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1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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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, 1998
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Commission File No. 0-24683
FLORIDA BANKS, INC.
A Florida Corporation
(IRS Employer Identification No. 58-2364573)
4110 Southpoint Boulevard
Suite 212, Southpoint Square II
Jacksonville, Florida 33216-0925
(904) 296-2329
Securities Registered Pursuant to Section 12(b)
of the Securities Exchange Act of 1934:
None
Securities Registered Pursuant to Section 12(g)
of the Securities Exchange Act of 1934:
Common Stock, $.01 par value
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[ ]
The aggregate market value of the common stock of the registrant held by
nonaffiliates of the registrant (4,531,041 shares) on March 15, 1999 was
approximately $32,850,047 based on the closing price of the registrant's common
stock as reported on the Nasdaq National Market on March 15, 1999. For the
purposes of this response, officers, directors and holders of 5% or more of the
registrant's common stock are considered the affiliates of the registrant at
that date.
The number of shares outstanding of the registrant's common stock, as of March
15, 1999: 5,852,756 shares of $.01 par value common stock.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of the registrant's definitive proxy statement to be delivered to
shareholders in connection with the 1999 Annual Meeting of Shareholders
scheduled to be held on April 23, 1999 are incorporated by reference in
response to Part III of this Report.
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PART I
ITEM 1. BUSINESS.
GENERAL
Florida Banks, Inc. (the "Company") was formed to create a statewide
community banking system focusing on the largest and fastest growing markets in
Florida. The Company operates through its wholly-owned banking subsidiary,
Florida Bank, N.A. (the "Bank"). The Company currently operates community
banking offices in the Tampa, Jacksonville and Alachua County (Gainesville)
markets. Future business plans include further expansion in the Tampa,
Jacksonville and Gainesville markets and entry into the markets of St.
Petersburg, Orlando, Ft. Lauderdale and the Palm Beaches (collectively, the
"Identified Markets"). As opportunities arise, the Company may also expand into
other Florida market areas with demographic characteristics similar to the
Identified Markets. Within each of the Identified Markets, the Company expects
to offer a broad range of traditional banking products and services, focusing
primarily on small and medium-sized businesses. See "--Strategy of the
Company--Market Expansion" and "--Products and Services."
The Company has a community banking approach that emphasizes responsive
and personalized service to its customers. Management's expansion strategy
includes attracting strong local management teams who have significant banking
experience, strong community contacts and strong business development potential
in the Identified Markets. Once local management teams are identified, the
Company intends to establish community banking offices in each of the remaining
Identified Markets. Each management team will operate one or more community
banking offices within its particular market area, will have a high degree of
local decision-making authority and will operate in a manner that provides
responsive, personalized services similar to an independent community bank. The
Company maintains centralized credit policies and procedures as well as
centralized back office functions from its Tampa office to support the community
banking offices. Upon the Company's entry into a new market area, it undertakes
a marketing campaign utilizing an officer calling program and community-based
promotions. In addition, management is compensated based on profitability,
growth and loan production goals, and each market area is supported by a local
board of advisory directors, which is provided with financial incentives to
assist in the development of banking relationships throughout the community. See
"--Model 'Local Community Bank.'"
Management of the Company believes that the significant consolidation
in the banking industry in Florida has disrupted customer relationships as the
larger regional financial institutions increasingly focus on larger corporate
customers, standardized loan and deposit products and other services. Generally,
these products and services are offered through less personalized delivery
systems which has created a need for higher quality services to small and
medium-sized businesses. In addition, consolidation of the Florida banking
market has dislocated experienced and talented management personnel due to the
elimination of redundant functions and the need to achieve cost savings. As a
result of these factors, management believes the Company has a unique
opportunity to attract and maintain its targeted banking customers and
experienced management personnel within the Identified Markets.
The community banking offices within each market area are supported by
centralized back office operations. From the Company's main offices located in
Jacksonville and its operations center in Tampa, the Company provides a variety
of support services to each of the community banking offices, including back
office operations, investment portfolio management, credit administration and
review, human resources, administration, training and strategic planning. Core
processing, check clearing and other similar functions are outsourced to major
vendors. As a result, these operating strategies enable the Company to achieve
cost efficiencies and to maintain consistency in policies and procedures and
allow the local management teams to concentrate on developing and enhancing
customer relationships.
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The Company expects to establish community banking offices in each new
market area, primarily through the de novo branching of the Bank. Management
will also, however, evaluate opportunities for strategic acquisitions of
financial institutions in markets that are consistent with its business plan.
STRATEGY OF THE COMPANY
General
The Company's business strategy is to create a statewide community
banking system in Florida. The major elements of this strategy are to:
- EXPAND THE BANK'S OPERATIONS IN THE TAMPA, JACKSONVILLE AND
GAINESVILLE MARKETS;
- ESTABLISH COMMUNITY BANKING OFFICES IN THE REMAINING
IDENTIFIED MARKETS AS SOON AS LOCAL MANAGEMENT TEAMS ARE
IDENTIFIED;
- ESTABLISH COMMUNITY BANKING OFFICES WITH LOCALLY RESPONSIVE
MANAGEMENT TEAMS EMPHASIZING A HIGH LEVEL OF PERSONALIZED
CUSTOMER SERVICE;
- TARGET SMALL AND MEDIUM-SIZED BUSINESS CUSTOMERS THAT REQUIRE
THE ATTENTION AND SERVICE WHICH A COMMUNITY-ORIENTED BANK IS
WELL SUITED TO PROVIDE;
- PROVIDE A BROAD ARRAY OF TRADITIONAL BANKING PRODUCTS AND
SERVICES;
- MAINTAIN CENTRALIZED SUPPORT FUNCTIONS, INCLUDING BACK OFFICE
OPERATIONS, CREDIT POLICIES AND PROCEDURES, INVESTMENT
PORTFOLIO MANAGEMENT, ADMINISTRATION, HUMAN RESOURCES AND
TRAINING, TO MAXIMIZE OPERATING EFFICIENCIES AND FACILITATE
RESPONSIVENESS TO CUSTOMERS; AND
- OUTSOURCE CORE PROCESSING AND BACK ROOM OPERATIONS TO INCREASE
EFFICIENCIES.
Model "Local Community Bank"
In order to achieve its expansion strategy, the Company intends to
establish community banking offices in the remaining Identified Markets through
the de novo branching of the Bank. The Company may, however, accomplish its
expansion strategy by acquiring existing banks within an Identified Market if an
opportunity for such an acquisition becomes available. Although each community
banking office is legally a branch of the Bank, the Company's business strategy
envisions that community banking office(s) located within each market will
operate as if it were an independent community bank.
Prior to expanding into a new market area, management of the Company
first identifies an individual who will serve as the president of that
particular market area, as well as those individuals who will serve on the local
advisory board of directors. The Company believes that a management team that is
familiar with the needs of its community can provide higher quality personalized
service to their customers. The local management teams have a significant amount
of decision-making authority and are accessible to their customers. As a result
of the consolidation trend in Florida, management of the Company believes there
are significant opportunities to attract experienced bank managers who would
like to join an institution promoting a community banking concept.
Within each market area, the community banking offices have a local
advisory board of directors which are comprised of prominent members of the
community, including business leaders and professionals, and it is anticipated
that certain members of the local advisory boards may serve as members of the
Board of Directors of the Bank and of the Company. These directors act as
ambassadors
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of the Bank within the community and are expected to promote the business
development of each community banking office.
The Company encourages both the members of its local boards of
directors as well as its lending officers to be active in the civic, charitable
and social organizations located in the local communities. Many members of the
local management team hold leadership positions in a number of community
organizations, and will continue to volunteer for other positions in the future.
Upon the Company's entry into a new market area, it undertakes a
marketing campaign utilizing an officer calling program, and community-based
promotions and media advertising. A primary component of management compensation
is based on loan production goals. Such campaigns emphasize each community
banking office's local responsiveness, local management team and special focus
on personalized service.
The initial community banking office established in an Identified
Market will typically have the following banking personnel: a President, a
Senior Lender, an Associate Lending Officer, a Credit Analyst, a
Branch/Operations Manager and an appropriate number of financial service
managers and tellers. Additional community banking offices opened within an
Identified Market will be staffed with appropriate personnel. The number of
financial service managers and tellers necessary will be dependent upon the
volume of business generated by that particular community banking office. Each
community banking office will also be staffed with enough administrative
assistants to assist the officers effectively in their duties and to enable them
to market products and services actively outside of the office.
The lending officers are primarily responsible for the sales and
marketing efforts of the community banking offices. Management emphasizes
relationship banking whereby each customer will be assigned to a specific
officer, with other local officers serving as backup or in supporting roles.
Through its experience in the Florida banking industry, management believes that
the most frequent customer complaints pertain to a lack of personalized service
and turnover in lending personnel, which limits the customer's ability to
develop a relationship with his or her lending officer. The Company has and will
continue to hire an appropriate number of lending officers necessary to
facilitate the development of strong customer relationships.
Management has and will continue to offer salaries to the lending
officers that are competitive with other financial institutions in each market
area. The salaries of the lending officers are comprised of base compensation
plus an incentive payment structure that is based upon the achievement of
certain loan production goals. Those goals will be reevaluated on a quarterly
basis and paid as a percentage of base salary. Management of the Company
believes that such a compensation structure provides greater motivation for
participating officers.
The community banking offices are located in commercial areas in each
market where the local management team determines there is the greatest
potential to reach the maximum number of small and medium-sized businesses. It
is expected that these community banking offices will develop in the areas
surrounding office complexes and other commercial areas, but not necessarily in
a market's downtown area. Such determinations will depend upon the customer
demographics of a particular market area and the accessibility of a particular
location to its customers. Management of the Company expects to lease facilities
of approximately 2,500 to 6,000 square feet at market rates for each community
banking office. The Company is currently leasing its facilities in the Tampa,
Jacksonville and Gainesville markets. Leasing facilities enables the Company to
avoid investing significant amounts of capital in property and facilities.
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Market Expansion
The Company intends to expand into the largest and fastest growing
communities in Florida. Once the Company has assembled a local management team
and local advisory board of directors for a particular market area, the Company
intends to establish one or more community banking offices in that market. The
Company has established community banking offices in the Tampa, Jacksonville and
Gainesville markets. The other markets into which the Company presently intends
to expand are St. Petersburg, Orlando, Ft. Lauderdale and Palm Beach. Management
has identified these markets as providing the most favorable opportunities for
growth and intends to establish community banking offices within these markets
as soon as practicable. Management is also considering expansion into other
selected Florida metropolitan areas.
Customers
Management believes that the recent bank consolidation within Florida
provides a community-oriented bank significant opportunities to build a
successful, locally-oriented franchise. Management of the Company further
believes that many of the larger financial institutions do not emphasize a high
level of personalized service to the smaller commercial or individual retail
customers. The Company focuses its marketing efforts on attracting small and
medium-sized businesses which include: professionals, such as physicians and
attorneys, service companies, manufacturing companies and commercial real estate
developers. Because the Company focuses on small and medium-sized businesses,
the majority of its loan portfolio is in the commercial area with an emphasis
placed on commercial and industrial loans secured by real estate, accounts
receivable, inventory, property, plant and equipment. However, in an effort to
maintain a high level of credit quality, the Company attempts to ensure that the
commercial real estate loans are made to borrowers who occupy the real estate
securing the loans or where a creditworthy tenant is involved.
Although the Company has concentrated on lending to commercial
businesses, management has attracted and will continue to attract consumer
business. Many of its retail customers are the principals of the small and
medium-sized businesses for whom a community banking office provides banking
services. Management emphasizes "relationship banking" in order that each
customer can identify and establish a comfort level with the bank officers
within a community banking office. Management intends to further develop its
retail business with individuals who appreciate a higher level of personal
service, contact with their lending officer and responsive decision-making. It
is expected that most of the Company's business will be developed through its
lending officers and local advisory boards of directors and by pursuing an
aggressive strategy of making calls on customers throughout the market area.
Products and Services
The Company through the Bank currently offers a broad array of
traditional banking products and services to its customers. The Bank currently
provides products and services that are substantially similar to those set forth
below. For additional information with respect to the Bank's current operations,
see "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Loans. The Bank offers a wide range of short to long-term commercial
and consumer loans. As of December 31, 1998, the Bank has established an
internal limit for loans of up to $5,000,000 to any one person.
Commercial. The Bank's commercial lending consists primarily of
commercial and industrial loans for the financing of accounts
receivable, inventory, property, plant and equipment. In making these
loans, the Bank manages its credit risk by actively monitoring such
measures as advance rate, cash flow, collateral value and other
appropriate credit factors.
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Commercial Real Estate. The Bank offers commercial real estate loans
to developers of both commercial and residential properties. In making
these loans, the Bank manages its credit risk by actively monitoring
such measures as advance rate, cash flow, collateral value and other
appropriate credit factors. See "--Operations of the Holding
Company--Credit Administration."
Residential Mortgage. The Bank's real estate loans consist of
residential first and second mortgage loans, residential construction
loans and home equity lines of credit and term loans secured by first
and second mortgages on the residences of borrowers for home
improvements, education and other personal expenditures. The Bank makes
mortgage loans with a variety of terms, including fixed and floating to
variable rates and a variety of maturities. These loans are made
consistent with the Bank's appraisal policy and real estate lending
policy which detail maximum loan-to-value ratios and maturities.
Management believes that these loan-to-value ratios are sufficient to
compensate for fluctuations in the real estate market to minimize the
risk of loss. Mortgage loans that do not conform to the Bank's
asset/liability mix policies are sold in the secondary markets.
Consumer Loans. The Bank's consumer loans consist primarily of
installment loans to individuals for personal, family and household
purposes. In evaluating these loans, the Bank requires its lending
officers to review the borrower's level and stability of income, past
credit history and the impact of these factors on the ability of the
borrower to repay the loan in a timely manner. In addition, the Bank
requires that its banking officers maintain an appropriate margin
between the loan amount and collateral value. Many of the Bank's
consumer loans are made to the principals of the small and medium-sized
businesses for whom the community banking offices provide banking
services.
Credit Card and Other Loans. The Bank has issued credit cards to
certain of its customers. In determining to whom it will issue credit
cards, the Bank evaluates the borrower's level and stability of income,
past credit history and other factors. Finally, the Bank makes
additional loans which may not be classified in one of the above
categories. In making such loans, the Bank attempts to ensure that the
borrower meets its credit quality standards.
Deposits. The Bank offers a broad range of interest-bearing and
noninterest-bearing deposit accounts, including commercial and retail checking
accounts, money market accounts, individual retirement accounts, regular
interest-bearing savings accounts and certificates of deposit with a range of
maturity date options. The primary sources of deposits are small and
medium-sized businesses and individuals. In each identified market, senior
management has the authority to set rates within specified parameters in order
to remain competitive with other financial institutions located in the
identified market. All deposits are insured by the FDIC up to the maximum amount
permitted by law. In addition, the Bank has implemented a service charge fee
schedule, which is competitive with other financial institutions in the
community banking offices' market areas, covering such matters as maintenance
fees on checking accounts, per item processing fees on checking accounts,
returned check charges and other similar fees.
Specialized Consumer Services. The Bank offers specialized products and
services to its customers, such as lock boxes, travelers checks and safe deposit
services.
Courier Services. The Bank offers courier services to its customers.
Courier services, which the Bank may either provide directly or through a third
party, permit the Bank to provide the convenience and personalized service its
customers require by scheduling pick-ups of deposits. The Bank currently offers
courier services only to its business customers. The Bank has received
regulatory approval for, and is currently offering courier services in, the
Tampa, Jacksonville and Gainesville Markets and expects to apply for approval in
other market areas.
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Telephone and PC Banking. The Bank believes that there is a strong need
within its market niche for telephone banking and on-line banking with personal
computers ("PC Banking"). These services allow customers to access detailed
account information, execute transactions and pay bills electronically.
Management believes that these services are particularly attractive for its
customers who live part-time outside of Florida as it enables them to conduct
their banking business and monitor their bank accounts from remote locations.
Management believes that telephone and PC Banking services assist their
community banking offices in retaining customers and also encourages its
customers to maintain their total banking relationships with the community
banking offices. Both of these services are provided through the Bank's
third-party provider.
Automatic Teller Machines ("ATMs"). Presently, management does not
expect to establish an ATM network, as it believes its resources can be more
effectively deployed elsewhere. As an alternative, management has made other
financial institutions' ATMs available to its customers and offers customers a
certain number of free ATM transactions per month.
Other Products and Services. The Bank intends to evaluate other
services such as trust services, brokerage and investment services, insurance,
and other permissible activities. Management expects to introduce these services
as they become economically viable.
Operations of the Holding Company
From its main offices in Jacksonville and its operations center in
Tampa, the Company provides a variety of support services for each of the
community banking offices. These services include back office operations,
investment portfolio management, credit administration and review, human
resources, training and strategic planning. The Company recently hired a Human
Resources Officer to serve as a member of its senior management team.
The Company uses the Bank's facilities for its data processing,
operational and back office support activities. The community banking offices
utilize the operational support provided by the Bank to perform account
processing, loan accounting, loan support, network administration and other
functions. The Bank has developed extensive procedures for many aspects of its
operations, including operating procedures manuals and audit and compliance
procedures. Management believes that the Bank's existing operations and support
management are capable of providing continuing operational support for all of
the community banking offices.
Outsourcing. Management of the Company believes that by outsourcing
certain functions of its back room operations, it can realize greater
efficiencies and economies of scale. In addition, various products and services,
especially technology-related services, can be offered through third-party
vendors at a substantially lower cost than the costs of developing these
products internally. The Bank is currently utilizing M&I Data Services, Inc.
("M&I") to provide its core data processing and certain customer products.
Credit Administration. The Company oversees all credit operations while
still granting local authority to each community banking office. The Chief
Credit Officer of the Company is Richard B. Kensler who, since 1994, has served
as a senior credit officer with Signet Banking Corporation. Mr. Kensler has
experience in the Florida market as he served as a Relationship Manager and
Special Assets Manager for Sun Banks of Florida, Inc. in Orlando from 1972 to
1980. The Company's Chief Credit Officer is primarily responsible for
maintaining a quality loan portfolio and developing a strong credit culture
throughout the entire organization. The Chief Credit Officer is also responsible
for developing and updating the credit policy and procedures for the
organization. In addition, he works closely with each lending officer at the
community banking offices to ensure that the business being solicited is of the
quality and structure that fits the Company's desired risk profile. Credit
quality is controlled through uniform compliance to credit policy. The Company's
risk-decision process is actively
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managed in a disciplined fashion to maintain an acceptable risk profile
characterized by soundness, diversity, quality, prudence, balance and
accountability.
The Company's credit approval process consists of specific authorities
granted to the lending officers. Loans exceeding a particular lending officer's
level of authority are reviewed and considered for approval by the next level of
authority. The Chief Credit Officer has ultimate credit decision-making
authority, subject to review by the Chief Executive Officer and the Board of
Directors. Risk management requires active involvement with the Company's
customers and active management of the Company's portfolio. The Chief Credit
Officer reviews the Company's credit policy with the local management teams at
least annually but will review it more frequently if necessary. The results of
these reviews are then presented to the Board of Directors. The purpose of these
reviews is to attempt to ensure that the credit policy remains compatible with
the short and long-term business strategies of the Company. The Chief Credit
Officer will also generally require all individuals charged with risk management
to reaffirm their familiarity with the credit policy annually.
ASSET/LIABILITY MANAGEMENT
The objective of the Bank is to manage assets and liabilities to
provide a satisfactory level of consistent operating profitability within the
framework of established liquidity, loan, investment, borrowing and capital
policies. The Chief Financial Officer of the Company is primarily responsible
for monitoring policies and procedures that are designed to maintain an
acceptable composition of the asset/liability mix while adhering to prudent
banking practices. The overall philosophy of management is to support asset
growth primarily through growth of core deposits. Management intends to continue
to invest the largest portion of the Bank's earning assets in commercial,
industrial and commercial real estate loans.
The Bank's asset/liability mix is monitored on a daily basis, with
monthly reports presented to the Bank's Board of Directors. The objective of
this policy is to control interest-sensitive assets and liabilities so as to
minimize the impact of substantial movements in interest rates on the Bank=s
earnings. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Financial Condition--Interest Rate
Sensitivity and Liquidity Management."
COMPETITION
Competition among financial institutions in Florida and the Identified
Markets into which the Company may expand is intense. The Company and the Bank
compete with other bank holding companies, state and national commercial banks,
savings and loan associations, consumer finance companies, credit unions,
securities brokerages, insurance companies, mortgage banking companies, money
market mutual funds, asset-based non-bank lenders and other financial
institutions. Many of these competitors have substantially greater resources and
lending limits, larger branch networks and are able to offer a broader range of
products and services than the Company and the Bank.
Various legislative actions in recent years have led to increased
competition among financial institutions. As a result of such actions, most
barriers to entry to the Florida market by out-of-state financial institutions
have been eliminated. Recent legislative and regulatory changes and
technological advances have enabled customers to conduct banking activities
without regard to geographic barriers through computer and telephone-based
banking and similar services. In addition, with the enactment of the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 and other laws and
regulations affecting interstate bank expansion, financial institutions located
outside of the State of Florida may now more easily enter the markets currently
and proposed to be served by the Company and the Bank. There can be no assurance
that the United States Congress or the Florida Legislature or the applicable
bank regulatory agencies will not enact legislation or promulgate rules that may
further increase competitive pressures on the Company. The Company's failure to
compete effectively for deposit, loan and other
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banking customers in its market areas could have a material adverse effect on
the Company's business, future prospects, financial condition or results of
operations. See "--Strategy of the Company--Market Expansion."
DATA PROCESSING
The Bank currently has an agreement with M&I to provide its core
processing and certain customer products. The Company believes that M&I will be
able to provide state-of-the-art data processing and customer service-related
processing at a competitive price to support the Company's future growth. The
Company believes the M&I contract to be adequate for its business expansion
plans. See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations."
EMPLOYEES
The Company presently employs seven persons on a full-time basis and
one person on a part-time basis. The Company will hire additional persons as
needed to support its growth.
The Bank presently employs 44 persons on a full-time basis and three
persons on a part-time basis, including 24 officers. The Bank will hire
additional persons as needed, including additional tellers and financial service
representatives.
SUPERVISION AND REGULATION
The Company and the Bank operate in a highly regulated environment, and
their business activities will be governed by statute, regulation, and
administrative policies. The business activities of the Company and the Bank are
closely supervised by a number of regulatory agencies, including the Federal
Reserve Board, the Office of the Comptroller of the Currency (the "OCC"), the
Florida Department of Banking and Finance (the "Florida Banking Department") (to
a limited extent) and the FDIC.
The Company is regulated by the Federal Reserve Board under the federal
Bank Holding Company Act, which requires every bank holding company to obtain
the prior approval of the Federal Reserve Board before acquiring more than 5% of
the voting shares of any bank or all or substantially all of the assets of a
bank, and before merging or consolidating with another bank holding company. The
Federal Reserve Board (pursuant to regulation and published policy statements)
has maintained that a bank holding company must serve as a source of financial
strength to its subsidiary banks. In adhering to the Federal Reserve Board
policy, the Company may be required to provide financial support to a subsidiary
bank at a time when, absent such Federal Reserve Board policy, the Company may
not deem it advisable to provide such assistance.
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994, the Company and any other bank holding company located in Florida is
able to acquire a bank located in any other state, and a bank holding company
located outside Florida can acquire any Florida-based bank, in either case
subject to certain deposit percentage and other restrictions. In addition,
adequately capitalized and managed bank holding companies may consolidate their
multi-state bank operations into a single bank subsidiary and may branch
interstate through acquisitions unless an individual state has elected to
prohibit out-of-state banks from operating interstate branches within its
territory. De novo branching by an out-of-state bank is lawful only if it is
expressly permitted by the laws of the host state. The authority of a bank to
establish and operate branches within a state remains subject to applicable
state branching laws.
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The State of Florida has adopted an interstate banking statute that
allows banks to branch interstate through mergers, consolidations and
acquisitions. Establishment of de novo bank branches in Florida by out-of-state
financial institutions is not permitted under Florida law.
A bank holding company is generally prohibited from acquiring control
of any company which is not a bank and from engaging in any business other than
the business of banking or managing and controlling banks. However, there are
certain activities which have been identified by the Federal Reserve Board to be
so closely related to banking as to be a proper incident thereto and thus
permissible for bank holding companies. Effective April 21, 1997, the Federal
Reserve Board revised and expanded the list of permissible nonbanking
activities, which includes the following activities: acting as investment or
financial advisor to subsidiaries and certain outside companies; leasing
personal and real property or acting as a broker with respect thereto; providing
management consulting advice to nonaffiliated banks and nonbank depository
institutions; operating certain nonbank depository institutions; performing
certain trust company functions; operating collection agencies and credit
bureaus; acting as a futures commission merchant; providing data processing and
data transmission services; acting as an insurance agent or underwriter with
respect to limited types of insurance; performing real estate appraisals;
arranging commercial real estate equity financing; providing securities
brokerage services; and underwriting and dealing in obligations of the United
States, the states and their political subdivisions.
In determining whether an activity is so closely related to banking as
to be permissible for bank holding companies, the Federal Reserve Board is
required to consider whether the performance of such activities by a bank
holding company or its subsidiaries can reasonably be expected to produce such
benefits to the public as greater convenience, increased competition and gains
in efficiency that outweigh such possible adverse effects as undue concentration
of resources, decreased or unfair competition, conflicts of interest and unsound
banking practices. Generally, bank holding companies are required to obtain
prior approval of the Federal Reserve Board to engage in any new activity not
previously approved by the Federal Reserve Board.
The Company is also regulated by the Florida Banking Department under
the Florida Banking Code, which requires every bank holding company to obtain
the prior approval of the Florida Commissioner of Banking before acquiring more
than 5% of the voting shares of any Florida bank or all or substantially all of
the assets of a Florida bank, or before merging or consolidating with any
Florida bank holding company. A bank holding company is generally prohibited
from acquiring ownership or control of 5% or more of the voting shares of any
Florida bank or Florida bank holding company unless the Florida bank or all
Florida bank subsidiaries of the bank holding company to be acquired have been
in existence and continuously operating, on the date of the acquisition, for a
period of three years or more. However, approval of the Florida Banking
Department is not required if the bank to be acquired or all bank subsidiaries
of the Florida bank holding company to be acquired are national banks.
The Bank is also subject to the Florida banking and usury laws
restricting the amount of interest which it may charge in making loans or other
extensions of credit. In addition, the Bank, as a subsidiary of the Company, is
subject to restrictions under federal law in dealing with the Company and other
affiliates, if any. These restrictions apply to extensions of credit to an
affiliate, investments in the securities of an affiliate and the purchase of
assets from an affiliate.
Loans and extensions of credit by national banks are subject to legal
lending limitations. Under federal law, a national bank may grant unsecured
loans and extensions of credit in an amount up to 15% of its unimpaired capital
and surplus to any person if the loans and extensions of credit are not fully
secured by collateral having a market value at least equal to their face amount.
A national bank may grant loans and extensions of credit to such person up to an
additional 10% of its unimpaired capital and surplus, provided that the
transactions are fully secured by readily marketable collateral having a market
value determined by reliable and continuously available price quotations, at
least equal to the amount of funds outstanding. This 10% limitation is separate
from, and in addition to, the 15% limitation for
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unsecured loans. Loans and extensions of credit may exceed the general lending
limit if they qualify under one of several exceptions. Such exceptions include
certain loans or extensions of credit arising from the discount of commercial or
business paper, the purchase of bankers' acceptances, loans secured by documents
of title, loans secured by U.S. obligations and loans to or guaranteed by the
federal government.
Both the Company and the Bank are subject to regulatory capital
requirements imposed by the Federal Reserve Board and the OCC. The Federal
Reserve Board and the OCC have issued risk-based capital guidelines for bank
holding companies and banks which make regulatory capital requirements more
sensitive to differences in risk profiles of various banking organizations. The
capital adequacy guidelines issued by the Federal Reserve Board are applied to
bank holding companies on a consolidated basis with the banks owned by the
holding company. The OCC's risk capital guidelines apply directly to national
banks regardless of whether they are a subsidiary of a bank holding company.
Both agencies' requirements (which are substantially similar), provide that
banking organizations must have capital equivalent to at least 8% of
risk-weighted assets. The risk weights assigned to assets are based primarily on
credit risks. Depending upon the riskiness of a particular asset, it is assigned
to a risk category. For example, securities with an unconditional guarantee by
the United States government are assigned to the lowest risk category, while a
risk weight of 50% is assigned to loans secured by owner-occupied one to four
family residential mortgages, provided that certain conditions are met. The
aggregate amount of assets assigned to each risk category is multiplied by the
risk weight assigned to that category to determine the weighted values, which
are added together to determine total risk-weighted assets. Both the Federal
Reserve Board and the OCC have also implemented new minimum capital leverage
ratios to be used in tandem with the risk-based guidelines in assessing the
overall capital adequacy of banks and bank holding companies. Under these rules,
banking institutions are required to maintain a ratio of at least 3% "Tier 1"
capital to total weighted risk assets (net of goodwill). Tier 1 capital includes
common shareholders equity, noncumulative perpetual preferred stock and related
surplus, and minority interests in the equity accounts of consolidated
subsidiaries.
Both the risk-based capital guidelines and the leverage ratio are
minimum requirements, applicable only to top-rated banking institutions.
Institutions operating at or near these levels are expected to have
well-diversified risks, excellent control systems high asset quality, high
liquidity, good earnings and in general, must be considered strong banking
organizations, rated composite 1 under the CAMELS rating system for banks.
Institutions with lower ratings and institutions with high levels of risk or
experiencing or anticipating significant growth would be expected to maintain
ratios 100 to 200 basis points above the stated minimums.
The OCC's guidelines provide that intangible assets are generally
deducted from Tier 1 capital in calculating a bank's risk-based capital ratio.
However, certain intangible assets which meet specified criteria ("qualifying
intangibles") are retained as a part of Tier 1 capital. The OCC has modified the
list of qualifying intangibles, currently including only purchased credit card
relationships and mortgage and non-mortgage servicing assets. The OCC's
guidelines formerly provided that the amount of such qualifying intangibles that
may be included in Tier 1 capital was strictly limited to a maximum of 50% of
total Tier 1 capital. The OCC has amended its guidelines to increase the
limitation on such qualifying intangibles from 50% to 100% of Tier 1 capital, of
which no more than 25% may consist of purchased credit card relationships and
non-mortgage servicing assets.
In addition, the OCC has adopted rules which clarify treatment of asset
sales with recourse not reported on a bank's balance sheet. Among assets
affected are mortgages sold with recourse under Fannie Mae, Freddie Mac and
Farmer Mac programs. The rules clarify that even though those transactions are
treated as asset sales for bank Call Report purposes, those assets will still be
subject to a capital charge under the risk-based capital guidelines.
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12
The risk-based capital guidelines of the OCC, the Federal Reserve Board
and the FDIC explicitly include provisions regarding a bank's exposure to
declines in the economic value of its capital due to changes in interest rates
to ensure that the guidelines take adequate account of interest rate risk.
Interest rate risk is the adverse effect that changes in market interest rates
may have on a bank's financial condition and is inherent to the business of
banking. The exposure of a bank's economic value generally represents the change
in the present value of its assets, less the change in the value of its
liabilities, plus the change in the value of its interest rate off-balance sheet
contracts. Concurrently, the agencies issued a joint policy statement to
bankers, effective June 26, 1996, to provide guidance on sound practices for
managing interest rate risk. In the policy statement, the agencies emphasize the
necessity of adequate oversight by a bank's board of directors and senior
management and of a comprehensive risk management process. The policy statement
also describes the critical factors affecting the agencies' evaluations of a
bank's interest rate risk when making a determination of capital adequacy. The
agencies' risk assessment approach used to evaluate a bank's capital adequacy
for interest rate risk relies on a combination of quantitative and qualitative
factors. Banks that are found to have high levels of exposure and/or weak
management practices will be directed by the agencies to take corrective action.
The Comptroller, the Federal Reserve Board and the FDIC recently added
a provision to the risk-based capital guidelines that supplements and modifies
the usual risk-based capital calculations to ensure that institutions with
significant exposure to market risk maintain adequate capital to support that
exposure. Market risk is the potential loss to an institution resulting from
changes in market prices. The modifications are intended to address two types of
market risk: general market risk, which includes changes in general interest
rates, equity prices, exchange rates, or commodity prices, and specific market
risk, which includes particular risks faced by the individual institution, such
as event and default risks. The provision defines a new category of capital,
Tier 3, which includes certain types of subordinated debt. The provision
automatically applies only to those institutions whose trading activity, on a
worldwide consolidated basis, equals either (i) 10% or more of total assets or
(ii) $1 billion or more, although the agencies may apply the provision's
requirements to any institution for which application of the new standard is
deemed necessary or appropriate for safe banking practices. For institutions to
which the modifications apply, Tier 3 capital may not be included in the
calculation rendering the 8% credit risk ratio; the sum of Tier 2 and Tier 3
capital may not exceed 100% of Tier 1 capital; and Tier 3 capital is used in
both the numerator and denominator of the normal risk-based capital ratio
calculation to account for the estimated maximum amount that the value of all
positions in the institution's trading account, as well as all foreign exchange
and commodity positions, could decline within certain parameters set forth in a
model defined by the statute. Furthermore, beginning no later than January 1,
1999, covered institutions must "backtest," comparing the actual net trading
profit or loss for each of its most recent 250 days against the corresponding
measures generated by the statutory model. Once per quarter, the institution
must identify the number of times the actual net trading loss exceeded the
corresponding measure and must then apply a statutory multiplication factor
based on that number for the next quarter's capital charge for market risk.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (the
"FDICIA"), enacted on December 19, 1991, provides for a number of reforms
relating to the safety and soundness of the deposit insurance system,
supervision of domestic and foreign depository institutions and improvement of
accounting standards. One aspect of the FDICIA involves the development of a
regulatory monitoring system requiring prompt action on the part of banking
regulators with regard to certain classes of undercapitalized institutions.
While the FDICIA does not change any of the minimum capital requirements, it
directs each of the federal banking agencies to issue regulations putting the
monitoring plan into effect. The FDICIA creates five "capital categories" ("well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized") which are defined in the
FDICIA and which will be used to determine the severity of corrective action the
appropriate regulator may take in the event an institution reaches a given level
of undercapitalization. For example, an institution which becomes
"undercapitalized" must submit a capital restoration plan to the appropriate
regulator outlining the steps it will take to become adequately capitalized.
Upon
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approving the plan, the regulator will monitor the institution's compliance.
Before a capital restoration plan will be approved, any entity controlling a
bank (i.e., holding companies) must guarantee compliance with the plan until the
institution has been adequately capitalized for four consecutive calendar
quarters. The liability of the holding company is limited to the lesser of five
percent of the institution's total assets or the amount which is necessary to
bring the institution into compliance with all capital standards. In addition,
"undercapitalized" institutions will be restricted from paying management fees,
dividends and other capital distributions, will be subject to certain asset
growth restrictions and will be required to obtain prior approval from the
appropriate regulator to open new branches or expand into new lines of business.
As an institution's capital levels decline, the extent of action to be
taken by the appropriate regulator increases, restricting the types of
transactions in which the institution may engage and ultimately providing for
the appointment of a receiver for certain institutions deemed to be critically
undercapitalized.
The FDICIA also provides that banks have to meet new safety and
soundness standards. In order to comply with the FDICIA, the Federal Reserve
Board, the OCC and the FDIC have adopted regulations defining operational and
managerial standards relating to internal controls, loan documentation, credit
underwriting, interest rate exposure, asset growth, and compensation, fees and
benefits.
Both the capital standards and the safety and soundness standards which
the FDICIA seeks to implement are designed to bolster and protect the deposit
insurance fund.
In response to the directive issued under the FDICIA, the regulators
have established regulations which, among other things, prescribe the capital
thresholds for each of the five capital categories established by the FDICIA.
The following table reflects the capital thresholds:
TOTAL RISK-BASED TIER 1 RISK-BASED TIER 1
CAPITAL RATIO CAPITAL RATIO LEVERAGE RATIO
---------------- ----------------- --------------
Well capitalized(1)...................... 10.0% 6.0% 5.0%
Adequately Capitalized(1)................ 8.0% 4.0% 4.0%(2)
Undercapitalized(3)...................... < 8.0% < 4.0% < 4.0%(4)
Significantly Undercapitalized(3)........ < 6.0% < 3.0% < 3.0%
Critically Undercapitalized.............. -- -- < 2.0%(5)
- ---------------------------
(1) An institution must meet all three minimums.
(2) 3.0% for composite 1-rated institutions, subject to appropriate federal
banking agency guidelines.
(3) An institution falls into this category if it is below the specified
capital level for any of the three capital measures.
(4) Less than 3.0% for composite 1-rated institutions, subject to appropriate
federal banking agency guidelines.
(5) Ratio of tangible equity to total assets.
As a national bank, the Bank is subject to examination and review by
the OCC. This examination is typically completed on-site at least every eighteen
months and is subject to off-site review at call. The OCC, at will, can access
quarterly reports of condition, as well as such additional reports as may be
required by the national banking laws.
As a bank holding company, the Company is required to file with the
Federal Reserve Board an annual report of its operations at the end of each
fiscal year and such additional information as the Federal Reserve Board may
require pursuant to the Act. The Federal Reserve Board may also make
examinations of the Company and each of its subsidiaries.
-12-
14
The scope of regulation and permissible activities of the Company and
the Bank is subject to change by future federal and state legislation. In
addition, regulators sometimes require higher capital levels on a case-by-case
basis based on such factors as the risk characteristics or management of a
particular institution. The Company and the Bank are not aware of any attributes
of their operating plan that would cause regulators to impose higher
requirements.
ITEM 2. PROPERTIES.
The Company's main offices are currently located at 4110 Southpoint
Boulevard, Suite 212, Southpoint Square II, Jacksonville, Florida 32216. The
Company expects to occupy its permanent offices located at 5210 Belfort Road,
Concourse II, Jacksonville, Florida 32256, in May 1999.
The Bank currently has three branch offices which are located in
Jacksonville, Tampa and Gainesville, Florida. The Bank leases the space for all
of its branch offices. The Jacksonville branch office is located at 95 Corporate
Center, 6650 Southpoint Parkway, Jacksonville, Florida 32216. The Bank occupies
approximately 3,900 square feet in the building. The Bank will relocate to its
permanent facility of approximately 6,000 square feet in May 1999. This office
will be located at 5210 Belfort Road, Jacksonville, Florida 32256. The Tampa
branch office is located at 100 West Kennedy Boulevard, Tampa, Florida 33602.
The Bank occupies approximately 8,400 square feet in the building but has an
option for additional space at a predetermined lease rate. The Gainesville
branch office is located at 3600 N.W. 43rd Street, Bldg. A, Suite 1,
Gainesville, Florida 32606. The Bank leases approximately 2,900 square feet of
space at this location.
ITEM 3. LEGAL PROCEEDINGS.
There are no material pending legal proceedings to which the Company or
the Bank is a party or of which any of their properties are subject; nor are
there material proceedings known to the Company or the Bank to be contemplated
by any governmental authority; nor are there material proceedings known to the
Company or the Bank in which any director, officer or affiliate or any principal
security holder of the Company or the Bank, or any associate of any of the
foregoing is a party or has an interest adverse to the Company or the Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted during the fourth quarter ended December 31,
1998 to a vote of security holders of the Company.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the Nasdaq National Market
under the symbol "FLBK." The Common Stock began trading on the Nasdaq National
Market on July 30, 1998. The following table sets forth for the periods
indicated the quarterly high and low bid quotation per share as reported by the
Nasdaq National Market. These quotations also reflect inter-dealer prices
without retail mark-ups, mark-downs, or commissions and may not necessarily
represent actual transactions.
HIGH LOW
---- ---
Fiscal year ended December 31, 1998
Third Quarter........................... $10.50 $ 7.50
Fourth Quarter.......................... 9.25 6.375
As of March 15, 1999, there were approximately 147 holders of record of
the Common Stock. Management of the Company believes that there are in excess of
2,100 beneficial holders of its Common Stock.
The Company has never declared or paid any dividends on its capital
stock. The Company currently anticipates that all of its earnings will be
retained for development of the Company's business, and does not anticipate
paying any cash dividends in the foreseeable future. Future cash dividends, if
any, will be at the discretion of the Company's Board of Directors and will
depend upon, among other things, the Company's future earnings, operations,
capital requirements and surplus, general financial condition, contractual
restrictions, and such other factors as the Board of Directors may deem
relevant.
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15
ITEM 6. SELECTED FINANCIAL DATA.
SELECTED FINANCIAL DATA
The following tables set forth selected financial data of the Company
for the periods indicated. Florida Banks, Inc. (the "Company") was incorporated
on October 15, 1997 for the purpose of becoming a bank holding company and
acquiring First National Bank of Tampa (the "Bank"). On August 4, 1998, the
Company completed its initial public offering and its merger (the "Merger")
with the Bank pursuant to which the Bank was merged with and into Florida Bank
No. 1, N.A., a wholly-owned subsidiary of the Company, and renamed Florida
Bank, N.A. Shareholders of the Bank received 1,375,000 shares of common stock
of the Company valued at $13,750,000. The Merger was considered a reverse
acquisition for accounting purposes with the Bank identified as the accounting
acquiror. The Merger has been accounted for as a purchase, but no goodwill has
been recorded in the Merger and the financial statements of the Bank have
become the historical financial statements of the Company.
The number of shares of common stock, the par value of common stock
and per share amounts have been restated to reflect the shares exchanged in the
Merger.
The selected financial data of the Company as of December 31, 1998,
1997 and 1996 and for each of the years ended December 31, 1998, 1997, 1996 and
1995 are derived from the financial statements of the Company, which have been
audited by Deloitte & Touche LLP, independent auditors. The selected financial
data of the Company as of December 31, 1995 and 1994 and for the year ended
December 31, 1994 are derived from the financial statements of the Company,
which were audited by other independent certified public accountants. These
selected financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
Company's financial statements and notes thereto, and financial and other
information included elsewhere herein.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1998 1997 1996 1995 1994
Summary Income Statement:
Interest income $ 5,432 $ 4,302 $ 3,614 $ 2,937 $ 2,075
Interest expense 2,436 2,296 1,872 1,474 1,005
------- ------- ------- ------- -------
Net interest income 2,996 2,006 1,742 1,463 1,070
Provision (benefit) for loan losses 629 60 60 (138) (15)
------- ------- ------- ------- -------
Net interest income after
provision for loan losses 2,367 1,946 1,682 1,602 1,085
Noninterest income 594 504 517 375 385
Noninterest expense (1) 7,903 1,842 1,598 1,621 1,568
------- ------- ------- ------- -------
Income (loss) before (benefit) provision for
income taxes (4,943) 608 601 356 (99)
(Benefit) provision for income taxes (2) (350) 232 217 -- --
------- ------- ------- ------- -------
Net income (loss) $(4,593) $ 376 $ 384 $ 356 $ (99)
======= ======= ======= ======= =======
Earnings (loss) per common share (3):
Basic $ (1.46) $ 0.31 $ 0.32 $ 0.29 $ (0.08)
Diluted (1.46) 0.29 0.30 0.28 (0.08)
(1) Noninterest expense for the Company for 1998 includes a nonrecurring
noncash charge of $3,939,000 relating to the February 3, 1998 sale of
Common Stock and Warrants included in the Units sold to accredited
foreign investors and the February 11, 1998 sale of 297,000 shares of
Common Stock to 14 officers, directors and consultants.
(2) The provision for income taxes for 1998, 1997 and 1996 is comprised
solely of deferred income taxes. The benefit of the utilization of net
operating loss carryforwards for 1997 and 1996 (periods subsequent to
the effective date of the Company's quasi-reorganization) have been
reflected as increases to additional paid-in capital.
(3) The earnings per share amounts have been restated to reflect the
shares exchanged in the Merger.
AT DECEMBER 31.
----------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Summary Balance Sheet Data:
Investment securities $ 22,242 $ 10,765 $ 8,551 $ 6,760 $ 7,495
Loans, net of deferred loan fees 67,131 33,720 31,627 26,571 20,292
Earning assets 106,022 54,731 52,588 38,801 32,377
Total assets 113,566 60,396 55,505 41,748 34,959
Noninterest-bearings deposits 11,840 6,442 8,122 5,719 4,660
Total deposits 64,621 45,460 45,526 34,633 31,886
Other borrowed funds 5,718 8,317 6,480 4,212 780
Total shareholders' equity 42,588 6,314 3,269 2,678 2,143
Performance Ratios:
Net interest margin (1) 4.28% 3.89% 4.05% 4.13% 3.77%
Efficiency ratio (2) 220.18 73.39 70.76 88.16 107.84
Return on average assets (5.42) 0.70 0.85 0.95 (0.32)
Return on average equity (16.54) 10.62 13.18 14.85 (4.14)
Asset Quality Ratios:
Allowance for loan losses to total loans 1.60% 1.42% 1.36% 1.28% 2.27 %
Non-performing loans to total loans (3) 2.8 -- -- -- 0.60
Net charge-offs (recoveries) to average loans (0.09) 0.03 (0.11) (0.07) (0.18)
Capital and Liquidity Ratios:
Total capital to risk-weighted assets 67.77 % 14.29 % 12.26 % 12.42 % 13.28 %
Tier 1 capital to risk-weighted assets 66.27 13.00 11.01 11.17 12.03
Tier 1 capital to average assets 39.22 7.42 6.42 6.64 6.30
Average loans to average deposits 81.04 75.77 75.83 67.26 65.11
Average equity to average total assets 32.80 6.54 6.45 6.40 7.75
- -----------------------
(1) Computed by dividing net interest income by average earning assets.
(2) Computed by dividing noninterest expense by the sum of net interest
income and noninterest income.
(3) The Bank had no non-performing loans at December 31, 1997, 1996 and
1995.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This Report contains statements that constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These statements appear in a
number of places in this Report and include statements regarding the intent,
belief or current expectations of the Company, its directors or its officers
with respect to, among other things: (i) potential acquisitions by the Company;
(ii) trends affecting the Company's financial condition or results of
operations; and (iii) the Company's business and growth strategies. Investors
are cautioned that any such forward-looking statements are not guarantees of
future performance and involve risks and uncertainties, and that actual results
may differ materially from those projected in the forward-looking statements as
a result of various factors. These factors include the following: (a)
competitive pressure in the banking industry; (b) changes in the interest rate
environment; (c) the fact that general economic conditions may be less favorable
than we expect; and (d) changes in our regulatory environment. The accompanying
information contained in this Report, including, without limitation, the
information set forth under the headings "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business," as well as in
the Company's Securities Act filings, identifies important additional factors
that could adversely affect actual results and performance. Prospective
investors are urged to carefully consider such factors.
All forward-looking statements attributable to the Company are
expressly qualified in their entirety by the foregoing cautionary statements.
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Company (including the notes thereto)
contained elsewhere in this Report. The following discussion compares results of
operations for the years ended December 31, 1998, 1997 and 1996.
THE COMPANY
The Company was incorporated on October 15, 1997 to acquire or
establish a bank in Florida. Prior to the consummation of the merger with First
National Bank of Tampa (the "Merger"), the Company had no operating activities.
The Merger was consummated immediately prior to the closing of the Company's
initial public offering (the "Offering") on August 4, 1998. After the
consummation of the Merger, the Bank's shareholders owned greater than 50% of
the outstanding Common Stock of the Company, excluding the issuance of the
shares in connection with the Offering. Accordingly, the Merger was accounted
for as if the Bank had acquired the Company, the financial statements of the
Bank have become the historical financial statements of the Company and no
goodwill was recorded as a result of the Merger. In addition, the operating
results of the Company incurred prior to the Merger, which consisted of
organizational and start-up costs, are not included in the consolidated
operating results.
The Company funded its start-up and organization costs through the sale
of units, consisting of Common Stock, Preferred Stock and warrants to purchase
shares of Common Stock. As the Company had no operations during 1997 and had no
equity and de minimis assets and liabilities at December 31, 1997, the
Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company as of December 31, 1997 includes only information
relevant to the Bank. Discussions and financial information for December 31,
1998 and for the period then ended, includes consolidated financial data of the
Company and Bank. As the Company was not formed until 1997, the term "Company"
used throughout "Management's Discussion and Analysis of Financial Condition and
Results of Operations" refers to the Company and the Bank for the period ended
December 31, 1998 and for the Bank only for the period ended December 31, 1997
and prior periods. Unless otherwise indicated, the "Bank" refers to Florida
Bank, N.A., formerly First National Bank of Tampa.
SUMMARY
The Company's net income for 1998 decreased $5.0 million to a loss of
($4.6) million from $376,000 in 1997. Net income for 1997 decreased $8,000 or
2.0% to $376,000 from $384,000 in 1996. Basic and diluted earnings per share was
a loss of ($1.46) for 1998 as compared to basic and diluted earnings of $.31 and
$.29, respectively, for 1997 and basic and diluted earnings of $.32 and $.30,
respectively, for 1996. Diluted earnings per share reflects the dilutive effect
of outstanding options and has been adjusted for the Offering and the exchange
of shares related to the consummation of the Merger.
The decrease in net income from 1997 to 1998 primarily resulted from
expenses associated with the opening of the Jacksonville and Gainesville
offices, expenses related to the Merger, noncash compensation and financing
costs of $3.9 million or $(1.26) per share related to the February 3, 1998 sale
of common stock and warrants included in the units sold to foreign investors and
the February 11, 1998 sale of the 297,000 shares of common stock to 14 officers,
directors and consultants and an increase in the provision for loan losses, all
of which were partially offset by an increase in net interest income. The
Company recorded such non-cash, non-recurring compensation expense and financing
costs measured as the difference between the fair value of common stock, based
upon the initial public offering price of $10.00 per share, and the sale
-15-
17
price or allocated proceeds of $.01 per share. These non-cash charges were
recorded with a corresponding increase in additional paid-in capital and
therefore had no effect on the Company's total shareholders' equity or book
value. Net interest income increased to $3.0 million in 1998 from $2.0 million
in 1997, an increase of 49.3%, reflecting the investment of the proceeds from
the Offering. The provision for loan losses increased to $629,000 in 1998 from
$60,000 in 1997. Noninterest expenses increased to $7.9 million in 1998 from
$1.8 million in 1997.
The decrease in net income from 1996 to 1997 was primarily attributable
to a decrease in noninterest income and increases in noninterest expense and the
provision for income taxes, all of which were partially offset by an increase in
net interest income. Net interest income increased to $2.0 million in 1997 from
$1.7 million in 1996, an increase of 15.1%. Noninterest income decreased 2.5% to
$504,000 in 1997 from $517,000 in 1996. Noninterest expense increased to $1.8
million in 1997 from $1.6 million in 1996, an increase of 15.2%. The provision
for income taxes increased to $232,000 in 1997 from $217,000 in 1996, an
increase of 7.0%.
As a result of poor operating performance from its inception in 1988
through 1994, First National Bank of Tampa generated approximately $8.5 million
in net operating loss carryforwards. As of December 31, 1997, the Company had
$7.0 million in net operating loss carryforwards remaining to be utilized and
net deferred tax assets of $2.4 million. At December 31, 1997, the Company
assessed its earnings history and trends over the past three years, its estimate
of future earnings, and the expiration dates of the loss carryforwards and
determined that it was more likely than not that the deferred tax assets will be
realized. Accordingly, no valuation allowance was required at December 31, 1997
resulting in net deferred tax assets of $2.4 million and a corresponding
increase to additional paid-in capital. See "-- Provision for Income Taxes."
Total assets at December 31, 1998 were $113.6 million, an increase of
$53.2 million, or 88.0%, over the prior year. Total loans increased 99.1% to
$67.3 million at December 31, 1998, from $33.8 million at December 31, 1997.
Total deposits increased $19.2 million, or 42.1%, to $64.6 million at December
31, 1998 from $45.5 million at December 31, 1997. Shareholders' equity increased
to $42.6 million at December 31, 1998 from $6.3 million at December 31, 1997.
These increases were attributable to the use of proceeds of the Offering and the
completion of the Merger.
The earnings performance of the Company is reflected in the
calculations of net income (loss) as a percentage of average total assets
("Return on Average Assets") and net income (loss) as a percentage of average
shareholders' equity ("Return on Average Equity"). During 1998, the Return on
Average Assets and Return on Average Equity were (5.43%) and (16.54%)
respectively, compared to .70% and 10.62%, respectively, for 1997. The Company's
ratio of total equity to total assets increased to 37.5% at December 31, 1998
from 10.5% at December 31, 1997, primarily as a result of the proceeds of the
Offering and the completion of the Merger.
RESULTS OF OPERATIONS
Net Interest Income
The following table sets forth, for the periods indicated, certain
information related to the Company's average balance sheet, its yields on
average earning assets and its average rates on interest-bearing liabilities.
Such yields and rates are derived by dividing income or expense by the average
balance of the corresponding assets or liabilities. Average balances have been
derived from the daily balances throughout the periods indicated.
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18
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1998 1997
--------------------------------- -------------------------------
INTEREST INTEREST
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
------- ------- ---- ------- ------- ----
ASSETS (DOLLARS IN THOUSANDS)
Earning assets:
Loans, net of deferred loan fees(1)........... $39,917 $3,826 9.58% $34,264 $3,353 9.79%
Investment securities(2)...................... 15,766 875 5.55 9,971 583 5.85
Repurchase agreement.......................... 5,342 277 5.19 0 0 0
------
Federal funds sold............................ 9,033 454 5.03 7,398 366 4.94
------- ------ ------- ------
Total earning assets....................... 70,058 5,432 7.75 51,633 4,302 8.33
------ ------
Cash and due from banks.......................... 4,588 2,092
Premises and equipment, net...................... 627 500
Other assets..................................... 9,882 342
Allowance for loan losses........................ (550) (478)
------- -------
Total assets............................... $84,605 $54,089
======= =======
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing liabilities:....................
Interest-bearing demand deposits.............. $ 2,956 75 2.54 $ 2,894 73 2.52%
Savings deposits.............................. 7,353 347 4.72 5,707 273 4.77
Money market deposits......................... 1,417 35 2.47 1,511 38 2.51
Certificates of deposit of $100,000 or more... 10,548 579 5.49 10,530 585 5.55
Other time deposits........................... 18,161 1,071 5.90 18,974 1,107 5.84
Repurchase agreements......................... 5,237 231 4.41 3,957 178 4.50
Other borrowed funds.......................... 1,641 98 5.97 949 42 4.44
------- ------ ------- ------
Total interest-bearing liabilities............... 47,313 2,436 5.15 44,522 2,296 5.16
------- ------ ------- ------
Noninterest-bearing demand deposits.............. 8,818 5,729
Other liabilities................................ 711 298
Shareholders' equity............................. 27,763 3,540
------- -------
Total liabilities and
shareholders' equity....................... $84,605 $54,089
======= =======
Net interest income.............................. $2,996 $2,006
====== ======
Net interest spread ............................. 2.60% 3.17%
Net interest margin.............................. 4.28% 3.89%
-----------------
(1) At December 31, 1998, $725,000 of loans were accounted for on
a non-accrual basis. During 1997, all loans were accruing
interest. Loan amounts are net of deferred loan fees which
were $162,000 in 1998 and $79,000 in 1997.
(2) The yield on investment securities is computed based upon the
average balance of investment securities at amortized cost and
does not reflect the unrealized gains or losses on such
investments.
Net interest income is the principal component of a financial
institution's income stream and represents the difference or spread between
interest and certain fee income generated from earning assets
-17-
19
and the interest expense paid on deposits and other borrowed funds. Fluctuations
in interest rates, as well as volume and mix changes in earning assets and
interest-bearing liabilities, can materially impact net interest income. The
Company had no investments in tax-exempt securities during 1998, 1997 and 1996.
Accordingly, no adjustment is necessary to facilitate comparisons on a taxable
equivalent basis.
Net interest income increased 49.3% to $3.0 million in 1998 from $2.0
million in 1997. This increase in net interest income is attributable to growth
in average earning assets due to the investment of the proceeds from the
Offering, partially offset by the growth in savings deposits and repurchase
agreements. The trend in net interest income is commonly evaluated using net
interest margin and net interest spread. The net interest margin, or net yield
on average earning assets, is computed by dividing fully taxable equivalent net
interest income by average earning assets. The net interest margin increased 39
basis points to 4.28% in 1998 on average earning assets of $70.0 million from
3.89% in 1997 on average earning assets of $51.6 million. This increase is
primarily due to the significant increase in average earning assets from the
investment of proceeds from the Offering. The effect of the investment of the
proceeds from the Offering more than offset a 58 basis point decrease in the
average yield on earning assets to 7.75% in 1998 from 8.33% in 1997 and a one
basis point decrease in the average rate paid on interest-bearing liabilities to
5.15% in 1998 from 5.16% in 1997. The decreased yield on earning assets was
primarily the result of lower market rates on loans and investment securities.
The decrease in the cost of interest-bearing liabilities is attributable to
minimal decreases in rates on time deposits, money market and savings deposits
and repurchase agreements.
Net interest income increased $264,000, or 15.1%, to $2.0 million in
1997 from $1.7 million in 1996. This increase in net interest income is
attributable to the growth in average earning assets, partially offset by the
growth in interest-bearing liabilities and by lower margins. The net interest
margin decreased 16 basis points to 3.89% in 1997 on average earning assets of
$51.6 million from 4.05% in 1996 on average earning assets of $43.0 million.
Management attributes this decrease in the net interest margin to higher rates
on interest-bearing liabilities, which were partially offset by higher yields on
earning assets, resulting from higher market rates.
The net interest spread decreased 57 basis points to 2.60% in 1998 from
3.17% in 1997, as the yield on average earning assets decreased 58 basis points
while the cost of interest-bearing liabilities increased one basis point. The
net interest spread measures the absolute difference between the yield on
average earning assets and the rate paid on average interest-bearing sources of
funds. The net interest spread eliminates the impact of noninterest-bearing
funds and gives a direct perspective on the effect of market interest rate
movements. This measurement allows management to evaluate the variance in market
rates and adjust rates or terms as needed to maximize spreads.
The net interest spread decreased 20 basis points to 3.17% in 1997 from
3.37% in 1996. The decrease resulted from a 7 basis points decrease in the yield
on average earning assets offset by a 13 basis point increase in the cost of
average interest-bearing liabilities.
During recent years, the net interest margins and net interest spreads
have been under pressure, due in part to intense competition for funds with
non-bank institutions and changing regulatory supervision for some financial
intermediaries. The pressure was not unique to the Company and was experienced
by the banking industry nationwide.
To counter potential declines in the net interest margin and the
interest rate risk inherent in the balance sheet, the Company adjusts the rates
and terms of its interest-bearing liabilities in response to general market rate
changes and the competitive environment. The Company monitors Federal funds sold
levels throughout the year, investing any funds not necessary to maintain
appropriate liquidity in higher yielding investments such as short-term U.S.
government and agency securities. The Company will continue to manage its
balance sheet and its interest rate risk based on changing market interest rate
conditions.
-18-
20
Rate/Volume Analysis of Net Interest Income
The table below presents the changes in interest income and interest
expense attributable to volume and rate changes between 1997 and 1998 and
between 1996 and 1997. The effect of a change in average balance has been
determined by applying the average rate in 1997 and 1996 to the change in
average balance from 1997 to 1998 and from 1996 to 1997, respectively. The
effect of change in rate has been determined by applying the average balance in
1997 and 1996 to the change in the average rate from 1997 to 1998 and from 1996
to 1997, respectively. The net change attributable to the combined impact of the
volume and rate has been allocated to both components in proportion to the
relationship of the absolute dollar amounts of the change in each.
YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997
COMPARED WITH COMPARED WITH
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
INCREASE (DECREASE) DUE TO: INCREASE (DECREASE) DUE TO:
--------------------------- ---------------------------
VOLUME YIELD/RATE TOTAL VOLUME YIELD/RATE TOTAL
------ ---------- ----- ------ ---------- -----
Interest Earned On:
Taxable securities ................... $ 355,866 $ (31,898) $ 290,784 $123,712 $ (443) $123,269
Federal funds sold ................... 72,090 16,509 88,599 78,715 23,391 102,106
Net loans ............................ 544,240 (70,657) 473,583 462,537 -- 462,537
Repurchase agreements ................ 277,165 N/A 277,165 -- -- --
----------- --------- ----------- -------- -------- --------
Total earning assets .............. 1,249,361 (85,546) 1,130,131 664,964 22,948 687,912
----------- --------- ----------- -------- -------- --------
Interest Paid On:
Money market deposits ............... (855) (205) (1,060) 2,327 391 2,718
Savings deposits .................... 77,635 (2,820) 74,815 84,389 4,445 88,834
Time deposits ....................... (45,526) 3,683 (41,843) 202,423 37,047 239,470
Repurchase agreements ............... 56,111 (3,471) 52,640 61,268 8,575 69,843
Other borrowed funds ................ 38,067 18,106 56,173 23,434 (213) 23,221
----------- --------- ----------- -------- -------- --------
Total interest-bearing liabilities 125,432 15,293 140,725 373,841 50,245 424,086
----------- --------- ----------- -------- -------- --------
Net interest income ............... $ 1,123,929 $(100,839) $ 989,406 $291,123 $(27,297) $263,826
=========== ========= =========== ======== ======== ========
Provision for Loan Losses
The provision for loan losses is the expense of providing an allowance
or reserve for anticipated future losses on loans. The amount of the provision
for each period is dependent upon many factors, including loan growth, net
charge-offs, changes in the composition of the loan portfolio, delinquencies,
management=s assessment of loan portfolio quality, the value of loan collateral
and general business and economic conditions.
The provision for loan losses charged to operations in 1998 was
$629,000 as compared to $60,000 for 1997. Management=s analysis of the allowance
for loan losses prepared as of December 31, 1998 indicated the need for a
specific reserve in the amount of $529,000 for an impaired credit in the Tampa
market. The remaining $100,000 provision in 1998 was generally due to increases
in the amount of loans outstanding.
-19-
21
The provision for loan losses charged to operations in both 1997 and
1996 was $60,000. Management's analysis of the allowance for loan losses during
1997 and 1996 indicated no material changes in the quality of the loan
portfolio, economic outlook or other factors generally considered by management.
Accordingly, the provision for loan losses for 1997 and 1996 were generally due
to increases in the amount of loans outstanding. For additional information
regarding provision for loan losses, charge-offs and allowance for loan losses,
see "--Financial Condition--Asset Quality."
Noninterest Income
Noninterest income consists of revenues generated from a broad range of
financial services, products and activities, including fee-based services,
service fees on deposit accounts and other activities. In addition, gains
realized from the sale of the guaranteed portion of SBA loans, other real estate
owned, and available for sale investments are included in noninterest income.
Noninterest income increased 17.8% to $594,000 in 1998 from $504,000 in
1997. This change resulted from an increase in the amount of service fees on
deposit accounts and increased gains on the sale of the guaranteed portion of
SBA loans. Service fees on deposit accounts increased 17.8% to $382,000 in 1998
from $325,000 in 1997 due to an increase in insufficient funds and returned
check fees and increased volume in the number of wire transfers transacted for
customers. Gains on sale of the guaranteed portion of SBA loans increased 11.4%
to $106,000 in 1998 from $95,000 in 1997 due to an increase in the principal
amount of such loans sold. During 1998, the Company sold $1.2 million principal
balance of SBA loans all of which were originated in 1998, compared to $1.1
million of loans sold in 1997, of which $1.0 million were originated in 1997.
Other income, which includes various recurring noninterest income items such as
travelers checks fees and safe deposit box fees, increased 27.0% to $98,000 in
1998 from $76,000 in 1997.
Noninterest income decreased 2.5% to $504,000 in 1997 from $517,000 in
1996. This decrease resulted primarily from lower service fees on deposits and
lower gains on the sale of the guaranteed portion of SBA loans, partially offset
by higher gains on sale of available for sale investments and other real estate
owned. Fees on deposits decreased 2.0% to $325,000 in 1997 from $331,000 in
1996. Gain on sale of the guaranteed portion of SBA loans decreased 31.1% to
$95,000 in 1997 from $138,000 in 1996 due to a decrease in the principal amount
of loans sold. In 1997, the Company sold $1.1 million principal balance of loans
of which $1.0 million were originated in 1997, compared to $1.7 million of loans
sold in 1996 of which $1.0 million were originated in 1996. In 1997, there was a
small gain on sale of available for sale investments, but in 1996, loss on sale
of available for sale investments and other real estate owned totaled $2,000.
Other income increased 53.2% to $76,000 in 1997 from $50,000 in 1996.
The following table presents an analysis of the noninterest income for
the periods indicated with respect to each major category of noninterest income:
% CHANGE % CHANGE
1998 1997 1996 1998-1997 1997-1996
---- ---- ---- --------- ---------
(DOLLARS IN THOUSANDS)
Service fees................................ $382 $325 $331 17.8% (2.0)%
Gain on sale of loans....................... 106 95 138 11.4% (31.1)
Gains (loss) on sale of available for sale
Investment securities, net............... 8 8 (2) N/A N/A
Other....................................... 98 76 50 27.0 53.2
---- ---- ----
Total................................... $594 $504 $517 17.8% (2.5)%
==== ==== ====
-20-
22
Noninterest Expense
Noninterest expense increased 329.0% to $7.9 million in 1998 from $1.8
million in 1997. Management attributes this increase to the $3.9 million
non-cash compensation and financing costs, the costs of the Merger and increases
in personnel expense, occupancy expense and data processing expense relating to
opening the Jacksonville and Gainesville banking offices. Salaries and benefits
increased 438.3% to $5,380,000 in 1998 from $999,000 in 1997. This increase is
attributable to a non-cash, non-recurring charge of approximately $3 million
related to the sale of stock and warrants to the founders of the Company and
foreign investors and to increases in the number of personnel at the holding
company level and for the Jacksonville and Gainesville offices. Occupancy and
equipment expense increased 89.8% to $486,000 in 1998 from $256,000 in 1997
primarily as a result of the addition of the holding company and Jacksonville
banking offices. Data processing expense increased 53.6% to $142,000 in 1998
from $93,000 in 1997 which is primarily attributable to the growth in loan and
deposit transactions and the addition of new services. Financing costs for 1998
represents a non-cash non-recurring charge of $972,000 for financing costs
relating to the issuance of common stock and warrants to foreign investors.
Other operating expenses increased 86.8% to $923,000 in 1998 from $494,000 in
1997. This increase is attributable primarily to an increase of $47,000 in
marketing and advertising expenses, an increase of $137,000 in legal and
accounting fees associated with the Merger, an increase of $68,000 in
communications expense associated with the network expansion at the holding
company and Jacksonville banking offices and an increase of $49,000 in
stationary, printing and supplies associated with the Company name change and
opening of the Jacksonville banking office.
Noninterest expense increased 15.2% to $1.8 million in 1997 from $1.6
million in 1996. Management attributes this increase to an increase in personnel
expense, occupancy expense, data processing expense and other operating
expenses. Salaries and benefits expense increased 14.5% to $999,000 in 1997 from
$872,000 in 1996. This increase is attributable to an increase in the Company's
administrative lending staff, additional incentive awards under an expanded
officer incentive program, increases in the cost of employee's group insurance
and normal salary increases. Occupancy and equipment expense decreased 12.9% to
$256,000 in 1997 from $227,000 in 1996 primarily as a result of the addition of
967 square feet of leased space for the Company's SBA department at an
annualized cost of $11,000. Data processing expense increased 22.9% to $93,000
in 1997 from $75,000 in 1996. Other operating expenses increased 16.6% to
$494,000 in 1997 from $429,000 in 1996. The increase in operating expenses is
attributed primarily to an increase of $26,000 in FDIC insurance premiums
associated with deposit growth, an increase of $18,000 in directors' fees and
increases in SBA expenses of $28,000 related to the liquidation and collection
of problem loans.
The following table presents an analysis of the noninterest expense for
the periods indicated with respect to each major category of noninterest
expense:
% CHANGE % CHANGE
1998 1997 1996 1998-1997 1997-1996
---- ---- ---- --------- ---------
(DOLLARS IN THOUSANDS)
Salaries and benefits.................... $5,380 $ 999 $ 872 438.3% 14.5%
Occupancy and equipment.................. 486 256 227 89.8 12.9
Data processing.......................... 142 93 75 53.6 22.9
Financing cost........................... 972 0 0 N/A N/A
Other.................................... 923 494 424 86.8 16.6
------ ------ ------ ----- ----
Total................................ $7,903 $1,842 $1,598 329.0% 15.2%
====== ====== ======
-21-
23
Provision for Income Taxes
The provision (benefit) for income taxes was ($350,000) for 1998
compared to a provision of $232,000 for 1997. The effective tax rate for 1998
was a benefit of (7.1%) as compared to an effective tax rate of 38.2% for 1997.
The decrease in the effective tax rate is due to the effect of a higher level of
nondeductible expenses in 1998 as compared to 1997. These nondeductible expenses
for 1998 are comprised primarily of the $3.9 million in compensation and
financing costs resulting from the sale of common stock and warrants to founders
and foreign investors. The Company paid no income taxes during 1998 due to the
availability of net operating loss carryforwards.
The provision for income taxes increased to $232,000 for 1997 from
$217,000 for 1996, reflecting an effective tax rate of 38.2% for 1997, compared
to an effective tax rate of 36.1% for 1996. The increase in the effective tax
rate is due to the effect of a higher level of nondeductible expenses in 1997
over 1996. The Company paid no income taxes during 1997 and 1996 due to the
availability of net operating loss carryforwards. The provision for income taxes
for 1997 and 1996 represents deferred income taxes.
Certain income and expense items are recognized in different periods
for financial reporting purposes and for income tax return purposes. Deferred
income tax assets and liabilities reflect the differences between the values of
certain assets and liabilities for financial reporting purposes and for income
tax purposes, computed at the current tax rates. Deferred income tax expense is
computed as the change in the Company's deferred tax assets, net of deferred tax
liabilities and the valuation allowance. The Company's deferred income tax
assets consist principally of net operating loss carryforwards. A deferred tax
valuation allowance is established if it is more likely than not that all or a
portion of the deferred tax assets will not be realized.
First National Bank of Tampa reported losses from operations each year
from its inception in 1988 through 1994. These losses primarily resulted from
loan losses and high overhead costs. Management of First National Bank of Tampa
was replaced during 1992 and additional capital of $1.6 million was raised
through a private placement of common stock during 1993. Largely as a result of
these changes, the Company became profitable in 1995. In order to reflect this
fresh start, the Bank elected to restructure its capital accounts through a
quasi-reorganization. A quasi-reorganization is an accounting procedure that
allows a company to restructure its capital accounts to remove an accumulated
deficit without undergoing a legal reorganization. Accordingly, the Bank charged
against additional paid-in capital its accumulated deficit of $8.1 million at
December 31, 1995. As a result of the quasi-reorganization, the future benefit
from the utilization of the net operating loss carryforwards generated prior to
the date of the quasi-reorganization was required to be accounted for as an
increase to additional paid-in capital. Such benefits are not considered to have
resulted from the Bank's results of operations subsequent to the
quasi-reorganization.
As of December 31, 1998, the Company had $7.6 million in net operating
loss carryforwards available to reduce future taxable earnings, which resulted
in net deferred tax assets of $2.9 million. These net operating loss
carryforwards will expire in varying amounts in the years 2004 through 2018
unless fully utilized by the Company.
Prior to 1997, because of the uncertain nature of the Company's
earnings, the Company recorded a valuation allowance equal to the full amount of
the deferred tax assets. At December 31, 1997, the Company assessed its earnings
history and trends over the past three years, its estimate of future earnings,
and the expiration dates of the net operating loss carryforwards and determined
that it was more likely than not that the benefit of the deferred tax assets
will be realized. Accordingly, no valuation allowance was required at December
31, 1997, and the elimination of the valuation allowance of $2.4 million has
been reflected as an increase to additional paid-in capital.
-22-
24
The following table presents the components of net deferred tax assets:
AS OF DECEMBER 31,
------------------
1998 1997 1996
---- ---- ----
(DOLLARS IN THOUSANDS)
Deferred tax assets............................. $3,026 $2,525 $2,729
Deferred tax liabilities........................ 133 105 85
Valuation allowance............................. -- -- 2,644
------ ------ ------
Net deferred tax assets......................... $2,893 $2,420 $ --
====== ====== ======
The utilization of the net operating loss carryforwards reduces the
amount of the related deferred tax asset by the amount of such utilization at
the current enacted tax rates. Other deferred tax items resulting in temporary
differences in the recognition of income and expenses such as the allowance for
loan losses, loan fees, accumulated depreciation and cash to accrual adjustments
will fluctuate from year-to-year.
As a result of the elimination of the deferred tax valuation allowance,
the Company recognized the full benefit of the deferred tax assets at December
31, 1997. Accordingly, the Company will record a provision for income taxes in
future periods that includes a current and deferred income tax component. The
deferred income tax provision will reflect the benefit of the utilization of the
net operating loss carryforwards.
As a result of the Merger, the Company will have the use of the
Company's net operating loss carryforwards. However, the portion of the
Company's net operating loss carryforwards which will be usable each year by the
Company will be limited under provisions of Section 382 of the Internal Revenue
Code relating to the change in control. The annual limitation is based upon the
purchase price of the Company multiplied by the applicable Long-Term Tax-Exempt
Rate (as defined in the Internal Revenue Code) at the date of acquisition. Based
upon the applicable Long-Term Tax-Exempt Rate for December 1998 acquisitions,
this annual limitation would be approximately $700,000. Management believes it
is more likely than not that the Company will produce sufficient taxable income
to allow the Company to fully utilize its net operating loss carryforwards prior
to their expiration.
Net Income
The Company reported a net loss of $(4,593,000) in 1998 compared to net
income of $376,000 in 1997. The net loss for 1998 resulted from the $3.9 million
non-cash non-recurring compensation and financing costs, expenses associated
with the opening of the Jacksonville and Gainesville offices, expenses related
to the Merger and an increase in the provision for loan losses, partially offset
by an increase in net interest income. Basic earnings (loss) per share were
$(1.46) for 1998 and $.31 for 1997.
Return on Average Assets decreased 643 basis points to a deficit of
(5.43%) in 1998 from .70% in 1997. Return on Average Equity decreased 2716 basis
points to a deficit of (16.54%) in 1998 from 10.62% in 1997.
Net income decreased 2.0% to $376,000 in 1997 from $384,000 in 1996.
The decrease in net income for the year ended December 31, 1997, was
attributable to a decrease in net interest income, and an increase in
noninterest expense, which were partially offset by an increase in the provision
for income taxes. Basic earnings per share was $.31 for 1997 and $.32 for 1996.
Return on Average Assets decreased fifteen basis points to .70% in 1997
from .85% in 1996. Return on Average Equity decreased 256 basis points to 10.62%
in 1997 from 13.18% in 1996.
-23-
25
FINANCIAL CONDITION
Earning Assets
Average earning assets increased 35.7% to $70.0 million in 1998 from
$51.6 million in 1997. During 1998, loans, net of deferred loan fees,
represented 57.0% of average earning assets, investment securities comprised
22.5%, Federal funds sold comprised 7.6%, and Repurchase Securities comprised
12.9%. In 1997, loans, net of deferred loan fees, comprised 66.4% of average
earning assets, investment securities comprised 19.3% and Federal funds sold
comprised 14.3%. The variance in the mix of earning assets is primarily
attributable to the addition of repurchase securities, a short-term investment
of the holding company. The Company manages its securities portfolio and
additional funds to minimize interest rate fluctuation risk and to provide
liquidity.
In 1998, growth in earning assets was funded primarily through an
increase in shareholders' equity via the Offering.
Loan Portfolio
The Company's total loans outstanding increased 99.1% to $67.2 million
as of December 31, 1998 from $33.8 million as of December 31, 1997. Loan growth
for 1998 was funded primarily through the proceeds of the Offering and growth in
average deposits. The growth in the loan portfolio primarily was a result of an
increase in commercial and commercial real estate loans of $30.0 million, or
105.5%, from December 31, 1997 to 1998. Average total loans in 1998 were $40.7
million, $26.6 million less than the year end balance of $67.3 million due to
the increase in loan production for the third and fourth quarters of 1998. The
Company engages in a full complement of lending activities, including
commercial, real estate construction, real estate mortgage, home equity,
installment, SBA guaranteed loans and credit card loans.
The following table presents various categories of loans contained in
the Company's loan portfolio for the periods indicated, the total amount of all
loans for such periods, and the percentage of total loans represented by each
category for such periods:
AS OF DECEMBER 31,
-------------------------------------------
1998 1997
-------------------- --------------------
% OF % OF
BALANCE TOTAL BALANCE TOTAL
------- ----- ------- -----
(DOLLARS IN THOUSANDS)
TYPE OF LOAN
Commercial real estate............................................. $25,326 37.6% $15,281 45.2%
Commercial ........................................................ 33,103 49.2 13,158 38.9
Residential mortgage............................................... 6,047 9.0 3,269 9.7
Consumer........................................................... 2,021 3.0 1,222 3.6
Credit cards and other............................................. 796 1.2 869 2.6
Total loans............................................... 67,293 100% 33,799 100%
==== ====
Net deferred loan fees............................................. (162) (79)
------- -------
Loans, net of deferred loan fees............................... 67,131 33,720
Allowance for loan losses.......................................... (1,074) (481)
------- -------
Net loans................................................. $66,057 $33,239
======= =======
-24-
26
Commercial Real Estate. Commercial real estate loans consist of loans
secured by owner-occupied commercial properties, income-producing properties and
construction and land development. At December 31, 1998, commercial real estate
loans represented 37.6% of outstanding loan balances, compared to 45.2% at
December 31, 1997. The decrease in this category of loans is due to the
increased emphasis on commercial loans and the decreased emphasis on real estate
loans.
Commercial. This category of loans includes loans made to individual,
partnership or corporate borrowers, and obtained for a variety of business
purposes. At December 31, 1998, commercial loans represented 49.2% of
outstanding loan balances, compared to 38.9% at December 31, 1996. The growth in
commercial loans represents the increased emphasis placed on commercial lending
and the strategy of management to diversify risk.
Residential Mortgage. The Company's residential mortgage loans consist
of first and second mortgage loans and construction loans. At December 31, 1998,
residential mortgage loans represented 9.0% of outstanding loan balances,
compared to 9.7% at December 31, 1997. The Company does not actively market
residential mortgages and its portfolio primarily consists of loans to the
principals of other commercial relationships.
Consumer. The Company's consumer loans consist primarily of installment
loans to individuals for personal, family and household purposes, education and
other personal expenditures. At December 31, 1998, consumer loans represented
3.0% of outstanding loan balances, compared to 3.6% at December 31, 1997. The
decrease in consumer loans is attributable to the increased focus on commercial
loans and increased competition for those loans principally by non-bank
institutions.
Credit Card and Other Loans. This category of loans consists of
borrowings by customers using credit cards, overdrafts and overdraft protection
lines. At December 31, 1998, credit card and other loans represented 1.2% of
outstanding loan balances as compared to 2.6% at December 31, 1997. These
credits are primarily extended to the principals of commercial customers.
The Company's only area of credit concentration is commercial and
commercial real estate loans. The Company has not invested in loans to finance
highly-leveraged transactions, such as leveraged buy-out transactions, as
defined by the Federal Reserve Board and other regulatory agencies. In addition,
the Company had no foreign loans or loans to lesser developed countries as of
December 31, 1998.
While risk of loss in the Company's loan portfolio is primarily tied to
the credit quality of the borrowers, risk of loss may also increase due to
factors beyond the Company's control, such as local, regional and/or national
economic downturns. General conditions in the real estate market may also impact
the relative risk in the Company's real estate portfolio. Of the Company's
target areas of lending activities, commercial loans are generally considered to
have greater risk than real estate loans or consumer loans. For this reason the
Company seeks to diversify its commercial loan portfolio by industry, geographic
distribution and size of credits.
From time to time, management of the Company has originated certain
loans which, because they exceeded the Company's legal lending limit, were sold
to other institutions. As a result of the Offering, the Company has an increased
lending limit and has repurchased certain loan participations, thereby
increasing earning assets. Loan participation agreements allow the Company to
repurchase loans at the outstanding principal balance plus accrued interest, if
any, at the Company's discretion.
The Company also purchases participations from other institutions. When
the Company purchases these participations, such loans are subjected to the
Company's underwriting standards as if the loan was originated by the Company.
Accordingly, management of the Company does not believe that loan participations
purchased from other institutions pose any greater risk of loss than loans that
the Company originates.
-25-
27
The repayment of loans in the loan portfolio as they mature is a source
of liquidity for the Company. The following table sets forth the maturity of the
Company's loan portfolio within specified intervals as of December 31, 1998:
DUE
DUE IN 1 DUE AFTER 1 TO AFTER
YEAR OR LESS 5 YEARS 5 YEARS TOTAL
------------ ------- ------- -----
TYPE OF LOAN (DOLLARS IN THOUSANDS)
- ------------
Commercial real estate...................... $ 3,626 $ 8,802 $12,898 $25,326
Commercial.................................. 21,317 10,210 1,576 33,103
Residential mortgage........................ 3,036 1,745 1,266 6,047
Consumer ................................... 1,625 357 39 2,021
Credit card and other loans................. 796 0 0 796
------- ------- ------- -------
Total.............................. $30,400 $21,114 $15,779 $67,293
======= ======= ======= =======
The following table presents the maturity distribution as of December
31, 1998 for loans with predetermined fixed interest rates and floating interest
rates by various maturity periods:
DUE IN 1 DUE AFTER 1 DUE AFTER
YEAR OR LESS TO 5 YEARS 5 YEARS TOTAL
------------ ---------- ------- -----
INTEREST CATEGORY (DOLLARS IN THOUSANDS)
- -----------------
Predetermined fixed interest rate................. $ 9,892 $13,136 $13,246 $36,274
Floating interest rate............................ 20,509 7,978 2,532 31,019
------ ------- ------- -------
Total.................................... $30,401 $21,114 $15,778 $67,293
======= ======= ======= =======
Asset Quality
At December 31, 1998, $725,000 of loans were accounted for on a
non-accrual basis as compared to 1997 when all loans were accruing interest.
Included in the non-accrual loans as of December 31, 1998 were $150,000 of SBA
guaranteed loans. The SBA loans consist of the remaining balance of liquidated
loans pending payment of the SBA guarantee. All of the loans past due 90 days at
December 31, 1998 were SBA loans, of which $236,000 are guaranteed by the SBA,
subject to certain conditions. At December 31, 1997, $624,000 of the loans past
due 90 days were SBA loans, of which $526,000 were guaranteed by the SBA,
subject to certain conditions. See "--Non-performing Assets."
First National Bank of Tampa started its SBA lending program in August
1994. Under this program, the Company originates commercial and commercial real
estate loans to borrowers that qualify for various SBA guaranteed loan products.
The guaranteed portion of such loans generally ranges from 75% to 85% of the
principal balance, the majority of which the Company sells in the secondary
market. The majority of the Company's SBA loans provide a servicing fee of 1.00%
of the outstanding principal balance. Certain SBA loans provide servicing fees
of up to 2.32% of the outstanding principal balance. The Company records the
premium received upon the sale of the guaranteed portion of SBA loans as gain on
sale of loans. The Company does not defer a portion of the gain on sale of such
loans as a yield adjustment on the portion retained, nor does it record a
retained interest, as such amounts are not considered significant. The principal
balance of SBA loans in the Company's loan portfolio at December 31, 1998
totaled $3.9 million, including the SBA guaranteed portion of $2.1 million,
compared to an outstanding balance of $2.9 million at December 31, 1997,
including the SBA guaranteed portion of $1.6 million. At December 31, 1998, the
principal balance of the guaranteed portion of SBA loans cumulatively sold in
the secondary market since the commencement of the SBA program totaled $4.0
million.
-26-
28
The Company generally repurchases the SBA guaranteed portion of loans
in default to fulfill the requirements of the SBA guarantee or in certain cases,
when it is determined to be in the Company's best interest, to facilitate the
liquidation of the loans. The guaranteed portion of the SBA loans are
repurchased at the current principal balance plus accrued interest through the
date of repurchase. Upon liquidation, in most cases, the Company is entitled to
recover up to 120 days of accrued interest from the SBA on the guaranteed
portion of the loan paid. In certain cases, the Company has the option of
charging-off the non-SBA guaranteed portion of the loan retained by the Company
and requesting payment of the SBA guaranteed portion. In such cases, the Company
will have determined that insufficient collateral exists, or the cost of
liquidating the business exceeds the anticipated proceeds to the Company. In all
liquidations, the Company seeks the advice of the SBA and submits a liquidation
plan for approval prior to the commencement of liquidation proceedings. The
payment of any guarantee by the SBA is dependent upon the Company following the
prescribed SBA procedures and maintaining complete documentation on the loan and
any liquidation services. The total principal balance of the guaranteed portion
of SBA loans repurchased during 1998 was $0 as compared to $319,000 for 1997.
As of December 31, 1998, there were no loans other than those disclosed
above that were classified for regulatory purposes as doubtful, substandard or
special mention which (i) represented or resulted from trends or uncertainties
which management reasonably expects will materially impact future operating
results, liquidity, or capital resources, or (ii) represented material credits
about which management is aware of any information which causes management to
have serious doubts as to the ability of such borrowers to comply with the loan
repayment terms. There are no loans other than those disclosed above where known
information about possible credit problems of borrowers causes management to
have serious doubts as to the ability of such borrowers to comply with loan
repayment terms.
Allowance for Loan Losses and Net Charge-Offs
The allowance for loan losses represents management's estimate of an
amount adequate to provide for potential losses inherent in the loan portfolio.
In its evaluation of the allowance and its adequacy, management considers loan
growth, changes in the composition of the loan portfolio, the loan charge-off
experience, the amount of past due and non-performing loans, current and
anticipated economic conditions, underlying collateral values securing loans and
other factors. While it is the Company's policy to provide for a full reserve or
charge-off in the current period the loans in which a loss is considered
probable, there are additional risks of future losses which cannot be quantified
precisely or attributed to particular loans or classes of loans. Because these
risks include the state of the economy, management's judgment as to the adequacy
of the allowance is necessarily approximate and imprecise.
-27-
29
An analysis of the Company's loss experience is furnished in the
following table for the periods indicated, as well as a detail of the allowance
for loan losses:
YEARS ENDED
DECEMBER 31,
------------
1998 1997
---- ----
(DOLLARS IN THOUSANDS)
Balance at beginning of period...................................................... $ 481 $ 432
Charge-offs:
Commercial real estate.......................................................... (39) (24)
Commercial...................................................................... (16) (19)
Residential mortgage............................................................ -- --
Consumer........................................................................ -- --
Consumer credit card and other.................................................. (10) --
------- -----
Total charge-offs........................................................... (65) (43)
------- -----
Recoveries:
Commercial real estate........................................................... 28 32
Commercial....................................................................... 1 --
Residential mortgage............................................................. -- --
Consumer......................................................................... -- --
Credit card and other............................................................ -- --
------- -----
Total recoveries........................................................... 29 32
------- -----
Net (charge-offs)/recoveries........................................................ (36) (11)
Provision for loan losses........................................................... 629 60
------- -----
Balance at end of period............................................................ $ 1,074 $ 481
======= =====
Net (charge-offs)/recoveries as a percentage of average loans....................... (.09)% (.02)%
Allowance for loan losses as a percentage of total loans............................
1.60% 1.42%
Net charge-offs were $36,000 or .09% of average loans outstanding in
1998 as compared to net charge-offs of $11,000 or .02% of average loans
outstanding in 1997. The allowance for loan losses increased 122.9% to $1.1
million or 1.60% of loans outstanding at December 31, 1998 from $481,000 or
1.42% of loans outstanding at December 31, 1997. The allowance for loan losses
as a multiple of net loans charged off was 28.9x for the year ended December 31,
1998 as compared to 44.7x for the year ended December 31, 1997. The increase in
the allowance for the loan losses was primarily related to the establishment of
a specific reserve in the amount of $529,000 for a loan in the Tampa market. Net
recoveries decreased to $29,000 in 1998, representing .09% of average loans
outstanding, from $32,000 in 1997, representing .02% of average loans
outstanding. See "--Asset Quality."
In assessing the adequacy of the allowance, management relies
predominantly on its ongoing review of the loan portfolio, which is undertaken
to ascertain whether there are probable losses which must be charged off and to
assess the risk characteristics of the portfolio in the aggregate. This review
encompasses the judgment of management, utilizing internal loan rating
standards, guidelines provided by the banking regulatory authorities governing
the Company, their loan portfolio reviews as part of the company examination
process and semi-annual independent external loan reviews performed by a
consultant.
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30
Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan" ("SFAS 114") was issued in May 1993. SFAS
114 requires that impaired loans be measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate or
the fair value of the collateral if the loan is collateral dependent. The
Company adopted SFAS 114 on January 1, 1995. At December 31, 1998, the Company
held impaired loans as defined by SFAS 114 of $1.9 million ($649,000 of such
balance is guaranteed by the SBA) for which specific allocations of $580,000
have been established within the allowance for loan losses which have been
measured based upon the fair value of the collateral. Such reserve is allocated
between commercial and commercial real estate. A portion of these impaired loans
have also been classified by the Company as loans past due over 90 days
($315,000) and none have been classified as troubled debt restructurings. At
December 31, 1997, the Company held impaired loans as defined by SFAS 114 of
$372,000 ($300,000 of such balance is guaranteed by the SBA) for which specific
allocations of $72,000 have been established within the allowance for loan
losses which have been measured based upon the fair value of the collateral.
Such reserve is allocated between commercial and commercial real estate. A
portion of these impaired loans have also been classified by the Company as
loans past due over 90 days ($342,000) and as troubled debt restructurings
($249,000). Interest income on such impaired loans during 1998 and 1997 was not
significant.
As shown in the table below, management determined that as of December
31, 1998, 21.3% of the allowance for loan losses was related to commercial real
estate loans, 64.0% was related to commercial loans, 8.5% was related to
residential mortgage loans, 1.5% was related to consumer loans, 4.4% to credit
card and other loans and .3% was unallocated. There was no significant
fluctuation in the allocation of the allowance for loan losses between 1996 and
1997. As shown in the table below, management determined that as of December 31,
1997, 22.8% of the allowance for loan losses was related to commercial real
estate loans, 37.0% was related to commercial loans, 7.3% was related to
residential mortgage loans, 1.8% was related to consumer loans, 4.7% to credit
card and other loans and 26.4% was unallocated. The fluctuations in the
allocation of the allowance for loan losses between 1998 and 1997 is attributed
to the establishment of a specific reserve in the amount of $529,000 for
commercial loans and allocation of reserves for future loans growth which were
previously unallocated.
For the periods indicated, the allowance was allocated as follows:
AS OF DECEMBER 31,
------------------
1998 1997
---- ----
% OF % OF
AMOUNT TOTAL AMOUNT TOTAL
------ ----- ------ -----
(DOLLARS IN THOUSANDS)
Commercial real estate ........ $ 229 21.3% $110 22.8%
Commercial .................... 687 64.0 178 37.0
Residential mortgage .......... 91 8.5 35 7.3
Consumer ...................... 16 1.5 9 1.8
Credit card and other loans.... 47 4.4 23 4.7
Unallocated ................... 3 0.3 126 26.4
------ ----- ---- -----
Total ................ $1,073 100.0% $481 100.0%
====== ===== ==== =====
In considering the adequacy of the Company's allowance for loan losses,
management has focused on the fact that as of December 31, 1998, 37.6% of
outstanding loans are in the category of commercial real estate and 49.2% are in
commercial loans. Commercial loans are generally considered by management to
have greater
-29-
31
risk than other categories of loans in the Company's loan portfolio. Generally,
such loans are secured by accounts receivable, marketable securities, deposit
accounts, equipment and other fixed assets which reduces the risk of loss
inherently present in commercial loans. Commercial real estate loans inherently
have a higher risk due to depreciation of the facilities, limited purposes of
the facilities and the effect of general economic conditions. The Company
attempts to limit this risk by generally lending no more than 75% of the
appraised value of the property held as collateral.
Residential mortgage loans constituted 9.0% of outstanding loans at
December 31, 1998. The majority of the loans in this category represent
residential real estate mortgages where the amount of the original loan
generally does not exceed 80% of the appraised value of the collateral. These
loans are considered by management to be well secured with a low risk of loss.
At December 31, 1998, the majority of the Company's consumer loans were
secured by collateral primarily consisting of automobiles, boats and other
personal property. Management believes that these loans involve less risk than
commercial loans.
A credit review of the loan portfolio by an independent firm has
historically been conducted semi-annually with future reviews planned on a
quarterly basis. The purpose of this review is to assess the risk in the loan
portfolio and to determine the adequacy of the allowance for loan losses. The
review includes analyses of historical performance, the level of nonconforming
and rated loans, loan volume and activity, review of loan files and
consideration of economic conditions and other pertinent information. Upon
completion, the report is approved by the Board and management of the Company.
In addition to the above credit review, the Company's primary regulator, the
OCC, also conducts a periodical examination of the loan portfolio. Upon
completion, the OCC presents its report of examination to the Board and
management of the Company. Information provided from the above two independent
sources, together with information provided by the management of the Company and
other information known to members of the Board, are utilized by the Board to
monitor the loan portfolio and the allowance for loan losses. Specifically, the
Board attempts to identify risks inherent in the loan portfolio (e.g., problem
loans, potential problem loans and loans to be charged off), assess the overall
quality and collectability of the loan portfolio, and determine amounts of the
allowance for loan losses and the provision for loan losses to be reported based
on the results of their review.
Non-performing Assets
At December 31, 1998, $725,000 of loans were accounted for on a
nonaccrual basis as compared to 1997 when all loans were accruing interest. The
remaining balance of non-accrual loans consists of $150,000 of SBA loans and one
credit in the amount of $575,000 to a professional firm in the Tampa market. The
Company intends to proceed with collection efforts and is in the process of
requesting the cash surrender value of the borrowers life insurance from the
insurance companies. However, due to the uncertainty of the borrower=s future
cash flows, the Company has reserved the entire un-collaterized portion of the
loan, totaling $529,000. At December 31, 1998, two loans totaling $315,000 were
accruing interest and were contractually past due 90 days or more as to
principal and interest payments, compared to ten loans totaling $774,000 which
were accruing interest and were contractually past due 90 days or more at
December 31, 1997. All of the loans past due 90 days at December 31, 1998 were
SBA loans, of which $236,000 are guaranteed by the SBA, subject to certain
conditions as compared to $624,000 in SBA loans, of which $526,000 are
guaranteed by the SBA, as of December 31, 1997.
At December 31, 1998, two loans totaling $35,000 (none of which are
also included in the amount of loans past due 90 days or more) were defined as
"troubled debt restructurings." At December 31, 1997, five loans totaling
$265,000 (two of which, totaling $219,000, are also included in the amount of
loans past due 90 days or more) were defined as "troubled debt restructurings."
During 1998, the Company restructured two commercial loans to one borrower that
was experiencing financial difficulties. The Company consolidated the two loans
and renewed the debt for a five-year term. At December 31, 1998, the
consolidated loan had an outstanding principal balance of $35,000. This loan has
been classified as an impaired loan at December 31, 1998 and the Company has
provided a specific reserve of $3,500 representing the Company's estimated
-30-
32
exposure on this loan. The borrower has provided financial statements reflecting
that the business is now generating adequate cash flows to service the loan
going forward.
The Company has policies, procedures and underwriting guidelines
intended to assist in maintaining the overall quality of its loan portfolio. The
Company monitors its delinquency levels for any adverse trends. Non-performing
assets consist of loans on non-accrual status, real estate and other assets
acquired in partial or full satisfaction of loan obligations and loans that are
past due 90 days or more.
The Company's policy generally is to place a loan on nonaccrual status
when it is contractually past due 90 days or more as to payment of principal or
interest. A loan may be placed on nonaccrual status at an earlier date when
concerns exist as to the ultimate collections of principal or interest. At the
time a loan is placed on nonaccrual status, interest previously accrued but not
collected is reversed and charged against current earnings. Recognition of any
interest after a loan has been placed on nonaccrual is accounted for on a cash
basis. Loans that are contractually past due 90 days or more which are well
secured or guaranteed by financially responsible third parties and are in the
process of collection generally are not placed on nonaccrual status.
Investment Portfolio
Total investment securities increased 106.6% to $22.2 million in 1998
from $10.8 million in 1997. At December 31, 1998, investment securities
available for sale totaled $22.0 million, with an unrealized loss of $12,000,
net of tax effect. At December 31, 1997, investment securities available for
sale totaled $10.5 million, with an unrealized gain of $4,000. At December 31,
1998, investment securities available for sale had net unrealized losses of
$19,000, comprised of gross unrealized losses of $88,000 and gross unrealized
gains of $69,000. At December 31, 1997, investment securities available for sale
had net unrealized gains of $6,000, comprised of gross unrealized losses of
$25,000 and gross unrealized gains of $31,000. Average investment securities as
a percentage of average earning assets increased to 22.5% in 1998 from 19.3% in
1997.
The Company invests primarily in direct obligations of the United
States, obligations guaranteed as to principal and interest by the United
States, obligations of agencies of the United States and mortgage-backed
securities. In addition, the Company enters into Federal funds transactions with
its principal correspondent banks, and acts as a net seller of such funds. The
sale of Federal funds amounts to a short-term loan from the Company to another
company.
Proceeds from sales and maturities of available for sale investment
securities decreased 13.8% to $11.7 million in 1998 from $13.5 million in 1997,
with a resulting net gain on sales of $8,000 in 1998. Such proceeds are
generally used to reinvest in additional available for sale investments.
Other investments include Independent Bankers Bank stock, Federal
Reserve Bank stock and Federal Home Loan Bank stock that are required for the
Company to be a member of and to conduct business with such institutions.
Dividends on such investments is determined by the institutions and is payable
semi-annually or quarterly. Other investments decreased 6.8% to $292,000 at
December 31, 1998 from $313,000 at December 31, 1997. Other investments are
carried at cost as such investments do not have readily determinable fair
values.
During 1998, the Company began investing in collateralized mortgage
obligations ("CMOs"). At December 31, 1998, the investment portfolio included
$12.3 million in CMOs. During 1998, the Company maintained its investment in
mortgage-backed securities. At December 31, 1998, the investment portfolio
included $4.6 million in mortgage-backed securities.
-31-
33
The following table presents, for the periods indicated, the carrying
amount of the Company's investment securities, including mortgage-backed
securities.
AS OF DECEMBER 31,
--------------------------------------------------
1998 1997
------------------------ ------------------------
BALANCE % OF TOTAL BALANCE % OF TOTAL
------- ---------- ------- ----------
INVESTMENT CATEGORY (DOLLARS IN THOUSANDS)
-------------------
Available for sale:
U.S. Treasury and other U.S. agency obligations ... $ 5,050 22.7% $ 5,027 46.7%
Mortgage-backed securities ........................ 16,900 76.0 5,425 50.4
------- ----- ------- -----
21,950 98.7 10,452 97.1
Other investments ................................... 292 1.3 313 2.9
------- ----- ------- -----
Total ................................ $22,242 100.0% $10,765 100.0%
======= ===== ======= =====
The Company utilizes its available for sale investment securities,
along with cash and Federal funds sold, to meet its liquidity needs.
As of December 31, 1998, $16.9 million, or 76.0%, of the investment
securities portfolio consisted of mortgage-backed securities compared to $5.4
million, or 50.4%, of the investment securities portfolio as of December 31,
1997. During 1999, $4.2 million of all mortgage-backed securities will mature.
The maturities of mortgage-backed securities, of which 24.6% were adjustable,
may be shortened by prepayments which tend to increase in a declining interest
rate environment.
As a result of the adoption of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115"), the Company has segregated its investment securities
portfolio into securities held to maturity and those available for sale.
Investments held to maturity are those for which management has both the ability
and intent to hold to maturity and are carried at amortized cost. At December
31, 1998 and 1997, no investments were classified as held to maturity.
Investments available for sale are securities identified by management as
securities which may be sold prior to maturity in response to various factors
including liquidity needs, capital compliance, changes in interest rates or
portfolio risk management. The available for sale investment securities provide
interest income and serve as a source of liquidity for the Company. These
securities are carried at fair market value, with unrealized gains and losses,
net of taxes, reported as a separate component of shareholders' equity.
Investment securities with a carrying value of approximately $16.1
million and $9.3 million at December 31, 1998 and 1997, respectively, were
pledged to secure deposits of public funds, repurchase agreements and certain
other deposits as provided by law.
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34
The maturities and weighted average yields of the investment securities
portfolio at December 31, 1998 are presented in the following table using
primarily the stated maturities, excluding the effects of prepayments.
WEIGHTED
AVERAGE
AMOUNT YIELD(1)
------ --------
AVAILABLE FOR SALE: (DOLLARS IN THOUSANDS)
U.S. Treasury and other U.S. agency obligations:
0 - 1 year...................................................................... $ 2,994 5.37%
Over 1 through 5 years.......................................................... 2,017 5.62
Over 5 years ................................................................... -- N/A
------- ----
Total........................................................................... 5050
-------
Mortgage-backed securities:
0-1 year........................................................................ 4,156 4.39
Over 1 through 5 years.......................................................... 9,658 5.59
Over 5 years.................................................................... 1,960 5.52
Over 10 years................................................................... 1,183 5.49
-------
Total........................................................................... 16,950 5.33
-------
Total available for sale.............................................. $21,969 5.27%
=======
(1) The Company has not invested in any tax-exempt
obligations.
As of December 31, 1998, except for the U.S. Government and its
agencies, there was not any issuer within the investment portfolio who
represented 10% or more of the shareholders' equity.
Deposits and Short-Term Borrowings
The Company's average deposits increased 8.6%, or $4.0 million, to
$49.3 million during 1998 from $45.3 million during 1997. This growth is
attributed to a 53.9% increase in noninterest-bearing demand deposits, a 6.2%
decrease in money market deposits, a 28.8% increase in savings deposits, a .2%
decrease in certificates of deposits of $100,000 or more and a 4.3% decrease in
other time deposits.
Average noninterest-bearing demand deposits increased 53.9% to $8.8
million in 1998 from $5.7 million in 1997. As a percentage of average total
deposits, these deposits increased to 17.9% in 1998 from 12.6% in 1997.
Noninterest-bearing demand deposits increased 83.8% to $11.8 million at December
31, 1998, from $6.4 million at December 31, 1997. This increase is attributable
to large business deposits retained by the Company during 1998.
Average interest-bearing demand deposits remained relatively constant
from 1997 to 1998. Savings deposits increased 204.9% to $17.9 million at
December 31, 1998, form $5.9 million at December 31, 1997. The increase in
average savings deposits is primarily attributable to an increase of $11.9
million at year-end 1998 in the Company's prime investments account which is a
specialized savings account that pays interest at 60.0% of the prime rate as
quoted in The Wall Street Journal on accounts with a balance of greater than
$25,000. The average balances of money market accounts and the year end balances
decreased slightly from 1997 to 1998. This decrease is attributable primarily to
decreases in commercial deposit balances. Average balances of certificates of
deposit of $100,000 or more remained constant at $10.5 million for both 1998 and
1997. The average balance for other time deposits decreased 4.5% from 1997 to
1998 due to a slight decrease in rates. Other time deposits increased 8.4% to
$20.1 million at December 31, 1998 compared to $18.5 million at December 31,
1997.
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35
The following table presents, for the periods indicated, the average
amount of and average rate paid on each of the following deposit categories:
YEARS ENDING DECEMBER 31,
-------------------------
1998 1997
---- ----
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE
------- ---- ------- ----
DEPOSIT CATEGORY (DOLLARS IN THOUSANDS)
----------------
Noninterest-bearing demand.................... $ 8,818 --% $ 5,729 --%
Interest-bearing demand....................... 2,956 2.54 2,894 2.25
Money market.................................. 1,417 2.47 1,511 2.51
Savings ...................................... 7,353 4.72 5,707 4.77
Certificates of deposit of $100,000 or more... 10,548 5.49 10,530 5.55
Other Time.................................... 18,161 5.90 18,974 5.84
------- ------
Total.................................... $49,253 4.28% $45,345 4.58%
======= =======
Interest-bearing deposits, including certificates of deposit, will
continue to be a major source of funding for the Company. However, there is no
specific emphasis placed on time deposits of $100,000 and over. During 1998,
aggregate average balances of time deposits of $100,000 and over comprised 21.4%
of total deposits compared to 23.2% for the prior year. The average rate on
certificates of deposit of $100,000 or more decreased to 5.49% in 1998, compared
to 5.55% in 1997. The rates on certificates of deposit of $100,000 or more are
generally lower than the rates on other time deposits as such certificates are
generally shorter in term.
The following table indicates amounts outstanding of time certificates
of deposit of $100,000 or more and respective maturities:
DECEMBER 31,
------------
1998 1997
---- ----
(DOLLARS IN THOUSANDS)
AMOUNT AVERAGE AMOUNT AVERAGE
------ RATE ------ RATE
---- ----
3 months or less..................... $2,861 4.61% $ 3,520 5.18%
3-6 months........................... 1,847 5.22 1,253 5.64
6-12 months.......................... 1,914 5.69 3,199 5.41
Over 12 months....................... 2,927 6.11 2,242 4.89
------ -------
Total........................... $9,549 5.49% $10,214 5.55%
====== =======
Average short-term borrowings increased 40.2% to $6.9 million in 1998
from $4.9 million in 1997. Short-term borrowings consist of treasury tax and
loan deposits and repurchase agreements with certain commercial customers.
Average treasury tax and loan deposits increased 72.9% to $1,641,000 in 1998
from $949,000 in 1997. Average repurchase agreements increased 32.3% to $5.2
million in 1998 from $4.0 million in 1997. The treasury tax and loan deposits
provide an additional liquidity resource to the Company as such funds are
invested in Federal funds sold. The repurchase agreements represent an
accommodation to
-34-
36
commercial customers that seek to maximize their return on liquid assets. The
Company invests these funds in Federal funds sold and earns a contractual margin
of 50 to 100 basis points on such invested funds.
Repurchase agreements decreased 4.1% to $5.7 million at December 31,
1998 from $5.9 million at December 31, 1997. Management believes that the
increase in average balances more appropriately reflects the trend of increasing
repurchase agreements.
The following table presents the components of short-term borrowings
and the average rates on such borrowings for the years ended December 31, 1998
and 1997:
MAXIMUM
AMOUNT AVERAGE
OUTSTANDING AT AVERAGE AVERAGE ENDING RATE AT
YEAR ENDED DECEMBER 31, ANY MONTH END BALANCE RATE BALANCE YEAR END
- ----------------------- ------------- ------- ---- ------- --------
(DOLLARS IN THOUSANDS)
1998
Treasury tax and loan deposits...... $2,539 $1,641 5.97% $ 50 4.22%
Repurchase agreements............... 7,964 5,237 4.41 5,669 3.72
------ ------
Total........................... $6,878 $5,719
====== ======
1997
Treasury tax and loan deposits...... $2,414 $ 949 4.44% $2,406 5.19%
Repurchase agreements............... 6,257 3,957 4.5 5,912 4.66
------ ------
Total........................... $4,906 $8,318
====== ======
Capital Resources
Shareholders' equity increased 574.59% to $42.6 million in 1998 from
$6.3 million in 1997. This increase results primarily from the Company's public
offering of $41 million on August 4, 1998, the issuance of common shares and
units to the founders of the Company and foreign investors and the exercise of
stock options, which were offset by the net loss from operations.
Average shareholders' equity as a percentage of total average assets is
one measure used to determine capital strength. The ratio of average
shareholders' equity to average assets increased to 32.8% in 1998 from 6.5% in
1997 and 6.4% in 1996.
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37
REGULATORY CAPITAL CALCULATION
1998 1997
---- ----
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
(DOLLARS IN THOUSANDS)
Tier 1 risk based:
Actual.............................. $42,600 66.27% $ 4,138 13.00%
Minimum required.................... 2,579 4 1,273 4
------- ----- ------- -----
Excess above minimum................ $40,021 62.27% $ 2,865 9.00%
======= ====== ======= =====
Total risk based:
Actual............................. $43,568 67.77% $ 4,546 14.29%
Minimum required................... 5,159 8 2,546 8
------- ----- ------- -----
Excess above minimum............... $38,409 59.77% $ 2,000 6.29%
======= ====== ======= =====
Leverage:
Actual.............................. $42,600 39.22% $ 4,138 7.42%
Minimum required.................... 4,359 4.00 2,231 4
------- ----- ------- -----
Excess above minimum................ $38,241 35.22% $ 1,907 3.42%
======= ====== ======= =====
Total risked based assets....... $64,487 $31,819
Total average assets............ $84,605 $54,089
The various federal bank regulators, including the Federal Reserve and
the FDIC, have risk-based capital requirements for assessing bank capital
adequacy. These standards define capital and establish minimum capital standards
in relation to assets and off-balance sheet exposures, as adjusted for credit
risks. Capital is classified into two tiers. For banks, Tier 1 or "core" capital
consists of common shareholders' equity, qualifying noncumulative perpetual
preferred stock and minority interests in the common equity accounts of
consolidated subsidiaries, reduced by goodwill, other intangible assets and
certain investments in other corporations ("Tier 1 Capital"). Tier 2 Capital
consists of Tier 1 Capital, as well as a limited amount of the allowance for
possible loan losses, certain hybrid capital instruments (such as mandatory
convertible debt), subordinated and perpetual debt and non-qualifying perpetual
preferred stock ("Tier 2 Capital").
At December 31, 1994, a risk-based capital measure and a minimum ratio
standard was fully phased in, with a minimum total capital ratio of 8.00% and
Tier 1 Capital equal to at least 50% of total capital. The Federal Reserve also
has a minimum leverage ratio of Tier 1 Capital to total assets of 3.00%. The
3.00% Tier 1 Capital to total assets ratio constitutes the leverage standard for
bank holding companies and BIF-insured state-chartered non-member banks, and
will be used in conjunction with the risk-based ratio in determining the overall
capital adequacy of banking organizations. The FDIC has similar capital
requirements for BIF-insured state-chartered non-member banks.
The Federal Reserve and the FDIC have emphasized that the foregoing
standards are supervisory minimums and that an institution would be permitted to
maintain such minimum levels of capital only if it were rated a composite "one"
under the regulatory rating systems for bank holding companies and banks. All
other bank holding companies are required to maintain a leverage ratio of 3.00%
plus at least 1.00% to 2.00% of additional capital. These rules further provide
that banking organizations experiencing internal growth or making acquisitions
will be expected to maintain capital positions substantially above the minimum
supervisory levels and comparable to peer group averages, without significant
reliance on intangible assets. The Federal Reserve continues to consider a
"tangible Tier 1 leverage ratio" in evaluation proposals for expansion or new
activities. The tangible Tier 1 leverage ratio is the ratio of a banking
organization's Tier 1 Capital less all intangibles, to total average assets less
all intangibles.
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The Company's Tier 1 (to risk-weighted assets) capital ratio increased
to 66.27% in 1998 from 13.0% in 1997. The Company's total risk based capital
ratio increased to 67.77% in 1998 from 14.29% in 1997. These ratios exceed the
minimum capital adequacy guidelines imposed by regulatory authorities on banks
and bank holding companies, which are 4.00% for Tier 1 capital and 8.00% for
total risk based capital. The ratios also exceed the minimum guidelines imposed
by the same regulatory authorities to be considered "well-capitalized," which
are 6.00% of Tier 1 capital and 10.00% for total risk based capital.
The Company does not have any commitments which it believes would
reduce its capital to levels inconsistent with the regulatory definition of a
"well capitalized" financial institution. See "Business--Supervision and
Regulation."
Interest Rate Sensitivity and Liquidity Management
Liquidity is the ability of a company to convert assets into cash or
cash equivalents without significant loss and to raise additional funds by
increasing liabilities. Liquidity management involves maintaining the Company's
ability to meet the day-to-day cash flow requirements of its customers, whether
they are depositors wishing to withdraw funds or borrowers requiring funds to
meet their credit needs.
The primary function of asset/liability management is not only to
assure adequate liquidity in order for the Company to meet the needs of its
customer base, but to maintain an appropriate balance between interest-sensitive
assets and interest-sensitive liabilities so that the Company can profitably
deploy its assets. Both assets and liabilities are considered sources of
liquidity funding and both are, therefore, monitored on a daily basis.
Interest rate sensitivity is a function of the repricing
characteristics of the Company's portfolio of assets and liabilities. These
repricing characteristics are the time frames within which the interest-bearing
assets and liabilities are subject to change in interest rates either at
replacement, repricing or maturity during the life of the instruments. Interest
rate sensitivity management focuses on repricing relationships of assets and
liabilities during periods of changes in market interest rates. Interest rate
sensitivity is managed with a view to maintaining a mix of assets and
liabilities that respond to changes in interest rates within an acceptable time
frame, thereby managing the effect of interest rate movements on net interest
income. Interest rate sensitivity is measured as the difference between the
volume of assets and liabilities that are subject to repricing at various time
horizons. The differences are interest sensitivity gaps: less than one month,
one to three months, four to twelve months, one to five years, over five years
and on a cumulative basis. The following table shows interest sensitivity gaps
for these different intervals as of December 31, 1998.
ONE FOUR-
MONTH ONE-THREE TWELVE ONE-FIVE OVER FIVE NONINTEREST
OR LESS MONTHS MONTHS YEARS YEARS SENSITIVE TOTAL
------- ----- ------ ----- ----- --------- -----
DECEMBER 31, 1998 (DOLLARS IN THOUSANDS)
- -----------------
ASSETS
Earning assets:
Available for sale investment
Securities .............. -- $ 4,065 $ 7,213 $ 8,732 $ 1,959 -- $ 21,950
Other investments ........... -- -- -- -- 292 -- 292
Repurchase agreements ....... $ 9,700 -- -- -- -- -- 9,700
Federal funds sold .......... 6,950 -- -- -- -- -- 6,950
Loans ....................... 5,334 3,179 21,888 21,114 15,778 -- 67,293
-------- -------- -------- -------- -- --------
Total earning assets ........... 21,984 7,244 29,101 29,846 18,029 -- 106,204
-------- -------- -------- -------- -------- -- --------
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ONE FOUR-
MONTH ONE-THREE TWELVE ONE-FIVE OVER FIVE NONINTEREST
OR LESS MONTHS MONTHS YEARS YEARS SENSITIVE TOTAL
------- --------- ------ -------- --------- ----------- -----
LIABILITIES
Interest-bearing liabilities:
Interest-bearing demand deposits .... 3,913 -- -- -- -- -- 3,913
Savings deposits .................... 17,200 -- -- -- -- 710 17,910
Money market deposits ............... -- -- -- -- 1,341 1,341
Certificates of deposit of
$100,000 or more................... $ 725 $ 2,136 $ 3,761 $ 2,927 -- -- $ 9,549
Other time deposits ................. 2,662 1,297 5,631 10,476 -- -- 20,066
Repurchase agreements ............... 5,669 -- -- -- -- -- 5,669
Other borrowed funds ................ 50 -- -- -- -- 50
-------- -------- -------- -------- -------- -------- --------
Total interest-bearing
Liabilities ................. 30,219 3,433 9,392 13,403 0 2,051 58,498
-------- -------- -------- -------- -------- -------- --------
Noninterest-bearing demand deposits .... -- -- -- -- -- 11,840 11,840
Other noninterest liabilities .......... -- -- -- -- -- 35,866 35,866
-------- -------- -------- -------- -------- -------- --------
Noninterest-bearing sources
of funds-net ................ $ -- $ -- $ -- $ -- $ -- $ 47,706 $ 47,706
-------- -------- -------- -------- -------- -------- --------
Interest sensitivity gap:
Amount .............................. $ (8,235) $ 3,811 $ 19,709 $ 16,443 $ 18,029 $(49,757) $ --
-------- -------- -------- -------- -------- -------- --------
Cumulative amount ................... $ (8,235) $ (4,424) $ 15,285 $ 31,728 $ 49,757 $ -- $ --
Percent of total earning assets ..... (7.75%) 3.59% 18.55% 15.48% 16.98% (46.85%)
Cumulative percent of total
Earning assets..................... (7.75%) (4.17%) 14.39% 29.87% 46.85%
Ratio of rate sensitive assets to rate
sensitive liabilities ............. .73x 2.11x 3.10x 2.23x N/A
Cumulative ratio of rate sensitive
assets to rate sensitive
liabilities ....................... .73x 1.15x 1.36x 1.56x 1.88x
In the current interest rate environment, the liquidity and maturity
structure of the Company's assets and liabilities are important to the
maintenance of acceptable performance levels. A decreasing rate environment
negatively impacts earnings as the Company's rate-sensitive assets generally
reprice faster than its rate-sensitive liabilities. Conversely, in an increasing
rate environment, earnings are positively impacted. This asset/liability
mismatch in pricing is referred to as gap ratio and is measured as rate
sensitive assets divided by rate sensitive liabilities for a defined time
period. A gap ratio of 1.00 means that assets and liabilities are perfectly
matched as to repricing. Management has specified gap ratio guidelines for a one
year time horizon of between .80 and 1.20 years for the Bank. At December 31,
1998, the Bank had a cumulative gap ratio of 1.11 for the one year period ending
December 31, 1999 At December 31, 1998, the Company had gap ratios of
approximately 1.15 for the next three month time period and 1.36 for the one
year period ending December 31, 1999. Thus, over the next twelve months,
rate-sensitive assets will reprice faster than rate-sensitive liabilities. This
rate sensitivity gap exceeds managements' guideline due to the investment of the
proceeds from the offerings.
The allocations used for the interest rate sensitivity report above
were based on the maturity schedules for the loans and deposits and the duration
schedules for the investment securities. All interest-bearing demand deposits
were allocated to the one month or less category with the exception of personal
savings deposit accounts which were allocated to the noninterest sensitive
category. Changes in the mix of earning assets or supporting liabilities can
either increase or decrease the net interest margin without affecting interest
rate sensitivity. In
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40
addition, the net interest spread between an asset and its supporting liability
can vary significantly while the timing of repricing for both the asset and the
liability remain the same, thus impacting net interest income. This is referred
to as basis risk and, generally, relates to the possibility that the repricing
characteristics of short-term assets tied to the Company's prime lending rate
are different from those of short-term funding sources such as certificates of
deposit.
Varying interest rate environments can create unexpected changes in
prepayment levels of assets and liabilities which are not reflected in the
interest sensitivity analysis report. Prepayments may have significant effects
on the Company's net interest margin. Because of these factors and in a static
test, interest sensitivity gap reports may not provide a complete assessment of
the Company's exposure to changes in interest rates. Management utilizes
computerized interest rate simulation analysis to determine the Company's
interest rate sensitivity. The table above indicates the Company is in an asset
sensitive gap position for the first year, then moves into a matched position
through the five year period. Overall, due to the factors cited, current
simulations results indicate a relatively low sensitivity to parallel shifts in
interest rates. A liability sensitive company will generally benefit from a
falling interest rate environment as the cost of interest-bearing liabilities
falls faster than the yields on interest-bearing assets, thus creating a
widening of the net interest margin. Conversely, an asset sensitive company will
benefit from a rising interest rate environment as the yields on earning assets
rise faster than the costs of interest-bearing liabilities. Management also
evaluates economic conditions, the pattern of market interest rates and
competition to determine the appropriate mix and repricing characteristics of
assets and liabilities required to produce a targeted net interest margin.
In addition to the gap analysis, management uses rate shock simulation
to measure the rate sensitivity of its balance sheet. Rate shock simulation is a
modeling technique used to estimate the impact of changes in rates on the
Company's net interest margin. The Company measures its interest rate risk by
estimating the changes in net interest income resulting from instantaneous and
sustained parallel shifts in interest rates of plus or minus 200 basis points
over a period of twelve months. The Company's most recent rate shock simulation
analysis which was performed as of January 31, 1999, indicates that a 200 basis
point increase in rates would cause an increase in net interest income of
$262,000 over the next twelve month period. Conversely, a 200 basis point
decrease in rates would cause a decrease in net interest income of $262,000 over
a twelve month period.
This simulation is based on management's assumption as to the effect of
interest rate changes on assets and liabilities and assumes a parallel shift of
the yield curve. It also includes certain assumptions about the future pricing
of loans and deposits in response to changes in interest rates. Further, it
assumes that delinquency rates would not change as a result of changes in
interest rates although there can be no assurance that this will be the case.
While this simulation is a useful measure of the Company's sensitivity to
changing rates, it is not a forecast of the future results and is based on many
assumptions, that if changed, could cause a different outcome. In addition, a
change in U.S. Treasury rates in the designated amounts accompanied by a change
in the shape of the Treasury yield curve would cause significantly different
changes to net interest income than indicated above.
Generally, the Company's commercial and commercial real estate loans
are indexed to the prime rate. A portion of the Company's investments in
mortgage-backed securities are indexed to U.S. Treasury rates. Accordingly, any
changes in these indices will have a direct impact on the Company's interest
income. The majority of the Company's savings deposits are indexed to the prime
rate. Certificates of deposit are generally priced based upon current market
conditions which include changes in the overall interest rate environment and
pricing of such deposits by competitors. Other interest-bearing deposits are not
priced against any particular index, but rather, reflect changes in the overall
interest rate environment. Repurchase agreements are indexed to the average
daily Federal funds sold rate and other borrowed funds are indexed to U.S.
Treasury rates. The Company adjusts the rates and terms of its loans and
interest-bearing liabilities in response to changes in the interest rate
environment.
The Company does not currently engage in trading activities or use
derivative instruments to manage interest rate risk.
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41
At December 31, 1998, available for sale investment securities with a
carrying value of approximately $18.8 million are scheduled to mature within the
next five years. Of this amount, $11.3 million is scheduled to mature within one
year. The Company's main source of liquidity is Federal funds sold and
repurchase agreements. Average Federal funds sold were $9.0 million in 1998, or
12.9% of average earning assets, compared to $7.4 million in 1997, or 14.3% of
average earning assets. Federal funds sold totaled $7.0 million at December 31,
1998, or 6.6% of earning assets, compared to $10.2 million at December 31, 1997,
or 18.7% of earning assets. Repurchase agreements totaled $9.7 million at
December 31, 1998, compared to $0 at December 31, 1997.
At December 31, 1998, loans with a carrying value of approximately
$51.5 million are scheduled to mature within the next five years. Of this
amount, $30.4 million is scheduled to mature within one year.
At December 31, 1998, time deposits with a carrying value of
approximately $29.6 million are scheduled to mature within the next five years.
Of this amount, $16.2 million is scheduled to mature within one year.
The Company's average loan-to-deposit ratio increased 54 basis points
to 81.0% for 1998 and 75.6% for 1997. The Company's total loan-to-deposit ratio
increased 298 basis points to 104.1% at December 31, 1998 from 74.3% at December
31, 1997, due to the increased loan production and the investment of proceeds
form the offering.
The Company has short-term funding available through various federal
funds lines of credit with other financial institutions and its membership in
the Federal Home Loan Bank of Atlanta ("FHLBA"). Further, the FHLBA membership
provides the availability of participation in loan programs with varying
maturities and terms. At December 31, 1998, the Company had no short-term
borrowings from the FHLBA or any other financial institution.
There are no known trends, demands, commitments, events or
uncertainties that will result in or that are reasonably likely to result in
liquidity increasing or decreasing in any material way.
It is not anticipated that the Company will find it necessary to raise
additional funds to meet expenditures required to operate the business of the
Company over the next twelve months. All anticipated material expenditures for
such period have been identified and provided for out of the proceeds of the
Offering.
YEAR 2000
As the year 2000 ("Year 2000") approaches, an important business issue
has emerged regarding existing application software programs and operating
systems. Many existing application software products, including the Company's,
were designed to accommodate a two-digit year. For example, "98" is stored on
the system and represents 1998 and "00," represents 1900. The Company primarily
utilizes M&I Data Services, Inc. ("M&I"), a third-party vendor, to provide its
primary banking applications, including core processing systems. In addition,
the Company also uses M&I's software for certain ancillary computer
applications. M&I has committed substantial resources in the process of
modifying, upgrading or replacing its computer applications to ensure timely
Year 2000 compliance. M&I has notified the Company that it has successfully
completed the conversion of its banking systems to a Year 2000-ready platform.
Prior to the actual conversion, both the Company and M&I conducted comprehensive
awareness, assessment, renovation, and testing phases as part of their
respective Year 2000 projects. Each of these phases helped both organizations
ensure that they understood the scope of the year 2000 impact on their
day-to-day business. In August 1998, M&I Data Services' Year 2000 Outsourcing
Solution, the Company's core processing systems, was certified by the
Information Technology of America (ITAA). ITAA 2000 is the banking industry's
century date change certification program. The program examines processes and
methods used by companies to perform their Year 2000 software conversion. M&I
has provided all upgrades, modifications and systems enhancements to the Company
in accordance with its data processing agreement and without additional costs to
the Company.
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42
In addition to its core processing systems, the Company has implemented
a Year 2000 compliance program whereby the Company is reviewing the Year 2000
issues that may be faced by its other third-party vendors and loan and deposit
customers. Under such program, the Company will examine the need for
modifications or replacement of all non-Year 2000 compliant pieces of software.
This process is ongoing, however, to date the Company has not identified any
mission critical software systems that are not Year 2000 compliant or in the
process of being modified for compliance. Within the last nine months, the
Company has made a physical inventory of its computer and other hardware and
equipment to determine if such hardware is Year 2000 compliant. As part of this
process, the Company has replaced certain equipment and hardware at a cost of
$36,000. The Company has also established a reserve in the amount of $5,000 for
the cost of outside solution providers to review, assess and provide testing of
its internal computer network and other internal systems. Management of the
Company does not currently expect that the cost of its Year 2000 compliance
program will exceed the amount of the established reserves nor will any costs in
excess of these reserves be material to its financial condition.
An area of concern by the Company, the Bank and its primary regulator,
the OCC is the effect of Year 2000 issues on its deposit and loan customers.
Failure to address Year 2000 related issues could have significant impact on the
ability of certain customers of the Company to continue operations. The
Company's loan portfolio could be negatively impacted if customers are unable to
honor loan agreements and defaults occur as a result of failure to address Year
2000 issues. In February of 1998, the Company conducted a review of all loan
relationships in excess of $25,000 to determine the potential effect of Year
2000 issues on the customers systems. The primary focus of this review was a
determination of the readiness of the customer to address Year 2000 problems and
the effect of such readiness on the customer's ability to repay loans.
Management identified a small number of customers which could be potentially be
affected by Year 2000 issues, and has addressed the Company's concern with these
customers. Continuing monitoring of these customer relationships will be made to
ensure that the necessary modifications to systems will be made on a timely
basis. In addition, the Company now reviews Year 2000 related issues, as part of
its normal underwriting criteria and loan approval process. The Company also
includes Year 2000 compliance requirements and covenants requiring compliance
within its standard loan agreements. Although the Company has taken extensive
steps to address Year 2000 customer related issues; there can be no assurance
that these customers will be Year 2000 compliant. Failure of certain customers
to adequately address these issues could result in loan defaults which would
negatively impact the Company's earnings.
The Company believes that its mission critical systems are currently
Year 2000 compliant with the remaining systems compliant by March 31, 1999, and
expects that it will satisfy such compliance program without material disruption
of its operations. Management of the Company has also evaluated the potential
effect on M&I's data processing systems should events beyond M&I's control such
as power and communications failures occur as a result of Year 2000 issues. In
addition, the Company's internal systems could fail as a result of undetected
system or software errors or failure of certain infrastructure which is beyond
the control of the Company. The Company has prepared a Year 2000 Contingency
Strategy and Policy (the "Plan") to address the various recovery solutions for
Year 2000-related issues, which may arise from the most likely Year 2000
scenarios, based on current available information. The Plan identifies and
classifies areas within the organization which could potentially be affected by
Year 2000 issues. The identified areas have been assigned a status of Mission
Critical, Long-Term Mission Critical, or Non-Mission Critical. Based on these
classifications, contingency plans have been prepared to provide a minimum
acceptable level of service on an ongoing basis to the Company's customers.
Outside solution providers will review the Plan and testing on mission critical
functions will be completed by the end of the first quarter of 1999.
Although the Company and the Bank have taken extensive steps to address
Year 2000 related issues, there can be no assurance that all necessary
modifications will be identified and corrected or that unforeseen difficulties
or costs will not arise. In addition, there can be no assurance that the failure
of the Company's internal systems or the systems provided by M&I or other
companies on which the Company's systems rely will not negatively impact the
Company's systems or operations.
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ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS 130). This statement establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains,
and losses) in a full set of general-purpose financial statements. SFAS 130
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statements that is displayed with the same prominence as other financial
statements. SFAS 130 does not require a specific format for that financial
statements but requires that an enterprise display an amount representing total
comprehensive income for the period in that financial statements. Additionally,
SFAS 130 requires that an enterprise (a) classify items of other comprehensive
income by their nature in a financial statements and (b) display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of a statement of financial
position. This Statement is effective for fiscal years beginning after December
15, 1997. Reclassification of financial statements for earlier periods provided
for comparative purposes is required. The Company adopted the requirements of
SFAS No. 130 in the year ended December 31, 1998.
In June 1997, the FASB issued SFAS No. 131, Disclosure about Segments
of and Enterprise and Related Information." This statement establishes standards
for reporting operating segments by public business enterprises in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports to
shareholders. SFAS No. 131 also establishes standards for related disclosures
about products and services, geographic areas, and major customers. This
statement is effective for fiscal years beginning after December 13, 1997. The
Company does not expect any significant changes to its current reporting format
in response to SFAS No. 131.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and hedging activities. SFAS No.
133 is effective for fiscal years beginning after June 15, 1999. Retroactive
application to financial statements of prior periods is not required. The
Company does not currently have any derivative instruments nor is it involved in
hedging activities.
In March 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1") which provides guidance for
the accounting of such costs. SOP 98-1 is effective for fiscal years beginning
after December 15, 1998. The adoption of the SOP is not expected to have a
significant effect on the Company.
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, "Reporting on the Cost of Start-Up Activities" ("SOP
98-5") which requires costs of start-up activities and organization costs to be
expensed as incurred. SOP 98-5 is effective for fiscal years beginning after
December 15, 1998, with earlier application encouraged. The Company elected to
early adopt SOP 98-5 for the year ended December 31, 1998.
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EFFECTS OF INFLATION AND CHANGING PRICES
Inflation generally increases the cost of funds and operating overhead,
and to the extent loans and other assets bear variable rates, the yields on such
assets. Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on the performance of a
financial institution than the effects of general levels of inflation. Although
interest rates do not necessarily move in the same direction or to the same
extent as the prices of goods and services, increases in inflation generally
have resulted in increased interest rates. In addition, inflation affects
financial institutions' increased cost of goods and services purchased, the cost
of salaries and benefits, occupancy expense, and similar items. Inflation and
related increases in interest rates generally decrease the market value of
investments and loans held and may adversely effect liquidity, earnings, and
shareholders' equity. Mortgage originations and refinancings tend to slow as
interest rates increase, and can reduce the Company's earnings from such
activities and the income from the sale of residential mortgage loans in the
secondary market.
MONETARY POLICIES
The results of operations of the Company will be affected by credit
policies of monetary authorities, particularly the Federal Reserve Board. The
instruments of monetary policy employed by the Federal Reserve Board include
open market operations in U.S. Government securities, changes in the discount
rate on member Company borrowings, changes in reserve requirements against
member Company deposits and limitations on interest rates which member Company
may pay on time and savings deposits. In view of changing conditions in the
national economy and in the money markets, as well as the effect of action by
monetary and fiscal authorities, including the Federal Reserve Board, no
prediction can be made as to possible future changes in interest rates, deposit
levels, loan demand or the business and earnings of the Company or the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's financial performance is subject to risk from interest
rate fluctuations. This interest rate risk arises due to differences between the
amount of interest-earning assets and the amount of interest-earning liabilities
subject to repricing over a specified period and the amount of change in
individual interest rates. In the current interest rate environment, the
liquidity and maturity structure of the Company's assets and liabilities are
important to the maintenance of acceptable performance levels. A decreasing rate
environment negatively impacts earnings as the Company's rate-sensitive assets
generally reprice faster than its rate-sensitive liabilities. Conversely, in an
increasing rate environment, earnings are positively impacted. This
asset/liability mismatch in pricing is referred to as gap ratio and is measured
as rate sensitive assets divided by rate sensitive liabilities for a defined
time period. A gap ratio of 1.00 means that assets and liabilities are perfectly
matched as to repricing. Management has specified gap ratio guidelines for a one
year time horizon of between .80 and 1.20 years for the Bank. At December 31,
1998, the Bank had a cumulative gap ratio of 1.11 for the one year period ending
December 31, 1999. At December 31, 1998, the Company had gap ratios of
approximately 1.15 for the next three month time period and 1.36 for the one
year period ending December 31, 1999. Thus, over the next twelve months,
rate-sensitive assets will reprice faster than rate-sensitive liabilities. This
rate sensitivity gap exceeds managements' guideline due to the investment of the
proceeds from the offerings.
Varying interest rate environments can create unexpected changes in
prepayment levels of assets and liabilities which are not reflected in the
interest sensitivity analysis report. Prepayments may have significant effects
on the Company's net interest margin. Because of these factors and in a static
test, interest sensitivity gap reports may not provide a complete assessment of
the Company's exposure to changes in interest rates. Management utilizes
computerized interest rate simulation analysis to determine the Company's
interest rate sensitivity. The table above indicates the Company is in an asset
sensitive gap position for the first year, then moves into a matched position
through the five year period. Overall, due to the factors cited, current
simulations results indicate a relatively low sensitivity to parallel shifts in
interest rates. A liability sensitive company will generally benefit from a
falling interest rate environment as the cost of interest-bearing liabilities
falls faster than
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45
the yields on interest-bearing assets, thus creating a widening of the net
interest margin. Conversely, an asset sensitive company will benefit from a
rising interest rate environment as the yields on earning assets rise faster
than the costs of interest-bearing liabilities. Management also evaluates
economic conditions, the pattern of market interest rates and competition to
determine the appropriate mix and repricing characteristics of assets and
liabilities required to produce a targeted net interest margin.
In addition to the gap analysis, management uses rate shock simulation
to measure the rate sensitivity of its balance sheet. Rate shock simulation is a
modeling technique used to estimate the impact of changes in rates on the
Company's net interest margin. The Company measures its interest rate risk by
estimating the changes in net interest income resulting from instantaneous and
sustained parallel shifts in interest rates of plus or minus 200 basis points
over a period of twelve months. The Company's most recent rate shock simulation
analysis which was performed as of January 31, 1999, indicates that a 200 basis
point increase in rates would cause an increase in net interest income of
$262,000 over the next twelve month period. Conversely, a 200 basis point
decrease in rates would cause a decrease in net interest income of $262,000 over
a twelve month period.
This simulation is based on management's assumption as to the effect of
interest rate changes on assets and liabilities and assumes a parallel shift of
the yield curve. It also includes certain assumptions about the future pricing
of loans and deposits in response to changes in interest rates. Further, it
assumes that delinquency rates would not change as a result of changes in
interest rates although there can be no assurance that this will be the case.
While this simulation is a useful measure of the Company's sensitivity to
changing rates, it is not a forecast of the future results and is based on many
assumptions, that if changed, could cause a different outcome. In addition, a
change in U.S. Treasury rates in the designated amounts accompanied by a change
in the shape of the Treasury yield curve would cause significantly different
changes to net interest income than indicated above.
The Company does not currently engage in trading activities or use
derivative instruments to manage interest rate risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following financial statements are filed with this report:
Report of Independent Public Accountants
Consolidated Balance Sheets - December 31, 1998 and
1997
Consolidated Statements of Operations - Years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity -
Years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows - Years ended
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
-44-
46
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Florida Banks, Inc.
Jacksonville, Florida
We have audited the accompanying consolidated balance sheets of Florida Banks,
Inc. (the "Company") as of December 31, 1998 and 1997, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31,
1998 and 1997, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
January 29, 1999
Jacksonville, Florida
-45-
47
FLORIDA BANKS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
1998 1997
ASSETS
CASH AND DUE FROM BANKS $ 4,295,139 $ 2,788,211
FEDERAL FUNDS SOLD AND REPURCHASE AGREEMENTS 16,650,000 10,245,000
------------- ------------
Total cash and cash equivalents 20,945,139 13,033,211
INVESTMENT SECURITIES:
Available for sale, at fair value (cost $21,968,826 and
$10,445,885 at December 31, 1998 and 1997) 21,949,929 10,452,185
Other investments 291,850 313,050
LOANS:
Commercial real estate 25,325,557 15,281,442
Commercial 33,103,488 13,157,905
Residential mortgage 6,046,666 3,268,704
Consumer 2,020,954 1,222,045
Credit card and other loans 796,120 869,031
------------- ------------
Total loans 67,292,785 33,799,127
Allowance for loan losses (1,073,346) (481,462)
Net deferred loan fees (162,334) (78,765)
------------- ------------
Net loans 66,057,105 33,238,900
PREMISES AND EQUIPMENT, NET 822,283 511,503
ACCRUED INTEREST RECEIVABLE 478,700 332,031
DEFERRED INCOME TAXES, NET 2,893,078 2,420,271
OTHER ASSETS 128,086 94,628
------------- ------------
TOTAL ASSETS $ 113,566,170 $ 60,395,779
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS:
Noninterest-bearing demand $ 11,840,430 $ 6,441,785
Interest-bearing demand 3,913,509 3,073,535
Regular savings 17,910,355 5,874,911
Money market accounts 1,340,779 1,348,431
Time $100,000 and over 9,549,263 10,214,403
Other time 20,066,271 18,507,107
------------- ------------
Total deposits 64,620,607 45,460,172
REPURCHASE AGREEMENTS 5,668,664 5,911,513
OTHER BORROWED FUNDS 49,813 2,405,604
ACCRUED INTEREST PAYABLE 218,897 198,817
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 420,340 106,038
------------- ------------
Total liabilities 70,978,321 54,082,144
------------- ------------
COMMITMENTS (NOTES 6 and 8)
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value; 30,000,000 shares authorized
5,852,756 and 1,215,194 shares issued and outstanding, respectively 58,528 12,152
Additional paid-in capital 46,209,114 5,537,996
Warrants 164,832
Retained earnings (accumulated deficit) (deficit of $8,134,037 (3,832,909) 759,707
eliminated upon quazi-reorganization on December 31, 1995)
Accumulated other comprehensive income, net of tax (11,716) 3,780
------------- ------------
Total shareholders' equity 42,587,849 6,313,635
------------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 113,566,170 $ 60,395,779
============= ============
See notes to consolidated financial statements.
-46-
48
FLORIDA BANKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
----------- ----------- -----------
INTEREST INCOME:
Loans, including fees $ 3,826,324 $ 3,352,741 $ 2,890,204
Investment securities 874,374 583,590 460,321
Federal funds sold 454,257 365,658 263,552
Repurchase agreements 277,165
----------- ----------- -----------
Total interest income 5,432,120 4,301,989 3,614,077
----------- ----------- -----------
INTEREST EXPENSE:
Deposits 2,107,343 2,075,429 1,744,407
Repurchase agreements 230,840 178,200 108,357
Borrowed funds 98,272 42,099 18,878
----------- ----------- -----------
Total interest expense 2,436,455 2,295,728 1,871,642
----------- ----------- -----------
NET INTEREST INCOME 2,995,665 2,006,261 1,742,435
PROVISION FOR LOAN LOSSES 629,000 60,000 60,000
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,366,665 1,946,261 1,682,435
----------- ----------- -----------
NONINTEREST INCOME:
Service fees 382,359 324,693 331,421
Gain on sale of loans 105,635 94,805 137,655
Gain (loss) on sale of available for sale investment securities 8,197 7,635 (2,446)
Other noninterest income 97,315 76,596 50,005
----------- ----------- -----------
593,506 503,729 516,635
----------- ----------- -----------
NONINTEREST EXPENSES:
Salaries and benefits 5,379,989 999,382 872,643
Occupancy and equipment 486,148 256,160 226,965
Data processing 142,315 92,633 75,366
Financing costs 972,000
Other 922,342 493,848 423,462
----------- ----------- -----------
7,902,794 1,842,023 1,598,436
----------- ----------- -----------
(LOSS) INCOME BEFORE (BENEFIT) PROVISION
FOR INCOME TAXES (4,942,623) 607,967 600,634
(BENEFIT) PROVISION FOR INCOME TAXES (350,007) 231,998 216,896
----------- ----------- -----------
NET (LOSS) INCOME $(4,592,616) $ 375,969 $ 383,738
=========== =========== ===========
(LOSS) EARNINGS PER SHARE:
Basic $ (1.46) $ 0.31 $ 0.32
=========== =========== ===========
Diluted $ (1.46) $ 0.29 $ 0.30
=========== =========== ===========
See notes to consolidated financial statements.
-47-
49
FLORIDA BANKS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
PREFERRED STOCK COMMON STOCK ADDITIONAL
--------------------- ------------------------ PAID-IN
SHARES PAR VALUE SHARES PAR VALUE CAPITAL
BALANCE, JANUARY 1, 1996 1,215,194 $ 12,152 $ 2,666,311
Comprehensive Income:
Net income
Other comprehensive income, net change
in unrealized loss on available for sale
investment securities, net of tax $0
------ --------- ----------- -------- ------------
Comprehensive income
Adjustment to deferred tax asset
valuation allowance subsequent
to quasi-reorganization 216,896
------ --------- ----------- -------- ------------
BALANCE, DECEMBER 31, 1996 1,215,194 12,152 2,883,207
Comprehensive income:
Net income
Unrealized gain on available for sale
investment securities, net of tax of $2,520
------ --------- ----------- -------- ------------
Comprehensive income
Adjustment to deferred tax asset
valuation allowance subsequent
to quasi-reorganization 2,654,789
------ --------- ----------- -------- ------------
BALANCE, DECEMBER 31, 1997 1,215,194 12,152 5,537,996
Comprehensive income:
Net loss
Unrealized loss on available for sale
investment securities, net of tax of $7,180
------ --------- ----------- -------- ------------
Comprehensive income
Issuance of common stock, net 4,100,000 41,000 37,351,948
Exercise of stock options 159,806 1,598 238,402
Income tax benefit resulting from the
exercise of stock options 118,265
Issuance of common stock to founders 297,000 2,970 2,155,748
Issuance of units 80,800 808 807,192
Issuance of preferred stock 60,600 $ 606,000
Redemption of preferred stock (60,600) (606,000)
Purchase of fractional shares (44) (407)
------ --------- ----------- -------- ------------
BALANCE, DECEMBER 31, 1998 5,852,756 $ 58,528 $ 46,209,114
====== ========= =========== ======== ============
See notes to consolidated financial statements.
-48-
50
ACCUMULATED
OTHER
RETAINED COMPREHENSIVE
EARNINGS INCOME (LOSS),
WARRANTS (DEFICIT) NET OF TAX TOTAL
$ 2,678,463
-----------
$ 383,738 383,738
$ (9,655) (9,655)
----------- -------- -----------
383,738 (9,655) 374,083
216,896
----------- -------- -----------
383,738 (9,655) 3,269,442
----------- -------- -----------
375,969 375,969
13,435 13,435
----------- -------- -----------
375,969 13,435 389,404
2,654,789
----------- -------- -----------
759,707 3,780 6,313,635
----------- -------- -----------
(4,592,616) (4,592,616)
(15,496) (15,496)
----------- -------- -----------
(4,592,616) (15,496) (4,608,112)
37,392,948
240,000
118,265
2,158,688
$ 164,832 972,832
606,000
(606,000)
(407)
- --------- ----------- -------- -----------
$ 164,832 $(3,832,909) $(11,716) $42,587,849
========= =========== ======== ===========
-49-
51
FLORIDA BANKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
------------ ------------ ------------
OPERATING ACTIVITIES:
Net (loss) income $ (4,592,616) $ 375,969 $ 383,738
Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities:
Depreciation and amortization 165,327 109,595 87,056
Deferred income tax (benefit) expense (350,007) 231,998 216,896
Gain on sale of securities (8,197) (7,635)
Amortization of premiums on investments, net 35,070 6,072
Provision for loan losses 629,000 60,000 60,000
Increase in accrued interest receivable (126,748) (46,611) (60,350)
Increase in accrued interest payable 20,080 19,989 41,779
Increase in other assets (74,380) (7,237) (42,797)
(Decrease) increase in other liabilities (552,531) (16,654) 35,288
Noncash compensation and financing costs 3,939,054
------------ ------------ ------------
Net cash (used in) provided by operating activities (915,948) 725,486 721,610
------------ ------------ ------------
INVESTING ACTIVITIES:
Proceeds from sales, paydowns and maturities
of investment securities:
Available for sale 11,672,088 13,543,810 3,884,442
Other 28,600
Purchases of investment securities:
Available for sale (23,221,902) (15,698,714) (5,683,851)
Other investments (7,400) (42,200)
Net increase in loans (33,447,205) (2,104,078) (5,023,344)
Purchases of premises and equipment (435,620) (133,020) (33,709)
Proceeds from sale of other real estate owned 45,000
Cash resulting from merger 163,971
------------ ------------ ------------
Net cash used in investing activities (45,247,468) (4,434,202) (6,811,462)
------------ ------------ ------------
FINANCING ACTIVITIES:
Net increase in demand deposits,
money market accounts and savings accounts 18,266,411 600,054 3,436,405
Net increase (decrease) in time deposits 894,024 (665,952) 7,456,862
Proceeds from issuance of common stock, net 38,129,956
Exercise of stock options 240,000
Redemption of preferred stock (606,000)
Payment of note payable (250,000)
Purchase of fractional shares (407)
(Decrease) increase in repurchase agreements (242,849) 522,073 1,780,682
(Decrease) increase in other borrowed funds (2,355,791) 1,386,968 415,002
------------ ------------ ------------
Net cash provided by financing activities 54,075,344 1,843,143 13,088,951
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 7,911,928 (1,865,573) 6,999,099
CASH AND CASH EQUIVALENTS:
Beginning of year 13,033,211 14,898,784 7,899,685
------------ ------------ ------------
End of year $ 20,945,139 $ 13,033,211 $ 14,898,784
============ ============ ============
See notes to consolidated financial statements.
-50-
52
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Florida Banks, Inc. (the "Company") was incorporated on October 15, 1997
for the purpose of becoming a bank holding company and acquiring First
National Bank of Tampa (the "Bank"). On August 4, 1998, the Company
completed its initial public offering and its merger (the "Merger") with
the Bank pursuant to which the Bank was merged with and into Florida Bank
No. 1, N.A., a wholly-owned subsidiary of the Company, and renamed
Florida Bank, N.A. Shareholders of the Bank received 1,375,000 shares of
common stock of the Company valued at $13,750,000. The Merger was
considered a reverse acquisition for accounting purposes, with the Bank
identified as the accounting acquiror. The Merger has been accounted for
as a purchase, but no goodwill has been recorded in the Merger and the
financial statements of the Bank have become the historical financial
statements of the Company.
The number of shares of common stock, the par value of common stock and
per share amounts have been restated to reflect the shares exchanged in
the Merger.
The consolidated financial statements include the accounts of the Company
and the Bank. All significant intercompany balances and transactions have
been eliminated in consolidation.
The accounting and reporting policies of the Company conform to generally
accepted accounting principles and to general practices within the
banking industry. The following summarizes these policies and practices:
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the 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.
INVESTMENT SECURITIES - Debt securities for which the Company has the
positive intent and ability to hold to maturity are classified as held to
maturity and reported at amortized cost. Securities are classified as
trading securities if bought and held principally for the purpose of
selling them in the near future. No investments are held for trading
purposes. Securities not classified as held to maturity are classified as
available for sale, and reported at fair value with unrealized gains and
losses excluded from earnings and reported net of tax as a separate
component of other comprehensive income or loss until realized. Other
investments, which include Federal Reserve Bank stock and Federal Home
Loan Bank stock, are carried at cost as such investments are not readily
marketable.
Realized gains and losses on sales of investment securities are
recognized in the statements of income upon disposition based upon the
adjusted cost of the specific security. Declines in value of investment
securities judged to be other than temporary are recognized as losses in
the statement of income.
LOANS - Loans are stated at the principal amount outstanding, net of
unearned income and an allowance for loan losses. Interest income on all
loans is accrued based on the outstanding daily balances.
Management has established a policy to discontinue accruing interest
(nonaccrual status) on a loan after it has become 90 days delinquent as
to payment of principal or interest unless the loan is considered to be
-51-
53
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (CONTINUED)
well collateralized and Company is actively in the process of collection.
In addition, a loan will be placed on nonaccrual status before it becomes
90 days delinquent if management believes that the borrower's financial
condition is such that collection of interest or principal is doubtful.
Interest previously accrued but uncollected on such loans is reversed and
charged against current income when the receivable is estimated to be
uncollectible. Interest income on nonaccrual loans is recognized only as
received.
Nonrefundable fees and certain direct costs associated with originating
or acquiring loans are recognized over the life of related loans on a
method that approximates the interest method.
ALLOWANCE FOR LOAN LOSSES - The determination of the balance in the
allowance for loan losses is based on an analysis of the loan portfolio
and reflects an amount which, in management's judgment, is adequate to
provide for probable loan losses after giving consideration to the growth
and composition of the loan portfolio, current economic conditions, past
loss experience, evaluation of potential losses in the current loan
portfolio and such other factors that warrant current recognition in
estimating loan losses.
Loans which are considered to be uncollectible are charged-off against
the allowance. Recoveries on loans previously charged-off are added to
the allowance.
Impaired loans are loans for which it is probable that the Company will
be unable to collect all amounts due according to the contractual terms
of the loan agreement. Impairment losses are included in the allowance
for loan losses through a charge to the provision for loan losses.
Impairment losses are measured by the present value of expected future
cash flows discounted at the loan's effective interest rate, or, as a
practical expedient, at either the loan's observable market price or the
fair value of the collateral. Interest income or impaired loans is
recognized only as received.
Large groups of smaller balance homogeneous loans (consumer loans) are
collectively evaluated for impairment. Commercial loans and larger
balance real estate and other loans are individually evaluated for
impairment.
PREMISES AND EQUIPMENT - Premises and equipment are stated at cost less
accumulated depreciation computed on the straight-line method over the
estimated useful lives of 3 to 20 years. Leasehold improvements are
amortized on the straight-line method over the shorter of their estimated
useful life or the period the Company expects to occupy the related
leased space. Maintenance and repairs are charged to operations as
incurred. Periodically, management reviews long-lived assets for
impairment whenever events indicate that the carrying amount of an asset
may not be recoverable. An impairment loss is recognized if the sum of
the expected future cash flows (undiscounted and without interest
charges) from the use of an asset is less than its carrying amount.
INCOME TAXES - Deferred tax liabilities are recognized for temporary
differences that will result in amounts taxable in the future and
deferred tax assets are recognized for temporary differences and tax
benefit carryforwards that will result in amounts deductible or
creditable in the future. Net deferred tax liabilities or assets are
recognized through charges or credits to the deferred tax provision. A
deferred tax valuation allowance is established if it is more likely than
not that all or a portion of the deferred tax assets will not be
realized. Subsequent to the Company's quasi-reorganization (see note 12)
reductions in the deferred tax valuation allowance are credited to paid
in capital.
-52-
54
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (CONTINUED)
LOAN ORIGINATION FEES AND COSTS - Loan fees, net of certain specific
incremental direct loan origination costs, are deferred and accreted into
income over the life of each loan as a yield adjustment.
REPURCHASE AGREEMENTS - Repurchase agreements consist of agreements with
customers to pay interest daily on funds swept into a repo account based
on a rate of .75% to 1.00% below the Federal funds rate. Such agreements
generally mature within one to four days from the transaction date.
Information concerning repurchase agreements for the years ended December
31, 1998 and 1997 is summarized as follows:
1998 1997
Average balance during the year $ 5,236,857 $ 3,957,381
Average interest rate during the year 4.41% 4.50%
Maximum month-end balance during the year $ 7,964,257 $ 6,257,096
OTHER BORROWED FUNDS - Other borrowed funds consist of treasury tax and
loan deposits and generally are repaid within one to 120 days from the
transaction date.
STOCK OPTIONS - The Company has elected to account for its stock options
under the intrinsic value based method with pro forma disclosures of net
earnings and earnings per share, as if the fair value based method of
accounting defined in Statement of Financial Accounting Standards
("SFAS") No. 123 "Accounting for Stock Based Compensation" had been
applied. Under the intrinsic value based method, compensation cost is the
excess, if any, of the quoted market price of the stock at the grant date
or other measurement date over the amount an employee must pay to acquire
the stock. Under the fair value based method, compensation cost is
measured at the grant date based on the fair value of the award and is
recognized over the service period, which is usually the vesting period.
EARNINGS PER SHARE - The Company accounts for earnings per share in
accordance with SFAS No. 128, "Earnings per Share". Basic earnings per
share ("EPS") excludes dilution and is computed by dividing earnings
available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential
dilutive securities that could share in the earnings.
NEW ACCOUNTING PRONOUNCEMENTS - In June 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive
Income". This Statement establishes standards for reporting and display
of comprehensive income and its components (revenues, expenses, gains,
and losses) in a full set of general-purpose financial statements. SFAS
No. 130 requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in
a financial statement that is displayed with the same prominence as other
financial statements. SFAS No. 130 does not require a specific format for
the financial statement but requires that an enterprise display an amount
representing total comprehensive income for the period in the financial
statement. Additionally, SFAS No. 130 requires that an enterprise (a)
classify items of other comprehensive income by their nature in a
financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement
-53-
55
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (CONTINUED)
of financial position. This Statement is effective for fiscal years
beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes is
required. The Company adopted the requirements of SFAS No. 130 in the
year ended December 31, 1998. Realized gains and losses on available for
sale maturities were insignificant for the years ended December 31, 1998,
1997 and 1996.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information". This statement establishes
standards for reporting operating segments by public business enterprises
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial
reports to shareholders. SFAS No. 131 also establishes standards for
related disclosures about products and services, geographic areas, and
major customers. This statement is effective for fiscal years beginning
after December 13, 1997. The adoption of SFAS No. 131 had no effect on
the Company.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes
accounting and reporting standards for derivative instruments and hedging
activities. SFAS No. 133 is effective for fiscal years beginning after
June 15, 1999. Retroactive application to financial statements of prior
periods is not required. The Company does not currently have any
derivative instruments nor is it involved in hedging activities.
In March 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1") which
provides guidance for the accounting of such costs. SOP 98-1 is effective
for fiscal years beginning after December 15, 1998. The adoption of this
SOP is not expected to have a significant effect on the Company.
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities" (SOP 98-5") which requires costs of start-up activities and
organization costs to be expensed as incurred. SOP 98-5 is effective for
fiscal years beginning after December 15, 1998, with earlier application
encouraged. The Company elected to early adopt SOP 98-5 for the year
ended December 31, 1998.
SUPPLEMENTARY CASH FLOW INFORMATION - Cash and cash equivalents include
cash and due from banks, Federal funds sold and repurchase agreements.
Generally, Federal funds and repurchase agreements are sold for one day
periods. Interest paid on deposits and borrowed funds for the years ended
December 31, 1998, 1997 and 1996 was $2,416,375, $2,275,739 and
$1,829,863, respectively.
RECLASSIFICATION - Certain reclassification have been made to the 1997
and 1996 consolidated financial statements to conform with the
presentation adopted in 1998.
-54-
56
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (CONTINUED)
2. INVESTMENT SECURITIES
The amortized cost and estimated fair value of available for sale
investment securities as of December 31, 1998 and 1997 are as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
DECEMBER 31, 1998
U.S. Treasury securities and
other U.S. agency obligations $ 5,011,331 $ 38,312 $ 5,049,643
Mortgage-backed securities 16,957,495 31,158 $ (88,367) 16,900,286
------------ -------- ------------ ------------
$ 21,968,826 $ 69,470 $ (88,367) $ 21,949,929
============ ======== ============ ============
DECEMBER 31, 1997
U.S. Treasury securities and
other U.S. agency obligations $ 5,024,418 $ 8,024 $ (4,862) $ 5,027,580
Mortgage-backed securities 5,421,467 23,567 (20,429) 5,424,605
------------ -------- ------------ ------------
$ 10,445,885 $ 31,591 $ (25,291) $ 10,452,185
============ ======== ============ ============
Expected maturities of debt securities will differ from contractual
maturities because borrowers may have the right to call or prepay
obligations with or without prepayment penalties. The amortized cost and
estimated fair value of debt securities available for sale, at December
31, 1998, by contractual maturity, are shown below:
AMORTIZED FAIR
COST VALUE
Due within one year $ 2,491,366 $ 2,495,530
Due after one year through five years 2,004,444 2,034,890
Due after five years through ten years 515,519 519,220
Due after ten years ------------ ------------
5,011,329 5,049,640
Mortgage-backed securities 16,957,497 16,900,289
------------ ------------
Total $ 21,968,826 $ 21,949,929
============ ============
Investment securities with a carrying value of $16,135,926 and $9,303,244
were pledged as security for certain borrowed funds and public deposits
held by the Company at December 31, 1998 and 1997, respectively.
-55-
57
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (CONTINUED)
3. LOANS
Changes in the allowance for loan losses are summarized as follows:
1998 1997
Balance, beginning of year $ 481,462 $ 432,238
Provision for loan losses 629,000 60,000
Charge-offs (64,981) (43,292)
Recoveries 27,865 32,516
----------- ---------
Balance, end of year $ 1,073,346 $ 481,462
=========== =========
The Company's primary lending areas are Tampa, Jacksonville and
Gainesville, Florida and surrounding areas. Although the Company's loan
portfolio is diversified, a significant portion of its loans are
collateralized by real estate. Therefore the Company could be susceptible
to economic downturns and natural disasters. It is the Company's lending
policy to collateralize real estate loans based upon certain loan to
appraised value ratios.
At December 31, 1998, the Company had nonaccrual loans aggregating
approximately $725,000, of which $150,000 is guaranteed by the SBA. The
Company had no loans on nonaccrual as of December 31, 1997. The effects
of carrying nonaccrual loans during 1998, 1997, and 1996 resulted in a
reduction of interest income of approximately $38,000, $0 and $0,
respectively.
Loans considered impaired totaled $1,869,687 and $372,111 of which
$649,433 and $299,611 is guaranteed by the SBA at December 31, 1998 and
1997, respectively. The total allowance for loan losses related to these
loans was $579,724 and $72,500 at December 31, 1998 and 1997,
respectively. The interest income recognized on impaired loans for the
year ended December 31, 1998 and 1997 was not significant.
The Company lends to shareholders, directors, officers, and their related
business interests on substantially the same terms as loans to other
individuals and businesses of comparable credit worthiness. Such loans
outstanding were approximately $199,000 and $249,000 at December 31, 1998
and 1997. During the year ended December 31, 1998, such shareholders,
directors, officers and their related business interest borrowed
approximately $154,000 from the Company and repaid approximately
$204,000.
-56-
58
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (CONTINUED)
4. PREMISES AND EQUIPMENT
Major classifications of these assets are as follows:
1998 1997
Leasehold improvements $ 292,096 $ 271,456
Furniture, fixtures and equipment 1,154,681 742,810
----------- -----------
1,446,777 1,014,266
Accumulated depreciation and
amortization (624,494) (502,763)
----------- -----------
$ 822,283 $ 511,503
=========== ===========
Depreciation and amortization amounted to $165,327, $109,595 and $87,056
for the years ended December 31, 1998, 1997 and 1996, respectively.
5. INCOME TAXES
The components of the provision for income tax expenses for the years
ended December 31, 1998, 1997 and 1996 are as follows:
1998 1997 1996
Deferred tax (benefit) expense $(350,007) $ 231,998 $ 216,896
--------- --------- ---------
$(350,007) $ 231,998 $ 216,896
========= ========= =========
Income taxes for the years ended December 31, 1998, 1997 and 1996, differ
from the amount computed by applying the federal statutory corporate rate
to earnings before income taxes as summarized below:
1998 1997 1996
(Benefit) provision based on Federal income tax rate $(1,680,491) $ 204,216 $ 206,709
Noncash compensation and financing costs 1,339,279
Nondeductible items, state income taxes
net of federal benefit and other (8,795) 27,782 10,187
----------- --------- ---------
$ (350,007) $ 231,998 $ 216,896
=========== ========= =========
-57-
59
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (CONTINUED)
At December 31, 1998 and 1997, the Bank had tax operating loss
carryforwards of approximately $7,597,000 and $7,001,000,
respectively. During the years ended December 31, 1997 and 1996, the
Bank utilized net operating loss carryforwards to reduce current taxes
payable by approximately $236,000 and $272,000, respectively. The
utilization of net operating losses for the years ended December 31,
1997 and 1996 (periods subsequent to the date of the Bank's quasi
reorganization) and the complete recognition of all remaining deferred
tax assets at December 31, 1997, totaling approximately $2,423,000,
have been reflected as an increase to additional paid-in capital.
The components of net deferred income taxes at December 31, 1998 and
1997 are as follows:
1998 1997
----------- -----------
Deferred tax assets:
Net operating loss carryforwards $ 2,693,993 $ 2,467,698
Allowance for loan losses 249,007 24,478
Loan fees 61,086 19,733
Unrealized loss on investment securities 7,181
Other 14,561 13,078
----------- -----------
3,025,828 2,524,987
----------- -----------
Deferred tax liabilities:
Accumulated depreciation 60,492 53,143
Cash to accrual adjustment 72,258 49,053
Unrealized gain in investment securities 2,520
----------- -----------
132,750 104,716
----------- -----------
Deferred tax assets, net $ 2,893,078 $ 2,420,271
=========== ===========
At December 31, 1998, the Bank had tax net operating loss carryforwards
of approximately $7,597,000. Such carryforwards expire as follows:
$597,000 in 2004, $1,588,000 in 2005, $1,171,000 in 2006, $1,919,000 in
2007, $1,620,000 in 2008, $92,000 in 2009 and $609,000 in 2018. A change
in ownership on August 4, 1998, as defined in section 382 of the Internal
Revenue Code, limits the amount of net operating loss carryforwards
utilized in any one year to approximately $700,000.
At December 31, 1998 and 1997, the Bank assessed its earnings history and
trends over the past three years, its estimate of future earnings, and
the expiration dates of the loss carryforwards and has determined that it
is more likely than not that the deferred tax assets will be realized.
Accordingly, no valuation allowance is recorded at December 31, 1998 and
1997.
-58-
60
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (CONTINUED)
6. COMMITMENTS
The Bank is obligated under certain noncancellable operating leases for
office space and office property. Rental expense for 1998, 1997 and 1996
was approximately $160,000, $116,000 and $101,000, respectively, and is
included in net occupancy and equipment expense in the accompanying
statements of income. The following is a schedule of future minimum lease
payments at December 31, 1998.
YEAR ENDING DECEMBER 31:
1999 $ 169,485
2000 158,865
2001 158,311
2002 124,775
2003 127,271
Later years 1,582,146
-----------
$ 2,320,853
===========
The Company has entered into two five-year noncancellable operating
leases for office space which is currently under construction. Lease
payments will commence upon the receipt of a certificate of occupancy
which is expected to occur in the second quarter of 1999. Upon
commencement of the leases, rent expense will increase by approximately
$181,000 per year.
7. STOCK OPTIONS
During 1994, the Bank's Board of Directors approved a Stock Option Plan
(the "Plan") for certain key officers, employees and directors whereby
300,000 shares of the Bank's common stock were made available through
qualified incentive stock options and non-qualified stock options. The
Plan specifies that the exercise price per share of common stock under
each option shall not be less than the fair market value of the common
stock on the date of the grant, except for qualified stock options
granted to individuals who own either directly or indirectly more than
10% of the outstanding stock of the Bank. For qualified stock options
granted to those individuals owning more than 10% of the Bank's
outstanding stock, the exercise price shall not be less than 110% of the
fair market value of the common stock on the date of grant. Options
issued under the Plan expire ten years after the date of grant, except
for qualified stock options granted to more than 10% shareholders as
defined above. For qualified stock options granted to more than 10%
shareholders, the expiration date shall be five years from the date of
grant or earlier if specified in the option agreement. During 1994, the
Bank granted stock options to purchase 240,000 shares of the Bank's
common stock at an exercise price of $1.00. Such stock options were
exercised during 1998 and the Company recorded an increase to additional
paid-in capital of $118,265 equal to the resulting income tax benefit.
No options were granted during 1997 or 1996.
During July, 1988, the Bank granted stock warrants to purchase 225,000
shares of the Bank's common stock at an exercise price of $10.25. Such
warrants expired June 10, 1998.
On June 4, 1998, the Company adopted the 1998 Stock Option Plan (the
"1998 Plan"), effective March 31, 1998, which provides for the grant of
incentive or non-qualified stock options to certain directors, officers
and key employees who participate in the Plan. An aggregate of 900,000
shares of common
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61
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (CONTINUED)
stock are reserved for issuance pursuant to the 1998 Plan. During 1998,
the Company granted stock options to purchase 524,498 shares of the
Company's common stock at an exercise price of $10.00 per share.
If compensation cost for stock options granted in 1998 was determined
based on the fair value at the grant date consistent with the method
prescribed by SFAS No. 123, the Company's net loss and loss per share
would have been adjusted to the pro forma amounts indicated below:
Net loss
As reported $(4,592,616)
Pro forma (5,621,732)
Loss per share - Basic
As reported (1.46)
Pro forma (1.79)
Under SFAS No. 123, the fair value of each option is estimated on the
date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for options granted in 1998:
dividend yield of 0%, expected volatility of 27.70%, risk-free interest
rate of 4.60%, and an expected life of 10 years. There were no stock
options granted in 1997 or 1996.
A summary of the status of fixed stock option grants under the Company's
stock-based compensation plans as of December 31, 1998, 1997 and 1996,
and changes during the years ending on those dates is presented below:
1998 1997 1996
Weighted Average Weighted Average Weighted Average
Options Exercise Price Options Exercise Price Options Exercise Price
Outstanding -
Beginning of year 159,806 $ 1.50 159,806 $ 1.50 159,806 $ 1.50
Granted 524,498 10.00
Exercised (159,806) (1.50)
----------- ------- ------- ------ ------- ------
Outstanding -
End of year 524,498 $ 10.00 159,806 $ 1.50 159,806 $ 1.50
=========== ======= ======= ====== ======= ======
Options exercisable
at year end 339,000 $ 10.00 159,806 $ 1.50 159,806 $ 1.50
Fair value of options
granted during the year $ 2,504,382
Weighted average
remaining life 9.61
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62
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (CONTINUED)
Remaining non-exercisable options as of December 31, 1998 become
exercisable as follows:
1999 41,591
2000 41,591
2001 41,491
2002 39,725
2003 11,100
2004 10,000
-------
185,498
=======
8. FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK
The Bank originates financial instruments with off-balance sheet risk in
the normal course of business, usually for a fee, primarily to meet the
financing needs of its customers. The financial instruments include
commitments to fund loans, letters of credit and unused lines of credit.
These commitments involve varying degrees of credit risk, however,
management does not anticipate losses upon the fulfillment of these
commitments.
At December 31, 1998, financial instruments having credit risk in excess
of that reported in the balance sheet totaled approximately $22,163,186.
-61-
63
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (CONTINUED)
9. CONDENSED FINANCIAL INFORMATION OF FLORIDA BANKS, INC. (PARENT ONLY)
The following represents the parent only condensed balance sheet as of
December 31, 1998 and the related condensed statement of operations and
statement of cash flows for the period from August 4, 1998, the effective
date of the merger, through December 31, 1998.
CONDENSED BALANCE SHEET
Assets
Cash and repurchase agreements $ 12,718,376
Due from Florida Bank, N.A. 898
Available for sale investment securities, at
fair value (cost $5,834,057) 5,810,033
Loans
Commercial 4,176,193
Commercial real estate 1,749,848
-------------
Total loans 5,926,041
Premises and equipment, net 45,281
Accrued interest receivable 27,930
Deferred income taxes, net 162,435
Investment in subsidiary 18,210,770
-------------
Total assets $ 42,901,764
=============
Liabilities and Stockholders' Equity
Accounts payable and accrued expenses $ 326,223
Stockholders' Equity
Common stock 58,528
Additional paid in capital 46,209,114
Warrants 164,832
Accumulated deficit (3,832,909)
Unrealized loss on available for sale securities,
net of tax (24,024)
-------------
Total liabilities and stockholders' equity $ 42,901,764
=============
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64
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (CONTINUED)
CONDENSED STATEMENT OF OPERATIONS
Income $ 529,337
Equity in undistributed loss of Florida Bank, N.A (615,598)
Expenses (4,873,126)
Income tax benefit 162,435
-------------
Net loss $ (4,796,952)
=============
CONDENSED STATEMENT OF CASH FLOWS
Operating Activities:
Net loss $ (4,796,952)
Adjustments to reconcile net loss to net
cash used in operating activities:
Noncash compensation and financing costs 3,939,054
Equity in undistributed loss of Florida Bank, N.A 615,598
Depreciation 8,582
Deferred income tax benefit (162,435)
Increase in accrued interest receivable (8,009)
Increase in due from Florida Bank, N.A (898)
Decrease in accounts payable and accrued expenses (540,610)
-------------
Net cash used in operating activities (945,670)
-------------
Investing activities:
Purchase of premises and equipment (13,376)
Purchase of investment securities (5,834,057)
Net increase in loans (5,926,041)
Capital contributed to Florida Bank, N.A (12,000,000)
-------------
Net cash used in financing activities (23,773,474)
-------------
Financing activities:
Proceeds from sale of common stock 38,129,956
Payment of note payable (250,000)
Redemption of preferred stock (606,000)
Purchase of fractional shares (407)
-------------
Net cash provided by financing activities 37,273,549
-------------
Increase in cash and cash equivalents 12,554,405
Cash and cash equivalents at beginning of period 163,971
-------------
Cash and cash equivalents at end of period $ 12,718,376
=============
-63-
65
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (CONTINUED)
10. REGULATORY MATTERS
The Bank is 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 Bank's financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification 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 Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I
capital (as defined) to average assets (as defined). Management
believes, as of December 31, 1998, that the Bank meets all capital
adequacy requirements to which it is subject.
As of December 31, 1998 and 1997, notifications from the Office of the
Comptroller of the Currency categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. To be
categorized as well capitalized the Bank must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth
in the table. There are no conditions or events since that
notification that management believes have changed the institution's
category. The Bank's actual capital amounts and ratios are also
presented in the following table.
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------------ ------------------------ -------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
AS OF DECEMBER 31, 1998:
Total capital
(to risk-weighted assets)
Florida Banks, Inc. $ 43,567,572 67.77% > $ 5,158,990 > 8.00% N/A N/A
- -
Florida Bank, N.A 18,176,996 31.00 > 4,690,405 > 8.00 > $ 5,863,007 > 10.00%
- - - -
Tier I capital >
(to risk-weighted assets) -
Florida Banks, Inc. 42,599,565 66.27 > 2,579,495 > 4.00 N/A N/A
- -
Florida Bank, N.A 17,306,196 29.52 > 2,345,203 > 4.00 > 3,517,804 > 6.00
- - - -
Tier I capital
(to average assets)
Florida Banks, Inc. 42,599,565 39.22 > 4,359,197 > 4.00 N/A N/A
- -
Florida Bank, N.A 17,306,196 20.20 > 3,427,113 > 4.00 > 4,283,891 > 5.00
- - - -
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66
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (CONTINUED)
- -------------------------------------------------------------------------------
To be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------------- --------------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1997:
Total capital $ 4,545,625 14.29% > $ 2,545,537 > 8.0% > $ 3,181,922 > 10.0%
- - - -
(to risk-weighted assets)
Tier I capital 4,137,864 13.00 > 1,272,769 > 4.0 > 1,909,153 > 6.0
- - - -
(to risk-weighted assets)
Tier I capital 4,137,864 7.42 > 2,230,741 > 4.0 > 2,788,426 > 5.0
(to average assets) - - - -
The following is a reconciliation of shareholders' equity as reported in the
financial statements to regulatory capital for Florida Banks, Inc. as of
December 31, 1998 and 1997:
TIER I TOTAL
LEVERAGE RISK BASED RISK BASED
CAPITAL CAPITAL CAPITAL
December 31, 1998:
Shareholders' equity $ 42,587,849 $ 42,587,849 $ 42,587,849
Unrealized loss on available for sale
investment securities 11,716 11,716 11,716
Allowance for loan loss 968,007
------------ ------------ -------------
Regulatory capital $ 42,599,565 $ 42,599,565 $ 43,567,572
============ ============ ============
DECEMBER 31, 1997:
Shareholders' equity $ 6,313,635 $ 6,313,635 $ 6,313,635
Unrealized gain on available for sale
investment securities (3,780) (3,780) (3,780)
Allowance for loan loss 407,761
Deferred tax asset in excess of projected
benefit for 1998 (2,171,991) (2,171,991) (2,171,991)
------------ ------------ ------------
Regulatory capital $ 4,137,864 $ 4,137,864 $ 4,545,625
============ ============ ============
11. FAIR VALUE OF FINANCIAL INSTRUMENT
The following methods and assumptions were used by the Company in
estimating financial instrument fair values:
GENERAL COMMENT - The financial statements include various estimated fair
value information as required by Statement of Financial Accounting
Standards No. 107, Disclosures about Fair Value of Financial Instruments
(SFAS 107). Such information, which pertains to the Company's financial
instruments is based on the requirement set forth in SFAS 107 and does
not purport to represent the aggregate net fair value of the Company.
Furthermore, the fair value estimates are based on various assumptions,
methodologies and subjective considerations, which vary widely among
different financial institutions and which are subject to change.
CASH AND CASH EQUIVALENTS - The carrying amount for cash and cash
equivalents approximate the estimated fair values of such assets.
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67
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (CONTINUED)
- -------------------------------------------------------------------------------
AVAILABLE FOR SALE INVESTMENT SECURITIES - Fair values for securities
available for sale are based on quoted market prices, if available. If
quoted market prices are not available, fair values are based on quoted
market prices of comparable instruments.
OTHER INVESTMENT SECURITIES - Fair value of the Bank's investment in
Federal Reserve Bank stock and Federal Home Loan Bank stock is based on
its redemption value, which is its cost of $100 per share.
LOANS - For variable rate loans that reprice frequently, the carrying
amount is a reasonable estimate of fair value. The fair value of other
types of loans is estimated by discounting the future cash flows using
the current rates at which similar loans would be made to borrowers with
similar credit ratings for the same remaining maturities.
DEPOSITS - The fair value of demand deposits, savings deposits and
certain money market deposits is the amount payable on demand at the
reporting date. The fair value of fixed rate certificates of deposit is
estimated using a discounted cash flow calculation that applies interest
rates currently being offered to a schedule of aggregated expected
monthly time deposit maturities.
REPURCHASE AGREEMENTS AND OTHER BORROWED FUNDS - The carrying amounts of
repurchase agreements and other borrowed funds approximates the estimated
fair value of such liabilities due to the short maturities of such
instruments.
A comparison of the carrying amount to the fair values of the Company's
significant financial instruments as of December 31, 1998 and 1997 is as
follows:
1998 1997
---------------------------- -----------------------------
CARRYING FAIR CARRYING FAIR
Amounts in Thousands AMOUNT VALUE AMOUNT VALUE
Financial assets:
Cash and cash equivalents $ 20,945 $ 20,945 $ 13,033 $ 13,033
Investment available for sale 21,950 21,950 10,452 10,452
Other investments 292 292 313 313
Loans 67,293 66,303 33,799 33,444
Financial liabilities:
Deposits 64,621 64,501 45,460 45,460
Repurchase agreements 5,669 5,669 5,912 5,912
Other borrowed funds 50 50 2,406 2,406
12. QUASI-REORGANIZATION
Effective December 31, 1995, the Bank completed a quasi-reorganization of
its capital accounts. A quasi-reorganization is an accounting procedure
provided for under current banking regulations that allows a bank to
restructure its capital accounts to remove a deficit in undivided profits
without undergoing a legal reorganization. A quasi-reorganization allows
a bank that has previously suffered losses and subsequently corrected its
problems to restate its records as if it had been reorganized. A
quasi-reorganization is subject to regulatory approval and is contingent
upon compliance with certain legal and accounting requirements of the
banking regulations. The Bank's quasi-organization was
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68
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (CONTINUED)
- -------------------------------------------------------------------------------
authorized by the Office of the Comptroller of the Currency upon final
approval of the Bank's shareholders which was granted November 15, 1995.
As a result of the quasi-reorganization, the Bank charged against
additional paid-in capital its accumulated deficit through December 31,
1995 of $8,134,037.
13. EARNINGS PER SHARE
Following is a reconciliation of the denominator used in the computation
of basic and diluted earnings per common share.
1998 1997 1996
---------------- ---------------- ---------------
Weighted average number of common
shares outstanding - Basic 3,137,644 1,215,194 1,215,194
Incremental shares from the assumed
conversion of stock options 85,903 54,980
---------------- --------------- ---------------
Total - Diluted 3,137,644 1,301,097 1,270,174
================ =============== ===============
The incremental shares from the assumed conversion of stock options were
determined using the treasury stock method under which the assumed
proceeds were equal to (1) the amount that the Bank would receive upon
the exercise of the options plus (2) the amount of the tax benefit that
would be credited to additional paid-in capital assuming exercise of the
options. The assumed proceeds are used to purchase outstanding common
shares at the Company's offering price of $10.00 per share for 1998 and
an assumed fair value equal to the Bank's average book value per common
share for 1997 and 1996 as the Bank's stock was not actively traded and
limited trades during 1997 through 1996 indicated that book value was a
reasonable estimate of fair value.
14. BENEFIT PLAN
The Company has a 401(k) defined contribution benefit plan (the "Plan")
which covers substantially all of its employees. The Company matches 50%
of employee contributions to the Plan, up to 6% of all participating
employees compensation. The Company contributed $23,562, $10,353 and
$11,016 to the Plan in 1998, 1997 and 1996, respectively.
15. FOURTH QUARTER TRANSACTIONS
In the fourth quarter of 1998, management determined that a specific
valuation allowance in the amount of $529,000 should be established for
an impaired loan in the Tampa market. Management believes there is
potential for partial or full collection of the impaired loan. However,
because the future cash flows from the borrower could not be determined,
a specific valuation allowance equal to 100% of the non-collateralized
portion of the credit was established resulting in a provision for loan
losses of $522,000 for the fourth quarter. Management also reviewed all
outstanding credits of similar nature and determined that none of these
other credits possessed the weakness identified with the impaired loan.
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69
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (CONCLUDED)
- -------------------------------------------------------------------------------
At the January 1999 compensation committee meeting and Board of Directors
meeting, the Company approved the payment of additional bonuses to
management totaling $290,000 as additional compensation for services
rendered in 1998. Accordingly, this amount was recorded in the fourth
quarter of 1998.
* * * * * *
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70
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There has been no occurrence requiring a response to this Item.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information relating to directors and executive officers of the
Company contained in the Company's definitive proxy statement to be delivered to
shareholders in connection with the 1999 Annual Meeting of Shareholders
scheduled to be held April 23, 1999 are incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information relating to executive compensation contained in the
Company's definitive proxy statement to be delivered to shareholders in
connection with the 1999 Annual Meeting of Shareholders scheduled to be held
April 23, 1999 are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information relating to security ownership of certain beneficial
owners and management contained in the Company's definitive proxy statement to
be delivered to shareholders in connection with the 1999 Annual Meeting of
Shareholders scheduled to be held April 23, 1999 are incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information relating to related party transactions contained in the
registrant's definitive proxy statement to be delivered to shareholders in
connection with the 1999 Annual Meeting of Shareholders scheduled to be held
April 23, 1999 are incorporated herein by reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K.
(a) 1. Financial Statements. The following financial statements and
accountants' reports have been filed as Item 8 in Part II of this Report:
Report of Independent Public Accountants
Consolidated Balance Sheets - December 31, 1998 and 1997
Consolidated Statements of Operations - Years ended December
31, 1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity - Years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows - Years ended December
31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
2. Exhibits.
The following exhibits are filed with or incorporated by reference into
this report. The exhibits which are denominated by an asterisk (*) were
previously filed as a part of, and are hereby incorporated by reference from
either (i) a Registration Statement on Form S-1 for the Registrant, Registration
No. 333-50867 (referred to as "S-1"), or (ii) Amendment No. 1 to the
Registrant's Registration Statement on Form S-1 (referred to as "S-1 Amendment
No. 1"), Except as otherwise indicated, the exhibit number corresponds to the
exhibit number in the referenced document.
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71
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
-------- --------------------------
*3.1 - Articles of Incorporation of the Company, as amended (S-1)
*3.1.1 - Second Amended and Restated Articles of Incorporation (S-1 Amendment
No. 1)
*3.2 - By-Laws of the Company (S-1)
*3.2.1 - Amended and Restated By-Laws of the Company (S-1 Amendment No. 1)
*4.1 - Specimen Common Stock Certificate (S-1 Amendment No. 1)
*4.2 - See Exhibits 3.1.1 and 3.2.1 for provisions of the Articles of
Incorporation and By-Laws of the Company defining rights of the
holders of the Company's Common Stock
*10.1 - Form of Employment Agreement between the Company and Charles E.
Hughes, Jr. (S-1)
*10.2 - The Company's 1998 Stock Option Plan (S-1)
*10.2.1 - Form of Incentive Stock Option Agreement (S-1 Amendment No. 1)
*10.2.2 - Form of Non-qualified Stock Option Agreement (S-1 Amendment No. 1)
*10.3 - Form of Employment Agreement between the Company and T. Edwin Stinson,
Jr., Donald D. Roberts and Richard B. Kensler (S-1 Amendment No. 1)
21.1 - Subsidiaries of the Registrant
23.1 - Consent of Deloitte & Touche LLP
27.1 - Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K. No reports on Form 8-K were
filed during the quarter ended December 31, 1998.
72
SIGNATURES
In accordance with 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, in the City of Jacksonville, State
of Florida on March 19, 1999.
FLORIDA BANKS, INC.
By: /s/ Charles E. Hughes, Jr.
----------------------------------------
Charles E. Hughes, Jr.
President and Chief Executive Officer
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 in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Charles E. Hughes, Jr. President, Chief Executive March 19, 1999
- --------------------------------------- Officer and Director (Principal
Charles E. Hughes, Jr. Executive Officer)
/s/ T. Edwin Stinson, Jr. Chief Financial Officer, March 19, 1999
- --------------------------------------- Secretary, Treasurer and
T. Edwin Stinson, Jr. Director (Principal Financial
and Accounting Officer)
/s/ M.G. Sanchez Chairman of the Board March 19, 1999
- ---------------------------------------
M.G. Sanchez
Vice-Chairman of the Board
- ---------------------------------------
T. Stephen Johnson
/s/ Clay M. Biddinger Director March 19, 1999
- ---------------------------------------
Clay M. Biddinger
Director
- ---------------------------------------
P. Bruce Culpepper
/s/ J. Malcolm Jones, Jr. Director March 19, 1999
- ---------------------------------------
J. Malcolm Jones, Jr.
73
/s/ W. Andrew Krusen, Jr. Director March 19, 1999
- ---------------------------------------
W. Andrew Krusen, Jr.
/s/ Nancy E. LaFoy Director March 19, 1999
- ---------------------------------------
Nancy E. LaFoy
/s/ Wilford C. Lyon, Jr. Director March 19, 1999
- ---------------------------------------
Wilford C. Lyon, Jr.
Director
- ---------------------------------------
David McIntosh
74
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
21.1 Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche
LLP
27.1 Financial Data Schedule (for SEC use only).