Securities and Exchange Commission
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT
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Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2002 Commission File No. 000-1170902
FLORIDA COMMUNITY BANKS, INC.
(Exact Name of Registrant As Specified In Its Charter)
Florida 35-2164765
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(State of Incorporation) (I.R.S. Employer Identification No.)
1400 North 15th Street, Immokalee, Florida 34142-2202
- ------------------------------------------ -----------------------
(Address of principal executive offices) (Including zip code)
(239) 657-3171
(Issuer's Telephone Number, Including Area Code)
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE ACT:
Name of each exchange
Title of each class on which registered
- ------------------- ---------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $0.01 Par Value
------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2): Yes No X
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The issuer's revenues for its most recent fiscal year were $33,586,000.
There is no established trading market for the registrant's capital stock. The
aggregate market value of the stock held by non-affiliates of the registrant at
March 15, 2003 was $58,661,169, based on a per share price of $25.50, which is
the price of the last trade of which management is aware as of such date.
Although directors and executive officers of the registrant were assumed to be
"affiliates" of the registrant for purposes of this calculation, the
classification is not to be interpreted as an admission of such status.
At March 15, 2003, there were 3,123,316 shares of the registrant's Common Stock
outstanding.
Documents Incorporated by Reference
Portions of the registrant's definitive Proxy Statement for the 2003 Annual
Meeting of Shareholders are incorporated by reference into Part III of this
report.
FLORIDA COMMUNITY BANKS, INC.
2002 Form 10-K Annual Report
TABLE OF CONTENTS
Item Number Page or
in Form 10-K Description Location
PART I
Item 1. Business................................................................... 3
Item 2. Properties................................................................. 7
Item 3. Legal Proceedings.......................................................... 7
Item 4. Submission of Matters to a Vote of Security Holders........................ 7
PART II
Item 5. Market for the Registrant's Common Equity and Related
Shareholder Matters........................................................ 8
Item 6. Selected Financial Data.................................................... 9
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................ 10
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................. 10
Item 8. Financial Statements and Supplementary Data................................ 33
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................................... 74
PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.......................... 74
Item 11. Executive Compensation..................................................... 74
Item 12. Security Ownership of Certain Beneficial Owners and Management............. 74
Item 13. Certain Relationships and Related Transactions............................. 74
Item 14. Controls and Procedures.................................................... 74
PART IV
Item 15. Exhibits and Reports on Form 8-K........................................... 75
Signatures
Certification of Periodic Financial Reports
PART I
ITEM 1. BUSINESS
General
Florida Community Banks, Inc. ("FCBI" or the "Company") is a bank holding
company, which owns all of the common stock of Florida Community Bank ("Bank" or
"FCB") and a special purpose business trust organized to issue Trust Preferred
Securities. FCBI is a Florida corporation registered with the Board of Governors
of the Federal Reserve System under the Bank Holding Company Act of 1956, as
amended. Through its subsidiary Bank, FCBI is engaged in the commercial banking
business in southwestern Florida with offices in Collier, Lee, Hendry, and
Charlotte counties. At December 31, 2002, FCBI had total assets of approximately
$521 million, total deposits of approximately $424 million and stockholders'
equity of approximately $34 million.
Florida Community Bank is a Florida-chartered commercial bank, which
commenced operations in Everglades City, Florida on May 19, 1923, under the name
"Bank of the Everglades." The Bank changed its place of business from Everglades
City, Florida to Immokalee, Florida in September 1962. FCB changed its name from
Bank of the Everglades to "First Bank of Immokalee" in July 1967 and then to
"Florida Community Bank" in July 1996 as part of its merger with Tri-County Bank
of Lehigh Acres. The Bank is subject to regulation by the Florida Department of
Banking and Finance ("Department") and the Federal Deposit Insurance Corporation
("FDIC"). The Bank's main office is located at 1400 North 15th Street,
Immokalee, Florida and its telephone number is (239) 657-3171. In addition to
the main banking office in Immokalee, the Bank currently operates full-service
branches in the southwest Florida cities of Lehigh Acres, LaBelle, Naples
(Golden Gate area), Port Charlotte, Punta Gorda and Ft. Myers.
The Company employs approximately 130 persons and it believes that its
relationship with these employees is good.
The Bank is engaged primarily in soliciting deposits from the general
public and investing such deposits, together with other funds, in commercial
loans, consumer loans, agricultural loans, and real estate loans. To a lesser
extent, the Bank invests its funds in securities issued or guaranteed by
agencies of the United States Government and municipalities.
The Bank operates as a locally operated institution aimed at providing
prompt, efficient and personalized service to individuals, small and
medium-sized businesses, professionals and other local organizations. The Bank's
primary service area encompasses Charlotte, Lee, Collier, Glades and Hendry
Counties (the "PSA"). The Bank's principal markets within the PSA are:
(i) commercial and small business lending and deposit services;
(ii) residential real estate mortgage and retail lending and deposit
services; and
(iii) commercial and residential real estate development lending.
The principal sources of funds for the Bank's loans and other investments
are demand, time, savings and other deposits, amortization and prepayment of
loans, sales to other lenders or institutions of loans or participations in
loans, principal payments or maturities of investment securities, and
borrowings. The principal sources of income for the Bank are interest and fees
collected on loans, including fees received for servicing loans sold to other
lenders or institutions, and to a lesser extent, interest and dividends
collected on other investments. The principal expenses of the Bank are interest
paid on savings and other deposits, interest paid on other borrowings by the
Bank, employee compensation, office expenses and other overhead and operational
expenses.
The Bank offers several deposit accounts, including demand deposit
accounts, negotiable order of withdrawal accounts ("NOW" and "Super-NOW"
accounts), money market accounts, certificates of deposit and various retirement
accounts. In addition, the Bank belongs to an electronic banking network so that
its customers may use the automated teller machines (the "ATMs") of other
financial institutions and operates drive-in teller services and 24-hour
depository vaults.
3
The following loan services are offered by the Bank:
(a) consumer loans, automobile loans, real estate equity lines of credit,
education loans and real estate loans secured by single-family
residences;
(b) commercial and business loans for small to medium-sized companies,
including Small Business Administration and other
government-guaranteed financing;
(c) individual and builder short-term residential construction financing;
(d) home improvement loans; and
(e) commercial and residential real estate development loans.
The Bank provides a full range of competitive banking services and
emphasizes the manner in which the services are delivered. Management focuses
its efforts on filling the void created by the decreasing number of
locally-owned community banks due to acquisitions by large regional holding
companies, which it believes has negatively impacted the personal nature of the
delivery, quality and availability of banking services available in the PSA and
surrounding areas.
Primary Service Area
The PSA enjoys an abundant work force, attractive business climate and a
good relationship between the private and public sectors.
In general, commercial real estate in the PSA consists of small shopping
centers and office buildings. The type of residential real estate within the PSA
varies, with a number of condominiums, townhouses, apartments and single-family
housing developments dispersed throughout the PSA.
Competition
The business of banking is highly competitive. The Bank competes with other
banks, savings and loan associations and credit unions within the PSA. As of
June 30, 2002, there were approximately 46 banks and 5 savings institutions
operating in the PSA, operating a total of approximately 326 banking offices.
The Bank believes that its operation as a locally owned and controlled bank with
a broad base of ownership in the PSA enhances its ability to compete with those
non-local financial institutions now operating in its market, but no assurances
can be given in this regard.
The Bank's competitive strategy with respect to the financial institutions
described above consists of:
o reviewing and acting upon loan requests quickly with a locally-based
loan committee,
o maintaining flexible but prudent lending policies,
o personalizing service by establishing long-term banking relationships
with its customers; and
o maintaining an appropriate ratio of employees to customers to enhance
the level of service.
Facilities
The Bank's main office in Immokalee, Florida was purchased in 1962. At
December 31, 2002 the Bank operated seven branch offices with an eighth office
under construction. The Lehigh Acres branch was acquired in 1996 as a result of
the acquisition of Tri-County Bank of Lehigh Acres. The Golden Gate branch
operates in a facility leased in 1997 for a five-year period. The LaBelle branch
was acquired as a result of the acquisition of Hendry County Bank by merger in
1998. The land for the Port Charlotte branch was purchased in 1998 and the
branch opened in 1999 after construction was completed. The facility for the Ft.
Myers branch is leased for 15 years (with renewal options after that period) and
opened in 2000. The Punta Gorda branch office building is owned by the Bank and
the underlying land is subject to a 99-year lease, which commenced in 2000. The
Cape Coral branch land was purchased in 2001 and the branch opened in 2002. All
of the branch facilities are in good condition.
4
Regulation
The Bank is subject to comprehensive regulation, examination and
supervision by the Department and the FDIC, and is subject to other laws and
regulations applicable to banks. Such regulations include limitations on loans
to a single borrower and to the Bank's directors, officers and employees;
restrictions on the opening and closing of branch offices; the maintenance of
required capital and liquidity ratios; the granting of credit under equal and
fair conditions; disclosure of the costs and terms of such credit; and
restrictions as to permissible investments. The Bank is examined periodically by
both the Department and the FDIC and submits periodic reports regarding its
financial condition and other matters to each of them. Both the Department and
the FDIC have a broad range of powers to enforce regulations under their
respective jurisdictions, and to take discretionary actions determined to be for
the protection of the safety and soundness of the Bank, including the
institution of cease and desist orders and the removal of directors and
officers.
FDIC Regulations. The Bank's deposit accounts are insured by the Bank
Insurance Fund of the FDIC up to a maximum of $100,000 per insured depositor.
The FDIC issues regulations, conducts periodic examinations, requires the filing
of reports and generally supervises the operations of its insured banks. The
approval of the FDIC is required prior to a merger or consolidation or the
establishment or relocation of an office facility. This supervision and
regulation is intended primarily for the protection of depositors and not of
stockholders.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") substantially revised the depository institution regulatory and
funding provisions of the Federal Deposit Insurance Act. Among other things,
FDICIA requires the federal banking regulators to take prompt corrective action
in respect to depository institutions that do not meet minimum requirements.
FDICIA established five capital tiers: "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," and
"critically undercapitalized." A depository institution is well capitalized if
it significantly exceeds the minimum level required by regulation for each
relevant capital measure, adequately capitalized if it meets each such measure,
undercapitalized if it fails to meet any such measure, significantly
undercapitalized it is significantly below any such measure and critically
undercapitalized if it fails to meet any critical capital level set forth in the
regulations. The critically undercapitalized level occurs where tangible equity
is less than 2% of total tangible assets or less than 65% of the minimum
leverage ratio prescribed by regulation (except to the extent that 2% would be
higher than such 65% level). A depository institution may be deemed to be in a
capitalization category that is lower than is indicated by its actual capital
position if it receives an unsatisfactory examination rating.
FDICIA generally prohibits a depository institution from making any capital
distribution (including payment of a dividend) if the depository institution
would thereafter be undercapitalized. In addition, undercapitalized depository
institutions are subject to growth limitations and are required to submit
capital restoration plans to the FDIC. The federal banking agencies may not
accept a capital plan without determining, among other things, that the plan is
based on realistic assumptions and is likely to succeed in restoring the
depository institution's capital. If a depository fails to submit an acceptable
plan, it is treated as if it is significantly undercapitalized.
Significantly undercapitalized depository institutions may be subject to a
number of requirements and restrictions, including orders to sell sufficient
voting stock to become adequately capitalized, requirements to reduce total
assets and cessation of the receipt of deposits from correspondent banks.
Critically undercapitalized depository institutions are subject to the
appointment of a receiver or conservator.
FDICIA provides authority for special assessments against insured deposits
and for the development of a general risk-based insurance assessment system. The
risk-based insurance assessment system would be used to calculate a depository
institution's semi-annual deposit insurance assessment based on the probability
(as defined in the FDICIA) that the BIF will incur a loss with respect to the
institution. In accordance with FDICIA, the FDIC implemented a transitional
risk-based insurance premium system and increased deposit insurance premiums for
commercial banks to an average of 25.4 basis points.
FDICIA also contains various provisions related to an institution's
interest rate risk. Under certain circumstances, an institution may be required
to provide additional capital or maintain higher capital levels to address
interest rate risks.
5
In addition, the FDIC has adopted a minimum leverage ratio of 3%. The
minimum leverage ratio is the ratio of common equity, retained earnings and
certain amounts of perpetual preferred stock (after subtracting goodwill and
after making certain other adjustments) to the total assets of the institution.
Generally, banking organizations are expected to operate well above the minimum
required capital level of 3% unless they meet certain specified criteria,
including that they have the highest regulatory ratings. Most banking
organizations are required to maintain a leverage ratio of 3% plus an additional
cushion of 1% to 2%. The guidelines also provide that banking organizations
experiencing internal growth or making acquisitions are expected to maintain
strong capital positions substantially above the minimum supervisory levels
without significant reliance upon intangible assets.
Dividend Restrictions. In addition to dividend restrictions placed on the
Bank by the FDIC based on the Bank's minimum capital requirements, the Florida
Financial Institutions Code prohibits the declaration of dividends in certain
circumstances. Section 658.37 (Florida Statutes), prohibits the declaration of
any dividend until a bank has charged off bad debts, depreciation and other
worthless assets, and has made provision for reasonably-anticipated future
losses on loans and other assets. Such dividends are limited to the aggregate of
the net profits of the dividend period, combined with a bank's retained net
profits for the preceding two years. A bank may declare a dividend from retained
net profits that accrued prior to the preceding two years with the approval of
the Department. However, a bank will be required, prior to the declaration of a
dividend on its common stock, to carry 20% of its net profits for such preceding
period to its surplus fund, until the surplus fund equals at least the amount of
the bank's common and preferred stock then issued and outstanding. In no event
may a bank declare a dividend at any time in which its net income from the
current year, combined with its retained net income from the preceding two years
is a loss or which would cause the capital accounts of the bank to fall below
the minimum amount required by law, regulation, order or any written agreement
with the Department or other state or federal regulatory agency.
Riegle-Neal Interstate Banking and Branching Efficiency Act. The
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 provides
that as of June 1, 1997, adequately capitalized and managed banks will be able
to engage in interstate branching by merging banks in different states,
including Florida, which did not opt out of the application of this provision.
If a state did not opt out, banks will be required to comply with the host
state's regulations with respect to branching across state lines.
Gramm-Leach-Bliley Act. On November 12, 1999, President Clinton signed into
law the Gramm-Leach-Bliley Act which reforms and modernizes certain areas of
financial services regulation. The law permits the creation of new financial
services holding companies that can offer a full range of financial products
under a regulatory structure based on the principle of functional regulation.
The legislation eliminates the legal barriers to affiliations among banks and
securities firms, insurance companies, and other financial services companies.
The law also provides financial organizations with the opportunity to structure
these new financial affiliations through a holding company structure or a
financial subsidiary. The new law reserves the role of the Federal Reserve Board
as the supervisor for bank holding companies. At the same time, the law provides
a system of functional regulation which is designed to utilize the various
existing federal and state regulatory bodies.
The law also includes a minimum federal standard of financial privacy.
Financial institutions are required to have written privacy policies that must
be disclosed to customers. The disclosure of a financial institution's privacy
policy must take place at the time a customer relationship is established and
not less than annually during the continuation of the relationship. The act also
provides for the functional regulation of bank securities activities. The law
repeals the exemption that banks were afforded from the definition of "broker,"
and replaces it with a set of limited exemptions that allow the continuation of
some historical broker activities performed by banks. In addition, the act
amends the securities laws to include banks within the general definition of
dealer. Regarding new bank products, the law provides a procedure for handling
products sold by banks that have securities elements.
In the area of CRA activities, the law generally requires that financial
institutions address the credit needs of low-to-moderate income individuals and
neighborhoods in the communities in which they operate. Bank regulators are
required to take the CRA ratings of a bank or of the bank subsidiaries of a
holding company into account when acting upon certain branch and bank merger and
acquisition applications filed by the institution. Under the law, financial
holding companies and banks that desire to engage in new financial activities
are required to have satisfactory or better CRA ratings when they commence the
new activity.
Most of the provisions of the law took effect on March 11, 2000, with other
provisions being phased in over a one to two year period thereafter. It is
anticipated that the effects of the law, while providing additional flexibility
to bank holding companies and banks, may result in additional affiliations of
different financial services
6
providers, as well as increased competition, resulting in lower prices, more
convenience, and greater financial products and services available to consumers.
USA Patriot Act. On October 26, 2001, President Bush signed into law the
Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001 (the "USA Patriot Act"), which is
designed to deny terrorists and others the ability to obtain access to the
United States financial system. Title III of the USA Patriot Act is the
International Money Laundering Abatement and Anti-Terrorist Financing Act of
2001. Among its provisions, the USA Patriot Act mandates or will require
financial institutions to implement additional policies and procedures with
respect to, or additional measures, including additional due diligence and
recordkeeping, designed to address, any or all of the following matters, among
others: money laundering; suspicious activities and currency transaction
reporting; and currency crimes. The U.S. Department of the Treasury in
consultation with the Federal Reserve Board and other federal financial
institution regulators has promulgated rules and regulations implementing the
USA Patriot Act which (i) prohibits U.S. correspondent accounts with foreign
banks that have no physical presence in any jurisdiction; (ii) require financial
institutions to maintain certain records for correspondent accounts of foreign
banks; (iii) require financial institutions to produce certain records relating
to anti-money laundering compliance upon request of the appropriate federal
banking agency; (iv) require due diligence with respect to private banking and
correspondent banking accounts; (v) facilitate information sharing between the
government and financial institutions; and (vi) require financial institutions
to have in place a money laundering program. In addition, an implementing
regulation under the USA Patriot Act regarding verification of customer
identification by financial institutions has been proposed, although such
regulation has not yet been finalized. The Company has implemented and will
continue to implement the provisions of the USA Patriot Act, as such provisions
become effective. The Company currently maintains and will continue to maintain
policies and procedures to comply with the USA Patriot Act requirements. At this
time, the Company does not expect that the USA Patriot Act will have a
significant impact on the financial position of the Company.
Federal Reserve System. FCBI is a bank holding company subject to the
supervision and regulations of the Board of Governors of the Federal Reserve
System ("Federal Reserve"). As such, the Company is required to file periodic
reports and such other information as the Federal Reserve may deem necessary.
The Federal Reserve also conducts examinations of the Company. The Federal
Reserve maintains the position that the Company should serve as a source of
financial and managerial strength for the Bank and may not conduct its
operations in an unsound manner.
The foregoing is necessarily a general description of certain provisions of
federal and state law and does not purport to be complete. Proposals to change
the laws and regulations governing the banking industry are frequently
introduced in Congress, in the state legislatures and before the various bank
regulatory agencies. The likelihood and timing of any such changes and the
impact such changes might have on the Bank cannot be determined at this time.
ITEM 2. PROPERTIES
For the description of the property of the Company, see "ITEM I -
DESCRIPTION OF BUSINESS - Facilities."
ITEM 3. LEGAL PROCEEDINGS
There are no material proceedings to which the Company is a party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2002.
7
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
There is no established trading market for the Company's Common Stock, $.01
par value (the "Common Stock"), which has been traded inactively in private
transactions. Therefore, no reliable information is available as to trades of
the Common Stock or as to the prices at which Common Stock has traded.
In December 2002, the Company issued 1.2 shares for 1.0 share stock split,
thereby increasing the number of shares outstanding from 2,602,764 to 3,123,316.
Management has reviewed the limited information available as to the ranges
at which the Common Stock has been sold and is aware of trades that occurred
during 2002. To the best of management's knowledge, the last trade in December
was executed at a price of $24.00 per share. The per share price data regarding
the Common Stock is provided for information purposes only and should not be
viewed as indicative of the actual or market value of the Common Stock.
Estimated Price Range Per Share
-------------------------------
High Low
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2002 (Split Adjusted):
First Quarter.............................. $ 21.67 $ 20.83
Second Quarter............................. 22.29 21.67
Third Quarter.............................. 23.33 21.67
Forth Quarter.............................. 24.00 23.33
2001 (Split Adjusted):
First Quarter.............................. $ 18.75 $ 18.40
Second Quarter............................. 19.58 18.75
Third Quarter.............................. 20.00 19.58
Fourth Quarter............................. 20.83 20.42
As of March 15, 2003, there were 3,213,316 shares of Common Stock
outstanding held by approximately 900 shareholders of record.
The payment of future dividends will be at the sole discretion of the
Company's Board of Directors and will depend on, among other things, future
earnings, capital requirements, the general financial condition of the Company
and general business conditions. The Company paid a dividend of $.35 per share
(split-adjusted) in the second quarter of 2002. During October 2002, the
Company's Board of Directors adopted a policy of capital retention that ceases
cash dividends for the foreseeable future.
Equity compensation plan
At their Annual Meeting, the Bank's shareholders adopted the 2002 Key Employee
Stock Compensation Program ("Employee Program"), which was assumed by FCBI upon
its acquisition of the Bank. The following table reflects the number of shares
to be issued upon the exercise of options granted under the Employee Program,
the weighted-average exercise price of all such options, and the total number of
shares of common stock reserved for the issuance upon the exercise of
authorized, but not-yet-granted options, as of December 31, 2002.
Number of Securities to Number of Equity Securities
Plan Category be Issued Upon the Weighted-average Remaining Available for Future
Exercise of Outstanding Exercise Price of Issuance Under Equity Compensation
Options Outstanding Options Plan
Equity Compensation Plans
Approved by Shareholders 55,200 $15.00 100,965
Equity Compensation Plans Not -- -- --
Approved by Shareholders
Total 55,200 $15.00 100,965
8
ITEM 6. SELECTED FINANCIAL DATA
The following table presents on a historical basis selected financial data
and ratios for the Company.
Years Ended December 31,
------------------------------------------------------------
2002 2001 2000 1999 1998
---------- --------- --------- ---------- ----------
(Dollars in thousands except per share data)
Earnings Summary:
Interest income................................... $ 31,570 $ 27,903 $ 24,991 $ 18,160 $ 16,463
Less interest expense............................. 11,787 12,018 10,276 6,231 6,117
Net interest income............................... 19,783 15,885 14,715 11,929 10,346
Provision for loan losses......................... 2,510 720 1,000 810 920
Net interest income after provision
for loan losses.............................. 17,273 15,165 13,715 11,119 9,426
Non-interest income............................... 2,016 1,699 1,804 1,424 1,092
Non-interest expense.............................. 9,020 8,226 7,553 6,811 6,539
Income before income taxes........................ 10,269 8,638 7,966 5,732 3,979
Applicable income taxes........................... 3,851 3,292 2,881 2,076 1,465
Net income........................................ 6,418 5,346 5,085 3,656 2,514
Per Common Share Data:
(Retroactively adjusted for effects of stock dividends
and stock splits)
Net income - basic ............................... $ 2.05 $ 1.71 $ 1.63 $ 1.17 $ 0.80
Net income - diluted.............................. 2.04 1.71 1.63 1.17 0.80
Cash dividends declared per common share.......... 0.35 0.70 0.64 0.55 0.50
Selected Average Balances:
Total assets...................................... $ 446,008 $ 324,188 $ 263,289 $ 211,132 $ 191,635
Total loans....................................... 370,062 255,294 206,333 154,771 132,522
Securities........................................ 40,796 40,418 39,676 34,727 30,748
Earning assets.................................... 426,064 307,524 247,238 193,220 169,613
Deposits.......................................... 366,632 271,431 216,348 184,127 166,861
Long-term borrowings.............................. 41,391 17,478 15,607 59 40
Shareholders' equity.............................. 32,025 28,009 24,724 22,134 20,685
Shares outstanding (split adjusted, in thousands). 3,123 3,123 3,123 3,123 3,123
Selected Period-End Balances:
Total assets...................................... $ 521,448 $ 388,061 $ 296,452 $ 238,360 $ 216,234
Total loans....................................... 416,415 318,666 227,155 181,764 152,848
Securities........................................ 36,214 35,001 42,270 38,757 35,343
Earning assets.................................... 498,199 364,012 273,356 220,587 197,408
Deposits.......................................... 423,935 317,861 249,059 204,018 193,822
Long-term borrowings.............................. 60,039 37,580 15,093 39 80
Shareholders' equity.............................. 34,464 29,139 25,970 22,873 20,942
Shares outstanding (split adjusted)............... 3,123 3,123 3,123 3,123 3,123
Selected Ratios:
Return on average equity.......................... 20.04% 19.09% 20.57% 16.52% 12.15%
Return on average assets.......................... 1.44 1.65 1.93 1.73 1.31
Net interest margin............................... 4.64 5.17 5.96 6.19 6.12
Allowance for loan losses to loans................ 1.52 1.19 1.44 1.24 1.14
Net charge-offs to average loans.................. 0.00 0.07 0.00 0.19 0.92
Average equity to average assets.................. 7.18 8.64 9.39 10.48 10.79
Cash Dividends Declared.............................. $ 1,093 $ 2,178 $ 1,988 $ 1,725 $ 1,568
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The purpose of this discussion is to focus on significant changes in the
financial condition and results of operations of the Company and its
subsidiaries during the past three years. The discussion and analysis is
intended to supplement and highlight information contained in the accompanying
consolidated financial statements and the selected financial data presented
elsewhere in this report.
ITEM 7A. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Forward-Looking Statements
This report, including Management's Discussion and Analysis of Financial
Condition and Results of Operations, and documents incorporated herein by
reference, may contain certain statements relating to the future results of the
Company based upon information currently available. These "forward-looking
statements" (as defined in Section 21E of The Securities and Exchange Act of
1934) are typically identified by words such as "believes", "expects",
"anticipates", "intends", "estimates", "projects", and similar expressions.
These forward-looking statements are based upon assumptions the Company believes
are reasonable and may relate to, among other things, the allowance for loan
loss adequacy, simulation of changes in interest rates and litigation results.
Such forward-looking statements are subject to risks and uncertainties, which
could cause the Company's actual results to differ materially from those
included in these statements. These risks and uncertainties include, but are not
limited to, the following: (1) changes in political and economic conditions; (2)
interest rate fluctuations; (3) competitive product and pricing pressures within
the Company's markets; (4) equity and fixed income market fluctuations; (5)
personal and corporate customers' bankruptcies; (6) inflation; (7) acquisitions
and integration of acquired businesses; (8) technological changes; (9) changes
in law; (10) changes in fiscal, monetary, regulatory and tax policies; (11)
monetary fluctuations; (12) success in gaining regulatory approvals when
required; and (13) other risks and uncertainties listed from time to time in the
Company's SEC reports and announcements.
General
The Company, through its subsidiary Bank, conducts a commercial banking
business, which consists of attracting deposits from the general public and
applying those funds to the origination of commercial, consumer and real estate
loans (including commercial loans collateralized by real estate). The Company's
profitability depends primarily on net interest income, which is the difference
between interest income generated from interest-earning assets (i.e., loans and
investments) less the interest expense incurred on interest-bearing liabilities
(i.e., customer deposits and borrowed funds). Net interest income is affected by
the relative amounts of interest-earning assets and interest-bearing
liabilities, and the interest rate paid and earned on these balances. Net
interest income is dependent upon the Company's interest rate spread, which is
the difference between the average yield earned on its interest-earning assets
and the average rate paid on its interest-bearing liabilities. When
interest-earning assets approximates or exceeds interest-bearing liabilities,
any positive interest rate spread will generate interest income. The interest
rate spread is impacted by interest rates, deposit flows and loan demand.
Additionally, and to a lesser extent, the Company's profitability is affected by
such factors as the level of non-interest income and expenses, the provision for
loan losses and the effective tax rate. Non-interest income consists primarily
of deposit account service charges and other customer service fees. Non-interest
expenses consist of compensation and benefits, occupancy-related expenses, and
other expenses.
Summary
Net income for 2002 was $6,418,306, a 20.05% increase over 2001 net income.
Net income for 2001 was $5,346,217, a 5.1% increase over 2000 net income. Net
income per common share for 2002 was $2.04 (diluted) compared to $1.71 in 2001
and $1.63 in 2000. Net income for 2000 was $5,085,061, a 39.1% increase from
1999 net income of $3,656,265.
The increases in net income from 1999 to 2000 and from 2000 to 2001 were
primarily attributable to increased volume of loans, with the resulting increase
in interest and fees. In 2001 and 2002, the volume increase in loans more than
offset the decrease in loan interest rates as discussed more fully below.
10
Earning Assets
During 2002, earning assets averaged $426 million, an increase of $118
million (38.3%) over 2001. During 2001, earning assets averaged $308 million, an
increase of $61 million (24.7%) over 2000. Average earning assets during 2000
totaled $247 million, an increase of $54 million (28.0%) over 1999.
The management of the Company considers many criteria in managing earning
assets, including creditworthiness, diversification, maturity, and interest rate
sensitivity. The following table sets forth the Company's interest-earning
assets by category at December 31, in each of the last three years.
December 31,
----------------------------------------
2002 2001 2000
----------- ----------- -----------
(In thousands)
Interest-bearing deposits with banks.................................... $ 12,668 $ 10,345 $ --
Securities.............................................................. 36,214 35,001 42,270
Federal funds sold...................................................... 32,902 -- 3,931
Loans:
Real estate.......................................................... 361,420 272,310 184,074
Commercial and other................................................. 54,995 46,356 43,081
----------- ----------- -----------
Total loans........................................................ 416,415 318,666 227,155
----------- ----------- -----------
Interest-earning assets ................................................ $ 498,199 $ 364,012 $ 273,356
=========== =========== ===========
Loan Portfolio
Loan and deposit growth is emphasized in each market the Company operates.
The Company has been successful in competing for loans against other larger
institutions due primarily to a lending strategy that includes direct
involvement by local management. Different customers require different solutions
to their financial needs and appreciate local banking officers that understand
the local environment and can provide for their business requirements.
Average loans increased $115 million (45.3%) in 2002 compared to 2001. The
increase in loans was a result of successful marketing efforts to originate real
estate construction loans and other real estate loans. Loan growth for 2002 was
funded primarily by issuance of brokered certificates of deposit and Federal
Home Loan Bank of Atlanta advances.
11
Average loans increased $49 million (23.7%) in 2001 compared to 2000. The
increase in loans was a result of population growth, branch openings, and strong
loan demand. Loan growth for 2001 was funded primarily with customer deposits
and Federal Home Loan Bank of Atlanta advances.
Loan Portfolio
December 31,
2002 2001 2000 1999 1998
------------------ ----------------- ----------------- ---------------- -----------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
-------- -------- ------- -------- -------- -------- ------- -------- -------- --------
(Dollars in Thousands)
Commercial, financial
and agricultural. $ 42,876 10.27% $ 38,007 11.92% $ 37,628 16.56% $32,718 17.98% $ 30,813 20.12%
Real estate -
construction..... 140,723 33.70 93,049 29.17 73,665 32.42 48,442 26.63 25,972 16.96
Real estate -
mortgage......... 220,697 52.85 179,261 56.20 110,409 48.60 95,257 52.36 90,792 59.27
Consumer........... 12,089 2.89 8,481 2.66 5,267 2.32 5,221 2.87 5,274 3.44
Other.............. 1,226 0.30 157 0.05 221 0.10 303 0.17 330 0.22
-------- -------- -------- -------- -------- ------ ------- ------- -------- -------
417,611 100.00% 318,955 100.00% 227,190 100.00% 181,941 100.00% 153,181 100.00%
======= ======= ======= ======= =======
Unearned income.... (1,197) (289) (35) (177) (332)
Allowance for loan
losses........... (6,319) (3,803) (3,267) (2,261) (1,750)
--------- --------- --------- --------- ---------
Net loans.......... $ 410,095 $ 314,863 $ 223,888 $ 179,503 $ 151,099
========= ========= ========= ========= =========
The following table sets forth maturities of the loan portfolio and the
sensitivity to interest rate changes of the Company's loan portfolio (in
thousands):
Selected Loan Maturity and Interest Rate Sensitivity
Rate Structure for Loans
Maturity Maturing Over One Year
--------------------------------------------------- -----------------------------
Over One
One Year Over Predetermined Floating or
Year or Through Five Interest Adjustable
Less Five Years Years Total Rate Rate
----------- ----------- ----------- ----------- ------------- --------------
(Amounts in thousands)
Commercial, financial
and agricultural............ $ 22,452 $ 18,290 $ 2,134 $ 42,876 $ 15,065 $ 5,359
Real estate - construction..... 47,466 74,220 19,037 140,723 51,331 41,926
----------- ----------- ----------- ----------- ------------- --------------
Total....................... $ 69,918 $ 92,510 $ 21,171 $ 183,598 $ 66,396 $ 47,285
=========== =========== =========== =========== ============= ==============
For the purposes of this schedule, loans that have reached the fixed
contractual floor rate are treated as having a pre-determined interest rate.
Securities Portfolio
The securities portfolio increased by $1.2 million or 3.5% from 2001 to
2002. The balance in the securities portfolio decreased by $7.3 million or 17.2%
from 2000 to 2001. The balance in the securities portfolio decreased as funds
were allocated to the loan portfolio throughout 2001. The securities portfolio
increased by 9.06% or $3.5 million from 1999 to 2000. The balance in the
securities portfolio increased as deposits increased faster than loans in 2000.
12
The Company maintains an investment strategy of seeking portfolio yields
within acceptable risk levels, as well as providing liquidity through borrowings
secured by that portfolio. On a daily basis, funds available for short-term
investment are determined. Funds available for long-term investment are
projected based upon anticipated loan and deposit growth, liquidity needs,
pledging requirements, maturities of securities, and other factors. The Company
holds two classifications of securities: "Held-to-Maturity" and
"Available-for-Sale." The Available-for-Sale securities are carried at estimated
fair market value and are equity securities at year-end 2002, 2001 and 2000.
Held-to-Maturity securities are carried at amortized cost and represent the
largest portion of the total securities portfolio. At December 31, 2002, 2001
and 2000 there were no material unrealized gains (losses) in the
Available-for-Sale portfolio. At December 31, 2002, 2001 and 2000, net
unrealized gains (losses) in the Held-to-Maturity portfolio amounted to
$780,513, $249,651 and ($66,363), respectively.
The following table presents the carrying amounts of the securities
portfolio at December 31, in each of the last three years.
Securities Portfolio
December 31,
----------------------------------------------
2002 2001 2000
------------- ------------- --------------
(In thousands)
Held-to-Maturity:
U.S. government and agencies................................. $ 3,000 $ 16,098 $ 32,797
State and municipal.......................................... -- 110 7,603
Mortgage-backed securities................................... 30,339 16,833 559
------------- ------------- --------------
Total Held-to-Maturity..................................... 33,339 33,041 40,959
------------- ------------- --------------
Available-for-Sale:
Equity securities............................................ 2,875 1,960 1,311
------------- ------------- --------------
Total Available-for-Sale................................... 2,875 1,960 1,311
------------- ------------- --------------
Total Securities................................................ $ 36,214 $ 35,001 $ 42,270
============= ============= ==============
Security Portfolio Maturity Schedule
Maturing
--------------------------------------------------------------------------------------
Within After One But After Five But After
One Year Within Five Years Within Ten Years Ten Years
-------------------- ------------------- ------------------ -----------------
Amount Yield Amount Yield Amount Yield Amount Yield
-------- --------- -------- -------- -------- ------- -------- -------
(Amounts in thousands)
Securities Held-to-Maturity:
(amortized cost)
U.S. Government and agencies.. $ -- 0.00% $ 3,000 5.90% $ -- 0.00% $ -- 0.00%
Mortgage-backed securities.... 5,418 5.21 24,337 4.82 584 6.17 -- 0.00
-------- --------- -------- --------
Total....................... 5,418 5.21 27,337 4.94 584 6.17 -- 0.00
-------- -------- --------
Securities Available-for-Sale:
Equity securities............. -- 0.00 -- 0.00 -- 0.00 2,875 0.00
-------- --------- -------- --------
Total Securities................. $ 5,418 5.21 $ 27,337 4.94 $ 584 6.17 $ 2,875 0.00
======== ========= ======== ========
There were no securities held by the Company of which the aggregate value
at December 31, 2002, 2001 and 2000 exceeded ten percent of shareholders' equity
at that date. (Securities which are payable from and secured by the same source
of revenue or taxing authority are considered to be securities of a single
issuer. Securities of the U.S. Government and U.S. Government agencies and
corporations are not included.)
13
Deposits and Borrowed Funds
Average deposits increased $95.2 million (35.1%) in 2002 compared to 2001.
Total deposits increased $106 million (33.4%) from year-end 2001 to 2002. The
largest area of growth in 2002 was in certificates of deposit, which increased
$89.8 million. From 2001 to 2002, noninterest-bearing demand deposits decreased
$5.7 million or 9.4% and savings deposits increased $22.1 million (31.7%)
Average deposits rose $55 million or 25.5% in 2001 compared to 2000. Total
deposits increased $69 million or 27.5% from year-end 2000 to 2001. The largest
area of growth in 2001 was in certificates of deposit, which increased $32
million. From 2000 to 2001, interest-bearing transaction deposits increased $5.1
million or 25.5%, savings deposits increased $18 million or 34.5%, other time
deposits of less than $100,000 increased $13 million or 17.2%, and time deposits
of $100,000 or more increased $19 million or 34.2%. From year-end 2000 to
year-end 2001, total non-interest bearing deposits increased $14 million or
29.4%.
The following table sets forth the Company's deposit structure at December
31 in each of the last three years.
December 31,
----------------------------------------------
2002 2001 2000
------------- ------------- --------------
(In thousands)
Noninterest-bearing deposits:
Individuals partnerships and corporations.................... $ 49,970 $ 43,736 $ 40,301
U.S. Government and states and political subdivisions........ 2,311 2,408 1,936
Certified and official checks................................ 2,197 14,017 4,268
------------- ------------- --------------
Total non-interest-bearing deposits........................ 54,478 60,161 46,505
------------- ------------- --------------
Interest-bearing deposits:
Interest - bearing demand accounts........................... 24,774 24,959 19,883
Savings accounts............................................. 92,109 69,963 52,007
Certificates of deposit, less than $100,000.................. 111,774 86,992 74,200
Certificates of deposit, more than $100,000.................. 140,800 75,786 56,464
------------- ------------- --------------
Total interest-bearing deposits............................ 369,457 257,700 202,554
------------- ------------- --------------
Total deposits............................................. $ 423,935 $ 317,861 $ 249,330
============= ============= ==============
The following table presents a breakdown by category of the average amount
of deposits and the weighted average rate paid on deposits for the periods
indicated:
Years Ended December 31,
-----------------------------------------------------------------------
2002 2001 2000
---------------------- ---------------------- -----------------------
Amount Rate Amount Rate Amount Rate
---------- ---------- ---------- --------- --------- ----------
(Dollars in thousands)
Non interest-bearing deposits............ $ 53,376 0.00% $ 43,735 0.00% $ 39,268 0.00%
Savings deposits......................... 86,383 1.99 66,586 3.14 56,939 4.20
Time deposits............................ 203,413 3.99 138,773 6.05 100,566 6.10
Interest-bearing demand deposits......... 23,460 0.90 22,337 1.92 19,575 2.11
---------- -------- ---------- ---------
Total deposits......................... $ 366,632 2.74% $ 271,431 4.02% $ 216,348 4.13%
========== ========== =========
14
At December 31, 2002, time deposits of $100,000 or greater aggregated
approximately $140.8 million. The following table indicates, as of December 31,
2002, 2001 and 2000 the dollar amount of $100,000 or more time deposits by the
time remaining until maturity (in thousands):
Maturities of Large Time Deposits
(In thousands)
2002 2001 2000
------------- ------------- --------------
Three months or less............................................ $ 49,384 $ 27,855 $ 29,552
Over three through six months................................... 7,461 3,301 2,813
Over six through twelve months.................................. 40,581 27,476 14,434
Over twelve months.............................................. 43,374 17,154 9,665
------------- ------------- --------------
Total...................................................... $ 140,800 $ 75,786 $ 56,464
============= ============= ==============
At December 31, 2002 and 2001, respectively, borrowed funds consisted
primarily of long-term debt. The Bank had $22,250,000 in available lines to
purchase federal funds, on an unsecured basis, from commercial banks. At
December 31, 2001, the bank had $1,086,000 advanced against these lines. There
were no advances against these lines at the end of 2002 and 2000. At December
31, 2002 and 2001 the Company also had credit available of approximately $78
million and $58 million, respectively, with the Federal Home Loan Bank of
Atlanta. Of the credit available, $50,000,000 and $32,500,000 had been utilized
at December 31, 2002 and 2001, respectively. The line is secured by residential
and commercial real estate loans, investment securities and cash.
The following table sets forth the expected debt service for the next five
years based on interest rates and repayment provisions as of December 31, 2002.
Maturities of Long-term Debt
(In thousands)
2003 2004 2005 2006 2007
--------- --------- -------- -------- -----------
Interest on indebtedness......................... $ 2,463 $ 2,247 $ 1,723 $ 1,323 $ 1,231
Repayment of principal........................... 18 10,518 15,003 4,500 --
--------- --------- -------- ---------- -----------
$ 2,481 $ 12,765 $ 16,726 $ 5,823 $ 1,231
========= ========= ======== ========== ===========
Capital Resources
Shareholders' equity increased $5.3 million to $34.5 million as of December
31, 2002, and increased $3.2 million $29.1 to million as of December 31, 2001.
Shareholders' equity increased $3.1 million to $26.0 million as of December 31,
2000. The increase in shareholders' equity for 2002, 2001 and 2000 was
attributable to net income less dividends declared.
On June 21, 2002, FCBI Capital Trust I ("FCBI Trust"), a Delaware statutory
trust established by the Company, received $10,000,000 in proceeds in exchange
for $10,000,000 principal amount of FCBI Trust's floating rate cumulative trust
preferred securities (the "preferred securities") in a trust preferred private
placement. The proceeds of that transaction were then used by FCBI Trust to
purchase an equal amount of floating rate subordinated debentures (the
"subordinated debentures") of the Company. The Company has fully and
unconditionally guaranteed all obligations of FCBI Trust on a subordinated basis
with respect to the preferred securities. The Company accounts for the FCBI
Trust preferred securities as a minority interest. Subject to certain
limitations, the preferred securities qualify as Tier 1 capital and are
presented in the Consolidated Statements of Financial Condition as "Guaranteed
preferred beneficial interests in the Company's subordinated debentures." The
15
sole asset of FCBI Trust is the subordinated debentures issued by the Company.
Both the preferred securities of FCBI Trust and the subordinated debentures of
the Company each have approximately 30-year lives. However, both the Company and
FCBI Trust have a call option after five years, subject to regulatory capital
requirements.
A strong capital position, which is vital to the continued profitability of
the Company, also promotes depositor and investor confidence and provides a
solid foundation for the future growth of the organization. The objective of
management is to maintain a level of capitalization that is sufficient to take
advantage of profitable growth opportunities while meeting regulatory
requirements. This is achieved by improving profitability through effectively
allocating resources to more profitable businesses, improving asset quality,
strengthening service quality, and streamlining costs. The primary measures used
by management to monitor the results of these efforts are the ratios of return
on average assets, return on average common equity and average equity to average
assets.
The table below summarizes these and other key ratios for the Company for
each of the last three years.
Return on Equity and Assets
2002 2001 2000
----------- ----------- -----------
Return on average assets........................................... 1.44% 1.65% 1.93%
Return on average common equity.................................... 20.04 19.09 20.57
Dividend payout ratio.............................................. 17.03 40.74 39.10
Average common shareholders' equity to average
assets ratio.................................................... 7.18 8.64 9.39
In addition, bank holding companies are required to maintain capital to
support, on a risk-adjusted basis, certain off-balance sheet activities such as
loan commitments. The Federal Reserve has adopted capital guidelines governing
the activities of bank holding companies. These guidelines require the
maintenance of an amount of capital based on risk-adjusted assets so that
categories of assets with potentially higher credit risk will require more
capital backing than assets with lower risk.
The capital guidelines classify capital into two tiers, referred to as Tier
I and Tier II. Under risk-based capital requirements, Total Capital consists of
Tier I Capital, which is generally common shareholders' equity less goodwill,
and Tier II Capital, which is primarily a portion of the allowance for loan
losses and certain qualifying debt instruments. In determining risk-based
capital requirements, assets are assigned risk-weights of 0% to 100%, depending
primarily on the regulatory assigned levels of credit risk associated with such
assets. Off-balance sheet items are considered in the calculation of
risk-adjusted assets through conversion factors established by the regulators.
The framework for calculating risk-based capital requires banks and bank holding
companies to meet the regulatory minimums of 4% Tier I and 8% total risk-based
capital. In 1990 regulators added a leverage computation to the capital
requirements, comparing Tier I Capital to total average assets less goodwill.
Banks have similar capital requirements.
During 2001, the Bank issued $5,000,000 in subordinated debt to qualify as
Tier II Capital. Portions of this debt qualify according to maturity as
allowable Tier II Capital. In 2001, the Bank had $4,400,000 as qualifying Tier
II Capital. There were no similar transactions during 2000. The subordinated
debt was repaid by the Bank from proceeds of the Trust Preferred securities
issued by the Company and injected into the Bank as Tier I capital.
[The remainder of this page intentionally left blank]
16
The table below illustrates the Company's regulatory capital ratios under
federal guidelines at December 31, 2002, 2001 and 2000:
Capital Adequacy Ratios
Statutory Years ended December 31,
----------------------------------------
Minimum 2002 2001 2000
------------ ----------- ----------- -----------
(Amounts in thousands)
Tier I Capital $ 44,464 $ 29,139 $ 25,970
Tier II Capital 5,856 8,203 3,267
----------- ----------- -----------
Total Qualifying Capital $ 50,320 $ 37,342 $ 29,237
=========== =========== ===========
Risk Adjusted Total Assets (including
off-balance-sheet exposures) $ 468,050 $ 350,629 $ 268,019
=========== =========== ===========
Adjusted quarterly average assets $ 485,977 $ 351,496 $ 281,659
=========== =========== ===========
Tier I Capital Ratio 4.00% 9.50% 8.31% 9.69%
Total Capital Ratio 8.00 10.75 10.65 10.91
Leverage Ratio 4.00 9.15 8.29 9.22
Information on the Bank capital ratios appears in Footnote 11 to the
consolidated financial statements contained elsewhere herein.
On December 31, 2002 the Company and the Bank exceeded the regulatory
minimums and qualified as well capitalized institutions under the regulations.
Liquidity Management
Liquidity is the ability of a company to convert assets into cash without
significant loss and to raise funds by increasing liabilities. Liquidity
management involves having the ability to meet the day-to-day cash flow
requirements of its customers, whether they are depositors wishing to withdraw
funds or borrowers requiring funds to meet their credit needs.
The primary function of asset/liability management is not only to assure
adequate liquidity in order for the Bank to meet the needs of its customer base,
but to maintain an appropriate balance between interest-sensitive assets and
interest-sensitive liabilities so that the Bank can remain profitable in varying
interest rate environments. Both assets and liabilities are considered sources
of liquidity funding and both are, therefore, monitored on a daily basis.
The asset portion of the balance sheet provides liquidity primarily through
loan repayments and maturities of or pledge of securities. Additional sources of
liquidity are investments in federal funds sold and prepayments from the
mortgage-backed securities in the securities portfolio.
The liability portion of the balance sheet provides liquidity through
various interest bearing and noninterest-bearing deposit accounts. The Bank had
$22,250,000 and $21,164,000 of federal funds available at December 31, 2002 and
2001, respectively. The Bank also had available as a source of financing, a line
of credit with the Federal Home Loan Bank of Atlanta of which $28,000,000 and
$25,500,000 was available and unused at December 31, 2002 and 2001,
respectively, subject to the availability of assets to pledge to secure such
borrowings.
17
Interest Rate Sensitivity Management
Interest rate sensitivity is a function of the re-pricing characteristics
of the Company's portfolio of assets and liabilities. These re-pricing
characteristics are the time frames within which the interest-bearing assets and
liabilities are subject to change in interest rates either at replacement or
maturity during the life of the instruments. Sensitivity is measured as the
difference between the volume of assets and liabilities in the Bank's current
portfolio that are subject to re-pricing in future time periods. The differences
are known as interest sensitivity gaps and are usually calculated separately for
segments of time ranging from zero to thirty days, thirty-one to ninety days,
ninety-one days to one year, one to five years, over five years and on a
cumulative basis.
The following table shows interest sensitivity gaps for different intervals
as of December 31, 2002.
Interest Rate Sensitivity Analysis
(In thousands)
0-30 31-90 90-365 1-5 Over 5
Days Days Days Years Years Total
----------- ----------- ----------- ----------- ----------- -----------
Interest-earning assets (1)
Loans............................ $ 109,000 $ 10,720 $ 95,072 $ 169,777 $ 31,846 $ 416,415
Securities and federal funds sold 32,902 2,506 2,895 16,179 14,635 69,117
Interest-bearing deposits in banks 12,668 -- -- -- -- 12,668
----------- ----------- ----------- ----------- ----------- -----------
154,570 13,226 97,967 185,956 46,481 498,200
----------- ----------- ----------- ----------- ----------- -----------
Interest-bearing liabilities (2)....
Demand deposits (3).............. 8,258 8,258 8,258 -- -- 24,774
Savings deposits (3)............. 30,703 30,703 30,703 -- -- 92,109
Time deposits.................... 34,985 40,165 108,409 69,014 -- 252,573
Long-term borrowings............. -- -- 18 30,021 30,000 60,039
----------- ----------- ----------- ----------- ----------- -----------
73,946 79,126 147,388 99,035 30,000 429,495
----------- ----------- ----------- ----------- ----------- -----------
Interest sensitivity gap............ $ 80,624 $ (65,900) $ (49,421) $ 86,921 $ 16,481 $ 68,705
=========== ============ =========== =========== =========== ===========
Cumulative interest sensitivity gap. $ 80,624 $ 14,724 $ (34,697) $ 52,224 $ 68,705
=========== =========== =========== =========== ===========
Ratio of interest-earning assets to
Interest-bearing liabilities... 1.92 0.17 0.66 1.88 2.82
Cumulative ratio.................... 1.92 1.10 0.88 1.13 1.16
Ratio of cumulative gap to total
interest-earning assets.......... 0.16 0.03 (0.07) 0.10 0.14
(1) Excludes nonaccrual loans. Securities maturities are based on
projected re-payments at current interest rate levels.
(2) Excludes matured certificates which have not been redeemed by the
customer and on which no interest is accruing.
(3) Interests bearing demand and savings deposits are assumed to be
subject to movement into other deposit instruments in equal amounts
during the 0-30 day period, the 31-90 day period, and the 91-365 day
period.
The above table indicates that in a rising interest rate environment, the
Company's earnings may be positively affected in the short-term, (0-30 days) due
to earning assets repricing faster than interest-bearing liabilities. As seen in
the preceding table, for the first 30 days of repricing opportunity there is an
excess of earning assets over interest-bearing liabilities of approximately $80
million. For the first 365 days, interest-bearing liabilities exceed earning
assets by approximately $35 million. Changes in the mix of earning assets or
supporting liabilities can either increase or decrease the net interest margin
without affecting interest rate sensitivity. In addition, the interest rate
spread and the level of interest-bearing assets and liabilities may change, thus
impacting net interest income. Due to management's continued emphasis on
profitability, $3.0 million of the higher-yielding securities presented in the
table above have call features, which may result in such securities having a
shorter effective life. This in turn may reduce the interest rate sensitivity
gap presented above. It should be noted, therefore, that a matched
interest-sensitive position by itself would not ensure maximum net interest
income.
18
Management continually evaluates the condition of the economy, the pattern
of market interest rates, and other economic data to determine the types of
investments that should be made and at what maturities. Using this analysis,
management from time to time assumes calculated interest sensitivity gap
positions to maximize net interest income based upon anticipated movements in
the general level of interest rates.
Results of Operations
Net Interest Income
Net interest income is the principal component of a financial institution's
income stream and represents the spread between interest and fee income
generated from earning assets and the interest expense paid on deposits and
borrowings. The following discussion is on a fully taxable equivalent basis.
Net interest income increased approximately $3.9 million (24.5%) to $19.8
million in 2002 compared to 2001. Net interest income increased $1.2 million
(7.8%) to $15.9 million from 2000 to 2001. The increase each year in the net
interest income is primarily due to increased volume in total loans.
Interest income was $31.6 million in 2002, which represented an increase of
13.1% over 2001. Interest income produced by the loan portfolio increased $4.2
million (16.9%) in 2002 compared to 2001. The increase in loan interest
reflected the offsetting effects of a lower average rate earned on a greater
average investment in loans. Interest income on securities decreased $298
thousand (12.0%) in 2002 compared to 2001. The decrease in securities interest
from 2001 to 2002 reflected an increase in the average volume more than offset
by the decline in yield. The call of higher rate U.S. Government Agency
securities contributed to the lower yields.
Interest income was $27.9 million in 2001, which represented an increase
$2.9 million (11.6%) over 2000. Interest income produced by the loan portfolio
increased $2.4 (10.8%) in 2001 compared to 2000. The increase in loan interest
reflected the offsetting effects of a lower average rate earned on a greater
average investment in loans. Interest income on securities increased $37
thousand (1.5%) in 2001 compared to 2000. The minor increase in securities
income from 2000 to 2001 reflected a stable average investment in securities
during 2001 and 2000.
Interest income was $25.0 million in 2000, which represented an increase of
$6.8 million (37.5%) over 1999. Interest income produced by the loan portfolio
increased $6.5 million (40.6%) in 2000 from 1999. The Bank benefited from a rise
in the national interest rate levels and the asset sensitive position of the
loan portfolio. Interest income on securities increased $441 thousand (21.9%)
from 1999 to 2000. The increase in securities income from 1999 to 2000 is due to
an increase in the average volume of taxable securities.
Interest income other than loans and securities decreased by $259 thousand
from 2001 to 2002. During 2001, the Bank maintained a slightly larger investment
in federal funds sold (averaging $11.7 million) compared to 2000 while rates
declined significantly (about 2.8%), resulting in the decreased income.
Interest income other than loans and securities increased by $436 thousand
from 2000 to 2001. During 2001, the Company maintained a larger investment in
federal funds sold (averaging $11 million) compared to 2000, resulting in the
increased income. Interest income other than loans and securities decreased by
$106 thousand from 1999 to 2000. The decrease is due primarily to the decline in
the average federal funds sold balance.
Total interest expense decreased by $231 thousand (1.9%) in 2002 compared
to 2001. The interest expense decrease from 2001 to 2002 is primarily due to the
volume increase in time deposit accounts and FHLB advances more than offset by a
decline in the average rate paid on both. (See the "Rate/Volume Analysis"
following this section.) Interest expense on time deposit accounts decreased
$285 thousand although the average volume increased by $64.6 million. The
significant rate decline was cause by a shift from locally generated time
deposits to brokered time deposits and the general decline in rates during 2002.
19
Total interest expense increased by $1.7 million (17.0%) in 2001 compared
to 2000. The interest expense increase from 2000 to 2001 is primarily due to the
volume increase in time deposit accounts, partially offset by a 38 basis point
decline in the average rate paid on total interest-bearing liabilities. Interest
expense on time deposit accounts increased $2.2 million (36.7%) from 2000 to
2001 as the Bank relied on that source of funds to make loans.
Total interest expense increased by $4.0 million or 64.9% in 2000 from
1999. The interest expense increase from 1999 to 2000 is primarily due to the
increase in time deposit accounts and long-term borrowings and an increase of
107 basis points in the average rate paid on total interest-bearing liabilities.
Interest expense on time deposit accounts increased $2.5 million or 70.2% from
1999 to 2000 and interest expense on long-term borrowings increased $1.0 million
over the same period of time.
The trend in net interest income is commonly evaluated by measuring the
average yield on earning assets, the average cost of funds, and the net interest
margin. The Company's average yield on earning assets (total interest income
divided by average interest earning assets) decreased in 2002 to 7.40% compared
to 9.08% in 2001. Most of the decline was caused by the drop in Prime rate
during 2001 at the same time the Bank had over $100 million in loans tied to
that index. In line with the national interest rate markets, the Bank's average
cost of funds (total interest expense divided by average interest bearing
liabilities) declined from 4.83% in 2001 to 3.30% in 2002. The Bank's net
interest margin (net interest income divided by average interest earning assets)
declined in 2002 to 4.64% compared to 5.17% in 2001. The decline was caused by
the Bank's asset sensitive position during a period of dropping interest rates
as discussed more fully in the section titled "Interest Rate Sensitivity
Management" elsewhere in this report.
The Bank's average yield on earning assets (total interest income divided
by average interest earning assets) decreased in 2001 to 9.08% compared to
10.12% in 2000. Most of the decline was caused by the drop in Prime rate during
2001 at the same time the Bank had over $100 million in loans tied to that
index. In line with the national interest rate markets, the Bank's average cost
of funds (total interest expense divided by average interest bearing
liabilities) declined from 5.21% in 2000 to 4.83% in 2001. The Bank's net
interest margin (net interest income divided by average interest earning assets)
declined in 2001 to 5.17% in 2001 compared to 5.96% in 2000. The decline was
caused by the Bank's asset sensitive position during a period of dropping
interest rates.
The net interest margin decreased 23 basis points in 2000 from 6.19% at
year-end 1999 to 5.96% at year-end 2000, reflecting a major shift (as a percent
of deposits) from lower cost savings accounts to higher cost certificates of
deposit. The shift in funding was driven by a rapid loan growth requiring a
significant increase in rates to attract certificates of deposit. Partially
offsetting the higher rates paid on certificates of deposit in 2000 compared to
1999, the yield on earning assets increased 71 basis points to 10.12% from 9.41%
during the same period.
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20
The tables that follow show, for the periods indicated, the daily average
balances outstanding for the major categories of interest-bearing assets and
interest-bearing liabilities, and the average interest rate earned or paid
thereon. Such yields are calculated by dividing income or expense by the average
balance of the corresponding assets or liabilities. Also shown are the changes
in income attributable to changes in volume and changes in rate.
Average Balances, Interest Income/Expense and Yields/Rates
Taxable Equivalent Basis
Years Ended December 31,
------------------------------------------------------------------------------------------
2002 2001 2000
------------------------------ ---------------------------- ----------------------------
Interest Average Interest Average Interest Average
Average Income/ Yields/ Average Income/ Yields/ Average Income/ Yields/
Balance Expense Rates Balance Expense Rates Balance Expense Rates
--------- --------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
Assets:
Earning assets:
Loans, net of
unearned income (1) $ 370,062 $ 29,128 7.85% $255,294 $ 24,908 9.76% $206,333 $ 22,482 10.90%
Securities:
Taxable............ 40,714 2,185 5.37 40,093 2,459 6.13 38,984 2,386 6.12
Tax-exempt......... 82 5 6.10 325 29 8.31 692 65 9.39
-------- -------- -------- -------- -------- --------
Total securities. 40,796 2,190 5.37 40,418 2,488 6.15 39,676 2,451 6.18
Interest-bearing deposits
in other banks..... 3,483 77 2.21 1,137 55 4.84 19 -- 0.00
Federal funds sold... 11,723 182 1.55 10,675 463 4.34 1,210 82 6.78
-------- -------- -------- -------- -------- --------
Total interest-
earning assets (2) 426,064 31,577 7.41 307,524 27,914 9.08 247,238 25,015 10.12
Non-interest earning assets:
Cash and due from banks 10,689 8,756 9,000
Accrued interest and
other assets..... 13,995 11,449 9,873
Allowance for loan
losses........... (4,740) (3,541) (2,822)
-------- -------- --------
Total assets..... $ 446,008 $324,188 $263,289
========= ======== ========
Liabilities and Shareholders' Equity:
Interest-bearing liabilities:
Demand deposits.... $ 23,460 210 0.90% $ 22,337 429 1.92 $ 19,575 413 2.11
Savings deposits... 86,383 1,715 1.99 66,586 2,088 3.14 56,939 2,389 4.20
Time deposits...... 203,413 8,107 3.99 138,773 8,392 6.05 100,566 6,137 6.10
-------- -------- -------- -------- -------- --------
Total deposits... 313,256 10,032 3.20 227,696 10,909 4.79 177,080 8,939 5.05
Long-term borrowings 41,391 1,699 4.10 17,478 1,004 5.74 15,607 1,015 6.50
Short-term borrowings 2,759 56 2.03 3,773 105 2.78 4,614 322
-------- -------- -------- -------- -------- -------- 6.98
Total interest-
bearing liabilities 357,406 11,787 3.30 248,947 12,018 4.83 197,301 10,276
-------- -------- -------- -------- -------- -------- 5.21
Non interest-bearing liabilities:
Demand deposits.... 53,376 43,735 39,268
Accrued interest and
other liabilities 3,201 3,497 1,996
Shareholders' equity 32,025 28,009 24,724
-------- -------- --------
Total liabilities and
shareholders' equity $446,008 $324,188 $ 263,289
======== ======== =========
Net interest income/net
interest spread..... 19,790 4.11% 15,896 4.25% 14,739 4.91%
======== ======== ========
Net yield on earning assets 4.64% 5.17% 5.96%
======== ======== ========
Taxable equivalent adjustment:
Securities......... 1 9 22
Loans.............. 6 2 2
-------- -------- --------
Total taxable
equivalent adjustment 7 11 24
-------- -------- --------
Net interest income.. $ 19,783 $ 15,885 $ 14,715
======== ======== ========
(1) Average loans include nonaccrual loans. All loans and deposits are
domestic.
(2) Tax equivalent adjustments have been based on an assumed tax rate of
34 percent, and do not give effect to the disallowance for federal
income tax purpose of interest expense related to certain tax-exempt
earning assets.
21
Rate/Volume Variance Analysis
Taxable Equivalent Basis
Average Volume Change in Volume Average Rate
------------------------------- ------------------------- ------------------------------
2002 2001 2000 2002-2001 2001-2000 2002 2001 2000
--------- --------- --------- ----------- ----------- -------- -------- --------
(Dollars in thousands)
Earning assets:
Loans, net of unearned
income(1)............... $ 370,062 $ 255,294 $ 206,333 $ 117,768 $ 48,961 7.85% 9.76% 10.90%
Securities:
Taxable................. 40,714 40,093 38,984 621 1,109 5.37 6.13 6.12
Tax exempt.............. 82 325 692 (243) (367) 6.10 8.31 9.39
--------- --------- --------- ----------- -----------
Total securities...... 40,796 40,418 39,676 1,868 742 5.37 6.15 6.18
--------- --------- --------- ----------- -----------
Interest-bearing deposits
with other banks........ 3,483 1,137 19 2,348 1,118 2.21 4.84 0.00
Federal funds sold......... 11,723 10,675 1,210 1,048 9,465 1.55 4.34 6.78
--------- --------- --------- ----------- -----------
Total earning assets.. $ 426,964 $ 307,524 $ 247,238 $ 119,441 $ 60,286 7.41 9.08 10.12
========= ========= ========= =========== ===========
Interest-bearing liabilities:
Deposits:..................
Demand deposits......... $ 23,460 $ 22,337 $ 19,575 $ 1,123 $ 2,762 0.90 1.92 2.11
Savings................. 86,383 66,586 56,939 19,797 9,647 1.99 3.14 4.20
Time certificates....... 203,413 138,773 100,566 64,640 38,207 3.99 6.05 6.10
--------- --------- --------- ----------- -----------
Total deposits........ 313,256 227,696 177,080 85,560 50,616 3.20 4.79 5.05
Long-term borrowings....... 41,391 17,478 15,607 23,913 1,871 4.10 5.74 6.50
Other borrowings........... 2,759 3,773 4,614 (1,014) (841) 2.03 2.78 6.98
--------- --------- --------- ----------- -----------
Total interest-bearing
liabilities $ 357,406 $ 248,947 $ 197,301 $ 108,469 $ 51,646 3.30 4.83 5.21
========= ========= ========= =========== ===========
Net interest income/net interest spread 4.11 4.25 4.91
Net yield on earning assets 4.64 5.17 5.96
Net cost of funds.......... 2.77 3.91 4.16
Variance Attributed to
-------------------------------------------------------
Interest
Income/Expense Variance 2002 2001
---------------------- ------------------------ --------------------------- -------------------------
2002 2001 2000 2002-2001 2001-2000 Volume Rate Mix Volume Rate Mix
------ ------ ------ ----------- ----------- -------- -------- ------- ------- -------- ------
(Dollars in thousands)
Earning assets:
Loans, net of
unearned income....... $29,128 $24,908 $22,482 $ 4,220 $ 2,426 $ 11,198 $ (4,814) $(2,164) $ 5,335 $ (2,351)$ (558)
Securities:
Taxable.............. 2,185 2,459 2,386 (274) 73 38 (307) (5) 68 5 0
Tax exempt........... 5 29 65 (24) (36) (22) (9) 7 (34) (3) 1
------ ------ ------ ----------- ---------- -------- -------- ------- ------- -------- ------
Total securities... 2,190 2,488 2,451 (298) 37 16 (316) 2 34 (2) 1
------ ------ ------ ----------- ---------- -------- -------- ------- ------- -------- ------
Interest-bearing deposits
with other banks..... 77 55 -- 22 55 114 (30) (62) 0 1 54
Federal funds sold...... 182 463 82 (281) 381 45 (297) (29) 641 (30) (230)
------ ------ ------ ----------- ---------- -------- -------- ------- ------- -------- ------
Total earning
assets........... 31,577 27,914 25,015 3,663 2,899 11,373 (5,457) (2,253) 6,010 (2,378) (733)
------ ------ ------ ----------- ---------- -------- -------- ------- ------- -------- ------
Interest-bearing liabilities:
Deposits:
Demand............... 210 429 413 (219) 16 22 (229) (12) 58 (37) (5)
Savings.............. 1,715 2,088 2,389 (373) (301) 621 (766) (228) 405 (604) (102)
Time certificates.... 8,107 8,392 6,137 (285) 2,255 3,908 (2,861) (1,332) 2,332 (55) (22)
------ ------ ------- --------- --------- -------- -------- ------- ------- -------- ------
Total deposits..... 10,032 10,909 8,939 (877) 1,970 4,551 (3,856) (1,572) 2,795 (696) (129)
------ ------ ------- --------- --------- -------- -------- ------- ------- -------- ------
Long-term borrowings.... 1,699 1,004 1,015 695 (11) 1,375 (287) (393) 122 (118) (15)
Short-term borrowings... 56 105 322 (49) (217) (29) (28) 8 (59) (194) 36
------ ------ ------- --------- --------- -------- -------- ------- ------- ------- ------
Total interest-
bearing
liabilities..... 11,787 12,018 10,276 (231) 1,742 5,897 (4,171) (1,957) 2,858 (1,008) (108)
------ ------ ------- --------- --------- -------- -------- ------- ------- ------- ------
Net interest income/net
interest spread...... $19,790 $15,896 $14,739 $ 3,894 $ 1,157 $ 5,476 $ (1,286) $ (296) $ 3,152 $(1,370) $ (625)
====== ====== ======= ========= ========= ======== ======== ======= ======= ======= ======
22
Allowance for Loan Losses
Each of the Bank's loans is assigned to a lending officer responsible for
the ongoing review and administration of that loan. Lending officers make the
initial identification of loans which present some difficulty in collection or
where there is an indication that the probability of loss exists. Lending
officers are responsible for the collection effort on a delinquent loan. Senior
management is informed of the status of delinquent and problem loans on a
monthly basis.
Senior management makes recommendations monthly to the Board of Directors
as to charge-offs. Senior management reviews the allowance for possible loan
losses on a monthly basis. The Bank's policy is to discontinue interest accrual
when payment of principal and interest is 90 days or more in arrears unless the
value of the collateral exceeds the principal plus accrued interest.
The allowance for possible loan losses represents management's assessment
of the risks associated with extending credit and its evaluation of the quality
of the loan portfolio. Management analyzes the loan portfolio to determine the
adequacy of the allowance for possible loan losses and the appropriate
provisions required to maintain a level considered adequate to absorb
anticipated loan losses. In assessing the adequacy of the allowance, management
reviews the size, quality and risk of loans in the portfolio. Management also
considers such factors as loan loss experience, the amount of past due and
nonperforming loans, specific known risk, the status and amount of nonperforming
assets, underlying collateral values securing loans, current and anticipated
economic conditions and other factors which affect the allowance for potential
credit losses.
While it is the Bank's policy to charge off in the current period the loans
in which a loss is considered probable, there are additional risks of future
losses, which cannot be quantified precisely or attributed to particular loans
or classes of loans. Because these risks include the future state of the
economy, management's judgment as to the adequacy of the allowance is
necessarily approximate and imprecise.
Management believes that $6,319,000 on December 31, 2002, $3,803,000 on
December 31, 2001, $3,267,000 on December 31, 2000, $2,261,000 on December 31,
1999, and $1,750,000 on December 31, 1998, in the allowance for loan losses were
adequate to absorb known risks in the portfolio. No assurance can be given,
however, that adverse economic circumstances will not result in increased losses
in the loan portfolio, and require greater provisions for possible loan losses
in the future.
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23
The following table sets forth certain information with respect to the
Bank's loans, net of unearned income, and the allowance for loan losses for the
five years ended December 31, 2002.
Summary of Loan Loss Experience
2002 2001 2000 1999 1998
--------- --------- -------- -------- ---------
(Dollars in thousands)
Allowance for loan losses at beginning of year..... $ 3,803 $ 3,267 $ 2,261 $ 1,750 $ 2,045
Loans charged off:
Commercial, financial and agricultural........... 161 162 50 166 532
Real estate - mortgage........................... 0 185 8 479 1,021
Consumer......................................... 46 43 52 38 55
--------- --------- -------- -------- ---------
Total loans charged off........................ 207 390 110 683 1,608
--------- --------- -------- -------- ---------
Recoveries on loans previously charged off:
Commercial, financial and agricultural........... 193 47 33 7 126
Real estate - mortgage........................... 3 131 72 340 251
Consumer......................................... 17 28 11 37 16
--------- --------- -------- -------- ---------
Total recoveries............................... 213 206 116 384 393
--------- --------- -------- -------- ---------
Net loans charged off (recovered).................. (6) 184 (6) 299 1,215
Provision for loan losses.......................... 2,510 720 1,000 810 920
--------- --------- -------- -------- ---------
Allowance for loan losses at end of period......... $ 6,319 $ 3,803 $ 3,267 $ 2,261 $ 1,750
========= ========= ======== ======== =========
Loans, net of unearned income, at end of period.... $ 416,415 $ 318,666 $227,155 $181,764 $ 152,848
Average loans, net of unearned income,
outstanding for the period....................... 370,062 255,294 206,333 154,771 132,522
Ratio of net charge-offs to net average loans...... (0.00)% 0.07% (0.00)% 0.19% 0.92%
In evaluating the allowance, management also considers the historical loan
loss experience of the Bank, the amount of past due and nonperforming loans,
current and anticipated economic conditions, lender requirements and other
appropriate information. The Bank allocates the allowance for loan losses to
specific loan categories based on an average of historical losses and the volume
of each loan category.
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24
Management allocated the allowance for loan losses to specific loan categories as follows:
Allocation of Loan Loss Reserve
December 31,
------------------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
-------------------- --------------------- ------------------- -------------------- --------------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in Each in Each in Each in Each in Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
---------- --------- ---------- --------- ---------- --------- ---------- --------- ---------- ---------
(Dollars in Thousands)
Domestic loans:
Commercial, financial
and agricultural $ 2,494 10.27% $ 1,566 11.92% $ 544 16.56% $ 410 17.98% $ 336 20.12%
Real estate -
mortgage........ 3,357 86.54 2,021 85.37 2,647 81.02 1,786 78.98 1,372 76.23
Consumer.......... 468 3.19 216 2.71 76 2.42 65 3.04 42 3.66
---------- --------- ---------- --------- ---------- --------- ---------- --------- ---------- ---------
$ 6,319 100.00% $ 3,803 100.00% $ 3,267 100.00% $ 2,261 100.00% $ 1,750 100.00%
========== ========= ========== ========= ========== ========= ========== ========= ========== =========
Nonperforming Assets
Nonperforming assets include nonperforming loans and foreclosed real estate
held for sale. Nonperforming loans include loans classified as nonaccrual or
renegotiated. The Bank's policy is to place a loan on nonaccrual status when it
is contractually past due 90 days or more as to payment of principal or interest
unless the collateral value is greater than both the principal due and the
accrued interest. At the time a loan is placed on nonaccrual status, interest
previously accrued but not collected is reversed and charged against current
earnings. Recognition of any interest after a loan has been placed on nonaccrual
is accounted for on a cash basis.
The Bank had nonperforming assets at December 31, 2002, 2001, 2000, 1999,
and 1998 of approximately $7,698,000, $2,367,000, $1,548,000, $3,076,000, and
$4,219,000, respectively.
The following table presents information concerning outstanding balances of
nonperforming assets at December 31, 2002, 2001, 2000, 1999, and 1998.
Nonperforming Assets
December 31,
--------------------------------------------------------------------
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
(Amounts in thousands, except ratios)
Nonaccruing loans........................... $ 5,035 $ 1,333 $ 1,352 $ 945 $ 2,552
Accruing loans 90 days or more past due..... 2,662 984 2 1,313 1,199
Restructured loans.......................... -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Total nonperforming loans.............. 7,698 2,317 1,354 2,258 3,751
Nonaccruing securities...................... -- -- -- -- --
Other real estate........................... -- 50 194 818 468
----------- ----------- ----------- ----------- -----------
Total.................................. $ 7,698 $ 2,367 $ 1,548 $ 3,076 $ 4,219
=========== =========== =========== =========== ===========
Ratios:
Loan loss allowance to total
nonperforming assets................... 0.821 1.607 2.110 0.735 0.415
=========== =========== =========== ============ ===========
Total nonperforming loans to total loans
(net of unearned interest)............. 0.018 0.007 0.007 0.017 0.027
=========== =========== =========== ============ ===========
Total nonperforming assets to
total assets........................... 0.015 0.006 0.005 0.013 0.020
=========== =========== =========== =========== ===========
25
It is the general policy of the Bank to stop accruing interest income and
place the recognition of interest on a cash basis when any commercial,
industrial or real estate loan is past due as to principal or interest and the
ultimate collection of either is in doubt. Accrual of interest income on
consumer installment loans is suspended when any payment of principal or
interest, or both, is more than 90 days delinquent. When a loan is placed on a
nonaccrual basis, any interest previously accrued but not collected is reversed
against current income unless the collateral for the loan is sufficient to cover
the accrued interest or a guarantor assures payment of interest.
There has been no significant impact on the Company's consolidated
financial statements as a result of the provisions of Statement of Financial
Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan,
or Statement of Financial Accounting Standards No. 118, Accounting by Creditors
for Impairment of a Loan-Income Recognition and Disclosures.
Noninterest Income
Noninterest income consists of revenues generated from a broad range of
financial services and activities including fee-based services and profits and
commissions earned through credit life insurance sales and other activities. In
addition, gains or losses realized from the sale of investment portfolio
securities are included in noninterest income. Total noninterest income
increased by $317 thousand (18.7%) for the year ended December 31, 2002 compared
to 2001. The increase was due to higher service charges on deposit accounts
(increased $156 thousand) and gains on sale of available-for-sale securities
(increased $36 thousand). Total noninterest income decreased by $105 thousand or
5.8% for the year ended December 31, 2001 compared to 2000. The decline was due
primarily to a decrease of $256 thousand in insurance proceeds (a non-recurring
event) offset by increased fess on customer accounts. Total noninterest income
increased by $380 thousand or 26.7% for the year ended December 31, 2000 as
compared to 1999 caused in large part by the insurance proceeds noted above.
The table below sets forth the Bank's noninterest income for the periods
indicated.
2001/2002 2000/2001
Years Ended December 31, Percent Percent
--------------------------------------------
2002 2001 2000 Change Change
------------ ------------ ------------- ------------- --------------
(Dollars in thousands)
Service charges on deposits........ $ 1,268 $ 1,112 $ 1,096 14.0% 1.5%
Insurance commissions.............. 31 41 13 (24.4) 215.4
Securities gains................... 36 -- -- -- --
Gains on other real estate......... 13 19 167 (31.6) (88.6)
Insurance policy proceeds.......... -- -- 256 -- --
Safe deposit box rental............ 67 67 66 -- 1.5
Exchange fees...................... 390 304 47 28.3 546.8
Other.............................. 211 156 159 35.3 (1.9)
------------ ------------ -------------
$ 2,016 $ 1,699 $ 1,804 18.7 (5.8)
============ ============ =============
Noninterest Expenses
From 2001 to 2002, noninterest expense increased $795 thousand (9.7%).
Salaries and employee benefits in 2002 increased $320 thousand (6.1%) from 2001
to a total of $5.6 million. The increase in 2002 reflected the effect of adding
staff for new branches and higher employee benefits costs.
From 2000 to 2001, noninterest expense increased $672 thousand (8.9%).
Salaries and employee benefits in 2001 increased $468 thousand (9.8%) from 2000
to a total of $5.2 million for 2001. The increase in 2001 reflected the staffing
required to open two branches and additional support personnel for loans and
deposits. From 1999 to 2000, noninterest expense increased $742 thousand
(10.9%). Salaries and employee benefits in 2000 increased $671
26
(16.4%) from 1999 to a total of $4.8 million at year-end 2000. These increases
also can be attributed to the overall growth and expansion of the Bank in 2000
and 1999.
Occupancy and equipment expense increased $328 thousand (24.1%) from 2001
to 2002 and increased $252 thousand (22.7%) from 2000 to 2001. Occupancy and
equipment expense rose $79 thousand or 7.7% from 1999 to 2000. The occupancy and
equipment expense increases were a result of the additional property and
equipment added as a result of new branch locations and the associated
depreciation expense.
The table below sets forth the Bank's noninterest expenses for the periods
indicated.
2001/2002 2000/2001
Years Ended December 31, Percent Percent
--------------------------------------------
2002 2001 2000 Change Change
------------ ------------ ------------- ------------- --------------
(Dollars in thousands)
Salaries and employee benefits..... $ 5,552 $ 5,232 $ 4,764 6.1% 9.8%
Occupancy and equipment expense.... 1,689 1,361 1,109 24.1 22.7
Professional fees.................. 210 191 170 9.9 12.4
Supplies........................... 182 135 128 34.8 5.5
Regulatory fees and assessments.... 139 106 87 31.1 21.8
Postage............................ 137 99 87 38.4 13.8
Telephone.......................... 136 122 103 11.5 18.4
Advertising........................ 135 130 161 3.8 (19.3)
ATM expense........................ 124 124 101 0.0 22.8
Taxes and licenses................. 103 107 118 (3.7) (9.3)
Software maintenance............... 70 120 98 (41.7) (22.4)
Director and committee fees........ 67 67 72 -- (6.9)
Litigation settlement.............. -- -- 200 -- --
Other.............................. 476 431 355 10.2 21.4
------------ ------------ -------------
Total........................... $ 9,020 $ 8,225 $ 7,553 9.7% 8.9%
============ ============ =============
Income Taxes
Income tax expense increased $559 thousand (17.0%) to $3.9 million for the
year ended December 31, 2002, increased $411 thousand (14.3%) to $3.3 million
for the year ended December 31, 2001, $805 thousand (38.8%) to $2.9 for the year
ended December 31, 2000, and increased $611 thousand (41.7%) to $2.1 million for
the year ended December 31, 1999. The effective tax rate as a percentage of
pretax income was 37.5% in 2002, 38.1% in 2001, and 36.2% in 2000. The statutory
federal rate was 34 percent during 2002, 2001, and 2000. There is no current or
pending tax legislation of which management is aware that if passed would have
any material effect on the financial statements. For further information
concerning the provision for income taxes, refer to Note 14, Income Taxes, of
the "Notes to Financial Statements."
Impact of Inflation and Changing Prices
A bank's asset and liability structure is substantially different from that
of an industrial company in that virtually all assets and liabilities of a bank
are monetary in nature. Management believes the impact of inflation on its
financial results depends upon the Company's ability to react to changes in
interest rates and by such reaction to reduce the inflationary impact on
performance. Interest rates do not necessarily move in the same direction, or at
the same magnitude, as the prices of other goods and services. As discussed
previously, management seeks to manage the relationship between
interest-sensitive assets and liabilities in order to protect against wide
interest rate fluctuations, including those resulting from inflation.
Market Risk
Market risk is the risk arising from adverse changes in the fair value of
financial instruments due to a change in interest rates, exchange rates and
equity prices. The Company's primary risk is interest rate risk.
27
The primary objective of Asset/Liability Management of the Company is to
manage interest rate risk and achieve reasonable stability in net interest
income throughout interest rate cycles. This is achieved by maintaining the
proper balance of rate sensitive earning assets and rate sensitive liabilities.
The relationship of rate sensitive earning assets to rate sensitive liabilities
is the principal factor in projecting the effect that fluctuating interest rates
will have on future net interest income. Rate sensitive earning assets and
interest-bearing liabilities are those that can be repriced to current market
rates within a relatively short time period. Management monitors the rate
sensitivity of earning assets and interest-bearing liabilities over the entire
life of these instruments, but places particular emphasis on the first year and
through three years.
The Company has not experienced a high level of volatility in net interest
income primarily because of the relatively large base of core deposits that do
not reprice on a contractual basis. These deposit products include regular
savings, interest-bearing transaction accounts and money market savings
accounts. Balances for these accounts are reported based on historical repricing
experienced at each bank. However, the rates paid are typically not directly
related to market interest rates, since management has some discretion in
adjusting these rates as market rates change.
The Company uses additional tools to monitor and manage interest rate
sensitivity. One of the primary tools is simulation analysis. Simulation
analysis is the primary method of estimating earnings at risk and capital at
risk under varying interest rate conditions. Simulation analysis is used to test
the sensitivity of the Company's net interest income and shareholders' equity to
both the level of interest rates and the slope of the yield curve. Simulation
analysis accounts for the expected timing and magnitude of assets and liability
cash flows, as well as the expected timing and magnitude of deposits that do not
reprice on a contractual basis. In addition, simulation analysis includes
adjustments for the lag between movements in market interest rates on loans and
interest-bearing deposits. These adjustments are made to reflect more accurately
possible future cash flows, repricing behavior and ultimately net interest
income. The estimated impact on the Company's net interest income before
provision for loan loss sensitivity over a one-year time horizon is shown below.
Such analysis assumes a sustained parallel shift in interest rates and the
Company's estimate of how interest-bearing transaction accounts will reprice in
each scenario. Actual results will differ from simulated results due to timing,
magnitude and frequency of interest rate changes and changes in market
conditions and management's strategies, among other factors.
Percentage Increase
(Decrease) in Interest
Income/Expense Given
Interest Rate Shifts
-------------------------------
Down 200 Up 200
Basis Points Basis Points
For the Twelve Months After December 31, 2002 --------------- -------------
Projected change in:
Interest income (6.36)% 5.79%
Interest expense (10.30) 11.25
--------------- -------------
Net interest income (4.00)% 9.27%
=============== =============
Other Accounting Issues
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities. This statement establishes
accounting and reporting standards for derivative instruments and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial condition and measure those
instruments at fair value. The accounting for changes in the fair value of a
derivative is to be determined based upon the intended use of the derivative.
For certain hedge designations (cash flow and foreign currency exposure) the
derivative's gain or loss is reported as a component of other comprehensive
income. Other designations require the gain or loss to be recognized in earnings
in the period of change. This statement, amended as to effective date by SFAS
No. 137, is effective for financial statements for periods beginning after June
15, 2000. In June 2000, the Financial Accounting Standards Board also issued
SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an Amendment of SFAS No. 133. The adoption of SFAS No. 133, as
amended by SFAS No. 138 did not have a material impact on the Company's
consolidated financial statements. In September 2000, the FASB issued SFAS No.
140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities - a replacement of FASB Statement No. 125. While
SFAS No. 140 carries over most of the provisions of SFAS No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
it provides new standards for reporting financial assets transferred as
collateral and new standards for the derecognition of financial assets, in
particular transactions involving the use of special purpose entities. SFAS No.
140 also prescribes additional disclosures for collateral transactions and for
securitization transactions accounted for as sales. The new collateral standards
and disclosure requirements are effective for fiscal years ending after December
15, 2000, while the new standards for the derecognition of financial assets are
effective for transfers made after March 31, 2001. The adoption of this
statement did not have a material effect on the Company's consolidated financial
statements.
28
In May 2001, the Auditing Standards Board issued Statement on Auditing
Standards ("SAS") No. 94, The Effect of Information Technology on the Auditor's
Consideration of Internal Control in a Financial Statement Audit. This statement
amends SAS No. 55, Consideration of Internal Control in a Financial Statement
Audit, by providing additional guidance related to the understanding by the
auditor of an entity's use of information technology relevant to the audit. This
auditing standard is effective for audits of financial statements for periods
beginning on or after June 1, 2001. The impact on the audit of the Company's
consolidated financial statements resulting from the issuance of this auditing
standard was not material.
In June 2001, the FASB issued SFAS No. 141, Business Combinations. This
statement addresses financial accounting and reporting for business combinations
and supersedes Accounting Principles Board ("APB") Opinion No. 16, Business
Combinations, and SFAS No. 38, Accounting for Preacquisition Contingencies of
Purchased Enterprises. All business combinations in the scope of SFAS No. 141
are to be accounted for using one method, the purchase method. Prior to the
issuance of this statement, subject to certain criteria, business combinations
were accounted for using one of two methods, the pooling-of-interests method or
the purchase method. The two methods produce different financial statement
results. The single-method approach used in SFAS No. 141 reflects the conclusion
that virtually all business combinations are acquisitions and therefore should
be accounted for in the same manner as other asset acquisitions based on the
values exchanged. This statement provides expanded and revised guidance related
to the allocation of the purchase price to goodwill and other intangibles
arising from the business combination. The provisions of SFAS No. 141 apply to
all business combinations initiated after June 30, 2001.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets, which addresses financial accounting and reporting for acquired goodwill
and other intangible assets and supersedes APB Opinion No. 17, Intangible
Assets. SFAS No. 142 provides new standards for accounting relating to
intangible assets after initial recognition in the financial statements. This
statement proscribes the accounting practice of amortizing or expensing
intangibles ratably over a prescribed period of time and imposes new guidance
requiring that goodwill and certain other intangibles be tested for impairment
at least annually by comparing fair values of those assets with their recorded
amounts. Additional disclosure requirements also are provided. The provisions of
SFAS No. 142 are required to be applied in fiscal years beginning after December
15, 2001.
The adoption of SFAS No. 141 and SFAS No. 142 did not have a material
effect on the Company's consolidated financial statements.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. This statement requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which it is incurred
if a reasonable estimate of fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount of the
long-lived asset. This statement is effective for financial statements issued
for fiscal years beginning after June 15, 2002. The adoption of this statement
is not expected to have a material effect on the Company's consolidated
financial statements.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-lived Assets. This statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This
statement supersedes FASB Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the
accounting and reporting provisions of APB Opinion No. 30, Reporting the Results
of Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
the disposal of a segment of a business (as previously defined
29
in that opinion). This statement also amends Accounting Research Bulletin No.
51, Consolidated Financial Statements, to eliminate the exception to
consolidation for a subsidiary for which control is likely to be temporary. The
major changes resulting from this statement relate to the establishment of a
single method for the recognition of impairment losses on long-lived assets to
be held and used whether from discontinuance of a business segment or otherwise.
This statement is effective for financial statements issued for fiscal years
beginning after December 15, 2001. The adoption of this statement did not have a
material effect on the Company's consolidated financial statements.
In December 2001, the Accounting Standards Executive Committee issued
Statement of Position ("SOP") 01-6, Accounting by Certain Entities (Including
Entities With Trade Receivables) That Lend to or Finance the Activities of
Others. This statement reconciles and conforms the accounting and financial
reporting provisions for similar transactions as applied to different entities
within the financial services industry. It eliminates differences in disclosure
practices where not warranted and should provide greater consistency in
reporting by entities in the financial services industry. This statement is
effective for annual and interim financial statements issued for fiscal years
beginning after December 15, 2001. The adoption of SOP 01-6 did not have a
material effect on the Company's consolidated financial statements.
In December 2001, the Auditing Standards Board issued SAS No. 95, Generally
Accepted Auditing Standards. This statement supersedes Generally Accepted
Auditing Standards of SAS No. 1 and generally provides additional guidance to
the independent auditor in the conduct of an audit engagement, primarily by
addressing authoritative and nonauthoritative publications for audit
consideration and guidance. This SAS is effective for audits of financial
statements for periods beginning on or after December 15, 2001. The impact on
the audit of the Company's consolidated financial statements resulting from the
issuance of this auditing standard was not material.
In January 2002, the Auditing Standards Board issued SAS No. 96, Audit
Documentation. This statement supersedes SAS No. 41, Working Papers and amends
SAS No. 47, Audit Risk and Materiality in Conducting an Audit, SAS No. 56,
Analytical Procedures and SAS No. 59, The Auditor's Consideration of an Entity's
Ability to Continue as a Going Concern. This statement provides revised guidance
to the independent auditor as to the type, purpose and requirements of audit
documentation. This SAS is effective for audits of financial statements for
periods beginning on or after May 15, 2002. The impact on the audit of the
Company's consolidated financial statements resulting from the issuance of this
auditing standard was not material.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. SFAS No. 145 addresses accounting and financial reporting for
extinguishments of debt, intangible assets of motor carriers and leases. SFAS
No. 145 is effective for fiscal years beginning after and transactions occurring
after May 15, 2002. The adoption of this statement is not expected to have a
material effect on the Company's consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. The statement addresses financial reporting
and accounting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). The primary difference
between SFAS No. 146 and Issue 94-3 relates to the requirement for recognition
of a liability related to the cost of an exit or disposal activity when the
liability is incurred. Under 94-3, such liability would be recognized at the
date of an entity's commitment to an exit plan. SFAS No. 146 is effective for
exit or disposal activities initiated after December 31, 2002, with early
application encouraged. The adoption of this statement is not expected to have a
material impact on the Company's consolidated financial statements.
In June 2002, the Auditing Standards Board issued SAS No. 97, Amendment to
Statement on Auditing Standards No. 50, Reports on the Application of Accounting
Principles. This statement prohibits an accountant from providing a written
report on the application of accounting principles not involving facts and
circumstances of a specific entity. This SAS is effective for written reports
issued or oral advice provided on or after June 30, 2002. The impact on the
audit of the Company's consolidated financial statements resulting from the
issuance of this auditing standard is not expected to be material.
In September 2002, the Auditing Standards Board issued SAS No. 98, Omnibus
Statement on Auditing Standards - 2002. This statement revises and amends
several previously issued Statements on Auditing Standards. The
30
changes required impose enhanced quality controls and audit considerations on a
firm of independent auditors in the conduct of their audit of a company's
financial statements. The additional requirements primarily relate to more
descriptive guidance on the application of auditing procedures, the auditors
report and related disclosures and supplementary information. This SAS No. 98
was effective upon issuance except for the amendment to SAS No. 70, which is
effective for reports issued on or after January 1, 2003. The impact on the
audit of the Company's consolidated financial statements resulting from the
issuance of this auditing standard was not material.
In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain
Financial Institutions, an amendment of SFAS No. 72 and 144 and FASB
Interpretation No. 9. Except for transactions between two or more mutual
enterprises, SFAS No. 147 removes acquisitions of financial institutions from
the scope of SFAS No. 72 and Interpretation 9 and requires those transactions be
accounted for in accordance with SFAS No. 141 and 142. SFAS No. 147 also amends
SFAS No. 144 to include in its scope long-term customer-relationship intangible
assets of financial institutions such as depositor and borrower relationship
intangible assets and credit cardholder intangible assets. Consequently, those
intangible assets are subject to the same undiscounted cash flow recoverability
test and impairment loss recognition and measurement provisions that SFAS No.
144 requires for other long-lived assets that are held and used. The provisions
of SFAS No. 72 requiring the intangible recognition and subsequent amortization
of any excess fair value of net liabilities assumed in an acquisition will no
longer apply. SFAS No. 147 is essentially effective as of October 1, 2002. As a
result, the Company adopted SFAS No. 147 on October 1, 2002, with no material
impact on the Company's consolidated financial statements.
In October 2002, the Auditing Standards Board issued SAS No. 99,
Consideration of Fraud in a Financial Statement Audit. This statement supersedes
SAS No. 82 and amends SAS No. 1 and SAS No. 85. SAS No. 99 describes fraud and
its characteristics; discusses the need for auditors to exercise professional
skepticism; requires (as part of planning the audit) that there be a discussion
among the audit team members regarding the risks of material misstatement due to
fraud; and requires auditors to gather information necessary to identify risks
of material misstatement due to fraud. This SAS is effective for audits of
financial statements for periods beginning on or after December 15, 2002. The
impact on the audit of the Company's consolidated financial statements resulting
from the issuance of this auditing standard is not expected to be material.
In November 2002, the Auditing Standards Board issued SAS No. 100, Interim
Financial Information. This statement supersedes SAS No. 71 and establishes
standards on the nature, timing and extent of the procedures to be performed by
an independent accountant when conducting a review of interim financial
information. This SAS is effective for interim periods within fiscal years
beginning after December 15. 2002. The impact on the audit of the Company's
consolidated financial statements resulting from the issuance of this auditing
standard is not expected to be material.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. This interpretation changes the current
practice of accounting for, and the disclosures related to guarantees.
Interpretation No. 45 requires certain guarantees to be recorded at fair value,
which is a change from the current practice of generally only recording a
liability when a loss is probable and reasonably estimable. The interpretation
also requires a guarantor to make new disclosures, even when the likelihood of
making any payments under the guarantee is remote, which is another change from
current practice. The disclosure requirements of this interpretation are
effective for financial statements of interim or annual periods ending after
December 15, 2002. The interpretation's initial recognition and initial
measurement provisions are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002. The guarantor's previous accounting
for guarantees issued prior to the date of Interpretation No. 45 are not to be
revised or restated to reflect the interpretation's provisions. The adoption of
the disclosure requirements of Interpretation No. 45 did not have a material
impact on the Company's consolidated financial statements. The adoption of the
initial recognition and initial measurement provisions of Interpretation No. 45
is not expected to have a material impact on the Company's consolidated
financial statements.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure. This statement amends SFAS No. 123 to
provide alternative methods of transition for an entity that voluntarily changes
to the fair value based method of accounting for stock-based employee
compensation. It amends the disclosure provisions of that Statement to require
prominent disclosure about the effects on reported net income of an entity's
accounting policy decisions with respect to stock-based employee compensation.
This Statement also
31
amends APB Opinion No. 28 to require disclosure about those effects in interim
financial information. This Statement is effective for financial statements for
fiscal years ending after December 15, 2002 and for financial reports containing
condensed financial statements for interim periods beginning after December 15,
2002. The adoption of SFAS No. 148 did not have a material impact on the
Company's consolidated financial statements.
In January 2003, the Auditing Standards Board Issued SAS No. 101,
Auditing Fair Value Measurements and Disclosures. This statement establishes
standards on auditing the measurement and disclosure of assets, liabilities, and
specific components of equity presented or disclosed at fair value in financial
statements. This SAS is effective for audits of financial statements for periods
beginning on or after June 15, 2003. The impact on the audit of the Company's
consolidated financial statements resulting from the issuance of this auditing
standard is not expected to be material.
In January 2003, the FASB issued FIN 46, which clarifies the
application of Accounting Research Bulletin ("ARB") 51, Consolidated Financial
Statements, to certain entities (called variable interest entities) in which
equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
The disclosure requirements of this Interpretation are effective for all
financial statements issued after January 31, 2003. The consolidation
requirements apply to all variable interest entities created after January 31,
2003. In addition, public companies must apply the consolidation requirements to
variable interest entities that existed prior to February 1, 2003 and remain in
existence as of the beginning of annual or interim periods beginning after June
15, 2003. Management is currently assessing the impact of FIN 46, and does not
expect this Interpretation to have a material impact to the Consolidated
Financial Statements.
[The remainder of this page intentionally left blank]
32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by Regulation S-X
and by Item 302 of Regulation S-K are set forth in the pages listed below.
FLORIDA COMMUNITY BANKS, INC.
Consolidated Financial Statements
Page(s)
Independent Auditors' Report .............................................................................. 34
Consolidated Statements of Financial Condition as of December 31, 2002 and 2001............................ 35
Consolidated Statements of Income for the Years Ended December 31, 2002, 2001 and 2000..................... 36
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2002, 2001 and 2000....... 37
Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000................. 38
Notes to Consolidated Financial Statements................................................................. 40
Quarterly Results (Unaudited).............................................................................. 73
33
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Florida Community Banks, Inc. and Subsidiaries
Immokalee, Florida
We have audited the accompanying consolidated statements of financial condition
of Florida Community Banks, Inc. (a Florida corporation) and subsidiaries as of
December 31, 2002 and 2001, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
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 Florida Community
Banks, Inc. and subsidiaries as of December 31, 2002 and 2001, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America.
Birmingham, Alabama
January 31, 2003 /s/ Schauer Taylor Cox Vise Morgan & Fowler, P.C.
--------------------------------------------------
Schauer Taylor Cox Vise Morgan & Fowler, P.C.
See notes to consolidated financial statements
34
FLORIDA COMMUNITY BANKS, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 2002 and 2001
2002 2001
------------------ ------------------
Assets
Cash and due from banks............................................. $ 13,264,464 $ 15,193,797
Federal funds sold.................................................. 32,902,000 --
Interest-bearing demand deposits with banks......................... 12,668,201 7,845,331
------------------ ------------------
Cash and Cash Equivalents....................................... 58,834,665 23,039,128
Interest-bearing time deposits with banks........................... -- 2,500,000
Securities available-for-sale....................................... 2,874,977 1,960,475
Securities held-to-maturity, fair value of $34,120,018 in
2002 and $33,290,686 in 2001...................................... 33,339,505 33,041,035
Loans, net of unearned income....................................... 416,414,676 318,665,591
Allowance for loan losses........................................... (6,319,298) (3,802,836)
------------------ ------------------
Net Loans....................................................... 410,095,378 314,862,755
Premises and equipment, net......................................... 10,109,252 7,938,850
Accrued interest.................................................... 2,904,150 2,688,165
Foreclosed real estate.............................................. -- 49,788
Deferred taxes, net................................................. 1,960,513 1,111,359
Other assets........................................................ 1,329,363 869,117
------------------ ------------------
Total Assets.................................................... $ 521,447,803 $ 388,060,672
================== ==================
Liabilities and Shareholders' Equity
Liabilities
Deposits:
Noninterest-bearing............................................... $ 54,478,258 $ 60,160,766
Interest-bearing.................................................. 369,456,264 257,700,574
------------------ ------------------
Total Deposits.................................................. 423,934,522 317,861,340
Short-term borrowings............................................... -- 1,086,000
Long-term FHLB advances............................................. 50,000,000 32,500,000
Subordinated capital note........................................... -- 5,000,000
Other long-term debt................................................ 39,415 79,761
Guaranteed preferred beneficial interests in the Company's
subordinated debentures........................................... 10,000,000 --
Deferred compensation............................................... 424,745 473,267
Accrued interest.................................................... 1,866,824 1,688,813
Other liabilities................................................... 718,497 232,836
------------------ ------------------
Total Liabilities............................................... 486,984,003 358,922,017
Shareholders' Equity
Common stock - par value $.01 per share, 10,000,000 shares authorized,
3,123,316 shares issued and
outstanding....................................................... 31,233 31,233
Paid-in capital..................................................... 16,680,055 16,680,055
Retained earnings................................................... 17,752,512 12,427,367
------------------ ------------------
Total Shareholders' Equity...................................... 34,463,800 29,138,655
------------------ ------------------
Total Liabilities and Shareholders' Equity...................... $ 521,447,803 $ 388,060,672
================== ==================
See notes to consolidated financial statements
35
FLORIDA COMMUNITY BANKS, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
------------------ ------------------ ------------------
Interest Income
Interest and fees on loans..................... $ 29,121,572 $ 24,907,498 $ 22,479,761
Interest and dividends on securities:
Taxable securities........................... 2,184,654 2,458,634 2,386,201
Tax-exempt securities........................ 3,855 18,895 42,512
Interest on federal funds sold................. 181,906 462,658 81,924
Interest on deposits in banks.................. 78,130 55,200 --
------------------ ------------------ ------------------
Total Interest Income...................... 31,570,117 27,902,885 24,990,398
------------------ ------------------ ------------------
Interest Expense
Interest on FHLB advances...................... 1,300,372 999,021 1,015,003
Interest on deposits........................... 10,032,397 10,909,392 8,939,361
Interest on short-term borrowings.............. 55,987 105,235 319,007
Interest on other long-term debt............... 91,759 4,642 2,506
Interest on guaranteed preferred
beneficial interest in the Company's
subordinated debentures...................... 306,715 -- --
------------------ ------------------ ------------------
Total Interest Expense..................... 11,787,230 12,018,290 10,275,877
------------------ ------------------ ------------------
Net interest income............................... 19,782,887 15,884,595 14,714,521
Provision for loan losses......................... 2,510,000 720,000 1,000,000
------------------ ------------------ ------------------
Net Interest Income After Provision
For Loan Losses................................ 17,272,887 15,164,595 13,714,521
Noninterest Income
Customer service fees.......................... 1,268,130 1,065,183 1,100,673
Gains on other real estate owned, net.......... 13,489 -- 166,516
Investment security gains...................... 36,083 -- --
Insurance policy proceeds, net................. -- -- 256,010
Other operating income......................... 698,607 633,455 280,855
------------------ ------------------ ------------------
Total Noninterest Income................... 2,016,309 1,698,638 1,804,054
------------------ ------------------ ------------------
Noninterest Expenses
Salaries and employee benefits................. 5,551,509 5,232,453 4,764,181
Occupancy and equipment expense................ 1,689,334 1,360,901 1,109,263
Losses on other real estate owned, net......... -- 10,312 --
Other operating expenses....................... 1,779,225 1,621,816 1,679,271
------------------ ------------------ ------------------
Total Noninterest Expenses................. 9,020,068 8,225,482 7,552,715
------------------ ------------------ ------------------
Income before income taxes........................ 10,269,128 8,637,751 7,965,860
Income tax expense................................ 3,850,822 3,291,534 2,880,799
------------------ ------------------ ------------------
Net Income........................................ $ 6,418,306 $ 5,346,217 $ 5,085,061
================== ================== ==================
Earnings Per Common Share
Basic.......................................... $ 2.05 $ 1.71 $ 1.63
Diluted........................................ 2.04 1.71 1.63
Cash Dividends Declared Per
Common Share................................... 0.35 0.70 0.64
Weighted Average Shares Outstanding
Basic.......................................... 3,123,316 3,123,316 3,123,316
Diluted........................................ 3,140,439 3,126,245 3,123,316
See notes to consolidated financial statements
36
FLORIDA COMMUNITY BANKS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 2002, 2001 and 2000
Common Paid-in Retained
Stock Capital Earnings Total
---------------- ---------------- ----------------- -----------------
Balance at
December 31, 1999................ $ 31,233 $ 16,680,055 $ 6,161,957 $ 22,873,245
Net income - 2000................... -- -- 5,085,061 5,085,061
-----------------
Comprehensive income................ -- -- -- 5,085,061
-----------------
Cash dividends - Common
$0.64 per share.................. -- -- (1,988,222) (1,988,222)
---------------- ---------------- ----------------- -----------------
Balance at
December 31, 2000................ 31,233 16,680,055 9,258,796 25,970,084
Net income - 2001................... -- -- 5,346,217 5,346,217
-----------------
Comprehensive income................ -- -- -- 5,346,217
-----------------
Cash dividends - Common
$0.70 per share.................. -- -- (2,177,646) (2,177,646)
---------------- ---------------- ----------------- -----------------
Balance at
December 31, 2001................ 31,233 16,680,055 12,427,367 29,138,655
Net income - 2002................... -- -- 6,418,306 6,418,306
-----------------
Comprehensive income................ -- -- -- 6,418,306
-----------------
Cash dividends - Common
$0.35 per share.................. -- -- (1,093,161) (1,093,161)
---------------- ---------------- ----------------- -----------------
Balance at
December 31, 2002................ $ 31,233 $ 16,680,055 $ 17,752,512 $ 34,463,800
================ ================ ================= =================
See notes to consolidated financial statements
37
FLORIDA COMMUNITY BANKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
------------------ ------------------ ------------------
Operating Activities
Net income..................................... $ 6,418,306 $ 5,346,217 $ 5,085,061
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses.................. 2,510,000 720,000 1,000,000
Depreciation, amortization,
and accretion, net....................... 752,624 544,881 518,527
Deferred tax benefit....................... (849,154) (250,859) (359,242)
Realized investment securities gains....... (36,083) -- --
(Gain) loss on disposition of
other real estate........................ (13,489) 10,312 (166,515)
(Increase) decrease in accrued
interest receivable...................... (215,985) 728,824 (834,393)
Increase in accrued interest payable....... 178,011 349,659 713,138
Other, net................................. (45,523) (844,277) 437,880
------------------ ------------------ ------------------
Net Cash Provided By
Operating Activities..................... 8,698,707 6,604,757 6,394,456
------------------ ------------------ ------------------
Investing Activities
Purchases of securities available-for-sale..... (941,919) (650,000) (975,000)
Purchases of investment securities
held-to-maturity............................. (21,968,075) (28,310,329) (10,036,604)
Proceeds from maturities, calls
and paydowns of investment
securities held-to-maturity.................. 21,624,634 36,239,078 7,508,194
Proceeds from sale of securities
available for sale........................... 63,500 -- --
Purchases of interest-bearing time
deposits with other banks.................... -- (2,500,000) --
Proceeds from maturity of interest-
bearing deposits with other banks............ 2,500,000 -- --
Net increase in loans to customers............. (97,754,367) (92,039,273) (45,536,179)
Purchase of premises and equipment............. (2,919,987) (2,386,873) (1,637,570)
Proceeds from disposition of
premises and equipment....................... 62,119 1,829,724 73,948
Net proceeds from disposition of
foreclosed real estate....................... 75,000 478,666 941,394
------------------ ------------------ ------------------
Net Cash Used In
Investing Activities..................... (99,259,095) (87,339,007) (49,661,817)
------------------ ------------------ ------------------
(Continued on following page)
See notes to consolidated financial statements
38
FLORIDA COMMUNITY BANKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
------------------ ------------------ ------------------
Financing Activities
Net increase (decrease) in demand
deposits, NOW accounts, and
savings accounts............................. $ 16,278,817 $ 36,416,227 $ (3,483,547)
Net increase in certificates of deposit........ 89,794,365 32,114,632 48,795,648
Net decrease in short-term borrowings.......... (1,086,000) (1,914,000) (6,772,000)
Issuance of long-term debt..................... 25,055,696 17,500,000 15,080,243
Repayments of long-term debt................... (7,593,792) (12,818) (26,867)
Issuance of Subordinated Capital Note.......... -- 5,000,000 --
Repayment of Subordinated Capital Note......... (5,000,000) -- --
Issuance of guaranteed preferred
beneficial interest in the Company's
subordinated debentures...................... 10,000,000 -- --
Cash dividends................................. (1,093,161) (2,177,646) (1,988,222)
------------------ ------------------ ------------------
Net Cash Provided By
Financing Activities.................... 126,355,925 86,926,395 51,605,255
------------------ ------------------ ------------------
Net Increase in Cash and Cash
Equivalents.................................... 35,795,537 6,192,145 8,337,894
Cash and Cash Equivalents
at Beginning of Year........................... 23,039,128 16,846,983 8,509,089
------------------ ------------------ ------------------
Cash and Cash Equivalents
at End of Year................................. $ 58,834,665 $ 23,039,128 $ 16,846,983
================== ================== ==================
See notes to consolidated financial statements
39
FLORIDA COMMUNITY BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 1 - Summary of Significant Accounting Policies
Florida Community Banks, Inc. ("FCBI") (a Florida corporation) and its
wholly-owned subsidiaries, Florida Community Bank (the "Bank") (a Florida
corporation) and FCBI Capital Trust I (the " Trust")(a Delaware statutory
trust), collectively referred to herein as the "Company," is headquartered in
Immokalee, Florida. The Bank's main office also is in Immokalee, Florida with
seven additional branch locations in Southwest Florida. The Bank provides a full
range of banking services to individual and corporate customers in Charlotte,
Collier, Glades, Hendry and Lee counties and the surrounding areas.
The accounting and reporting policies of the Company conform to accounting
principles generally accepted in the United States of America and to general
practice within the banking industry. The following summarizes the most
significant of these policies.
Business Combination
Florida Community Banks was incorporated on February 20, 2002. FCBI had no
assets, liabilities, revenues or operations until April 15, 2002, when FCBI
acquired 100% of the outstanding shares of Florida Community Bank common stock
pursuant to a Plan of Reorganization and Share Exchange by exchanging one common
share of FCBI for one common share of the Bank. The combination has been
accounted for as a statutory pooling of interest between affiliates, and,
accordingly, all periods presented reflect FCBI and the Bank on a combined
basis. Since April 15, 2002, FCBI's predominate activity has been acting as a
one-bank holding company for the Bank. The Bank has continued to conduct its
activities in substantially the same manner as it had before the acquisition.
Basis of Consolidation
The consolidated financial statements include the accounts of Florida Community
Banks, Inc., the Bank and the Trust. All significant inter-company balances and
transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The determination of the adequacy of the allowance for loan losses is based on
estimates that are particularly susceptible to significant changes in the
economic environment and market conditions. In connection with the determination
of the estimated losses on loans, management obtains independent appraisals for
significant collateral. While management uses available information to recognize
losses on loans, further reductions in the carrying amounts of loans may be
necessary based on changes in local economic conditions. In addition, regulatory
agencies, as an integral part of their examination process, periodically review
the estimated losses on loans. Such agencies may require the Bank to recognize
40
Note 1 - Summary of Significant Accounting Policies - Continued
additional losses based on their judgments about information available to them
at the time of their examination. Because of these factors, it is reasonably
possible that the estimated losses on loans may change materially in the near
term. However, the amount of the change that is reasonably possible cannot be
estimated.
Securities
Securities are classified as either held-to-maturity, available-for-sale, or
trading.
Securities held-to-maturity are those securities for which management has the
ability and intent to hold on a long-term basis or until maturity. These
securities are carried at amortized cost, adjusted for amortization of premiums,
and accretion of discount to the earlier of the maturity or call date.
Securities available-for-sale represent those securities intended to be held for
an indefinite period of time, including securities that management intends to
use as part of its asset/liability strategy, or that may be sold in response to
changes in interest rates, changes in prepayment risk, the need to increase
regulatory capital, or other similar factors. Securities available-for-sale are
recorded at market value with unrealized gains and losses net of any tax effect,
added or deducted directly from shareholders' equity.
Securities carried in trading accounts are carried at market value with
unrealized gains and losses reflected in income.
Realized and unrealized gains and losses are based on the specific
identification method.
Declines in the fair value of individual held-to-maturity and available-for-sale
securities below their cost that are other than temporary result in write-downs
of the individual securities to their fair value. The related write-downs are
included in earnings as realized losses.
The Company has no trading securities.
Loans
Loans are stated at unpaid principal balances, less the allowance for loan
losses, unearned discounts and net deferred loan fees.
Unearned discounts on installment loans are recognized as income over the term
of the loans using a method that approximates the interest method.
Loan origination and commitment fees, as well as certain direct origination
costs, are deferred and amortized as a yield adjustment over the lives of the
related loans using the interest method or the straight-line method.
41
Note 1 - Summary of Significant Accounting Policies - Continued
Allowance for Possible Loan Losses
A loan is considered impaired, based on current information and events, if it is
probable that the Bank will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Uncollateralized loans are measured for impairment based on the
present value of expected future cash flows discounted at the historical
effective interest rate, while all collateral-dependent loans are measured for
impairment based on the fair value of the collateral. Smaller balance
homogeneous loans, which consist of residential mortgages and consumer loans,
are evaluated collectively and reserves are established based on historical loss
experience.
The allowance for loan losses is established through charges to earnings in the
form of a provision for loan losses. Increases and decreases in the allowance
due to changes in the measurement of the impaired loans are considered in the
provision for loan losses. Loans continue to be classified as impaired unless
they are brought fully current and the collection of scheduled interest and
principal is considered probable. When a loan or portion of a loan is determined
to be uncollectible, the portion deemed uncollectible is charged against the
allowance and subsequent recoveries, if any, are credited to the allowance.
Management's periodic evaluation of the adequacy of the allowance is based on
the Bank's past loan loss experience, known and inherent risks in the portfolio,
adverse situations that may affect the borrowers' ability to repay, estimated
value of any underlying collateral, and an analysis of current economic
conditions. While management believes that it has established the allowance in
accordance with generally accepted accounting principles and has taken into
account the views of banking regulators and the current economic environment,
there can be no assurance that in the future the Bank's regulators or its
economic environment will not require further increases in the allowance.
Income Recognition on Impaired and Non-accrual Loans
Loans, including impaired loans, are generally classified as non-accrual if they
are past due as to maturity or payment of principal or interest for a period of
more than 90 days, unless such loans are well collateralized and in the process
of collection. If a loan or a portion of a loan is classified as doubtful or is
partially charged off, the loan is generally classified as non-accrual. Loans
that are on a current payment status or past due less than 90 days may also be
classified as non-accrual if repayment in full of principal and/or interest is
in doubt.
Loans may be returned to accrual status when all principal and interest amounts
contractually due are reasonably assured of repayment within an acceptable
period of time, and there is a sustained period of repayment performance by the
borrower, in accordance with the contractual terms of interest and principal.
42
Note 1 - Summary of Significant Accounting Policies - Continued
While a loan is classified as non-accrual and the future collectability of the
recorded loan balance is doubtful, collections of interest and principal are
generally applied as a reduction to principal outstanding, except in the case of
loans with scheduled amortizations where the payment is generally applied to the
oldest payment due. When the future collectability of the recorded loan balance
is expected, interest income may be recognized on a cash basis. In the case
where a non-accrual loan has been partially charged off, recognition of interest
on a cash basis is limited to that which would have been recognized on the
recorded loan balance at the contractual interest rate. Receipts in excess of
that amount are recorded as recoveries to the allowance for loan losses until
prior charge offs have been fully recovered. Interest income recognized on a
cash basis was immaterial for the years ended December 31, 2002, 2001 and 2000.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
Expenditures for additions and major improvements that significantly extend the
useful lives of the assets are capitalized. Expenditures for repairs and
maintenance are charged to expense as incurred. The carrying values of assets
traded in are used to adjust the carrying values of the new assets acquired by
trade. Assets that are disposed of are removed from the accounts and the
resulting gains or losses are recorded in operations.
Depreciation is provided generally by accelerated and straight-line methods
based on the estimated useful lives of the respective assets.
Foreclosed Real Estate
Foreclosed real estate includes both formally foreclosed property and
in-substance foreclosed property. In-substance foreclosed properties are those
properties for which the institution has taken physical possession, regardless
of whether formal foreclosure proceedings have taken place.
At the time of foreclosure, foreclosed real estate is recorded at the lower of
the carrying amount or fair value less cost to sell, which becomes the
property's new basis. Any write-downs based on the asset's fair value at date of
acquisition are charged to the allowance for loan losses. After foreclosure,
these assets are carried at the lower of their new cost basis or fair value less
cost to sell. Costs incurred in maintaining foreclosed real estate and
subsequent adjustments to the carrying amount of the property are included in
income (loss) on foreclosed real estate.
Advertising Costs
The Company's policy is to expense advertising costs as incurred. Advertising
expense for the years ended December 31, 2002, 2001 and 2000 amounted to
approximately $135,000, $130,000 and $161,000, respectively.
43
Note 1 - Summary of Significant Accounting Policies - Continued
Income Taxes
Income taxes are provided for the tax effects of the transactions reported in
the financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the basis of the allowance for loan
losses, accumulated depreciation, and accrued employee benefits for financial
and income tax reporting. The deferred tax assets and liabilities represent the
future tax return consequences of those differences, which will either be
taxable or deductible when the assets and liabilities are recovered or settled.
Deferred tax assets and liabilities are reflected at income tax rates applicable
to the period in which the deferred tax assets or liabilities are expected to be
realized or settled. As changes in tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted through the provision for income taxes.
Stock-Based Compensation
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation; which defines a fair value based method of accounting for an
employee stock option plan. This statement establishes financial accounting and
reporting standards for stock-based employee compensation plans and stock-based
non-employee compensation. Under the fair value based method, compensation 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, SFAS No.
123 allows an entity to continue to measure compensation costs for those plans
using the intrinsic value based method of accounting prescribed by APB Opinion
No, 25, Accounting for Stock Issued to Employees. The Company has elected to
follow APB No. 25 in accounting for its stock option plans.
Retirement Plan
The Company has a defined contribution Pension Plan and a Profit-Sharing Plan
covering all eligible employees. Employer contributions to the plans are
included in salaries and employee benefits expense. Pension Plan contributions
are required at 10 percent of total eligible employee compensation.
Profit-Sharing contributions are determined by the board of directors. The
Company also has deferred compensation plans with certain executive officers and
directors. The Company contributes amounts to the pension fund sufficient to
satisfy funding requirements of the Employee Retirement Income Security Act.
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,
commercial letters of credit and standby letters of credit. Such financial
instruments are recorded in the financial statements when paid.
The Bank has available as a source of financing a line of credit with the
Federal Home Loan Bank of Atlanta that is limited to 15% of assets (an amount of
approximately $78,000,000 at December 31, 2002), of which $28,000,000 was
available and unused. The ability to utilize the remaining line is dependent on
the amount of eligible collateral that is available to pledge to the Federal
Home Loan Bank.
44
Note 1 - Summary of Significant Accounting Policies - Continued
The Bank also has available as a source of short-term financing the purchase of
federal funds from other commercial banks from available lines totaling
$25,000,000.
Segment Information
All of the Company's offices offer similar products and services, are located in
the same geographic region, and serve the same customer segments of the market.
As a result, management considers all units as one operating segment and
therefore feels that the basic consolidated financial statements and related
footnotes provide details related to segment reporting.
Reclassifications
Certain amounts in 2001 and 2000 have been reclassified to conform with the 2002
presentation.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial condition and measure those
instruments at fair value. The accounting for changes in the fair value of a
derivative is to be determined based upon the intended use of the derivative.
For certain hedge designations (cash flow and foreign currency exposure) the
derivative's gain or loss is reported as a component of other comprehensive
income. Other designations require the gain or loss to be recognized in earnings
in the period of change. This statement, amended as to effective date by SFAS
No. 137, is effective for financial statements for periods beginning after June
15, 2000. In June 2000, the FASB also issued SFAS No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities - an Amendment of
SFAS No. 133. The adoption of SFAS No. 133, as amended by SFAS No. 138 did not
have a material impact on the Company's consolidated financial statements.
In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities - a replacement
of FASB Statement No. 125. While SFAS No. 140 carries over most of the
provisions of SFAS No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, it provides new standards for
reporting financial assets transferred as collateral and new standards for the
derecognition of financial assets, in particular transactions involving the use
of special purpose entities. SFAS No. 140 also prescribes additional disclosures
for collateral transactions and for securitization transactions accounted for as
sales. The new collateral standards and disclosure requirements are effective
for fiscal years ending after December 15, 2000, while the new standards for the
derecognition of financial assets are effective for transfers made after March
31, 2001. The adoption of this statement did not have a material effect on the
Company's consolidated financial statements.
45
Note 1 - Summary of Significant Accounting Policies - Continued
In May 2001, the Auditing Standards Board issued Statement on Auditing Standards
("SAS") No. 94, The Effect of Information Technology on the Auditor's
Consideration of Internal Control in a Financial Statement Audit. This statement
amends SAS No. 55, Consideration of Internal Control in a Financial Statement
Audit, by providing additional guidance related to the understanding by the
auditor of an entity's use of information technology relevant to the audit. This
auditing standard is effective for audits of financial statements for periods
beginning on or after June 1, 2001. The impact on the audit of the Company's
consolidated financial statements resulting from the issuance of this auditing
standard was not material.
In June 2001, the FASB issued SFAS No. 141, Business Combinations. This
statement addresses financial accounting and reporting for business combinations
and supersedes Accounting Principles Board ("APB") Opinion No. 16, Business
Combinations, and SFAS No. 38, Accounting for Preacquisition Contingencies of
Purchased Enterprises. All business combinations in the scope of SFAS No. 141
are to be accounted for using one method, the purchase method. Prior to the
issuance of this statement, subject to certain criteria, business combinations
were accounted for using one of two methods, the pooling-of-interests method or
the purchase method. The two methods produce different financial statement
results. The single-method approach used in SFAS No. 141 reflects the conclusion
that virtually all business combinations are acquisitions and therefore should
be accounted for in the same manner as other asset acquisitions based on the
values exchanged. This statement provides expanded and revised guidance related
to the allocation of the purchase price to goodwill and other intangibles
arising from the business combination. The provisions of SFAS No. 141 apply to
all business combinations initiated after June 30, 2001.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets, which addresses financial accounting and reporting for acquired goodwill
and other intangible assets and supersedes APB Opinion No. 17, Intangible
Assets. SFAS No. 142 provides new standards for accounting relating to
intangible assets after initial recognition in the financial statements. This
statement proscribes the accounting practice of amortizing or expensing
intangibles ratably over a prescribed period of time and imposes new guidance
requiring that goodwill and certain other intangibles be tested for impairment
at least annually by comparing fair values of those assets with their recorded
amounts. Additional disclosure requirements also are provided. The provisions of
SFAS No. 142 are required to be applied in fiscal years beginning after December
15, 2001.
The adoption of SFAS No. 141 and SFAS No. 142 did not have a material effect on
the Company's consolidated financial statements.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. This statement requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which it is incurred
if a reasonable estimate of fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount of the
long-lived asset. This statement is effective for financial statements issued
for fiscal years beginning after June 15, 2002. The adoption of this statement
is not expected to have a material effect on the Company's consolidated
financial statements.
46
Note 1 - Summary of Significant Accounting Policies - Continued
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-lived Assets. This statement addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This statement
supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and
reporting provisions of APB Opinion No. 30, Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
the disposal of a segment of a business (as previously defined in that opinion).
This statement also amends Accounting Research Bulletin No. 51, Consolidated
Financial Statements, to eliminate the exception to consolidation for a
subsidiary for which control is likely to be temporary. The major changes
resulting from this statement relate to the establishment of a single method for
the recognition of impairment losses on long-lived assets to be held and used
whether from discontinuance of a business segment or otherwise. This statement
is effective for financial statements issued for fiscal years beginning after
December 15, 2001. The adoption of this statement did not have a material effect
on the Company's consolidated financial statements.
In December 2001, the Accounting Standards Executive Committee issued Statement
of Position ("SOP") 01-6, Accounting by Certain Entities (Including Entities
With Trade Receivables) That Lend to or Finance the Activities of Others. This
statement reconciles and conforms the accounting and financial reporting
provisions for similar transactions as applied to different entities within the
financial services industry. It eliminates differences in disclosure practices
where not warranted and should provide greater consistency in reporting by
entities in the financial services industry. This statement is effective for
annual and interim financial statements issued for fiscal years beginning after
December 15, 2001. The adoption of SOP 01-6 did not have a material effect on
the Company's consolidated financial statements.
In December 2001, the Auditing Standards Board issued SAS No. 95, Generally
Accepted Auditing Standards. This statement supersedes Generally Accepted
Auditing Standards of SAS No. 1 and generally provides additional guidance to
the independent auditor in the conduct of an audit engagement, primarily by
addressing authoritative and nonauthoritative publications for audit
consideration and guidance. This SAS is effective for audits of financial
statements for periods beginning on or after December 15, 2001. The impact on
the audit of the Company's consolidated financial statements resulting from the
issuance of this auditing standard was not material.
In January 2002, the Auditing Standards Board issued SAS No. 96, Audit
Documentation. This statement supersedes SAS No. 41, Working Papers and amends
SAS No. 47, Audit Risk and Materiality in Conducting an Audit, SAS No. 56,
Analytical Procedures and SAS No. 59, The Auditor's Consideration of an Entity's
Ability to Continue as a Going Concern. This statement provides revised guidance
to the independent auditor as to the type, purpose and requirements of audit
documentation. This SAS is effective for audits of financial statements for
periods beginning on or after May 15, 2002. The impact on the audit of the
Company's consolidated financial statements resulting from the issuance of this
auditing standard was not material.
47
Note 1 - Summary of Significant Accounting Policies - Continued
In April 2002, the Financial Accounting Standards Board issued SFAS No. 145,
Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No.
13, and Technical Corrections. SFAS No. 145 addresses accounting and financial
reporting for extinguishments of debt, intangible assets of motor carriers and
leases. SFAS No. 145 is effective for fiscal years beginning after and
transactions occurring after May 15, 2002. The adoption of this statement is not
expected to have a material effect on the Company's consolidated financial
statements.
In June 2002, the Financial Accounting Standards Board issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal Activities. The statement
addresses financial reporting and accounting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring). The
primary difference between SFAS No. 146 and Issue 94-3 relates to the
requirement for recognition of a liability related to the cost of an exit or
disposal activity when the liability is incurred. Under 94-3, such liability
would be recognized at the date of an entity's commitment to an exit plan. SFAS
No. 146 is effective for exit or disposal activities initiated after December
31, 2002, with early application encouraged. The adoption of this statement is
not expected to have a material impact on the Company's consolidated financial
statements.
In June 2002, the Auditing Standards Board issued SAS No. 97, Amendment to
Statement on Auditing Standards No. 50, Reports on the Application of Accounting
Principles. This statement prohibits an accountant from providing a written
report on the application of accounting principles not involving facts and
circumstances of a specific entity. This SAS is effective for written reports
issued or oral advice provided on or after June 30, 2002. The impact on the
audit of the Company's consolidated financial statements resulting from the
issuance of this auditing standard is not expected to be material.
In September 2002, the Auditing Standards Board issued SAS No. 98, Omnibus
Statement on Auditing Standards - 2002. This statement revises and amends
several previously issued Statements on Auditing Standards. The changes required
impose enhanced quality controls and audit considerations on a firm of
independent auditors in the conduct of their audit of a company's financial
statements. The additional requirements primarily relate to more descriptive
guidance on the application of auditing procedures, the auditors report and
related disclosures and supplementary information. This SAS No. 98 was effective
upon issuance except for the amendment to SAS No. 70, which is effective for
reports issued on or after January 1, 2003. The impact on the audit of the
Company's consolidated financial statements resulting from the issuance of this
auditing standard was not material.
In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain Financial
Institutions, an amendment of SFAS No. 72 and 144 and FASB Interpretation No. 9.
Except for transactions between two or more mutual enterprises, SFAS No. 147
removes acquisitions of financial institutions from the scope of SFAS No. 72 and
Interpretation 9 and requires those transactions be accounted for in accordance
with SFAS No. 141 and 142. SFAS No. 147 also amends SFAS No. 144 to include in
its scope long-term customer-relationship intangible assets of financial
institutions such as depositor and borrower relationship intangible assets and
credit cardholder intangible assets. Consequently, those intangible assets are
subject to the same undiscounted cash flow recoverability test and impairment
loss recognition
48
Note 1 - Summary of Significant Accounting Policies - Continued
and measurement provisions that SFAS No. 144 requires for other long-lived
assets that are held and used. The provisions of SFAS No. 72 requiring the
intangible recognition and subsequent amortization of any excess fair value of
net liabilities assumed in an acquisition will no longer apply. SFAS No. 147 is
essentially effective as of October 1, 2002. As a result, the Company adopted
SFAS No. 147 on October 1, 2002, with no material impact on the Company's
consolidated financial statements.
In October 2002, the Auditing Standards Board issued SAS No. 99, Consideration
of Fraud in a Financial Statement Audit. This statement supersedes SAS No. 82
and amends SAS No. 1 and SAS No. 85. SAS No. 99 describes fraud and its
characteristics; discusses the need for auditors to exercise professional
skepticism; requires (as part of planning the audit) that there be a discussion
among the audit team members regarding the risks of material misstatement due to
fraud; and requires auditors to gather information necessary to identify risks
of material misstatement due to fraud. This SAS is effective for audits of
financial statements for periods beginning on or after December 15, 2002. The
impact on the audit of the Company's consolidated financial statements resulting
from the issuance of this auditing standard is not expected to be material.
In November 2002, the Auditing Standards Board issued SAS No. 100, Interim
Financial Information. This statement supersedes SAS No. 71 and establishes
standards on the nature, timing and extent of the procedures to be performed by
an independent accountant when conducting a review of interim financial
information. This SAS is effective for interim periods within fiscal years
beginning after December 15. 2002. The impact on the audit of the Company's
consolidated financial statements resulting from the issuance of this auditing
standard is not expected to be material.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. This interpretation changes the current practice of
accounting for, and the disclosures related to guarantees. Interpretation No. 45
requires certain guarantees to be recorded at fair value, which is a change from
the current practice of generally only recording a liability when a loss is
probable and reasonably estimable. The interpretation also requires a guarantor
to make new disclosures, even when the likelihood of making any payments under
the guarantee is remote, which is another change from current practice. The
disclosure requirements of this interpretation are effective for financial
statements of interim or annual periods ending after December 15, 2002. The
interpretation's initial recognition and initial measurement provisions are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The guarantor's previous accounting for guarantees issued
prior to the date of Interpretation No. 45 are not to be revised or restated to
reflect the interpretation's provisions. The adoption of the disclosure
requirements of Interpretation No. 45 did not have a material impact on the
Company's consolidated financial statements. The adoption of the initial
recognition and initial measurement provisions of Interpretation No. 45 is not
expected to have a material impact on the Company's consolidated financial
statements.
49
Note 1 - Summary of Significant Accounting Policies - Continued
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure. This statement amends SFAS No. 123 to
provide alternative methods of transition for an entity that voluntarily changes
to the fair value based method of accounting for stock-based employee
compensation. It amends the disclosure provisions of that Statement to require
prominent disclosure about the effects on reported net income of an entity's
accounting policy decisions with respect to stock-based employee compensation.
This Statement also amends APB Opinion No. 28 to require disclosure about those
effects in interim financial information. This Statement is effective for
financial statements for fiscal years ending after December 15, 2002 and for
financial reports containing condensed financial statements for interim periods
beginning after December 15, 2002. The adoption of SFAS No. 148 did not have a
material impact on the Company's consolidated financial statements.
In January 2003, the Auditing Standards Board Issued SAS No. 101, Auditing Fair
Value Measurements and Disclosures. This statement establishes standards on
auditing the measurement and disclosure of assets, liabilities, and specific
components of equity presented or disclosed at fair value in financial
statements. This SAS is effective for audits of financial statements for periods
beginning on or after June 15, 2003. The impact on the audit of the Company's
consolidated financial statements resulting from the issuance of this auditing
standard is not expected to be material.
In January 2003, the FASB issued FIN 46, which clarifies the application of
Accounting Research Bulletin ("ARB") 51, Consolidated Financial Statements, to
certain entities (called variable interest entities) in which equity investors
do not have the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. The disclosure
requirements of this Interpretation are effective for all financial statements
issued after January 31, 2003. The consolidation requirements apply to all
variable interest entities created after January 31, 2003. In addition, public
companies must apply the consolidation requirements to variable interest
entities that existed prior to February 1, 2003 and remain in existence as of
the beginning of annual or interim periods beginning after June 15, 2003.
Management is currently assessing the impact of FIN 46, and does not expect this
Interpretation to have a material impact to the Consolidated Financial
Statements.
50
Note 1 - Summary of Significant Accounting Policies - Continued
Earnings Per Common Share
Basic earnings per common share are computed by dividing earnings available to
stockholders by the weighted average number of common shares outstanding during
the period. Diluted earnings per share reflect per share amounts that would have
resulted if dilutive potential common stock had been converted to common stock,
as prescribed by SFAS No. 128, Earnings per Share. All per share amounts
included in these consolidated financial statements have been retroactively
adjusted to reflect the effects of the 1.2 for 1.0 stock splits which occurred
during 2002, 2001 and 2000. The following reconciles the weighted average number
of shares outstanding:
2002 2001 2000
--------------- --------------- ----------------
Weighted average of common shares outstanding............. 3,123,316 3,123,316 3,123,316
Effect of dilutive options................................ 17,123 2,929 --
--------------- --------------- ----------------
Weighted average of common shares outstanding
effected for dilution.................................. 3,140,439 3,126,245 3,123,316
=============== =============== ================
In May 2000, June 2001 and April 2002, the Company issued 1.2-for-1.0 stock
splits. All per share amounts included in these consolidated financial
statements have been retroactively adjusted to give effect to these splits.
Comprehensive Income
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 130,
Reporting Comprehensive Income, on December 31, 1998. This statement establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. The statement
requires that an enterprise classify items of other comprehensive income by
their nature in the financial statement and display the accumulated balance of
other comprehensive income separately from retained earnings and additional paid
in capital in the equity section of a statement of financial condition.
Comprehensive income is generally defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources. It includes all changes in equity during a period except
those resulting from investments by owners and distributions to owners.
Comprehensive income is the total of net income and all other non-owner changes
in equity. Items that are to be recognized under accounting standards as
components of comprehensive income are displayed in statements of shareholders'
equity.
In the calculation of comprehensive income, certain reclassification adjustments
are made to avoid double counting items that are displayed as part of net income
for a period that also had been displayed as part of other comprehensive income
in that period or earlier periods. The Company had no such items to be
reclassified at December 31, 2002, 2001 and 2000.
51
Note 1 - Summary of Significant Accounting Policies - Continued
Statements of Cash Flows
The Company includes cash, due from banks, and certain cash equivalents in
preparing the statements of cash flows. The following is supplemental disclosure
to the statements of cash flows for the three years ended December 31, 2002.
Years Ended December 31,
--------------------------------------------------------------
2002 2001 2000
------------------ ------------------ ------------------
Cash paid during the year for interest......... $ 11,609,219 $ 11,668,631 $ 9,562,739
Cash paid during the year for income
taxes, net................................... 4,772,000 4,596,457 2,505,448
Non-cash Disclosures:
--------------------
Loans transferred to foreclosed
real estate during the year.................. 133,743 439,235 427,319
Proceeds from sale of foreclosed real
estate financed through loans................ 121,998 62,960 276,919
Note 2- Restrictions on Cash and Due from Bank Accounts
The Bank is required by regulatory authorities to maintain average reserve
balances either in vault cash or on deposit with the Federal Reserve. The
average amount of those reserves required at December 31, 2002 and 2001, were
approximately $3,877,000 and $3,168,000, respectively.
Note 3 - Securities
The carrying amounts of securities as shown in the consolidated statements of
financial condition and their approximate fair values at December 31, 2002 and
2001 were as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- --------------- --------------- ----------------
Securities Available-for-Sale
December 31, 2002:
Equity Securities........................ $ 2,874,977 $ -- $ -- $ 2,874,977
=============== =============== =============== ================
December 31, 2001:
Equity Securities........................ $ 1,960,475 $ -- $ -- $ 1,960,475
=============== =============== =============== ================
52
Note 3 - Securities - Continued
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- --------------- --------------- ----------------
Securities Held-to-Maturity
December 31, 2002:
U. S. Government and
agency securities...................... $ 3,000,000 $ 16,980 $ -- $ 3,016,980
Mortgage-backed securities............... 30,339,505 765,309 1,776 31,103,038
--------------- ---------------- --------------- ----------------
$ 33,339,505 $ 782,289 $ 1,776 $ 34,120,018
=============== ================ =============== ================
December 31, 2001:
U. S. Government and
agency securities...................... $ 16,097,906 $ 251,668 $ -- $ 16,349,574
Mortgage-backed securities............... 16,833,171 37,844 42,386 16,828,629
State and municipal securities........... 109,958 2,525 -- 112,483
--------------- ---------------- --------------- ----------------
$ 33,041,035 $ 292,037 $ 42,386 $ 33,290,686
=============== ================ =============== ================
The contractual maturities of securities held-to-maturity and securities
available-for-sale at December 31, 2002, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Securities Securities
Held-to-Maturity Available-for-Sale
-------------------------------- --------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------------- --------------- --------------- ---------------
Due in one year or less..................... $ 5,417,889 $ 5,520,191 $ -- $ --
Due after one year through five years....... 27,337,281 27,985,111 -- --
Due after five years through ten years...... 584,335 614,716 -- --
Due after ten years......................... -- -- -- --
Equity securities........................... -- -- 2,874,977 2,874,977
--------------- --------------- --------------- ----------------
$ 33,339,505 $ 34,120,018 $ 2,874,977 $ 2,874,977
=============== ================ =============== ================
Mortgage-backed securities have been included in the maturity tables based upon
the guaranteed payoff date of each security.
53
Note 3 - Securities - Continued
Gross realized gains and losses from the sale of securities for the years ended
December 31 are as follows:
2002 2001 2000
------------------ ------------------ ------------------
Realized gains.................................... $ 36,083 $ -- $ --
Realized losses................................... -- -- --
Dispositions through calls, maturities and paydowns resulted in no net gain or
loss during 2002, 2001 and 2000.
Equity securities are restricted investments in The Bankers Bank, Independent
Bankers' Bank and Federal Home Loan Bank stock, which must be maintained to
secure the available lines of credit. The amount of investment in the stocks
amounted to $2,874,977 and $1,960,475 at December 31, 2002 and 2001,
respectively.
Investment securities pledged to secure public funds on deposit, FHLB advances
and for other purposes as required by law amounted to approximately $29,677,000
and $23,319,000 at December 31, 2002 and 2001, respectively.
Note 4 - Loans
The Company grants loans to customers primarily in Charlotte, Collier, Glades,
Hendry and Lee Counties of Southwest Florida.
The major classifications of loans as of December 31, 2002 and 2001 are as
follows:
2002 2001
------------------ ------------------
Commercial, financial and agricultural................................. $ 42,875,563 $ 38,006,782
Real estate - construction............................................. 140,722,900 93,049,392
Real estate - mortgage................................................. 220,696,703 179,260,826
Consumer............................................................... 12,089,782 8,480,764
Other.................................................................. 1,226,777 157,061
------------------ ------------------
Total............................................................. 417,611,725 318,954,825
Unearned income........................................................ (1,197,049) (289,234)
Allowance for loan losses.............................................. (6,319,298) (3,802,836)
------------------ ------------------
Net loans.............................................................. $ 410,095,378 $ 314,862,755
================== ==================
54
Note 4 - Loans - Continued
Deposits reclassified as loans and included in the other loan category amounted
to $474,064 and $157,061, at December 31, 2002 and 2001, respectively.
Loans the Company considered to be impaired (including non-accrual loans) at
December 31, 2002 and 2001 totaled $5,035,395 and $4,581,704, respectively. The
impaired loans at December 31, 2002 and 2001 had related allowances of $757,906
and $632,321, respectively. The average recorded investment in impaired loans
for the years ended December 31, 2002 and 2001 was approximately $4,808,550 and
$3,791,619, respectively. For the years ended December 31, 2002 and 2001, the
difference between gross interest income that would have been recorded in such
period if the nonaccruing loans had been current in accordance with their
original terms and the amount of interest income on those loans that was
included in such period's net income was approximately $350,302 and $187,850,
respectively.
The Company has no commitments to lend additional funds to the borrowers of
non-accrual loans.
Net unamortized deferred loan fees and origination costs included in unearned
income amounted to $1,192,851 and $283,076, for the years ended as of December
31, 2002 and 2001.
Commercial and residential real estate loans pledged to secure Federal Home Loan
Bank advances amounted to approximately $58,790,000 and $32,461,000 at December
31, 2001 and 2000, respectively (see Note 9).
Note 5 - Allowance for Loan Losses
Changes in the allowance for loan losses for the years ended December 31, 2002,
2001 and 2000 were as follows:
2002 2001 2000
------------------ ------------------ ------------------
Balance at beginning of year................... $ 3,802,836 $ 3,266,667 $ 2,261,413
Charge-offs.................................... (206,836) (389,627) (109,980)
Recoveries..................................... 213,298 205,796 115,234
------------------ ------------------ ------------------
Net (charge-offs) recoveries................. 6,462 (183,831) 5,254
Provision for loan losses...................... 2,510,000 720,000 1,000,000
------------------ ------------------ ------------------
Balance at end of year......................... $ 6,319,298 $ 3,802,836 $ 3,266,667
================== ================== ==================
55
Note 6 - Premises and Equipment
Premises and equipment as of December 31, 2002 and 2001 is as follows:
2002 2001
------------------ ------------------
Land............................................................... $ 1,322,827 $ 972,536
Land improvements................................................... 311,725 336,369
Building............................................................ 8,420,405 6,668,709
Furniture and equipment............................................. 3,776,619 3,491,079
Automobiles......................................................... 286,038 301,342
Construction in progress............................................ 669,512 703,049
------------------ ------------------
14,787,126 12,473,084
Less allowance for depreciation..................................... 4,677,874 4,534,234
------------------ ------------------
$ 10,109,252 $ 7,938,850
================== ==================
The provision for depreciation charged to occupancy and equipment expense for
the years ended December 31, 2002, 2001 and 2000 was $687,466, $555,439, and
$527,415, respectively.
Note 7 - Deposits
The aggregate amounts of time deposits of $100,000 or more, including
certificates of deposit of $100,000 or more at December 31, 2002 and 2001 were
$140,799,724 and $75,786,468, respectively. Time deposits of less than $100,000
totaled $111,773,587 and $86,992,478 at December 31, 2002 and 2001,
respectively. Demand deposits reclassified as loan balances as of December 31,
2002 and 2001 amounted to $474,064 and $153,772, respectively.
The maturities of time certificates of deposit and other time deposits issued by
the Bank at December 31, 2002, are as follows:
Year Ending December 31,
------------------------
2003...................................................................... $ 183,558,660
2004...................................................................... 50,652,938
2005...................................................................... 13,027,062
2006...................................................................... 1,542,141
2007...................................................................... 3,792,510
------------------
$ 252,573,311
==================
Note 8 - Short-term Borrowings
Short-term borrowings at December 31, 2001 consisted of Federal funds purchased
totaling $1,086,000. No short-term borrowings were outstanding at December 31,
2002.
56
Note 9 - Long-term Debt
At December 31, 2002 and 2001, the Company had long-term debt totaling
$60,039,415 and $37,579,761, respectively.
Long-term debt consists of the following at December 31:
2002 2001
------------------ ------------------
Long-term Federal Home Loan Bank advances, with varying
maturities from December 2004 through March 2010, the
interest rates have a variable base or are at a fixed
rate between 1.49% to 6.37%, secured by real estate
mortgage loans and pledged securities........................... $ 50,000,000 $ 32,500,000
Long-term FCBI Capital Trust I, guaranteed preferred
securities; interest rate prime plus 0.5%, the
debenture has a 30-year life with a call option of
5 years, subject to regulatory approval....................... 10,000,000 --
Subordinated Capital Note, 3.75% (Prime plus 1%), for
one year then floating prime, due December 2013,
unsecured and subordinated to depositors' and
unsecured creditors' interests; subject to certain
capital requirements............................................ -- 5,000,000
Notes payable to Ford Motor Credit, with interest
rates varying from 0.90% to 5.90%, interest and
principal paid monthly over 3-year periods, various
maturities in 2003, secured by vehicles......................... 39,415 79,761
------------------ -------------------
$ 60,039,415 $ 37,579,761
================== ====================
In June 2002, the Company formed a wholly-owned Delaware statutory business
trust, FCBI Capital Trust I, which issued $10,000,000 of guaranteed preferred
securities representing undivided beneficial interests in the assets of the
trust ("Trust Preferred Securities"). The common securities of the trust are
owned by the Company. The proceeds from the issuance of the Trust Preferred
Securities ($10,000,000) and common securities ($310,000) were used by the trust
to purchase $10,310,000 of junior subordinated deferrable interest debentures of
the Company. The debentures, which bear interest at Prime rate plus 0.5%,
represent the sole asset of the trust. The Company is allowed to treat the Trust
Preferred Securities as Tier 1 capital under current Federal Reserve Board
guidelines.
The Company has entered into an agreement, which fully and unconditionally
guarantees payment of accrued and unpaid distributions required to be paid on
the Trust Preferred Securities, with respect to any Trust Preferred Securities
called for redemption.
57
Note 9 - Long-term Debt - Continued
The Trust Preferred Securities mature in September 2032 and may be called by the
Company at any time after June 2007. Maturities of long-term debt following
December 31, 2002, are as follows:
Year Ending December 31,
-----------------------
2003......................................................................... $ 17,754
2004......................................................................... 10,518,567
2005......................................................................... 15,003,094
2006......................................................................... 4,500,000
2007......................................................................... --
Thereafter................................................................... 30,000,000
------------------
$ 60,039,415
==================
Note 10 - Shareholders' Equity
At December 31, 2002 and 2001, shareholders' equity of the Company consisted of
the following:
Common Stock: 10,000,000 shares authorized with a par value of $0.01 per share.
Voting rights equal to one vote per share.
Paid-in Capital: Represents the funds received in excess of par value upon the
issuance of stock, net of issuance costs and the related effects of the stock
dividends and stock splits.
Retained Earnings: Represents the accumulated net earnings of the Company as
reduced by dividends paid to shareholders and the effect of stock dividends
issued in previous periods.
Stock Dividends and Stock Splits: In May 2000, the Bank issued a 1.2 shares for
1.0 share stock split, thereby increasing the number of shares outstanding to
2,168,970. In conjunction with the split, the par value of the stock was reduced
from $5.00 per share to $4.00 per share. In June 2001, the Bank issued a 1.2
shares for 1.0 share stock split, thereby increasing the number of shares
outstanding to 2,602,764. In conjunction with the split, the par value of the
stock was reduced from $4.00 per share to $3.20 per share. In April 2002, each
share of the Bank was converted into one share of the Company's $.01 par value
common stock. In December 2002, the Company issued a 1.2 for 1 common stock
split resulting in an increase in the number of outstanding shares to 3,213,316.
All per share amounts included in these consolidated financial statements have
been adjusted to give retroactive effect to the stock splits.
Accumulated Other Comprehensive Income: Represents the change in equity during
each period from the effects of unrealized holding gains and losses on
securities available-for-sale, net of tax.
58
Note 11 - Regulatory Capital Matters
The Company and the Bank are subject to various regulatory capital requirements
administered by the state and federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possible additional
discretionary actions by regulators, which if undertaken, could have a direct
material effect on the Company's consolidated financial statements. Under
regulatory capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and its subsidiary bank must meet specific
capital guidelines involving quantitative measures of the Company's and its
subsidiary bank's assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The Bank's capital amounts and
classification under the prompt corrective guidelines are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of Total
capital and Tier I capital to risk-weighted assets (as defined in the
regulations), and Tier I capital to adjusted total assets (as defined).
Management believes, as of December 31, 2002, that the Company and the Bank meet
all capital adequacy requirements to which they are subject.
As of December 31, 2002, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To remain categorized as well
capitalized, the Bank will have to maintain minimum Total capital, Tier 1
capital, and Tier 1 leverage ratios as disclosed in the table below. There are
no changes in conditions or events since the most recent notification that
management believes have changed the Bank's prompt corrective action category.
The Company's and the Bank's actual capital amounts and ratios are also
presented in the table.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------------- ----------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
----------- -------- ----------- --------- ----------- ---------
(In thousands)
As of December 31, 2002:
Total Capital
Consolidated.............. $ 50,320 10.75% $ 37,444 8.00% $ 46,805 10.00%
Florida Community
Bank.................... 49,736 10.64 37,412 8.00 46,765 10.00
Tier 1 Capital
Consolidated.............. 44,464 9.50 18,722 4.00 28,083 6.00
Florida Community
Bank.................... 43,885 9.38 18,706 4.00 28,059 6.00
Tier 1 Leverage
Consolidated.............. 44,464 9.15 19,439 4.00 24,299 5.00
Florida Community
Bank.................... 43,885 9.04 19,420 4.00 24,275 5.00
59
Note 11 - Regulatory Capital Matters - Continued
As of December 31, 2001(Bank Only):
Total Capital............. $ 37,342 10.65% $ 28,041 8.00% $ 35,052 10.00%
Tier 1 Capital............ 29,139 8.31 14,021 4.00 21,031 6.00
Tier 1 Leverage........... 29,139 8.29 14,056 4.00 17,570 5.00
Note 12 - Stock Option Plans
The Company has adopted its 2002 Key Employee Stock Compensation Program under
which it has granted statutory and non-statutory stock options to certain key
employees to purchase up to 55,200 shares (as adjusted for the stock split) at
$15.00 per share. The options granted provide for these key employees to
purchase shares of the Company's $0.01 par value common stock at no less than
the market value at the dates of grant. The options granted may be exercised
within ten years from the dates of grant.
The following sets forth certain information regarding stock options for the
years ended December 31, 2002 and 2001.
Fixed Options
2002 2001
------------------------- --------------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
----------- ----------- ----------- ------------
Outstanding at beginning of year........................... 55,200 $ 15.00 -- $ --
Granted................................................. -- -- 55,200 15.00
Exercised............................................... -- -- -- --
Forfeited............................................... -- -- -- --
---------- -----------
Outstanding at end of year................................. 55,200 15.00 55,200 15.00
========== ===========
Weighted average fair value of
options granted during the year......................... 0.00 1.74
Expiration Options
Number Date Exercisable
------------- ------------- --------------
Options with an Exercise Price of $15.00.......................... 55,200 10-25-11 22,080
Of the 55,200 outstanding options at December 31, 2002, 22,080 were exercisable
with the remaining 33,120 having remaining vesting periods of up to three years.
Total unexercised options of 55,200 have a weighted average contractual life of
8.82 years and a weighted average exercise price of $15.00.
At December 31, 2002, the shares under option include nonqualified options of
7,350 and incentive stock options of 47,850 issued to certain key employees of
the Company.
60
Note 12 - Stock Option Plans - Continued
The number of shares and weighted average exercise price have been restated to
give effect for the 1.2 for 1 stock split effective December 2002.
If the Company had elected to recognize compensation cost for options granted in
2002 and 2001, based on the fair value of the options as permitted by SFAS No.
123, net income and earnings per share would have been reduced to the pro forma
amounts indicated below:
Years Ended December 31,
---------------------------------
2002 2001
------------- --------------
Net Income:
As reported............................................................... $ 6,418,306 $ 5,346,217
Pro forma................................................................. 6,389,537 5,325,276
Basic Earnings Per Share:
As reported............................................................... $ 2.05 $ 1.71
Pro forma................................................................. 2.05 1.71
Diluted Earnings Per Share:
As reported............................................................... $ 2.04 $ 1.71
Pro forma................................................................. 2.03 1.70
All options are assumed to be exercised in the calculation of diluted average
common shares outstanding, causing the equivalent number of shares outstanding
on a diluted basis to be 17,123 and 2,929 greater than that used to calculate
basic earnings per share for 2002 and 2001, respectively. There was a $0.01 and
$0.00 dilutive effect on earnings per share for the years ended December 31,
2002 and 2001, respectively.
The Company's options outstanding have a weighted average contractual life of
8.83 years. The fair value of each grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions:
2002 2001
------------------ ------------------
Expected stock price volatility..................................... -- 0.085%
Expected dividend yield............................................. -- 2.600%
Risk-free interest rate............................................. -- 4.070%
Expected option life................................................ -- 5 years
The effects of applying SFAS No. 123 for providing proforma disclosures are not
likely to be representative of the effects on reported earnings for future
years, nor are the dividend estimates representative of commitments on the part
of the Company's Board.
61
Note 13 - Other Operating Expenses
The major components of other operating expenses included in noninterest
expenses at December 31, 2002, 2001 and 2000 are as follows:
2002 2001 2000
------------------ ------------------ ------------------
Professional fees.............................. $ 209,776 $ 191,238 $ 169,547
Supplies....................................... 181,958 135,019 127,776
Examination and assessment..................... 139,128 105,540 86,966
Postage........................................ 137,112 98,590 86,674
Telephone...................................... 136,195 121,962 102,704
Promotions and public relations................ 135,472 129,716 161,149
ATM expense.................................... 124,029 124,261 101,468
Taxes and licenses............................. 102,911 106,613 118,486
Bank charges................................... 95,300 135,274 120,487
Courier........................................ 94,705 71,141 64,768
Software maintenance........................... 70,155 119,690 98,159
Director's board and committee fees............ 67,200 67,200 71,750
Dues and subscriptions......................... 44,109 31,241 24,619
Employee educational expenses.................. 41,400 39,528 35,031
Litigation settlement.......................... -- -- 200,000
Other.......................................... 199,775 144,803 109,687
------------------ ------------------ ------------------
$ 1,779,225 $ 1,621,816 $ 1,679,271
================== ================== ==================
Note 14 - Income Taxes
Federal and state income taxes receivable (payable) as of December 31, 2002 and
2001 included in other assets and other liabilities, respectively, were as
follows:
2002 2001
------------------ ------------------
Current
Federal............................................................. $ 76,180 $ 30,694
State............................................................... 13,006 (13,532)
62
Note 14 - Income Taxes - Continued
The components of the deferred income tax asset included in other assets as of
December 31, 2002 and 2001 are as follows:
2002 2001
------------------ ------------------
Deferred tax asset:
Federal............................................................. $ 1,773,225 $ 991,061
State............................................................... 295,537 160,318
------------------ ------------------
Total deferred income tax asset................................... 2,068,762 1,151,379
------------------ ------------------
Deferred tax liability:
Federal............................................................. (92,785) (34,448)
State............................................................... (15,464) (5,572)
------------------ ------------------
Total deferred income tax liability............................... (108,249) (40,020)
------------------ ------------------
Net deferred tax asset................................................. $ 1,960,513 $ 1,111,359
================== ==================
The tax effects of each type of income and expense item that gave rise to
deferred taxes are:
2002 2001
------------------ ------------------
Depreciation........................................................ $ (108,249) $ (40,020)
Allowance for loan losses........................................... 1,906,373 964,439
Directors benefit plan.............................................. 141,163 155,653
Officers benefit plan............................................... 21,226 31,287
------------------ ------------------
Net deferred tax asset.............................................. $ 1,960,513 $ 1,111,359
================== ==================
The components of income tax expense for the years ended December 31, 2002, 2001
and 2000 were as follows:
2002 2001 2000
------------------ ------------------ ------------------
Current
Federal...................................... $ 4,009,514 $ 3,031,351 $ 2,762,291
State........................................ 690,462 511,042 477,750
Deferred
Federal...................................... (723,827) (215,930) (309,221)
State........................................ (125,327) (34,929) (50,021)
------------------ ------------------ ------------------
$ 3,850,822 $ 3,291,534 $ 2,880,799
================== ================== ==================
63
Note 14 - Income Taxes - Continued
There were no material tax effects of securities transactions for the years
ended December 31, 2002, 2001 and 2000.
The principal reasons for the difference in the effective tax rate and the
federal statutory rate are as follows for the years ended December 31, 2002,
2001 and 2000:
2002 2001 2000
------------------ ------------------ ------------------
Statutory federal income tax rate................. 34.0% 34.0% 34.0%
Effect on rate of:
Tax-exempt securities.......................... 0.0 (0.1) (0.2)
Insurance proceeds............................. 0.0 0.0 (1.1)
State income tax, net of
federal tax benefit ......................... 3.2 3.5 3.4
Other.......................................... 0.3 0.7 0.1
------------------ ----------------- -----------------
Effective income tax rate......................... 37.5% 38.1% 36.2%
================== ================= =================
Note 15 - Benefit Plans
The Company has two qualified employee benefit plans: 1) A Pension Plan, and 2)
A Profit Sharing Plan. The Plans cover substantially all employees, subject to
similar eligibility requirements. The Company contributes 10% of eligible
compensation under the Pension Plan, annually. The Company's annual contribution
to the Profit Sharing Plan is discretionary as determined by the board of
directors. For the years ended December 31, 2002, 2001 and 2000, the Company's
contributions charged to operations amounted to $347,214, $274,904 and $235,412
for the Pension Plan and $362,215, $289,170 and $253,285 for the Profit Sharing
Plan, respectively.
The Company also has a Director's Benefit Plan (the "Benefit Plan") covering
certain directors and a Salary Continuation Plan (the "Salary Plan") for a
former officer. These plans were obtained resulting from a business combination
that occurred in 1998.
The Benefit Plan provides for the payment of scheduled benefits to the
participants or their beneficiaries at age 65 or their normal retirement date,
whichever occurs later. If the participant dies prior to receiving 180 monthly
payments, the participant's beneficiary shall receive any remaining monthly
payments. Payment of benefits under the Benefit Plan requires that the
participant fulfill certain conditions related to age and length of service. The
Company is accruing the present value of the future benefits to be paid under
the Benefit Plan over the term of each participant's service period.
64
Note 15 - Benefit Plans - Continued
The Salary Plan provides for the payment of a retirement benefit of $30,000 per
year for a period of ten years. Payment of these benefits commenced on January
1, 1995, and continued throughout the current year according to the terms of the
Plan. The Company has accrued the present value of the future benefits to be
paid under the Salary Plan.
The Company has determined that the following disclosures are relevant to the
Benefit Plan and the Salary Plan, however, the plans are non-qualified and
unfunded. Payments to retired directors and officers are funded through
operations.
Net pension cost for the Director's Benefit Plan and the Salary Continuation
Plan for 2002, 2001 and 2000 included the following components:
2002 2001 2000
------------------ ------------------ ------------------
Service cost................................... $ 23,171 $ 20,878 $ 1,800
Interest cost.................................. 39,373 41,439 43,902
------------------ ------------------ ------------------
Net periodic pension cost.................... $ 62,544 $ 62,317 $ 45,702
================== ================== ==================
The following table sets forth the accumulated benefit obligation of the
Director's Benefit Plan and the Salary Continuation Plan recognized in the
Company's statements of financial condition at December 31, 2002 and 2001.
2002 2001
------------------ ------------------
Present value of benefit obligation:
Vested.............................................................. $ 424,746 $ 473,267
Nonvested........................................................... -- --
------------------ ------------------
Accumulated benefit obligation/pension liability....................... $ 424,746 $ 473,267
================== ==================
The weighted average discount rate used in determining present value of the
projected benefit obligation for the Director's Benefit Plan and Salary
Continuation Plan was nine percent.
Note 16 - Commitments and Contingencies
In the normal course of business, the Company offers a variety of financial
products to its customers to aid them in meeting their requirements for
liquidity, credit enhancement, and interest rate protection. Generally accepted
accounting principles recognize these transactions as contingent liabilities
and, accordingly, they are not reflected in the accompanying consolidated
financial statements.
65
Note 16 - Commitments and Contingencies - Continued
Loan commitments are made to accommodate the financial needs of the Company's
customers. Standby letters of credit commit the Company to make payments on
behalf of customers when certain specified future events occur. Historically,
most loan commitments and standby letters of credit expire unused. The Company's
exposure to credit loss in the event of nonperformance by the counter-party to
the financial instrument for loan commitments and standby letters of credit is
represented by the contractual amount of those instruments. The Company uses the
same underwriting standards in making commitments and conditional obligations as
it does for on-balance sheet instruments. The amount of collateral obtained is
based on management's credit evaluation of the customer. Collateral held varies,
but may include accounts receivable, inventory, property, plant, and equipment,
and income-producing commercial properties.
The total amounts of loan commitments and standby letters of credit are
summarized as follows at December 31:
Contract or
Notional Amount
----------------------------------------
2002 2001
------------------ ------------------
Loan commitments....................................................... $ 94,694,000 $ 79,515,000
Standby letters of credit.............................................. 5,852,000 1,306,000
------------------ ------------------
Total unfunded commitments.......................................... $ 100,546,000 $ 80,821,000
================== ==================
Management conducts regular reviews of these instruments on an individual
customer basis, and the results are considered in assessing the adequacy of the
Company's allowance for loan losses. The total reserve allocated for unfunded
commitments was approximately $374,000 and $265,000 at December 31, 2002 and
2001, respectively
Note 17 - Concentrations of Credit
Most of the Company's loans, commitments, and commercial and standby letters of
credit have been granted to customers in the Company's market area. Many such
customers are depositors of the Company. The concentrations of credit by type of
loan are set forth in note 4. The distribution of commitments to extend credit
related primarily to unused real estate draw lines. Commercial and standby
letters of credit were granted primarily to commercial borrowers.
The Company maintains its cash accounts at various commercial banks in the
United States. The total cash balances in commercial banks are insured by the
FDIC up to $100,000. Total uninsured balances held at correspondent commercial
banks amounted to $5,967,875 and $13,017,358 at December 31, 2002 and 2001,
respectively.
66
Note 18 - Restrictions on Dividends
The Bank is subject to the dividend restrictions set forth by the State Banking
Department (Florida). Under such restrictions, the Bank may not, without the
prior approval of the State Banking Department, declare dividends in excess of
the sum of the current year's earnings plus the retained earnings from the prior
two years. For the year ending December 31, 2003, the Bank can declare
dividends, without prior regulatory approval, of approximately $8,343,375 plus
an additional amount equal to its net profits for 2003.
Note 19 - Litigation
While the Company is party to various legal proceedings arising from the
ordinary course of business, management believes after consultation with legal
counsel that there are no proceedings threatened or pending against the Company
that will, individually or in the aggregate, have a material adverse effect on
the business or financial condition of the Company.
Note 20 - Leases
The Company leased facilities under non-cancelable operating leases during 2002,
2001 and 2000. The leases provided for renewal options and generally required
the Company to pay maintenance, insurance and property taxes. For the years
ended December 31, 2002, 2001 and 2000, rental expense for such leases was
$182,870, $160,342 and $13,126, respectively. The Company also entered into a
sale/leaseback transaction with a related party in January 2001 for a branch
facility, future minimum payments under this lease are included in the table
below (see also Note 21).
Future minimum lease payments under such non-cancelable operating leases at
December 31, 2002 are as follows:
Year Ending December 31,
-----------------------
2003....................................................................... $ 168,164
2004....................................................................... 171,805
2005....................................................................... 166,750
2006....................................................................... 164,906
2007....................................................................... 168,913
Thereafter................................................................. 1,753,876
------------------
Total minimum lease payments............................................................ $ 2,594,414
==================
67
Note 21 - Related Party Transactions
Loans: Certain directors, executive officers and principal shareholders,
including their immediate families and associates were loan customers of the
Company during 2002 and 2001. Such loans are made in the ordinary course of
business at normal credit terms, including interest rates and collateral and do
not represent more than a normal risk of collection. A summary of activity and
amounts outstanding are as follows:
2002 2001
------------------ ------------------
Balance at Beginning of Year........................................... $ 9,525,429 $ 10,242,034
New loans.............................................................. 7,166,439 2,319,483
Repayments............................................................. (8,245,030) (3,036,088)
------------------ ------------------
Balance at End of Year................................................. $ 8,446,838 $ 9,525,429
================== ==================
Deposits: Deposits held from related parties were $9,446,535 and $10,793,946 at
December 31, 2002 and 2001, respectively.
Other: On January 11, 2001, the board of directors of the Bank adopted a
resolution to sell the land and premises of the Cypress Lake Branch at fair
market value to a Bank Director and lease the property back at a fair rental.
The sales price of $1,855,000 is greater than the appraised value and is based
on the cost to the Bank of the land, building and closing costs. The agreement
specifies a 15-year net lease of $11,805 per month with annual increases of
2.5%.
Note 22 - Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and Short-Term Investments: For those short-term instruments, the carrying
amount is a reasonable estimate of fair value.
Securities: For securities available-for-sale and securities held-to-maturity,
fair values are based on quoted market prices or dealer quotes. For other
securities held as investments, fair value equals quoted market price, if
available. If a quoted market price is not available, fair value is estimated
using quoted market prices for similar securities.
Loans: For certain homogeneous categories of loans, such as some residential
mortgage, credit card receivables, and other consumer loans, fair value is
estimated using the quoted market prices for securities backed by similar loans,
adjusted for differences in loan characteristics. The fair value of other types
of loans is estimated by discounting the future cash flows using the current
rates at which similar loans would be made to borrowers with similar credit
ratings and for the same remaining maturities.
Accrued Interest Receivable: The carrying amount of accrued interest receivable
approximates its fair value.
68
Note 22 - Fair Value of Financial Instruments - Continued
Deposits: The fair value of demand deposits, savings accounts, and certain money
market deposits is the amount payable on demand at the reporting date. The fair
value of fixed-maturity certificates of deposit is estimated using the rates
currently offered for deposits of similar remaining maturities.
Accrued Interest Payable: The carrying amount of accrued interest payable
approximates its fair value.
Short-Term Borrowings: The carrying amounts of short-term borrowings approximate
their fair values.
Long-Term Debt: Rates currently available to the Company for debt with similar
terms and remaining maturities are used to estimate fair value of existing debt.
Commitments to Extend Credit, Standby Letters of Credit, and Financial
Guarantees Written: The fair value of commitments, letters of credit, and
financial guarantees is estimated to be approximately the same as the notional
amount of the related commitment.
The estimated fair values of the Company's financial instruments as of December
31, 2002 and 2001 are as follows:
2002 2001
--------------------------------- ---------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------- ---------------- --------------- ----------------
(in thousands) (in thousands)
Financial Assets
Cash and short-term investments.......... $ 58,835 $ 58,835 $ 25,539 $ 25,539
Securities............................... 36,214 36,995 35,002 35,251
Loans.................................... 416,415 418,079 318,666 323,556
Accrued interest receivable.............. 2,904 2,904 2,688 2,688
--------------- ---------------- --------------- ----------------
Total Financial Assets................. $ 514,368 $ 516,813 $ 381,895 $ 387,034
=============== ================ =============== ================
Financial Liabilities
Deposits................................. $ 423,935 $ 424,121 $ 317,861 $ 317,949
Short-term borrowings.................... -- -- 1,086 1,086
Long-term debt........................... 60,039 60,039 37,580 37,928
Accrued interest payable................. 1,867 1,867 1,689 1,689
--------------- ---------------- --------------- ----------------
Total Financial Liabilities............ $ 485,841 $ 476,027 $ 358,216 $ 358,652
=============== ================ =============== ================
Unrecognized Financial Instruments
Commitments to extend credit............. $ 94,694 $ 94,694 $ 79,515 $ 79,515
Standby letters of credit................ 5,852 5,852 1,306 1,306
--------------- ---------------- --------------- ----------------
Total Unrecognized Financial
Instruments.......................... $ 100,546 $ 100,546 $ 80,821 $ 80,821
=============== ================ =============== ================
69
Note 23 - Condensed Parent Company Information
Statement of Financial Condition
2002
-----------------
Assets
Cash and due from banks.................................................................... $ 104,942
Federal funds sold......................................................................... 100,000
Investment in subsidiaries (equity method) -
eliminated upon consolidation............................................................ 44,195,191
Other assets............................................................................... 373,667
-----------------
Total Assets........................................................................... $ 44,773,800
=================
Liabilities and Shareholders' Equity
Guaranteed preferred beneficial interest in the Company's
subordinated debentures.................................................................. $ 10,310,000
Other liabilities.......................................................................... --
-----------------
Total Liabilities...................................................................... 10,310,000
Total Shareholders' Equity............................................................. 34,463,800
-----------------
Total Liabilities and Shareholders' Equity............................................. $ 44,773,800
=================
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70
Note 23 - Condensed Parent Company Information - Continued
Statement of Income
2002
----------------
Income
From subsidiaries - eliminated upon consolidation
Dividends.................................................................................. $ 1,405,510
Interest................................................................................... 1,261
----------------
Total Income............................................................................. 1,406,771
----------------
Expenses
Salaries and employee benefits............................................................... 14,706
Interest..................................................................................... 306,752
Other expenses............................................................................... 58,329
----------------
Total Expenses........................................................................... 379,787
----------------
Income before income taxes and equity in
undistributed earnings of subsidiaries....................................................... 1,026,984
Income tax benefit.............................................................................. 144,786
----------------
Income before equity in undistributed
earnings of subsidiaries..................................................................... 1,171,770
Equity in undistributed earnings of subsidiaries................................................ 5,246,536
----------------
Net Income............................................................................... $ 6,418,306
================
[The remainder of this page intentionally left blank.]
71
Note 23 - Condensed Parent Company Information - Continued
Statement of Cash Flows
2002
----------------
Operating Activities
Net income................................................................................... $ 6,418,306
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed income of subsidiaries............................................. (5,246,536)
Other...................................................................................... (93,855)
----------------
Net Cash Provided By Operating Activities................................................ 1,077,915
----------------
Investing Activities
Investment in subsidiaries................................................................... (9,810,000)
----------------
Net Cash Used In Investing Activities.................................................... (9,810,000)
----------------
Financing Activities
Issuance of guaranteed preferred beneficial interest in the
Company's subordinated debentures, net of issuance costs................................... 10,030,188
Cash dividends............................................................................... (1,093,161)
----------------
Net Cash Provided By Financing Activities................................................ 8,937,027
----------------
Net increase in cash and cash equivalents....................................................... 204,942
Cash and Cash Equivalents at Beginning of Year.................................................. --
----------------
Cash and Cash Equivalents at End of Year........................................................ $ 204,942
================
Cash Paid During the Year For:
Interest..................................................................................... $ 306,752
Florida Community Banks, Inc., the parent holding company of Florida Community
Bank and FCBI Capital Trust I, was formed during the second quarter of 2002 and
had no assets, liabilities or income for the years 2001 and 2000.
72
Note 24 - Quarterly Results of Operations (Unaudited)
Selected quarterly results of operations for the four quarters ended December 31
are as follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------------- ------------- ------------- ------------- ----------------
(In Thousands)
2002:
Total interest income.............. $ 7,080 $ 7,729 $ 8,304 $ 8,457 $ 31,570
Total interest expense............. 2,808 2,914 2,951 3,114 11,787
Provision for loan losses.......... 330 280 1,100 800 2,510
Net interest income after
provision for loan losses....... 3,942 4,535 4,253 4,543 17,273
Investment securities
gains (losses).................. 36 -- -- -- 36
Other noninterest income........... 535 452 449 544 1,980
Other noninterest expense.......... 2,123 2,242 2,312 2,343 9,020
Income tax expense................. 898 1,024 902 1,027 3,851
Net income......................... 1,492 1,721 1,488 1,717 6,418
Per common share
Basic earnings.................. 0.48 0.55 0.48 0.54 2.05
Diluted earnings................ 0.48 0.55 0.48 0.53 2.04
2001:
Total interest income.............. $ 6,921 $ 7,449 $ 6,851 $ 6,682 $ 27,903
Total interest expense............. 3,181 3,085 2,931 2,821 12,018
Provision for loan losses.......... 150 150 150 270 720
Net interest income after
provision for loan losses....... 3,590 4,214 3,770 3,591 15,165
Investment securities
gains (losses).................. -- -- -- -- --
Other noninterest income........... 387 416 326 570 1,699
Other noninterest expense.......... 2,026 2,135 2,112 1,953 8,226
Income tax expense................. 724 933 798 837 3,292
Net income......................... 1,227 1,562 1,186 1,371 5,346
Per common share
Basic earnings.................. 0.39 0.50 0.38 0.44 1.71
Diluted earnings................ 0.39 0.50 0.38 0.44 1.71
2000:
Total interest income.............. $ 5,833 $ 6,007 $ 6,419 $ 6,731 $ 24,990
Total interest expense............. 2,239 2,324 2,709 3,004 10,276
Provision for loan losses.......... 150 550 150 150 1,000
Net interest income after
provision for loan losses....... 3,444 3,133 3,560 3,577 13,714
Investment securities
gains (losses).................. -- -- -- -- --
Other noninterest income........... 373 736 330 365 1,804
Other noninterest expense.......... 1,805 1,934 1,909 1,904 7,552
Income tax expense................. 747 624 735 775 2,881
Net income......................... 1,265 1,311 1,246 1,263 5,085
Per common share
Basic earnings.................. 0.41 0.42 0.40 0.40 1.63
Diluted earnings................ 0.41 0.42 0.40 0.40 1.63
73
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information appearing under the headings "ELECTION OF DIRECTORS,"
"BOARD OF DIRECTORS" and "COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES
EXCHANGE ACT OF 1934" on pages 3 to 6 and 11 in the Proxy Statement (the "2003
Proxy Statement") relating to the annual meeting of shareholders of the Company,
scheduled to be held on April 17, 2003, is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information appearing under the headings "EXECUTIVE COMPENSATION" and
"EMPLOYEE BENEFITS" on pages 6 to 10 of the 2003 Proxy Statement is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND Management
The information appearing under the heading "ELECTION OF DIRECTORS" on
pages 3 to 5 of the 2002 Proxy Statement and from Item 5 above is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing under the heading "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS" on pages 10 to 11 of the 2003 Proxy Statement is
incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
The Company has evaluated the effectiveness of its disclosure controls
and procedures pursuant to Securities Exchange Act Rule 13a-14. The
evaluation was performed under the supervision and with the
participation of management, including the chief executive officer and
the chief financial officer, within 90 days prior to the date of the
filing of this annual
74
report. Based on this evaluation, the chief executive officer and
chief financial officer have concluded that the disclosure controls
and procedures are effective in ensuring that all material information
required to be disclosed in this annual report has been communicated
to them in a manner appropriate to allow timely decisions regarding
required disclosure.
(b) Changes in internal controls.
Subsequent to the date of their evaluation, there were no significant
changes in internal controls or other factors that could significantly
affect internal controls, including any corrective actions with regard
to significant deficiencies and material weaknesses.
ITEM 15. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit No. Exhibit Page
(a) Financial Statements, Financial Schedules and Exhibits.
3.1 Articles of Incorporation of FCBI (included as Exhibit 3.1 to FCBI's
Registration Statement on Form 8-A filed with the SEC on April 15,
2002 and incorporated herein by reference).
3.2 By-laws of FCBI (included as Exhibit 3.2 to FCBI's Registration
Statement on Form 8-A filed with the SEC on April 15, 2002 and
incorporated herein by reference).
4.1 Subordinated Promissory Note, dated December 24, 2001, between Florida
Community Bank and Independent Bankers Bank of Florida (included as
Exhibit 4.1 to the Bank's Form 10-KSB for the year ended December 31,
2001, and incorporated herein by reference).
4.2 Specimen Common Stock Certificate of FCBI (included as Exhibit 4.1 to
FCBI's Registration Statement on Form 8-A filed with the SEC on April
15, 2002 and incorporated herein by reference).
10.1 Employment agreement with Thomas S. Junker dated December 9, 1997
(included as Exhibit 10.1 to the Bank's Registration Statement on Form
10-SB-A for the year ended December 31, 1998 and incorporated herein
by reference).
10.2 2002 Key Employee Stock Compensation Program of FCBI (included as
Appendix D to the Bank's Definitive Schedule 14-A filed with the FDIC
on March 22, 2002 and incorporated herein by reference).
75
Exhibit No. Exhibit Page
10.3 Amended and Restated Trust Agreement among Florida Community Banks,
Inc. as depositor, Wilmington Trust Company as property trustee,
Wilmington Trust Company, as Delaware trustee, and Stephen L. Price,
and Thomas V. Ogletree as administrators, dated as of June 21, 2002
(included as Exhibit 10.3 to the Company's Form 10-Q for the quarter
ended June 30, 2002, and incorporated herein by reference).
10.4 Guarantee Agreement between Florida Community Banks, Inc. as
guarantor, and Wilmington Trust Company as guarantee trustee, dated as
of June 21, 2002 (included as Exhibit 10.4 to the Company's Form 10-Q
for the quarter ended June 30, 2002, and incorporated herein by
reference).
10.5 Junior Subordinated Indenture between Florida Community Banks, Inc.
(as Company) and Wilmington Trust Company (as trustee), dated as of
June 21, 2002 (included as Exhibit 10.5 to the Company's Form 10-Q for
the quarter ended June 30, 2002, and incorporated herein by
reference).
10.6 Term Loan Agreement between Florida Community Banks, Inc. and The
Bankers Bank, Atlanta, Georgia, dated June 13, 2002 (included as
Exhibit 10.6 to the Company's Form 10-Q for the quarter ended June 30,
2002, and incorporated herein by reference).
11 Statement re: computation of earnings per common share 77
12 Statement re: computation of ratios 77
21 Subsidiaries of the Registrant 78
24 Power of Attorney 81
99.1 Code of Ethics (included as Exhibit 99.1 to the Company's Form 8-K
filed on March 3, 2003, and incorporated herein by reference.)
99.2 Chief Executive Officer - Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 79
99.3 Chief Financial Officer - Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 79
(b) Reports on Form 8-K
During the quarter ended December 31, 2002, Florida Community Banks,
Inc. filed Form 8-K, dated November 11, 2002 for the purpose of
notifying the shareholders of a change in dividend policy. The item
reported under this Report was Item 5 Other Events. No financial
statements were filed therewith.
76
EXHIBIT 11 - STATEMENTS RE: COMPUTATION OF PER SHARE EARNINGS
Florida Community Banks, Inc.
Computation of Net Income Per Common Share
The following tabulation presents the calculation of basic and diluted earnings
per common share for the years ended December 31, 2002, 2001 and 2000.
2002 2001 2000
---------------- --------------- ---------------
Basic Earnings Per Share:
Net income................................................ $ 6,418,306 $ 5,346,217 $ 5,085,061
================ =============== ===============
Earnings on common shares................................. $ 6,418,306 $ 5,346,217 $ 5,085,061
================ =============== ===============
Weighted average common shares outstanding - basic........ 3,123,316 3,123,316 3,123,316
================ =============== ===============
Weighted average common shares outstanding - diluted...... 3,140,439 3,126,245 3,123,316
================ =============== ===============
Basic earnings per common share........................... $ 2.05 $ 1.71 $ 1.63
=============== =============== ===============
Diluted earnings per common share......................... $ 2.04 $ 1.71 $ 1.63
=============== =============== ===============
Exhibit 12 - Statements Re: Computation of Ratios
Florida Community Banks, Inc.
Computation of Ratio of Earnings to Fixed Charges
Year Ended December 31,
-------------------------------------------------
2002 2001 2000
-------------- ------------- --------------
(Dollars in thousands)
Pretax income................................................. $ 10,269 $ 8,638 $ 7,966
Add fixed charges:
Interest on deposits....................................... 10,032 10,909 8,939
Interest on borrowings..................................... 1,448 1,109 1,337
Portion of rental expense representing interest expense.... 60 53 4
-------------- ------------- --------------
Total fixed charges...................................... 11,540 12,071 10,280
-------------- ------------- --------------
Income before fixed charges................................... $ 21,809 $ 20,709 $ 18,246
============== ============= ==============
Pretax income................................................. $ 10,269 $ 8,638 $ 7,966
Add fixed charges (excluding interest on deposits):
Interest on borrowings..................................... 1,448 1,109 1,337
Portion of rental expense representing interest expense.... 60 53 4
-------------- ------------- --------------
Total fixed charges...................................... 1,508 1,162 1,341
-------------- ------------- --------------
Income before fixed charges (excluding interest on
deposits).................................................. $ 11,777 $ 9,800 $ 9,307
============== ============= ==============
Ratio of Earnings to Fixed Charges
Including interest on deposits............................. 1.89 1.72 1.77
Excluding interest on deposits............................. 7.81 8.44 6.94
77
Exhibit 21 - SUBSIDIARIES OF THE REGISTRANT
Subsidiaries - Direct/Wholly-owned State of Incorporation
- ---------------------------------- ----------------------
Florida Community Bank Florida
FCBI Capital Trust I Delaware
78
EXHIBIT 99.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with Florida Community Banks, Inc.'s ("Company") Annual Report on
Form 10-K for the period ended December 31, 2002 ("Report"), each of the
undersigned certify that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: March 20, 2003 By: /s/ Stephen L. Price
-------------------------------------
Stephen L. Price
President and Chief Executive Officer
EXHIBIT 99.3
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with Florida Community Banks, Inc.'s ("Company") Annual Report on
Form 10-K for the period ended December 31, 2002 ("Report"), each of the
undersigned certify that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: March 20, 2003 By: /s/ Thomas V. Ogletree
-------------------------------------
Thomas V. Ogletree
Chief Financial Officer
79
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FLORIDA COMMUNITY BANKS, INC.
Date: March 20, 2003 By: /s/ Stephen L. Price
------------------------------------
Stephen L. Price
Chairman and Chief Executive Officer
Date: March 20, 2003 By: /s/ Thomas V. Ogletree
------------------------------------
Thomas V. Ogletree
Chief Financial Officer
80
Exhibit 24 - POWER OF ATTORNEY
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Stephen L. Price and Thomas V. Ogletree and each of
them, his true and lawful attorney-in-fact, as agent with full power of
substitution and resubstitution for him and in his name, place and stead, in any
and all capacity, to sign any or all amendments to this Form 10-K and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Federal Deposit Insurance Corporation, granting unto said
attorney-in-fact and agents in full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully and to all intents and purposes as they might or could be in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, and their substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in capacities and on the dates indicated.
Directors Date
- ---------------------------------------- -----------------------------------
/s/ Beauford E. Davidson March 20, 2003
- ----------------------------------------
Beauford E. Davidson
/s/ Patrick B. Langford March 20, 2003
- ----------------------------------------
Patrick B. Langford
/s/ Lewis J. Nobles, Jr. March 20, 2003
- ----------------------------------------
Lewis J. Nobles, Jr.
/s/ Jon R. Olliff March 20, 2003
- ----------------------------------------
Jon R. Olliff
/s/ James O'Quinn March 20, 2003
- ----------------------------------------
James O'Quinn
/s/ Stephen L. Price March 20, 2003
- ----------------------------------------
Stephen L. Price
/s/ Bernard T. Rasmussen March 20, 2003
- ----------------------------------------
Bernard T. Rasmussen
/s/ R. A. Roberts March 20, 2003
- ----------------------------------------
R. A. Roberts
/s/ Daniel G. Rosbough March 20, 2003
- ----------------------------------------
Daniel G. Rosbough
/s/ James E. Williams, Jr. March 20, 2003
- ----------------------------------------
James E. Williams, Jr.
81
CERTIFICATIONS
I, Stephen L. Price, certify that:
1. I have reviewed this annual report on Form 10-K of Florida Community Banks,
Inc.
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 officers 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 officers 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 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 officers 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 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 20, 2003
/s/ Stephen L. Price
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Stephen L. Price
Chief Executive Officer
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CERTIFICATIONS
I, Thomas V. Ogletree, certify that:
1. I have reviewed this annual report on Form 10-K of Florida Community Banks,
Inc.
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 officers 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 officers 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 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 officers 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 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 20, 2003
/s/ Thomas V. Ogletree
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Thomas V. Ogletree
Chief Financial Officer
83