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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
Commission File Number 0-24433
POINTE FINANCIAL CORPORATION
----------------------------
(Exact name of Registrant as specified in its charter)
Florida 65-0451402
------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
21845 Powerline Road, Boca Raton, Florida 33433
- ----------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (561) 368-6300
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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, 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 the 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 held by non-affiliates
of the Registrant, based upon the average bid and asked prices as quoted on the
NASDAQ Stock Market on March 13, 2003, was $24,134,849*.
The Registrant had 2,216,964 shares of Common Stock outstanding on
March 13, 2003.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's Definitive Proxy Statement for its 2003 Annual Meeting
of Stockholders will be filed with the Securities and Exchange Commission not
later than 120 days after the end of the fiscal year covered by this Form 10-K
pursuant to Rule G(3) of the General Instructions for Form 10-K. Information
from such Definitive Proxy Statement will be incorporated by reference into Part
III, Items 10, 11, 12 and 13 hereof.
* Based on reported beneficial ownership of all directors and executive
officers of the Registrant; this determination does not, however,
constitute an admission of affiliated status for any of these
individual stockholders.
INDEX
PART I PAGE
Item 1. Description of Business
Business 2-3
Investment Banking Joint Venture 3
Market Area and Competition 3
Market Risk 3-4
Employees 4
Forward-Looking Statements 4
Item 2. Properties 5-6
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 6
PART II
Item 5. Market for Registrant's Common Equity and Related 7
Stockholder Matters
Item 6. Selected Financial Data 8-9
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10-29
Item 7A. Quantitative and Qualitative Disclosure About Market Risk 29
Item 8. Financial Statements and Supplementary Data 29
(See Index - Page 29)
Item 9. Change In and Disagreements with Accountants on
Accounting and Financial Disclosure 31
PART III
Item 10. Directors and Executive Officers of the Registrant 31-32
Item 11. Executive Compensation 32
Item 12. Security Ownership of Certain Beneficial Owners and Management 32
Item 13. Certain Relationships and Related Transactions 33
Item 14. Controls and Procedures 33
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 33-34
Supplemental Information 34
SIGNATURES 35-37
1
PART I
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS
Pointe Financial Corporation, a Florida corporation, ("Pointe" or the "Company")
is a bank holding company headquartered in Boca Raton. Pointe's principal
business consists of operating its commercial bank subsidiary, Pointe Bank, a
Florida state chartered commercial bank ("the Bank"). At December 31, 2002, the
Company has total assets of $327.3 million and stockholders equity of $32.3
million.
As a bank holding company registered under the Bank Holding Company Act (the
"BHCA"), the Company is subject to the regulation and supervision of the Board
of Governors of the Federal Reserve System (the "FRB"). The Company is required
to file with the FRB annual reports and other information regarding its business
operations and those of its subsidiaries.
As a state-chartered commercial bank, the Bank is subject to extensive
regulation by the Florida Department of Financial Services, Office of Financial
Institutions and Security Regulation ("Florida OFISR"), the Federal Reserve
Board and the Federal Deposit Insurance Corporation ("FDIC"). The Bank files
reports with Florida OFISR and FDIC concerning its activities and financial
condition, in addition to obtaining regulatory approvals prior to entering into
certain transactions such as mergers with or acquisitions of other financial
institutions. Periodic examinations and inspections are performed by the Florida
OFISR and the Federal Reserve Board to monitor the Bank's compliance with the
various regulatory requirements.
There are a number of obligations and restrictions imposed on bank holding
companies and their depository institution subsidiaries by law and regulatory
policy that are designed to minimize potential loss to the depositors of such
depository institutions and the FDIC insurance funds in the event the depository
institution becomes in danger of default. Under a policy of the FRB with respect
to bank holding company operations, a bank holding company is required to serve
as a source of financial strength to its subsidiary depository institutions and
to commit resources to support such institutions in circumstances where it might
not do so absent such policy. The FRB also has the authority under the BHCA to
require a bank holding company to terminate any activity or to relinquish
control of a non-bank subsidiary upon the FRB's determination that such activity
or control constitutes a serious risk to the financial soundness and stability
of any depository institution subsidiary of the bank holding company.
The BHCA has been substantially amended by the Gramm-Leach-Bliley Financial
Modernization Act of 1999 (the "Modernization Act"). The portion of the
Modernization Act affecting the powers of the Company became effective March 13,
2000. Prior to the Modernization Act, the BHCA prohibited a bank holding
company, with certain limited exceptions, from:
(i) acquiring or retaining direct or indirect ownership or control
of more than 5% of the outstanding voting stock of any company
which is not a bank or bank holding company; or
(ii) engaging directly or indirectly in activities other than those
of banking, managing or controlling banks, or performing
services for its subsidiaries, unless such non-banking
business is determined by the FRB to be so closely related to
banking or managing or controlling banks as to be properly
incident thereto.
The Modernization Act, among other things:
(i) allows bank holding companies meeting management, capital and Community
Reinvestment Act standards to elect the status of financial holding
company and thereafter engage in a substantially broader range of
non-banking activities, including insurance underwriting and making
merchant banking investments in commercial and financial companies;
(ii) allows insurers and other financial services companies to acquire banks
or bank holding companies;
(iii) removes various restrictions that currently apply to bank holding
company ownership of securities firms and mutual fund advisory
companies; and
(iv) establishes the overall regulatory structure applicable to bank holding
companies that also engage in insurance and securities operations.
The Company filed a declaration with the Federal Reserve Bank to become a
financial holding company under the Modernization Act. The Board of Governors of
the Federal Reserve System advised the Company that its election to become a
financial holding company was effective on March 13, 2000. The Company elected
to relinquish the financial holding company status early in 2002. The Company
believes that the relinquishment of this status does not have any effect on its
business plan.
2
The Company was incorporated under the laws of the State of Florida on September
29, 1993 for the dual purpose of serving as a holding company for Pointe Federal
Savings Bank, a federally chartered thrift (the "Thrift"), and to facilitate the
acquisition of the Bank, then known as Flamingo Bank, in mid-1994. Both the Bank
and the Thrift were established in the mid-1980's. The Thrift, headquartered in
Boca Raton, had been a mortgage banking thrift highly focused on residential
mortgage lending. The Bank had focused on small business commercial lending,
with emphasis on originating Small Business Administration ("SBA") guaranteed
loans. After the acquisition of the Bank in mid-1994, the Company had been both
a bank holding company (subject to regulation by the FRB) and a thrift holding
company (subject to regulation by the Office of Thrift Supervision (the "OTS")).
This was a very complex regulatory environment for the Company. The Company
streamlined its operations through the merger in April 1997 of the Thrift into
the Bank. As a result of the merger of the Thrift into the Bank, the Company is
no longer subject to regulation by the OTS. The merger thus allowed the Company
to alleviate some of its regulatory burdens without negatively impacting its
ability to service its customers.
On June 12, 1998 the Company completed an initial public offering issuing
869,565 shares of its common stock. The proceeds totaled $12.1 million of which
$6.0 million was invested in the Bank; the remainder was retained by the Company
for general corporate purposes. Following its business plan to build its network
of banking center locations into communities that are consistent with the Bank's
focus on small businesses, professionals and individuals, in 1999 the Bank
opened two branches in Palm Beach County. In 2001, the Bank opened one de novo
branch in Broward County and acquired four branches in Miami-Dade County from
Republic Bancshares, Inc. of St. Petersburg, Florida. During the year ending
December 31, 2002, the Company entered into a lease agreement for a de novo
branch office in Miami-Dade County's South Beach. The office was opened for
business during the last quarter of the year.
The Company's principal business, conducted through the Bank, is making
commercial, consumer and real estate loans. Attracting deposits from the general
public, along with utilizing Federal Home Loan Bank advances and other
borrowings, are the primary sources of funds used to make these loans, and to a
lesser extent, purchase security investments. The Bank conducts business through
its eleven full service facilities located in Palm Beach, Broward and Miami-Dade
counties. The Company derives revenues principally from interest income earned
on loans and securities, fee income associated with loans serviced and
originated, service charges on depository accounts and the sale of assets
designated as available for sale.
INVESTMENT BANKING JOINT VENTURE
In July, 2000, the Company formed Pointe Capital, LLC ("Pointe Capital") an
investment banking joint venture with First Integrated Capital. Pointe Capital
offers investment banking services to customers who are overlooked by larger
investment banking firms. During 2001, Pointe Capital became a broker-dealer
registered with the Securities and Exchange Commission and is a member of the
National Association of Securities Dealers. During the years ended December 31,
2002, 2001 and 2000, the Company recognized losses of $171,000, $149,000 and
earnings of $2,000, respectively.
MARKET AREA AND COMPETITION
The financial services industry in which the Company operates is highly
competitive. The Bank competes with national and state banks, savings and loan
associations and credit unions for loans and deposits. In addition, the Bank
competes with other providers of financial services, from both inside and
outside Florida, including finance companies, institutional buyers of commercial
paper, money market funds, brokerage firms, investment companies, insurance
companies, insurance agencies and governmental agencies. These competitors are
actively engaged in marketing various types of loans, commercial paper,
short-term obligations, investments, insurance and other products and services.
The Company anticipates that the intensity of competition among financial
institutions will increase due to the provisions in the Modernization Act. The
Modernization Act permits banks, securities firms, and insurance companies to
affiliate which could then serve their customers' varied financial needs through
a single corporate structure.
The consolidation of the financial services industry has continued to create
opportunities and challenges for the Company. Mergers among institutions have
disrupted many customer relationships and created opportunities for the Bank to
acquire new customers. The Bank's objective is to compete for deposits and loans
by offering the customers a higher level of personal service, together with a
wide range of products offered at competitive rates. Management continues to
evaluate market needs and products to meet those needs, which would also allow
Pointe to control the growth of its assets and liabilities.
MARKET RISK
Market risk is the uncertainty of loss from adverse changes in market prices and
rates. The Company's market risk arises primarily from interest-rate risk
inherent in its lending and deposit taking activities. To that end, management
actively monitors and manages its interest-rate risk exposure. The measurement
of market risk associated with financial instruments is meaningful only when all
related and offsetting on- and off-balance-sheet transactions are aggregated,
and the resulting net positions are identified. Disclosures about the fair value
of financial instruments, which reflect changes in market prices and rates, can
be found in Note 9 of Notes to Consolidated Financial Statements.
3
The Company's primary objective in managing interest-rate risk is to minimize
the adverse impact of changes in interest rates on the Bank's net interest
income and capital, while adjusting the Company's asset-liability structure to
obtain the maximum yield-cost spread on that structure. The Company relies
primarily on its asset-liability structure to control interest-rate risk.
However, a sudden and substantial increase or decrease in interest rates may
impact the Company's earnings, to the extent that the interest rates borne by
assets and liabilities do not change at the same speed, to the same extent or on
the same basis. The Company does not engage in trading activities.
EMPLOYEES
As of December 31, 2002, the Company had 119 employees of which 116 were
full-time and 3 part-time. The Company's employees are not represented by a
collective bargaining group, and the Company considers its relations with its
employees to be good. The Company provides employees with benefits customary in
the banking industry, which include major medical insurance, group term life
insurance, dental insurance, long-term disability insurance, a 401(k) plan, and
vacation and sick leave.
FORWARD-LOOKING STATEMENTS
When used in this Form 10-K or future filings by the Company with the Securities
and Exchange Commission, in the Company's press releases or other public or
shareholder communications, or in oral statements made with the approval of an
authorized executive officer, the word or phrases "will likely result",
"expect", "will continue", "anticipate", "estimate", "project", "believe" and
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. The Company
wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made, and to advise
readers that various factors, including general economic factors and conditions,
changes in levels of market interest rates, credit risks of lending activities,
competitive and regulatory factors, and expansion strategies could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ materially from those anticipated or projected. The
Company does not undertake, and specifically disclaims any obligation, to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
4
ITEM 2. PROPERTIES
The Bank conducts its business through its main office and ten branch offices.
The following table sets forth certain information regarding the Bank's office
properties:
Book Value
Of Leasehold
Improvements
Date Book and Furniture
Acquired/ Lease Expiration Value of Land Fixtures and
Leased and and Building at Equipment at Square
Location December 31, 2002 Renewal Terms December 31, 2002 December 31, 2002 Footage
- -------- ----------------- ------------- ----------------- ----------------- -------
(Dollars in thousands)
Main Office (1)
21845 Powerline Road 08/31/2012
Boca Raton, Florida 33433 2002 2 - 5 year period $ -- $384 18,929
Pembroke Pines (1)
One S.W. 129th Avenue 02/28/2006
Pembroke Pines, Florida 33027 1994 - -- 114 4,659
Aventura (1)
20495 Biscayne Boulevard 09/30/2008
Aventura, Florida 33180 2001 3-10 year period -- 72 3,200
Boca Raton
19645 State Road 7
Boca Raton, Florida 33498 1998 - 516 89 3,200
Ocean Ridge (1)
5112 N. Ocean Boulevard 05/31/2004
Ocean Ridge, Florida 33435 1999 1 - 5 year period -- 76 2,500
Coral Springs
4697 North State Road 7
Coral Springs, Florida 33067 1999 - 1,278 167 3,000
Coral Gables (1)
2222 Ponce de Leon Boulevard 05/07/2008
Coral Gables, Florida 33134 2001 2-5 year period -- 174 11,801
South Miami (1)
8211 South Dixie Highway 02/28/2005
Miami, Florida 33143 2001 - 58 1,946
Doral (1)
9785 N.W. 41st Street 04/30/2003
Miami, Florida 33178 2001 - -- 115 3,944
Airpark (1)
720 N.W. 57th Avenue 10/29/2009
Miami, Florida 33126 2001 1-10 year period -- 180 3,250
South Beach (1)
500 South Pointe Drive 12/31/2012
Miami Beach, Florida 33139 2002 1-5 year period -- 395 2,402
(1) Leased branch office.
5
The Bank owns and operates personal computers, teller terminals and associated
equipment. At December 31, 2002, such equipment had a net book value of
$366,000, included above.
ITEM 3. LEGAL PROCEEDINGS
The Company and the Bank are parties to various legal proceedings in the
ordinary course of business. Management does not believe that there is any
pending or threatened proceeding against the Company and the Bank which, if
determined adversely, would have a material adverse effect on the business,
results of operations, or financial position of the Company or the Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the stockholders during the fourth
quarter of the fiscal year ended December 31, 2002, through the solicitation of
proxies or otherwise.
6
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET PRICE AND DIVIDENDS
(a) The common stock of the Company, par value $.01 per share, has been traded
on the Nasdaq National Market System under the symbol "PNTE" since June 12,
1998. Prior to June 12, 1998 there was no established public trading market for
the Company's common stock. The following table sets forth the high and low bids
for the common stock for the periods indicated as reported by Nasdaq.
YEAR ENDED
---------------------------------------------
DECEMBER 31, 2002 DECEMBER 31, 2001
----------------- -----------------
HIGH LOW HIGH LOW
---- --- ---- ---
Quarter ended March 31 $14.300 11.350 12.000 8.625
Quarter ended June 30 16.250 13.700 12.200 10.000
Quarter ended September 30 15.100 12.750 12.490 11.000
Quarter ended December 31 14.300 12.110 12.000 10.750
Currently the Company has eleven market makers in its common stock:
Advest, Inc. Archipelago, LLC
Sandler O'Neill & Partners Sterne, Agee & Leach
Keefe, Bruyette & Woods, Inc. McConnell Budd & Downes
Goldman Sachs & Co. THE BRUT ECN, LLC
Knight Securities, LP Ryan Beck & Co., Inc.
Cincinnati Stock Exchange
As of December 31, 2002 there were 2,174,668 common shares issued and
outstanding held by approximately 121 shareholders of record and 387 beneficial
shareholders, not including persons or entities where stock is held in nominee
or "street" name through various brokerage firms or banks.
The following table sets forth cash dividends paid during the years ended 2002
and 2001.
2002 2001
---------------------------- ---------------------------
Quarter Ended Dividend Quarter Ended Dividend
March 31 $ .05 March 31 $ .05
June 30 $ .05 June 30 $ .05
September 30 $ .05 September 30 $ .05
December 31 $ .05 December 31 $ .05
Future payments of dividends are subject to determination and declaration by the
Board of Directors. See Note 17 to the Audited Consolidated Financial Statements
for discussion of restrictions on dividend payments.
Information regarding the Company's securities authorized for issuance under the
Company's equity compensation plans is set forth below under Item 12.
7
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
AT DECEMBER 31,
----------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
Cash and cash equivalents .................... $ 35,648 40,655 7,616 6,909 3,471
Securities ................................... 66,009 57,612 56,631 48,389 52,989
Loans ........................................ 214,840 223,379 173,129 150,852 128,005
Loans held for sale .......................... 150 446 719 2,696 617
All other assets ............................. 10,660 11,303 6,413 4,810 4,193
-------- -------- -------- -------- --------
Total assets ............................. $327,307 333,395 244,508 213,656 189,275
======== ======== ======== ======== ========
Deposits ..................................... $233,501 225,825 161,136 146,176 141,212
Other borrowings ............................. 57,963 75,094 53,067 40,454 18,446
All other liabilities ........................ 3,512 3,929 3,575 2,443 2,582
Stockholders' equity ......................... 32,331 28,547 26,730 24,583 27,035
-------- -------- -------- -------- --------
Total liabilities and stockholders' equity $327,307 333,395 244,508 213,656 189,275
======== ======== ======== ======== ========
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
Total interest income ........................ $ 20,230 21,707 18,545 15,044 13,113
Total interest expense ....................... 7,583 10,453 9,305 6,904 6,498
-------- -------- -------- -------- --------
Net interest income .......................... 12,647 11,254 9,240 8,140 6,615
Provision for loan losses .................... 811 1,296 685 610 950
-------- -------- -------- -------- --------
Net interest income after provision
for loan losses .......................... 11,836 9,958 8,555 7,530 5,665
Noninterest income ........................... 2,883 2,714 1,092 1,131 1,650
Noninterest expense .......................... 12,126 10,190 7,185 6,720 5,631
-------- -------- -------- -------- --------
Earnings before income taxes
and extraordinary item ................... 2,593 2,482 2,462 1,941 1,684
Income taxes ................................. 829 814 821 718 631
Extraordinary item (1) ....................... -- -- 78 -- --
-------- -------- -------- -------- --------
Net earnings ................................. $ 1,764 1,668 1,719 1,223 1,053
Earnings per common share - basic (2) ........ $ .84 .82 .85 .56 .56
======== ======== ======== ======== ========
Earnings per common share - diluted (2) ...... $ .82 .81 .85 .56 .55
======== ======== ======== ======== ========
8
SELECTED FINANCIAL DATA, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
AT OR FOR THE
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
FOR THE PERIOD:
Return on average assets .................. .54% .55% .73% .60% .61%
Return on average equity .................. 5.86% 6.02% 6.84% 4.67% 5.02%
Average equity to average assets .......... 9.23% 9.20% 10.73% 12.95% 12.19%
Interest rate spread during the period (3) 3.53% 3.18% 3.17% 3.30% 3.10%
Net interest margin ....................... 4.09% 3.96% 4.14% 4.22% 4.05%
Noninterest income to average assets ...... .88% .90% .47% .56% .96%
Noninterest expense to average assets ..... 3.72% 3.38% 3.07% 3.32% 3.27%
Efficiency ratio .......................... 78.08% 77.77% 69.55% 72.78% 70.68%
AT THE END OF THE PERIOD:
Ratio of average interest-earning assets to
average interest-bearing liabilities .. 1.25 1.22 1.24 1.26 1.24
Nonperforming loans and foreclosed real
estate as a percentage of total assets .10% .31% .63% .83% 1.60%
Allowance for loan losses as a percentage
of total loans ........................ 1.61% 1.06% 1.02% .87% .83%
Allowance for loan losses as a percentage
of nonperforming loans ................ 1652.11% 234.37% 117.43% 87.45% 40.19%
Total number of offices ................... 11 10 5 5 3
Full-service banking offices .............. 11 10 5 5 3
Total shares outstanding at
end of period (2) ..................... 2,174,668 2,048,295 2,022,227 2,013,018 2,266,972
Book value per share (2) .................. $ 14.87 13.94 13.22 12.21 11.93
Tangible Book Value Per Share (4) ......... $ 13.39 12.25 -- -- --
(1) In 2000, the Company sold $5.0 million of a Federal Home Loan Bank advance
recording a pre-tax gain of $125,000. The gain is reported as an
extraordinary item; gain on extinguishment of debt, net of tax of $47,000.
(2) All per share information is presented to reflect a three-for-two stock
split effective February 1998. The per share information also reflects the
consummation of an initial public offering issuing 869,565 shares of common
stock on June 12, 1998.
(3) Difference between weighted-average yield on all interest-earning assets and
weighted-average rate on all interest-bearing liabilities.
(4) Intangible asset is a result of acquired branches in April 2001.
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Pointe Financial Corporation (the "Company") owns 100% of the outstanding stock
of Pointe Bank (the "Bank"). The Bank is a Florida State chartered commercial
bank. On February 12, 2002, the Bank formed a subsidiary, Will No-No, Inc., a
Florida corporation, for the purpose of owning, maintaining and disposing of the
Bank's foreclosed assets. The Bank provides a variety of community banking
services to small and middle-market businesses and individuals through its
eleven banking offices located in Broward, Miami-Dade and Palm Beach counties,
Florida. Will No-No, Inc. had minimal activity during the year ended December
31, 2002. The Company owns an inactive subsidiary, Pointe Financial Services and
is a 50% owner of Pointe Capital, LLC, an investment banking joint venture.
On June 12, 1998, the Company consummated an initial public offering (the
"Offering") of 869,565 shares of common stock, par value $.01 per share. The
shares were sold at an offering price of $15.375 per share. Keefe, Bruyette &
Woods, Inc. and McGinn, Smith & Co. acted as the representatives of the
underwriters of the Offering. The net proceeds of the Offering totaled $12.076
million of which $6.000 million was invested in the Bank. The remaining proceeds
retained by the Company will continue to fund branch expansion and support
growth in the loan and security portfolio.
At December 31, 2002, the Company had total consolidated assets of $327.307
million, a decrease of $6.088 million or 1.8% over total assets of $333.395
million at December 31, 2001. Despite the Company's $102.841 million in total
loan originations during 2002, loan receivables ended December 31, 2002 at
$218.784 million, a decrease of $7.483 million or 3.3% from December 31, 2001,
$226.267 million. Total originations were out-paced by the refinance and
accelerated prepayments in the loan portfolio as a result of the lower interest
rate environment. During 2002, we received principal reductions in the loan
portfolio exceeding $110.324 million. The Bank's deposits increased to $233.501
million as of December 31, 2002 from $225.825 million as of December 31, 2001, a
3.4% increase. At December 31, 2002, the Company's time deposits were $89.594
million, a decrease of $14.439 million or 13.9% from December 31, 2001. During
2002, the Company elected to not renew $11.000 million of State of Florida time
deposits and focus on customer related transaction deposit accounts. At December
31, 2002, the combined noninterest bearing and interest bearing transaction
accounts totaled $143.907 million, an increase of $22.115 million or 18.2% over
December 31, 2001, $121.792 million. The Company's net earnings for the twelve
months ended December 31, 2002, were $1.764 million compared to $1.668 million
for the same period in 2001. Net interest income was $12.647 million in 2002 as
compared to $11.254 million during 2001, a $1.393 million increase, or 12.4%.
The Company's net interest income to average interest earning assets ending
December 31, 2002 increased to 4.09%, as compared to 3.96% for the same period
in 2001. The net interest spread (the difference between the weighted average
yield on interest earning assets less the weighted average cost paid on
interest-bearing liabilities) ending December 31, 2002 increased to 3.53%, as
compared to 3.18% for the same period in 2001. The improvements of net interest
income, margin and spread result from the continuing shifting of deposit
balances from time deposits to less costly interest bearing transaction
accounts.
10
CREDIT RISK
The Bank's primary business is making commercial, business, consumer and real
estate loans. That activity entails potential loan losses, the magnitude of
which depend on a variety of economic factors affecting borrowers which are
beyond the control of the Bank. While management has instituted underwriting
guidelines and credit review procedures to protect the Bank from avoidable
credit losses, some losses will inevitably occur.
The following table sets forth certain information regarding nonaccrual loans
and foreclosed real estate, including the ratio of such loans and foreclosed
real estate to total assets as of the dates indicated, and certain other related
information.
AT DECEMBER 31,
---------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
Nonaccrual loans:
Residential real estate .......................... $ 71 408 74 294 1,376
Commercial real estate ........................... 0 250 432 -- --
Commercial ....................................... 120 348 988 1,228 1,306
Consumer and other ............................... 22 21 32 -- --
----- ----- ----- ----- -----
Total nonaccrual loans ....................... $ 213 1,027 1,526 1,522 2,682
----- ----- ----- ----- -----
Total nonperforming loans .................... 213 1,027 1,526 1,522 2,682
----- ----- ----- ----- -----
Total nonperforming loans to total loans ..... .10% .46% .88% 1.00% 2.08%
===== ===== ===== ===== =====
Foreclosed real estate-
Real estate acquired by foreclosure or deed
in lieu of foreclosure ......................... 117 -- 18 257 353
----- ----- ----- ----- -----
Total nonperforming loans and foreclosed
real estate .................................. $ 330 1,027 1,544 1,779 3,035
===== ===== ===== ===== =====
Total nonperforming and foreclosed real estate
to total assets .............................. .10% .31% .63% .83% 1.60%
===== ===== ===== ===== =====
Interest income that would have been recorded under the original terms of
nonaccrual loans and the interest income actually recognized are summarized
below:
YEAR ENDED DECEMBER 31,
---------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
Interest income that would have been recognized... $ 8 64 158 169 302
Interest income recognized........................ 8 34 109 42 146
----- --- --- --- ---
Interest income foregone.......................... $ 0 30 49 127 156
===== === === === ===
11
The following table sets forth information with respect to activity in the
Bank's allowance for loan losses during the years indicated:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
Average loans outstanding ................. $ 226,446 213,630 163,247 143,882 116,499
========= ========= ========= ========= =========
Allowance at beginning of year ............ 2,407 1,792 1,331 1,078 848
--------- --------- --------- --------- ---------
Charge-offs:
Residential real estate .............. (16) -- -- -- --
Commercial ........................... (316) (1,107) (184) (335) (682)
Consumer and other ................... (93) (43) (55) (26) (40)
--------- --------- --------- --------- ---------
Total loans charged-off .......... (425) (1,150) (239) (361) (722)
--------- --------- --------- --------- ---------
Recoveries ................................ 726 4 15 4 2
--------- --------- --------- --------- ---------
Net recoveries (charge-offs) .............. 301 (1,146) (224) (357) (720)
Provision for loan losses charged
to operating expenses ................ 811 1,296 685 610 950
Reserve on loans received in acquisition of
branches ............................. -- 465 -- -- --
--------- --------- --------- --------- ---------
Allowance at end of year .................. $ 3,519 2,407 1,792 1,331 1,078
========= ========= ========= ========= =========
Net (recoveries) charge-offs to
average loans outstanding ............ (.13)% .54% .14% .25% .62%
========= ========= ========= ========= =========
Allowance as a percent of total
loans ................................ 1.61% 1.06% 1.02% .87% .83%
========= ========= ========= ========= =========
Allowance as a percentage of
nonperforming loans .................. 1652.11% 234.37% 117.43% 87.45% 40.19%
========= ========= ========= ========= =========
Total loans at end of year ................ 218,784 226,267 175,131 152,349 129,156
========= ========= ========= ========= =========
The Company's non-performing loans decreased $814,000 at December 31, 2002, to
$213,000 a decrease of 79.3%. During 2002, charge-offs in commercial loans
reflect $263,000 of balances previously reported as non-performing loans at the
end of 2001. The provision for loan losses for the year ended December 31, 2002,
was $811,000 a decrease of $485,000 from the year ended December 31, 2001.
During the year ending December 31, 2002, the Company had significant recoveries
from commercial and commercial real estate loan charged-off in previous
reporting periods. The Company has historically had strong asset quality as
evidenced by the low percentage of net charge-offs to average loans outstanding
over the last five years was .28%. Management believes that the allowance for
loan losses of $3.519 million was adequate at December 31, 2002.
12
The following table presents information regarding the Bank's total allowance
for loan losses as well as the allocation of such amounts to the various
categories of loans:
AT DECEMBER 31,
----------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------------ ------------------ ----------------- ----------------- -----------------
% OF % OF % OF % OF % OF
AMOUNT LOANS TO AMOUNT LOANS TO AMOUNT LOANS TO AMOUNT LOANS TO AMOUNT LOANS TO
OF TOTAL OF TOTAL OF TOTAL OF TOTAL OF TOTAL
ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
(DOLLARS IN THOUSANDS)
Commercial loans..... $2,283 26.09% $1,184 26.52% $1,122 23.59% $ 791 22.35% $ 641 16.64%
Commercial real
estate loans....... 954 24.90% 904 25.95 367 16.96 295 16.84 213 16.19
Residential real.....
estate loans....... 96 35.80% 102 37.05 142 50.62 100 53.05 109 59.56
Consumer and other
loans.............. 186 13.21% 217 10.48 161 8.83 145 7.76 115 7.61
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance
for loan
losses ... $3,519 100.00% $2,407 100.00% $1,792 100.00% $1,331 100.00% $1,078 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectibility of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.
Management regularly reviews its loan portfolio and charge-off experience to
maintain the allowance at a level management feels is adequate. During 2002, the
commercial and commercial real estate loans have continued to be the largest
component of the portfolio at 50.99% as compared to the 52.47% in 2001. The
residential real estate loans continue to be a less dominant category of the
loan portfolio as they were 35.80% at the end of 2002 as compared to 37.05% at
the end of 2001. Consumer loans at the end of 2002 were 13.21% of the loan
portfolio as compared to the 10.48% at the end of 2001. The increase in consumer
loans is related to the Company's increase in home equity lines of credit.
13
RESULTS OF OPERATIONS
The operating results of the Company depend primarily on its net interest
income, which is the difference between interest income on interest-earning
assets and interest expense on interest-bearing liabilities, consisting
primarily of deposits. Net interest income is determined by the difference
between yields earned on interest-earning assets and rates paid on
interest-bearing liabilities ("the interest-rate spread") and the relative
amounts of interest-earning assets and interest-bearing liabilities. The
Company's interest-rate spread is affected by regulatory, economic and
competitive factors that influence interest rates, loan demand and deposit
flows. In addition, the Company's net earnings are also affected by the level of
nonperforming loans and foreclosed real estate, as well as the level of its
noninterest income, and its noninterest expenses, such as salaries and employee
benefits, occupancy and equipment costs and income taxes.
The following table sets forth for the periods indicated, information regarding
is: (i) the total dollar amount of interest and dividend income of the Company
from interest-earning assets and the resultant average yields; (ii) the total
dollar amount of interest expense on interest-bearing liabilities and the
resultant average cost; (iii) net interest/dividend income; (iv) interest-rate
spread; (v) interest margin; and (vi) ratio of average interest-earning assets
to average interest-bearing liabilities.
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------
2002 2001 2000
-------------------------- ---------------------------- ---------------------------
INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE
AVERAGE AND YIELD/ AVERAGE AND YIELD/ AVERAGE AND YIELD/
BALANCE DIVIDENDS RATE BALANCE DIVIDENDS RATE BALANCE DIVIDENDS RATE
------- --------- ---- ------- --------- ---- ------- --------- ----
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans........................ $ 226,446 16,735 7.39% $213,630 17,934 8.39% $163,247 14,864 9.11%
Securities (1)............... 65,486 3,107 4.92 59,244 3,270 5.66 53,479 3,232 6.15
Other interest-earning
assets (2)................. 17,002 388 2.28 11,060 503 4.55 6,560 449 6.86
-- --------- ------ ---- -------- ------ ---- -------- ------ ----
Total interest-earning
assets................ 308,934 20,230 6.59 283,934 21,707 7.67 223,286 18,545 8.33
Noninterest-earning
assets (3)............. 16,868 17,521 10,903
Total assets............. $ 325,802 $301,455 $234,189
Interest-bearing liabilities:
Savings and NOW deposits.... $ 22,174 158 .71 $ 15,541 161 1.04 $ 13,249 195 1.47
Money-market deposits....... 64,408 1,174 1.82 48,757 1,546 3.17 37,317 1,586 4.25
Time deposits............... 98,343 3,543 3.60 105,050 5,484 5.22 80,037 4,553 5.69
Borrowings ................. 62,496 2,708 4.33 63,665 3,262 5.12 49,713 2,971 5.98
------ ----- ------ ----- ------ -----
Total interest-bearing
liabilities...... 247,421 7,583 3.06 233,013 10,453 4.49 180,316 9,305 5.16
----- ------ -----
Demand deposits................ 44,443 36,185 25,150
Noninterest-bearing liabilities 3,851 4,536 3,583
Stockholders' equity........... 30,087 27,721 25,140
------ ------ ------
........
Total liabilities and
stockholders'
equity........... $ 325,802 $ 301,455 $234,189
========= ========= ========
Net interest income............ $12,647 $11,254 $ 9,240
======= ======= ========
Interest-rate spread (4)....... 3.53% 3.18% 3.17%
==== ==== ====
Net interest margin (5)........ 3.96% 4.14% 4.09%
==== ==== ====
Ratio of average interest-
earning assets to
average interest-
bearing liabilities....... 1.25 1.22 1.24
==== ==== ====
- -----------------------------------------------------------------------------------------------------------------------------
(1) Yield on securities is stated on a tax equivalent basis.
(2) Includes interest-bearing deposits and federal funds sold.
(3) Includes nonaccrual loans.
(4) Interest rate spread represents the difference between the
weighted-average yield on interest-earning assets and the
weighted-average cost of interest-bearing liabilities.
(5) Net interest margin is net interest income divided by average
interest-earning assets.
14
RATE/VOLUME ANALYSIS
The following table sets forth certain information regarding changes in interest
income and interest expense of the Company for the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in rate (change
in rate multiplied by prior volume), (ii) changes in volume (change in volume
multiplied by prior rate) and (iii) changes in rate-volume (change in rate
multiplied by change in volume).
YEAR ENDED DECEMBER 31,
2002 VS. 2001
----------------------------------------------------
INCREASE (DECREASE) DUE TO
----------------------------------------------------
RATE/
RATE VOLUME VOLUME TOTAL
------- ------- ------- -------
(In thousands)
Interest-earning assets:
Loans .............................................. $(2,136) 1,075 (138) (1,199)
Securities ......................................... (438) 353 (78) (163)
Other interest-earning assets ...................... (251) 270 (134) (115)
------- ------- ------- -------
Total ............................................ (2,825) 1,698 (350) (1,477)
------- ------- ------- -------
Interest-bearing liabilities:
Deposits:
Savings and NOW deposits ......................... (51) 69 (21) (3)
Money-market deposits ............................ (658) 496 (210) (372)
Time deposits .................................... (1,702) (350) 111 (1,941)
Borrowings ....................................... (503) (60) 9 (554)
------- ------- ------- -------
Total ............................................ (2,914) 155 (111) (2,870)
------- ------- ------- -------
Net change in net interest income ...................... $ (89) 1,543 (239) 1,393
======= ======= ======= =======
YEAR ENDED DECEMBER 31,
2001 VS. 2000
----------------------------------------------------
INCREASE (DECREASE) DUE TO
----------------------------------------------------
RATE/
RATE VOLUME VOLUME TOTAL
------- ------- ------- -------
(In thousands)
Interest-earning assets:
Loans ............................................... $(1,175) 4,590 (345) 3,070
Securities .............................................. (278) 348 (32) 38
Other interest-earning assets ....................... (152) 309 (103) 54
------- ------- ------- -------
Total ............................................. (1,605) 5,247 (480) 3,162
------- ------- ------- -------
Interest-bearing liabilities:
Deposits:
Savings and NOW deposits .......................... (57) 34 (11) (34)
Money-market deposits ............................. (403) 486 (123) (40)
Time deposits ..................................... (376) 1,423 (116) 931
Borrowings ........................................ (428) 834 (115) 291
------- ------- ------- -------
Total ............................................. (1,264) 2,777 (365) 1,148
------- ------- ------- -------
Net change in net interest income ....................... $ (341) 2,470 (115) 2,014
======= ======= ======= =======
15
LIQUIDITY AND CAPITAL RESOURCES
A Florida chartered commercial bank is required to maintain a liquidity reserve
of at least 15% of its total transaction accounts and 8% of its total
nontransaction accounts. The liquidity reserve may consist of cash on hand, cash
on demand with other correspondent banks and other investments and short-term
marketable securities as determined by the rules of Florida OFISR, such as
federal funds sold and United States securities or securities guaranteed by the
United States or agencies thereof. As of December 31, 2002 and December 31,
2001, the Bank had liquidity of approximately $74.583 million and $52.759
million, or approximately 31.16% and 22.30%, respectively.
During the year ended December 31, 2002, the Company's primary sources of funds
consisted of principal payments on loans and securities, from maturities and
sales of securities, net increases in deposits and net cash flows from operating
activities. The Company used its capital resources principally to fund existing
and continuing loan commitments and the purchase of securities. At December 31,
2002, the Company had commitments to originate loans totaling $8.317 million.
Scheduled maturities of certificates of deposit during the 12 months following
December 31, 2002 totaled $68.201 million. Management believes the Company has
adequate resources to fund all of its commitments, that substantially all of its
existing commitments will be funded within the next twelve months and, if so
desired, that it can adjust the rates on certificates of deposit to attract
deposits in a changing interest-rate environment.
The following table sets forth, by maturity distribution, certain information
pertaining to the securities portfolio:
AFTER ONE YEAR
ONE YEAR OR LESS TO FIVE YEARS AFTER FIVE YEARS TOTAL
------------------- ------------------ ------------------- ------------------
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
----- ----- ----- ----- ----- ----- ----- -----
(DOLLARS IN THOUSANDS)
AT DECEMBER 31, 2002:
U.S. Government agency
securities.......................... $ -- --% $37,368 4.49% $ 3,308 6.07% $40,676 4.62%
U.S. Treasury securities.............. -- -- 7,275 5.68% -- -- 7,275 5.68%
Mortgage-backed securities............ -- -- 2,085 6.03% 1,066 5.89% 3,151 5.98%
Tax-exempt Municipal bonds............ -- -- -- -- 10,545 4.63% 10,545 4.63%
Preferred Stock....................... -- -- -- -- 1,058 5.70% 1,058 5.70%
Other................................. -- -- 125 6.70% 200 4.61% 325 5.41%
------- ---- ------- ---- ------- ---- ------- ----
Total................................. $ -- --% $46,853 4.75% $16,177 5.08% $63,030 4.83%
======= ==== ======= ==== ======= ==== ======= ====
AT DECEMBER 31, 2001:
U.S. Government agency
securities.......................... $ -- --% $25,005 5.05% $ -- --% $25,005 5.05%
U.S. Treasury securities.............. 517 5.68 -- -- -- -- 517 5.68
Mortgage-backed securities............ 1,244 7.48 781 6.50 15,521 6.86 17,546 6.89
Tax-exempt Municipal bonds............ -- -- -- -- 8,876 4.67 8,876 4.67
Preferred Stock.......................... -- -- -- -- 1,964 6.60 1,964 6.60
Other................................. -- -- 25 7.50 300 5.90 325 6.02
------- ---- ------- ---- ------- ---- ------- ----
Total................................. $ 1,761 6.95% $25,811 5.10% $26,661 6.10% $54,233 5.65%
======= ==== ======= ==== ======= ==== ======= ====
16
REGULATORY CAPITAL REQUIREMENTS
Federal and state banking regulations place certain restrictions on dividends
paid and loans or advances made by the Bank to the Company.
The Company (on a consolidated basis) and the Bank are subject to various
regulatory capital requirements administered by the federal and state 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 Company's and the Bank's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company and the Bank must meet
specific capital guidelines that involve quantitative measures of their assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The capital amounts and classification are also subject to
qualitative judgements by the regulators about components, risk weightings, and
other factors. Prompt corrective action provisions are not applicable to bank
holding companies.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and percentages
(set forth in the following table) of total and Tier 1 capital (as defined in
the regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of December 31,
2002 and 2001, that the Company and the Bank met all capital adequacy
requirements to which they are subject.
Under Federal Reserve Board regulations, the Bank is required to meet certain
minimum regulatory capital requirements. This is not a valuation allowance and
has not been created by charges against earnings. It represents a restriction on
stockholders' equity.
As of December 31, 2002, the most recent notification from the regulatory
authorities categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
an institution must maintain minimum total risk-based, Tier I risk-based, and
Tier I leverage percentages as set forth in the following tables. There are no
conditions or events since that notification that management believes have
changed the Bank's category. The Company and the Bank's actual capital amounts
and capital percentages as of December 31, 2002 and 2001 are also presented in
the table (dollars in thousands).
17
MINIMUM
TO BE WELL
CAPITALIZED UNDER
MINIMUM CAPITAL PROMPT CORRECTIVE
ACTUAL REQUIREMENT ACTION PROVISIONS
-------------- --------------- --------------------
AMOUNT % AMOUNT % AMOUNT %
------ ----- ------ ---- ------- -----
AS OF DECEMBER 31, 2002:
Total capital to Risk-
Weighted assets:
Consolidated.......... $30,919 14.13% $17,500 8.00% N/A N/A
Bank......... 28,007 12.85 17,431 8.00 $21,789 10.00%
Tier I Capital to Risk-
Weighted Assets:
Consolidated.......... 28,175 12.88 8,750 4.00 N/A N/A
Bank.... 25,273 11.60 8,715 4.00 13,073 6.00
Tier I Capital
to Average Assets
Consolidated.......... 28,175 8.73 12,903 4.00 N/A N/A
Bank............ 25,273 7.86 12,858 4.00 16,072 5.00
AS OF DECEMBER 31, 2001:
Total capital to Risk-
Weighted assets:
Consolidated.......... $ 27,514 12.28% $17,926 8.00% N/A N/A
Bank ............ 25,202 11.30 17,841 8.00 $22,301 10.00%
Tier I Capital to Risk-
Weighted Assets:
Consolidated.......... 25,107 11.20 8,963 4.00 N/A N/A
Bank 22,795 10.22 8,921 4.00 13,381 6.00
Tier I Capital
to Average Assets
Consolidated.......... 25,107 8.33 12,058 4.00 N/A N/A
Bank 22,795 7.58 12,023 4.00 15,028 5.00
ASSET - LIABILITY STRUCTURE
As part of its asset and liability management, the Company has emphasized
establishing and implementing internal asset-liability decision processes, as
well as communications and control procedures to aid in managing the Company's
earnings. Management believes that these processes and procedures provide the
Company with better capital planning, asset mix and volume controls,
loan-pricing guidelines, and deposit interest-rate guidelines which should
result in tighter controls and less exposure to interest-rate risk.
18
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest-rate sensitive" and by
monitoring an institution's interest-rate sensitivity "gap." An asset or
liability is said to be interest-rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest-rate sensitivity
gap is defined as the difference between interest-earning assets and
interest-bearing liabilities maturing or repricing within a given time period.
The gap ratio is computed as dividing rate-sensitive assets by rate-sensitive
liabilities. A gap ratio of 1.0% represents perfect matching. A gap is
considered positive when the amount of interest-rate sensitive assets exceeds
interest-rate sensitive liabilities. A gap is considered negative when the
amount of interest-rate sensitive liabilities exceeds interest-rate sensitive
assets. During a period of rising interest rates, a negative gap would adversely
affect net interest income, while a positive gap would result in an increase in
net interest income. During a period of falling interest rates, a negative gap
would result in an increase in net interest income, while a positive gap would
adversely affect net interest income.
In order to minimize the potential for adverse effects of material and prolonged
increases in interest rates on the results of operations, the Company's
management continues to monitor asset and liability management policies to
better match the maturities and repricing terms of its interest-earning assets
and interest-bearing liabilities. Such policies have consisted primarily of: (i)
emphasizing the origination of adjustable-rate loans; (ii) maintaining a stable
core deposit base; and (iii) maintaining a significant portion of liquid assets
(cash and short-term investments).
The following table sets forth certain information relating to the Company's
interest-earning assets and interest-bearing liabilities at December 31, 2002
that are estimated to mature or are scheduled to reprice within the period
shown:
19
MORE
THAN MORE
THREE THAN SIX MORE
MONTHS MONTHS THAN ONE
THREE TO SIX TO ONE YEAR TO MORE THAN
MONTHS MONTHS YEAR FIVE YEARS FIVE YEARS TOTAL
------ ------ ---- ---------- ---------- -----
($ IN THOUSANDS)
Loans (1),(2) .................. $ 83,917 13,666 23,170 98,114 67 218,934
Securities (3) ................. 12,507 10,901 9,159 23,133 10,309 66,009
Interest-bearing deposits ...... 28,194 -- -- -- -- 28,194
--------- --------- --------- --------- --------- ---------
Total rate-sensitive assets 124,618 24,567 32,329 121,247 10,376 313,137
--------- --------- --------- --------- --------- ---------
Deposit accounts (4):
Savings and NOW .............. 26,530 26,530
Money-market ................. 72,179 72,179
Time deposits ................ 21,146 22,711 24,344 21,391 2 89,594
--------- --------- --------- --------- --------- ---------
Total deposit accounts ......... 119,855 22,711 24,344 21,391 2 188,303
Borrowings (5) ................. 37,963 -- -- 5,000 15,000 57,963
--------- --------- --------- --------- --------- ---------
Total rate-sensitive
liabilities ........... 157,818 22,711 24,344 26,391 15,002 246,266
--------- --------- --------- --------- --------- ---------
Gap (repricing differences) .... $ (33,200) 1,856 7,985 94,856 (4,626) $ 66,871
========= ========= ========= ========= ========= =========
Cumulative GAP ................. $ (33,200) (31,344) (23,359) 71,497 66,871
========= ========= ========= ========= =========
Cumulative GAP/total assets..... -10.18% -9.61 % -7.16% 21.92% 20.51%
========= ========= ========= ========= =========
- ------------------------------------------------------------------------------------------------------------------------
(1) In preparing the table above, adjustable-rate loans are included in the
period in which the interest rates are next scheduled to adjust rather than
in the period in which the loans mature. Fixed-rate loans are scheduled,
including repayment, according to their contractual maturities.
(2) Includes nonaccrual loans and loans held for sale.
(3) Securities are scheduled according to their respective repricing, predicted
call dates and maturity dates, includes Federal Home Loan Bank (FHLB) stock
and Federal Reserve Bank stock.
(4) Savings, NOW and money-market accounts are regarded as readily accessible
withdrawable accounts. All other time accounts are scheduled according to
their respective maturity dates.
(5) Borrowings include FHLB fixed and floating rate convertible advances which
have a call option and investment repurchase agreements.
20
The following table reflects the contractual principal repayments of the
Company's loan portfolio at December 31, 2002:
COMMERCIAL RESIDENTIAL
COMMERCIAL REAL ESTATE MORTGAGE CONSUMER
LOANS LOANS LOANS LOANS TOTAL
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Due within one year ................ $48,803 30,343 5,743 23,352 108,241
Due after one through five years.... 7,213 17,564 12,585 4,579 41,941
Due after five years ............... 1,074 6,574 59,988 966 68,602
------- ------- ------- ------- -------
Total ....................... $57,090 54,481 78,316 28,897 218,784
======= ======= ======= ======= =======
Of the $110.5 million in loans due after one year, 48.3% of such loans have
fixed rates of interest and 51.7% have adjustable rates.
The following table displays loan originations by type of loan and principal
reductions during the periods indicated.
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
Originations:
Commercial loans ........... $ 28,450 31,510 13,931 26,960 13,854
Commercial real estate loans 27,978 28,066 13,527 12,668 7,020
Residential real estate .... 41,222 27,554 24,468 20,804 33,498
Consumer loans ............ 5,191 10,298 6,802 4,139 2,959
--------- --------- --------- --------- ---------
Total loans originated .... $ 102,841 97,428 58,728 64,571 57,331
Principal reductions ........... (110,176) (66,035) (35,721) (41,378) (34,834)
--------- --------- --------- --------- ---------
(Decrease) Increase in gross
loans .................... $ (7,335) 31,393 23,007 23,193 22,497
========= ========= ========= ========= =========
During the years ending December 2002 and 2001, the Company did not originate
any loans held for sale. The table above excludes originations of loans held for
sale of $7.082 million, $2.496 million and $1.994 million for periods ended
December 31, 2000, 1999 and 1998, respectively.
21
LOAN PORTFOLIO COMPOSITION
The following table summarizes the loan portfolio of the Company by type of loan
as of December 31, 2002, 2001, 2000, 1999 and 1998.
AT DECEMBER 31,
--------------------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------------ ------------------ ------------------ ------------------ ------------------
% OF % OF % OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
(DOLLARS IN THOUSANDS)
Commercial ...... $ 57,090 26.09% $ 60,003 26.52% $ 41,305 23.59% $ 34,054 22.35% $ 21,487 16.64%
Commercial
real estate ... 54,481 24.90% 58,711 25.95 29,699 16.96 25,655 16.84 20,904 16.19
Residential
real estate ... 78,316 35.80% 83,834 37.05 88,659 50.62 80,814 53.05 76,938 59.56
Consumer ........ 28,897 13.21% 23,719 10.48 15,468 8.83 11,826 7.76 9,827 7.61
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans.. $218,784 100.00% $226,267 100.00% $175,131 100.00% $152,349 100.00% $129,156 100.00%
====== ====== ====== ====== ======
Less:
Deferred loan
fees.......... (425) (481) (210) (166) (73)
Allowance for
loan losses... (3,519) (2,407) (1,792) (1,331) (1,078)
------- ------- ------- ------- -------
Loans, net.... $214,840 $223,379 $173,129 $150,852 $128,005
======== ======== ======== ======== ========
The Bank originates, purchases and participates in loans for its own portfolio
and for sale in the secondary market. The Bank provides commercial business
loans, commercial and residential real estate loans, and consumer loans. Loans
secured by real estate generally include commercial and residential real estate,
loans to refinance or purchase existing properties and home equity loans. Over
the past five years, the Company has continued to increase its originations of
commercial and commercial real estate loans. Management intends to continue to
focus on these types of lending.
Commercial business loans totaled $57.090 million or 26.09% of the Bank's loan
portfolio, as of December 31, 2002. Commercial business loan underwriting
practices assess the borrower's creditworthiness and ability to repay, including
an evaluation of the value of any collateral securing the proposed loan. While
commercial business loans generally are made for shorter terms and at higher
yields than one-to-four family residential loans, such loans generally involve a
higher level of risk than one-to-four family residential loans.
The Bank's commercial real estate loans at December 31, 2002 totaled $54.481
million or 24.90% of the Bank's portfolio. The portfolio generally has terms
generally ranging from five to seven and in some cases ten years and interest
rate adjustment periods ranging from monthly to five years. Amortization periods
for commercial mortgage loans generally are 15 to 20 and do not exceed 25 years.
Commercial real estate loans originated by the Bank are primarily secured by
income-producing properties such as office buildings, warehouse buildings,
retail space and to a lesser extent multi-family property. Generally, in
underwriting commercial real estate loans, the Bank requires the personal
guaranty of borrowers, a maximum loan to value ratio of 75%, and a cash flow to
debt service ratio of 1.25 to 1 or higher.
22
The Bank's residential real estate mortgage loans at December 31, 2002 totaled
$78.316 million or 35.80% of the Bank's total loan portfolio. The Bank's
residential mortgage loans have terms which do not exceed 30 years and are
secured by one-to-four family residences. Loans made for an amount in excess of
80% of the appraised value of the financed residences are generally originated
with private mortgage insurance, which essentially insures that portion of the
loan which is in excess of 80% of the appraised value of the financed
residences. The company will originate loans targeted at low and moderate income
home buyers whose underwriting standard may exceed what's considered typical. As
of December 31, 2002, the residential loan portfolio of the Bank consisted of
approximately 42.6% in adjustable rate mortgages and 57.4% in fixed rate loans.
During 2002, the Company originated residential real estate mortgage loans to
correspondent banks, servicing released totaling $15.535 million and originated
$41.223 million of loans to the portfolio. Residential mortgage loans generally
are underwritten by the Bank in accordance with guidelines of the Federal
National Mortgage Association (the "FNMA") and the Federal Home Loan Mortgage
Corporation (the "FHLMC").
Consumer loans are extended for a variety of purposes including the purchase of
automobiles, home improvement, lines of credit and unsecured personal loans. As
of December 31, 2002, consumer loans were approximately $28.897 million or
13.21% of total loans. Consumer loan underwriting standards include an
examination of the applicant's payment history on other debts and an evaluation
of the applicant's ability to meet existing obligations and payments on the
proposed loan.
Although creditworthiness of the applicant is of primary importance, the
underwriting process also includes a comparison of the value of the security, if
any, in relation to the proposed loan amount. While consumer loans generally
involve a higher element of credit risk than one-to-four family residential
loans, consumer loans are typically made at higher interest rates and for
shorter terms, or at adjustable rates, and are helpful in maintaining a
profitable spread between the Bank's loan yield and its cost of funds.
DEPOSIT COMPOSITION
The Company attracts both short-term and long-term deposits from the Company's
primary market area by offering a wide assortment of accounts and rates. The
Company offers checking accounts (both interest bearing and non-interest
bearing), money market accounts, savings accounts, fixed interest rate
certificates of deposits with varying maturities and individual retirement
accounts.
The following table shows the distribution of, and certain other information
relating to, deposit accounts by type:
AT DECEMBER 31,
--------------------------------------------------------------
2002 2001 2000
----------------- ----------------- -----------------
% OF % OF % OF
BALANCE TOTAL BALANCE TOTAL BALANCE TOTAL
------- ----- ------- ----- ------- -----
(DOLLARS IN THOUSANDS)
Demand deposits ........ $ 45,198 19.36% $ 41,197 18.24% $ 29,827 18.51%
Savings and NOW deposits 26,530 11.36% 20,056 8.88 12,048 7.48
Money-market deposits .. 72,179 30.91% 60,539 26.81 33,920 21.05
Time deposits .......... 89,594 38.37% 104,033 46.07 85,341 52.96
-------- ------ -------- ------ -------- ------
Total deposits .... $233,501 100.00% $225,825 100.00% $161,136 100.00%
======== ====== ======== ====== ======== ======
23
Jumbo certificates ($100,000 and over) included above mature as follows:
AT DECEMBER 31,
---------------
2002
----
(DOLLARS IN THOUSANDS)
Due three months or less...................................... $5,179
Due over three months to six months........................... 6,898
Due over six months to one year............................... 12,419
Due over one year............................................. 5,177
--------
Total....................................................... $ 29,673
========
The scheduled maturities of time deposits are as follows:
AT DECEMBER 31,
---------------
2002
----
(DOLLARS IN THOUSANDS)
Due in one year or less....................................... $ 68,201
Due in more than one but less than three years................ 16,772
Due in more than three but less than five years............... 4,621
--------
Total....................................................... $ 89,594
========
The following table sets forth the net deposit flows of the Company during the
year indicated:
YEAR ENDED DECEMBER 31,
--------------------------
2002 2001 2000
---- ---- ----
(DOLLARS IN THOUSANDS)
Net increase before interest credited..................... $ 2,389 24,323 13,310
Net interest credited..................................... 5,344 7,562 1,650
--------- ------ ------
Net deposit increase...................................... $ 7,733 31,885 14,960
========= ====== ======
The following table indicates the daily average balances and weighted average
interest rates paid on interest bearing deposits for each of the three years
ended December 31, 2002, 2001 and 2000:
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
2002 2001 2000
-------------------------- ------------------------ ---------------------------
AVERAGE % OF AVERAGE AVERAGE % OF AVERAGE AVERAGE % OF AVERAGE
BALANCE TOTAL YIELD BALANCE TOTAL YIELD BALANCE TOTAL YIELD
------- ----- ----- ------- ----- ----- ------- ----- -----
(DOLLARS IN THOUSANDS)
Savings and NOW
deposits .......... $ 22,174 9.67% .71% 15,541 7.56 1.04% $ 13,249 8.51 1.47%
Money-market
deposits .......... 64,408 28.08 1.82 48,757 23.72 3.17 37,317 23.96 4.25
Time deposits ........ 98,343 42.87 3.60 105,050 51.11 5.22 80,037 51.39 5.69
-------- ----- -------- ----- -------- -----
Total interest-bearing
deposits .......... 184,925 80.62 2.64% 169,348 82.39 4.25% 130,603 83.86 4.85
Noninterest bearing
deposits........... 44,443 19.38 36,185 17.61 25,150 16.14
-------- ----- -------- ----- -------- -----
Total................. $229,368 100.00% $205,533 100.00% $ 155,753 100.00%
======== ====== ======== ====== ========== ======
24
COMPARISON OF YEARS ENDED DECEMBER 31, 2002 AND 2001
GENERAL
Net earnings for the twelve months ended December 31, 2002, were $1.764 million
as compared to $1.668 million for the same period in 2001. The marginal increase
in earnings reflects the full year absorption of four acquired Miami-Dade
banking offices and the de novo Coral Springs office that opened during the
spring of 2001. The Company's earnings per share were $.84 basic and $.82
diluted for the year ended December 31, 2002, as compared to $.82 basic and
$.81, diluted for the same period in 2001.
INTEREST INCOME AND EXPENSE
Interest income decreased by $1.5 million, or 6.8%, from $21.7 million for the
year ended December 31, 2001 to $20.2 million for the year ended December 31,
2002. Interest income on loans decreased $1.2 million primarily due to a
decrease in the average yield earned from 8.39% in 2001 to 7.39% in 2002,
partially offset by an increase in the average loan portfolio balance from
$213.6 million for the year ended December 31, 2001 to $226.4 million for the
comparable period in 2002. Interest on securities decreased $163,000 primarily
due to a decrease in the weighted-average yield earned of .74%, partially offset
by an increase in the average securities portfolio balance from $59.2 million in
2001 to $65.5 million in 2002. The marginal decrease in interest income on other
interest-earning assets of $115,000 was due to a decrease in the
weighted-average yield earned of 2.27%, partially offset by an increase in the
average other interest-earning assets balance from $11.1 million in 2001 to
$17.0 million in 2002.
Interest expense on deposits decreased to $4.9 million for the year ended
December 31, 2002 from $7.2 million for the year ending December 31, 2001.
Interest expense on deposits decreased due to a decrease in the average rate
paid on deposits from 4.25% in 2001 to 2.64% in 2002, partially offset by an
increase in the average balance from $169.3 million in 2001 to $184.9 million in
2002.
Interest expense on borrowings decreased $554,000 to $2.708 million for the year
ended December 31, 2002 from $3.262 million for the year ending December 31,
2001. Interest expense on borrowings decreased due to a decrease in the
weighted-average rate paid for year ended December 31, 2002 to 4.33% compared to
5.12% for the same period in 2001.
PROVISION FOR LOAN LOSSES
The provision for loan losses is charged to earnings to bring the total
allowance to a level deemed appropriate by management and is based upon
historical experience, the volume and type of lending conducted by the Bank,
industry standards, the amounts of nonperforming loans, general economic
conditions, particularly as they relate to the Bank's market areas, and other
factors related to the collectibility of the Bank's loan portfolio. A provision
of $811,000 was made for year ended December 31, 2002 compared to the $1.296
million provision made in the comparable period in 2001. The decrease in the
provision is a direct result in realizing recoveries on previously charged-off
loans. Management's decision to decrease reserves is based on the composition
and risk associated in the loan portfolio. Management's assessment is that the
allowance for loan losses of $3.519 million was adequate at December 31, 2002.
NONINTEREST INCOME
Total noninterest income for the year ended December 31, 2002 was $2.883 million
as compared to the $2.714 million for the year ended December 31, 2001. The net
increase in noninterest income of $169,000 was primarily due to the increase in
service charges on deposit accounts of $402,000 related to the greater number of
transaction-based deposit accounts that the Company service's. The increase in
other income was a result of a $67,000 profit earned on the sale of real estate
owned. The increase in noninterest revenue was offset by a decrease in gains
realized from the sale of securities available for sale of $399,000.
25
NONINTEREST EXPENSES
Total noninterest expenses increased $1.936 million to $12.126 million for the
year ended December 31, 2002 from $10.190 million for the year ended December
31, 2001. The increase in noninterest expenses in 2002 was primarily a result of
an
increase in salaries and employee benefits of $1.022 million due to the increase
in staff to support the Company's growth.
Occupancy expenses increased of $552,000 as we realized the full year effect of
the four acquired Miami-Dade banking offices and the de novo Coral Springs
office that were opened in the spring of 2001. The amortization of intangible
assets increased by $76,000 as the Company realized a year's effect resulting
from the application of purchase accounting principles to the acquisition of the
four Miami-Dade County branch offices in 2001.
PROVISION FOR INCOME TAXES
The provision for income taxes increased from $814,000 (an effective rate at
33%) during the year ended December 31, 2001 to $829,000 (an effective rate at
32%) during the year ended December 31, 2002. The decrease in the effective
income tax rate is directly related to bank qualified municipal investments in
the securities available for sale during the year ended December 31, 2002.
COMPARISON OF YEARS ENDED DECEMBER 31, 2001 AND 2000
GENERAL
Net earnings for the twelve months ended December 31, 2001, were $1.668 million
as compared to $1.719 million for the same period in 2000. The decrease in the
Company's net earnings was attributed to an increase in noninterest expenses
directly related to the acquisition of four banking offices and the
infrastructure to supporting the Company's growth. The Company's earnings per
share were $.82 basic and $.81 diluted for the year ended December 31, 2001, as
compared to $.85 per basic and diluted for the year ended December 31, 2000.
INTEREST INCOME AND EXPENSE
Interest income increased from $18.545 million for the year ended December 31,
2000 to $21.707 million for the year ended December 31, 2001. Interest income on
loans increased $3.070 million in 2001 from 2000 due to a $50.383 million
increase in average loans outstanding, offsetting the decrease in average loan
rates from 9.11% in 2000 to 8.39% in 2001. Interest on securities increased to
$3.270 million for the year ended December 31, 2001 from $3.232 million for the
year ended December 31, 2000. The slight increase in interest income of $38,000
on securities available for sale in 2001 from 2000 is due to a $5.765 million
increase in average securities available for sale, offsetting a decrease in
average rates from 6.15% to 5.66%. The marginal increase in interest income on
other interest-earning assets of $54,000 was due to a $4.500 million increase in
average other interest-earning assets, offset by the earnings rate decrease from
6.86% in 2000 to 4.55% in 2001.
Interest expense increased to $10.453 million for the year ended December 31,
2001 from $9.305 million for the year ended December 31, 2000. Interest expense
on deposit accounts increased $857,000 from $6.334 million in 2000 to $7.191
million during 2001, primarily attributed to the $38.745 million increase in the
average interest-bearing deposits offset by a decrease in rates paid on deposit
from 4.85% in 2000 to 4.25% in 2001. The average interest-bearing deposit
balances increased from $130.603 million during the year ended December 31, 2000
to $169.348 million for 2001. Interest expense on other borrowings increased
$291,000 from $2.971 million in 2000 to $3.262 million in 2001, primarily due to
an increase in average borrowings from $49.713 million during the year ended
December 31, 2000 to $63.665 million in 2001, offset by the rates paid on
borrowing from 5.98% in 2000 to 5.12% in 2001.
26
PROVISION FOR LOAN LOSSES
The provision for loan losses is charged to earnings to bring the total
allowance to a level deemed appropriate by management and is based upon
historical experience, the volume and type of lending conducted by the Bank,
industry standards, the amounts of nonperforming loans, general economic
conditions, particularly as they relate to the Bank's market areas, and other
factors related to the collectibility of the Bank's loan portfolio. The
provision increased to $1.296 million for the year ended December 31, 2001 from
$685,000 for the year ended December 31, 2000. The increase in the provision is
a result of management's decision to increase reserves as the composition of the
loans continues to shift from residential mortgage dominance to a more
traditional commercial bank's portfolio. Management's assessment is that the
allowance for loan losses of $2.407 million was adequate at December 31, 2001.
NONINTEREST INCOME
Total noninterest income for the year ended December 31, 2001 was $2.714 million
as compared to the $1.092 million for the year ended December 31, 2000. The
increase of noninterest income of $1.622 million was attributed to a $499,000
increase in service charges on deposit accounts, resulting from increased
volume, $741,000 in net profits realized on securities available for sale and a
$201,000 increase in loan correspondent fees associated with mortgage
production. The interest rate environment during 2001 was favorable towards
repositioning the securities available for sale and allowed us the ability to
earn loan fees from originating fixed rate mortgages to correspondents.
NONINTEREST EXPENSES
Total noninterest expenses increased $3.005 million to $10.190 million for the
year ended December 31, 2001 from $7.185 million for the year ended December 31,
2000. The increase in noninterest expenses in 2001 was primarily a result of an
increase in salaries and employee benefits of $1.313 million due to additional
staffing to support the four acquired branch offices in Miami-Dade County, a de
novo branch in northern Broward County, the infrastructure to support the
Company's growth, and an increase of $682,000 in occupancy expenses with the new
facilities. The increase in other expenses of $474,000 is associated with
stationery and supplies, postage and related costs as the Company expanded. The
amortization of intangible assets of $169,000 at the year ended December 31,
2001 resulting from the application of purchase accounting principles to the
acquisition of the four Miami-Dade County branch offices.
PROVISION FOR INCOME TAXES
The provision for income taxes decreased from $821,000 (an effective rate at
33.3%) during the year ended December 31, 2000 to $814,000 (an effective rate at
32.8%) during the year ended December 31, 2001. The decrease in the effective
income tax rate is directly related to bank qualified municipal investments in
the securities available for sale during the year ended December 31, 2001.
27
QUARTERLY DATA
The following table presents summarized quarterly financial data (dollars in
thousands, except per share amounts):
YEAR ENDED DECEMBER 31, 2002
------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Interest income ........................ $ 5,194 $ 5,148 $ 5,042 $ 4,846
.......
Interest expense ....................... 2,017 1,974 1,860 1,732
------- ------- ------- -------
Net interest income ............... 3,177 3,174 3,182 3,114
Provision (credit) for loan losses ..... 471 816 (126) (350)
------- ------- ------- -------
Net interest income after provision
for loan losses ............... 2,706 2,358 3,308 3,464
------- ------- ------- -------
Noninterest income ..................... 761 651 692 779
Noninterest expense .................... 2,903 2,927 3,035 3,261
------- ------- ------- -------
Net earnings before income taxes ....... 564 82 965 982
Income taxes .................. 166 (18) 320 361
------- ------- ------- -------
Net Earnings ........................... 398 100 645 621
======= ======= ======= =======
Basic earnings per common share ........ $ .19 $ .05 $ .30 $ .30
======= ======= ======= =======
Diluted earnings per common share ...... $ .19 $ .05 $ .30 $ .28
======= ======= ======= =======
YEAR ENDED DECEMBER 31, 2001
------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
Interest income ........................ $ 4,905 $ 5,578 $ 5,762 $ 5,462
Interest expense ....................... 2,553 2,822 2,746 2,332
------- ------- ------- -------
Net interest income ............... 2,352 2,756 3,016 3,130
Provision for loan losses .............. 150 210 225 711
------- ------- ------- -------
Net interest income after provision
for loan losses ............... 2,202 2,546 2,791 2,419
------- ------- ------- -------
Noninterest income ..................... 482 573 641 1,018
Noninterest expense .................... 1,986 2,590 2,749 2,865
------- ------- ------- -------
Net earnings before income taxes ....... 698 529 683 572
Income taxes .................. 238 173 236 167
------- ------- ------- -------
Net Earnings ........................... 460 356 447 405
======= ======= ======= =======
Basic earnings per common share ........ .23 .17 .22 .20
======= ======= ======= =======
Diluted earnings per common share ...... .23 .17 .21 .20
======= ======= ======= =======
28
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
See Part I, Item 1. DESCRIPTION OF BUSINESS, Market Risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX
-----
Audited Consolidated Financial Statements Page(s)
-------
Report of Independent Certified Public Accountants
(Hacker, Johnson & Smith PA).................................................... F-1
Consolidated Balance Sheets as of December 31, 2002 and 2001.................... F-2
Consolidated Statements of Earnings for the years ended
December 31, 2002, 2001 and 2000................................................ F-3, F-4
Consolidated Statements of Stockholder's Equity for the
years ended December 31, 2002, 2001 and 2000.................................... F-5, F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000................................................ F-7, F-8
Notes to Consolidated Financial Statements...................................... F-9, F-29
Independent Auditors' Report on Supplementary Information....................... F-30
Consolidated Balance Sheets as of December 31, 2002............................. F-31
Consolidated Statements of Earnings for the year ended
December 31, 2002............................................................... F-32
29
POINTE FINANCIAL CORPORATION AND SUBSIDIARIES
Boca Raton, Florida
Audited Consolidated Financial Statements
At December 31, 2002 and 2001 and
for Each of the Years in the Three-
Year Period Ended December 31, 2002
with Supplementary Information
(Together With Independent Auditors' Report)
30
INDEPENDENT AUDITORS' REPORT
Board of Directors
Pointe Financial Corporation
Boca Raton, Florida:
We have audited the accompanying consolidated balance sheets of Pointe
Financial Corporation and Subsidiaries (the "Company") at December 31, 2002 and
2001, and the related consolidated statements of earnings, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
at December 31, 2002 and 2001, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 2002 in
conformity with accounting principles generally accepted in the United States of
America.
HACKER, JOHNSON & SMITH PA
Fort Lauderdale, Florida
January 17, 2003
F-1
POINTE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS, EXCEPT SHARE AMOUNTS)
AT DECEMBER 31,
-----------------------
ASSETS 2002 2001
--------- ---------
Cash and due from banks .................................................... $ 7,454 9,313
Interest-bearing deposits with banks ....................................... 28,194 31,342
--------- ---------
Total cash and cash equivalents ..................................... 35,648 40,655
Securities available for sale .............................................. 63,030 54,233
Loans, net of allowance for loan losses of $3,519
in 2002 and $2,407 in 2001 .............................................. 214,840 223,379
Loans held for sale ........................................................ 150 446
Accrued interest receivable ................................................ 1,983 1,779
Premises and equipment, net ................................................ 3,618 3,465
Federal Home Loan Bank stock, at cost ...................................... 2,500 2,900
Federal Reserve Bank stock, at cost ........................................ 479 479
Foreclosed real estate ..................................................... 117 --
Branch acquisition intangible asset ........................................ 3,216 3,461
Deferred income tax asset .................................................. 842 483
Other assets ............................................................... 884 2,115
--------- ---------
Total ............................................................... $ 327,307 333,395
========= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Noninterest-bearing demand deposits ..................................... 45,198 41,197
Savings and NOW deposits ................................................ 26,530 20,056
Money-market deposits ................................................... 72,179 60,539
Time deposits ........................................................... 89,594 104,033
--------- ---------
Total deposits ...................................................... 233,501 225,825
Official checks ......................................................... 1,919 2,094
Other borrowings ........................................................ 12,963 30,094
Advances from Federal Home Loan Bank .................................... 45,000 45,000
Accrued interest payable ................................................ 594 849
Advance payments by borrowers for taxes and insurance ................... 230 284
Other liabilities ....................................................... 769 702
--------- ---------
Total liabilities ................................................... 294,976 304,848
--------- ---------
Commitments and contingencies (Notes 4, 8 and 9)
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized, none issued -- --
Common stock, $.01 par value, 5,000,000 shares authorized; 2,471,668 and
2,345,295 shares issued at December 31, 2002 and 2001, respectively ... 25 23
Additional paid-in capital .............................................. 25,540 24,110
Retained earnings ....................................................... 8,878 7,535
Accumulated other comprehensive income (loss) ........................... 940 (17)
Treasury stock, at cost (297,000 shares) ................................ (3,000) (3,000)
Stock incentive plan .................................................... (52) (104)
--------- ---------
Total stockholders' equity .......................................... 32,331 28,547
--------- ---------
Total ............................................................... $ 327,307 333,395
========= =========
See Accompanying Notes to Consolidated Financial Statements.
F-2
POINTE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
($ IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
-----------------------------
2002 2001 2000
------- ------- -------
Interest income:
Loans ................................................................. $16,735 17,934 14,864
Securities available for sale ......................................... 3,107 3,270 3,232
Other interest-earning assets ......................................... 388 503 449
------- ------- -------
Total interest income ............................................. 20,230 21,707 18,545
------- ------- -------
Interest expense:
Deposits .............................................................. 4,875 7,191 6,334
Borrowings ............................................................ 2,708 3,262 2,971
------- ------- -------
Total interest expense ............................................ 7,583 10,453 9,305
------- ------- -------
Net interest income ...................................................... 12,647 11,254 9,240
Provision for loan losses ......................................... 811 1,296 685
------- ------- -------
Net interest income after provision for loan losses ...................... 11,836 9,958 8,555
------- ------- -------
Noninterest income:
Service charges on deposit accounts ................................... 1,716 1,314 815
Loan servicing fees ................................................... 30 36 47
Net gains from sale of loans .......................................... -- -- 6
Net realized gain (loss) on sale of securities ........................ 342 741 (123)
Loan correspondent fees ............................................... 254 231 30
Other ................................................................. 541 392 317
------- ------- -------
Total noninterest income .......................................... 2,883 2,714 1,092
------- ------- -------
Noninterest expenses:
Salaries and employee benefits ........................................ 6,166 5,144 3,831
Occupancy expense ..................................................... 2,395 1,843 1,161
Advertising and promotion ............................................. 375 399 263
Professional fees ..................................................... 300 260 207
Data processing ....................................................... 693 591 413
Amortization of intangible asset ...................................... 245 169 --
Other ................................................................. 1,952 1,784 1,310
------- ------- -------
Total noninterest expenses ........................................ 12,126 10,190 7,185
------- ------- -------
Earnings before income taxes and extraordinary item ............... 2,593 2,482 2,462
Income taxes ............................................................. 829 814 821
------- ------- -------
Earnings before extraordinary item ................................ 1,764 1,668 1,641
Extraordinary item - gain on extinguishment of debt, net of taxes of $47 . -- -- 78
------- ------- -------
Net earnings ...................................................... $ 1,764 1,668 1,719
======= ======= =======
(continued)
F-3
POINTE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS, CONTINUED
($ IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
---------------------------------------------
2002 2001 2000
------------- ------------ ------------
Net earnings per share - basic:
Earnings before extraordinary item ............... $ .84 .82 .81
Extraordinary gain from extinguishment of debt.... -- -- .04
------------- ------------ ------------
Net earnings per share - basic ............... $ .84 .82 .85
Net earnings per share - diluted:
Earnings before extraordinary item ............... .82 .81 .81
Extraordinary gain from extinguishment of debt ... -- -- .04
Net earnings per share - diluted ............. $ .82 .81 .85
============= ============ ============
Weighted-average shares outstanding for basic .... 2,111,301 2,037,150 2,019,567
============= ============ ============
Weighted-average shares outstanding for diluted .. 2,148,659 2,064,328 2,019,632
============= ============ ============
Dividends per share .............................. $ .20 .20 .20
============= ============ ============
See Accompanying Notes to Consolidated Financial Statements
F-4
POINTE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
($ IN THOUSANDS)
ACCUMULATED
OTHER
COMPRE-
ADDITIONAl STOCK HENSIVE TOTAL
COMMON PAID-IN INCENTIVE TREASURY RETAINED INCOME STOCKHOLDERS'
STOCK CAPITAL PLAN STOCK EARNINGS (LOSS) EQUITY
------- ------- ------- ------- ------- ------- -------
Balance at December 31, 1999 ................... $ 23 23,753 (50) (3,000) 4,959 (1,102) 24,583
-------
Comprehensive income:
Net earnings ................................ -- -- -- -- 1,719 -- 1,719
Net change in unrealized loss on
available-for-sale securities, net of taxes -- -- -- -- -- 729 729
-------
Comprehensive income ........................ 2,448
-------
Shares committed to participants in
stock incentive plan ........................ -- -- 11 -- -- -- 11
Shares cancelled in stock incentive plan
(1,010 shares) .............................. -- (10) 10 -- -- -- --
Cash dividends paid ............................ -- -- -- -- (404) -- (404)
Issuance of common stock to directors
as compensation (12,164 shares) ............. -- 109 -- -- -- -- 109
Cancellation of common stock issued to
directors as compensation (1,945 shares) .... -- (17) -- -- -- -- (17)
------- ------- ------- ------- ------- ------- -------
Balance at December 31, 2000 ................... 23 23,835 (29) (3,000) 6,274 (373) 26,730
-------
Comprehensive income:
Net earnings ................................ -- -- -- -- 1,668 -- 1,668
Net change in unrealized loss on
available-for-sale securities, net of taxes -- -- -- -- -- 356 356
-------
Comprehensive income ........................ 2,024
-------
Shares issued in stock incentive plan
(10,659 shares) ............................. -- 113 (113) -- -- -- --
Shares committed to participants in
stock incentive plan ........................ -- -- 34 -- -- -- 34
Shares cancelled in stock incentive plan
(460 shares) ................................ -- (4) 4 -- -- -- --
Cash dividends paid ............................ -- -- -- -- (407) -- (407)
Common stock options exercised (7,337 shares) .. -- 70 -- -- -- -- 70
Issuance of common stock to directors
as compensation (8,532 shares) .............. -- 96 -- -- -- -- 96
------- ------- ------- ------- ------- ------- -------
Balance at December 31, 2001 ................... $ 23 24,110 (104) (3,000) 7,535 (17) 28,547
======= ======= ======= ======= ======= ======= =======
(continued)
F-5
POINTE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY, CONTINUED
($ IN THOUSANDS)
ACCUMULATED
OTHER
COMPRE-
ADDITIONAl STOCK HENSIVE TOTAL
COMMON PAID-IN INCENTIVE TREASURY RETAINED INCOME STOCKHOLDERS'
STOCK CAPITAL PLAN STOCK EARNINGS (LOSS) EQUITY
------- ------- ------- ------- ------- ------- -------
Balance at December 31, 2001 ................... $ 23 24,110 (104) (3,000) 7,535 (17) 28,547
-------
Comprehensive income:
Net earnings ................................ -- -- -- -- 1,764 -- 1,764
Net change in unrealized loss on
available-for-sale securities, net of taxes -- -- -- -- -- 957 957
-------
Comprehensive income ........................ 2,721
-------
Common stock options exercised (129,540 shares) 2 1,245 -- -- -- -- 1,247
Tax benefit related to the exercise of common
stock options ............................... -- 218 -- -- -- -- 218
Shares committed to participants in
stock incentive plan ........................ -- -- 19 -- -- -- 19
Shares cancelled in stock incentive plan
(3,167 shares) .............................. -- (33) 33 -- -- -- --
Cash dividends paid ............................ -- -- -- -- (421) -- (421)
------- ------- ------- ------- ------- ------- -------
Balance at December 31, 2002 ................... $ 25 25,540 (52) (3,000) 8,878 940 32,331
======= ======= ======= ======= ======= ======= =======
See Accompanying Notes to Consolidated Financial Statements
F-6
POINTE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001 2000
-------- -------- --------
Cash flows from operating activities:
Net earnings ................................................ $ 1,764 1,668 1,719
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Provision for loan losses ................................ 811 1,296 685
Depreciation and amortization ............................... 692 580 423
Net amortization of fees, premiums, discounts and other .. 448 211 131
(Credit) provision for deferred income taxes ................ (359) 108 (243)
Common stock issued as compensation for services ......... -- 96 92
Shares committed to participants in incentive stock plan .... 19 34 11
(Gain) loss on sale of securities ........................ (342) (741) 123
Gain on sale of foreclosed real estate ...................... (67) -- --
Gain on sale of loans .................................... -- -- (6)
Originations of loans held for sale ......................... -- -- (7,082)
Repayments of loans held for sale ........................ 296 273 --
Proceeds from sale of loans held for sale ................ -- -- 9,065
Decrease (increase) in other assets ...................... 812 (1,403) (687)
(Increase) decrease in accrued interest receivable ....... (204) 256 (660)
(Decrease) increase in official checks ................... (175) 434 585
(Decrease) increase in accrued interest payable .......... (255) (140) 301
Increase in other liabilities ............................ 67 141 332
-------- -------- --------
Net cash provided by operating activities ............. 3,507 2,813 4,789
-------- -------- --------
Cash flows from investing activities:
Purchase of securities available for sale ................... (98,160) (96,370) (26,731)
Proceeds from sale of securities ............................ 38,020 59,455 8,955
Maturities and calls of securities available for sale ....... 50,980 46,855 10,100
Principal repayments on securities available for sale ....... 2,015 2,985 1,123
Net decrease (increase) in loans ............................ 7,335 (31,393) (23,007)
Purchase of premises and equipment, net ..................... (845) (799) (1,040)
Cash paid for foreclosed real estate ........................ -- -- (99)
Proceeds from sale of foreclosed real estate ................ 367 47 263
Net decrease (increase) in other securities ................. 400 (418) (729)
Increase in branch acquisition intangible asset ............. -- (3,630) --
-------- -------- --------
Net cash provided by (used in) investing activities ... 112 (23,268) (31,165)
-------- -------- --------
Cash flows from financing activities:
Net increase in deposits .................................... 7,733 31,885 14,960
Net increase in Federal Home Loan Bank advances ............. -- -- 9,940
Net (decrease) increase in other borrowings ................. (17,131) 22,027 2,673
Decrease in advance payments for taxes and insurance ........ (54) (81) (86)
Proceeds from exercise of stock options ..................... 1,247 70 --
Cash dividends paid on common stock ......................... (421) (407) (404)
-------- -------- --------
Net cash (used in) provided by financing activities ... (8,626) 53,494 27,083
-------- -------- --------
Net (decrease) increase in cash and cash equivalents .. (5,007) 33,039 707
Cash and cash equivalents at beginning of year ................... 40,655 7,616 6,909
-------- -------- --------
Cash and cash equivalents at end of year ......................... $ 35,648 40,655 7,616
======== ======== ========
(continued)
F-7
POINTE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
($ IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-----------------------------
2002 2001 2000
---- ---- ----
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest .......................................................... $ 7,838 10,593 9,004
========== ====== =====
Income taxes ...................................................... $ 399 2,257 998
========== ====== =====
Noncash transactions:
Reclassification of loans to foreclosed real estate ............... $ 367 29 --
========== ====== =====
Reclassification of other assets to foreclosed real estate ........ $ 50 -- 75
========== ====== =====
Accumulated other comprehensive income (loss), change in unrealized
loss on securities available for sale .......................... $ 957 356 729
========== ====== =====
Transfer of loans to loans held for sale .......................... $ -- -- 6,736
========== ====== =====
Securitization of loans ........................................... $ -- 12,329 --
========== ====== =====
Tax benefit related to exercise of common stock options ........... $ 218 -- --
========== ====== =====
Activity in stock incentive plan, net ............................. $ 52 (75) 21
========== ====== =====
Acquisition of branches:
Fair value of premises and equipment acquired .................. $ -- 404 --
========== ====== =====
Fair value of loans acquired ................................... $ -- 32,912 --
========== ====== =====
Deposits assumed ............................................... $ -- 33,316 --
========== ====== =====
See Accompanying Notes to Consolidated Financial Statements.
F-8
POINTE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AT DECEMBER 31, 2002 AND 2001 AND FOR THE YEARS ENDED
DECEMBER 31, 2002, 2001 AND 2000
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL. Pointe Financial Corporation (the "Holding Company") owns 100% of
Pointe Bank (the "Bank"), a state-chartered commercial bank and
Pointe Financial Services, Inc. On February 12, 2002, the Bank
incorporated a subsidiary, Will No-No, Inc., a Florida corporation,
formed for the purpose to own, maintain and dispose of the Bank's
foreclosed assets (collectively the "Company"). The Bank provides a
variety of community banking services to small and middle-market
businesses and individuals through its eleven banking offices
located in Broward, Miami-Dade and Palm Beach counties, Florida.
Pointe Financial Services, Inc. is an inactive subsidiary and Will
No-No, Inc. had minimal activity during the year ended December 31,
2002.
In 2000, the Company formed Pointe Capital, an investment banking
joint venture with First Integrated Capital Corporation, a
subsidiary of McGinn, Smith & Company, Inc., a related party. The
Company owns 50% of Pointe Capital. Pointe Capital offers investment
banking services to small and medium-size businesses in South
Florida. The Company accounts for its investment in Pointe Capital
using the equity method of accounting.
On April 20, 2001, the Company purchased four branch offices in
Miami-Dade County from another financial institution. The branches
had a combined deposit base of approximately $55.0 million. The
Company also acquired in this transaction consumer loans of
approximately $7.5 million and $25.4 million of participation
interests in existing commercial real estate loans in the seller's
portfolio. The excess of the fair value of liabilities assumed over
the fair value of tangible assets acquired in this transaction is
being amortized on a straight line basis over fifteen years.
BASIS OF PRESENTATION. The accompanying consolidated financial statements
include the accounts of the Holding Company and its subsidiaries.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
The accounting and reporting policies of the Company conform to
accounting principles generally accepted in the United States of
America and to general practices within the banking industry. The
following summarizes the more significant of these policies and
practices.
USE OF ESTIMATES. In preparing consolidated financial statements in
conformity with accounting principles generally accepted in the
United States of America, management is required to make estimates
and assumptions that affect the reported amounts of assets and
liabilities as of the date of the consolidated balance sheet and
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to significant change in
the near term relate to the determination of the allowance for loan
losses and deferred tax assets.
CASH AND CASH EQUIVALENTS. For purposes of the consolidated statements of
cash flows, cash and cash equivalents include cash and balances due
from banks and interest-bearing deposits with banks.
The Bank is required by law or regulation to maintain cash reserves
with the Federal Reserve Bank. The reserve balances at December 31,
2002 and 2001 were approximately $3.3 million and $2.3 million,
respectively.
(continued)
F-9
POINTE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED
SECURITIES. The Company may classify its securities as either trading,
held to maturity or available for sale. Trading securities are held
principally for resale and recorded at their fair values. Unrealized
gains and losses on trading securities are included immediately in
earnings. Held-to-maturity securities are those which the Company
has the positive intent and ability to hold to maturity and are
reported at amortized cost. Available-for-sale securities consist of
securities not classified as trading securities nor as
held-to-maturity securities. Unrealized holding gains and losses,
net of tax, on available-for-sale securities are excluded from
earnings and reported in other comprehensive income. Gains and
losses on the sale of available-for-sale securities are recorded on
the trade date and are determined using the specific-identification
method. Premiums and discounts on securities available for sale are
recognized in interest income using the interest method over the
period to maturity.
LOANS.Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are reported at
their outstanding principal adjusted for any charge-offs, the
allowance for loan losses, and any deferred fees or costs on
originated loans.
Loan origination fees and certain direct origination costs are
capitalized and recognized as an adjustment of the yield of the
related loan.
The accrual of interest on loans is discontinued at the time the
loan is ninety days delinquent unless the credit is
well-collateralized and in process of collection. In all cases,
loans are placed on nonaccrual or charged-off at an earlier date if
collection of principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on
nonaccrual or charged-off is reversed against interest income. The
interest on these loans is accounted for on the cash-basis or
cost-recovery method, until qualifying for return to accrual. Loans
are returned to accrual status when all the principal and interest
amounts contractually due are brought current and future payments
are reasonably assured.
LOANS HELD FOR SALE. Loans held for sale are carried at the lower of cost
or estimated fair value in the aggregate. Net unrealized losses are
recognized through a valuation allowance by charges to earnings. At
December 31, 2002 and 2001 the book value of loans held for sale
approximated fair value in the aggregate.
Loan origination fees and direct loan origination costs are deferred
until the related loan is sold, at which time the net fees are
included in the gain on sale of loans in the consolidated statements
of earnings.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established as
losses are estimated to have occurred through a provision for loan
losses charged to earnings. Loan losses are charged against the
allowance when management believes the uncollectibility of a loan
balance is confirmed. Subsequent recoveries, if any, are credited to
the allowance.
The allowance for loan losses is evaluated on a regular basis by
management and is based upon management's periodic review of the
collectibility of the loans in light of historical experience, the
nature and volume of the loan portfolio, adverse situations that may
affect the borrower's ability to repay, estimated value of any
underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that
are susceptible to significant revision as more information becomes
available.
(continued)
F-10
POINTE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED
ALLOWANCE FOR LOAN LOSSES, CONTINUED. A loan is considered impaired when,
based on current information and events, it is probable that the
Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of
the loan agreement. Factors considered by management in determining
impairment include payment status, collateral value, and the
probability of collecting scheduled principal and interest payments
when due. Loans that experience insignificant payment delays and
payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into consideration all of
the circumstances surrounding the loan and the borrower, including
the length of the delay, the reasons for the delay, the borrower's
prior payment record, and the amount of the shortfall in relation to
the principal and interest owed. Impairment is measured on a loan by
loan basis for commercial and commercial real estate loans by either
the present value of expected future cash flows discounted at the
loan's effective interest rate, the loan's obtainable market price,
or the fair value of the collateral if the loan is collateral
dependent.
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, the Company does not
separately identify individual consumer and residential loans for
impairment disclosures.
FORECLOSED REAL ESTATE. Real estate acquired through, or in lieu of,
foreclosure, is initially recorded at the lower of fair value or the
loan balance plus acquisition costs at the date of foreclosure. After
foreclosure, valuations are periodically performed by management and
the real estate is carried at the lower of carrying amount or fair
value less cost to sell. Revenue and expenses from operations and
changes in the valuation allowance are included in earnings.
PREMISES AND EQUIPMENT. Land is stated at cost. Building, furniture,
fixtures, equipment and leasehold improvements are carried at cost,
less accumulated depreciation and amortization computed using the
straight-line method over the shorter of the lease term or estimated
useful life of each type of asset.
TRANSFER OF FINANCIAL ASSETS. Transfers of financial assets are accounted
for as sales, when control over the assets has been surrendered.
Control over transferred assets is deemed to be surrendered when (1)
the assets have been isolated from the Company, (2) the transferee
obtains the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred
assets, and (3) the Company does not maintain effective control over
the transferred assets through an agreement to repurchase them
before their maturity.
INCOMETAXES. Deferred tax assets and liabilities are determined using the
liability (or balance sheet) method. Under this method, the net
deferred tax asset or liability is determined based on the tax
effects of the temporary differences between the book and tax basis
of the various balance sheet assets and liabilities and gives
current recognition to changes in tax rates and laws.
STOCK COMPENSATION PLANS. Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation, as amended
by SFAS 148, Accounting for Stock-Based Compensation Transition and
Disclosure (collectively, "SFAS No. 123") encourages all entities to
adopt a fair value based method of accounting for employee stock
compensation plans, whereby compensation cost is measured at the
grant date based on the value of the award and is recognized over
the service period, which is usually the vesting period. However, it
also allows an entity to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting
prescribed by Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, ("Opinion No. 25") whereby
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. Stock options
issued under the Company's stock option plan have no intrinsic value
at the grant date, and under Opinion No. 25 no compensation cost is
recognized for them. The Company has elected to continue with the
accounting methodology in Opinion No. 25 and, as a result, has
provided pro forma disclosures of net earnings and earnings per
share and other disclosures, as if the fair value based method of
accounting had been applied.
(continued)
F-11
POINTE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED
EARNINGS PER SHARE. Basic earnings per share is computed on the basis of
the weighted-average number of common shares outstanding. Diluted
earnings per share is computed based on the weighted-average number
of shares outstanding plus the effect of outstanding stock options,
computed using the treasury stock method.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS. In the ordinary course of
business the Company has entered into off-balance-sheet financial
instruments consisting of commitments to extend credit, unused lines
of credit and stand-by letters of credit. Such financial instruments
are recorded in the consolidated financial statements when they are
funded.
FAIR VALUES OF FINANCIAL INSTRUMENTS. The fair value of a financial
instrument is the current amount that would be exchanged between
willing parties, other than in a forced liquidation. Fair value is
best determined based upon quoted market prices. However, in many
instances, there are no quoted market prices for the Company's
various financial instruments. In cases where quoted market prices
are not available, fair values are based on estimates using present
value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. Accordingly, the
fair value estimates may not be realized in an immediate settlement
of the instrument. SFAS 107 excludes certain financial instruments
and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented may not
necessarily represent the underlying fair value of the Company. The
following methods and assumptions were used by the Company in
estimating fair values of financial instruments:
CASH AND CASH EQUIVALENTS. The carrying amounts of cash and cash
equivalents approximate their fair value.
SECURITIES. Fair values for securities available for sale are
based on quoted market prices, where available. If quoted market
prices are not available, fair values are based on quoted market
prices of comparable instruments. The carrying value of Federal
Home Loan Bank stock and Federal Reserve Bank stock approximates
fair value.
LOANS HELD FOR SALE. Fair values of loans held for sale are based
on commitments on hand from investors or prevailing market prices.
LOANS. For variable-rate loans that reprice frequently and have no
significant change in credit risk, fair values are based on
carrying values. Fair values for fixed-rate mortgage (e.g.
one-to-four family residential), commercial real estate and
commercial loans are estimated using discounted cash flow
analyses, using interest rates currently being offered for loans
with similar terms to borrowers of similar credit quality. Fair
values for nonperforming loans are estimated using discounted cash
flow analysis or underlying collateral values, where applicable.
ACCRUED INTEREST RECEIVABLE. Book value approximates fair value.
DEPOSIT LIABILITIES. The fair values disclosed for demand, NOW,
money market and savings deposits are, by definition, equal to the
amount payable on demand at the reporting date (that is, their
carrying amounts). Fair values for fixed-rate certificates of
deposit are estimated using a discounted cash flow calculation
that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly
maturities of time deposits.
BORROWED FUNDS. The carrying amounts of other borrowings
approximate their fair values. Fair values of advances from
Federal Home Loan Bank are estimated using discounted cash flow
analysis based on the Company's current incremental borrowing
rates for similar types of borrowings.
OFF-BALANCE-SHEET INSTRUMENTS. Fair values for off-balance-sheet
lending commitments are based on fees currently charged to enter
into similar agreements, taking into account the remaining terms
of the agreements and the counterparties' credit standing.
(continued)
F-12
POINTE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED ADVERTISING. The Company expenses all advertising as incurred.
RECENT PRONOUNCEMENTS. In November 2002, the FASB issued FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others" ("FIN 45"), which expands previously issued
accounting guidance and disclosure requirements for certain
guarantees. FIN 45 requires the Company to recognize an initial
liability for the fair value of an obligation assumed by issuing a
guarantee. The provision for initial recognition and measurement of
the liability will be applied on a prospective basis to guarantees
issued or modified after December 31, 2002. The adoption of FIN 45
is not expected to materially affect the consolidated financial
statements.
(2) SECURITIES AVAILABLE FOR SALE
Securities have been classified according to management's intent. The
carrying amount of securities and their approximate fair values are
summarized as follows (in thousands):
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------- ------- ------- -------
AT DECEMBER 31, 2002:
U.S. Treasury securities ........ $ 6,848 427 -- 7,275
Mortgage-backed securities ...... 3,085 66 -- 3,151
U.S. Government agency securities 40,015 663 (2) 40,676
Tax-exempt securities ........... 10,241 321 (17) 10,545
Preferred stock ................. 1,000 58 -- 1,058
Other ........................... 325 -- -- 325
------- ------- ------- -------
Total ........................ $61,514 1,535 (19) 63,030
======= ======= ======= =======
AT DECEMBER 31, 2001:
U.S. Treasury securities ........ 506 11 -- 517
Mortgage-backed securities ...... 17,313 242 (9) 17,546
U.S. Government agency securities 25,035 83 (113) 25,005
Tax-exempt securities ........... 9,082 -- (206) 8,876
Preferred stock ................. 2,000 -- (36) 1,964
Other ........................... 325 -- -- 325
------- ------- ------- -------
Total ........................ $54,261 336 (364) 54,233
======= ======= ======= =======
At December 31, 2002 and 2001, approximately $585,000 and $517,000
respectively, of securities were pledged for the Company's treasury
tax and loan account, approximately $16,651,000 and $28,046,000,
respectively, were pledged as collateral for investment repurchase
agreements and approximately $8,023,000 and $13,566,000,
respectively, were pledged for public deposits.
(continued)
F-13
POINTE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(2) SECURITIES AVAILABLE FOR SALE, CONTINUED The following summarizes sales of
securities (in thousands):
YEAR ENDED DECEMBER 31,
---------------------------------
2002 2001 2000
---- ---- ----
Proceeds from sale of securities................................... $ 38,020 59,455 8,955
========= ====== =====
Gross gains from sale of securities................................ 440 962 12
Gross losses from sale of securities............................... (98) (221) (135)
-------- ------ -----
Net gains (losses)................................................. $ 342 741 (123)
========= ====== =====
The scheduled maturities of securities available for sale at December 31,
2002 are as follows (in thousands):
AMORTIZED FAIR
COST VALUE
---- -----
Due from one to five years.................................................... $ 43,678 44,768
Due from five to ten years.................................................... 3,510 3,508
Due in over ten years......................................................... 10,241 10,545
Mortgage-backed securities.................................................... 3,085 3,151
Preferred stock............................................................... 1,000 1,058
-------- ------
$ 61,514 63,030
======== ======
(3) LOANS
The components of loans are summarized as follows (in thousands):
AT DECEMBER 31,
-----------------------
2002 2001
---- ----
Residential real estate................................................. $ 78,316 83,834
Commercial real estate.................................................. 54,481 58,711
Commercial.............................................................. 57,090 60,003
Consumer................................................................ 28,897 23,719
---------- -------
Total loans......................................................... 218,784 226,267
Deduct:
Net deferred loan fees.............................................. (425) (481)
Allowance for loan losses ......................................... (3,519) (2,407)
---------- -------
$ 214,840 223,379
========= =======
(continued)
F-14
POINTE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(3) LOANS, CONTINUED
An analysis of the change in the allowance for loan losses follows (in
thousands):
YEAR ENDED DECEMBER 31,
---------------------------------
2002 2001 2000
---- ---- ----
Balance at beginning of year.................................... $ 2,407 1,792 1,331
------- ----- -----
Loans charged-off............................................... (425) (1,150) (239)
Recoveries...................................................... 726 4 15
------- ----- -----
Net loans recovered (charged-off)........................... 301 (1,146) (224)
------- ----- -----
Provision for loan losses....................................... 811 1,296 685
Reserve on loans received in acquisition of branches............ -- 465 --
------- ----- -----
Balance at end of year.......................................... $ 3,519 2,407 1,792
======= ===== =====
The following summarizes the amount of impaired loans (in thousands):
AT DECEMBER 31,
----------------
2002 2001
---- ----
Loans identified as impaired:
Gross loans with no related allowance for losses.............................. $ -- --
Gross loans with related allowance for losses recorded........................ -- 150
Less: Allowances on these loans.............................................. -- (150)
----- ----
Net investment in impaired loans.................................................. $ -- --
===== ====
The average net investment in impaired loans and interest income recognized
and received on impaired loans is as follows (in thousands):
YEAR ENDED DECEMBER 31,
---------------------------
2002 2001 2000
---- ---- ----
Average investment in impaired loans.................................. $ -- 474 109
===== === ===
Interest income recognized on impaired loans.......................... $ -- 13 --
===== === ===
Interest income received on impaired loans............................ $ -- 13 --
===== === ===
No additional funds are committed to be advanced in connection with
impaired loans.
Nonaccrual and past due loans were as follows (in thousands):
AT DECEMBER 31,
----------------
2002 2001
---- ----
Nonaccrual loans.............................................................. $ 213 1,027
Past due ninety days or more, but still accruing.............................. -- 24
----- -----
$ 213 1,051
===== =====
(continued)
F-15
POINTE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(4) PREMISES AND EQUIPMENT
Premises and equipment is summarized as follows (in thousands):
AT DECEMBER 31,
--------------------
2002 2001
---- ----
Land....................................................................... $ 964 964
Building................................................................... 913 913
Leasehold improvements..................................................... 1,602 1,100
Furniture, fixtures and equipment.......................................... 4,024 3,650
Automobile................................................................. 22 22
Construction in process.................................................... -- 76
------- -----
Total, at cost........................................................... 7,525 6,725
Less accumulated depreciation and amortization............................. (3,907) (3,260)
------- -----
Net book value........................................................... $ 3,618 3,465
======= =====
The Company leases nine of its banking offices. The lease terms range up to
ten years. Some of the leases contain escalation clauses providing for
increased rent expense based primarily on increases in the average
consumer index or percentages stipulated in the lease agreements.
Rental expense was approximately $1,304,000, $947,000 and $534,000 for
the years ended December 31, 2002, 2001 and 2000, respectively.
Approximate future minimum annual rental payments under noncancellable
leases are as follows (in thousands):
YEAR ENDING
DECEMBER 31, AMOUNT
------------ ------
2003................................................................................ $ 1,388
2004................................................................................ 1,249
2005................................................................................ 1,188
2006................................................................................ 1,126
2007................................................................................ 1,115
Thereafter.......................................................................... 3,283
--------
Total............................................................................... $ 9,349
========
(5) DEPOSITS
The aggregate amount of jumbo time deposits with a minimum denomination of
$100,000, was approximately $29.7 million and $42.5 million at December
31, 2002 and 2001, respectively.
At December 31, 2002, the scheduled maturities of all time deposits are as
follows (in thousands):
YEAR ENDING
DECEMBER 31, AMOUNT
------------ ------
2003................................................................................ $ 68,201
2004................................................................................ 14,859
2005................................................................................ 1,913
2006................................................................................ 1,464
2007 and thereafter................................................................. 3,157
--------
$ 89,594
========
(6) OTHER BORROWINGS
The Company enters into investment repurchase agreements that require the
Company to pledge securities as collateral for the balance in the
accounts. At December 31, 2002 and 2001 the balance totaled
approximately $13.0 million and $30.1 million, respectively and the
Company pledged securities as collateral for these agreements with a
carrying value of approximately $16.7 million and $28.0 million,
respectively.
(continued)
F-16
POINTE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(7) ADVANCES FROM FEDERAL HOME LOAN BANK
Maturities and interest rates on advances from the Federal Home Loan Bank
("FHLB") were as follows (dollars in thousands):
MATURING IN AT DECEMBER 31,
YEAR ENDING INTEREST -----------------
DECEMBER 31, RATE 2002 2001
------------ ---- ---- ----
2003....................................... 4.13 - 5.33% $ 15,000 15,000
2005....................................... 4.51 - 6.49% 15,000 15,000
2008....................................... 5.09% 5,000 5,000
2010....................................... 5.77% - 6.19% 10,000 10,000
-------- ------
Total.................................. $ 45,000 45,000
======== ======
At December 31, 2002, the FHLB has the option to call $20.0 million of the
above advances at an earlier date than the maturity date. At December
31, 2002 and 2001, pursuant to the collateral agreement with the FHLB,
advances are collateralized by the Company's FHLB stock and a blanket
lien on the Company's qualifying first mortgage, one-to-four family
residential loans.
In 2000, the Company successfully completed the sale of a $5.0 million
Federal Home Loan Bank advance. The Company recorded a pre-tax gain of
$125,000 on the sale of the advance. This gain is reported as an
extraordinary item - gain on extinguishment of debt, net of tax of
$47,000.
(8) CONTINGENCIES
Various legal claims arise from time to time in the normal course of
business which, in the opinion of management, will have no material
effect on the Company's consolidated financial statements.
(9) FINANCIAL INSTRUMENTS
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments are commitments to extend
credit, available lines of credit and standby letters of credit and may
involve, to varying degrees, elements of credit and interest-rate risk
in excess of the amount recognized in the consolidated balance sheet.
The contract amounts of these instruments reflect the extent of
involvement the Company has in these financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend
credit and standby letters of credit is represented by the contractual
amount of those instruments. The Company uses the same credit policies
in making commitments as it does for on-balance-sheet instruments.
(continued)
F-17
POINTE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(9) FINANCIAL INSTRUMENTS, CONTINUED
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since some of the commitments
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The
Company evaluates each customer's credit worthiness on a case-by-case
basis. The amount of collateral obtained if deemed necessary by the
Company upon extension of credit is based on management's credit
evaluation of the counterparty.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. The credit
risk involved in issuing letters of credit is essentially the same as
that involved in extending loans to customers.
The estimated fair values of the Company's financial instruments were as
follows (in thousands):
AT DECEMBER 31, 2002 AT DECEMBER 31, 2001
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -----
Financial assets:
Cash and cash equivalents........................... $ 35,648 35,648 40,655 40,655
Securities available for sale..................................... 63,030 63,030 54,233 54,233
Loans, net.......................................... 214,840 219,925 223,379 230,811
Loans held for sale............................................... 150 150 446 446
Accrued interest receivable......................... 1,983 1,983 1,779 1,779
Other securities ................................................ 2,979 2,979 3,379 3,379
Financial liabilities:
Deposit liabilities................................. 233,501 234,638 225,825 225,827
Other borrowings ................................................ 12,963 12,963 30,094 30,094
Advances from Federal Home Loan Bank................ 45,000 47,842 45,000 45,095
A summary of the notional amounts of the Company's financial instruments,
which approximate fair value, with off- balance sheet
risk at December 31, 2002 follows (in thousands):
NOTIONAL CARRYING FAIR
AMOUNT AMOUNT VALUE
------ ------ -----
Unfunded loan commitments at fixed rates......................... $ 2,272 -- --
========= ====== ======
Unfunded loan commitments at variable rates...................... $ 6,045 -- --
========= ====== ======
Available lines of credit........................................ $ 29,173 -- --
========= ====== ======
Standby letters of credit........................................ $ 1,477 -- --
========= ====== ======
(continued)
F-18
POINTE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(10) CREDIT RISK
The Company grants a majority of its loans to borrowers primarily in Palm
Beach, Broward and Miami-Dade counties, Florida. Although the Company
has a diversified loan portfolio, a significant portion of its
borrowers' ability to honor their contracts is dependent upon the
economy of these counties in Florida. The contractual amounts of
credit-related financial instruments such as commitments to extend
credit and standby letters of credit represent the amounts of potential
accounting loss should the contract be fully drawn upon, the customer
default and the value of any existing collateral become worthless.
(11) INCOME TAXES
Allocation of Federal and state income taxes between current and deferred
portions is as follows (in thousands):
YEAR ENDED DECEMBER 31, 2002: CURRENT DEFERRED TOTAL
----------------------------- ------- -------- -----
Federal....................................................... $ 1,001 (307) 694
State......................................................... 187 (52) 135
------- ----- ----
Total..................................................... $ 1,188 (359) 829
======= ===== ====
YEAR ENDED DECEMBER 31, 2001:
-----------------------------
Federal....................................................... 591 92 683
State......................................................... 115 16 131
------- ----- ----
Total..................................................... $ 706 108 814
======= ===== ====
YEAR ENDED DECEMBER 31, 2000:
-----------------------------
Federal....................................................... 903 (207) 696
State......................................................... 161 (36) 125
------- ----- ----
Total..................................................... $ 1,064 (243) 821
======= ===== ====
The reasons for the differences between the statutory Federal income tax
rate and the effective tax rate are summarized as follows:
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001 2000
---- ---- ----
Tax provision at statutory Federal rate............................ 34% 34% 34%
Increase (decrease) in taxes resulting from:
State taxes, net of Federal tax benefit........................ 3 3 3
Tax-exempt income, net of disallowed interest expense.......... (5) (4) (4)
-- -- --
Effective tax rates ............................................... 32% 33% 33%
== == ==
(continued)
F-19
POINTE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(11) INCOME TAXES, CONTINUED
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities relate to the
following (in thousands):
AT DECEMBER 31,
-------------------
2002 2001
---- ----
Deferred tax assets:
Allowance for loan losses................................................ $ 791 489
Accumulated depreciation................................................. 140 172
Stock incentive plan .................................................... 28 20
Interest income from impaired loans...................................... 3 24
Other.................................................................... 7 --
----- ---
Total gross deferred tax assets....................................... 969 705
----- ---
Deferred tax liabilities:
Intangible asset......................................................... 115 134
Accrued dividends........................................................ 12 17
Deferred loan fees....................................................... -- 70
Other.................................................................... -- 1
----- ---
Total gross deferred tax liabilities.................................. 127 222
----- ---
Net deferred tax assets............................................... $ 842 483
===== ===
(12) RELATED PARTIES
The Company has entered into transactions with officers, directors and
principal stockholders in the ordinary course of business. Loans to
such related parties amounted to approximately $2,287,000 and
$7,758,000 at December 31, 2002 and 2001, respectively. During the year
ended December 31, 2002, no principal additions occurred and total
principal payments were approximately $5,471,000. Deposits from such
related parties at December 31, 2002 and 2001 were approximately
$7,353,000 and $13,409,000, respectively.
(13) PROFIT SHARING PLAN
The Company sponsors a 401(k) profit sharing plan (the "Plan"). The Plan is
available to all employees electing to participate after meeting
certain length-of-service requirements. The Company's contributions to
the Plan are discretionary and are determined annually. Expense
relating to the Company's contributions to the Plan included in the
accompanying consolidated financial statements was $79,000, $58,000 and
$53,000 for 2002, 2001 and 2000, respectively.
(14) DEFERRED COMPENSATION PLANS
The Company has a deferred compensation plan for the Board of Directors.
The plan permits the directors to receive common stock of the Company
in lieu of cash as payment of their annual retainer fee for being
directors and provides the directors the opportunity to defer portions
of these retainers. At December 31, 2002, the total number of remaining
shares available under this plan is 83,071. For the year ended December
31, 2002, all fees were paid in cash. For the years ended December 31,
2001 and 2000, a total of 8,532 and 10,219 shares, respectively, were
paid in lieu of cash of $96,000 and $92,000, respectively to the
directors.
(continued)
F-20
POINTE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(15) STOCK AWARD PLANS
Certain key employees and directors of the Company have options to purchase
shares of the Company's common stock under a nonqualified stock option
plan adopted in 1994. The Company's Board of Directors in 2001
determined that all new options would be granted under the 1998 Plan.
In 1998, a new Incentive Compensation and Stock Award Plan was adopted
under which both qualified and nonqualified options can be granted and
stock can be awarded to employees as compensation. A total of 400,000
options or shares can be granted to directors and employees of the
Company under this plan. As of December 31, 2002, 93,443 options or
shares remain available for grant. A summary of stock option
transactions follows ($ in thousands, except per share amounts):
RANGE
OF PER WEIGHTED-
SHARE AVERAGE AGGREGATE
NUMBER OF OPTION PER SHARE OPTION
SHARES PRICE PRICE PRICE
------ ----- ----- -----
Outstanding at December 31, 1999.................. 292,162 $ 9.55-15.38 10.39 3,036
Options granted................................... 89,352 8.62-9.50 9.02 806
Options forfeited................................. (46,313) 9.00-15.38 10.56 (490)
------- ----
Outstanding at December 31, 2000.................. 335,201 8.62-15.38 10.00 3,352
Options granted................................... 85,767 10.50-11.80 10.67 915
Options exercised................................. (7,337) 9.00-9.75 9.57 (70)
Options forfeited................................. (54,579) 9.00-15.38 10.65 (581)
------- ----
Outstanding at December 31, 2001.................. 359,052 8.62-15.38 10.07 3,616
Options granted................................... 113,334 11.95 - 14.75 12.47 1,413
Options exercised................................. (129,540) 9.00 - 11.25 9.61 (1,245)
Options forfeited................................. (31,319) 9.00 - 15.38 11.22 (351)
------- ----
Outstanding at December 31, 2002.................. 311,527 $ 8.62 - 15.38 11.02 3,433
======= =============== ===== =====
(continued)
F-21
POINTE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(15) STOCK AWARD PLANS, CONTINUED
The weighted-average remaining contractual life of the outstanding stock
options at December 31, 2002, 2001 and 2000 was seventy-eight months,
fifty-six months and sixty-two months, respectively.
These options are exercisable as follows:
NUMBER OF WEIGHTED-AVERAGE
YEAR ENDING SHARES EXERCISE PRICE
----------- ------ --------------
Currently.............................................. 162,287 $ 9.65
2003 .................................................. 67,075 10.98
2004 .................................................. 50,479 11.64
2005 .................................................. 31,686 12.27
-------
311,527 $ 11.02
======= =======
The Company accounts for their stock option plans under the recognition and
measurement principles of Opinion No. 25. No stock-based employee
compensation cost is reflected in net earnings, as all options granted
under those plans had an exercise price equal to the market value of
the underlying common stock on the date of grant. The following table
illustrates the effect on net earnings and earnings per share if the
Company had applied the fair value recognition provisions of SFAS No.
123 to stock-based employee compensation ($ in thousands, except per
share amounts).
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001 2000
---- ---- ----
Net earnings, as reported.................................... $ 1,764 1,668 1,719
Deduct: Total stock-based employee compensation
determined under the fair value based method for all
awards................................................. 91 61 119
------- ----- -----
Pro forma net earnings....................................... $ 1,673 1,607 1,600
======= ===== =====
Basic earnings per share:
As reported............................................ $ .84 .82 .85
======= ===== =====
Pro forma ............................................. $ .79 .79 .79
======= ===== =====
Diluted earnings per share:
As reported............................................ $ .82 .81 .85
======= ===== =====
Pro forma.............................................. $ .78 .78 .79
======= ===== =====
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions:
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001 2000
---- ---- ----
Risk-free interest rate........................................... 5.0% 5.0% 5.5%
Dividend yield.................................................... 4.0% 4.0% 4.0%
Expected volatility............................................... 19.6% 26.6% 15.7%
Expected life in years ........................................ 5 or 10 5 or 10 5 or 10
Weighted-average grant date fair value of options
issued during the year...................................... $ 3.14 1.12 .93
====== ==== ===
(continued)
F-22
POINTE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(15) STOCK AWARD PLANS, CONTINUED
Also beginning in April 1999, the Company awarded 6,935 shares of
restricted common stock to employees under the 1998 Incentive
Compensation and Stock Award Plan. During the years ended December 31,
2002 and 2000, no shares were awarded. During the year ended December
31, 2001, 10,659 shares were awarded. Four years following the date of
grant these restricted stock awards become entirely vested. The Company
is amortizing these restricted stock awards into salaries and employee
benefits over the four-year period. From the date awarded, the
employees are entitled to dividends paid on common stock and may vote
these shares. During the years ended December 31, 2002, 2001 and 2000,
3,167 shares, 460 shares and 1,010 shares, respectively were forfeited
due to employee termination.
(16) REGULATORY MATTERS
Federal and state banking regulations place certain restrictions on
dividends paid and loans or advances made by the Bank to the Holding
Company.
TheCompany (on a consolidated basis) and the Bank are subject to various
regulatory capital requirements administered by the Federal and state
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 Company's and the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of their assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The capital amounts and classification
are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors. Prompt corrective
action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and
percentages (set forth in the following table) of total and Tier 1
capital (as defined in the regulations) to risk-weighted assets (as
defined) and of Tier 1 capital (as defined) to average assets (as
defined). Management believes, as of December 31, 2002, that the
Company and the Bank met all capital adequacy requirements to which
they are subject.
(continued)
F-23
POINTE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(16) REGULATORY MATTERS, CONTINUED
As of December 31, 2002, the most recent notification from the regulatory
authorities categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as
well capitalized, an institution must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage percentages as set
forth in the following tables. There are no conditions or events since
that notification that management believes have changed the Bank's
category. The Company and the Bank's actual capital amounts and
percentages as of December 31, 2002 and 2001 are also presented in the
table (dollars in thousands).
MINIMUM
TO BE WELL
CAPITALIZED UNDER
MINIMUM CAPITAL PROMPT CORRECTIVE
ACTUAL REQUIREMENT ACTION PROVISIONS
------------------- -------------------- ---------------------
AMOUNT % AMOUNT % AMOUNT %
------ ----- ------ ---- ------ ----
AS OF DECEMBER 31, 2002:
Total capital to Risk-
Weighted assets:
Consolidated.......... $ 30,919 14.13% $ 17,500 8.00% N/A N/A
Bank.................. 28,007 12.85 17,431 8.00 $ 21,789 10.00%
Tier I Capital to Risk-
Weighted Assets:
Consolidated.......... 28,175 12.88 8,750 4.00 N/A N/A
Bank.................. 25,273 11.60 8,715 4.00 13,073 6.00
Tier I Capital
to Average Assets
Consolidated.......... 28,175 8.73 12,903 4.00 N/A N/A
Bank.................. 25,273 7.86 12,858 4.00 16,072 5.00
AS OF DECEMBER 31, 2001:
Total capital to Risk-
Weighted assets:
Consolidated.......... 27,514 12.28 17,926 8.00 N/A N/A
Bank.................. 25,202 11.30 17,841 8.00 22,301 10.00
Tier I Capital to Risk-
Weighted Assets:
Consolidated.......... 25,107 11.20 8,963 4.00 N/A N/A
Bank.................. 22,795 10.22 8,921 4.00 13,381 6.00
Tier I Capital
to Average Assets
Consolidated.......... 25,107 8.33 12,058 4.00 N/A N/A
Bank.................. 22,795 7.58 12,023 4.00 15,028 5.00
(continued)
F-24
POINTE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(17) STOCKHOLDERS' EQUITY
In 1999, the Company's Board of Directors approved a stock repurchase
program. The program was initially allocated $3.0 million and in the
year 2000, the Board authorized up to an additional $3.0 million to be
used to repurchase Company stock. As of December 31, 2002, the Company
has repurchased 297,000 shares in treasury stock at a net cost of
approximately $3.0 million.
The Company's ability to pay cash dividends on its common stock is limited
to the amount of dividends it could receive from the Bank plus its own
cash and cash equivalents, which amounted to $1,476,000 at December 31,
2002. The amount of dividends the Bank is permitted to pay to the
Company is restricted to 100% of its calendar year-to-date net earnings
plus retained earnings for the preceding two years. Twenty percent of
the net earnings in the preceding two-year period may not be paid in
dividends, but must be retained to increase capital surplus until such
surplus equals the amount of the Bank's common stock then outstanding.
In addition, no bank may pay a dividend at any time that net earnings
in the current year when combined with retained earnings from the
preceding two years produce a loss. Under Florida law, a Florida
chartered commercial bank may not pay cash dividends that would cause
the Bank's capital to fall below the minimum amount required by Federal
or Florida law.
(18) EARNINGS PER SHARE
Basic earnings per share represents earnings available to common
stockholders divided by the weighted-average number of common shares
outstanding during the year. Diluted earnings per share reflects
additional common shares that would have been outstanding if dilutive
potential common shares had been issued. Potential common shares that
may be issued by the Company relate solely to outstanding stock
options, and are determined using the treasury stock method. Earnings
per common share have been computed based on the following:
YEAR ENDED DECEMBER 31,
----------------------------
2002 2001 2000
---- ---- ----
Weighted-average number of common shares outstanding.............. 2,111,301 2,037,150 2,019,567
Effect of dilutive options........................................ 37,358 27,178 65
--------- --------- ---------
Weighted-average number of common shares outstanding used
to calculate diluted earnings per common share................ 2,148,659 2,064,328 2,019,632
========= ========= =========
(continued)
F-25
POINTE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(19) COMPREHENSIVE INCOME
TheCompany follows SFAS 130, Reporting Comprehensive Income. Accounting
principles generally require that recognized revenue, expenses, gains
and losses be included in net earnings. 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 consolidated balance sheet, such items along
with net earnings, are components of comprehensive income. The
components of other comprehensive income and related tax effects are as
follows (in thousands):
BEFORE TAX AFTER
TAX EFFECT TAX
--- ------ ---
YEAR ENDED DECEMBER 31, 2002:
Unrealized holding gains.............................................. $ 1,886 (716) 1,170
Reclassification adjustment for gains included
in net earnings..................................................... (342) 129 (213)
------- ---- ----
$ 1,544 (587) (957)
======= ==== ====
YEAR ENDED DECEMBER 31, 2001:
Unrealized holding gains.............................................. 1,312 (494) 818
Reclassification adjustment for gains included
in net earnings..................................................... (741) 279 (462)
------- ---- ----
$ 571 (215) 356
======== ==== ===
YEAR ENDED DECEMBER 31, 2000:
Unrealized holding gains.............................................. 1,045 (393) 652
Reclassification adjustment for losses included
in net earnings..................................................... 123 (46) 77
------- ---- ----
$ 1,168 (439) 729
======= ==== ===
(continued)
F-26
POINTE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(20) INVESTMENT IN JOINT VENTURE
The Company is a joint venture partner in Pointe Capital, which was formed
in 2000 and is accounted for using the equity method of accounting. The
following is a summary of condensed financial information pertaining to
this joint venture (in thousands).
AT DECEMBER 31,
--------------------
2002 2001
---- ----
Total assets............................................................ $ 377 707
===== ===
Total liabilities....................................................... 11 1
----- ---
Capital - the Company................................................... 183 353
Capital - other ........................................................ 183 353
----- ---
Total equity............................................................ 366 706
----- ---
Total liabilities and equity............................................ $ 377 707
===== ===
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------
2002 2001 2000
---- ---- ----
Total revenues............................................. $ 39 202 235
Total expenses............................................. (380) (499) (231)
----- --- ---
Net (loss) earnings........................................ $(341) (297) 4
===== ==== ===
During the years ended December 31, 2002, 2001 and 2000, the Company
recognized losses of $171,000, $149,000 and earnings of $2,000,
respectively related to its investment in this joint venture, which
represents its distributive share of the joint ventures' net losses and
earnings above. The Company's investment in this joint venture is
included in other assets in the consolidated balance sheets.
(continued)
F-27
POINTE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(21) HOLDING COMPANY FINANCIAL INFORMATION
The Holding Company's unconsolidated financial information is as follows
(in thousands):
CONDENSED BALANCE SHEETS
AT DECEMBER 31,
-------------------
2002 2001
---- ----
ASSETS
Cash and cash equivalents...................................................... $ 1,476 1,246
Investment in subsidiaries..................................................... 29,436 26,243
Other assets................................................................... 1,422 1,062
-------- ------
Total assets............................................................... $ 32,334 28,551
======== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities.............................................................. 3 4
Stockholders' equity.......................................................... 32,331 28,547
-------- ------
Total liabilities and stockholders' equity................................. $ 32,334 28,551
======== ======
CONDENSED STATEMENTS OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
2002 2001 2000
------- ----- -----
Revenues.......................................................... $ 13 13 2
Expenses.......................................................... (485) (467) (124)
------- ----- -----
Loss before earnings of subsidiaries.......................... (472) (454) (122)
Earnings of subsidiaries...................................... 2,236 2,122 1,841
------- ----- -----
Net earnings.................................................. $ 1,764 1,668 1,719
======= ===== =====
(continued)
F-28
POINTE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(21) HOLDING COMPANY FINANCIAL INFORMATION, CONTINUED
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
2002 2001 2000
------- ----- -----
Cash flows from operating activities:
Net earnings ...................................................... $ 1,764 1,668 1,719
Adjustments to reconcile net earnings to net cash
used in operating activities:
Undistributed earnings of subsidiaries......................... (2,236) (2,122) (1,841)
Common stock issued as compensation for services............... -- 96 92
Shares committed to participants in incentive stock plan....... 19 34 11
(Increase) decrease in other assets............................ (142) 203 (1,089)
(Decrease) increase in other liabilities....................... (1) -- 2
------- ----- -----
Net cash used in operating activities....................... (596) (121) (1,106)
------- ----- -----
Cash flows from financing activities:
Cash dividends paid on common stock................................ (421) (407) (404)
Proceeds from exercise of stock options............................ 1,247 70 --
------- ----- -----
Net cash provided by (used in) financing activities......... 826 (337) (404)
------- ----- -----
Net increase (decrease) in cash and cash equivalents.................... 230 (458) (1,510)
Cash and cash equivalents at beginning of the year...................... 1,246 1,704 3,214
------- ----- -----
Cash and cash equivalents at end of year................................ $ 1,476 1,246 1,704
======= ===== =====
Noncash transactions:
Change in investment in subsidiaries due to accumulated other
comprehensive income (loss), net change in unrealized loss
on securities available for sale............................... $ 957 356 729
======= ===== =====
Tax benefit related to exercise of common stock options............ $ 218 -- --
======= ===== =====
Activity in stock incentive plan, net.............................. $ 52 (75) 21
======= ===== =====
F-29
INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTARY INFORMATION
Board of Directors
Pointe Financial Corporation
Boca Raton, Florida
We have audited the accompanying consolidated financial statements of Pointe
Financial Corporation and Subsidiaries at and for the year ended December 31,
2002, and have issued our report thereon dated January 17, 2003. Our audit was
conducted for the purpose of forming an opinion on the basic consolidated
financial statements taken as a whole. The consolidating information in the
accompanying schedules is presented for purposes of additional analysis of the
consolidated financial statements rather than to present the financial position
and results of operations of the individual companies. The consolidating
information has been subjected to the auditing procedures applied in the audit
of the consolidated financial statements and, in our opinion, is fairly stated
in all material respects in relation to the consolidated financial statements
taken as a whole.
HACKER, JOHNSON & SMITH PA
Fort Lauderdale, Florida
January 17, 2003
F-30
POINTE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2002
(DOLLARS IN THOUSANDS)
POINTE POINTE
FINANCIAL POINTE FINANCIAL CONSOLIDATED
CORPORATION BANK SERVICES ELIMINATIONS TOTAL
----------- ---- -------- ------------ -----
ASSETS
Cash and cash equivalents ........................... $ 1,476 35,648 7 (1,483) 35,648
Securities available for sale ....................... -- 63,030 -- -- 63,030
Loans, net .......................................... -- 214,840 -- -- 214,840
Loans held for sale ................................. -- 150 -- -- 150
Accrued interest receivable ......................... -- 1,983 -- -- 1,983
Premises and equipment, net ......................... -- 3,618 -- -- 3,618
Other securities .................................... -- 2,979 -- -- 2,979
Foreclosed real estate .............................. -- 117 -- -- 117
Investment in subsidiaries .......................... 29,436 -- -- (29,436) --
Branch acquisition intangible asset ................. -- 3,216 -- -- 3,216
Deferred income tax asset ........................... 29 813 -- -- 842
Other assets ........................................ 1,393 (509) -- -- 884
-------- -------- -------- -------- --------
Total ...................................... $ 32,334 325,885 7 (30,919) 327,307
======== ======= ======== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits ........................................ -- 234,984 -- (1,483) 233,501
Official checks ................................. -- 1,919 -- -- 1,919
Other borrowings ................................ -- 12,963 -- -- 12,963
Advances from Federal Home Loan Bank ............ -- 45,000 -- -- 45,000
Accrued interest payable ........................ -- 594 -- -- 594
Advance payments by borrowers for taxes
and insurance .............................. -- 230 -- -- 230
Other liabilities ............................... 3 766 -- -- 769
-------- -------- -------- -------- --------
Total liabilities .......................... 3 296,456 -- (1,483) 294,976
-------- -------- -------- -------- --------
Stockholders' equity:
Common stock .................................... 25 306 1 (307) 25
Additional paid-in capital ...................... 25,540 15,662 220 (15,882) 25,540
Retained earnings (accumulated deficit) ......... 8,878 12,521 (214) (12,307) 8,878
Accumulated other comprehensive income .......... 940 940 -- (940) 940
Treasury stock .................................. (3,000) -- -- -- (3,000)
Stock incentive plan ............................ (52) -- -- -- (52)
-------- -------- -------- -------- --------
Total stockholders' equity ................. 32,331 29,429 7 (29,436) 32,331
-------- -------- -------- -------- --------
Total ...................................... $ 32,334 325,885 7 (30,919) 327,307
======== ======== ======== ======== ========
(continued)
F-31
POINTE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF EARNINGS
YEAR ENDED DECEMBER 31, 2002
(DOLLARS IN THOUSANDS)
POINTE POINTE
FINANCIAL POINTE FINANCIAL CONSOLIDATED
CORPORATION BANK SERVICES ELIMINATIONS TOTAL
----------- ---- -------- ------------ -----
Interest income:
Loans ......................................... $ -- 16,735 -- -- 16,735
Securities available for sale ................. -- 3,107 -- -- 3,107
Other interest-earning assets ................. 12 376 -- -- 388
------- ------- ------- ------- -------
Total interest income .................... 12 20,218 -- -- 20,230
------- ------- ------- ------- -------
Interest expense:
Deposits ...................................... -- 4,875 -- -- 4,875
Borrowings .................................... -- 2,708 -- -- 2,708
------- ------- ------- ------- -------
Total interest expense ................... -- 7,583 -- -- 7,583
------- ------- ------- ------- -------
Net interest income ............................... 12 12,635 -- -- 12,647
Provision for loan losses ................ -- 811 -- -- 811
------- ------- ------- ------- -------
Net interest income after provision for loan losses 12 11,824 -- -- 11,836
------- ------- ------- ------- -------
Noninterest income:
Service charges on deposit accounts ........... -- 1,716 -- -- 1,716
Loan servicing fees ........................... -- 30 -- -- 30
Net realized gain on sale of securities ....... -- 342 -- -- 342
Earnings of subsidiaries ...................... 2,236 -- -- (2,236) --
Loan correspondent fees ....................... -- 254 -- -- 254
Other ......................................... 1 540 -- -- 541
------- ------- ------- ------- -------
Total noninterest income ................. 2,237 2,882 -- (2,236) 2,883
------- ------- ------- ------- -------
Noninterest expenses:
Salaries and employee benefits ................ 420 5,746 -- -- 6,166
Occupancy expense ............................. -- 2,395 -- -- 2,395
Advertising and promotion ..................... 48 327 -- -- 375
Professional fees ............................. 51 249 -- -- 300
Data processing ............................... 12 681 -- -- 693
Amortization of intangible asset .............. -- 245 -- -- 245
Other ......................................... 243 1,709 -- -- 1,952
------- ------- ------- ------- -------
Total noninterest expenses ............... 774 11,352 -- -- 12,126
------- ------- ------- ------- -------
Earnings before income taxes ............. 1,475 3,354 -- (2,236) 2,593
Income taxes (benefit) ........................ (289) 1,118 -- -- 829
------- ------- ------- ------- -------
Net earnings ........................ $ 1,764 2,236 -- (2,236) 1,764
======= ======= ======= ======= =======
F-32
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The information contained under the caption "Election of Directors" to appear in
the Company's definitive proxy statement relating to the Company's 2003 Annual
Meeting of Stockholders, which definitive proxy statement will be filed with the
Securities and Exchange Commission not later than 120 days after the end of the
Company's fiscal year covered by this report on Form 10-K (hereinafter referred
to as the "Annual Meeting Proxy Statement"), is incorporated herein by
reference. Information concerning the executive officers of the Company is
included in Part III of this Report on Form 10-K.
The following table sets forth information concerning the executive officers of
the Company and the Bank.
NAME POSITION AGE
- ---- -------- ---
R. Carl Palmer, Jr. Chairman of the Board,
President and Chief Executive Officer of the 62
Company and the Bank; President and Chief
Executive Officer of the Bank
Jean Murphy-Engler Executive Vice President and Chief Operating Officer 40
of the Company and Bank
Bradley R. Meredith Senior Vice President and Chief Financial Officer of the 49
Company and the Bank
John P. Dover Senior Vice President/Commercial Lending of the Bank 53
John W. Lowery, Jr. Senior Vice President/Senior Credit Officer of the Bank 52
R. CARL PALMER, JR. Mr. Palmer joined the Company and Bank in 1995 as Chief
Executive Officer, President and director. He was elected to serve as Chairman
of the Company in November 2000. He began his banking career at Chemical Bank in
New York in 1964. In 1979, he moved to South Florida as an Executive Vice
President for Southeast Banking Corporation where he had responsibilities for
business development, business banking and community banking. From 1988 to 1991,
he was President, Chief Operating Officer and Director of BancFlorida in Naples,
Florida. He became a Senior Associate with Martin W. Taplin & Associates, Inc.,
a real estate investment firm, in 1991. Mr. Palmer received a B.A. from
Dartmouth College in 1962, an M.B.A. from Amos Tuck School in 1963 and a J.D.
from New York Law School in 1969. Mr. Palmer has served as a director of
Integrated Alarm Services Group, Inc. since January 2003. Mr. Palmer resides in
Palm Beach County.
JEAN MURPHY-ENGLER. Ms. Murphy-Engler joined the Company and the Bank in April
2002. Prior to joining the Company, Ms. Murphy-Engler served as chief executive
officer of a Citibank Internet start-up in Eastern Europe. During her 17-year
career with Citibank she held various positions in operations, treasury, cash
management and trade services, new business development and the launch of small
and medium business segments both domestically and overseas. Ms. Murphy-Engler
received a B.S. from the State University of New York at Plattsburgh. Ms.
Murphy-Engler resides in Palm Beach County.
BRADLEY R. MEREDITH. Mr. Meredith joined the Company and Bank in 1997, after
eight years as Executive Vice President and Chief Financial Officer for First
Family Financial Corporation in Central Florida. The majority of his twenty-one
years of banking experience has been with community banks. Mr. Meredith
graduated from DePaul University with a B.S. in Finance in 1982. Mr. Meredith
received a diploma from the Graduate School of Banking at the University of
Wisconsin in 1989. Mr. Meredith resides in Palm Beach County.
JOHN P. DOVER. Mr. Dover joined the Company and Bank in 1995. He currently
serves as Senior Vice President of Commercial Lending. Mr. Dover has thirty
years of banking experience both in community banks and major regional banks. He
served as Executive Vice President and Senior Lender for Continental Illinois
Bank of Western Springs and held various positions with Northern Trust
Corporation both in Chicago and Florida. Mr. Dover graduated from Valparaiso
University in 1971 with a B.A. in Economics, and attended Keller Graduate School
of Management. Mr. Dover resides in Palm Beach County.
31
JOHN W. LOWERY, JR. Mr. Lowery joined the Company and Bank in November 2000,
after five years as Head of Credit Risk Management for Dresdner Bank
Lateinamerika AG-Miami Agency. He has twenty-six years banking experience that
includes various credit and lending positions at First Union National Bank and
Bank of America NT & SA. Mr. Lowery graduated from Southwest Texas State
University with a B.B.A. in 1973 and from Barry University with a M.B.A. in
1984. Mr. Lowery resides in Miami-Dade County.
ITEM 11. EXECUTIVE COMPENSATION.
The information contained under the caption "Executive Compensation" to appear
in the Annual Meeting Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information contained under the caption "Security Ownership of Certain
Beneficial Owners and Management" to appear in the Annual Meeting Proxy
Statement is incorporated herein by reference.
EXISTING STOCK COMPENSATION PLANS
---------------------------------
Heretofore, the Company has adopted, and the shareholders of the Company have
approved, three equity compensation plans: (i) the 1998 Directors Deferred
Compensation Plan (the "Directors Plan"); (ii) the 1998 Incentive Compensation
and Stock Award Plan (the "Incentive Stock Plan"); and (iii) the 1994
Non-Statutory Stock Option Plan. The Directors Plan, as amended at the 2000
annual meeting to increase the number of shares of common stock that can be
authorized for issuance under the plan to 122,500 shares, authorizes the Company
to award shares of its common stock to directors of the Company and the Bank, in
lieu of cash, as payment for annual retainers for their service as directors of
the Company or the Bank. The purpose of the Incentive Stock Plan, amended at the
2001 annual meeting to increase the number of shares of common stock available
for grant and issuance under the plan to 400,000 shares, is to attract,
motivate, retain and reward high quality executives and other employees,
officers, directors and affiliates by enabling such persons to acquire or
increase a proprietary interest in the Company in order to strengthen the
mutuality of interests between such persons and the Company's shareholders and
providing such persons with annual and long-term performance incentives to
expend their maximum efforts in the creation of shareholder value. In
conjunction with the amendment of the Incentive Stock Plan, the Company's Board
has determined that no further options will be granted under the 1994
Non-Statutory Stock Option Plan.
The following table sets forth information regarding our existing compensation
plans and individual compensation arrangements pursuant to which our equity
securities are authorized for issuance to employees or non-employees (such as
directors, consultants, advisors, vendors, customers, suppliers or lenders) in
exchange for consideration in the form of goods or services:
- -----------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c)
- -----------------------------------------------------------------------------------------------------------------------------------
Plan category Number of securities to be Weighted-average exercise Number of securities remaining available
issued upon exercise of price of outstanding for future issuance under equity
outstanding options, warrants options, warrants and compensation plans (excluding securities
and rights rights reflected in column (a))
- -----------------------------------------------------------------------------------------------------------------------------------
1998 Directors Deferred 39,429 $11.23 83,071
Compensation Plan
- -----------------------------------------------------------------------------------------------------------------------------------
1998 Incentive 267,037* $11.07 93,443
Compensation and Stock
Award Plan
- -----------------------------------------------------------------------------------------------------------------------------------
1994 Non-Statutory 44,490 $10.74 -0-
Stock Option Plan
- -----------------------------------------------------------------------------------------------------------------------------------
Total 350,956 $11.05 176,514
- -----------------------------------------------------------------------------------------------------------------------------------
*The 267,037 of securities to be issued upon exercise of outstanding
options, warrants and rights associated with the "1998 Incentive Compensation
and Award Plan" is net of 27,378 options previously exercised and 12,142 of
stock grants previously issued.
32
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information contained under the captions "Compensation Committee Interlocks
and Insider Participation" and "Certain Relationships and Related Transactions"
to appear in the Annual Meeting Proxy Statement is incorporated herein by
reference.
ITEM 14. CONTROLS AND PROCEDURES.
The Company's chief executive officer and chief financial officer, based on
their evaluation of the Company's disclosure controls and procedures within the
past 90 days, have concluded that such disclosure controls and procedures were
effective to ensure that material information relating to the Company and
required to be disclosed by the Company has been made known to them and has been
recorded, processed, summarized and reported timely. There have not been any
significant changes in the Company's internal controls or in other factors that
could significantly affect these controls subsequent to the date of evaluation
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
(1) Financial Statements.
The following consolidated financial statements of the Company and the report of the
independent certified public accountants thereon filed with this report:
Report of Independent Certified Public Accountants (Hacker, Johnson & Smith, P.A.)
Consolidated Statements of Financial Condition as of December 31, 2001 and 2000.
Consolidated Statements of Earnings for the years ended December 31, 2001, 2000 and 1999.
Consolidated Statements of Stockholder's Equity for the years ended December 31, 2001, 2000 and 1999.
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999.
Notes to Consolidated Financial Statements.
(2) Financial Statement Schedules.
Schedules are omitted because the conditions requiring their filing are not applicable or because the required
information is provided in the Consolidated Financial Statements, including the Notes thereto.
(3) Exhibits.*
2.1 Plan of Merger and Merger Agreement dated February 14, 1997 by and between Pointe Federal Savings Bank and
Pointe Bank (Exhibit 2.1 to the Registrant's Form SB-2 Registration Statement, File No. 333-49835, as
initially filed with the Securities and Exchange Commission on April 9, 1998
[the "Registration Statement"]).
3.1 Articles of Incorporation of the Registrant (Exhibit 3.1 to the Registration Statement).
3.2 By-Laws of the Registrant (Exhibit 3.2 to the Registration Statement).
4.1 Specimen Common Stock Certificate (Exhibit 4.1 to the Registration Statement).*
10.1** 1994 Non-Statutory Stock Option Plan (Exhibit 10.1 to the Registration Statement).
10.2** Deferred Compensation Plan (Exhibit 10.2 to the Registration Statement).
10.3 Office Lease Agreement dated October 8, 1986 by and between Centrum Pembroke, Inc. and
Flamingo Bank (Exhibit 10.3 to the Registration Statement).
10.4 Lease dated as of July 15, 1992 between Konrad Ulmer and Pointe Savings Bank (Exhibit 10.4 to the
Registration Statement).
33
10.6 Credit Agreement dated August 18, 1997 between Independent Bankers' Bank of Florida and Pointe Bank
(Exhibit 10.6 to the Registration Statement).
10.7 Credit Agreement dated October 14, 1997 between SunTrust Bank/Miami, N.A. and Pointe Bank (Exhibit 10.7
to the Registration Statement).
10.8 Agreement for Advances and Security Agreement with Blanket Floating Lien dated November 24, 1997 between
Pointe Bank and the Federal Home Loan Bank of Atlanta (Exhibit 10.8 to the Registration Statement).
10.9 Equipment Sales and Software License Agreements between Information Technology, Inc. and
Pointe Financial Corporation (Exhibit 10.9 to the Registration Statement).
10.10 Master Equipment Lease Agreement dated May 7, 1997 between Leasetec Corporation and Pointe Financial
Corporation (Exhibit 10.10 to the Registration Statement).
10.11*** Letter Agreement dated March 9, 1995 between Pointe Financial Corporation and R. Carl Palmer, Jr. (Exhibit
10.11 to the Registration Statement).
10.12** 1998 Incentive Compensation and Stock Award Plan (Exhibit 10.12 to the Registration Statement).
10.13*** Employment agreement between the company and R. Carl Palmer, Jr. (Exhibit 10.13 to the 1999 Form 10-K filed
February 23, 2000).
10.14*** Employment agreement between the company and Beverly P. Chambers (Exhibit 10.14 to the 1999 Form 10-K filed
February 23, 2000).
10.15*** Employment agreement between the company and Bradley R. Meredith (Exhibit 10.15 to the 1999 Form 10-K filed
February 23, 2000).
10.16 Branch Purchase and Deposit Assumption Agreement by and between Pointe Bank and Republic Bank dated
January 4, 2001, Amendment included (Exhibit 10.16 to the Form 10-QSB filed May 8, 2001.)
10.17*** Employment agreement between the Company and Jean Muphy-Engler. (Exhibit 10.17 to the Form 10-QSB
filed August 9, 2002).
10.18*** Employment agreement between the Company and John P. Dover. (Exhibit 10.18 to the Form 10-QSB
filed August 9, 2002).
10.19 Amended and restated lease agreement dated May 13, 2002, by and between 21845 Powerline Road, Ltd.
and Pointe Bank.*
10.20 Standard Retail Lease Agreement dated June 25, 2002 between Marquesa, Inc. and Pointe Bank.
11.1 Statement regarding calculation of earnings per common share (included in the Audited Consolidated
Financial Statements in the 2001 Form 10-K).
12.1 Statement regarding calculation of ratio of earnings to fixed charges (included in the Audited Consolidated
Financial Statements in the 2001 Form 10-K).
21.1 Subsidiaries of the Registrant (included in the Audited Consolidated Financial Statements in the
2001 Form 10-K).
99.1 CEO Certifications required under Section 906 of Sarbanes-Oxley Act of 2002.
99.2 CFO Certifications required under Section 906 of Sarbanes-Oxley Act of 2002.
* Exhibits followed by a parenthetical reference are incorporated herein by
reference from the documents described therein.
** Exhibits 10.1, 10.2, 10.11 and 10.12 are compensatory plans or
arrangements.
*** Contracts with Management.
(B) REPORTS OF FORM 8-K.
During the fourth quarter, no form 8-K's were filed by the Company.
SUPPLEMENTAL INFORMATION.
As of the date of filing of this report on Form 10-K no annual report or proxy
material has been sent to security holders. Such material will be furnished to
security holders and the Securities and Exchange Commission subsequent to the
filing of this report on Form 10-K.
34
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
POINTE FINANCIAL CORPORATION
(Registrant)
Date: March 17, 2003 By: /s/ R. Carl Palmer, Jr.
----------------- ------------------------------------------
R. Carl Palmer, Jr., Chairman of the Board,
President and Chief Executive Officer
Date: March 17, 2003 By: /s/ Bradley R. Meredith
----------------- ------------------------------------------
Bradley R. Meredith, Chief Financial Officer
and Senior Vice President
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
- ---- ----- ----
/s/ R. Carl Palmer, Jr. Chairman of the Board, President March 17, 2003
- ----------------------------- and Chief Executive Officer
R. Carl Palmer, Jr.
/s/ Timothy M. McGinn Vice Chairman of the Board March 17, 2003
- -----------------------------
Timothy M. McGinn
/s/Bradley R. Meredith Chief Financial Officer, March 17, 2003
- ----------------------------- Senior Vice President
Bradley R Meredith
/s/ Clarita Kassin Director March 17, 2003
- -----------------------------
Clarita Kassin
/s/ Morris Massry Director March 17, 2003
- -----------------------------
Morris Massry
/s/ D. Richard Mead, Jr. Director March 17, 2003
- -----------------------------
D. Richard Mead, Jr.
/s/ James L. Horan Director March 17, 2003
- -----------------------------
James L. Horan
35
CERTIFICATIONS
I, R. Carl Palmer, Jr., certify, that:
1. I have reviewed this annual report on Form 10-K of Pointe Financial
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of the
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect the internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 17, 2003 By: /s/ R. Carl Palmer, Jr.
--------------- ------------------------------------------
R. Carl Palmer, Jr., Chairman of the Board,
President and Chief Executive Officer
36
I, Bradley R. Meredith, certify, that:
1. I have reviewed this annual report on Form 10-K of Pointe Financial
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of the
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect the internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 17, 2003 By: /s/ Bradley R. Meredith
--------------- ------------------------------------------
Bradley R. Meredith, Chief Financial Officer
and Senior Vice President
37