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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, 2000
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Commission File No. 0-24683
FLORIDA BANKS, INC.
A Florida corporation
(IRS Employer Identification No. 58-2364573)
5210 Belfort Road
Suite 310, Concourse II
Jacksonville, Florida 32256
(904) 332-7770
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.[X]
The aggregate market value of the common stock of the registrant held by
nonaffiliates of the registrant (4,979,857 shares) on March 26, 2001 was
approximately $29,567,901 based on the closing price of the registrant's common
stock as reported on the Nasdaq National Market on March 26, 2001. 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.
As of March 26, 2001, there were 5,709,004 shares of $.01 par value common stock
issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of the registrant's definitive proxy statement to be delivered to
shareholders in connection with the 2001 Annual Meeting of Shareholders
scheduled to be held on May 18, 2001 are incorporated by reference in response
to Part III of this Report.
PART I
Item 1. Business.
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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, Alachua County (Gainesville),
Broward County (Ft. Lauderdale), Pinellas County (St Petersburg - Clearwater)
and Marion County (Ocala) markets. Future business plans include entry into the
markets of Orlando and the greater Palm Beach area (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 operations center in Tampa 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, compliance, internal audit, administration, training
and strategic planning. Core processing, check clearing and other similar
functions are currently 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.
The Company expects to establish community banking offices in new
market areas, primarily by opening new branch offices of the Bank. Management
will also, however, evaluate opportunities for strategic acquisitions of
financial institutions in markets that are consistent with its business plan.
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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:
* Establish community banking offices in additional markets including
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 that a community-oriented bank is well suited
to provide;
* Provide a broad array of traditional banking products and services;
* Provide non-traditional products and services through strategic
partnerships with third party vendors;
* Utilize technology to provide a higher level of customer service and
enhance deposit growth;
* Maintain centralized support functions, including back office
operations, credit policies and procedures, investment portfolio
management, administration, compliance, internal audit, 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 by
opening new branch offices 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
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
board of directors that are comprised of prominent members of the community,
including business leaders and professionals. It is anticipated that certain
members of the local boards may serve as members of the Board of Directors of
the Bank and of the Company. These directors act as representatives 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
3
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 community banking office established in a 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. 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 semi-annual
basis and paid annually 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 4,000 to 6,000 square feet at market rates for each community
banking office. The Company currently leases its facilities in the Tampa,
Jacksonville, Ft. Lauderdale, St. Petersburg-Clearwater and Ocala/Marion County
markets. To better serve the Alachua County (Gainesville) market, the Company
has built and owns a free-standing office with traditional drive-in and lobby
banking facilities. The Company plans to lease facilities in the other
Identified Markets to avoid investing significant amounts of capital in property
and facilities.
Loan Production Offices
In order to achieve its expansion strategy in a timely manner, the
Company may establish loan production offices ("LPO") as a prelude to
establishing full service community banking offices in the remaining Identified
Markets and other locations. Loan production offices would provide the same
lending products and services to the local market as the community banking
office with substantially less overhead expense. These offices would typically
be staffed with the President, Senior Lender and one administrative assistant.
By opening loan production offices, the Company can begin to generate
loans during the period it is preparing to open and staff the banking office and
reduce the overall cost of expansion into a new market. The same philosophy of
marketing, growth, customer service and incentive based compensation would be
followed in a loan production office. These offices would also establish local
boards which would be responsible for promoting the growth of the office.
4
Market Expansion
The Company intends to expand into the largest and fastest growing
communities in Florida as well as other markets within the state which offer
strategic opportunities. In order to achieve its expansion strategy, the Company
intends to establish community banking offices through the de novo branching of
the Bank. The Company may, however, accomplish its expansion strategy by
acquiring existing banks if an opportunity for such an acquisition becomes
available. 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 a community banking office in that market either through the opening
of an LPO or a full service bank. The Company has established community banking
offices in the Tampa, Jacksonville, Alachua County (Gainesville), Broward County
(Ft. Lauderdale), Pinellas County (St. Petersburg - Clearwater) and Marion
County (Ocala) markets. The other markets into which the Company presently
intends to expand are Orlando and the greater Palm Beach area. 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 currently offers a broad array of traditional banking
products and services to its customers through the Bank. 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
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and consumer loans. As of December 31, 2000, the Bank has established an
internal limit for loans of up to $5.1 million to any one borrower.
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.
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."
5
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
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non-interest-bearing deposit accounts, including commercial and retail checking
accounts, money market accounts, individual retirement accounts, regular and
premium rate 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 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.
In additional to deposits within the local markets, the Bank utilizes brokered
certificates of deposits to supplement its funding needs. Brokered CDs are sold
by various investment firms which are paid a fee by the Bank for placing the
deposit. Currently, the cost of brokered deposits is slightly lower than the
cost of the same deposits in the local markets. 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
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services to its customers, such as lock boxes, traveler's checks and safe
deposit services.
Courier Services. The Bank offers courier services to its customers.
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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 all of its
existing markets and expects to apply for approval in other market areas.
Telephone Banking. The Bank believes that there is a need within its
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market niche for consumer and commercial telephone banking. These services allow
customers to access detailed account information, via a toll free number 24
hours a day. Management believes that telephone 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. This service is provided through the Bank's third-party data
processor.
Internet Banking. In the fourth quarter of 1999, the Bank began
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offering its "DirectNet" Internet banking product. This service allows customers
to access detailed account information, execute transactions, download account
information, and pay bills electronically. Management believes that this service
is particularly attractive for its commercial customers since most transactions
can be handled over the Internet rather than over the phone or in person. In
addition, DirectNet offers the opportunity of opening deposit accounts both
within and outside of the local markets. The Bank intends to expand its Internet
banking services in the future to offer additional bank services as well as
6
non-traditional products and services. The DirectNet banking service is provided
by the Bank's third-party data processor.
ACH EFT Services. The Bank offers various Automated Clearing House and
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Electronic Funds Transfer services to its commercial customers. These services
include payroll direct deposits, payroll tax payments, electronic payments and
other funds transfers. The services are customized to meet the needs of the
customer and offer an economical alternative to paper checks and drafts.
Automatic Teller Machines ("ATMs"). Presently, management does not
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expect to establish an ATM network although certain banking offices may provide
one or more ATMs in the local market. As an alternative, management has made
other financial institutions' ATMs available to its customers and offers
customers up to ten free ATM transactions per month.
Other Products and Services. The Bank intends to evaluate other
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services such as trust services, brokerage and investment services, insurance,
and other permissible activities. Management expects to introduce these services
in the future 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, compliance, internal audit, administration, training and strategic
planning.
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 procedure 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
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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 Metavante, (formerly M&I
Data Services, Inc.) to provide its core data processing and certain customer
products.
Credit Administration. The Company oversees all credit operations while
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still granting local authority to each community banking office. 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 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.
7
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 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. 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. In addition, the
Gramm-Leach-Bliley Act repeals certain sections of the Glass-Steagall Act and
amends sections of the Bank Holding Company Act. See "---Supervision and
Regulation". The future effect of these changes in regulations could be far
ranging in their impact on traditional banking activities. Mergers, partnerships
and acquisitions between banks and other financial and service companies could
dramatically effect competition within the Bank's markets.
There can be no assurance that the United States Congress, 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 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 Metavante (formerly M&I) to
provide its core processing and certain customer products. The Company believes
that Metavante 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 Metavante 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 eleven 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.
8
The Bank presently employs 104 persons on a full-time basis and 6
persons on a part-time basis, including 45 officers. The Bank will hire
additional persons as needed, including additional tellers and financial service
representatives. Management believes the relations with employees are generally
satisfactory.
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 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. Entry into Florida by out-of-state financial institutions is
permitted only by acquisition of existing banks. The authority of a bank to
establish and operate branches within a state remains subject to applicable
state branching laws.
Until March 2000, a bank holding company was generally prohibited from
acquiring control of any company which was not a bank and from engaging in any
business other than the business of banking or managing and controlling banks.
In April 1997, the Federal Reserve Board revised and expanded the list of
permissible non-banking activities in which a bank holding company could engage,
however limitations continued to exist under certain laws and regulations. The
Gramm-Leach-Bliley Act repeals certain regulations pertaining to Bank Holding
Companies and eliminates many of the previous prohibitions. Specifically, Title
I of the Gramm-Leach-Bliley Act repeals sections 20 and 32 of the Glass-Steagall
Act (12 U.S.C. ss.ss. 377 and 78, respectively) and is intended to facilitate
affiliations among banks, securities firms, insurance firms, and other financial
companies. To further this goal, the Gramm-Leach-Bliley Act amends section 4 of
the Bank Holding Company Act (12 U.S.C.ss. 1843) ("BHC Act") to authorize bank
holding companies and foreign banks that qualify as "financial holding
companies" to engage in securities, insurance and other activities that are
financial in nature or incidental to a financial activity. The activities of
bank holding companies that are not financial holding companies would continue
to be limited to activities authorized currently under the BHC Act, such as
activities that the Federal Reserve Board previously has determined in
regulations and orders issued under section 4(c)(8) of the BHC Act to be closely
related to banking and permissible for bank holding companies.
The Gramm-Leach-Bliley Act defines a financial holding company as a
bank holding company that meets certain eligibility requirements. In order for a
bank holding company to become a financial holding company and be eligible to
engage in the new activities authorized under the Gramm-Leach-Bliley Act, the
Act requires that all depository institutions controlled by the bank holding
company be well capitalized and well managed.
To become a financial holding company, the Gramm-Leach-Bliley Act
requires a bank holding company to submit to the Federal Reserve Board a
declaration that the company elects to be a financial holding company and a
certification that all of the depository institutions controlled by the company
are well capitalized and well managed. The Act also provides that a Bank holding
company's election to become a financial holding company will not be effective
if the Board finds that, as of the date the company submits its election to the
Board, not all of the insured depository institutions controlled by the company
have achieved at least a "satisfactory" rating at the most recent examination of
the institution under the Community Reinvestment Act (12 U.S.C.ss. 2903 et seq.)
9
The Gramm-Leach-Bliley Act grants the Federal Reserve Board discretion
to impose limitations on the conduct or activities of any financial holding
company that controls a depository institution that does not remain both well
capitalized and well managed following the company's elections to be a financial
holding company.
New rules by the Federal Reserve Board and the Office of the
Comptroller of the Currency under the Gramm-Leach-Bliley Act could substantially
affect the Company's future business strategies, including its products and
services. On June 22, 2000, the Federal Reserve Bank of Atlanta approved the
Company's application to become a Financial Holding Company. The Company
currently meets the requirements of the rules, however, there can be no
assurance that it will continue to meet these requirements on an ongoing basis.
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.
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. 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 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 risk 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
10
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, non-cumulative 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.
The risk-based capital guidelines of the OCC, the Federal Reserve Board
and the FDIC explicitly include provisions to limit 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
11
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 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 twelve
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.
12
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.
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.
CERTAIN EVENTS THAT MAY AFFECT FUTURE RESULTS
Limited Operating History of Company
The Company was incorporated on October 15, 1997 and acquired the Bank on August
4, 1998. Accordingly, the Company has a limited history of operations as a bank
holding company. The Company's prospects must be considered in light of the
risks, expenses and difficulties frequently encountered by companies in their
early stages of development. To address these risks, the Company must, among
other things, continue to expand into new markets, build its customer base,
respond to competitive developments, continue to attract, retain and motivate
qualified management and employees and continue to upgrade its technologies,
products and services. There can be no assurance that the Company will be
successful in addressing such risks. As a result of the expenditures that must
be incurred by the Company in connection with addressing these risks, the
Company may continue operating losses.
Expansion and Management of Growth
The Company intends to pursue an aggressive growth strategy for the foreseeable
future, and future results of operations will be affected by its ability to,
among other things, identify suitable markets and sites for new community
banking offices, build its customer base, attract qualified bank management,
negotiate agreements with acceptable terms in connection with the acquisition of
existing banks and maintain adequate working capital. Failure to manage growth
effectively or to attract and retain qualified personnel could have a material
adverse effect on the Company's business, future prospects, financial condition
or results of operations, and could adversely affect the Company's ability to
implement its business strategy successfully. There can also be no assurance
that the Company will be able to expand its market presence in the Bank's
existing Tampa market or successfully enter new markets or that any such
expansion will not adversely affect the Company. In entering new markets, the
Company will encounter competitors with greater knowledge of such local markets
and greater financial and operational resources. In addition, although the
Company intends to expand primarily through selective new Bank branch openings,
the Company intends to regularly evaluate potential acquisition transactions
that would complement or expand the Company's business. In doing so, the Company
expects to compete with other potential bidders, many of which have greater
financial resources than the Company.
When entering new geographic markets, the Company will need to establish
relationships with additional well-trained local senior management and other
employees. In order to effect the Company's business strategy, the Company will
be substantially reliant upon local management, and accordingly, it will be
necessary for the Company to give significant local decision-making authority to
its senior officers and managers in any new bank office location. There can be
no assurance that the Company will be able to establish such local affiliations
and attract qualified management personnel. The process of opening new bank
locations and evaluating, negotiating and integrating acquisition transactions
may divert management time and resources. There can be no assurance that the
Company will be able to establish any future new branch office or acquire any
additional financial institutions. Moreover, there can be no assurance that the
Company will be able to integrate successfully or operate profitably any newly
established branch office or acquired financial institution. There can be no
assurance that the Company will not incur disruption and unexpected expenses in
integrating newly established operations. The Company's ability to manage growth
as it pursues its expansion strategy will also be dependent upon, among other
factors, its ability to (i) maintain appropriate policies, procedures and
13
systems to ensure that the Company's loan portfolio maintains an acceptable
level of credit risk and loss and (ii) manage the costs associated with
expanding its infrastructure, including systems, personnel and facilities. The
Company's inability to manage growth as it pursues its expansion strategy could
have a material adverse effect on the Company's business, future prospects,
financial condition or results of operations.
Intense Competition in the Market Areas of the Bank
Vigorous competition exists in all areas where the Bank presently engages in
business. The Bank faces intense competition in their market areas from major
banking and financial institutions, including many which have substantially
greater resources, name recognition and market presence than the Bank. Other
banks, many of which have higher legal lending limits, actively compete for
loans, deposits and other services which the Bank offers. Competitors of the
Bank include commercial banks, savings banks, savings and loan associations,
insurance companies, asset-based non-bank lenders, finance companies, credit
unions, mortgage companies and other financial institutions. Trends toward the
consolidation of the banking industry may make it more difficult for smaller
banks, such as the Bank, to compete with large national and regional banking
institutions. The Company's failure to compete effectively for deposit, loan and
other 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.
Credit Risk
There are risks inherent in making any loan, including risks with respect to the
period of time over which the loan may be repaid, risks resulting from changes
in economic and industry conditions risks inherent in dealing with individual
borrowers and risks resulting from uncertainties as to the future value of
collateral. The risk of nonpayment of loans is inherent in commercial banking.
Moreover, the Bank expects to focus on loans to small and medium-sized
businesses, which may result in a large concentration by the Bank of loans to
such businesses. Management will attempt to minimize the Bank's credit exposure
by carefully monitoring the concentration of its loans within specific
industries and through prudent loan application approval procedures, but there
can be no assurance that such monitoring and procedures will reduce such lending
risks. Moreover, as the Company expands into new geographic markets, the
Company's credit administration and loan underwriting policies will be required
to adapt to the local lending and economic environments of these new markets.
There is no assurance that the Company's credit administration personnel,
policies and procedures will adequately adapt to such new geographic markets. At
December 31, 2000, real estate loans, which included construction and commercial
loans secured by real estate and residential mortgages, comprised 59.0% of the
Bank's total loan portfolio, net of deferred loan fees. The Bank presently
generates all of its real estate mortgage loans in Florida. Therefore,
conditions of the Florida real estate market could strongly influence the level
of the Bank's non-performing mortgage loans and the results of operations and
financial condition of the Company and the Bank. Real estate values and the
demand for mortgages and construction loans are affected by, among other things,
changes in general or local economic conditions, changes in governmental rules
or policies, and the availability of loans to potential purchasers. In addition,
Florida historically has been vulnerable to certain natural disaster risks, such
as floods, hurricanes and tornadoes, which are not typically covered by the
standard hazard insurance policies maintained by borrowers. Uninsured disasters
may adversely impact the ability of borrowers to repay loans made by the Bank.
The existence of adverse economic conditions, declines in real estate values or
the occurrence of such natural disasters in Florida could have a material
adverse effect on the Company's business, future prospects, financial condition
or results of operations. The failure by the Company to adapt its credit
policies and procedures on an adequate and timely basis to new markets or to
provide sufficient oversight to its lending activities could result in an
increase in nonperforming assets, thereby causing operating losses, impairing
liquidity and eroding capital, and could have a material adverse effect on the
Company's business, future prospects, financial condition or results of
operations.
14
Allowance for Loan Losses
Industry experience indicates that a portion of the loans of the Bank will
become delinquent and a portion of the loans will require partial or entire
charge off. Regardless of the underwriting criteria utilized by the Bank or its
predecessors, losses may be experienced as a result of various factors beyond
the Bank's control, including, among others, changes in market conditions
affecting the value of collateral and problems affecting the credit of the
borrower. Due to the concentration of loans in Florida, adverse economic
conditions in that area could result in a decrease in the value of a significant
portion of the Bank's collateral. Although management of the Bank believes that
the allowance for loan losses is currently adequate to absorb losses on any
existing loans that may become uncollectible, there can be no assurance that the
Bank will not experience significant losses in its loan portfolios which may
require significant additions to the loan loss reserves.
Effect of Interest Rates
The operations of the Bank, and of commercial banks in general, are
significantly influenced by general economic conditions, by the related monetary
and fiscal policies of the federal government and, in particular, the FDIC and
the FRB. Deposit flows and the cost of funds are influenced by interest rates of
competing investments and general market rates of interest. Lending activities
are affected by the demand for commercial and residential mortgage financing and
for other types of loans, which in turn is affected by the interest rates at
which such financing may be offered and by other factors affecting the supply of
office space and housing and the availability of funds.
At December 31, 2000, the Bank's liabilities which would reprice within the next
twelve months exceeded the assets (which would re-price during that time) by
approximately $51.0 million, 14.2% or % of total assets. As a result of this
difference, an increase in market interest rates is likely to result in a
reduction of net interest income for the Bank because the level of interest paid
on interest-bearing liabilities is likely to increase more quickly than the
level of interest earned on interest-earning assets. Increases in the level of
interest rates may reduce loan demand, and thereby the amount of loans that can
be originated by the Bank and, similarly, the amount of loan and commitment
fees, as well as the value of the investment securities and other
interest-earning assets of the Bank. Moreover, volatility in interest rates can
result in disintermediation, which is the flow of funds away from banks into
direct investments, such as corporate securities and other investment vehicles
which, because of the absence of federal deposit insurance, generally pay higher
rates of return than bank deposits, or the transfer of funds within the bank
from a lower yielding savings accounts to higher yielding certificates of
deposit.
Unpredictable Economic Conditions
Commercial banks and other financial institutions are affected by economic and
political conditions, both domestic and international, and by governmental
monetary policies. Conditions such as inflation, recession, unemployment, high
interest rates, restricted money supply, scarce natural resources, international
disorders and other factors beyond the control of the Company and the Bank may
adversely affect their profitability. The Company's success will significantly
depend upon general economic conditions in Florida, the Bank's individual
markets, and the other market areas into which the Company may expand. A
prolonged economic dislocation or recession, whether in Florida generally or in
any or all of the Bank's markets, could cause the Company's non-performing
assets to increase, thereby causing operating losses, impaired liquidity and the
erosion of capital. Such an economic dislocation or recession could result from
a variety of causes, including natural disasters such as hurricanes, floods or
tornadoes, or a prolonged downturn in various industries upon which the
economies of Florida and/or particular markets of the Bank depend. Future
adverse changes in the Florida economy or the local economies of the Identified
Markets could have a material adverse effect on the Company's business, future
prospects, financial condition or results of operations.
15
Limitation on Dividends; Reliance on the Bank
The Company has never declared or issued a dividend. It is not anticipated that
the Company will distribute any cash dividends to its shareholders in the
foreseeable future. Earnings of the Bank, if any, are expected to be retained by
the Bank to enhance its capital structure or distributed to the Company to pay
its operating costs. As the Company has no independent sources of revenue, the
Company's principal source of funds to pay dividends on the Common Stock and its
other securities, to service indebtedness and to fund operations will be cash
dividends and other payments that the Company receives from the Bank. The
payment of dividends by the Bank to the Company is subject to certain
restrictions imposed by federal banking laws, regulations and authorities.
Impact of Technological Advances; Upgrade to Company's Internal Systems
The banking industry is undergoing, and management believes will continue to
undergo, technological changes with frequent introductions of new
technology-driven products and services. In addition to improving customer
services, the effective use of technology increases efficiency and enables
financial institutions to reduce costs. The Company's future success will
depend, in part, on its ability to address the needs of its customers by using
technology to provide products and services that will satisfy customer demands
for convenience as well as to enhance efficiencies in the Company's operations.
Management believes that keeping pace with technological advances is important
for the Company, as long as its emphasis on personalized services is not
adversely impacted. Many of the Company's competitors will have substantially
greater resources than the Company to invest in technological and infrastructure
improvements. There can be no assurance that the Bank will be able to implement
new technology-driven products and services effectively or to market
successfully such products and services to its clients. Furthermore, the Company
and the Bank outsource many of their core technology-related systems. The Bank's
failure to acquire, implement or market new technology could have a material
adverse effect on the Company's business, future prospects, financial condition
or results of operations. The Company, therefore, is dependent upon these
outside vendors to provide many of its technology-related products and services.
Anti-takeover Provisions
The Company's Second Amended and Restated Articles of Incorporation (the
"Articles of Incorporation") contain provisions requiring supermajority
shareholder approval to effect certain extraordinary corporate transactions with
Interested Persons, which are defined in the Articles of Incorporation as those
persons who own greater than 5% or more of the shares of the Company's stock
entitled to vote in election of directors, unless that transaction is approved
by three quarters of the Company's Board of Directors. This approval is in
addition to any other required approval of the Board of Directors or
shareholders. In addition, the Articles of Incorporation provide for the Board
of Directors to be classified into three classes, as nearly equal in number as
possible. Directors are elected to serve for three year terms. The Company's
Amended and Restated By-Laws (the "By-Laws") also contain provisions which (i)
authorize the Board to determine the precise number of members of the Board and
authorize either the Board or the shareholders to fill vacancies on the Board,
(ii) authorize any action required or permitted to be taken by the Company's
shareholders to be effected by consent in writing; and (iii) establish certain
advance notice procedures for nomination of candidates for election as directors
and for shareholder proposals to be considered at an annual or special meeting
of shareholders. The issuance of preferred stock by the Company could also have
the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from acquiring, a controlling interest in the Company
and could adversely affect the voting power or other rights of holders of the
Common Stock. These provisions may have the effect of impeding the acquisition
of control of the Company by means of a tender offer, a proxy fight, open-market
purchases or otherwise, without approval of such acquisition by the Board of
Directors. Certain of these provisions also make it more difficult to remove the
Company's current Board of Directors and management.
16
Future Capital Needs
The Board of Directors may determine from time to time a need to obtain
additional capital through the issuance of additional shares of Common Stock or
other securities. Such issuance would dilute the ownership interests in the
Company of the investors in the Offering.
Government Regulation
The Company and the Bank operate in a highly regulated environment and are
subject to supervision and regulation by several governmental regulatory
agencies, including the Board of Governors of the Federal Reserve System, the
OCC, the Federal Deposit Insurance Corporation, the Florida Department of
Banking and Finance and the Securities and Exchange Commission. These
regulations are generally intended to provide protection for depositors and
customers rather than for the benefit of shareholders. The Company and the Bank
are subject to future legislation and government policy, including bank
deregulation and interstate expansion, which could materially adversely affect
the banking industry as a whole, including the operations of the Company and the
Bank. The establishment of branches or the acquisitions of banks in Identified
Markets and other market areas is subject to the prior receipt of certain
regulatory approvals. Failure to obtain such regulatory approvals could have a
material adverse effect on the Company's business, future prospects, financial
condition or results of operations.
Dependence on Key Personnel
The success of the Bank depends to a significant extent upon the performance of
its respective Chairmen, President and Executive Vice Presidents, the loss of
any of whom could have a materially adverse effect on the Bank. The Bank
believes that its future success will depend in large part upon its ability to
retain such personnel. There can be no assurance that the Bank will be
successful in retaining such personnel.
Item 2. Properties.
- ------ ----------
The Company's occupies 5,113 sq. ft. of leased space for its main
offices located at 5210 Belfort Road, Suite 310, Concourse II, Jacksonville,
Florida 32256. The Bank operates six banking offices and an operations center in
the following locations:
Florida Bank, N.A. - Alachua County (1)
600 N.W. 43rd Street, Suite A
Gainesville, Florida 32606
Facilities: Owned by the Bank - 7,581 sq. ft.
Florida Bank, N.A. - Jacksonville
5210 Belfort Road, Suite 140
Jacksonville, Florida 32256
Facilities: Leased 6001 sq. ft.
Florida Bank, N.A. - Tampa (2)
100 West Kennedy Boulevard
Tampa, Florida 33602
Facilities: Leased 12,573 sq. ft.
Florida Bank, N.A. - Broward County
600 North Pine Island Rd., Suite 350
Plantation, Florida 33324
Facilities: Leased 4,893 sq. ft.
Florida Bank, N.A. - Pinellas County
8250 Bryan Dairy Road
Suite 150
Largo, Florida 33777
Facilities: Leased 5,428 sq. ft.
17
Florida Bank, N.A. - Marion County
2437 SE 17th Street
Suite 101
Ocala, Florida 34471
Facilities: Leased 5,485 sq. ft.
Florida Bank, N.A. - Operations Center
6301 Benjamin Road
Suite 105
Tampa, Florida 33634
Facilities: Leased 5,056 sq. ft.
(1) The Alachua County Bank leased approximately 1,600 square feet of its
facility to a local health and fitness center until needed for future
expansion by the Bank. The Alachua County Bank is still liable for monthly
rental payments under the terms of the lease at its former location, 3600
N.W. 43rd Street, Suite 1A, through November 30, 2001. The Bank is
currently seeking to sublease this space.
(2) Approximately 5,546 sq. ft. of the Tampa Bank facility has been subleased
to a local law firm. The term of the sublease expires on June 30, 2003 in
conjunction with the expiration of Bank's lease.
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.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------ ---------------------------------------------------
No matter was submitted during the fourth quarter ended December 31,
2000 to a vote of security holders of the Company.
18
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, 1999
First Quarter $8.688 $6.813
Second Quarter 43.000 7.500
Third Quarter 11.125 6.625
Fourth Quarter 10.000 5.625
Fiscal year ended December 31, 2000
First Quarter $7.500 $4.875
Second Quarter 6.000 4.875
Third Quarter 6.000 5.000
Fourth Quarter 6.938 5.063
As of February 26, 2001, there were approximately 168 holders of record
of the Common Stock. Management of the Company believes that there are in excess
of 3,200 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.
In September of 1999, the Company's Board of Directors authorized a
stock repurchase plan covering up to ten percent (10%) of the outstanding shares
of common stock (approximately 585,000 shares). The share repurchase plan
authorizes the purchase of shares at any price below the then current book value
per share. As of December 31, 2000, the Company has repurchased 241,100 shares
for a total cost of $1,506,836 or an average cost of $6.25 per share.
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.
19
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, 2000, 1999, 1998
and 1997 and for each of the years then ended 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, 1996 and for the year then ended 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,
-----------------------------------------------------------------------
2000 1999 1998 1997 1996
(Dollars in Thousands)
Summary Income Statement:
Interest income $ 23,766 $ 11,142 $ 5,413 $4,302 $3,614
Interest expense 13,711 4,696 2,436 2,296 1,872
-------- -------- -------- ------ ------
Net interest income 10,055 6,446 2,977 2,006 1,742
Provision (benefit) for loan losses 1,912 1,610 629 60 60
-------- -------- -------- ------ ------
Net interest income after
provision for loan losses 8,143 4,836 2,348 1,946 1,682
Noninterest income 1,011 583 613 504 517
Noninterest expense (1) 10,886 8,342 7,903 1,842 1,598
-------- -------- -------- ------ ------
Income (loss) before provision for
income taxes (1,732) (2,923) (4,943) 608 601
(Benefit) provision for income taxes (2) (652) (1,076) (350) 232 217
-------- -------- -------- ------ ------
Net income (loss) $ (1,080) $ (1,847) $ (4,593) $ 376 $ 384
======== ======== ======== ====== ======
Earnings (loss) per common share (3):
Basic $ (0.19) $ (0.32) $ (1.46) $ 0.31 $ 0.32
Diluted (0.19) (0.32) (1.46) 0.29 0.30
(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 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 for 1997 and 1996 have been restated to
reflect the shares exchanged in the Merger.
20
At December 31,
----------------------------------------------------------------
2000 1999 1998 1997 1996
------------- ------------ ------------ ------------ -----------
(Dollars in Thousands)
Summary Balance Sheet Data:
Investment securities $ 36,756 $ 28,511 $ 22,242 $ 10,765 $ 8,551
Loans, net of deferred loan fees 285,526 157,517 67,131 33,720 31,627
Earning assets 353,239 205,898 106,022 54,731 52,588
Total assets 372,797 218,163 113,566 60,396 55,505
Noninterest-bearing deposits 41,965 22,036 11,840 6,442 8,122
Total deposits 305,239 159,106 64,621 45,460 45,526
Other borrowed funds 26,035 18,279 5,718 8,317 6,480
Total shareholders' equity 38,556 39,235 42,588 6,314 3,269
Performance Ratios:
Net interest margin (1) 3.54% 4.57% 4.28% 3.89% 4.05%
Efficiency ratio (2) 98.37 118.68 220.18 73.39 70.76
Return on average assets (0.36) (1.07) (5.42) 0.70 0.85
Return on average equity (2.83) (3.12) (16.54) 10.62 13.18
Asset Quality Ratios:
Allowance for loan losses to total loans 1.23% 1.18% 1.60% 1.42% 1.36%
Non-performing loans to total loans (3) 1.44 1.46 2.80 - -
Net charge-offs (recoveries) to average loans 0.12 0.80 0.09 0.03 (0.11)
Capital and Liquidity Ratios:
Total capital to risk-weighted assets 12.73% 18.19% 63.25% 14.29% 12.26%
Tier 1 capital to risk-weighted assets 11.58 17.29 61.59 13.00 11.01
Tier 1 capital to average assets 10.28 20.01 36.44 7.42 6.42
Average loans to average deposits 94.9 108.2 81.04 75.77 75.83
Average equity to average total assets 12.80 34.30 32.8 6.54 6.45
- ------------
(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 and 1996.
21
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, but are not limited to 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 the Company expects; and (d) changes in The Company's
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, 2000, 1999 and 1998.
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 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
periods ended December 31, 2000, 1999 and 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 loss for fiscal 2000 decreased $767,000 to a loss of
$1.08 million or 49.6% from $1.8 million in 1999. Net loss for 1999 decreased
$2.8 million to $1.8 million from $4.6 million in 1998. Basic and diluted
earnings per share was a loss of $.19, $.32 and $1.46 for the years ended
December 31, 2000, 1999 and 1998. 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 losses from 1999 to 2000 was primarily attributable
to an increase in net interest income and an increase in noninterest income,
partially offset by increases in the provision for loan losses and noninterest
expenses. Net interest income increased to $10.1 million in 2000 from $6.5
million in 1999, an increase of 56.0%. The provision for loan losses increased
by 18.8% to $1.9 million in 2000 from $1.6 million in 1999. Noninterest income
22
increased 73.6% to $1.01 million in 2000 from $543,000 in 1999. Noninterest
expense increased to $10.9 million in 2000 from $8.3 million in 1999, an
increase of 30.5%. The benefit for income taxes decreased to $652,000 in 2000
from $1.1 million in 1999, a decrease of 39.4%.
The decrease in net losses from 1998 to 1999 was primarily attributable
to an increase in net interest income, partially offset by increases in the
provision for loan losses and noninterest expenses. Net interest income
increased to $6.5 million in 1999 from $3.0 million in 1998, an increase of
116.6%. The provision for loan losses increased by 156.0% to $1.6 million in
1999 from $629,000 in 1998. Noninterest income decreased 4.9% to $583,000 in
1999 from $613,000 in 1998. Noninterest expense increased to $8.3 million in
1999 from $7.9 million in 1998, an increase of 5.6%. The provision for income
taxes increased to $1.1 million in 1999 from $350,000 in 1998, an increase of
207.4%.
The 1998 results included 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 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.
Total assets at December 31, 2000 were $372.8 million, an increase of
$154.7 million, or 70.9%, over the prior year. Total loans increased 81.2% to
$285.6 million at December 31, 2000, from $157.6 million at December 31, 1999.
Total deposits increased $146.1 million, or 91.8%, to $305.2 million at December
31, 2000 from $159.1 million at December 31, 1999. Shareholders' equity
decreased to $38.6 million at December 31, 2000 from $39.2 million at December
31, 1999, a decrease of 1.7%. These increases and decrease were primarily
attributable to the opening of the Marion County branch and a full year of
start-up operations for the Pinellas and Broward County branches.
The earnings performance of the Company is reflected in the
calculations of net loss as a percentage of average total assets ("Return on
Average Assets") and net loss as a percentage of average shareholders' equity
("Return on Average Equity"). During 2000, the Return on Average Assets and
Return on Average Equity were (0.36%) and (2.83%) respectively, compared to
(1.07%) and (3.12%), respectively, for 1999. The Company's ratio of total equity
to total assets decreased to 10.3% at December 31, 2000 from 18.0% at December
31, 1999, primarily as a result of growth from the new branch operations.
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.
23
Year Ended December 31,
-----------------------------------------------------------------------------
2000 1999
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).... $224,317 $20,073 8.95% $103,492 $9,035 8.77%
Investment securities(2)............... 37,416 2,477 6.62 26,670 1,518 5.69
Repurchase agreements.................. 0 0 - 6,420 333 5.19
Federal funds sold & other investments 21,987 1,216 5.53 5,512 257 4.66
------ ----- -------- ------
Total earning assets................ 280,817 23,766 8.46 142,094 11,142 7.87
------ ------
Cash and due from banks................... 9,311 5,448
Premises and equipment, net............... 2,805 1,428
Other assets.............................. 5,675 3,639
Allowance for loan losses................. (2,676) (1,197)
------ -----
Total assets........................ $295,932 $158,461
======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing liabilities:.............
Interest-bearing demand deposits....... $9,879 156 1.58 % $ 4,912 99 2.02%
Savings deposits....................... 38,101 2,092 5.49 24,427 1,153 4.72
Money market deposits.................. 1,762 63 3.58 1,674 37 2.21
Certificates of deposit of $100,000 or
more...................... 94,038 6,142 6.53 21,165 1,166 5.51
Other time deposits.................... 62,112 3,940 6.34 28,723 1,598 5.59
Repurchase agreements.................. 14,956 904 6.04 12,510 553 4.42
Other borrowed funds................... 6,824 414 6.07 1,657 90 5.43
----- --- -------- ------
6.02
Total interest-bearing liabilities........ 227,672 13,711 95,068 4,696 4.94
------ ------
Noninterest-bearing demand deposits....... 27,677 14,727
Other liabilities......................... 2,343 3,445
Shareholders' equity...................... 38,240 41,358
------ --------
Total liabilities and
shareholders' equity................ $295,932 $158,461
======== ========
Net interest income....................... $ 10,055 $6,487
======== ======
Net interest spread ...................... 2.44% 2.93%
Net interest margin.......................
3.58% 4.57%
- -----------------------------
(1) At December 31, 2000 and 1999, $1.5 million and $1.1 million of loans,
respectively were accounted for on a non-accrual basis.
(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.
24
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 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 2000, 1999 and 1998. Accordingly, no
adjustment is necessary to facilitate comparisons on a taxable equivalent basis.
Net interest income increased 55.0% to $10.1 million in 2000 from $6.5
million in 1999. This increase is attributable to growth in loan volume due to
new branch operations, and is partially offset by the growth in time 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 decreased 99 basis points to 3.58% in 2000 on average earning
assets of $280.8 million from 4.57% in 1999 on average earning assets of $142.1
million. This decrease is primarily due to the fact that the average rates paid
on interest bearing liabilities increased more than the average yield on earning
assets increased. There was a 59 basis point increase in the average yield on
earning assets to 8.46% in 2000 from 7.87% in 1999 and a 108 basis point
increase in the average rate paid on interest-bearing liabilities to 6.02% in
2000 from 4.94% in 1999. The increased yield on earning assets was primarily the
result of higher market rates on loans and investment securities. The increase
in the cost of interest-bearing liabilities is attributable to increases in
rates on interest-bearing demand deposits, other time deposits, money market
accounts and other borrowed funds.
Net interest income increased 116.6% to $6.5 million in 1999 from $3.0
million in 1998. This increase in net interest income is attributable to growth
in loan volume due to new branch operations, and is partially offset by the
growth in savings deposits and repurchase agreements. The net interest margin
increased 29 basis points to 4.57% in 1999 on average earning assets of $142.1
million from 4.28% in 1998 on average earning assets of $70.1 million. This
increase is primarily due to the significant increase in average earning assets
from the operations of the new branches and to an overall decrease in interest
rates on interest-bearing liabilities. There was a 12 basis point increase in
the average yield on earning assets to 7.87% in 1999 from 7.75% in 1998 and a 21
basis point decrease in the average rate paid on interest-bearing liabilities to
4.94% in 1999 from 5.15% in 1998. The increased yield on earning assets was
primarily the result of slightly higher market rates on loans and investment
securities. The decrease in the cost of interest-bearing liabilities is
attributable to decreases in rates on interest-bearing demand deposits, other
time deposits, money market accounts and other borrowed funds.
The net interest spread decreased 49 basis points to 2.44% in 2000 from
2.93% in 1999, as the yield on average earning assets increased 59 basis points
while the cost of interest-bearing liabilities increased 108 basis points. 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.
25
The net interest spread increased 33 basis points to 2.93% in 1999 from
2.60% in 1998, as the yield on average earning assets increased 12 basis points
while the cost of interest-bearing liabilities decreased 21 basis points.
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.
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 1999 and 2000 and
between 1998 and 1999. The effect of a change in average balance has been
determined by applying the average rate in 1999 and 1998 to the change in
average balance from 1999 to 2000 and from 1998 to 1999, respectively. The
effect of change in rate has been determined by applying the average balance in
1999 and 1998 to the change in the average rate from 1999 to 2000 and from 1998
to 1999, 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, 2000 Year Ended December 31, 1999
Compared With Compared With
December 31, 1999 December 31, 1998
----------------- -----------------
Increase (Decrease) Due to: Increase (Decrease) Due to:
-------------------------- --------------------------
Volume Yield/Rate Total Volume Yield/Rate Total
------ ---------- ----- ------ ---------- -----
Interest Earned On:
Taxable securities............ $611,000 $348,000 $959,000 $623,000 $21,000 $644,000
Federal funds sold............ 767,000 192,000 959,000 (197,000) (197,000)
Net loans..................... 10,596,000 442,000 11,038,000 5,521,000 (294,000) 5,227,000
Repurchase agreements......... (333,000) (333,000) 89,000 (33,000) 56,000
------- -------- ------- ------ ------- ------
Total earning assets....... 11,641,000 982,000 12,623,000 6,036,000 (306,000) 5,730,000
---------- ------- ---------- --------- --------- ---------
Interest Paid On:
Money market and
interest-bearing demand
deposits................... 104,000 (21,000) 83,000 32,000 (5,000) 27,000
Savings deposits............. 634,000 305,000 939,000 806,000 806,000
Time deposits................ 5,887,000 1,431,000 7,318,000 1,171,000 (58,000) 1,113,000
Repurchase agreements........ 108,000 243,000 351,000 320,000 2,000 322,000
Other borrowed funds......... 280,000 44,000 324,000 1,000 (9,000) (8,000)
------- ------ ------- ----- ------- -----
Total interest-bearing
liabilities..................... 7,013,000 2,002,000 9,015,000 2,330,000 (70,000) 2,260,000
--------- --------- --------- --------- -------- ---------
Net interest income........ $4,628,000 $(1,020,000) $3,608,000 $3,706,000 $(236,000) $3,470,000
========== =========== ========== ========== ========== ==========
26
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 2000 was $1.9
million as compared to $1.6 million for 1999. The increase in the provision from
1999 to 2000 was generally due to the increase in the amount of loans
outstanding.
The provision for loan losses charged to operations in 1999 was $1.6
million, compared to $629,000 for 1998. The increase in 1999 was 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 decreased 73.6% to $1.0 million in 2000 from
$583,000 in 1999. This change resulted from an increase in the amount of service
fees on deposit accounts and a net gain from the sale of available for sale
securities. Service fees on deposit accounts increased 55.2% to $706,000 in 2000
from $455,000 in 1999 due to an increase in the volume of business and personal
transaction accounts and increased volume in the number of services transacted
for customers which are subject to service charges. Sale of available for sale
securities resulted in a net gain of $10,000 in 2000, compared to a net loss of
$4,000 in 1999. Other income, which includes various recurring noninterest
income items such as service fee income on SBA (Small Business Administration)
loans originated by the Bank, and residential mortgage loan origination fees,
increased 125.6% to $296,000 in 2000 from $131,000 in 1999.
Noninterest income decreased 4.9% to $583,000 in 1999 from $613,000 in
1998. This change resulted from an increase in the amount of service fees on
deposit accounts offset by decreased gains on the sale of the guaranteed portion
of SBA loans and available for sale securities. Service fees on deposit accounts
increased 18.9% to $455,000 in 1999 from $382,000 in 1998 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 decreased 98.9% to $1,000 in 1999 from $106,000 in 1998 due to a
decrease in the principal amount of such loans sold. There were no sales of SBA
loans during 1999, compared to $1.2 million of loans sold in 1998, all of which
were originated in 1998. The Company substantially reduced its SBA lending
operations in 1998 due to the cost of maintaining this specialized lending
practice and due to recent charge-offs in the unguaranteed portion of the SBA
27
loans that were retained by the Bank. Other income, which includes various
recurring noninterest income items such as travelers checks fees and safe
deposit box fees, decreased 12.6% to $131,000 in 1999 from $116,000 in 1998.
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
2000 1999 1998 2000-1999 1999-1998
---- ---- ---- --------- ---------
(Dollars in thousands)
Service fees................................ $705 $455 $382 55.2% 18.9%
Gain on sale of loans....................... 0 1 106 (100.0) (98.9)
(Loss) gain on sale of available
for sale investment securities, net......... 10 (4) 8 N/A N/A
Other....................................... 296 131 116 125.6 12.6
--- --- ---
Total................................... $1,011 $583 $613 73.6% (4.9%)
====== === ===
Noninterest Expense
Noninterest expense increased 30.5% to $10.9 million in 2000 from $8.3
million in 1999. These increases are primarily attributable to increases in
personnel, occupancy, data processing and other expenses relating to opening of
the Marion County banking office, and the first full year of operation of the
Broward County and Pinellas County banking offices. Salaries and benefits
increased 23.8% to $6.8 million in 2000 from $5.5 million in 1999. This increase
is primarily attributable increases in the number of personnel at the holding
company level and for the Marion County office. Occupancy and equipment expense
increased 60.6% to $1.5 million in 2000 from $951,000 in 1999, primarily as a
result of the addition of the Marion County banking office, and the first full
year of operation of the Broward and Pinellas County banking offices. Data
processing expense increased 72.1% to $457,000 in 2000 from $265,000 in 1999,
which is primarily attributable to the growth in loan and deposit transactions
and the addition of new services. Other operating expenses increased 28.6% to
$2.1 million in 2000 from $1.6 million in 1999. This increase is attributable
primarily to an increase of $118,000 in postage and courier expenses, an
increase of $114,000 in loan closing expenses, an increase of $95,000 in
communications expense and an increase of $60,000 in legal fees. These expenses
are primarily attributable to opening of new banking offices and an overall
increase in the size and volume of business conducted by the Bank.
Noninterest expense increased 5.6% to $8.3 million in 1999 from $7.9 million in
1998. These increases are primarily attributable to increases in personnel,
occupancy, data processing and other expenses relating to opening of the Broward
County and Pinellas County banking offices. Salaries and benefits decreased
2.25% to $5.5 million in 1999 from $5.4 million in 1998. This decrease is
attributable to a non-cash, non-recurring charge of approximately $3 million in
1998 related to the sale of stock and warrants to the founders of the Company
and foreign investors and offset by increases in the number of personnel at the
holding company level and for the Broward and Pinellas County offices. Occupancy
and equipment expense increased 95.7% to $951,000 in 1999 from $486,000 in 1998
primarily as a result of the addition of the Broward and Pinellas County banking
offices. Data processing expense increased 86.6% to $265,000 in 1999 from
$142,000 in 1998 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 76.1% to $1.6 million in 1999 from $923,000
in 1998. This increase is attributable primarily to an increase of $40,000 in
marketing and advertising expenses, an increase of $106,000 in legal and
accounting fees associated with the growth of the Bank and the opening of new
28
banking offices, an increase of $138,000 in communications expense associated
with the network expansion at the holding company and the openings of new
banking offices and an increase of $109,000 in stationary, printing and supplies
associated with the opening of the Broward and Pinellas County banking offices.
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
2000 1999 1998 2000-1999 1999-1998
---- ---- ---- --------- ---------
(Dollars in thousands)
Salaries and benefits.................... $6,813 $5,501 $5,380 23.8% (2.3%)
Occupancy and equipment.................. 1,528 951 486 60.6 95.7
Data processing.......................... 457 265 142 72.1 86.6
Financing cost........................... 0 0 972 N/A (100.0)
Other.................................... 2,088 1,624 923 28.6 76.1
----- ----- --- ---- ----
Total................................ $10,886 $8,342 $7,903 30.5% 5.6%
======= ====== ======
Provision for Income Taxes
The benefit for income taxes was $652,000 for 2000 compared to $1.1
million for 1999. The effective tax rate for 2000 was a benefit of 37.6% as
compared to 1999, which was a benefit of 36.8%. The increase in the effective
tax rate is due to the effect of a slightly higher level of nondeductible
expenses in 1999 as compared to 2000. The Company paid no income taxes during
2000 and 1999 due to the availability of net operating loss carryforwards.
The benefit for income taxes was $1.1 million for 1999 compared to
$350,000 for 1998. The effective tax rate for 1999 was a benefit of 36.8% as
compared to 1998, which was a benefit of 7.1%. The increase in the effective tax
rate is due to the effect of a higher level of nondeductible expenses in 1998 as
compared to 1999. 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 1999 and 1998 due to the availability of net operating
loss carryforwards.
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
29
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, 2000, the Company had $9.4 million in net operating
loss carryforwards available to reduce future taxable earnings, which resulted
in net deferred tax assets of $4.6 million. These net operating loss
carryforwards will expire in varying amounts in the years 2004 through 2020
unless fully utilized by the Company. Based on management's estimate of future
earnings and the expiration dates of the net operating loss carry forwards as of
December 31, 2000 and 1999, it was determined that it is more likely than not
that the benefit of the deferred tax assets will be realized.
The following table presents the components of net deferred tax assets:
As of December 31,
-----------------
2000 1999 1998
---- ---- ----
(Dollars in thousands)
Deferred tax assets............................. $4,779 $4,426 $3,026
Deferred tax liabilities........................ 174 61 133
Valuation allowance............................. ---- ---- ----
Net deferred tax assets......................... $4,605 $4,365 $2,893
====== ====== ======
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 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 $1.1 million in 2000 compared to a
net loss of $1.8 million in 1999. The net loss for 2000 resulted primarily from
the opening of the Marion County banking office, and the first full year of
operation of Broward and Pinellas County Banking offices. Basic loss per share
was $.19 for 2000 and $.32 for 1999.
Return on Average Assets increased 71 basis points to a deficit of .36%
in 2000 from a deficit of 1.07% in 1999. Return on Average Equity increased 30
basis points to a deficit of 2.82% in 2000 from a deficit of 3.12% in 1999.
The Company reported a net loss of $1.8 million in 1999 compared to a
net loss of $4.6 million in 1998. The net loss for 1999 resulted primarily from
expenses associated with the opening of the Broward County and Pinellas County
offices. Basic loss per share was $.32 for 1999 and $1.46 for 1998.
Return on Average Assets increased 436 basis points to a deficit of
1.07% in 1999 from a deficit of 5.43% in 1998. Return on Average Equity
increased 1346 basis points to a deficit of 3.12% in 1999 from a deficit of
16.54% in 1998.
30
Financial Condition
Earning Assets
Average earning assets increased 97.6% to $280.8 million in 2000 from
$142.0 million in 1999. During 2000, loans, net of deferred loan fees,
represented 79.9% of average earning assets, investment securities comprised
13.3%, and Federal funds sold and other investments comprised 6.8%. In 1999,
loans, net of deferred loan fees, comprised 72.8% of average earning assets,
investment securities comprised 18.8%, Federal funds sold and other investments
comprised 3.9% and repurchase agreements comprised 4.5%. The variance in the mix
of earning assets is primarily attributable to the growth in the Company's loan
portfolio. The Company manages its securities portfolio and additional funds to
minimize interest rate fluctuation risk and to provide liquidity.
In 2000, growth in earning assets was funded primarily through an
increase in total loans due to new branch operations.
Loan Portfolio
The Company's total loans outstanding increased 81.2% to $285.6 million
as of December 31, 2000 from $157.6 million as of December 31, 1999. Loan growth
for 2000 was funded primarily through 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 $122.8 million, or 88.8%, from December 31, 1999
to December 31, 2000. Average total loans in 2000 were $224.3 million, $61.3
million less than the year end balance of $285.6 million due to the increase in
loan production for the third and fourth quarters of 2000. 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:
31
As of December 31,
---------------------------------------------------
2000 1999
% of % of
Balance Total Balance Total
------- ----- ------- -----
(Dollars in thousands)
Type of Loan
- ------------
Commercial real estate............................................. $158,654 55.6% $69,261 43.9%
Commercial ........................................................ 102,391 35.8 68,991 43.8
Residential mortgage............................................... 9,796 3.4 10,846 6.9
Consumer........................................................... 13,036 4.6 7,246 4.6
Credit cards and other............................................. 1,747 0.6 1,244 0.8
----- --- ----- ---
Total loans............................................... 285,624 100% 157,588 100%
==== ====
Net deferred loan fees............................................. (98) (71)
-- --
Loans, net of deferred loan fees........................ 285,526 157,517
Allowance for loan losses.......................................... (3,511) (1,858)
----- -----
Net loans................................................. $282,015 $155,659
======== ========
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, 2000, commercial real estate
loans represented 55.6% of outstanding loan balances, compared to 43.9% at
December 31, 1999. The increase in this category of loans is due to the
increased emphasis on commercial 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, 2000, commercial loans represented 35.8% of
outstanding loan balances, compared to 43.8% at December 31, 1999. The decrease
in commercial loans corresponds with management's strategy to diversify risk.
Residential Mortgage. The Company's residential mortgage loans consist
of first and second mortgage loans and construction loans. At December 31, 2000,
residential mortgage loans represented 3.4% of outstanding loan balances,
compared to 6.9% at December 31, 1999. 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, 2000, consumer loans represented
4.6% of outstanding loan balances, compared to 4.6% at December 31, 1999. The
Company does not actively market consumer loans and its portfolio primarily
consists of loans to the principals of other commercial relationships.
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, 2000, credit card and other loans represented 0.6% of
outstanding loan balances as compared to 0.8% at December 31, 1999. 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, 2000.
32
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.
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.
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, 2000:
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...................... $24,391 $56,417 $77,846 $158,654
Commercial.................................. 63,766 29,718 8,907 102,391
Residential mortgage........................ 1,892 5,465 2,439 9,796
Consumer ................................... 5,717 6,403 916 13,036
Credit card and other loans................. 1,747 0 0 1,747
----- ----- ----- -----
Total.............................. $97,513 $98,003 $90,108 $285,624
======= ======= ======= ========
The following table presents the maturity distribution as of December
31, 2000 for loans with predetermined fixed interest rates and floating interest
rates by various maturity periods:
Due in 1 Due after Due After
Year or Less 1 to 5 5 years Total
------------ years ------- -----
-----
Interest Category (Dollars in thousands)
- -----------------
Predetermined fixed interest rate................. $26,075 $67,691 $67,518 $161,284
Floating interest rate............................ 71,438 30,312 22,590 124,340
------ ------ ------ -------
Total.................................... $97,513 $98,003 $90,108 $285,624
======= ======= ======= ========
Asset Quality
At December 31, 2000, $1.5 million of loans were accounted for on a
non-accrual basis as compared to $1.1 million at December 31, 1999. Included in
the non-accrual loans as of December 31, 2000 were $872,000 of SBA guaranteed
loans compared to $733,000 at December 31, 1999. The SBA loans consist of the
remaining balance of liquidated loans pending payment of the SBA guarantee. At
December 31, 2000, $2.6 million in loans past due 90 days or more were still
accruing interest, compared to $293,000 at December 31, 1999. No SBA loans were
past due 90 days at December 31, 2000. The loans past due 90 days at December
33
31, 1999 were SBA loans, the remaining balances of which represent the
un-guaranteed portions. 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 internally originated SBA loans in the Company's loan portfolio at
December 31, 2000 totaled $3.2 million, including the SBA guaranteed portion of
$3.0 million, compared to an outstanding balance of $4.1 million at December 31,
1999, including the SBA guaranteed portion of $3.1 million. At December 31,
2000, 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.
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 2000 and 1999 were approximately $0 and
$356,000.
The Company substantially reduced SBA lending operations in 1998 due to
the cost of maintaining this specialized lending practice and due to recent
charge-offs in the unguaranteed portion of the SBA loans that were retained by
the Bank.
As of December 31, 2000, 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 for loans in the period 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.
34
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,
--------------------------------
2000 1999 1998
---- ---- ----
(Dollars in thousands)
Balance at beginning of period................................................ $1,858 $1,073 $481
Charge-offs:
Commercial real estate.................................................... (4) (0) (39)
Commercial................................................................ (388) (819) (16)
Residential mortgage...................................................... (0) (5) (0)
Consumer.................................................................. (0) (19) (0)
Consumer credit card and other............................................ (9) (14) (10)
- -- --
Total charge-offs..................................................... (401) (857) (65)
--- --- --
Recoveries:
Commercial real estate..................................................... 18 15 28
Commercial................................................................. 74 14 0
Residential mortgage....................................................... 50 2 0
Consumer................................................................... 0 0 0
Credit card and other...................................................... 0 1 0
- - -
Total recoveries..................................................... 142 32 28
--- -- --
Net (charge-offs)/recoveries.................................................. (259) (825) (37)
Provision for loan losses..................................................... 1,912 1,610 629
----- ----- ---
Balance at end of period...................................................... $3,511 $1,858 $1,073
====== ====== ======
Net charge-offs as a percentage of average loans.............................. .12% .80% .09%
Allowance for loan losses as a percentage of total loans...................... 1.23% 1.18% 1.60%
Net charge-offs were $259,000, or .12% of average loans outstanding in
2000 as compared to net charge-offs of $825,000 or .80% of average loans
outstanding in 1999. The allowance for loan losses increased 89.0% to $3.5
million or 1.23% of loans outstanding at December 31, 2000 from $1.9 million or
1.18% of loans outstanding at December 31, 1999. The allowance for loan losses
as a multiple of net loans charged-off was 13.6x for the year ended December 31,
2000 as compared to 2.3x for the year ended December 31, 1999. The increase in
the provision from 1999 to 2000 was generally due to increases in the amount of
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, and their loan portfolio reviews as part of the company examination
process.
35
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, 2000, the Company
held impaired loans as defined by SFAS 114 of $946,000 ($147,000 of such balance
is guaranteed by the SBA) for which specific allocations of $329,000 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 ($2.6
million) and none have been classified as troubled debt restructurings. At
December 31, 1999, the Company held impaired loans as defined by SFAS 114 of
$2.3 million ($497,000 of such balance is guaranteed by the SBA) for which
specific allocations of $63,000 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 ($2.1 million) and none have been
classified as troubled debt restructurings. Interest income on such impaired
loans during 2000 and 1999 was not significant.
As shown in the table below, management determined that as of December
31, 2000, 37.0% of the allowance for loan losses was related to commercial real
estate loans, 50.6% was related to commercial loans, 9.0% was related to
residential mortgage loans, 2.0% was related to consumer loans, 1.4% to credit
card and other loans and 0.0% was unallocated. As shown in the table below,
management determined that as of December 31, 1999, 34.2% of the allowance for
loan losses was related to commercial real estate loans, 55.3% was related to
commercial loans, 4.8% was related to residential mortgage loans, 4.1% was
related to consumer loans, 1.6% to credit card and other loans and 0.0% was
unallocated. The fluctuations in the allocation of the allowance for loan losses
between 2000 and 1999 is attributed to the establishment of specific reserves
totaling $488,000 at December 31,2000, of which 385,000 was for commercial
loans, and the changing mix of the loan portfolio as previously discussed.
For the periods indicated, the allowance was allocated as follows:
As of December 31,
2000 1999
---- ----
% of % of
Amount Total Amount Total
------ ----- ------ -----
(Dollars in thousands)
Commercial real estate..................... $1,300 37.0% $636 34.2%
Commercial................................. 1,775 50.6 1,027 55.3
Residential mortgage....................... 317 9.0 89 4.8
Consumer................................... 69 2.0 77 4.1
Credit card and other loans................ 50 1.4 29 1.6
Unallocated................................ 0 0 0 0
- - - -
Total............................. $3,511 100.0% $1,858 100.0%
====== ====== ====== ======
In considering the adequacy of the Company's allowance for loan losses,
management has focused on the fact that as of December 31, 2000, 55.6% of
outstanding loans are in the category of commercial real estate and 35.8% are in
commercial loans. Commercial loans are generally considered by management to
have greater 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,
36
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 3.4% of outstanding loans at
December 31, 2000. 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, 2000, 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.
An internal credit review of the loan portfolio is conducted 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. In
addition to the above credit review, the Company's primary regulator, the OCC,
also conducts a periodic 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 these reviews, together with other
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, 2000, $1.5 million of loans were accounted for on a
nonaccrual basis as compared to $1.1 million at December 31, 1999. The remaining
balance of non-accrual loans which is guaranteed by the SBA was $872,000 at
December 31, 2000 compared to $733,000 at December 31, 1999. At December 31,
2000, six loans totaling $2.6 million were accruing interest and were
contractually past due 90 days or more as to principal and interest payments,
compared to two loans totaling $293,000 which were accruing interest and were
contractually past due 90 days or more at December 31, 1999. No loans past due
90 days at December 31, 2000 were guaranteed by the SBA. The loans past due 90
days at December 31, 1999 represented the portion of SBA loans that were not
guaranteed.
At December 31, 2000 and December 31, 1999, no loans were considered
troubled debt restructurings.
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 28.9% to $36.8 million in 2000
from $28.5 million in 1999. At December 31, 2000, investment securities
available for sale totaled $32.1 million compared to $27.6 million at December
31, 1999. At December 31, 2000, investment securities available for sale had net
unrealized gains of $22,000, comprised of gross unrealized losses of $249,000
and gross unrealized gains of $271,000. At December 31, 1999, investment
securities available for sale had net unrealized losses of $1.1 million,
37
comprised of gross unrealized losses of $1.1 million and gross unrealized gains
of $6,000. Investment securities held to maturity at December 31, 2000 were $3.4
million, compared to zero at December 31, 1999. The carrying value of held to
maturity securities represents cost. The fair value of investment securities
held to maturity at December 31, 2000 was $3.5 million. Average investment
securities as a percentage of average earning assets decreased to 13.2% in 2000
from 18.8% in 1999.
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, paydowns and maturities of available for sale and
held to maturity investment securities decreased 53.9% to $13.3 million in 2000
from $29.0 million in 1999, with a resulting net gain on sales of $10,000 in
2000 and loss on sale of $4,000 in 1999. Such proceeds are generally used to
reinvest in additional investment securities.
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 increased 40.4% to $1.3 million at
December 31, 2000 from $902,000 at December 31, 1999. Other investments are
carried at cost as such investments do not have readily determinable fair
values.
At December 31, 2000, the investment portfolio included $12.7 million
in CMOs compared to $20.1 million at December 31, 1999. At December 31, 2000,
the investment portfolio included $16.1 million in other mortgage-backed
securities compared to $3.9 million at December 31, 1999.
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,
-------------------------------------------------------
2000 1999
Balance % of Total Balance % of Total
------- ---------- ------- ----------
Investment Category (Dollars in thousands)
-------------------
Available for sale:
U.S. Treasury and other U.S. agency obligations.. $1,746 4.8% $2,965 10.4%
State & Municipal Securities..................... 1,458 4.0 481 1.7
Mortgage-backed securities....................... 28,858 78.5 23,975 84.1
Marketable equity securities..................... 0 0 189 0.7
------ ---- ------ ----
32,062 87.3 27,610 96.9
Other investments................................... 1,266 3.4 902 3.1
Held to Maturity:
U.S. Treasury and other U.S. agency obligations.. 3,429 9.3 0 0
----- ---- ------- -----
Total............................. $36,757 100.0% $28,512 100.0%
======= ====== ======= ======
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, 2000, $28.9 million, or 78.5%, of the investment
securities portfolio consisted of mortgage-backed securities compared to $24.0
million, or 84.1%, of the investment securities portfolio as of December 31,
1999. During 2001, approximately $754,000 of mortgage-backed securities will
mature.
38
In accordance with 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, 2000, investments classified
as held to maturity totaled $3.4 million at amortized cost and $3.5 million at
fair value. At December 31, 1999, 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 $21.0
million and $16.3 million at December 31, 2000 and 1999, respectively, were
pledged to secure deposits of public funds, repurchase agreements and certain
other deposits as provided by law.
The maturities and weighted average yields of debt securities at
December 31, 2000 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...................................................................... $ 1,246 5.69%
Over 1 through 5 years.......................................................... 500 5.71
---
Over 5 years ...................................................................
Total........................................................................... 1,746
-----
State and municipal:
N/A
0-1 year........................................................................ ---
N/A
Over 1 through 5 years.......................................................... ---
Over 5 years.................................................................... 1,458 7.26%
-----
Total........................................................................... 1,458
-----
Mortgage-backed securities:
0-1 year........................................................................ 652 5.39%
Over 1 through 5 years.......................................................... 14,988 7.09
Over 5 years.................................................................... 7,309 6.30
Over 10 years................................................................... 5,909 7.68
-----
Total........................................................................... 28,858
------
Total available for sale debt securities.............................. 32,062
======
Held to maturity:
U.S. Treasury and other U.S. agency obligations:
N/A
0 - 1 year...................................................................... ---
N/A
Over 1 through 5 years.......................................................... ---
Over 5 years ................................................................... 3,429 8.05
-----
Total........................................................................... 3,429
-----
39
State and municipal:
N/A
0-1 year........................................................................ ---
N/A
Over 1 through 5 years.......................................................... ---
N/A
Over 5 years.................................................................... ---
Total........................................................................... ---
Mortgage-backed securities:
N/A
0-1 year........................................................................ ---
N/A
Over 1 through 5 years.......................................................... ---
N/A
Over 5 years.................................................................... ---
N/A
Over 10 years................................................................... ---
Total........................................................................... ---
Total held to maturity debt securities................................ 3,429
=====
(1) The Company has not invested in any tax-exempt obligations.
As of December 31, 2000, 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 144.2%, or $137.9 million, to
$233.6 million during 2000 from $95.6 million during 1999. This growth is
attributed to a 87.9% increase in average noninterest-bearing demand deposits, a
76.7% increase in average interest-bearing transaction account deposits, a 55.9%
increase in average savings deposits, a 344.3% increase in average certificates
of deposits of $100,000 or more and a 116.2% increase in other time deposits.
Average noninterest-bearing demand deposits increased 87.9% to $27.7
million in 2000 from $14.7 million in 1999. As a percentage of average total
deposits, these deposits decreased to 11.7% in 2000 from 15.4% in 1999. The
year-end balance of noninterest-bearing demand deposits increased 90.4% to $42.0
million at December 31, 2000, from $22.0 million at December 31, 1999. This
increase is primarily attributable to large business deposits retained by the
Company during 2000.
Average interest-bearing demand deposits increased 101.1% to $9.9
million in 2000 from $4.9 million in 1999. Average savings deposits increased
56.0% to $38.1 million in 2000, from $24.4 million in 1999. The increase in
average savings deposits is primarily attributable to an increase 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, 45% of the prime rate as quoted
in The Wall Street Journal on accounts with a balance of greater than $10,000
but less than $25,000, and the personal savings account rate on accounts with a
balance below $10,000. Average money market deposits increased 5.3% to $1.8
million for 2000 from $1.7 million in 1999. The year-end balance of money market
deposits increased 75.4% to $2.8 million at December 31, 2000 from $1.6 million
at December 31, 1999. This increase is attributable primarily to increases in
commercial deposit balances. Average balances of certificates of deposit of
$100,000 or more increased 344.3% to $94.0 million for 2000 from $21.2 million
in 1999. The year-end balance of certificates of deposit of $100,000 or more
increased 126.7 to $116.8 million at December 31, 2000 from $51.5 million at
December 31, 1999. The average balance for other time deposits increased 116.2
to $62.1 million for 2000 from $28.7 million in 1999. The year-end balance of
other time deposits increased 152.5% to $85.3 million at December 31, 2000
compared to $33.8 million at December 31, 1999. The increases in overall deposit
balances results primarily from new deposits obtained as a result of growth in
existing markets.
The following table presents, for the periods indicated, the average
amount of and average rate paid on each of the following deposit categories:
40
Years Ending December 31,
------------------------
2000 1999
---- ----
Average Average Average Average
Balance Rate Balance Rate
------- ------- ------- -------
Deposit Category (Dollars in thousands)
----------------
Noninterest-bearing demand................... $27,677 0% $ 14,727 0%
Interest-bearing demand...................... 9,879 1.58 4,912 2.02
Money market................................. 1,762 3.58 1,674 2.21
Savings ..................................... 38,101 5.49 24,427 4.72
Certificates of deposit of $100,000 or more.. 94,038 6.53 21,165 5.51
Other time................................... 62,112 6.03 28,723 5.56
------ ------
Total................................... $233,566 5.30% $ 95,628 4.24%
-------- --------
Interest-bearing deposits, including certificates of deposit, will
continue to be a major source of funding for the Company. During 2000, aggregate
average balances of time deposits of $100,000 and over comprised 39.8% of total
deposits compared to 22.1% for the prior year. The average rate on certificates
of deposit of $100,000 or more increased to 6.53% in 2000, compared to 5.51% in
1999.
The following table indicates amounts outstanding of time certificates
of deposit of $100,000 or more and their respective contractual maturities:
December 31,
-----------
2000 1999
---- ----
(Dollars in thousands)
Average Average
Amount Rate Amount Rate
------ ------- ------ -------
3 months or less..................... $32,205 6.53% $ 13,475 5.20%
3-6 months........................... 28,231 6.96 15,191 5.90
6-12 months.......................... 27,585 6.80 17,180 6.02
Over 12 months....................... 28,803 7.11 5,693 5.91
------ -----
Total........................... $116,824 6.84% $51,539 5.84%
======== ======
Average short-term borrowings increased 53.5% to $21.8 million in 2000
from $14.2 million in 1999. Short-term borrowings consist of treasury tax and
loan deposits, Federal Home Loan Bank borrowings, and repurchase agreements with
certain customers. In addition, the Company has securities sold under agreements
to repurchase, which are classified as secured borrowings. Average treasury tax
and loan deposits increased 20.0% to $1.8 million in 2000 from $1.5 million in
1999. Average Federal Home Loan Bank borrowings increased 3301% to $5 million in
2000 compared with $147,000 during 1999. Average repurchase agreements with
customers increased 19.6% to $15.0 million in 2000 from $12.5 million in 1999.
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 certain customers that seek to maximize
their return on liquid assets. The Company invests these funds primarily in
securities purchased under agreements to resell at the nationally quoted rate
for such investments. The year-end balance of repurchase agreements increased
70.4% to $18.8 million at December 31, 2000 from $11.0 million at December 31,
1999.
The following table presents the components of short-term borrowing and average
rates for such borrowing for the years ended December 31, 2000 and 1999:
41
Maximum
Amount Average
Outstanding at Average Average Ending Rate at
Any Month End Balance Rate Balance Year End
------------- ------- ------- ------- --------
Year Ended December 31,
- ----------------------
(Dollars in thousands)
2000
- ----
Treasury tax and loan deposits...... $2,299 $1,824 6.32% $2,223 6.36%
Repurchase agreements............... 21,240 14,956 6.04 18,812 6.47
Federal Home Loan Bank
borrowings...................... 5,000 5,000 5.97 5,000 5.90
----- -----
Total........................... $21,780 $26,035
======= =======
1999
- ----
Treasury tax and loan deposits...... $2,473 $1,510 5.39% $2,242 4.78%
Repurchase agreements............... 19,293 12,510 4.42 11,037 5.95
Federal Home Loan Bank
borrowings.................. 5,000 147 5.98 5,000 5.48
--- -----
Total........................... $14,167 $18,279
======= =======
Capital Resources
Shareholders' equity decreased 1.7% to $38.6 million in 2000 from $39.2
million in 1999. This decrease results primarily from the Company's net loss for
the year of $1.1 million, and the repurchase of 106,000 shares of its stock
totaling $648,000, partially offset by an increase in accumulated other
comprehensive income to a gain of $14,000 at December 31, 2000 from a loss of
$669,000 at December 31, 1999, representing a change in the unrealized gain/loss
(after tax effect) on available for sale securities.
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 decreased to 12.8% in 2000 from 34.3% in
1999.
Regulatory Capital Calculation
------------------------------
2000 1999
---- ----
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in thousands)
Tier 1 risk based:
Actual.............................. $35,529 11.58% $35,778 17.29%
Minimum required.................... 12,271 4.00 8,278 4.00
------ ---- ----- ----
Excess above minimum................ $23,258 7.58% $27,500 13.29%
======= ==== ======= =====
Total risk based:
Actual............................. $39,050 12.73% $37,636 18.19%
Minimum required................... 24,542 8.00 16,567 8.00
------ ---- ------ ----
Excess above minimum............... $14,508 4.73% $21,069 10.19%
======= ==== ======= =====
Leverage:
Actual.............................. $35,529 10.28% $35,778 20.01%
Minimum required.................... 13,828 4.00 6,915 4.00
------ ---- ----- ----
Excess above minimum................ $21,701 6.28% $28,863 16.10%
======= ==== ======= =====
Total risked based assets.... $306,771 $206,957
Total average assets......... $345,707 $172,364
42
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(Bank Insurance Fund)-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.
The Company's Tier 1 (to risk-weighted assets) capital ratio decreased
to 11.58% in 2000 from 17.29% in 1999. The Company's total risk based capital
ratio decreased to 12.73% in 2000 from 18.19% in 1999. 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
43
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, 2000.
44
One Four-
Month One-Three Twelve One-Five Over Five Noninterest
or Less Months Months Years Years Sensitive Total
------- --------- ------ -------- --------- ----------- -----
December 31, 2000 (Dollars in thousands)
- -----------------
ASSETS
Earning assets:
Available for sale investment
Securities....................... -- -- $1,202 $21,088 $9,771 -- $32,061
Held to maturity investment
securities and other investments. -- -- -- -- 4,695 -- 4,695
Federal funds sold and
repurchase agreements............ $30,957 -- -- -- -- -- 30,957
Loans............................... 96,182 $39,449 14,366 66,931 68,696 -- 285,624
------ ------- ------ ------ ------ -------
Total earning assets................... 127,139 39,449 15,568 88,019 83,162 -- 353,337
------- ------ ------ ------ ------ -- -------
LIABILITIES
Interest-bearing liabilities:
Interest-bearing demand deposits.... $12,260 -- -- -- -- -- $12,260
Savings deposits.................... 44,166 -- -- -- -- $1,955 46,121
Money market deposits............... -- -- -- -- -- 2,796 2,796
Certificates of deposit of 20,902 $26,168 $60,877 $ 6,952 $1,925 -- 116,824
$100,000 or more..................
Other time deposits................. 3,605 19,150 41,180 21,339 -- -- 85,274
Repurchase agreements............... 18,812 -- -- -- -- -- 18,812
Other borrowed funds................ 2,223 -- 5,000 -- -- -- 7,223
----- -------- -------- ------ ------ ------- -----
Total interest-bearing
Liabilities................. 101,968 45,318 107,057 28,291 1,925 4,751 289,310
------- ------ ------- ------ ----- ----- -------
Noninterest-bearing demand deposits....
-- -- -- -- -- 41,965 41,965
Other noninterest liabilities and
shareholders' equity............. -- -- -- -- -- 22,062 22,062
-------- ------ ------- ------ ----- ------ ------
Noninterest-bearing sources
of funds-net................ $ -- $ -- $ -- $ -- $ -- $64,027 $64,027
---- ---- ---- ---- ----- ------- -------
Interest sensitivity gap:
Amount.............................. $25,171 ($5,869) $ (91,489) $59,728 $81,237 $(68,778) $ --
------- -------- ---------- ------- ------- --------- ----
Cumulative amount................... $25,171 $19,302 $ (72,187) $(12,459) $68,778 $ -- $ --
Percent of total earning assets..... 7.12% (1.66%) (25.89%) 16.90% 22.99% (19.47%)
Cumulative percent of total
Earning assets.................... 7.12% 5.46% (20.43%) (3.52%) 19.47%
Ratio of rate sensitive assets to rate
sensitive liabilities................ 1.25x .87x .15x 3.11x 432.01x
Cumulative ratio of rate sensitive
assets to rate sensitive liabilities.. 1.25x 1.13x .72x .96x 1.24x
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 .60 and 1.20 years for the Company. At December 31,
2000, the Company had cumulative gap ratios of approximately 1.13 for the three
month time period and .72 for the one year period ending December 31, 2001.
Thus, over the next twelve months, rate-sensitive liabilities will reprice
faster than rate-sensitive assets.
45
The allocations used for the interest rate sensitivity report above
were based on the contractual maturity (or next repricing opportunity, whichever
comes sooner) 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 because the
rate paid on these accounts typically is not sensitive to movements in market
interest rates. 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 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 a
liability 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 December 31, 2000, indicates that a 200
basis point decrease in rates would cause an increase in net interest income of
$170,000 over the next twelve month period. Conversely, a 200 basis point
increase in rates would cause a decrease in net interest income of $429,000 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 nationally
quoted repurchase agreement 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.
During the year ended December 31, 2000, the Company entered into
various interest rate swaps to help manage the Company's interest sensitivity.
These are indexed to the London Interbank Offered Rate ("LIBOR"). The interest
46
rate risk factor in these contracts is considered in the overall interest
management strategy and the Company's interest risk management program. The
income or expense associated with these contracts is reflected as an adjustment
to interest expense, and results in an adjustment of the rate on the liabilities
with which the contracts are associated. Changes in the estimated fair value of
these contracts were not reflected in the financial statements unless realized.
At December 31, 2000, the estimated net fair value of the Company's outstanding
interest rate swaps was $794,000. For the year ended December 31, 2000, there
were no realized gains or losses on terminated interest rate swaps.
At December 31, 2000, available for sale debt securities with a
carrying value of approximately $17.4 million are scheduled to mature within the
next five years. Of this amount, $1.9 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 and repurchase agreements were
$22.0 million in 2000, or 7.8% of average earning assets, compared to $11.9
million in 1999, or 8.4% of average earning assets. Federal funds sold and
repurchase agreements totaled $31.0 million at December 31, 2000, or 8.8% of
earning assets, compared to $19.9 million at December 31, 1999, or 9.6% of
earning assets.
At December 31, 2000, loans with a carrying value of approximately
$195.5 million are scheduled to mature within the next five years. Of this
amount, $97.5 million is scheduled to mature within one year.
At December 31, 1999, time deposits with a carrying value of
approximately $202.1 million are scheduled to mature within the next five years.
Of this amount, $151.8 million is scheduled to mature within one year.
The Company's average loan-to-deposit ratio decreased 13.3 basis points
to 94.9% for 2000 from 108.2% for 1999. The Company's total loan-to-deposit
ratio decreased 5.4 basis points to 93.6% at December 31, 2000 from 99.0% at
December 31, 1999.
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, 2000, the Company had borrowings from the
FHLBA in the amount of $5.0 million.
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 anticipated that the Company will find it necessary to raise
additional capital prior to the third quarter of 2001 to maintain its
classification by regulatory authorities as "well capitalized". This results
from the rate of growth of the Company. Management and the Board of Directors
are currently evaluating several alternatives for raising capital.
Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and hedging activities. In June
1999, the FASB issued SFAS No. 137, which deferred the effective date of
adoption of SFAS No. 133 for one year. SFAS No. 133 will be effective for the
first quarter of the year ending December 31, 2001. Retroactive application to
financial statements of prior periods is not required. The Company will adopt
Statement of Financial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133) on January 1, 2001. SFAS No.
133 requires the Company to recognize all derivatives on the balance sheet at
fair value. Derivatives that are not hedges must be adjusted to fair value
through income. If a derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of the derivatives will either be offset
against the changes in fair value of the hedged assets, liabilities or firm
commitments through earnings, or recognized in other comprehensive income until
the hedge item is recognized in earnings. The change in a derivative's fair
value related to the ineffective portion of a hedge, if any, will be immediately
recognized in earnings. Management has completed its evaluation of the various
issues related to SFAS No. 133, including performing an inventory of derivative
and embedded derivative instruments and has identified four interest rate swaps
which are considered derivative instruments as defined by SFAS No. 133, for the
year ended December 31, 2000. In addition, such swaps qualify for the fair value
method of hedge accounting under the "short-cut method" based on the guidelines
47
established by SFAS No. 133. No other derivative instruments, as defined by SFAS
No. 133, were identified by the Company. As a result, when the Company adopts
SFAS No. 133, as amended by SFAS No. 138, on January 1, 2001, total assets will
increase by $794,221 with a corresponding increase in liabilities. As the fair
value hedge is assumed to be completely effective under the short-cut method,
hedging gains and losses net to zero and will have no effect on the earnings of
the Company.
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 targeted gap ratio guidelines for a one
year time horizon of between .60 and 1.20 years for the Bank. At December 31,
2000, the Bank had cumulative gap ratios of approximately 1.13 for the three
month time period ended March 31, 2001 and .72 for the one year period ending
December 31, 2001. Thus, over the next three months, rate-sensitive assets will
reprice faster than rate-sensitive liabilities, and for the following nine
months, rate-sensitive liabilities will reprice faster than rate-sensitive
assets.
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 on page 39 indicates the Company is in an
liability 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
48
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 December 31, 2000, indicates that a 200 basis
point decrease in rates would cause an increase in net interest income of
$170,000 over the next twelve month period. Conversely, a 200 basis point
increase in rates would cause a decrease in net interest income of $429,000 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.
Derivative Financial Instruments
The Company is exposed to market risks, including fluctuations in
interest rates, variability in spread relationships (Prime to LIBOR spreads),
mismatches of repricing intervals between finance receivables and related
funding obligations, and variability in currency exchange rates. The Company has
established policies, procedures and internal processes governing its management
of market risks and the use of financial instruments to manage its exposure to
such risks. Sensitivity of earnings to these risks are managed by entering into
securitization transactions, issuing debt obligations with appropriate price and
term characteristics, and utilizing derivative financial instruments. These
derivative financial instruments consist primarily of interest rate swaps. The
Company does not use derivative financial instruments for trading purposes.
The Company uses interest rate swap agreements to change the
characteristics of its fixed and variable rate exposures and to manage the
Company's asset/liability match. The Company's interest rate swap portfolio is
an integral element of its risk management policy, and as such, all swaps are
linked to an underlying debt.
During the year ended December 31, 2000, the Company entered into
various interest rate swaps to help manage the Company's interest sensitivity.
These are indexed to the LIBOR. The interest rate risk factor in these contracts
is considered in the overall interest management strategy and the Company's
interest risk management program. The income or expense associated with these
contracts is reflected as an adjustment to interest expense, and results in an
adjustment of the rate on the liabilities with which the contracts are
associated. Changes in the estimated fair value of these contracts were not
reflected in the financial statements unless realized. At December 31, 2000, the
estimated net fair value of the Company's outstanding interest rate swaps was
$794,000. For the year ended December 31, 2000, there were no realized gains or
losses on terminated interest rate swaps.
49
Item 8. Financial Statements and Supplementary Data.
- --------------------------------------------------------------------------------
The following financial statements are filed with this report:
Consolidated Balance Sheets - December 31, 2000 and 1999
Consolidated Statements of Operations - Years ended December 31,
2000, 1999 and 1998
Consolidated Statements of Shareholders' Equity - Years ended
December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows - Years ended December 31,
2000, 1999 and 1998
Notes to Consolidated Financial Statements
50
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, 2000 and 1999, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 2000. 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 auditing standards generally accepted
in the United States of America. 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, 2000
and 1999, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
February 15, 2001
51
FLORIDA BANKS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 and 1999
- ------------------------------------------------------------------------------------------------------------------------------------
2000 1999
ASSETS
CASH AND DUE FROM BANKS $ 12,730,964 $ 6,088,628
FEDERAL FUNDS SOLD 30,957,000 19,870,000
------------- -------------
Total cash and cash equivalents 43,687,964 25,958,628
INVESTMENT SECURITIES:
Available for sale, at fair value (cost $32,039,307 and
$28,681,760 at December 31, 2000 and 1999) 32,061,545 27,609,601
Held to maturity (fair value $3,486,595) 3,428,558
Other investments 1,266,000 901,800
LOANS:
Commercial real estate 158,653,667 69,260,661
Commercial 102,391,117 68,991,516
Residential mortgage 9,795,665 10,845,841
Consumer 13,036,447 7,245,919
Credit card and other loans 1,747,145 1,244,256
------------- -------------
Total loans 285,624,041 157,588,193
Allowance for loan losses (3,510,677) (1,858,040)
Net deferred loan fees (98,421) (71,341)
------------- -------------
Net loans 282,014,943 155,658,812
PREMISES AND EQUIPMENT, NET 3,300,170 2,440,818
ACCRUED INTEREST RECEIVABLE 1,897,303 1,021,175
DEFERRED INCOME TAXES, NET 4,605,153 4,365,270
OTHER ASSETS 535,408 207,385
------------- -------------
TOTAL ASSETS $ 372,797,044 $ 218,163,489
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS:
Noninterest-bearing demand $ 41,965,131 $ 22,035,567
Interest-bearing demand 12,259,897 11,211,366
Regular savings 46,121,007 38,954,093
Money market accounts 2,795,661 1,593,930
Time $100,000 and over 116,824,179 51,538,664
Other time 85,273,577 33,772,060
------------- ----------
Total deposits 305,239,452 159,105,680
REPURCHASE AGREEMENTS 18,812,378 11,037,111
OTHER BORROWED FUNDS 7,223,402 7,242,352
ACCRUED INTEREST PAYABLE 2,206,379 616,549
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 758,994 926,942
------------- -------------
Total liabilities 334,240,605 178,928,634
------------- -------------
COMMITMENTS (NOTE 8)
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value; 30,000,000 shares authorized
5,929,751 and 5,853,756 shares issued, respectively 59,298 58,538
Additional paid-in capital 46,750,329 46,383,936
Accumulated deficit (deficit of $8,134,037
eliminated upon quasi-reorganization on December 31, 1995) (6,760,222) (5,680,069)
Treasury stock, 241,100 and 135,100 shares at cost, respectively (1,506,836) (858,844)
Accumulated other comprehensive income (loss), net of tax 13,870 (668,706)
------------- -------------
Total shareholders' equity 38,556,439 39,234,855
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 372,797,044 $ 218,163,489
============= =============
52
FLORIDA BANKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
- ------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
-------------- -------------- ---------------
INTEREST INCOME:
Loans, including fees $ 20,072,894 $ 9,034,939 $ 3,807,233
Investment securities 2,477,179 1,518,052 874,374
Federal funds sold 1,215,804 257,042 454,257
Repurchase agreements 219 332,871 277,165
------------ ----------- -----------
Total interest income 23,766,096 11,142,904 5,413,029
------------ ----------- -----------
INTEREST EXPENSE:
Deposits 12,393,304 4,053,353 2,107,343
Repurchase agreements 903,794 552,499 230,840
Borrowed funds 413,938 90,442 98,272
------------ ----------- -----------
Total interest expense 13,711,036 4,696,294 2,436,455
------------ ----------- -----------
NET INTEREST INCOME 10,055,060 6,446,610 2,976,574
PROVISION FOR LOAN LOSSES 1,912,380 1,610,091 629,000
------------ ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 8,142,680 4,836,519 2,347,574
FLORIDA BANKS, INC. ------------ ----------- -----------
NONINTEREST INCOME:
Service fees 705,584 454,660 382,359
Gain on sale of loans 1,135 105,635
Gain (loss) on sale of available for sale investment securities 9,864 (4,274) 8,197
Other noninterest income 295,735 131,110 116,406
------------ ----------- -----------
1,011,183 582,631 612,597
------------ ----------- -----------
NONINTEREST EXPENSES:
Salaries and benefits 6,813,011 5,501,251 5,379,989
Occupancy and equipment 1,527,775 951,155 486,148
Data processing 456,972 265,499 142,315
Financing costs 972,000
Other 2,087,962 1,624,186 922,342
------------ ----------- -----------
10,885,720 8,342,091 7,902,794
------------ ----------- -----------
LOSS BEFORE BENEFIT FOR INCOME TAXES (1,731,857) (2,922,941) (4,942,623)
BENEFIT FOR INCOME TAXES (651,704) (1,075,781) (350,007)
------------ ----------- -----------
NET LOSS $ (1,080,153) $(1,847,160) $(4,592,616)
============ =========== ===========
LOSS PER SHARE:
Basic $ (0.19) $ (0.32) $ (1.46)
============ =========== ===========
Diluted $ (0.19) $ (0.32) $ (1.46)
============ =========== ===========
See notes to consolidated financial statements.
53
FLORIDA BANKS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
- -------------------------------------------------------------------------------------------------------------------------
Preferred Stock Common Stock Additional
-------------------------- --------------------------- Paid-In
Shares Par Value Shares Par Value Capital
BALANCE, JANUARY 1, 1998 1,215,194 $ 12,152 $ 5,537,996
Comprehensive loss:
Net loss
Unrealized loss on available for sale
investment securities, net of tax of $7,181
Comprehensive loss
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 2,155,718
Issuance of units 80,800 808 972,024
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 46,373,946
Comprehensive loss:
Net loss
Unrealized loss on available for sale
investment securities, net of tax of $396,270
Comprehensive loss
Exercise of stock options 1,000 10 9,990
Purchase of treasury stock
BALANCE, DECEMBER 31, 1999 5,853,756 58,538 46,383,936
--------- ------ ----------
Comprehensive loss:
Net loss
Unrealized gain on available for sale investment
securities, net of tax of $411,821
Comprehensive loss
Issuance of common stock under employee
stock purchase plan 75,995 760 366,393
Purchase of treasury stock
------ --------- --------- --------- ----------
BALANCE, DECEMBER 31, 2000 $ 5,929,751 $ 59,298 $46,750,329
====== ========= ========= ========= ==========
See notes to consolidated financial statements.
54
- --------------------------------------------------------------------------------
Accumulated
Other
Retained Comprehensive
Treasury Earnings Income (Loss),
Stock (Deficit) Net of Tax Total
$ 759,707 $ 3,780 $ 6,313,635
(4,592,616) (4,592,616)
(15,496) (15,496)
-----------
(4,608,112)
37,392,948
240,000
118,265
2,158,688
972,832
606,000
(606,000)
(407)
----------- --------- -----------
(3,832,909) (11,716) 42,587,849
(1,847,160) (1,847,160)
(656,990) (656,990)
-----------
(2,504,150)
10,000
$ (858,844) (858,844)
----------- ----------- --------- -----------
(858,844) (5,680,069) (668,706) 39,234,855
(1,080,153) (1,080,153)
682,576 682,576
-----------
(397,577)
367,153
(647,992) (647,992)
----------- ----------- --------- -----------
$(1,506,836) $(6,760,222) $ 13,870 $38,556,439
55
FLORIDA BANKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
- ------------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
----------------- ----------------- ----------------
OPERATING ACTIVITIES:
Net loss $ (1,080,153) $ (1,847,160) $ (4,592,616)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 647,891 350,204 165,327
Loss on disposition of furniture and equipment 15,468 450
Deferred income tax benefit (651,704) (1,075,781) (350,007)
(Gain) loss on sale of securities (9,864) 4,274 (8,197)
Gain on sale of real estate owned (18,263)
(Accretion) amortization of (discount) premiums on investments, net (196,934) 41,064 35,070
Provision for loan losses 1,912,380 1,610,091 629,000
Increase in accrued interest receivable (876,128) (542,475) (126,748)
Increase in other assets (328,023) (79,299) (74,380)
Increase in accrued interest payable 1,589,830 397,652 20,080
(Decrease) increase in other liabilities (167,948) 506,602 (552,531)
Noncash compensation and financing costs 3,939,054
------------ ------------ ------------
Net cash provided by (used in) operating activities 836,552 (634,378) (915,948)
------------ ------------ ------------
INVESTING ACTIVITIES:
Proceeds from sales, paydowns and maturities of investment securities:
Available for sale 12,261,314 28,974,876 11,672,088
Held to maturity 1,082,529
Other 28,600
Purchases of investment securities:
Available for sale (15,560,354) (35,733,287) (23,221,902)
Held to maturity (4,362,796)
Other (364,200) (609,950) (7,400)
Net increase in loans (129,114,511) (91,211,798) (33,447,205)
Purchases of premises and equipment (1,522,711) (1,969,539) (435,620)
Proceeds from the sale of premises and equipment 350
Proceeds from the sale of real estate owned 864,263
Cash resulting from merger 163,971
------------ ------------ ------------
Net cash used in investing activities (136,716,466) (100,549,348) (45,247,468)
------------ ------------ ------------
FINANCING ACTIVITIES:
Net increase in demand deposits,
money market accounts and savings accounts 29,713,892 38,789,882 18,266,411
Net increase in time deposits 116,787,033 55,695,191 894,024
Proceeds from issuance of common stock, net 38,129,956
Exercise of stock options 10,000 240,000
Redemption of preferred stock (606,000)
Payment of note payable (250,000)
Purchase of treasury stock (647,992) (858,844)
Purchase of fractional shares (407)
Proceeds from FHLB advances 5,000,000 5,000,000
Repayment of FHLB advances (5,000,000)
Increase (decrease) in repurchase agreements 7,775,267 5,368,447 (242,849)
(Decrease) increase in other borrowed funds (18,950) 2,192,539 (2,355,791)
------------ ------------ ------------
Net cash provided by financing activities 153,609,250 106,197,215 54,075,344
------------ ------------ ------------
NET INCREASE IN CASH
AND CASH EQUIVALENTS 17,729,336 5,013,489 7,911,928
CASH AND CASH EQUIVALENTS:
Beginning of year 25,958,628 20,945,139 13,033,211
------------ ------------ ------------
End of year $ 43,687,964 $ 25,958,628 $ 20,945,139
============ ============ ============
See notes to consolidated financial statements.
56
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
- --------------------------------------------------------------------------------
l. 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 its subsidiaries. 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.
Cash and Cash Equivalents - 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.
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 operations 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 operations.
57
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (Continued)
- --------------------------------------------------------------------------------
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 well
collateralized and the 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 on 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.
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
58
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (Continued)
- --------------------------------------------------------------------------------
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 15) reductions in the deferred tax
valuation allowance are credited to additional paid-in capital.
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. In
addition, the Company has securities sold under agreements to repurchase,
which are classified as secured borrowings. Such borrowings generally
mature within one to thirty days from the transaction date. Securities
sold under agreements to repurchase are reflected at the amount of cash
received in connection with the transaction. Information concerning
repurchase agreements for the years ended December 31, 2000 and 1999 is
summarized as follows:
2000 1999
Average balance during the year $ 14,955,704 $ 12,505,681
Average interest rate during the year 6.04% 4.42%
Maximum month-end balance during the year $ 21,240,341 $ 19,293,496
Other Borrowed Funds - Other borrowed funds consist of Federal Home Loan
Bank borrowings and treasury tax and loan deposits. Treasury tax and loan
deposits 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 - 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.
Comprehensive Income - Accounting principles generally require that
recognized revenue, expenses, gains and losses be included in net income.
Although certain changes in assets and liabilities, such as unrealized
gains and losses on available for sale securities, are reported as a
separate component of the equity section of the balance sheet, such items
along with net income, are components of comprehensive income. The
components of other comprehensive income and related tax effects are
presented in the Consolidated Statements of Shareholders' Equity.
59
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (Continued)
- --------------------------------------------------------------------------------
Recent Accounting Pronouncements - SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, is effective for all fiscal years
beginning after June 15, 2000. SFAS 133, as amended and interpreted,
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and
for hedging activities. All derivatives, whether designated in hedging
relationships or not, will be required to be recorded on the balance sheet
at fair value. If the derivative is designated in a fair-value hedge, the
changes in the fair value of the derivative and the hedged item will be
recognized in earnings. If the derivative is designated in a cash-flow
hedge, changes in the fair value of the derivative will be recorded on
other comprehensive incomes (OCI) and will be recognized in the statement
of operations when the hedged item affects earnings. SFAS 133 defines new
requirements for designation and documentation of hedging relationships as
well as ongoing effectiveness assessments in order to use hedge
accounting. For a derivative that does not qualify as a hedge, changes in
fair value will be recognized in earnings.
Management has completed its evaluation of the various issued related to
SFAS No. 133, including performing an inventory of derivative and embedded
derivative instruments and has identified four interest rate swaps which
are considered derivative instruments as defined by SFAS No. 133, for the
year ended December 31, 2000. In addition, such swaps qualify for the fair
value method of hedge accounting under the "short-cut method" based on the
guidelines established by SFAS No. 133. No other derivative instruments,
as defined by SFAS No. 133, were identified by the Company. As a result,
when the Company adopts SFAS No. 133, as amended by SFAS No. 138, on
January 1, 2001, total assets will increase by $794,221 with a
corresponding increase in total liabilities. As the fair value hedge is
assumed to be completely effective under the short-cut method, hedging
gains and losses net to zero and will have no effect on the earnings of
the Company.
Reclassifications - Certain reclassifications have been made to the 1998
and 1999 consolidated financial statements to conform with the
presentation adopted in 2000.
2. INVESTMENT SECURITIES
The amortized cost and estimated fair value of available for sale and held
to maturity investment securities as of December 31, 2000 and 1999 are as
follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 2000
Available for sale:
U.S. Treasury securities and
other U.S. agency obligations $ 1,748,054 $ 250 $ (2,694) $ 1,745,610
State and municipal 1,435,000 22,893 1,457,893
Mortgage-backed securities 28,856,253 247,894 (246,105) 28,858,042
----------- --------- --------- -----------
32,039,307 271,037 (248,799) 32,061,545
Held to maturity:
U.S. Treasury securities and
other U.S. agency obligations 3,428,558 66,906 (8,869) 3,486,595
----------- --------- --------- -----------
$35,467,865 $ 337,943 $(257,668) $ 35,548,140
=========== ========= ========= ===========
60
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (Continued)
- --------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 1999
U.S. Treasury securities and
other U.S. agency obligations $ 3,002,132 $ (37,568) $ 2,964,564
State and municipal 500,000 (18,630) 481,370
Mortgage-backed securities 24,990,628 $ 5,933 (1,021,894) 23,974,667
----------- ------- ----------- -----------
Total debt securities 28,492,760 5,933 (1,078,092) 27,420,601
Marketable equity securities 189,000 189,000
----------- ------- ----------- -----------
Total securities available for sale $28,681,760 $ 5,933 $(1,078,092) $27,609,601
=========== ======= =========== ===========
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, 2000, by contractual maturity, are shown below:
Available for Sale Held to Maturity
------------------------------------ ----------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
Due before one year $ 1,248,054 $ 1,245,360
Due after one year through five years 500,000 500,250
Due after five years through ten years 935,000 948,553
Due after ten years 500,000 509,340 $3,428,558 $3,486,595
----------- ----------- ---------- ----------
3,183,054 3,203,503 3,428,558 3,486,595
Mortgage-backed securities 28,856,253 28,858,042
----------- ----------- ---------- ----------
Total $32,039,307 $32,061,545 $3,428,558 $3,486,595
=========== =========== ========== ==========
Investment securities with a carrying value of $21,032,693 and $16,316,693
were pledged as security for certain borrowed funds and public deposits
held by the Company at December 31, 2000 and 1999, respectively.
3. LOANS
Changes in the allowance for loan losses are summarized as follows:
2000 1999
Balance, beginning of year $ 1,858,040 $ 1,073,346
Provision for loan losses 1,912,380 1,610,091
Charge-offs (401,329) (857,732)
Recoveries 141,586 32,335
----------- -----------
Balance, end of year $ 3,510,677 $ 1,858,040
=========== ===========
61
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (Continued)
- --------------------------------------------------------------------------------
The Company's primary lending area is the state of Florida. 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.
Nonaccrual loans totaled approximately $1,547,000 and $1,100,000 of which
approximately $872,000 and $733,000 is guaranteed by the SBA at December
31, 2000 and 1999, respectively. The effects of carrying nonaccrual loans
during 2000, 1999, and 1998 resulted in a reduction of interest income of
approximately $151,000, $76,000 and $38,000, respectively.
Loans considered impaired totaled approximately $946,000 and $2,284,000 of
which approximately $147,000 and $497,000 is guaranteed by the SBA at
December 31, 2000 and 1999, respectively. The total allowance for loan
losses related to these loans was approximately $329,000 and $63,000 at
December 31, 2000 and 1999, respectively. The interest income recognized
on impaired loans for the year ended December 31, 2000, 1999, and 1998 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 $1,222,000 and $186,000 at December 31,
2000 and 1999. During the year ended December 31, 2000, such shareholders,
directors, officers and their related business interest borrowed
approximately $1,331,000 from the Company and repaid approximately
$295,000.
4. PREMISES AND EQUIPMENT
Major classifications of these assets are as follows:
2000 1999
Land $ 95,000 $ 95,000
Buildings 660,315
Construction in process 37,500
Leasehold improvements 787,985 753,463
Furniture, fixtures and equipment 3,145,737 2,519,854
----------- -----------
4,689,037 3,405,817
Accumulated depreciation and
amortization (1,388,867) (964,999)
----------- -----------
$ 3,300,170 $ 2,440,818
=========== ===========
Depreciation and amortization amounted to $647,891, $350,204 and $165,327
for the years ended December 31, 2000, 1999 and 1998, respectively.
62
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (Continued)
- --------------------------------------------------------------------------------
5. INCOME TAXES
The components of the provision for income tax expenses for the years
ended December 31, 2000, 1999 and 1998 are as follows:
2000 1999 1998
Deferred tax benefit $(651,704) $ (1,075,781) $(350,007)
========= ============ =========
Income taxes for the years ended December 31, 2000, 1999 and 1998, differ
from the amount computed by applying the federal statutory corporate rate
to earnings before income taxes as summarized below:
2000 1999 1998
Benefit based on federal income
tax rate $(588,831) $ (993,800) $ (1,680,491)
Noncash compensation and financing costs 1,339,279
State income taxes net of federal benefit (66,362) (113,784) (37,376)
Other 3,489 31,803 28,581
--------- ------------ ------------
$(651,704) $ (1,075,781) $ (350,007)
========= ============ ============
During the year ended December 31, 1998, the Bank utilized net operating
loss carryforwards to reduce current taxes payable by approximately
$236,000. The utilization of net operating losses for the year ended
December 31, 1998 (a period subsequent to the date of the Bank's quasi
reorganization) and the complete recognition of all remaining deferred tax
assets at December 31, 1998, 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, 2000 and 1999
are as follows:
2000 1999
Deferred tax assets:
Net operating loss carryforwards $ 3,436,983 $ 3,278,623
Allowance for loan losses 1,166,025 544,137
Loan fees 40,988 26,846
Unrealized loss on investment securities 403,451
Cash to accrual adjustment 112,757 150,343
Other 22,077 22,362
----------- -----------
4,778,830 4,425,762
----------- -----------
Deferred tax liabilities:
Accumulated depreciation 165,309 60,492
Unrealized gain on investment securities 8,368
----------- -----------
173,677 60,492
----------- -----------
Deferred tax assets, net $ 4,605,153 $ 4,365,270
=========== ===========
63
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (Continued)
- --------------------------------------------------------------------------------
At December 31, 2000 and 1999, the Bank had tax net operating loss
carryforwards of approximately $9,429,000 and $9,249,000, respectively.
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, $643,000 in 2018, $1,619,000 in 2019, and $180,000 in 2020. 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 each year to approximately $700,000. Unused
limitations from each year accumulate in successive years.
At December 31, 2000 and 1999, 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, 2000 and
1999.
6. DEPOSITS
At December 31, 2000, the scheduled maturities of time deposits are as
follows:
2001 $ 151,818,504
2002 19,557,658
2003 9,135,152
2004 3,722,549
2005 17,863,893
-------------
Total $ 202,097,756
=============
7. OTHER BORROWED FUNDS
Other borrowed funds at December 31, 2000 and 1999 are summarized as
follows:
2000 1999
Treasury tax and loan deposits $ 2,223,402 $ 2,242,352
Federal Home Loan Bank advance, maturing on
July 6, 2010, subject to early termination; interest
is fixed at 5.90% 5,000,000
Federal Home Loan Bank advance, maturing on
December 21, 2009, subject to early termination;
interest is fixed at 5.48% 5,000,000
----------- -----------
$ 7,223,402 $ 7,242,352
=========== ===========
Treasury tax and loan deposits are generally repaid within one to 120 days
from the transaction date.
The Federal Home Loan Bank of Atlanta has the option to convert the
$5,000,000 advance outstanding at December 31, 2000 into a three-month
LIBOR-based floating rate advance effective January 6, 2001 and any
payment date thereafter with at least two business days prior notice to
the Company.
64
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (Continued)
- --------------------------------------------------------------------------------
If the Federal Home Loan Bank elects to convert this advance, then the
Company may elect, with at least two business days prior written notice,
to terminate in whole or part this transaction without payment of a
termination amount on any subsequent payment date. The Company may elect
to terminate the advance and pay a prepayment penalty, with two days prior
written notice, if the Federal Home Loan Bank does not elect to convert
this advance.
8. COMMITMENTS
The Company has entered into certain noncancellable operating leases and
subleases for office space and office property. Rental expense for 2000,
1999 and 1998 was approximately $659,000, $455,000 and $160,000,
respectively. Rental income for 2000 was approximately $55,000. There was
no rental income in 1999 or 1998. Both rental expense and rental income
are included in net occupancy and equipment expense in the accompanying
statements of operations. The following is a schedule of future minimum
lease payments and future minimum lease revenues under the sublease at
December 31, 2000.
Year Ending December 31: Payments for Revenue Under
Operating Leases Subleases
2001 $ 752,391 $ 92,721
2002 883,765 73,524
2003 916,374 36,762
2004 812,949
2005 608,631
Later years 3,951,295
----------- --------
$ 7,925,405 $203,007
=========== ========
9. 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 159,806 shares of the Bank's common stock at an
exercise price of $1.50. 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.
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.
65
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (Continued)
- --------------------------------------------------------------------------------
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 stock are reserved for issuance pursuant to the 1998
Plan. During 1999 and 1998, the Company granted stock options to purchase
98,350 and 524,498 shares, respectively, of the Company's common stock at
an exercise price of $10.00 per share. During 2000, the Company granted
277,900 at various exercise prices based on the fair value of the stock at
the time of grant.
If compensation cost for stock options granted in 2000 and 1999 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:
2000 1999 1998
Net loss
As reported $(1,080,153) $(1,847,160) $(4,592,616)
Pro forma (1,361,588) (1,969,054) (5,621,732)
Loss per share - Basic
As reported (0.24) (0.32) (1.46)
Pro forma (0.24) (0.34) (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 2000, 1999 and
1998, respectively: dividend yield of 0%, expected volatility of 32.64%,
27.50% and 27.70%, risk-free interest rate of 6.44%, 4.30% and 4.60%, and
an expected life of 10 years.
A summary of the status of fixed stock option grants under the Company's
stock-based compensation plans as of December 31, 2000, 1999 and 1998, and
changes during the years ending on those dates is presented below:
2000 1999 1998
Weighted Average Weighted Average Weighted Average
Options Exercise Price Options Exercise Price Options Exercise Price
Outstanding -
Beginning of year 561,848 $10.00 524,498 $10.00 159,806 $ 1.50
Granted 277,900 6.37 98,350 10.00 524,498 10.00
Cancelled (22,800) 10.00 (60,000) 10.00
Exercised (1,000) 10.00 (159,806) 1.50
Outstanding - ------- ------ ------- ------ -------- -------
End of year 816,948 $ 8.76 561,848 $10.00 524,498 $ 10.00
======= ====== ======= ====== ======== =======
Options exercisable
at year end 465,206 $ 9.39 387,491 $10.00 339,000 $ 10.00
Weighted average fair
value of options
granted during the year $ 1.94 $ 3.19 $ 4.76
66
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (Continued)
- --------------------------------------------------------------------------------
The following table summarizes information related to stock options
outstanding at December 31, 2000:
Weighted Weighted Weighted
Average Average Average
Exercise Options Remaining Exercise Options Exercise
Price Outstanding Life Price Exercisable Price
- --------------------- ----------------- --------------- --------------- ---------------- ---------------
$5.25 - 6.69 277,900 9.21 $ 6.37 77,000 $ 6.34
$ 10.00 539,048 7.71 $ 10.00 388,206 $ 10.00
10. FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK
The Company 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, 2000, financial instruments having credit risk in excess
of that reported in the balance sheet totaled approximately $109,118,000.
11. SUPPLEMENTAL STATEMENTS OF CASH FLOWS INFORMATION
Supplemental disclosure of cash flow information:
2000 1999 1998
Cash paid during the year for interest
on deposits and borrowed funds $ 12,121,206 $ 4,298,642 $ 2,416,375
Supplemental schedule of noncash investing and financing activities:
2000 1999 1998
Proceeds from demand deposits used to
purchase shares of common stock under
the employee stock purchase plan $ 367,153
Loans transferred to real estate owned $ 846,000
Issuance of common stock to founders $ 2,158,688
Financing costs in connection with merger $ 972,000
67
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (Continued)
- --------------------------------------------------------------------------------
12. CONDENSED FINANCIAL INFORMATION OF FLORIDA BANKS, INC., (PARENT ONLY)
The following represents the parent only condensed balance sheets as of
December 31, 2000 and 1999 and the related condensed statements of
operations and statements of cash flows for the years ending December 31,
2000 and 1999 and the period from August 4, 1998, the effective date of
the merger, through December 31, 1998.
Condensed Balance Sheet 2000 1999
Assets
Cash and repurchase agreements $ 2,005,965 $ 7,181,793
Available for sale investment securities, at
fair value (cost $11,979,600 and $9,775,921, respectively) 12,091,155 9,639,524
Loans
Commercial 976,047 3,920,588
Commercial real estate 98,713 3,557,234
Consumer 300,000
------------- ------------
Total loans 1,074,760 7,777,822
Allowance for loan losses (10,000) (74,411)
------------- ------------
Net loans 1,064,760 7,703,411
Premises and equipment, net 224,220 250,344
Accrued interest receivable 80,053 112,504
Deferred income taxes, net 583,115 350,292
Prepaid and other assets 132,803 43,904
Investment in subsidiaries 32,599,848 20,334,951
------------- ------------
Total Assets $ 48,781,919 $ 45,616,723
============= ============
Liabilities and Stockholders' Equity
Repurchase agreements $ 10,143,000 $ 6,058,000
Accounts payable and accrued expenses 82,480 323,868
Stockholders' Equity
Common stock 59,298 58,538
Additional paid-in capital 46,750,329 46,383,936
Treasury stock (1,506,836) (858,844)
Accumulated deficit (6,760,222) (5,680,069)
Accumulated other comprehensive income (loss),
net of tax 13,870 (668,706)
------------- ------------
Total Liabilities and Stockholders' Equity $ 48,781,919 $ 45,616,723
============= ============
68
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (Continued)
- --------------------------------------------------------------------------------
Condensed Statements of Operations 2000 1999 1998
Income $ 1,523,797 $ 1,330,858 $ 529,337
Equity in undistributed loss of subsidiaries (540,090) (1,289,184) (615,598)
Expenses (2,389,988) (2,063,983) (4,873,126)
Income tax benefit 326,128 175,149 162,435
------------ ----------- ------------
Net loss $ (1,080,153) $(1,847,160) $ (4,796,952)
============ =========== ============
Condensed Statements of Cash Flows 2000 1999 1998
Operating activities:
Net loss $ (1,080,153) $ (1,847,160) $ (4,796,952)
Adjustments to reconcile net loss to net
cash used in operating activities:
Noncash compensation and finance costs 3,939,054
Equity in undistributed loss of Florida Bank, N.A. 539,611 1,289,184 615,598
Equity in loss of Florida Bank Financial Services, Inc. 479
Depreciation and amortization 60,177 37,289 8,582
Deferred income tax benefit (326,128) (175,149) (162,435)
Loss on disposal of premises and equipment 1,597
Gain on sale of investment securities (5,174) (42,250)
(Accretion) amortization of discounts/premiums
on investments, net (20,957) 47,338
(Benefit) provision for loan losses (64,411) 74,411
Amortization of loan premiums 45,685 3,043
Increase (decrease) in accrued interest receivable 32,451 (84,574) (8,009)
Decrease in due from Florida Bank, N.A. 898 (898)
Increase in prepaid and other assets (88,899) (43,904)
Decrease in accounts payable and accrued expenses (241,388) (2,355) (540,610)
------------ ------------ -------------
Net cash used in operating activities (1,147,110) (743,229) (945,670)
------------ ------------ -------------
Investing activities:
Purchase of premises and equipment (35,650) (250,822) (13,376)
Proceeds from sales, paydowns and maturities
of investment securities 5,264,240 4,929,200
Purchase of investment securities (7,441,787) (8,837,534) (5,834,057)
Net decrease (increase) in loans 6,657,377 (1,854,824) (5,926,041)
Purchase of common stock of Florida Bank
Financial Services, Inc. (10,000)
Capital contributed to Florida Bank, N.A. (12,300,000) (4,000,000) (12,000,000)
------------ ------------ -------------
Net cash used in financing activities (7,865,820) (10,013,980) (23,773,474)
------------ ------------ -------------
Financing activities:
Increase in repurchase agreements 4,085,000 6,058,000
Proceeds from advance from Florida Bank, N.A. 32,941 11,470
Proceeds from sale of common stock, net 367,153 38,129,956
Payment of Note Payable (250,000)
Redemption of preferred stock (606,000)
Purchase of fractional shares (407)
Net proceeds from the exercise of stock options 10,000
Purchase of treasury stock (647,992) (858,844)
------------ ------------ -------------
Net cash provided by financing activities 3,837,102 5,220,626 37,273,549
------------ ------------ -------------
Net decrease in cash and cash equivalents (5,175,828) (5,536,583) 12,554,405
Cash and cash equivalents at beginning of period 7,181,793 12,718,376 163,971
------------ ------------ -------------
Cash and cash equivalents at end of period $ 2,005,965 $ 7,181,793 $ 12,718,376
============ ============ =============
69
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (Continued)
- --------------------------------------------------------------------------------
13. 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,
2000, that the Bank meets all capital adequacy requirements to which it is
subject.
As of December 31, 2000 and 1999, 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 adequately or 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 Company's
and 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, 2000:
Total capital
(to risk-weighted assets)
Florida Banks, Inc. $ 39,050,000 12.73% > $ 24,542,000 > 8.00% N/A N/A
- -
Florida Bank, N.A. 33,791,000 11.52 > 23,464,000 > 8.00 > $ 29,330,000 > 10.00%
- - - -
Tier I capital
(to risk-weighted assets)
Florida Banks, Inc. 35,529,000 11.58 > 12,271,000 > 4.00 N/A N/A
- -
Florida Bank, N.A. 30,290,000 10.33 > 11,732,000 > 4.00 > 17,598,000 > 6.00
- - - -
Tier I capital
(to average assets)
Florida Banks, Inc. 35,529,000 10.28 > 13,828,000 > 4.00 N/A N/A
- -
Florida Bank, N.A. 30,290,000 9.24 > 13,112,000 > 4.00 > 16,390,000 > 5.00
- - - -
70
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (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, 1999:
Total capital
(to risk-weighted assets)
Florida Banks, Inc. $ 37,636,000 18.19% > $ 16,567,000 > 8.00% N/A N/A
- -
Florida Bank, N.A. 18,926,000 10.53 > 14,380,000 > 8.00 > $17,974,000 > 10.00%
- - - -
Tier I capital
(to risk-weighted assets)
Florida Banks, Inc. 35,778,000 17.29 > 8,278,000 > 4.00 N/A N/A
- -
Florida Bank, N.A. 17,142,000 9.54 > 7,190,000 > 4.00 > 10,785,000 > 6.00
- - - -
Tier I capital
(to average assets)
Florida Banks, Inc. 35,778,000 20.01 > 6,915,000 > 4.00 N/A N/A
- -
Florida Bank, N.A. 17,142,000 10.35 > 6,627,000 > 4.00 > 8,284,000 > 5.00
- - - -
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
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.
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.
71
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (Continued)
- --------------------------------------------------------------------------------
Repurchase Agreements - The carrying amounts of repurchase agreements
approximates the estimated fair value of such liabilities due to the short
maturities of such instruments.
Other Borrowed Funds - For treasury tax and loan deposits, the carrying
amount approximates the estimated fair value of such liabilities due to
the short maturities of such instruments. The fair value of the Federal
Home Loan Bank advances are based on quoted market prices.
A comparison of the carrying amount to the fair values of the Company's
significant financial instruments as of December 31, 2000 and 1999 is as
follows:
2000 1999
---------------------------- ----------------------------
Carrying Fair Carrying Fair
Amounts in Thousands Amount Value Amount Value
Financial assets:
Available for sale investment securities $ 32,062 $ 32,062 $ 27,610 $ 27,610
Held to maturity investment securities 3,429 3,487
Other investments 1,266 1,266 902 902
Loans 285,624 271,268 157,588 152,602
Financial liabilities:
Deposits 305,239 305,382 159,106 159,197
Repurchase agreements 18,812 18,812 11,037 11,037
Other borrowed funds 7,223 7,013 7,242 7,242
Interest Rate Swap Agreements - The Company enters into interest rate swap
agreements to manage its exposure to changes in interest rates and to
convert the fixed rate on certain brokered certificates of deposit to a
floating rate in order to more closely match interest rate sensitivity
between selected assets and liabilities. The contract has no carrying
value with gains and losses recognized as a component of interest expense.
The Company does not use derivative financial instruments for speculative
purposes. As is customary for these types of instruments, the Company does
not require collateral or other security from other parties to these
instruments. By their nature all such instruments involve risk, including
the credit risk of nonperformance by counterparties. However, at December
31, 2000, in management's opinion there was no significant risk of loss in
the event of nonperformance of the counterparties to these financial
instruments.
The contract/notional amount and estimated fair value of the Company's
off-balance-sheet financial instrument are as follows:
2000
----------------------------------
Contract/Notional Fair
Amount Value
Interest rate swap agreements $ 20,000,000 $794,221
72
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (Continued)
- --------------------------------------------------------------------------------
15. 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 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.
16. EARNINGS PER SHARE
Following is a reconciliation of the denominator used in the computation
of basic and diluted earnings per common share.
2000 1999 1998
---------------- ---------------- ----------------
Weighted average number of common
shares outstanding - Basic 5,681,290 5,829,937 3,137,644
Incremental shares from the assumed
conversion of stock options 583
---------------- ---------------- ----------------
Total - Diluted 5,681,873 5,829,937 3,137,644
================ ================ ================
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 Company 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.
17. 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 $110,092 , $63,055 and
$23,562 to the Plan in 2000, 1999 and 1998, respectively.
73
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (Concluded)
- --------------------------------------------------------------------------------
18. EMPLOYEE STOCK PURCHASE PLAN
On January 22, 1999, the Board of Directors of the Company adopted the
Employee Stock Purchase Plan (the "Plan"). The Plan was approved by the
Company's shareholders at the Company's 1999 Annual Meeting of
Shareholders on April 23, 1999. The Plan provides for the sale of not more
than 200,000 shares of common stock to eligible employees of the Company
pursuant to one or more offerings under the Plan. The purchase price for
shares purchased pursuant to the Plan is the lesser of (a) 85% of the fair
market value of the common stock on the grant date, or if no shares were
traded on that day, on the last day prior thereto on which shares were
traded, or (b) an amount equal to 85% of the fair market value of the
common stock on the exercise date, or if no shares were traded on that
day, on the last day prior thereto on which shares were traded. For the
year ended December 31, 2000, approximately 76,000 shares were purchased
by employees. For the year ended December 31, 1999, there were no
purchases of common stock pursuant to the Plan.
19. SUMMARIZED QUARTERLY DATA (UNAUDITED)
Following is a summary of the quarterly results of operations for the
years ended December 31, 2000 and 1999:
Fiscal Quarter
--------------------------------------------------
First Second Third Fourth Total
$ In Thousands Except Per Share Amounts
2000
Total interest income $ 4,480 $ 5,836 $ 6,351 $ 7,099 $ 23,766
Interest expense 2,375 3,292 3,849 4,195 13,711
------- ------- ------- ------- --------
Net interest income 2,105 2,544 2,502 2,904 10,055
Provision for loan losses 370 339 877 326 1,912
------- ------- ------- ------- --------
Net interest income after provision
for loan losses 1,735 2,205 1,625 2,578 8,143
Noninterest income 151 202 252 406 1,011
Noninterest expense 2,562 2,791 2,639 2,894 10,886
------- ------- ------- ------- --------
Loss before income taxes (676) (384) (762) 90 (1,732)
Benefit for income taxes (259) (139) (287) (33) (652)
------- ------- ------- ------- --------
Net loss $ (417) $ (245) $ (475) $ 57 $ (1,080)
------- ------- ------- ------- --------
Basic loss per share (0.07) (0.04) (0.08) 0.01 (0.19)
Diluted loss per share (0.07) (0.04) (0.08) 0.01 (0.19)
74
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (Concluded)
- --------------------------------------------------------------------------------
Fiscal Quarter
--------------------------------------------------
First Second Third Fourth Total
$ In Thousands Except Per Share Amounts
1999
Total interest income $ 2,127 $ 2,673 $ 3,002 $ 3,341 $ 11,143
Interest expense 832 1,111 1,330 1,424 4,697
------- ------- ------- ------- --------
Net interest income 1,295 1,562 1,672 1,917 6,446
Provision for loan losses 65 200 718 627 1,610
------- ------- ------- ------- --------
Net interest income after provision
for loan losses 1,230 1,362 954 1,290 4,836
Noninterest income 116 154 151 162 583
Noninterest expense 1,707 1,989 2,171 2,475 8,342
------- ------- ------- ------- --------
Loss before income taxes (361) (473) (1,066) (1,023) (2,923)
Benefit for income taxes (136) (221) (364) (355) (1,076)
------- ------- ------- ------- --------
Net loss $ (225) $ (252) $ (702) $ (668) $ (1,847)
======= ======= ======= ======= ========
Basic loss per share (0.04) (0.04) (0.12) (0.12) (0.32)
Diluted loss per share (0.04) (0.04) (0.12) (0.12) (0.32)
75
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
2001 Annual Meeting of Shareholders scheduled to be held
May 18, 2001 is 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 2001 Annual Meeting of
Shareholders scheduled to be held May 18, 2001 is 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 2001 Annual Meeting of Shareholders
scheduled to be held May 18, 2001 is 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 2001 Annual Meeting of
Shareholders scheduled to be held May 18, 2001 is 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, 2000 and 1999
Consolidated Statements of Operations - Years ended December 31,
2000, 1999 and 1998 Consolidated Statements of Shareholders'
Equity - Years ended December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows - Years ended December 31,
2000, 1999 and 1998 Notes to Consolidated Financial Statements
76
2. Exhibits.
--------
Exhibit Number Description of Exhibits
-------------- -----------------------
*3.1 - Articles of Incorporation of the Company, as
amended
*3.1.1 - Second Amended and Restated Articles of
Incorporation
*3.2 - By-Laws of the Company
*3.2.1 - Amended and Restated By-Laws of the Company
*4.1 - Specimen Common Stock Certificate
*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.
*10.2 - The Company's 1998 Stock Option Plan
*10.2.1 - Form of Incentive Stock Option Agreement
*10.2.2 - Form of Non-qualified Stock Option Agreement
*10.3 - Form of Employment Agreement between the
Company and T. Edwin Stinson, Jr., Don
D. Roberts and Richard B. Kensler
**21.1 - Subsidiaries of the Registrant
**23.1 - Consent of Deloitte & Touche LLP
(b) Reports on Form 8-K.
-------------------
* Incorporated by reference to the Company's Registration Statement on
Form S-1, Commission File No. 333-5087
** Filed herewith
77
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 23, 2001.
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 23,2001
- --------------------------------------- Officer and Director (Principal
Charles E. Hughes, Jr. Executive Officer)
/s/ T. Edwin Stinson, Jr. Chief Financial Officer, March 23,2001
- --------------------------------------- Secretary, Treasurer and
T. Edwin Stinson, Jr. Director (Principal Financial
and Accounting Officer)
/s/ M.G. Sanchez Chairman of the Board March 23,2001
- ---------------------------------------
M. G. Sanchez
/s/ T. Stephen Johnson Vice-Chairman of the Board March 23,2001
- ---------------------------------------
T. Stephen Johnson
/s/ Clay M. Biddinger Director March 23,2001
- ---------------------------------------
Clay M. Biddinger
/s/ P. Bruce Culpepper Director March 23,2001
- ---------------------------------------
P. Bruce Culpepper
/s/ J. Malcolm Jones, Jr. Director March 23,2001
- ---------------------------------------
J. Malcolm Jones, Jr.
/s/ W. Andrew Krusen, Jr. Director March 23,2001
- ---------------------------------------
W. Andrew Krusen, Jr.
/s/ Nancy E. LaFoy Director March 23,2001
- ---------------------------------------
Nancy E. LaFoy
78
Signature Title Date
--------- ----- ----
/s/ Wilford C. Lyon, Jr. Director March 23,2001
- ---------------------------------------
Wilford C. Lyon, Jr.
/s/ David McIntosh Director March 23,2001
- ---------------------------------------
David McIntosh
79
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
------ ----------------------
21.1 Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche
LLP