted for on the equity method. The Companys
share of earnings of TCB included in non-interest income in 2004 totaled $815,000. The Companys
share of TCBs unrealized loss on investment securities available for sale at December 31, 2004
amounted to $737,000. See the Acquisitions footnote related to the Companys acquisition of the
remaining 67.8% of TCB common stock on January 1, 2005.
The Company had a 50.0% investment in FirsTrust Financial Services, Inc. (FirsTrust), which at
December 31, 2004 totaled $2,000. The investment in FirsTrust was accounted for on the equity
method. The Companys share of FirsTrust operating loss included in non-interest income in 2004
totaled $186,000. See the Acquisitions footnote related to the Companys acquisition of the
remaining 50.0% of FirsTrust common stock on January 1, 2005.
81
On September 3, 2004, the Company sold its 21.68% investment in Russellville BancShares, Inc.
(RBI), resulting in a gain of $4,410,000. At the date of the sale, the Companys investment in RBI
was $9,175,000. The Companys share in earnings of RBI included in non-interest income for 2004
(through the sale date) totaled $931,000.
The Company has invested funds representing 100% ownership in four statutory trusts which
issue trust preferred securities. The Companys investment in these trusts was $1.3 million at
December 31, 2006 and 2005. Under generally accepted accounting principles, these trusts are not
consolidated.
The summarized financial information below represents an aggregation of the Companys
unconsolidated affiliates as of December 31, 2006 and 2005, and for the years then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
2004 |
|
|
(In thousands) |
Assets |
|
$ |
387,599 |
|
|
$ |
229,072 |
|
|
$ |
654,112 |
|
Liabilities |
|
|
330,640 |
|
|
|
176,511 |
|
|
|
591,761 |
|
Equity |
|
|
56,959 |
|
|
|
52,561 |
|
|
|
62,351 |
|
Net income (loss) |
|
|
(1,822 |
) |
|
|
(2,658 |
) |
|
|
2,158 |
|
Intangible Assets
Intangible assets consist of goodwill and core deposit intangibles. Goodwill represents the
excess purchase price over the fair value of net assets acquired in business acquisitions. Core
deposit intangibles represent the estimated value related to customer deposit relationships in the
Companys acquisitions. The core deposit intangibles are being amortized over 84 to 114 months on a
straight-line basis. Goodwill is not amortized but rather is evaluated for impairment on at least
an annual basis. The Company performed its annual impairment test of goodwill and core deposit
intangibles during 2006 and 2005, as required by SFAS No. 142, Goodwill and Other Intangible
Assets. The tests indicated no impairment of the Companys goodwill or core deposit intangibles.
Securities Sold Under Agreements to Repurchase
The Company sells securities under agreements to repurchase to meet customer needs for sweep
accounts. At the point funds deposited by customers become investable, those funds are used to
purchase securities owned by the Company and held in its general account with the designation of
Customers Securities. A third party maintains control over the securities underlying overnight
repurchase agreements. The securities involved in these transactions are generally U.S. Treasury or
Federal Agency issues. Securities sold under agreements to repurchase generally mature on the
banking day following that on which the investment was initially purchased and are treated as
collateralized financing transactions which are recorded at the amounts at which the securities
were sold plus accrued interest. Interest rates and maturity dates of the securities involved vary
and are not intended to be matched with funds from customers.
Derivative Financial Instruments
The Company may enter into derivative contracts for the purposes of managing exposure to
interest rate risk. The Company records all derivatives on the balance sheet at fair value.
Historically the Companys policy has been not to invest in derivative type investments but as a
result of the acquisition in June 2005, the Company acquired a derivative financial instrument.
The cash flow hedge acquired was an interest rate swap agreement associated with a
subordinated debenture, which was also acquired in the acquisition of Marine Bancorp, Inc. This
subordinated debenture is for $5.0 million and has an interest rate that adjusts quarterly to the
then current three-month LIBOR, plus 315 basis points. The subordinated debenture is redeemable
March 26, 2008. The interest rate swap is for a notional amount of $5.0 million and the Company
pays a fixed rate of 4.14%. In return, the Company will receive an interest rate that adjusts
quarterly on the same adjustment date as the subordinated debenture to the then current three-month
LIBOR. The
82
interest rate swap has a maturity date of March 26, 2008. As a result of the interest
rate swap, the Company effectively has a fixed rate debt of 7.29%. The Company does not use the
shortcut method and instead utilizes the period-by-period dollar-offset method in assessing hedge
effectiveness. The hedge is considered to be highly effective. The fair value of the hedge at
December 31, 2006 and 2005 was approximately $64,000 and $50,000, respectively.
Stock Options
Prior to 2006, we elected to follow Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees (APB 25), and related interpretations in accounting for employee stock
options using the fair value method. Under APB 25, because the exercise price of the options equals
the estimated market price of the stock on the issuance date, no compensation expense is recorded.
On January 1, 2006, we adopted SFAS No. 123, Share-Based Payment (Revised 2004) which establishes
standards for the accounting for transactions in which an entity (i) exchanges its equity
instruments for goods and services, or (ii) incurs liabilities in exchange for goods and services
that are based on the fair value of the entitys equity instruments or that may be settled by the
issuance of the equity instruments. SFAS 123R eliminates the ability to account for stock-based
compensation using APB 25 and requires that such transactions be recognized as compensation cost in
the income statement based on their fair values on the measurement date, which is generally the
date of the grant.
Income Taxes
The Company utilizes the liability method in accounting for income taxes. Under this method,
deferred tax assets and liabilities are determined based upon the difference between the values of
the assets and liabilities as reflected in the financial statements and their related tax basis
using enacted tax rates in effect for the year in which the differences are expected to be
recovered or settled. As changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes. A valuation allowance is
established to reduce deferred tax assets if it is more likely than not that a deferred tax asset
will not be realized.
The Company and its subsidiaries file consolidated tax returns. Its subsidiaries provide for
income taxes on a separate return basis, and remit to the Company amounts determined to be
currently payable.
Earnings per Share
Basic earnings per share are computed based on the weighted average number of shares
outstanding during each year. Diluted earnings per share are computed using the weighted average
common shares and all potential dilutive common shares outstanding during the period. The following
table sets forth the computation of basic and diluted earnings per share (EPS) for the years ended
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands) |
|
Net income available to all shareholders |
|
$ |
15,918 |
|
|
$ |
11,446 |
|
|
$ |
9,159 |
|
Less: Preferred stock dividends |
|
|
(359 |
) |
|
|
(574 |
) |
|
|
(529 |
) |
|
|
|
|
|
|
|
|
|
|
Income available to common shareholders |
|
$ |
15,559 |
|
|
$ |
10,872 |
|
|
$ |
8,630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares outstanding |
|
|
14,497 |
|
|
|
11,862 |
|
|
|
7,986 |
|
Effect of common stock options |
|
|
157 |
|
|
|
78 |
|
|
|
114 |
|
Effect of preferred stock options |
|
|
17 |
|
|
|
22 |
|
|
|
27 |
|
Effect of preferred stock conversions |
|
|
1,252 |
|
|
|
1,927 |
|
|
|
1,656 |
|
|
|
|
|
|
|
|
|
|
|
Diluted shares outstanding |
|
|
15,923 |
|
|
|
13,889 |
|
|
|
9,783 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
1.07 |
|
|
$ |
0.92 |
|
|
$ |
1.08 |
|
Diluted earnings per share |
|
$ |
1.00 |
|
|
$ |
0.82 |
|
|
$ |
0.94 |
|
83
Pension Plan
As the result of the acquisition during December 2003 and September 2005, the Company has two
noncontributory defined benefit plans covering certain employees from those acquisitions. The
Companys policy is to accrue pension costs in accordance with Statement of Financial Accounting
Standards No. 87, Employers Accounting for Pensions, and to fund such pension costs in accordance
with contribution guidelines established by the Employee Retirement Income Security Act of 1974, as
amended. The Company uses a measurement date of January 1.
Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in estimating fair values of
financial instruments as disclosed in these notes:
Cash and cash equivalents and federal funds sold For these short-term instruments, the
carrying amount is a reasonable estimate of fair value.
Investment securities Fair values for investment securities are based on quoted market
values.
Loans receivable, net For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are assumed to approximate the carrying amounts. The
fair values for fixed-rate loans are estimated using discounted cash flow analysis, based on
interest rates currently being offered for loans with similar terms to borrowers of similar credit
quality. Loan fair value estimates include judgments regarding future expected loss experience and
risk characteristics.
Accrued interest receivable The carrying amount of accrued interest receivable approximates
its fair value.
Deposits and securities sold under agreements to repurchase The fair values of demand,
savings deposits and securities sold under agreements to repurchase are, by definition, equal to
the amount payable on demand and therefore approximate their carrying amounts. The fair values for
time deposits are estimated using a discounted cash flow calculation that utilizes interest rates
currently being offered on time deposits with similar contractual maturities.
Federal funds purchased The carrying amount of federal funds purchased approximates its
fair value.
Accrued interest payable The carrying amount of accrued interest payable approximates its
fair value.
FHLB and other borrowed funds For short-term instruments, the carrying amount is a
reasonable estimate of fair value. The fair value of long-term debt is estimated based on the
current rates available to the Company for debt with similar terms and remaining maturities.
Subordinated debentures The fair value of subordinated debentures is estimated using the
rates that would be charged for subordinated debentures of similar remaining maturities.
Commitments to extend credit, letters of credit and lines of credit The fair value of
commitments is estimated using the fees currently charged to enter into similar agreements, taking
into account the remaining terms of the agreements and the present creditworthiness of the
counterparties. For fixed rate loan commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. The fair values of letters of credit and
lines of credit are based on fees currently charged for similar agreements or on the estimated cost
to terminate or otherwise settle the obligations with the counterparties at the reporting date.
2. Acquisitions
On September 1, 2005, HBI acquired Mountain View Bancshares, Inc., an Arkansas bank holding
company. Mountain View Bancshares owned Bank of Mountain View, located in Mountain View, Arkansas
which had
84
consolidated assets, loans and deposits of approximately $202.5 million, $68.8 million and
$158.0 million, respectively, as of the acquisition date. The consideration for the merger was
$44.1 million, which was paid approximately 90% in cash and 10% in shares of HBI common stock. As a
result of this transaction, the Company recorded goodwill and a core deposit intangible of $13.2
million and $3.0 million, respectively.
On June 1, 2005, HBI acquired Marine Bancorp, Inc., a Florida bank holding company. Marine
Bancorp owned Marine Bank of the Florida Keys (subsequently renamed Marine Bank), located in
Marathon, Florida, which had consolidated assets, loans and deposits of approximately $257.6
million, $215.2 million and $200.7 million, respectively, as of the acquisition date. The Company
also assumed debt obligations with carrying values of $39.7 million, which approximated their fair
market values as a result of the rates being paid on the obligations were at or near estimated
current market rates. The consideration for the merger was $15.6 million, which was paid
approximately 60.5% in cash and 39.5% in shares of HBI Class B preferred stock. As a result of this
transaction, the Company recorded goodwill and a core deposit intangible of $4.6 million and $2.0
million, respectively.
On January 3, 2005, we purchased 20% of the common stock of White River Bancshares, Inc. of
Fayetteville, Arkansas for $9.1 million. White River Bancshares is a newly formed corporation,
which owns all of the stock of Signature Bank of Arkansas, with branch locations in northwest
Arkansas. In January 2006, White River Bancshares issued an additional $15.0 million of common
stock. To maintain our 20% ownership, we invested an additional $3.0 million in White River
Bancshares at that time. As of December 31, 2006, White River Bancshares had total assets of $343.2
million, loans of $283.0 million, and total deposits of $268.9 million.
White River Bancshares, Inc has filed an application with Federal Reserve to acquire 100% of
the stock of Brinkley Bancshares, Inc., in connection with the merger of Bank of Brinkley with
Signature Bank. The Bank of Brinkley in Brinkley, Arkansas has assets of $140.2 million, loans of
$32.7 million and deposits of $118.8 million as of December 31, 2006. The merger is expected to
take place in the second quarter of 2007.
Effective January 1, 2005, HBI purchased the remaining 67.8% of TCBancorp and its subsidiary
Twin City Bank with branch locations in the Little Rock/North Little Rock metropolitan area. The
purchase brought our ownership of TCBancorp to 100%. HBI acquired, as of the effective date of this
transaction, approximately $633.4 million in total assets, $261.9 million in loans and
approximately $500.1 million in deposits. The Company also assumed debt obligations with carrying
values of $20.9 million, which approximated their fair market values as a result of the rates being
paid on the obligations were at or near estimated current market rates. The purchase price for the
TCBancorp acquisition was $43.9 million, which consisted of the issuance of 3,750,000 shares (split
adjusted) of HBI common stock and cash of approximately $110,000. As a result of this transaction,
the Company recorded goodwill and a core deposit intangible of $1.1 million and $3.3 million,
respectively. This transaction also increased to 100% HBI ownership of CB Bancorp and FirsTrust,
both of which the Company had previously co-owned with TCBancorp.
In February 2005, CB Bancorp merged into Home BancShares, and Community Bank thus became our
wholly owned subsidiary.
85
The following table summarizes the estimated fair value of the assets acquired and liabilities
assumed at the dates of the acquisitions of TCBancorp, Marine Bancorp, Inc. and Mountain View
Bancshares, Inc.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mountain |
|
|
|
|
|
|
|
Marine |
|
|
View |
|
|
|
TCBancorp |
|
|
Bancorp, Inc. |
|
|
Bancshares, Inc. |
|
|
|
|
(In thousands) |
|
Cash and cash equivalents |
|
$ |
9,039 |
|
|
$ |
6,378 |
|
|
$ |
3,204 |
|
Federal funds sold |
|
|
3,660 |
|
|
|
551 |
|
|
|
4,180 |
|
Investments |
|
|
327,189 |
|
|
|
23,432 |
|
|
|
106,707 |
|
Loans |
|
|
261,927 |
|
|
|
215,209 |
|
|
|
68,791 |
|
Other assets |
|
|
31,609 |
|
|
|
11,980 |
|
|
|
19,644 |
|
|
|
|
|
|
|
|
|
|
|
Total assets acquired |
|
|
633,424 |
|
|
|
257,550 |
|
|
|
202,526 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
500,144 |
|
|
|
200,747 |
|
|
|
158,007 |
|
Securities sold under agreements to repurchase |
|
|
45,754 |
|
|
|
|
|
|
|
|
|
FHLB and other borrowed funds |
|
|
20,884 |
|
|
|
34,564 |
|
|
|
|
|
Subordinated debentures |
|
|
|
|
|
|
5,155 |
|
|
|
|
|
Accrued interest payable and other liabilities |
|
|
1,928 |
|
|
|
1,521 |
|
|
|
441 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities assumed |
|
|
568,710 |
|
|
|
241,987 |
|
|
|
158,448 |
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired |
|
$ |
64,714 |
|
|
$ |
15,563 |
|
|
$ |
44,078 |
|
|
|
|
|
|
|
|
|
|
|
The following table presents condensed pro forma consolidated results of operations as if the
acquisitions of TCBancorp, Marine Bancorp, Inc. and Mountain View Bancshares, Inc. had occurred at
the beginning of each year. This information combines the historical results of operations of the
Company, TCBancorp, Marine Bancorp, Inc. and Mountain View Bancshares, Inc. after the effect of
purchase accounting adjustments. The unaudited pro forma information does not purport to be
indicative of the results that would have been obtained if the operations had actually been
combined during the period presented and is not necessarily indicative of operating results to be
expected in future periods.
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands, except per share data) |
|
Net interest income |
|
$ |
56,184 |
|
|
$ |
50,347 |
|
Non-interest income |
|
|
16,951 |
|
|
|
22,029 |
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
73,135 |
|
|
$ |
72,376 |
|
|
|
|
|
|
|
|
Net income |
|
$ |
13,291 |
|
|
$ |
13,768 |
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
1.05 |
|
|
$ |
1.09 |
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.93 |
|
|
$ |
0.96 |
|
|
|
|
|
|
|
|
86
3. Investment Securities
The amortized cost and estimated fair value of investment securities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 |
|
|
|
Available for Sale |
|
|
|
Amortized |
|
|
Gross Unrealized |
|
|
Gross Unrealized |
|
|
Estimated |
|
|
|
Cost |
|
|
Gains |
|
|
(Losses) |
|
|
Fair Value |
|
|
|
(In thousands) |
|
U.S. government-sponsored enterprises |
|
$ |
199,085 |
|
|
$ |
79 |
|
|
$ |
(2,927 |
) |
|
$ |
196,237 |
|
Mortgage-backed securities |
|
|
225,747 |
|
|
|
41 |
|
|
|
(5,988 |
) |
|
|
219,800 |
|
State and political subdivisions |
|
|
102,536 |
|
|
|
1,360 |
|
|
|
(496 |
) |
|
|
103,400 |
|
Other securities |
|
|
12,631 |
|
|
|
|
|
|
|
(177 |
) |
|
|
12,454 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
539,999 |
|
|
$ |
1,480 |
|
|
$ |
(9,588 |
) |
|
$ |
531,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
|
|
Available for Sale |
|
|
|
Amortized |
|
|
Gross Unrealized |
|
|
Gross Unrealized |
|
|
Estimated |
|
|
|
Cost |
|
|
Gains |
|
|
(Losses) |
|
|
Fair Value |
|
|
|
(In thousands) |
|
U.S. government-sponsored enterprises |
|
$ |
162,165 |
|
|
$ |
27 |
|
|
$ |
(4,723 |
) |
|
$ |
157,469 |
|
Mortgage-backed securities |
|
|
264,666 |
|
|
|
16 |
|
|
|
(8,209 |
) |
|
|
256,473 |
|
State and political subdivisions |
|
|
102,928 |
|
|
|
1,279 |
|
|
|
(746 |
) |
|
|
103,461 |
|
Other securities |
|
|
13,571 |
|
|
|
|
|
|
|
(672 |
) |
|
|
12,899 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
543,330 |
|
|
$ |
1,322 |
|
|
$ |
(14,350 |
) |
|
$ |
530,302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets, principally investment securities, having a carrying value of approximately $287.2
million and $276.1 million at December 31, 2006 and 2005, respectively, were pledged to secure
public deposits and for other purposes required or permitted by law. Also, investment securities
pledged as collateral for repurchase agreements totaled approximately $118.8 million and $103.7
million at December 31, 2006 and 2005, respectively.
The amortized cost and estimated fair value of securities at December 31, 2006, by contractual
maturity, are shown below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call or prepayment
penalties.
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale |
|
|
|
Amortized |
|
|
Estimated |
|
|
|
Cost |
|
|
Fair Value |
|
|
|
(In thousands) |
|
|
Due in one year or less |
|
$ |
206,628 |
|
|
$ |
203,755 |
|
Due after one year through five years |
|
|
199,256 |
|
|
|
196,627 |
|
Due after five years through ten years |
|
|
70,370 |
|
|
|
69,170 |
|
Due after ten years |
|
|
63,745 |
|
|
|
62,339 |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
539,999 |
|
|
$ |
531,891 |
|
|
|
|
|
|
|
|
For purposes of the maturity tables, mortgage-backed securities, which are not due at a single
maturity date, have been allocated over maturity groupings based on anticipated maturities. The
mortgage-backed securities may mature earlier than their weighted-average contractual maturities
because of principal prepayments.
87
There were no securities classified as held to maturity at December 31, 2006 and 2005.
During the years ended December 31, 2006, 2005 and 2004, $1.0 million, $58.9 million and $2.9
million in available for sale securities, respectively, were sold. The gross realized gains on
such sales totaled $1,000, $54,000 and $64,000 for years ended December 31, 2006, 2005 and 2004,
respectively. The gross realized loss on such sales totaled $593,000 for the year ended December
31, 2005. During 2004, the Company recorded a $313,000 charge-off on investments that had an other
than-temporary impairment. The income tax expense/benefit related to net security gains and losses
was 39.23% of the gross amounts for 2006, 2005, and 2004.
The Company evaluates all securities quarterly to determine if any unrealized losses are
deemed to be other than temporary. In completing these evaluations the Company follows the
requirements of paragraph 16 of SFAS No. 115, EITF 03-1, Staff Accounting Bulletin 59 and FASB
Staff Position No. 115-1. Certain investment securities are valued less than their historical cost.
These declines primarily resulted from recent increases in market interest rates. Based on
evaluation of available evidence, management believes the declines in fair value for these
securities are temporary. It is managements intent to hold these securities to maturity. Should
the impairment of any of these securities become other than temporary, the cost basis of the
investment will be reduced and the resulting loss recognized in net income in the period the
other-than-temporary, impairment is identified.
For the year ended December 31, 2006, the Company had $9.5 million in unrealized losses, which
have been in continuous loss positions for more than twelve months. Included in the $9.5 million in
unrealized losses are $6.9 million in unrealized losses, which were associated with
government-sponsored securities and government-sponsored mortgage-back securities. No securities
were deemed by management to have other than-temporary impairments for the years ended December 31,
2006 and 2005, besides securities for which an impairment was taken during 2004. The Companys
assessments indicated that the cause of the market depreciation was primarily the change in
interest rates and not the issuers financial condition, or downgrades by rating agencies. In
addition, approximately 75.2% of the Companys investment portfolio matures in five years or less.
As a result, the Company has the ability and intent to hold such securities until maturity.
The following shows gross unrealized losses and estimated fair value of investment securities
available for sale, aggregated by investment category and length of time that individual investment
securities have been in a continuous loss position as of December 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 |
|
|
|
Less Than 12 Months |
|
|
12 Months or More |
|
|
Total |
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
|
(In thousands) |
|
U.S. Government-sponsored
enterprises |
|
$ |
13,453 |
|
|
$ |
22 |
|
|
$ |
143,757 |
|
|
$ |
2,905 |
|
|
$ |
157,210 |
|
|
$ |
2,927 |
|
State and political subdivisions |
|
|
7,822 |
|
|
|
54 |
|
|
|
23,390 |
|
|
|
442 |
|
|
|
31,212 |
|
|
|
496 |
|
Mortgage-backed securities |
|
|
7,482 |
|
|
|
38 |
|
|
|
199,761 |
|
|
|
5,950 |
|
|
|
207,243 |
|
|
|
5,988 |
|
Other securities |
|
|
|
|
|
|
|
|
|
|
7,475 |
|
|
|
177 |
|
|
|
7,475 |
|
|
|
177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
28,757 |
|
|
$ |
114 |
|
|
$ |
374,383 |
|
|
$ |
9,474 |
|
|
$ |
403,140 |
|
|
$ |
9,588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
|
|
Less Than 12 Months |
|
|
12 Months or More |
|
|
Total |
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
|
(In thousands) |
|
U.S.
Government - sponsored
enterprises |
|
$ |
29,083 |
|
|
$ |
497 |
|
|
$ |
118,209 |
|
|
$ |
4,226 |
|
|
$ |
147,292 |
|
|
$ |
4,723 |
|
State and political subdivisions |
|
|
13,231 |
|
|
|
159 |
|
|
|
25,172 |
|
|
|
587 |
|
|
|
38,403 |
|
|
|
746 |
|
Mortgage-backed securities |
|
|
59,722 |
|
|
|
1,216 |
|
|
|
191,328 |
|
|
|
6,993 |
|
|
|
251,050 |
|
|
|
8,209 |
|
Other securities |
|
|
1,860 |
|
|
|
172 |
|
|
|
5,945 |
|
|
|
500 |
|
|
|
7,805 |
|
|
|
672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
103,896 |
|
|
$ |
2,044 |
|
|
$ |
340,654 |
|
|
$ |
12,306 |
|
|
$ |
444,550 |
|
|
$ |
14,350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4: Loans receivable and Allowance for Loan Losses
The various categories of loans are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
Real estate: |
|
|
|
|
|
|
|
|
Commercial real estate loans |
|
|
|
|
|
|
|
|
Non-farm/non-residential |
|
$ |
465,306 |
|
|
$ |
411,839 |
|
Construction/land development |
|
|
393,410 |
|
|
|
291,515 |
|
Agricultural |
|
|
11,659 |
|
|
|
13,112 |
|
Residential real estate loans |
|
|
|
|
|
|
|
|
Residential 1-4 family |
|
|
229,588 |
|
|
|
221,831 |
|
Multifamily residential |
|
|
37,440 |
|
|
|
34,939 |
|
|
|
|
|
|
|
|
Total real estate |
|
|
1,137,403 |
|
|
|
973,236 |
|
Consumer |
|
|
45,056 |
|
|
|
39,447 |
|
Commercial and industrial |
|
|
206,559 |
|
|
|
175,396 |
|
Agricultural |
|
|
13,520 |
|
|
|
8,466 |
|
Other |
|
|
13,757 |
|
|
|
8,044 |
|
|
|
|
|
|
|
|
Total loans receivable before allowance for loan losses |
|
|
1,416,295 |
|
|
|
1,204,589 |
|
Allowance for loan losses |
|
|
26,111 |
|
|
|
24,175 |
|
|
|
|
|
|
|
|
Total loans receivable, net |
|
$ |
1,390,184 |
|
|
$ |
1,180,414 |
|
|
|
|
|
|
|
|
The following is a summary of activity within the allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(Dollars in thousands) |
|
Balance, beginning of year |
|
$ |
24,175 |
|
|
$ |
16,345 |
|
|
$ |
14,717 |
|
Loans charged off |
|
|
(1,514 |
) |
|
|
(4,611 |
) |
|
|
(2,181 |
) |
Recoveries on loans previously charged off |
|
|
1,143 |
|
|
|
850 |
|
|
|
1,519 |
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
|
(371 |
) |
|
|
(3,761 |
) |
|
|
(662 |
) |
Provision charged to operating expense |
|
|
2,307 |
|
|
|
3,827 |
|
|
|
2,290 |
|
Allowance for loan losses of acquired institutions |
|
|
|
|
|
|
7,764 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year |
|
$ |
26,111 |
|
|
$ |
24,175 |
|
|
$ |
16,345 |
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2006 and 2005, accruing loans delinquent 90 days or more totaled $641,000 and
$426,000, respectively. Non-accruing loans at December 31, 2006 and 2005 were $3.9 million and $7.9
million, respectively.
89
Real estate securing loans having a carrying value of $1.5 million and $1.1 million were
transferred to foreclosed assets held for sale in 2006 and 2005, respectively. The Company is not
committed to lend additional funds to customers whose loans have been modified, restructured, or
foreclosed upon. During 2006, the Company sold foreclosed real estate with a carrying value of $1.8
million and $767,000 during 2006 and 2005, respectively, which resulted in gains of $380,000 and
$310,000 during 2006 and 2005, respectively, which are included in other non-interest income.
During 2006, 2005 and 2004, the Company sold $1.0 million, $5.5 million and $4.2 million of
the guaranteed portion of certain SBA loans, which resulted in gains of $72,000, $529,000 and
$26,00 during 2006, 2005 and 2004, respectively.
Mortgage loans held for resale of approximately $2.4 million and $3.0 million at December 31,
2006 and 2005, respectively, are included in residential 14 family loans. Mortgage loans held
for sale are carried at the lower of cost or fair value, determined using an aggregate basis.
Gains and losses resulting from sales of mortgage loans are recognized when the respective loans
are sold to investors. Gains and losses are determined by the difference between the selling price
and the carrying amount of the loans sold, net of discounts collected or paid. The Company obtains
forward commitments to sell mortgage loans to reduce market risk on mortgage loans in the process
of origination and mortgage loans held for sale. The forward commitments acquired by the Company
for mortgage loans in process of origination are not mandatory forward commitments. These
commitments are structured on a best efforts basis; therefore the Company is not required to
substitute another loan or to buy back the commitment if the original loan does not fund.
Typically, the Company delivers the mortgage loans within a few days after the loan are funded.
These commitments are derivative instruments and their fair values at December 31, 2006 and 2005
was not material.
At December 31, 2006 and 2005, impaired loans totaled $11.2 million and $5.1 million,
respectively. As of December 31, 2006 and 2005, average impaired loans were $7.2 million and $8.5
million, respectively. All impaired loans had designated reserves for possible loan losses.
Reserves relative to impaired loans at December 31, 2006, were $2.1 million and $1.8 million at
December 31, 2005. Interest recognized on impaired loans during 2006 and 2005 was immaterial.
5: Goodwill and Core Deposits and Other Intangibles
Changes in the carrying amount and accumulated amortization of the Companys goodwill, core
deposits and other intangibles at December 31, 2006 and 2005, were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
Goodwill |
|
|
|
|
|
|
|
|
Balance, beginning of year |
|
$ |
37,527 |
|
|
$ |
18,555 |
|
Acquisitions of financial institutions |
|
|
|
|
|
|
18,972 |
|
|
|
|
|
|
|
|
Balance, end of year |
|
$ |
37,527 |
|
|
$ |
37,527 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Deposit and Other Intangibles |
|
|
|
|
|
|
|
|
Balance, beginning of year |
|
$ |
11,200 |
|
|
$ |
4,261 |
|
Acquisitions of financial institutions |
|
|
|
|
|
|
8,405 |
|
Amortization expense |
|
|
(1,742 |
) |
|
|
(1,466 |
) |
|
|
|
|
|
|
|
Balance, end of year |
|
$ |
9,458 |
|
|
$ |
11,200 |
|
|
|
|
|
|
|
|
90
The increases in goodwill and core deposit intangibles for 2005 are the result of the
acquisitions of TCBancorp, Marin Bancorp, Inc. and Mountain View Bancshares, Inc. as discussed in
Note 2.
The carrying basis and accumulated amortization of core deposits and other intangibles at
December 31, 2006 and 2005 were:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
Gross carrying amount |
|
$ |
13,457 |
|
|
$ |
13,457 |
|
Accumulated amortization |
|
|
3,999 |
|
|
|
2,257 |
|
|
|
|
|
|
|
|
Net carrying amount |
|
$ |
9,458 |
|
|
$ |
11,200 |
|
|
|
|
|
|
|
|
Core deposit and other intangible amortization for the years ended December 31, 2006, 2005 and
2004 was approximately $1.7 million, $1.5 million and $728,000, respectively. Including all of the
mergers completed, HBIs estimated amortization expense of core deposits and other intangibles for
each of the following five years is: 2007 $1.7 million; 2008 $1.7 million; 2009 $1.7 million;
2010 $1.6 million; and 2011 $981,000.
The carrying amount of the Companys goodwill was $37.5 million at December 31, 2006 and 2005.
Goodwill is tested annually for impairment. If the implied fair value of goodwill is lower than
its carrying amount, goodwill impairment is indicated and goodwill is written down to its implied
fair value. Subsequent increases in goodwill value are not recognized in the financial statements.
6: Deposits
The aggregate amount of time deposits with a minimum denomination of $100,000 was $486.3
million and $403.0 million at December 31, 2006 and 2005, respectively. Interest expense
applicable to certificates in excess of $100,000 totaled $19.3 million, $11.3 million and $2.9
million for the years ended December 31, 2006, 2005 and 2004, respectively.
The following is a summary of the scheduled maturities of all time deposits at December 31, 2006
(in thousands):
|
|
|
|
|
One month or less |
|
$ |
110,769 |
|
Over 1 month to 3 months |
|
|
212,330 |
|
Over 3 months to 6 months |
|
|
168,628 |
|
Over 6 months to 12 months |
|
|
196,781 |
|
Over 12 months to 2 years |
|
|
81,154 |
|
Over 2 years to 3 years |
|
|
12,864 |
|
Over 3 years to 5 years |
|
|
26,564 |
|
Over 5 years |
|
|
537 |
|
|
|
|
|
Total time certificates of deposit |
|
$ |
809,627 |
|
|
|
|
|
Deposits totaling approximately $203.0 million and $236.1 million at December 31, 2006 and
2005, respectively, were public funds obtained primarily from state and political subdivisions in
the United States.
7: FHLB and Other Borrowed Funds
The Companys FHLB and other borrowed funds were $151.8 million and $117.1 million at December
31, 2006 and 2005, respectively. The outstanding balance for December 31, 2006 includes $5.0
million of short-term advances and $146.8 million of long-term advances. The outstanding balance
for December 31, 2005 includes $4.0
91
million of short-term advances and $113.1 million of long-term
advances. Short-term borrowings consist of U.S. TT&L notes and short-term FHLB borrowings.
Long-term borrowings consist of long-term FHLB borrowings and a line of credit with another
financial institution.
Additionally, the Company had $41.5 million and $46.5 million at December 31, 2006 and 2005,
respectively, in letters of credit under a FHLB blanket borrowing line of credit, which are used to
collateralize public deposits at December 31, 2006 and 2005, respectively.
Long-term borrowings at December 31, 2006 and 2005 consisted of the following components:
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
Line of Credit, due 2009, at a floating rate of 0.75% below Prime, secured
by bank stock |
|
$ |
|
|
|
$ |
14,000 |
|
FHLB advances, due 2006 to 2020, 1.98% to 5.96% secured by residential
real estate loans |
|
|
146,768 |
|
|
|
99,118 |
|
|
|
|
|
|
|
|
Total long-term borrowings |
|
$ |
146,768 |
|
|
$ |
113,118 |
|
|
|
|
|
|
|
|
Maturities of borrowings with original maturities exceeding one year at December 31, 2006, are
as follows (in thousands):
|
|
|
|
|
2007 |
|
$ |
54,018 |
|
2008 |
|
|
58,047 |
|
2009 |
|
|
512 |
|
2010 |
|
|
12,265 |
|
2011 |
|
|
268 |
|
Thereafter |
|
|
21,658 |
|
|
|
|
|
|
|
$ |
146,768 |
|
|
|
|
|
8: Subordinated Debentures
Subordinated Debentures at December 31, 2006 and 2005 consisted of guaranteed payments on
trust preferred securities with the following components:
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
Subordinated debentures, issued in 2003, due 2033, fixed at 6.40%, during the
first five years and at a floating rate of 3.15% above the three-month LIBOR
rate, reset quarterly, thereafter, callable in 2008 without penalty |
|
$ |
20,619 |
|
|
$ |
20,619 |
|
Subordinated debentures, issued in 2000, due 2030, fixed at 10.60%, callable in
2010 with a penalty ranging from 5.30% to 0.53% depending on the year of
prepayment, callable in 2020 without penalty |
|
|
3,424 |
|
|
|
3,516 |
|
Subordinated debentures, issued in 2003, due 2033, floating rate of 3.15% above
the three-month LIBOR rate, reset quarterly, callable in 2008 without penalty |
|
|
5,155 |
|
|
|
5,155 |
|
Subordinated debentures, issued in 2005, due 2035, fixed rate of 6.81% during the
first ten years and at a floating rate of 1.38% above the three-month LIBOR
rate, reset quarterly, thereafter, callable in 2010 without penalty |
|
|
15,465 |
|
|
|
15,465 |
|
|
|
|
|
|
|
|
Total subordinated debt |
|
$ |
44,663 |
|
|
$ |
44,755 |
|
|
|
|
|
|
|
|
92
As a result of the acquisition of Marine Bancorp, Inc., the Company has an interest rate
swap agreement that effectively converts the floating rate on the $5.2 million trust preferred
security noted above into a fixed interest rate of 7.29%, thus reducing the impact of interest rate
changes on future interest expense until the call date.
The trust preferred securities are tax-advantaged issues that qualify for Tier 1 capital
treatment subject to certain limitations. Distributions on these securities are included in
interest expense. Each of the trusts is a statutory business trust organized for the sole purpose
of issuing trust securities and investing the proceeds thereof in junior subordinated debentures of
the Company, the sole asset of each trust. The preferred trust securities of each trust represent
preferred beneficial interests in the assets of the respective trusts and are subject to mandatory
redemption upon payment of the junior subordinated debentures held by the trust. The Company wholly
owns the common securities of each trust. Each trusts ability to pay amounts due on the trust
preferred securities is solely dependent upon the Company making payment on the related junior
subordinated debentures. The Companys obligations under the junior subordinated securities and
other relevant trust agreements, in aggregate, constitute a full and unconditional guarantee by the
Company of each respective trusts obligations under the trust securities issued by each respective
trust.
9: Income Taxes
The following is a summary of the components of the provision for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands) |
|
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
7,705 |
|
|
$ |
4,224 |
|
|
$ |
5,622 |
|
State |
|
|
1,008 |
|
|
|
839 |
|
|
|
970 |
|
|
|
|
|
|
|
|
|
|
|
Total current |
|
|
8,713 |
|
|
|
5,063 |
|
|
|
6,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(1,226 |
) |
|
|
(107 |
) |
|
|
(1,304 |
) |
State |
|
|
(240 |
) |
|
|
(21 |
) |
|
|
(258 |
) |
|
|
|
|
|
|
|
|
|
|
Total deferred |
|
|
(1,466 |
) |
|
|
(128 |
) |
|
|
(1,562 |
) |
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
$ |
7,247 |
|
|
$ |
4,935 |
|
|
$ |
5,030 |
|
|
|
|
|
|
|
|
|
|
|
The reconciliation between the statutory federal income tax rate and effective income tax rate
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2006 |
|
2005 |
|
2004 |
Statutory federal income tax rate |
|
|
35.00 |
% |
|
|
35.00 |
% |
|
|
35.00 |
% |
Effect of nontaxable interest income |
|
|
(5.22 |
) |
|
|
(5.93 |
) |
|
|
(3.53 |
) |
Cash value of life insurance |
|
|
(0.46 |
) |
|
|
(0.54 |
) |
|
|
(0.58 |
) |
State income taxes, net of federal benefit |
|
|
2.15 |
|
|
|
2.17 |
|
|
|
3.63 |
|
Change in effective rate for deferred tax assets |
|
|
|
|
|
|
|
|
|
|
(0.33 |
) |
Other |
|
|
(0.19 |
) |
|
|
(0.57 |
) |
|
|
(0.13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate |
|
|
31.28 |
% |
|
|
30.13 |
% |
|
|
34.06 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
93
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, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
$ |
10,219 |
|
|
$ |
9,229 |
|
Deferred compensation |
|
|
244 |
|
|
|
249 |
|
Defined benefit pension plan |
|
|
107 |
|
|
|
109 |
|
Stock options |
|
|
155 |
|
|
|
|
|
Non-accrual interest income |
|
|
489 |
|
|
|
466 |
|
Investment in unconsolidated subsidiary |
|
|
485 |
|
|
|
336 |
|
Unrealized loss on securities |
|
|
3,179 |
|
|
|
5,105 |
|
Other |
|
|
170 |
|
|
|
349 |
|
|
|
|
|
|
|
|
Gross deferred tax assets |
|
|
15,048 |
|
|
|
15,843 |
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Accelerated depreciation on premises and equipment |
|
|
2,082 |
|
|
|
2,237 |
|
Core deposit intangibles |
|
|
3,552 |
|
|
|
4,211 |
|
Market value of cash flow hedge |
|
|
25 |
|
|
|
25 |
|
FHLB dividends |
|
|
567 |
|
|
|
393 |
|
Other |
|
|
461 |
|
|
|
156 |
|
|
|
|
|
|
|
|
Gross deferred tax liabilities |
|
|
6,687 |
|
|
|
7,022 |
|
|
|
|
|
|
|
|
Net deferred tax assets |
|
$ |
8,361 |
|
|
$ |
8,821 |
|
|
|
|
|
|
|
|
10: Common Stock and Stock Compensation Plans
On August 1, 2006, the Company redeemed and converted the issued and outstanding shares of
Home BancSharess Class A Preferred Stock and Class B Preferred Stock into Home BancShares Common
Stock. The conversion of the preferred stock increased the Companys outstanding common stock by
approximately 2.2 million shares.
The holders of shares of Class A Preferred Stock, received 0.789474 of Home BancShares Common
Stock for each share of Class A Preferred Stock owned, plus a check for the pro rata amount of the
third quarter Class A Preferred Stock dividend accrued through July 31, 2006. The Class A
Preferred shareholders did not receive fractional shares, instead they received cash at a rate of
$12.67 times the fraction of a share they otherwise would have been entitled to.
The holders of shares of Class B Preferred Stock, received three shares of Home BancShares
Common Stock for each share of Class B Preferred Stock owned, plus a check for the pro rata amount
of the third quarter Class B Preferred Stock dividend accrued through July 31, 2006.
On June 22, 2006, the Company priced its initial public offering of 2.5 million shares of
common stock at $18.00 per share. The total price to the public for the shares offered and sold by
the Company was $45.0 million. The amount of expenses incurred for the Companys account in
connection with the offering includes approximately $3.1 million of underwriting discounts and
commissions and offering expenses of approximately $1.0 million. The Company received net proceeds
of approximately $40.9 million from its sale of shares after deducting sales commissions and
expenses.
On July 21, 2006, the underwriters of the Companys initial public offering exercised and
completed their option to purchase an additional 375,000 shares of common stock to cover
over-allotments effective July 26, 2006.
94
The Company received net proceeds of approximately $6.3 million from this sale of shares after
deducting sales commissions.
On March 13, 2006, the Companys board of directors adopted the 2006 Stock Option and
Performance Incentive Plan. The Plan was submitted to the shareholders for approval at the 2006
annual meeting of shareholders. The purpose of the Plan is to attract and retain highly qualified
officers, directors, key employees, and other persons, and to motivate those persons to improve our
business results.
The Plan amends and restates various prior plans that were either adopted by the Company or
companies that were acquired. Awards made under any of the prior plans will be subject to the terms
and conditions of the Plan, which is designed not to impair the rights of award holders under the
prior plans. The Plan goes beyond the prior plans by including new types of awards (such as
unrestricted stock, performance shares, and performance and annual incentive awards) in addition to
the stock options (incentive and non-qualified), stock appreciation rights, and restricted stock
that could have been awarded under one or more of the prior plans. In addition, the Companys
outstanding preferred stock options are also subject to the Plan.
As of March 13, 2006, options for a total of 613,604 shares of common stock outstanding under
the prior plans became subject to the Plan. Also, on that date, the Companys board of directors
replaced 341,000 outstanding stock appreciation rights with 354,640 options, each with an exercise
price of $13.18. During 2005, the Company had issued 341,000 stock appreciation rights at $12.67
for certain executive employees throughout the Company. The appreciation rights were on a five-year
cliff-vesting schedule with all appreciation rights vesting on December 31, 2009. The vesting was
also subject to various financial performance goals of the Company and the subsidiary banks over
the five-year period ending January 1, 2010. The options issued in replacement of the stock
appreciation rights are subject to achievement of the same financial goals by the Company and the
bank subsidiaries over the five-year period ending January 1, 2010.
On January 1, 2006, the Company adopted the fair value recognition provisions of FASB
Statement No. 123 (R), Share-Based Payment (SFAS123(R)), using the
modified-prospective-transition method. Under that transition method, compensation cost is
recognized beginning in 2006 includes: (a) the compensation cost for all share-based payments
granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value
estimated in accordance with the original provisions of FASB Statement No. 123, and (b) the
compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the
grant-date fair value estimated in accordance with the provisions of SFAS 123 (R). Results for
prior periods have not been restated. Prior to January 1, 2006, the Company accounted for
stock-based compensation using the intrinsic value method. Total unrecognized compensation cost,
net of income tax benefit, related to non-vested awards, which are expected to be recognized over
the vesting periods, was $735,000 as of December 31, 2006.
95
The following table presents the required pro forma disclosures related to net income for the
year ended December 31, 2005 for the options granted:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
Basic pro forma |
|
|
|
|
|
|
|
|
Net income available to common shareholders as reported |
|
$ |
10,872 |
|
|
$ |
8,630 |
|
Less: Total stock-based employee compensation cost
determined under the fair value based method, net of tax |
|
|
249 |
|
|
|
72 |
|
|
|
|
|
|
|
|
Net income available to common shareholders pro forma |
|
$ |
10,623 |
|
|
$ |
8,558 |
|
|
|
|
|
|
|
|
Basic earnings per share as reported |
|
$ |
0.92 |
|
|
$ |
1.08 |
|
Basic earnings per share pro forma |
|
|
0.90 |
|
|
|
1.07 |
|
|
|
|
|
|
|
|
|
|
Diluted pro forma |
|
|
|
|
|
|
|
|
Net income as reported |
|
$ |
11,446 |
|
|
$ |
9,159 |
|
Less: Total stock-based employee compensation cost
determined under the fair value based method, net of tax |
|
|
249 |
|
|
|
72 |
|
|
|
|
|
|
|
|
Net income pro forma |
|
$ |
11,197 |
|
|
$ |
9,087 |
|
|
|
|
|
|
|
|
Diluted earnings per share as reported |
|
$ |
0.82 |
|
|
$ |
0.94 |
|
Diluted earnings per share pro forma |
|
|
0.81 |
|
|
|
0.93 |
|
As a result of adopting SFAS 123(R), the Companys income before income taxes and net income
for the year ended December 31, 2006, are $380,000 and $231,000 lower, respectively, than if the
Company had continued to account for share-based compensation under the intrinsic method. Basic
and diluted earnings per share for the year ended December 31, 2006, would have been $1.09 and
$1.01, respectively, if the Company had not adopted Statement 123(R), compared to reported basic
and diluted earnings per share of $1.07 and $1.00, respectively. For purposes of pro forma
disclosures as required by SFAS No. 123(R), the estimated fair value of stock options is amortized
over the options vesting period. The intrinsic value of the stock options outstanding and vested
at December 31, 2006 was $13.1 million and $8.3 million, respectively. The intrinsic value of the
stock options exercised during 2006 was $425,000.
The Company has a nonqualified stock option plan for employees, officers, and directors of the
Company. This plan provides for the granting of incentive nonqualified options to purchase up to
1.2 million shares of common stock in the Company.
The table below summarized the transactions under the Companys stock option plans (split
adjusted) at December 31, 2006, 2005 and 2004 and changes during the years then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
2004 |
|
|
Shares |
|
Weighted Average |
|
Shares |
|
Weighted Average |
|
Shares |
|
Weighted Average |
|
|
(000) |
|
Exercisable Price |
|
(000) |
|
Exercisable Price |
|
(000) |
|
Exercisable Price |
Outstanding, beginning of year |
|
|
630 |
|
|
$ |
10.07 |
|
|
|
453 |
|
|
$ |
9.46 |
|
|
|
324 |
|
|
$ |
8.11 |
|
Granted |
|
|
410 |
|
|
|
14.22 |
|
|
|
75 |
|
|
|
12.67 |
|
|
|
135 |
|
|
|
12.67 |
|
Converted options of preferred stock A |
|
|
9 |
|
|
|
8.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Converted options of preferred stock B |
|
|
71 |
|
|
|
6.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options of acquired institution |
|
|
|
|
|
|
|
|
|
|
168 |
|
|
|
10.80 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(31 |
) |
|
|
12.90 |
|
|
|
(23 |
) |
|
|
8.78 |
|
|
|
(6 |
) |
|
|
9.72 |
|
Exercised |
|
|
(57 |
) |
|
|
9.40 |
|
|
|
(43 |
) |
|
|
11.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of period |
|
|
1,032 |
|
|
|
11.39 |
|
|
|
630 |
|
|
|
10.07 |
|
|
|
453 |
|
|
|
9.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, end of period |
|
|
560 |
|
|
$ |
9.27 |
|
|
|
497 |
|
|
$ |
9.50 |
|
|
|
243 |
|
|
$ |
7.81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96
Stock-based compensation expense for all stock-based compensation awards granted after
January 1, 2006, is based on the grant date fair value. For stock option awards, the fair value is
estimated at the date of grant using the Black-Scholes option-pricing model. This model requires
the input of highly subjective assumptions, changes to which can materially affect the fair value
estimate. Additionally, there may be other factors that would otherwise have a significant effect
on the value of employee stock options granted but are not considered by the model. Accordingly,
while management believes that the Black-Scholes option-pricing model provides a reasonable
estimate of fair value, the model does not necessarily provide the best single measure of fair
value for the Companys employee stock options. The weighted-average fair value of options granted
during 2006, 2005 and 2004 was $3.39, $3.90 and $2.73 per share (split adjusted), respectively.
The fair value of each option granted is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected dividend yield |
|
|
0.59 |
% |
|
|
0.63 |
% |
|
|
0.00 |
% |
Expected stock price volatility |
|
|
9.23 |
% |
|
|
10.00 |
% |
|
|
0.01 |
% |
Risk-free interest rate |
|
|
4.80 |
% |
|
|
4.39 |
% |
|
|
3.73 |
% |
Expected life of options |
|
6.3 years |
|
|
10.0 years |
|
|
6.5 years |
|
The expected divided yield is based on historical data. The expected volatility is based on
published indexes of publicly traded bank holding companies with similar market capitalization.
The risk-free rate for periods within the contractual life of the option is based on the U.S.
Treasury yield curve in effect at the time of grant. The expected life of options granted is
derived using the simplified method and represents the period of time that options granted are
expected to be outstanding.
The following is a summary of currently outstanding and exercisable options at December 31,
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
Options Exercisable |
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
Weighted- |
|
|
|
|
|
Weighted- |
|
|
Options |
|
Remaining |
|
Average |
|
Options |
|
Average |
|
|
Outstanding |
|
Contractual Life |
|
Exercise |
|
Exercisable |
|
Exercise |
Exercise Prices |
|
Shares (000) |
|
(in years) |
|
Price |
|
Shares (000) |
|
Price |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 6.14 to $6.68
|
|
|
69 |
|
|
|
5.4 |
|
|
$ |
6.37 |
|
|
|
69 |
|
|
$ |
6.37 |
|
$ 7.33 to $8.66
|
|
|
215 |
|
|
|
5.4 |
|
|
|
7.45 |
|
|
|
215 |
|
|
|
7.45 |
|
$ 9.33 to $10.31
|
|
|
111 |
|
|
|
6.8 |
|
|
|
10.15 |
|
|
|
105 |
|
|
|
10.16 |
|
$11.34 to $11.67
|
|
|
71 |
|
|
|
8.4 |
|
|
|
11.41 |
|
|
|
64 |
|
|
|
11.38 |
|
$12.67 to $12.67
|
|
|
184 |
|
|
|
10.0 |
|
|
|
12.67 |
|
|
|
104 |
|
|
|
12.67 |
|
$13.18 to $13.18
|
|
|
329 |
|
|
|
9.2 |
|
|
|
13.18 |
|
|
|
3 |
|
|
|
13.18 |
|
$21.17 to $23.27
|
|
|
53 |
|
|
|
12.6 |
|
|
|
21.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,032 |
|
|
|
|
|
|
|
|
|
|
|
560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2005, the Company completed a three for one stock split. This resulted in issuing two
additional shares of stock to the common shareholders. As a result of the stock split, the
accompanying consolidated financial statements reflect an increase in the number of outstanding
shares of common stock and the $78,000 transfer of the par value of these additional shares from
surplus. All share and per share amounts have been restated to reflect the retroactive effect of
the stock split, except for the capitalization of the Company.
During 2005, the board of directors of the Company passed a resolution amending the articles
of incorporation to lower the par value from $0.10 to $0.01. This resulted in $352,000 reclassified
from common stock to capital surplus in stockholders equity.
97
11. Preferred Stock A and Preferred Stock A Options
During 2003, the Company issued preferred stock A as a result of the CBB acquisition. The
preferred stock A was non-voting, non-cumulative, callable and redeemable, and convertible to the
Companys common stock. The preferred stock A yielded an annual non-cumulative dividend of $0.25 to
be paid quarterly if and when authorized and declared by the Companys board of directors.
Dividends had to be paid on the preferred stock A before any other class of the Companys stock.
The Preferred Stock A was convertible at the holders option or redeemed by the Company at its
option under the following terms and conditions (common stock split adjusted):
The Preferred Stock A was convertible at the holders option, into HBI common stock upon the
earlier of the expiration of thirty months after the effective date of the merger or 180 days after
the date any of the HBI common stock is registered pursuant to the Securities Act of 1933 with the
Securities and Exchange Commission in connection with an initial public offering of HBI common
stock. Each share of Preferred Stock A to be converted and properly surrendered to the Company
pursuant to the Companys instructions for such surrender, shall be converted into 0.789474 shares
of HBI Common Stock, with fractional shares of the Preferred Stock A to be converted into cash at
the rate of $12.67 times the fraction of shares held.
The Company could, at its option, redeem all of the Preferred Stock A at any time after the
expiration of thirty months from the effective date of the merger or earlier if the HBI common
stock becomes publicly traded and (a) the last reported trade is at least $12.67 per share for 20
consecutive trading days or (b) if the trades are quoted on a bid and ask price basis and the
mean between the bid and ask price is at least $12.67 per share for 20 consecutive trading days.
At December 31, 2005 and 2004, the Company had 26,000 and 41,000 preferred stock A options
outstanding, respectively. The preferred stock A options became 100% exercisable at the date of the
CBB acquisition and are convertible to common stock under the same terms as the outstanding
preferred stock A.
On August 1, 2006, the Company redeemed and converted the issued and outstanding shares of
Home BancSharess Class A Preferred Stock into Home BancShares Common Stock. The holders of shares
of Class A Preferred Stock, received 0.789474 of Home BancShares Common Stock for each share of
Class A Preferred Stock owned, plus a check for the pro rata amount of the third quarter Class A
Preferred Stock dividend accrued through July 31, 2006. The Class A Preferred shareholders did
not receive fractional shares, instead they received cash at a rate of $12.67 times the fraction of
a share they otherwise would have been entitled to. Therefore, as of December 31, 2006, there were
no preferred stock A options outstanding.
The table below summarizes the transactions under the Companys preferred stock A option plan
at December 31, 2006, 2005 and 2004 and changes during the years then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
2004 |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
Weighted |
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
|
|
|
Average |
|
|
|
|
|
Average |
|
|
Shares |
|
Exercisable |
|
Shares |
|
Exercisable |
|
Shares |
|
Exercisable |
|
|
(000) |
|
Price |
|
(000) |
|
Price |
|
(000) |
|
Price |
Outstanding, beginning of year |
|
|
26 |
|
|
$ |
3.14 |
|
|
|
41 |
|
|
$ |
2.04 |
|
|
|
49 |
|
|
$ |
1.73 |
|
Converted to common stock |
|
|
(11 |
) |
|
|
6.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(15 |
) |
|
|
0.17 |
|
|
|
(15 |
) |
|
|
0.17 |
|
|
|
(8 |
) |
|
|
0.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of period |
|
|
|
|
|
|
|
|
|
|
26 |
|
|
|
3.14 |
|
|
|
41 |
|
|
|
2.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, end of period |
|
|
|
|
|
$ |
|
|
|
|
26 |
|
|
$ |
3.14 |
|
|
|
41 |
|
|
$ |
2.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98
12. Preferred Stock B and Preferred Stock B Options
During 2005, the Company issued preferred stock B as a result of the MBI acquisition. The
Class B Preferred Stock was a non-voting, non-cumulative, callable and redeemable, convertible
preferred stock The Class B Preferred Stock yielded an annual non-cumulative dividend of $0.57 to
be paid quarterly if and when authorized and declared by HBIs board of directors, and had priority
in the payment of dividends over the HBI Common Stock and any class of capital stock created after
the effective date of the merger, provided that dividends had first been paid on the Class A
Preferred Stock.
The Class B Preferred Stock was redeemable by HBI at any time on the basis of three shares of
HBI Common Stock for each share of Class B Preferred Stock. Holders of the Class B Preferred Stock
could convert their shares of Class B Preferred Stock into shares of HBI Common Stock (three shares
of HBI Common Stock for each share of Class B Preferred Stock), upon the occurrence of the earlier
of July 6, 2006, or two hundred ten (210) days after the date an underwritten initial public
offering of the HBI Common Stock is completed.
At December 31, 2005, the Company had 25,000 preferred stock B options outstanding. The
preferred stock B options became 100% exercisable at the date of the MBI acquisition and are
convertible to common stock under the same terms as the outstanding preferred stock B.
On August 1, 2006, the Company redeemed and converted the issued and outstanding shares of
Home BancSharess Class B Preferred Stock into Home BancShares Common Stock. The holders of
shares of Class B Preferred Stock, received three shares of Home BancShares Common Stock for each
share of Class B Preferred Stock owned, plus a check for the pro rata amount of the third quarter
Class B Preferred Stock dividend accrued through July 31, 2006. Therefore, as of December 31,
2006, there were no Preferred Stock B options outstanding.
The table below summarizes the transactions under the Companys preferred stock B option plan
at December 31, 2006 and 2005 and changes during the year then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
|
|
|
Average |
|
|
Shares |
|
Exercisable |
|
Shares |
|
Exercisable |
|
|
(000) |
|
Price |
|
(000) |
|
Price |
Outstanding, beginning of year |
|
|
25 |
|
|
$ |
19.06 |
|
|
|
|
|
|
$ |
|
|
Converted to common stock |
|
|
(24 |
) |
|
|
19.08 |
|
|
|
|
|
|
|
|
|
Options of acquired institution |
|
|
|
|
|
|
|
|
|
|
32 |
|
|
|
18.92 |
|
Exercised |
|
|
(1 |
) |
|
|
18.41 |
|
|
|
(7 |
) |
|
|
18.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of period |
|
|
|
|
|
|
|
|
|
|
25 |
|
|
|
19.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, end of period |
|
|
|
|
|
$ |
|
|
|
|
25 |
|
|
$ |
19.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99
13. Non-Interest Expense
The table below shows the components of non-interest expense for years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands) |
|
Salaries and employee benefits |
|
$ |
29,313 |
|
|
$ |
23,901 |
|
|
$ |
14,123 |
|
Occupancy and equipment |
|
|
8,712 |
|
|
|
6,869 |
|
|
|
3,750 |
|
Data processing expense |
|
|
2,506 |
|
|
|
1,991 |
|
|
|
1,170 |
|
Other operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Advertising |
|
|
2,383 |
|
|
|
2,067 |
|
|
|
900 |
|
Amortization of intangibles |
|
|
1,742 |
|
|
|
1,466 |
|
|
|
728 |
|
Electronic banking expense |
|
|
789 |
|
|
|
427 |
|
|
|
372 |
|
Directors fees |
|
|
774 |
|
|
|
505 |
|
|
|
210 |
|
Due from bank service charges |
|
|
331 |
|
|
|
284 |
|
|
|
197 |
|
FDIC and state assessment |
|
|
527 |
|
|
|
503 |
|
|
|
301 |
|
Insurance |
|
|
1,030 |
|
|
|
504 |
|
|
|
344 |
|
Legal and accounting |
|
|
1,025 |
|
|
|
941 |
|
|
|
452 |
|
Other professional fees |
|
|
771 |
|
|
|
534 |
|
|
|
493 |
|
Operating supplies |
|
|
940 |
|
|
|
745 |
|
|
|
530 |
|
Postage |
|
|
663 |
|
|
|
580 |
|
|
|
404 |
|
Telephone |
|
|
975 |
|
|
|
669 |
|
|
|
377 |
|
Other expense |
|
|
3,997 |
|
|
|
2,949 |
|
|
|
1,780 |
|
|
|
|
|
|
|
|
|
|
|
Total other operating expenses |
|
|
15,947 |
|
|
|
12,174 |
|
|
|
7,088 |
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expense |
|
$ |
56,478 |
|
|
$ |
44,935 |
|
|
$ |
26,131 |
|
|
|
|
|
|
|
|
|
|
|
14: Employee Benefit Plans
401(k) Plan
The Company has a retirement savings 401(k) plan in which substantially all employees may
participate. The Company matches employees contributions based on a percentage of salary
contributed by participants. The plan also allows for discretionary employer contributions. The
Companys expense for the plan was $810,000, $476,000 and $195,000 in 2006, 2005 and 2004,
respectively, which is included in salaries and employee benefits expense.
Stock Appreciation Rights
On March 13, 2006, the Companys board of directors replaced 341,000 outstanding stock
appreciation rights with 354,640 options, each with an exercise price of $13.18. During 2005, the
Company had issued 341,000 stock appreciation rights at $12.67 for certain executive employees
throughout the Company. The appreciation rights were on a five-year cliff-vesting schedule with all
appreciation rights vesting on December 31, 2009. The vesting was also subject to various financial
performance goals of the Company and the subsidiary banks over the five-year period ending January
1, 2010. The options issued in replacement of the stock appreciation rights are subject to
achievement of the same financial goals by the Company and the bank subsidiaries over the five-year
period ending January 1, 2010.
100
Pension Plan
The following table sets forth the status of the Companys defined benefit pension plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2006 |
|
2005 |
|
2004 |
|
|
(In thousands) |
Benefit obligation |
|
$ |
2,578 |
|
|
$ |
3,494 |
|
|
$ |
1,840 |
|
Fair value of plan assets |
|
|
2,606 |
|
|
|
2,693 |
|
|
|
1,025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status |
|
$ |
28 |
|
|
$ |
(801 |
) |
|
$ |
(815 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued benefit cost |
|
$ |
(152 |
) |
|
$ |
(552 |
) |
|
$ |
(949 |
) |
Unrecognized net (gain) or loss |
|
|
(235 |
) |
|
|
(146 |
) |
|
|
(212 |
) |
Unrecognized prior service cost |
|
|
|
|
|
|
117 |
|
|
|
|
|
Unrecognized net obligation |
|
|
|
|
|
|
70 |
|
|
|
|
|
Weighted-average assumptions: |
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
5.8 |
% |
|
|
6.8 |
% |
|
|
6.5 |
% |
Actual return on plan assets |
|
|
1.6 |
|
|
|
9.8 |
|
|
|
6.7 |
|
Expected return on plan assets |
|
|
5.8 |
|
|
|
6.8 |
|
|
|
6.5 |
|
Rate of compensation increase |
|
|
|
|
|
|
4.0 |
|
|
|
|
|
Benefit cost |
|
$ |
9 |
|
|
$ |
196 |
|
|
$ |
41 |
|
Interest cost |
|
|
150 |
|
|
|
268 |
|
|
|
117 |
|
Employer contributions |
|
|
|
|
|
|
767 |
|
|
|
166 |
|
Employee contributions |
|
|
|
|
|
|
|
|
|
|
|
|
Benefits paid |
|
|
198 |
|
|
|
1,095 |
|
|
|
296 |
|
The assets of the plans consist primarily of equity securities and mutual funds. The
measurement date for the plans is January 1. The plans have been frozen, and there have been no new
participants in the plan and no additional benefits earned. Contributions are made based upon at
least the minimum amounts required to be funded under provisions of the Employee Retirement Income
Security Act of 1974, with the maximum contribution not to exceed the maximum amount deductible
under the Internal Revenue Code.
The long-term rate of return on assets is determined by considering the historical returns for
the current mix of investments in the Companys pension plan. In addition, consideration is given
to the range of expected returns for the pension plan investment mix provided by the plans
investment advisors. The Company uses the historical information to determine if there has been a
significant change in the pension plans investment return history.
The discount rate was determined by projecting cash distributions from the plan and matching
them with the appropriate corporate bond yields in a yield curve regression analysis.
The Companys defined benefit pension plans are scheduled to terminate in 2007.
15: Related Party Transactions
In the ordinary course of business, loans may be made to officers and directors and their
affiliated companies at substantially the same terms as comparable transactions with other
borrowers. At December 31, 2006 and 2005, related party loans were approximately $53.0 million and
$55.8 million, respectively. New loans and advances on prior commitments made to the related
parties were $31.4 million and $19.1 million for the years ended December 31, 2006 and 2005,
respectively. Repayments of loans made by the related parties were $34.2 million and $14.5 million
for the years ended December 31, 2006 and 2005, respectively. As a result of acquisitions completed
during 2005, the Company acquired $12.4 million of related party loans.
101
At December 31, 2006 and 2005, directors, officers, and other related interest parties had demand, noninterest-bearing deposits of $52.6 million and $37.4 million, respectively, savings and interest-bearing transaction accounts of $630,000 and $1.3 million, respectively, and time certificates of deposit of $9.8 million and $13.6 million, respectively.
During 2006 and 2005, rent expense totaling $180,000 and $181,000, respectively, was paid to related parties.
The Company also received various fees from its investments in unconsolidated affiliates primarily for data processing and professional fees. During 2006 and 2005, these fees total $333,000 and $267,000, respectively. These fees are recorded in non-interest income.
In January 2005, the Company acquired the remaining 67.8% of TCBancorp, of which approximately 22.4% in the aggregate was owned by six of the Companys directors and executive officers (including the Chairman and Chief Executive Officer), or their affiliates. In June 2005, at the time the Company acquired Marine Bancorp, two of
the Companys directors and executive officers (including the Chairman and Chief
Executive Officer), or their affiliates, owned approximately 15.8% in the aggregate of the outstanding
stock of Marine Bancorp. In each of those transactions, the Company purchased the shares of
TCBancorp stock, or Marine Bancorp stock, that were held by the related parties, on the
same terms and with the same consideration as was paid to the other stockholders of TCBancorp
and Marine Bancorp. In the TCBancorp transaction, the Companys Chairman and Chief Executive
Officer received 136,420 shares (split adjusted) of the Companys common stock in payment
for his 2.46% interest in TCBancorp; in the Marine Bancorp transaction, he received cash of
$780,241 and 36,262 shares of the Companys Class B preferred stock in payment for
his 13.87% interest in Marine Bancorp.
16: Leases
The Company leases certain premises and equipment under noncancelable operating leases which
are charged to expense over the lease term as it becomes payable. The Companys leases do not have
rent holidays. In addition, any rent escalations are tied to the consumer price index or contain
nominal increases and are not included in the calculation of current lease expense due to the
immaterial amount. At December 31, 2006, the minimum rental commitments under these noncancelable
operating leases are as follows (in thousands):
|
|
|
|
|
2007 |
|
$ |
693 |
|
2008 |
|
|
617 |
|
2009 |
|
|
590 |
|
2010 |
|
|
577 |
|
2011 |
|
|
507 |
|
Thereafter |
|
|
1,054 |
|
|
|
|
|
|
|
$ |
4,038 |
|
|
|
|
|
17: Concentration of Credit Risks
The Companys primary market area is in central Arkansas, north central Arkansas, northwest
Arkansas, southwest Florida and the Florida Keys (Monroe County). The Company primarily grants
loans to customers located within these geographical areas unless the borrower has an established
relationship with the Company.
The diversity of the Companys economic base tends to provide a stable lending environment.
Although the Company has a loan portfolio that is diversified in both industry and geographic area,
a substantial portion of its debtors ability to honor their contracts is dependent upon real
estate values, tourism demand and the economic conditions prevailing in its market areas.
18: Significant Estimates and Concentrations
Accounting principles generally accepted in the United Sates of America require disclosure of
certain significant estimates and current vulnerabilities due to certain concentrations. Estimates
related to the allowance for loan losses and certain concentrations of credit risk are reflected in
Note 4, while deposit concentrations are reflected in Note 6.
102
19: Commitments and Contingencies
In the ordinary course of business, the Company makes various commitments and incurs certain
contingent liabilities to fulfill the financing needs of their customers. These commitments and
contingent liabilities include lines of credit and commitments to extend credit and issue standby
letters of credit. The Company applies the same credit policies and standards as they do in the
lending process when making these commitments. The collateral obtained is based on the assessed
creditworthiness of the borrower.
At December 31, 2006 and 2005, commitments to extend credit of $227.5 million and $266.5
million, respectively, were outstanding. A percentage of these balances are participated out to
other banks; therefore, the Company can call on the participating banks to fund future draws. Since
some of these commitments are expected to expire without being drawn upon, the total commitment
amount does not necessarily represent future cash requirements.
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 guarantee is dependent upon the credit worthiness of the borrower some of which are
long-term. The maximum amount of future payments the Company could be required to make under these
guarantees at December 31, 2006 and 2005, is $16.1 million and $21.0 million, respectively.
The Company and/or its subsidiary banks have various unrelated legal proceedings, most of
which involve loan foreclosure activity pending, which, in the aggregate, are not expected to have
a material adverse effect on the financial position of the Company and its subsidiaries.
20: Financial Instruments
The following table presents the estimated fair values of the Companys financial instruments.
The fair values of certain of these instruments were calculated by discounting expected cash flows,
which involves significant judgments by management and uncertainties. Fair value is the estimated
amount at which financial assets or liabilities could be exchanged in a current transaction between
willing parties other than in a forced or liquidation sale. Because no market exists for certain of
these financial instruments and because management does not intend to sell these financial
instruments, the Company does not know whether the fair values shown below represent values at
which the respective financial instruments could be sold individually or in the aggregate.
103
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 |
|
|
Carrying |
|
|
|
|
Amount |
|
Fair Value |
|
|
(In thousands) |
Financial assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
59,700 |
|
|
$ |
59,700 |
|
Federal funds sold |
|
|
9,003 |
|
|
|
9,003 |
|
Investment securities available for sale |
|
|
531,891 |
|
|
|
531,891 |
|
Net loans receivable |
|
|
1,390,184 |
|
|
|
1,382,248 |
|
Accrued interest receivable |
|
|
13,736 |
|
|
|
13,736 |
|
|
|
|
|
|
|
|
|
|
Financial liabilities: |
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
Demand and
non-interest bearing |
|
$ |
215,142 |
|
|
$ |
215,142 |
|
Savings and
interest-bearing transaction accounts |
|
|
582,425 |
|
|
|
582,425 |
|
Time deposits |
|
|
809,627 |
|
|
|
806,530 |
|
Federal funds purchased |
|
|
25,270 |
|
|
|
25,270 |
|
Securities sold under agreements to repurchase |
|
|
118,825 |
|
|
|
118,825 |
|
FHLB and other borrowed funds |
|
|
151,768 |
|
|
|
150,816 |
|
Accrued interest payable |
|
|
6,869 |
|
|
|
6,869 |
|
Subordinated debentures |
|
|
44,663 |
|
|
|
45,114 |
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
|
Carrying |
|
|
|
|
Amount |
|
Fair Value |
|
|
(In thousands) |
Financial assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
44,679 |
|
|
$ |
44,679 |
|
Federal funds sold |
|
|
7,055 |
|
|
|
7,055 |
|
Investment securities available for sale |
|
|
530,302 |
|
|
|
530,302 |
|
Net loans receivable |
|
|
1,180,414 |
|
|
|
1,173,873 |
|
Accrued interest receivable |
|
|
11,158 |
|
|
|
11,158 |
|
|
|
|
|
|
|
|
|
|
Financial liabilities: |
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
Demand and
non-interest bearing |
|
$ |
209,974 |
|
|
$ |
209,974 |
|
Savings and
interest-bearing transaction accounts |
|
|
512,184 |
|
|
|
512,184 |
|
Time deposits |
|
|
704,950 |
|
|
|
706,982 |
|
Federal funds purchased |
|
|
44,495 |
|
|
|
44,495 |
|
Securities sold under agreements to repurchase |
|
|
103,718 |
|
|
|
103,718 |
|
FHLB and other borrowings |
|
|
117,054 |
|
|
|
115,612 |
|
Accrued interest payable |
|
|
4,757 |
|
|
|
4,757 |
|
Subordinated debentures |
|
|
44,755 |
|
|
|
46,433 |
|
104
21: Regulatory Matters
The Companys subsidiaries are subject to a legal limitation on dividends that can be paid to
the parent company without prior approval of the applicable regulatory agencies. Arkansas bank
regulators have specified that the maximum dividend limit state banks may pay to the parent company
without prior approval is 75% of the current year earnings plus 75% of the retained net earnings of
the preceding year. Since, the Companys Arkansas bank subsidiaries are also under supervision of
the Federal Reserve, they are further limited if the total of all dividends declared in any
calendar year by the Bank exceeds the Banks net profits to date for that year combined with its
retained net profits for the preceding two years. Under Florida state banking law, regulatory
approval will be required if the total of all dividends declared in any calendar year by the Bank
exceeds the Banks net profits to date for that year combined with its retained net profits for the
preceding two years. As the result of special dividends paid by the Companys subsidiary banks
during to 2005 to help provide cash for the Marine Bancorp, Inc. and Mountain View Bancshares, Inc.
acquisitions, the Companys subsidiary banks did not have any significant undivided profits
available for payment of dividends to the Company, without prior approval of the regulatory
agencies at December 31, 2006.
The Companys subsidiaries are subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary actions by regulators that, if undertaken, could
have a direct material effect on the Companys financial statements. 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 Companys assets, liabilities
and certain off-balance-sheet items as calculated under regulatory accounting practices. The
Companys capital amounts and classifications are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company
to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital
(as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as
defined) to average assets (as defined). Management believes that, as of December 31, 2006, the
Company meets all capital adequacy requirements to which it is subject.
As of the most recent notification from regulatory agencies, the subsidiaries were well
capitalized under the regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Company and subsidiaries must maintain minimum total risk-based, Tier 1 risk-based
and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that
notification that management believes have changed the institutions categories.
105
The Companys actual capital amounts and ratios along with the Companys subsidiary banks are
presented in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To Be Well |
|
|
|
|
|
|
|
|
|
|
For Capital |
|
Capitalized Under |
|
|
Actual |
|
Adequacy Purposes |
|
Prompt Corrective |
|
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
|
(Dollars in thousands) |
As of December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home BancShares |
|
$ |
235,878 |
|
|
|
11.29 |
% |
|
$ |
83,571 |
|
|
|
4.00 |
% |
|
$ |
N/A |
|
|
|
N/A |
% |
First State Bank |
|
|
46,811 |
|
|
|
8.69 |
|
|
|
21,547 |
|
|
|
4.00 |
|
|
|
26,934 |
|
|
|
5.00 |
|
Community Bank |
|
|
26,235 |
|
|
|
7.94 |
|
|
|
13,217 |
|
|
|
4.00 |
|
|
|
16,521 |
|
|
|
5.00 |
|
Twin City Bank |
|
|
50,375 |
|
|
|
7.51 |
|
|
|
26,831 |
|
|
|
4.00 |
|
|
|
33,539 |
|
|
|
5.00 |
|
Marine Bank |
|
|
27,317 |
|
|
|
8.08 |
|
|
|
13,523 |
|
|
|
4.00 |
|
|
|
16,904 |
|
|
|
5.00 |
|
Bank of Mountain View |
|
|
15,230 |
|
|
|
7.73 |
|
|
|
7,881 |
|
|
|
4.00 |
|
|
|
9,851 |
|
|
|
5.00 |
|
Tier 1 capital ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home BancShares |
|
$ |
235,878 |
|
|
|
14.57 |
% |
|
$ |
64,757 |
|
|
|
4.00 |
% |
|
$ |
N/A |
|
|
|
N/A |
% |
First State Bank |
|
|
46,811 |
|
|
|
10.29 |
|
|
|
18,197 |
|
|
|
4.00 |
|
|
|
27,295 |
|
|
|
6.00 |
|
Community Bank |
|
|
26,235 |
|
|
|
10.31 |
|
|
|
10,178 |
|
|
|
4.00 |
|
|
|
15,268 |
|
|
|
6.00 |
|
Twin City Bank |
|
|
50,375 |
|
|
|
10.15 |
|
|
|
19,852 |
|
|
|
4.00 |
|
|
|
29,778 |
|
|
|
6.00 |
|
Marine Bank |
|
|
27,317 |
|
|
|
9.59 |
|
|
|
11,394 |
|
|
|
4.00 |
|
|
|
17,091 |
|
|
|
6.00 |
|
Bank of Mountain View |
|
|
15,230 |
|
|
|
14.09 |
|
|
|
4,324 |
|
|
|
4.00 |
|
|
|
6,485 |
|
|
|
6.00 |
|
Total risk-based capital ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home BancShares |
|
$ |
256,186 |
|
|
|
15.83 |
% |
|
$ |
129,469 |
|
|
|
8.00 |
% |
|
$ |
N/A |
|
|
|
N/A |
% |
First State Bank |
|
|
52,519 |
|
|
|
11.54 |
|
|
|
36,408 |
|
|
|
8.00 |
|
|
|
45,510 |
|
|
|
10.00 |
|
Community Bank |
|
|
29,471 |
|
|
|
11.58 |
|
|
|
20,360 |
|
|
|
8.00 |
|
|
|
25,450 |
|
|
|
10.00 |
|
Twin City Bank |
|
|
56,586 |
|
|
|
11.40 |
|
|
|
39,709 |
|
|
|
8.00 |
|
|
|
49,637 |
|
|
|
10.00 |
|
Marine Bank |
|
|
30,582 |
|
|
|
10.74 |
|
|
|
22,780 |
|
|
|
8.00 |
|
|
|
28,475 |
|
|
|
10.00 |
|
Bank of Mountain View |
|
|
16,316 |
|
|
|
15.09 |
|
|
|
8,650 |
|
|
|
8.00 |
|
|
|
10,812 |
|
|
|
10.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home BancShares |
|
$ |
172,244 |
|
|
|
9.22 |
% |
|
$ |
74,726 |
|
|
|
4.00 |
% |
|
$ |
N/A |
|
|
|
N/A |
% |
First State Bank |
|
|
38,572 |
|
|
|
8.44 |
|
|
|
18,281 |
|
|
|
4.00 |
|
|
|
22,851 |
|
|
|
5.00 |
|
Community Bank |
|
|
23,129 |
|
|
|
7.59 |
|
|
|
12,189 |
|
|
|
4.00 |
|
|
|
15,236 |
|
|
|
5.00 |
|
Twin City Bank |
|
|
51,679 |
|
|
|
8.07 |
|
|
|
25,615 |
|
|
|
4.00 |
|
|
|
32,019 |
|
|
|
5.00 |
|
Marine Bank |
|
|
20,050 |
|
|
|
7.28 |
|
|
|
11,016 |
|
|
|
4.00 |
|
|
|
13,771 |
|
|
|
5.00 |
|
Bank of Mountain View |
|
|
29,468 |
|
|
|
16.35 |
|
|
|
7,209 |
|
|
|
4.00 |
|
|
|
9,012 |
|
|
|
5.00 |
|
Tier 1 capital ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home BancShares |
|
$ |
172,244 |
|
|
|
12.25 |
% |
|
$ |
56,243 |
|
|
|
4.00 |
% |
|
$ |
N/A |
|
|
|
N/A |
% |
First State Bank |
|
|
38,572 |
|
|
|
10.01 |
|
|
|
15,413 |
|
|
|
4.00 |
|
|
|
23,120 |
|
|
|
6.00 |
|
Community Bank |
|
|
23,129 |
|
|
|
10.25 |
|
|
|
9,026 |
|
|
|
4.00 |
|
|
|
13,539 |
|
|
|
6.00 |
|
Twin City Bank |
|
|
51,679 |
|
|
|
11.53 |
|
|
|
17,929 |
|
|
|
4.00 |
|
|
|
26,893 |
|
|
|
6.00 |
|
Marine Bank |
|
|
20,050 |
|
|
|
9.08 |
|
|
|
8,833 |
|
|
|
4.00 |
|
|
|
13,249 |
|
|
|
6.00 |
|
Bank of Mountain View |
|
|
29,468 |
|
|
|
29.75 |
|
|
|
3,962 |
|
|
|
4.00 |
|
|
|
5,943 |
|
|
|
6.00 |
|
Total risk-based capital ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home BancShares |
|
$ |
189,902 |
|
|
|
13.51 |
% |
|
$ |
112,451 |
|
|
|
8.00 |
% |
|
$ |
N/A |
|
|
|
N/A |
% |
First State Bank |
|
|
43,362 |
|
|
|
11.26 |
|
|
|
30,808 |
|
|
|
8.00 |
|
|
|
38,510 |
|
|
|
10.00 |
|
Community Bank |
|
|
26,010 |
|
|
|
11.53 |
|
|
|
18,047 |
|
|
|
8.00 |
|
|
|
22,559 |
|
|
|
10.00 |
|
Twin City Bank. |
|
|
57,248 |
|
|
|
12.77 |
|
|
|
35,864 |
|
|
|
8.00 |
|
|
|
44,830 |
|
|
|
10.00 |
|
Marine Bank |
|
|
22,815 |
|
|
|
10.33 |
|
|
|
17,669 |
|
|
|
8.00 |
|
|
|
22,086 |
|
|
|
10.00 |
|
Bank of Mountain View |
|
|
30,094 |
|
|
|
30.38 |
|
|
|
7,925 |
|
|
|
8.00 |
|
|
|
9,906 |
|
|
|
10.00 |
|
106
22: Additional Cash Flow Information
In connection with 2005 acquisitions accounted for using the purchase method, the Company
acquired approximately $1.0 billion in assets, assumed $960 million in liabilities, issued $56
million of equity and paid cash net of funds received of $31 million. The company paid interest and
taxes during the years ended as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
2004 |
|
|
(In thousands) |
Interest paid |
|
$ |
58,828 |
|
|
$ |
34,282 |
|
|
$ |
11,584 |
|
Income taxes paid |
|
|
7,820 |
|
|
|
6,000 |
|
|
|
3,015 |
|
23: Recent Accounting Pronouncements
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin
(SAB) 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements, expressing the staffs view regarding the process of quantifying
financial statement misstatements. SAB 108 requires that when quantifying misstatements for the
purposes of evaluating materiality, the effects on both the income statement and balance sheet
should be considered. The Company has evaluated the requirements of SAB 108, and it did not have a
material effect on the Companys financial position or results of operations.
In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, Fair
Value Measurements, which defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles (GAAP), and expands disclosures about fair value
measurements. This Statement applies under other accounting pronouncements that require or permit
fair value measurements, FASB having previously concluded in those accounting pronouncements that
fair value is the relevant measurement attribute. Accordingly, this Statement does not require any
new fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal years. The Company
is currently evaluating the impact of the adoption of this standard, but does not expect it to have
a material effect on the Companys financial position or results of operations.
In September 2006, the FASB Emerging Issue Task Force (EITF) issued EITF 06-4, Accounting for
Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements. The EITF determined that for an endorsement split-dollar life insurance arrangement
within the scope of the Issue, the employer should recognize a liability for future benefits in
accordance with SFAS No. 106, Employers Accounting for Postretirement Benefits Other Than
Pensions, or APB Opinion 12, Omnibus Opinion-1967, based on the substantive agreement with the
employee. The Issue is effective for fiscal years beginning after December 15, 2007, with earlier
application permitted. Entities should recognize the effects of applying EITF 06-4 through either
(a) a change in accounting principle through a cumulative-effect adjustment to retained earnings or
to other components of equity or net assets in the statement of financial position as of the
beginning of the year of adoption or (b) a change in accounting principle through retrospective
application to all prior periods. As of December 31, 2006, the Company has split-dollar life
insurance arrangements with two executives of the Company that have death benefits. The Company is
currently evaluating the impact that the adoption of EITF 06-4 will have on the financial position
and results of operation of the Company.
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, which provides clarification for uncertainty in income taxes recognized in an enterprises
financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. This
Interpretation prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be taken in a tax
return. This Interpretation also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure, and transition. The Interpretation is
effective for fiscal years beginning after December 31, 2006. The Company expects to adopt the
Interpretation during the first quarter of 2007 without material effect on the Companys financial
position or results of operations.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets,
which amends
107
SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities, with respect to the accounting for servicing of financial assets. SFAS No. 156
requires that all separately recognized servicing rights be initially measured at fair value, if
practicable. SFAS No. 156 permits an entity to choose either of the following subsequent
measurement methods: (1) the amortization of servicing assets or liabilities in proportion to and
over the net servicing income period or net servicing loss or (2) the reporting of servicing assets
or liabilities at fair value at each reporting date and reporting changes in fair value in earnings
in the periods in which the change occur. SFAS No. 156 is effective the earlier of the date an
entity adopts the requirements of SFAS No. 156, or as of the beginning of its first fiscal year
beginning after September 15, 2006. The Company will adopt the Statement beginning January 1, 2007
and will choose the amortization of servicing assets over the net servicing income period which is
its current practice; therefore there will be minimal impact to the Company.
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial
Instruments, which amends SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. The Statement resolves issues addressed in SFAS No. 133
Implementation Issue No. D1, Application of Statement to Beneficial Interest in Securitized
Financial Assets. This Statement is effective for all financial instruments acquired or issued
after the beginning of the Companys first fiscal year that begins after September 15, 2006 and is
expected to have minimal impact on the Company.
Presently, the Company is not aware of any other changes from the Financial Accounting
Standards Board that will have a material impact on the Companys present or future financial
statements.
108
24: Condensed Financial Information (Parent Company Only)
Condensed Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
(In thousands) |
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
44,439 |
|
|
$ |
5,046 |
|
Investment securities |
|
|
4,716 |
|
|
|
5,000 |
|
Investments in wholly-owned subsidiaries |
|
|
206,349 |
|
|
|
198,929 |
|
Investments in unconsolidated subsidiaries |
|
|
12,449 |
|
|
|
9,813 |
|
Premises and equipment |
|
|
3,770 |
|
|
|
3,917 |
|
Other assets |
|
|
5,006 |
|
|
|
3,001 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
276,729 |
|
|
$ |
225,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term borrowings |
|
$ |
|
|
|
$ |
14,000 |
|
Subordinated debentures |
|
|
44,663 |
|
|
|
44,755 |
|
Other liabilities |
|
|
647 |
|
|
|
1,094 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
45,310 |
|
|
|
59,849 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock A |
|
|
|
|
|
|
21 |
|
Preferred stock B |
|
|
|
|
|
|
2 |
|
Common stock |
|
|
172 |
|
|
|
121 |
|
Capital surplus |
|
|
194,595 |
|
|
|
146,285 |
|
Retained earnings |
|
|
41,544 |
|
|
|
27,331 |
|
Accumulated other comprehensive loss |
|
|
(4,892 |
) |
|
|
(7,903 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
231,419 |
|
|
|
165,857 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
276,729 |
|
|
$ |
225,706 |
|
|
|
|
|
|
|
|
109
Condensed Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
(In thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends from subsidiaries |
|
$ |
7,044 |
|
|
$ |
10,664 |
|
|
$ |
1,010 |
|
Other income |
|
|
2,350 |
|
|
|
926 |
|
|
|
6,333 |
|
|
|
|
|
|
|
|
|
|
|
Total income |
|
|
9,394 |
|
|
|
11,590 |
|
|
|
7,343 |
|
Expense |
|
|
8,088 |
|
|
|
4,988 |
|
|
|
2,489 |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and equity in undistributed
net income of subsidiaries |
|
|
1,306 |
|
|
|
6,602 |
|
|
|
4,854 |
|
(Benefit) provision for income taxes |
|
|
(2,263 |
) |
|
|
(1,603 |
) |
|
|
1,553 |
|
|
|
|
|
|
|
|
|
|
|
Income before equity in undistributed net income
of subsidiaries |
|
|
3,569 |
|
|
|
8,205 |
|
|
|
3,301 |
|
Equity in undistributed net income of subsidiaries |
|
|
12,349 |
|
|
|
3,241 |
|
|
|
5,858 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
15,918 |
|
|
$ |
11,446 |
|
|
$ |
9,159 |
|
|
|
|
|
|
|
|
|
|
|
110
Condensed Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
(In thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
15,918 |
|
|
$ |
11,446 |
|
|
$ |
9,159 |
|
Items not requiring (providing) cash |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
120 |
|
|
|
138 |
|
|
|
4 |
|
Gain on sale of equity investment |
|
|
|
|
|
|
(465 |
) |
|
|
(4,410 |
) |
Share-based compensation |
|
|
380 |
|
|
|
|
|
|
|
|
|
Tax benefits from stock options exercised |
|
|
211 |
|
|
|
|
|
|
|
|
|
Equity in undistributed income of subsidiaries |
|
|
(12,349 |
) |
|
|
(3,241 |
) |
|
|
(5,858 |
) |
Equity in loss (income) of unconsolidated affiliates |
|
|
379 |
|
|
|
592 |
|
|
|
(1,560 |
) |
Changes in other assets |
|
|
(2,005 |
) |
|
|
(1,669 |
) |
|
|
15 |
|
Other liabilities |
|
|
(236 |
) |
|
|
(320 |
) |
|
|
639 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
2,418 |
|
|
|
6,481 |
|
|
|
(2,011 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of premises and equipment |
|
|
(65 |
) |
|
|
(276 |
) |
|
|
(49 |
) |
Investment in unconsolidated subsidiaries |
|
|
(3,000 |
) |
|
|
(9,091 |
) |
|
|
(180 |
) |
Capital contribution to subsidiaries |
|
|
(8,645 |
) |
|
|
(4,000 |
) |
|
|
|
|
Return of capital from subsidiaries |
|
|
16,570 |
|
|
|
27,246 |
|
|
|
|
|
Purchase of subsidiaries |
|
|
|
|
|
|
(48,988 |
) |
|
|
|
|
Proceeds from sale of investment in RBI |
|
|
|
|
|
|
|
|
|
|
13,546 |
|
Proceeds from maturities of investment securities |
|
|
284 |
|
|
|
|
|
|
|
|
|
Purchase of investment securities |
|
|
|
|
|
|
(5,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
5,144 |
|
|
|
(40,109 |
) |
|
|
13,317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from stock issuance |
|
|
47,747 |
|
|
|
425 |
|
|
|
24 |
|
Tax benefits from stock options exercised |
|
|
(211 |
) |
|
|
|
|
|
|
|
|
Purchase of treasury stock |
|
|
|
|
|
|
|
|
|
|
(549 |
) |
Issuance of subordinated debentures |
|
|
|
|
|
|
15,000 |
|
|
|
|
|
Issuance of long-term borrowings |
|
|
|
|
|
|
14,000 |
|
|
|
|
|
Repayment of long-term borrowings |
|
|
(14,000 |
) |
|
|
|
|
|
|
|
|
Dividends paid |
|
|
(1,705 |
) |
|
|
(1,410 |
) |
|
|
(869 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
31,831 |
|
|
|
28,015 |
|
|
|
(1,394 |
) |
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
39,393 |
|
|
|
(5,613 |
) |
|
|
9,912 |
|
Cash and cash equivalents, beginning of year |
|
|
5,046 |
|
|
|
10,659 |
|
|
|
747 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
44,439 |
|
|
$ |
5,046 |
|
|
$ |
10,659 |
|
|
|
|
|
|
|
|
|
|
|
111
|
|
|
Item 9. |
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE |
No items are reportable.
Item 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures.
An evaluation as of the end of the period covered by this annual report was carried out under
the supervision and with the participation of our management, including the Chairman and Chief
Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation
of our disclosure controls and procedures, which are defined under SEC rules as controls and
other procedures of a company that are designed to ensure that information required to be disclosed
by a company in the reports that it files under the Exchange Act is recorded, processed, summarized
and reported within required time periods. Based upon that evaluation, our Chairman and Chief
Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures
were effective.
Internal Control over Financial Reporting.
Our management, including the Chairman and Chief Executive Officer and the Chief Financial
Officer, have evaluated any changes in our internal control over financial reporting that occurred
during the fourth quarter of our 2006 fiscal year and have concluded that there was no change
during the fourth quarter of our 2006 fiscal year that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
Because 2006 was our first year as a public reporting company, Section 404 of Sarbanes Oxley
does not require us to evaluate and report on our internal controls over financial reporting and
have our independent auditors attest to our evaluation on Form 10-K for the fiscal year ending
December 31, 2006. This information will be required to be included in our annual report on Form
10-K for the fiscal year ending December 31, 2007.
Item 9B. OTHER INFORMATION
No items are reportable.
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNACE
Incorporated herein by reference from the Companys definitive proxy statement for the Annual
Meeting of Stockholders, to be filed pursuant to Regulation 14A.
Item 11. EXECUTIVE COMPENSATION
Incorporated herein by reference from the Companys definitive proxy statement for the Annual
Meeting of Stockholders, to be filed pursuant to Regulation 14A.
|
|
|
Item 12. |
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS |
Incorporated herein by reference from the Companys definitive proxy statement for the Annual
Meeting of Stockholders, to be filed pursuant to Regulation 14A.
112
|
|
|
Item 13. |
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE |
Incorporated herein by reference from the Companys definitive proxy statement for the Annual
Meeting of Stockholders, to be filed pursuant to Regulation 14A.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Incorporated herein by reference from the Companys definitive proxy statement for the Annual
Meeting of Stockholders, to be filed pursuant to Regulation 14A.
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this report:
(a) 1 and 2. Financial Statements and any Financial Statement Schedules
The financial statements and financial statement schedules listed in the accompanying index
to the consolidated financial statements and financial statement schedules are filed as part
of this report.
(b) Listing of Exhibits.
|
|
|
Exhibit |
|
|
No. |
|
|
23.1
|
|
Consent of BKD, LLP |
|
|
|
23.2
|
|
Consent of Ernst & Young, LLP |
|
|
|
31.1
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chairman and Chief Executive Officer. |
|
|
|
31.2
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. |
|
|
|
32.1
|
|
Certification of Chairman and Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
113
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
|
|
HOME BANCSHARES, INC.
|
|
|
By: |
/s/ John W. Allison
|
|
|
|
Chief Executive Officer and Chairman |
|
Date: March 9, 2007 |
|
of the Board of Directors |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the Registrant and in the capacities indicated on or
about March 9, 2007.
|
|
|
|
|
Signature |
|
Title |
|
|
|
|
|
|
|
/s/ John W. Allison
John W. Allison
|
|
Chief Executive Officer and
Chairman of the Board of
Directors (Principal Executive
Officer)
|
|
|
|
|
|
|
|
/s/ Ron W. Strother
Ron W. Strother
|
|
President, Chief Operating
Officer and Director |
|
|
|
|
|
|
|
/s/ Randy E. Mayor
Randy E. Mayor
|
|
Chief Financial Officer and
Treasurer (Principal Financial
Officer and Principal
Accounting Officer) |
|
|
|
|
|
|
|
/s/ Richard H. Ashley
Richard H. Ashley
|
|
Vice Chairman of the Board and
Director |
|
|
|
|
|
|
|
/s/ Dale A. Bruns
Dale A. Bruns
|
|
Director |
|
|
|
|
|
|
|
/s/ Richard A. Buckheim
Richard A. Buckheim
|
|
Director |
|
|
|
|
|
|
|
/s/ Jack E. Engelkes
Jack E. Engelkes
|
|
Director |
|
|
|
|
|
|
|
/s/ Frank D. Hickingbotham
Frank D. Hickingbotham
|
|
Director |
|
|
|
|
|
|
|
/s/ Herren C. Hickingbotham
Herren C. Hickingbotham
|
|
Director |
|
|
|
|
|
|
|
/s/ James G. Hinkle
James G. Hinkle
|
|
Director |
|
|
|
|
|
|
|
/s/ Alex R. Lieblong
Alex R. Lieblong
|
|
Director |
|
|
|
|
|
|
|
/s/ C. Randall Sims
C. Randall Sims
|
|
Director |
|
|
|
|
|
|
|
/s/ William G. Thompson
William G. Thompson
|
|
Director |
|
|
114