<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 8-K/A
(AMENDMENT NO. 1)
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): March 23, 1998
--------------------
AMERICAN BANCSHARES, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Florida 0-27474 65-0624640
- ---------------------------- ----------------------- ---------------------
(State or Other Jurisdiction (Commission File Number) (IRS Employer
Incorporation) Identification Number)
4502 Cortez Road West, Bradenton, Florida 34210-2801
----------------------------------------- ------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (941) 795-3050
-------------------
Page 1 of 4
<PAGE> 2
ITEM 5. OTHER EVENTS
As previously reported by American Bancshares, Inc. (the "Company") on
its Current Report on Form 8-K dated April 6, 1998 (the "Form 8-K"), and filed
with the Securities and Exchange Commission (the "Commission") on April 7,
1998, the Company completed its acquisition of Murdock Florida Bank. The
Company's Consolidated Financial Statements and Related Management's Discussion
and Analysis of Financial Condition and Results of Operations have been
provided herein and give retroactive effect to the Merger using the pooling of
interests method of accounting. The Company's Form 10-Q for the period ended
March 31, 1998 filed with the Commission is based on the historical
consolidated financial statements as set forth in this Form 8-K. The Company
is hereby filing with the Commission a copy of the Audited Consolidated
Financial Statements for years ended December 31, 1997 and 1996 and
Management's Discussion and Analysis.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C> <C>
99.1 - Audited Consolidated Financial Statements for the years ended December 31, 1997 and 1996 with
Report of Independent Accountants and Management's Discussion and Analysis.
99.2 - Report of Independent Accountants Coopers & Lybrand L.L.P. for the 1997 and 1996 Audits of
American Bancshares, Inc.
99.3 - Report of Independent Auditors Hacker, Johnson, Cohen & Grieb, P.A. for the 1997 and 1996
Audits of Murdock Florida Bank.
</TABLE>
Page 2 of 4
<PAGE> 3
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
AMERICAN BANCSHARES, INC.
May 21, 1998 By: /s/ Gerald L. Anthony
---------------------------------
Gerald L. Anthony
President and
Chief Executive Officer
Page 3 of 4
<PAGE> 4
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C> <C>
99.1 - Audited Consolidated Financial Statements for the years ended December 31, 1997 and 1996 with
Report of Independent Accountants and Management's Discussion and Analysis.
99.2 - Report of Independent Accountants Coopers & Lybrand L.L.P. for the 1997 and 1996 Audits of
American Bancshares, Inc.
99.3 - Report of Independent Auditors Hacker, Johnson, Cohen & Grieb, P.A. for the 1997 and 1996
Audits of Murdock Florida Bank.
</TABLE>
Page 4 of 4
<PAGE> 1
EXHIBIT 99.1
AMERICAN BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS,
AND MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
WITH REPORT OF INDEPENDENT ACCOUNTANTS
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Pages
<S> <C>
Report of Independent Accountants 1
Consolidated Financial Statements:
Consolidated Balance Sheets 2
Consolidated Statements of Income 3
Consolidated Statements of Shareholders' Equity 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6-28
Management's Discussion and Analysis of Financial Condition and Results of Operations 30-48
</TABLE>
<PAGE> 3
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
American Bancshares, Inc. and Subsidiaries
Bradenton, Florida
We have audited the accompanying consolidated balance sheets of American
Bancshares, Inc. and Subsidiaries (the "Company") as of December 31, 1997 and
1996, and the related consolidated statements of income, shareholders' equity,
and cash flows for the years then ended. 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 did not audit the financial statements of Murdock Florida Bank which
statements reflect total assets constituting 18% and 23%, respectively, and net
income constituting 15% and 13% for the years ended December 31, 1997 and 1996.
Those statements were audited by other auditors whose report has been furnished
to us, and our opinion, insofar as it relates to data included for Murdock
Florida Bank, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of American Bancshares,
Inc. and Subsidiaries as of December 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Tampa, Florida
February 13, 1998, except for Note 24,
as to which the date is March 23, 1998
1
<PAGE> 4
AMERICAN BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
<S> <C> <C>
Cash and due from banks $ 13,275,893 $ 17,562,908
Federal funds sold 5,120,000 6,000,000
Loans held for sale 39,587,522 20,351,204
Investment securities available for sale (at aggregate fair value) 68,664,216 43,508,712
Loans receivable (net of allowance for loan losses and deferred loan
fees/costs of $1,704,237 in 1997 and $1,173,463 in 1996) 213,405,033 175,264,438
Premises and equipment, net 9,160,971 7,134,589
Other assets 4,687,692 3,808,477
------------- -------------
Total assets $ 353,901,327 $ 273,630,328
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits $ 302,745,776 $ 232,432,633
Securities sold under agreements to repurchase 17,528,493 10,112,986
Federal Home Loan Bank advances 5,000,000 6,300,000
Note payable 500,000 0
Other liabilities 2,047,748 1,280,802
------------- -------------
Total liabilities 327,822,017 250,126,421
============= =============
COMMITMENTS AND CONTINGENCIES (Note 14)
SHAREHOLDERS' EQUITY
Common stock - $1.175 par value; 10,000,000 shares authorized;
4,994,482 and 4,925,768 shares issued at December 31, 1997
and 1996, respectively 5,868,516 5,787,777
Additional paid-in capital 15,547,568 15,203,743
Unrealized gain (loss) on investment securities available for sale,
net of tax of $85,914 and $(56,145) at December 31, 1997 and 1996,
respectively 139,808 (90,951)
Retained earnings 4,523,418 2,603,338
------------- -------------
Total shareholders' equity 26,079,310 23,503,907
------------- -------------
Total liabilities and shareholders' equity $ 353,901,327 $ 273,630,328
============= =============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
2
<PAGE> 5
AMERICAN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
for the years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Interest income:
Interest and fees on loans $ 20,101,030 $ 16,149,883
Interest on federal funds sold 534,642 336,408
Interest on investment securities 3,996,145 2,945,060
------------- -------------
Total interest income 24,631,817 19,431,351
------------- -------------
Interest expense:
Deposits 11,905,370 9,474,587
Borrowings 1,012,036 490,591
------------- -------------
Total interest expense 12,917,406 9,965,178
------------- -------------
Net interest income 11,714,411 9,466,173
Provision for loan losses 921,000 514,654
------------- -------------
Net interest income after provision for loan losses 10,793,411 8,951,519
------------- -------------
Other income 4,155,646 2,148,059
Other expenses 11,911,765 9,856,136
------------- -------------
Income before income tax provision 3,037,292 1,243,442
Income tax provision 1,117,212 460,953
------------- -------------
Net income $ 1,920,080 $ 782,489
============= =============
Weighted average basic shares outstanding 4,988,318 4,637,565
============= =============
Weighted average diluted shares outstanding 5,019,484 4,692,093
============= =============
Earnings per share:
Basic $ 0.38 $ 0.17
============= =============
Diluted $ 0.38 $ 0.17
============= =============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE> 6
AMERICAN BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
for the years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
Unrealized
Gains/
(Losses) on
Common Stock Investment
----------------------- Additional Securities
Authorized Outstanding Paid-In Retained Available
Shares Shares Par Value Capital Earnings for Sale, Net Total
---------- ----------- ---------- ----------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 10,000,000 3,325,094 $3,906,985 $ 8,725,149 $1,820,849 $ 179,486 $ 14,632,469
Exercise of warrants 0 163,695 192,342 789,828 0 0 982,170
Issuance of stock 0 1,436,979 1,688,450 5,688,766 0 0 7,377,216
Change in net unrealized
gain on investment
securities available
for sale 0 0 0 0 0 (270,437) (270,437)
Net income 0 0 0 0 782,489 0 782,489
---------- --------- ---------- ----------- ---------- --------- ------------
Balance, December 31,
1996 10,000,000 4,925,768 5,787,777 15,203,743 2,603,338 (90,951) 23,503,907
Exercise of warrants 0 61,595 72,374 297,196 0 0 369,570
Issuance of stock 0 7,119 8,365 46,629 0 0 54,994
Change in net unrealized
loss on investment
securities available
for sale 0 0 0 0 0 230,759 230,759
Net income 0 0 0 0 1,920,080 0 1,920,080
---------- --------- ---------- ----------- ---------- --------- ------------
Balance, December 31,
1997 10,000,000 4,994,482 $5,868,516 $15,547,568 $4,523,418 $ 139,808 $ 26,079,310
========== ========= ========== =========== ========== ========= ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE> 7
AMERICAN BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1997 and 1996
<TABLE>
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,920,080 $ 782,489
------------ ------------
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Deferred tax credit (199,194) (420,411)
Depreciation 717,916 485,976
Amortization of investment securities 18,479 120,064
Provision for loan losses 921,000 514,654
Gain on sale of investment securities available for sale (139,820) (106,826)
Gain on sale of loans (296,991) (190,624)
Gain on sale of mortgage servicing rights (381,151) (323,378)
(Gain) loss on sale of other real estate owned (12,990) 336,000
Origination of loans held for sale (58,451,859) (38,628,254)
Proceeds from sales of loans held for sale 44,112,636 38,158,995
Increase in deferred loan costs 23,359 150,103
Increase in other liabilities 766,946 71,011
(Increase) decrease in other assets (961,732) 681,988
------------ ------------
Total adjustments (13,883,401) 849,298
------------ ------------
Net cash (used in) provided by operating activities (11,963,321) 1,631,787
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net loans to customers (43,152,942) (36,815,218)
Purchases of bank premises and equipment (2,744,298) (3,332,104)
Proceeds from sales of available for sale investment securities 17,997,969 33,501,321
Proceeds from maturities of available for sale investment securities 14,178,000 12,337,437
Purchases of available for sale investment securities (56,936,173) (49,448,883)
Recoveries on loans charged off 100,536 49,486
------------ ------------
Net cash used in investing activities (70,556,908) (43,707,961)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, NOW, money market and savings accounts 36,468,555 28,231,180
Net increase in time deposits 33,844,588 17,474,549
Net increase in securities sold under agreements to repurchase 7,415,507 546,318
Proceeds from advances from borrowings 4,800,000 3,900,000
Repayments of advances from borrowings (5,600,000) (4,100,000)
Proceeds from stock sale 424,564 8,359,386
------------ ------------
Net cash provided by financing activities 77,353,214 54,411,433
------------ ------------
Net increase (decrease) in cash and cash equivalents (5,167,015) 12,335,259
Cash and cash equivalents at beginning of year 23,562,908 11,227,649
------------ ------------
Cash and cash equivalents at end of year $ 18,395,893 $ 23,562,908
============ ============
DISCLOSURES
Interest paid $ 12,710,683 $ 9,787,428
============ ============
Income taxes paid $ 1,415,233 $ 910,500
============ ============
Reclassification of loans to foreclosed real estate $ 160,000 $ 518,000
============ ============
Loans originated for sale of foreclosed real estate $ 95,000 $ 570,000
============ ============
Unrealized appreciation on investment securities $ 230,759 $ (270,437)
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 8
AMERICAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION:
American Bancshares, Inc. (Holding Company) is a one-bank holding
company, operated under the laws of the State of Florida. It has two
wholly owned subsidiaries, which include a banking subsidiary, American
Bank of Bradenton (Bank), a state-chartered bank; and Freedom Finance
Company (Finance), a Florida Corporation. The Bank is a general
commercial bank with all the rights, powers, and privileges granted and
conferred by the Florida Banking Code. Finance was incorporated on
March 26, 1997 and had no activity during 1997 other than a $100
capital contribution.
2. Summary of Significant Accounting Policies:
The accounting and reporting policies of the Holding Company and
Subsidiaries conform to generally accepted accounting principles and
general practice within the banking industry. Following is a
description of the more significant of those policies:
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of the Holding Company and its wholly owned
subsidiaries, American Bank of Bradenton and Freedom Finance Company,
collectively referred to herein as the Company. All significant
intercompany accounts and transactions have been eliminated.
INVESTMENT SECURITIES AVAILABLE FOR SALE - Securities to be held for
indefinite periods of time and not intended to be held to maturity are
classified as available for sale. Assets included in this category are
those assets that management intends to use as part of its
asset/liability management strategy and that may be sold in response to
changes in interest rates, resultant prepayment risk and other factors
related to interest rate and resultant prepayment risk changes.
Securities available for sale are recorded at fair value. Both
unrealized gains and losses on securities available for sale, net of
taxes, are included as a separate component of shareholders' equity in
the consolidated balance sheets until these gains or losses are
realized. If a security has a decline in fair value that is other than
temporary, then the security will be written down to its fair value by
recording a loss in the consolidated statements of operations.
6
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
Gains or losses on the disposition of investment securities are
recognized using the specific identification method.
LOANS - Loans are carried at the principal amount outstanding, net of
deferred loan fees and/or origination costs. Interest is accrued on a
simple-interest basis. Loans are charged to the allowance for loan
losses at such time as management considers them uncollectible in the
normal course of business. Accrual of interest is discontinued on a
loan, including impaired loans, when management believes, after
considering economic and business conditions and collection efforts,
the borrower's financial condition is such that collection of interest
is doubtful. Classification of a loan as nonaccrual is not necessarily
indicative of a potential loss of principal.
ALLOWANCE FOR LOAN LOSSES - The Company adheres to an internal asset
review system and allowance for loan losses methodology designated to
provide for the detection of problem assets and to provide an adequate
general valuation allowance to cover loan losses. A provision for loan
losses is charged to operations based on management's evaluation of
potential losses in the loan portfolio. The provision is based on an
analysis of the loan portfolio, economic conditions, historical loan
loss experience, changes in the nature and volume of the loan
portfolios and management's assessment of the inherent risk in the
portfolio in relation to the level of the allowance for loan losses.
While management uses the best information available to make these
evaluations, future adjustments to the allowance may be necessary if
economic conditions differ from the assumptions used in preparing the
evaluation. The Company also establishes provisions on a specific loan
basis when an identified problem becomes known. Ultimate losses may
vary from the current estimates and any adjustments, as they become
necessary, are reported in earnings in the periods in which they become
known.
When a loan or portion of a loan, including an impaired 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.
INCOME RECOGNITION ON IMPAIRED AND NONACCRUAL LOANS - Loans, including
impaired loans, are generally classified as nonaccrual 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 classified as
nonaccrual. Loans that are on a current payment status or past due less
than 90 days may also be classified as nonaccrual 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 (including arrearages) are reasonably assured
of repayment within an acceptable period of time, and there is a
sustained period of repayment performance (generally a minimum of six
months) by the borrower, in accordance with the contractual terms of
interest and principal.
7
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
While a loan is classified as nonaccrual and the future collectibility
of the recorded loan balance is doubtful, collections of interest and
principal are generally applied as a reduction to principal
outstanding. When the future collectibility of the recorded loan
balance is expected, interest income may be recognized on a cash basis.
In the case where a nonaccrual loan had 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. Cash interest receipts in excess of that amount are
recorded as recoveries to the allowance for loan losses until prior
charge-offs have been fully recovered.
LOANS HELD FOR SALE - Mortgage loans originated or purchased and
intended for sale in the secondary market are carried at the lower of
cost or market as determined by outstanding commitments from investors
or current investor yield requirements, calculated on the aggregate
loan basis. Net unrealized losses, if any, are recognized in a
valuation allowance by charges to earnings. Gains and losses resulting
from the sales of these loans are recognized in the period the sale
occurs. Mortgage loan servicing fees are earned concurrently with the
receipt of the related mortgage payments.
MORTGAGE SERVICING RIGHTS - The Company recognizes an asset for rights
to service mortgage loans for others. Management periodically assesses
its capitalized mortgage servicing rights for impairment based on the
fair value of those rights. The value of mortgage servicing rights
related to loans sold was $145,000 and $226,000 at December 31, 1997
and 1996, respectively. The Company had no valuation allowance for
capitalized mortgage servicing rights at December 31, 1997 and 1996.
LOAN FEES - Loan origination fees and certain direct loan origination
costs are deferred and amortized as a yield adjustment, using a method
which approximates the interest method, over the contractual lives of
the loans. The net of deferred origination fees and deferred
origination costs is presented as an adjustment of loans receivable in
the accompanying balance sheets.
The Company purchases consumer loans from local auto dealers which are
collateralized by automobiles. In conjunction with this program, the
Company pays a premium represented by the present value differential of
the yield required by the Company and the underlying loan interest
rate. The premium paid is amortized as a yield adjustment, using the
interest method, over the contractual lives of the loans. If the loan
prepays, the Company has recourse against the auto dealer for any
unamortized premiums. At December 31, 1997 and 1996, the unamortized
premiums totaled $448,934 and $459,541, respectively.
8
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
OTHER REAL ESTATE OWNED - Other real estate owned includes properties
acquired through foreclosure or acceptance of deeds in lieu of
foreclosure. These properties are recorded on the date acquired at the
lower of fair value minus estimated costs to sell or the recorded
investment in the related loan. If the fair value minus estimated costs
to sell the property acquired is less than the recorded investment in
the related loan, the resulting loss is charged to the allowance for
loan losses. The resulting carrying value established at the date of
foreclosure becomes the new cost basis for subsequent accounting. After
foreclosure, if the fair value minus estimated costs to sell the
property becomes less than its cost, the deficiency is charged to the
valuation allowance on other real estate owned or charged directly to
the asset. Costs relating to the development and improvement of the
property are capitalized, whereas those relating to holding the
property for sale are charged to expense. Gains and losses on the
disposition of other real estate owned are reflected in operations as
incurred. The Company had other real estate owned of $363,501 and
$90,000 at December 31, 1997 and 1996, respectively.
PREMISES AND EQUIPMENT - Premises and equipment are carried at cost
less accumulated depreciation and amortization. Depreciation and
amortization are computed on the straight-line method over the
estimated useful lives of the related assets. Maintenance, repairs and
minor improvements are charged to operating expenses as incurred. Major
improvements and betterments are capitalized. Upon retirement or other
disposition of the assets, the applicable cost and accumulated
depreciation are removed from the accounts and any gains or losses are
included in operations.
INCOME TAXES - The Company files consolidated income tax returns.
Deferred tax assets or liabilities are computed based on the difference
between the financial statement and income tax bases of assets and
liabilities using the enacted marginal tax rate. Deferred income tax
expenses or credits are based on the changes in the asset or liability
from period to period. The effect on deferred income taxes of a change
in tax rates is recognized in income in the period that includes the
enactment date.
STATEMENT OF CASH FLOWS - For purposes of reporting cash flows, cash
and cash equivalents include cash and due from banks and federal funds
sold.
EARNINGS PER SHARE - In 1997, the Financial Accounting Standards Board
issued Statement No. 128 (FAS No. 128), "Earnings Per Share." FAS No.
128 replaced the calculation of primary and fully diluted earnings per
share with basic and diluted earnings per share. All earnings per share
amounts have been restated to conform to the FAS No. 128 requirements.
Basic earnings per common share is calculated by dividing net income by
the sum of the weighted average number of shares of common stock
outstanding.
9
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
Diluted earnings per common share is calculated by dividing net income
by the weighted average number of shares of common stock outstanding,
assuming the exercise of stock options and warrants using the treasury
stock method. Such adjustments to the weighted average number of shares
of common stock outstanding are made only when such adjustments dilute
earnings per common share. The diluted earnings per share is summarized
as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Weighted average common shares outstanding 4,988,318 4,637,565
Weighted average common shares equivalents 31,166 54,528
--------- ---------
Shares used in diluted earnings per share calculation 5,019,484 4,692,093
========= =========
</TABLE>
RECLASSIFICATIONS - Certain amounts in the 1996 financial statements
have been reclassified to conform with the current year presentation.
Such reclassification had no impact on total assets, equity, net income
or total cash flow balances previously reported.
3. INVESTMENT SECURITIES AVAILABLE FOR SALE:
The amortized costs and approximate fair value of investment securities
available for sale at December 31, 1997 are summarized as follows:
<TABLE>
<CAPTION>
1997
---------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED APPROXIMATE
COST GAINS LOSSES FAIR VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
U.S. Treasury Securities $ 4,057,278 $ 358 $(19,046) $ 4,038,590
U.S. Government agencies 55,764,939 125,844 (43,127) 55,847,656
State and municipals 1,117,877 45,693 0 1,163,570
----------- -------- -------- -----------
Total debt securities 60,940,094 171,895 (62,173) 61,049,816
----------- -------- -------- -----------
FHLB stock 1,709,400 0 0 1,709,400
Mortgage-backed securities 5,789,000 129,000 (13,000) 5,905,000
----------- -------- -------- -----------
Total available for sale $68,438,494 $300,895 $(75,173) $68,664,216
=========== ======== ======== ===========
</TABLE>
10
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. INVESTMENT SECURITIES AVAILABLE FOR SALE, CONTINUED:
<TABLE>
<CAPTION>
1996
----------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED APPROXIMATE
COST GAINS LOSSES FAIR VALUE
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
U.S. Treasury Securities $ 7,562,521 $ 24,193 $(162,264) $ 7,424,450
U.S. Government agencies 22,202,152 0 (122,400) 22,079,752
State and municipals 1,020,639 15,000 (1,258) 1,034,381
----------- -------- --------- -----------
Total debt securities 30,785,312 39,193 (285,922) 30,538,583
----------- -------- --------- -----------
FHLB stock 1,075,100 0 0 1,075,100
Mortgage-backed securities 11,803,396 144,951 (53,318) 11,895,029
----------- -------- --------- -----------
Total available for sale $43,663,808 $184,144 $(339,240) $43,508,712
=========== ======== ========= ===========
</TABLE>
The FHLB stock is a restricted investment that is required by the FHLB
to be maintained by the Company.
The amortized cost and approximate fair value of investments at
December 31, 1997, by scheduled maturity, are shown below. Scheduled
maturities may differ from actual maturities because borrowers may have
the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
Amortized Approximate
Cost Fair Value
----------- -----------
<S> <C> <C>
Due in one year or less $ 2,604,528 $ 2,599,170
Due after one year through five years 20,632,650 20,618,685
Due after five years through ten years 35,598,916 35,723,107
Due after ten years 2,104,000 2,108,854
----------- -----------
Total debt securities 60,940,094 61,049,816
FHLB stock 1,709,400 1,709,400
----------- -----------
Mortgage-backed securities 5,789,000 5,905,000
----------- -----------
$68,438,494 $68,664,216
=========== ===========
</TABLE>
Proceeds from the sale of investment securities available for sale
during the years ended December 31, 1997 and 1996 was $17,997,969 and
$33,501,321, respectively. Gross gains of $148,259 and $159,526 were
realized on these sales for the years ended December 31, 1997 and 1996,
respectively. Gross losses of $8,439 and $52,700 were realized on these
sales for the years ended December 31, 1997 and 1996, respectively.
At December 31, 1997, the Company had pledged securities with a
carrying value of approximately $3,788,000 and market value of
approximately $3,827,000 to the State of Florida for public fund
deposits. The current value of pledged securities is adequate to meet
the pledging requirements.
11
<PAGE> 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. LOANS RECEIVABLE, NET:
The Company's loan portfolio consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Residential mortgage loans, substantially all single-family $ 54,243,596 $ 49,575,342
Commercial and commercial real estate loans 112,038,918 82,171,560
Consumer loans 48,826,756 44,690,999
------------ ------------
215,109,270 176,437,901
Less allowance for loan losses (2,311,415) (1,761,000)
Net deferred costs 607,178 587,537
------------ ------------
Loans, net $213,405,033 $175,264,438
============ ============
</TABLE>
The Company grants and purchases real estate, commercial and consumer
loans throughout Florida, with a majority in the Sarasota and Manatee
County area. Although the Company has a diversified loan portfolio, a
significant portion of its debtors' ability to honor their contracts is
dependent primarily upon the economy of Sarasota and Manatee Counties,
Florida and general economic conditions.
A summary of activity in the allowance for loan losses follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Balance at beginning of year $1,761,000 $1,609,000
Provision charged to income 921,000 514,654
Recoveries on loans previously charged off 100,535 49,486
Loans charged off (471,120) (412,140)
---------- ----------
Balance at end of year $2,311,415 $1,761,000
========== ==========
</TABLE>
In management's opinion, the allowance is adequate to reflect the risk
in the loan portfolio.
At December 31, 1997 and 1996, the recorded investment in loans for
which impairment has been recognized totaled approximately $662,000 and
$1,478,000, respectively. The total allowance for loan losses related
to these loans was approximately $246,000 and $331,000 at December 31,
1997 and 1996, respectively. Interest income on impaired loans of
approximately $48,500 and $87,000 was recognized for cash payments
received in 1997 and 1996, respectively. For the years ended December
31, 1997 and 1996, the average recorded investment in impaired loans
was $312,000 and $1,139,000.
At December 31, 1997 and 1996, the Company had approximately $986,000
and $1,134,000 in nonaccrual loans, respectively. For the years ended
December 31, 1997 and 1996, the amount of interest income not recorded
related to nonaccrual loans was approximately $42,000 and $60,000,
respectively. At December 31, 1997 and 1996, there were no accruing
loans that were 90 days or more past due.
12
<PAGE> 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. LOANS RECEIVABLE, NET, CONTINUED:
LOANS TO OFFICERS AND DIRECTORS - In the course of its business, the
Company has granted loans to executive officers, directors and
principal shareholders of the Company and to entities to which they are
related. Following is a summary of the amount of loans in which the
aggregate of the loans exceeded $60,000 during the year:
<TABLE>
<CAPTION>
1997
-----------
<S> <C>
Balance at beginning of year $ 6,892,406
New loans 2,164,334
Repayments on loans (2,597,223)
-----------
Balance at end of year $ 6,459,517
===========
</TABLE>
5. PREMISES AND EQUIPMENT:
A summary of premises and equipment at December 31, 1997 and 1996 is as
follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Land $ 2,802,264 2,792,263
Building and improvements 5,405,441 3,290,277
Furniture, fixtures, and equipment 4,034,019 3,618,909
----------- -----------
12,241,724 9,701,449
Less accumulated depreciation (3,080,753) (2,566,860)
----------- -----------
$ 9,160,971 $ 7,134,589
=========== ===========
</TABLE>
Depreciation expense totaled $717,916 and $485,976 for the years ended
December 31, 1997 and 1996, respectively.
The Company leases facilities and certain equipment under operating
leases with noncancelable terms. Rent expense amounted to $145,000 for
the year ended December 31, 1997. Operating lease commitments at
December 31, 1997 were $145,000, $145,000 and $84,000 for 1998, 1999,
and 2000, respectively.
13
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. LOAN SERVICING:
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of mortgage
loans serviced for others was approximately $10,998,000 and $19,782,000
at December 31, 1997 and 1996, respectively.
Custodial escrow balances maintained in connection with the foregoing
loan servicing, and included in demand deposits, were $40,653 and
$34,675 at December 31, 1997 and 1996, respectively.
14
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. LOAN SERVICING, CONTINUED:
Mortgage servicing rights of $187,889 and $254,783 were capitalized in
1997 and 1996, respectively. Amortization of mortgage servicing rights
was $25,927 and $28,901 during 1997 and 1996, respectively. The value
of mortgage servicing rights sold was $243,100 and $0 for 1997 and
1996, respectively. At December 31, 1997 and 1996, the capitalized
mortgage servicing rights totaled $144,744 and $225,882, respectively,
which approximated fair value.
7. DEPOSITS:
Deposits consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
Demand $ 44,119,577 29,763,696
NOW 24,390,090 20,546,210
Money market 61,997,868 45,463,356
Savings 13,258,135 11,523,853
------------ -----------
143,765,670 107,297,115
------------ -----------
Certificate accounts:
Under $100,000 111,339,006 90,512,837
Over $100,000 34,838,121 23,361,471
IRAs 12,802,979 11,261,210
------------ -----------
158,980,106 125,135,518
------------ -----------
$302,745,776 232,432,633
============ ===========
</TABLE>
The aggregate amount of certificates of deposit of $100,000 or more at
December 31, 1997 and 1996 was approximately $36,170,000 and
$24,682,000, respectively.
A summary of certificate accounts at December 31, 1997 by year of
scheduled maturity follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Due within one year $ 86,347,105 54,378,388
Due after one year through two years 34,662,004 18,454,878
Due after two years through three years 13,486,909 20,754,335
Due after three years through four years 19,389,187 12,087,533
Due after four years 5,094,901 19,460,384
------------ ------------
$158,980,106 $125,135,518
============ ============
</TABLE>
15
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. DEPOSITS, CONTINUED:
Interest expense on deposit accounts is summarized as follows:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Interest on NOW accounts and money market deposit accounts $ 3,206,096 $2,087,059
Interest on savings accounts 304,375 312,249
Interest on certificate accounts 8,394,899 7,075,279
----------- ----------
$11,905,370 $9,474,587
=========== ==========
</TABLE>
8. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE:
The Company enters into sales of securities under agreements to
repurchase. Repurchase agreements are treated as financings, and the
obligations to repurchase securities sold are reflected as a liability
in the consolidated balance sheets. The dollar amount of securities
underlying the agreements remains in the asset accounts. The securities
sold under repurchase agreements remain in the custody of a third-party
trustee. The Company may have sold, loaned, or otherwise disposed of
such securities in the normal course of its operations and has agreed
to maintain substantially identical securities during the agreements.
The agreements mature within 30 days.
Information related to the Company's securities sold under repurchase
agreements (including accrued interest) at December 31, 1997 and 1996
is presented below, segregated by the type of securities sold and by
due date of the agreement:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Average balance during the year $14,375,332 $ 9,660,214
Average interest rate during the year 4.54% 4.08%
Maximum month-end balance during the year $21,589,255 $10,557,098
U.S. Treasury securities underlying the agreements at year-end:
Carrying value $19,284,514 $11,242,138
Fair value 19,332,128 11,153,493
</TABLE>
9. FEDERAL HOME LOAN BANK ADVANCES:
Each Federal Home Loan Bank (FHLB) is authorized to make advances to
its member associations, subject to such regulations and limitations as
the FHLB may prescribe. The Bank's borrowings from the FHLB of Atlanta
at December 31, 1997 and 1996 were $5,000,000 and $6,300,000 at 6.31%
and 6.95%, respectively, with the December 31,1997 balance maturing in
October 1998.
The FHLB requires that the Bank maintain qualifying mortgages as
collateral and all of its FHLB stock as collateral for its advances. As
of December 31, 1997, the Bank has a credit availability of
$20,000,000.
16
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. FEDERAL HOME LOAN BANK ADVANCES, CONTINUED:
Uncollateralized Federal Fund lines amounting to $3.4 million at
December 31, 1997 were maintained with various banks with rates which
are at or below prime rate. The lines and their terms are periodically
reviewed and are generally subject to withdrawal at the discretion of
the banks. No borrowings on these agreements were outstanding at
December 31, 1997 and 1996, respectively.
10. NOTE PAYABLE:
In 1997, the Company entered into a Loan Agreement with a national
banking association for a $5 million revolving line of credit facility.
The agreement requires the proceeds of the new credit facility to be
used for the acquisition of real estate to be used for the development
of the Company's corporate headquarters, an operations center, and bank
branches. The credit facility is collateralized by the shares of the
Bank. The agreement requires the Company to meet certain covenants and
restricts the payment of dividends, which have been met. Interest on
the revolving credit facility is calculated quarterly on either one- or
three-month LIBOR plus 175 basis points (7.74% at December 31, 1997).
After two years, the loan converts into a ten-year term note with a
five-year balloon payment. The total amount of unused revolving credit
available to the Company at December 31, 1997 was $4.5 million.
11. INCOME TAXES:
The Company's provision for income taxes consisted of the following for
the years ended December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
Current:
Federal $1,239,812 $ 534,953
State 76,600 29,200
---------- ---------
1,316,412 564,153
---------- ---------
Deferred:
Federal (184,000) (90,500)
State (15,200) (12,700)
---------- ---------
(199,200) (103,200)
---------- ---------
$1,117,212 $ 460,953
========== =========
</TABLE>
17
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. INCOME TAXES. CONTINUED:
Deferred income taxes consisted of the following for the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Provision for loan losses $(163,000) $ 134,300
Cash to accrual adjustment (58,000) 57,900
Merger expense (128,000) 0
Net operating loss carryforward 219,000 (219,000)
Other (69,200) (76,400)
--------- ---------
$(199,200) $(103,200)
========= =========
</TABLE>
Deferred income taxes reflect the impact of temporary differences
between the amounts of assets and liabilities recorded for financial
reporting purposes and such amounts as measured in accordance with tax
laws. In general, these temporary differences are more inclusive than
timing differences recognized under previously applicable accounting
principles. The items which comprise a significant portion of deferred
tax assets and liabilities at December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
Book over tax bad debts $ 657,400 $ 494,400
Market value of loans held for sale 105,800 101,000
Merger expense 128,000 0
Net operating loss carryforward 0 219,000
Other 31,400 15,200
--------- ---------
Deferred tax assets 922,600 829,600
--------- ---------
Deferred tax liabilities:
Loan origination fees (71,200) (49,700)
Cash to accrual adjustment (57,900) (116,800)
Other 0 (63,900)
--------- ---------
Deferred tax liabilities (129,100) (230,400)
--------- ---------
Net deferred tax asset $ 793,500 $ 599,200
========= =========
</TABLE>
The Company's effective income tax rates of 37% for the years ended
December 31, 1997 and 1996 vary from the statutory federal income tax
rate of 34% due primarily to state income taxes of 5.5% net of federal
tax benefits.
18
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
12. OTHER INCOME:
Other income consisted of the following for the years ended December
31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Service charges on deposit accounts $1,812,104 $1,192,258
Broker loan fees 327,512 32,807
Net gains on sales of investment securities 139,820 106,826
Net gains on sales of loans held for sale 296,991 190,624
Net gain (loss) on sale of other real estate owned 12,990 (336,000)
Merchant fees on credit cards 479,048 262,061
Late fees 171,301 127,486
Net gain on sales of servicing rights 573,289 323,377
Other 342,591 248,620
---------- ----------
$4,155,646 $2,148,059
========== ==========
</TABLE>
13. OTHER EXPENSES:
Other expenses consisted of the following for the years ended December
31:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Compensation and related benefits $ 5,181,275 4,361,130
Occupancy and equipment 1,627,498 1,183,960
SAIF assessment 0 348,000
FDIC insurance 81,831 148,181
Data processing 916,891 925,140
Advertising and promotion 307,154 350,507
Printing supplies and postage 433,705 322,445
Directors fees and expenses 156,680 123,952
Professional fees 533,606 243,934
ATM and credit card fees 631,077 205,681
Foreclosed real estate expense 29,000 223,000
Intangible taxes 156,767 126,235
Other 1,856,281 1,293,971
----------- ----------
$11,911,765 $9,856,136
=========== ==========
</TABLE>
Loan origination costs of approximately $686,000 and $380,000 in 1997
and 1996, respectively, have been offset against compensation and
related benefits.
19
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
14. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK:
The Company is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of
its customers. These financial instruments include commitments to
extend credit, standby letters of credit, and credit cards. They
involve, to varying degrees, elements of credit and interest rate risk
in excess of the amount recognized on the balance sheet. The contract
or notional amounts of those instruments reflect the extent of
involvement the Company has in particular classes of financial
instruments. The Company has no financial instruments with
off-balance-sheet risk that are held for trading purposes.
The Company's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend
credit and standby letters of credit is represented by the contractual
or notional amount of the instruments. The Company uses the same credit
policies in making commitments and conditional obligations as it does
for on-balance sheet instruments. As of December 31, 1997 and 1996
financial instruments with off-balance-sheet risk were as follows:
<TABLE>
<CAPTION>
Contractual or Notional Amounts 1997 1996
------------------------------- ----------- -----------
<S> <C> <C>
Commitments to extend credit $56,598,000 $29,395,000
Standby letters of credit $ 537,000 $ 498,000
Credit cards $ 4,742,000 $ 4,258,000
</TABLE>
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. The Company evaluates each customer's credit worthiness
on a case-by-case basis. The amount of collateral obtained if deemed
necessary by the Company upon extension of credit is based on
management's credit evaluation of the counter-party. Collateral held
varies but may include accounts receivable, inventory, property, plant,
and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party.
Those guarantees are primarily issued to support public and private
borrowing arrangements, including commercial paper, bond financing, and
similar transactions. The guarantees are short-term, expiring in 1997.
20
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
15. EMPLOYEE BENEFIT AND STOCK OPTION PLANS:
The Company has a qualified plans under Section 401(k) of the Internal
Revenue Code (Plans) for all employees meeting certain eligibility
requirements. The Plans allow participants to make annual contributions
equal to 15% or less of the participant's compensation up to a maximum
allowed by Internal Revenue Service regulation. The Company may match a
percentage of the participant's contributions. Plan contributions by
the Company for the year ended December 31, 1997 and 1996 was
approximately $28,100 and $18,300, respectively.
The Company has a qualified Incentive Stock Option plan (Incentive
Plan) and a Non-qualified Share Option Plan for non-employee directors
(Non-qualified Plan) under which the Company may grant options for up
to 150,000 and 75,000 shares of common stock, respectively. Under the
Plans, the exercise price of each option equals the market price of the
Company's stock on the date of grant. Options are granted upon approval
of the Board of Directors and vest 33% per year for three years and are
exercisable over 10 years from the date of the grant.
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25) and related Interpretations in accounting for its
Plans. Accordingly, no compensation cost has been recognized for
options granted under the Plan. Had compensation cost for the Company's
Plan been determined based on the fair value at the grant dates for
awards under the Plan consistent with the method of SFAS 123, the
Company's net income and net income per share would have been reduced
to the pro forma amounts of $1,890,680 and $774,489 net income and
earnings per share of .38 and .17 for the years ended December 31, 1997
and 1996, respectively.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1997; dividend yield of
0% in each period, as there has been no regular dividend payment
history, expected stock price volatility of 0%, risk-free interest
rates of 6.35%; and expected lives of four years.
A summary of the status of the Company's Plan as of December 31, 1997
and 1996, respectively, and changes during the years ending on those
dates is presented below:
<TABLE>
<CAPTION>
1997 1996
------------------------ ------------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 28,800 $5.24 24,000 $5.25
Granted 34,800 7.93 4,800 5.17
Exercised
Forfeited
------ ------
Outstanding at end of year 63,600 6.71 28,800 5.24
====== ======
Options exercisable at year-end 33,600 28,800
====== ======
</TABLE>
21
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
15. EMPLOYEE BENEFIT AND STOCK OPTION PLANS, CONTINUED:
The following table summarizes information about the Plan's stock
options at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------- -------------------------------
Number Weighted-Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 12/31/97 Contractual Life Exercise Price at 12/31/97 Exercise Price
--------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$5.50 - $ 8.50 63,600 years $6.71 $5.23
====== ===== =====
</TABLE>
16. SHAREHOLDERS' EQUITY:
The Company's current policy is to retain all earnings to fund
operations. Future dividend payments will be at the discretion of the
Board of Directors of the Company and will be dependent upon several
factors, including State and Federal banking regulations that impose
limitations on such payments.
In February 1996, the Company completed a public offering of 1,250,000
shares of common stock at $6.00 per share (the Offering). Subsequent to
the Offering, an additional 187,500 shares of common stock were issued
as part of the over-allotment amount. The net proceeds of the Offering,
after deducting applicable issuance costs and expenses, were
approximately $7,377,000.
In January 1997, the Company acquired the net assets of Deschamps &
Gregory Mortgage Company, Inc., a mortgage brokerage company, for
approximately $55,000. The Company issued 7,119 shares of common stock
in connection with the acquisition. The Company accounted for the
acquisition using the purchase method of accounting.
The following table summarizes the activity of the Company's issued and
outstanding warrants and their corresponding exercise prices:
<TABLE>
<CAPTION>
1992 Warrants 1994 Warrants
--------------------------- ---------------------------
Warrants Exercise Warrants Exercise
Outstanding Price Outstanding Price
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
Balance, January 1, 1996 18,594 $4.00 227,224 $6.00
Warrants exercised -- 0.00 (163,695) 6.00
--------- ---------
Balance, December 31, 1996 18,594 4.00 63,529 6.00
Options issued -- 0.00 -- --
Warrants expired (18,594) 0.00 (1,934) 6.00
Warrants exercised -- 0.00 (61,595) 6.00
--------------------------- ---------------------------
Balance, December 31, 1997 0 $4.00 0 $6.00
========= =========
</TABLE>
22
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
17. DIVIDEND RESTRICTIONS:
State banking regulations limit the amount of dividends that may be
paid by the Bank to its Parent without prior approval of regulatory
agencies. The amount of dividends that may be paid is based on the net
profits of the current year combined with retained net profits of the
preceding two years as defined by state banking regulations. At
December 31, 1997, approximately $3,720,000 are available for payment
of dividends without prior regulatory approval.
18. FAIR VALUES OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments," requires that the Company
disclose estimated fair values for its financial instruments. Fair
value is defined as the price at which a financial instrument could be
liquidated in an orderly manner over a reasonable time period under
present market conditions. Fair values estimates, methods and
assumptions are set forth below for the Company's financial
instruments.
CASH AND DUE FROM BANK - For cash and due from banks, the carrying
amount is a reasonable estimate of fair value.
INVESTMENTS AND MORTGAGE-BACKED SECURITIES - The fair value of
investments and mortgage-backed securities is estimated based on bid
prices published in financial newspapers or bid quotations received
from securities dealers.
LOANS RECEIVABLE - The estimated fair value of the Company's fixed rate
loans was calculated by discounting contractual cash flows adjusted for
current prepayment estimates. The discount rates were based on the
interest rate charged to current customers for comparable loans. The
Company's adjustable rate loans reprice frequently at current market
rates. Therefore, the fair value of these loans has been estimated to
be approximately equal to their carrying amount.
The impact of delinquent loans on the estimation of the fair values
described above is not considered to have a material effect and,
accordingly, delinquent loans have been disregarded in the valuation
methodologies used.
DEPOSIT LIABILITIES - The fair value of deposits with no stated
maturity, such as demand, NOW, money market and savings is equal to the
amount payable on demand as of December 31, 1996. The fair value of
time deposits is estimated using the rates currently offered for
deposits of similar remaining maturities.
SECURITIES SOLD UNDER REPURCHASE AGREEMENTS - The repurchase agreements
outstanding at December 31, 1997 mature within 30 days. The estimated
fair value of these agreements approximates the carrying value.
FHLB ADVANCES AND NOTE PAYABLE - Cash flow from fixed-rate borrowings
are discounted at a spread to the zero Treasury curve which equates to
the LIBOR yield. The note payable's interest rate reprices quarterly.
The estimated fair value approximates the carrying value.
23
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
18. FAIR VALUES OF FINANCIAL INSTRUMENTS, CONTINUED:
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT - The fair
value of commitments to extend credit is estimated using the fees
currently charged to enter into similar agreements, taking into account
the remaining terms of the agreements and the present creditworthiness
of the counterparties. For fixed rate loan commitments, fair value also
considers the difference between current levels of interest rates and
the committed rates. The fair value of standby letters of credit is
based on fees currently charged for similar agreements or on the
estimated cost to terminate them or otherwise settle the obligations
with the counterparties.
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
(In Thousands)
---------------------------------------------------------
1997 1996
------------------------- -------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from bank $ 13,276 $ 13,276 $ 17,563 $ 17,563
Federal funds sold 5,120 5,120 6,000 6,000
Loans held for sale 39,588 39,747 20,351 20,414
Investment securities available for sale 68,664 68,664 43,509 43,509
Loans receivable, net 213,405 218,927 175,264 175,441
Financial liabilities:
Deposits 302,746 303,586 232,433 234,291
Securities sold under agreements to repurchase 17,528 17,528 10,113 10,113
FHLB advances 5,000 5,000 6,300 6,300
Note payable 500 500 0 0
</TABLE>
<TABLE>
<CAPTION>
Contract Contract
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Unrecognized financial instruments:
Loan commitments $56,598 $80 $29,395 $41
Standby letters of credit 537 0 498 0
Credit cards 4,742 0 4,258 0
</TABLE>
LIMITATIONS - The fair value estimates are made at a discrete point in
time based on relevant market information and information about the
financial instrument. Quoted market prices, when available, are used as
the measure of fair value. When quoted market prices are not available,
fair value estimates have been based on judgments regarding future
expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors.
These estimates are inherently subjective, involving uncertainties and
matters of significant judgment, and, therefore, may not be indicative
of the value that could be realized in a current market exchange.
Changes in assumptions could significantly affect the estimates.
24
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
18. FAIR VALUES OF FINANCIAL INSTRUMENTS, CONTINUED:
The value estimates are based on existing on- and off-balance-sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities
that are not considered financial instruments. Other significant assets
and liabilities that are not considered financial assets or liabilities
include deferred tax assets and property, plant and equipment. In
addition, the tax ramifications related to the realization of the
unrealized gains and losses for investments and mortgage-backed
securities can have a significant effect on fair value estimates and
have not been considered in many of the estimates.
19. RISKS AND UNCERTAINTIES:
The earnings of the Company depend on the earnings of the Bank. The
Bank is dependent primarily upon the level of net interest income,
which is the difference between interest earned on its interest earning
assets, such as loans and investments and the interest paid on its
interest-bearing liabilities, such as deposits and borrowings.
Accordingly, the operations of the Bank are subject to risks and
uncertainties surrounding its exposure to changes in the interest rate
environment.
Most of the Bank's lending activity is with customers located within
Sarasota and Manatee counties. Generally, the loans are collateralized
by real estate consisting of single family residential properties and
commercial properties. While this represents a concentration of credit
risk, the credit losses arising from this type of lending compares
favorably with the Bank's credit loss experience on its portfolio as a
whole. The ultimate repayment of these loans is dependent to a certain
degree on the local economy and real estate market.
The financial statements of the Company are prepared in conformity with
generally accepted accounting principles that require management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reported period. Actual
results could differ from these estimates.
Significant estimates are made by management in determining the
allowance for possible loan losses. Consideration is given to a variety
of factors in establishing these estimates including current economic
conditions, diversification of the loan portfolio, delinquency
statistics, results of internal loan reviews, borrowers' perceived
financial and managerial strengths, the adequacy of underlying
collateral, if collateral dependent, or present value of future cash
flows and other relevant factors. Since the allowance for possible loan
losses is dependent, to a great extent, on general and other conditions
that may be beyond the Bank's control, it is at least reasonably
possible that the estimates of the allowance for possible loan losses
and the carrying values of the real estate assets could differ
materially in the near term.
25
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
20. REGULATORY CAPITAL:
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I
capital (as defined) to average assets (as defined). Management
believes, as of December 31, 1997, that the Bank meets all capital
adequacy requirements to which it is subject.
As of December 31, 1997, the most recent notification from the FDIC
categorized the Bank as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized,
the Bank must maintain minimum total risk-based, Tier I risk-based, and
Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes
have changed the Bank's category.
The Bank's actual capital amounts and ratios are also presented in the
table. There were no deductions for interest-rate risk in 1997 or 1996.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------- ---------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ----- ------------ ----- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital (to Risk Weighted
Assets) $25,708,738 10.90% >$18,856,898 >8.0% >$23,571,123 >10.0%
- - - -
Tier I Capital (to Risk Weighted
Assets) $23,820,322 10.11% >$ 9,428,449 >4.0% >$14,142,674 >6.0%
- - - -
Tier I Capital (to Averaged
Assets) $23,820,322 6.87% >$10,398,157 >3.0% >$17,330,261 >5.0%
- - - -
As of December 31, 1996:
Total Capital (to Risk Weighted
Assets) $20,894,512 11.60% >$14,413,417 >8.0% >$18,016,772 >10.0%
- - - -
Tier I Capital (to Risk Weighted
Assets) $19,491,512 10.82% >$ 7,206,709 >4.0% >$10,810,063 >6.0%
- - - -
Tier I Capital (to Averaged
Assets) $19,491,512 7.31% >$ 8,001,300 >3.0% >$13,335,500 >5.0%
- - - -
</TABLE>
26
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
21. FUTURE ACCOUNTING PRONOUNCEMENTS:
FAS No. 130, "Reporting Comprehensive Income," establishes new
standards for reporting and display of comprehensive income and its
components in a full set of general purpose financial statements.
Comprehensive income is defined as the change in equity during a period
from transactions and other events and circumstances from
non-shareholder sources, such as changes in net unrealized securities
gains. It includes all changes in equity during a period except those
resulting from investments by shareholders and distributions to
shareholders. This statement is effective for the Company's fiscal year
ending December 31, 1998. Application of this statement will not impact
amounts previously reported for net income or affect the comparability
of previously issued financial statements.
FAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," establishes standards for the reporting of financial
information from operating segments in annual and interim financial
statements. It requires that financial information be reported on the
same basis that it is reported internally for evaluating segment
performance and deciding how to allocate resources to segments. Because
this statement addresses how financial information is disclosed in
annual and interim reports, the adoption will have no material impact
on the financial statements. This statement is effective for the
Company's fiscal year ending December 31, 1998.
22. CONDENSED PARENT COMPANY FINANCIAL STATEMENTS:
The condensed financial statements of American Bancshares, Inc., as the parent
organization, are presented as follows:
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
----------- -----------
<S> <C> <C>
Assets:
Cash $ 373,665 $ 3,392,968
Premises and equipment 2,159,542 682,118
Prepaid expense 156,874 5,781
Investment in banking subsidiary 24,039,907 19,423,040
Investment in finance subsidiary 100 0
Other assets 3,000 0
----------- -----------
Total assets $26,733,088 $23,503,907
=========== ===========
Liabilities:
Total liabilities $ 653,778 $ 0
----------- -----------
Shareholders' equity:
Common stock 5,868,530 5,787,791
Additional paid-in capital 15,547,554 15,203,729
Unrealized gain (loss) on investment securities available
for sale, net 139,808 (90,951)
Retained earnings 4,523,418 2,603,338
----------- -----------
Total shareholders' equity 26,079,310 23,503,907
----------- -----------
Total liabilities and shareholders' equity $26,733,088 $23,503,907
=========== ===========
</TABLE>
27
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
22. CONDENSED PARENT COMPANY FINANCIAL STATEMENTS, CONTINUED:
CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Equity in undistributed earnings of banking subsidiary $2,021,108 $852,567
Operating expense (101,028) (70,078)
---------- --------
Net income $1,920,080 $782,489
========== ========
</TABLE>
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1997 1996
----------- -----------
<S> <C> <C>
Cash flows used in operating activities $ 398,657 $ (75,859)
----------- -----------
Cash flows used in investing activities:
Acquisition of premises and equipment (3,842,524) (4,890,559)
----------- -----------
Cash flows provided by financing activities:
Proceeds from sale of common stock (net of stock
offering costs) 424,564 8,359,386
----------- -----------
Net increase in cash (3,019,303) 3,392,968
Cash at beginning of year 3,392,968 0
----------- -----------
Cash at end of year $ 373,665 $ 3,392,968
=========== ===========
</TABLE>
23. SAIF ASSESSMENT
On September 30, 1996, a one-time SAIF recapitalization assessment was
enacted. The rate was 65.7 cents per $100 on domestic deposits held as
of March 31, 1995. The effect on the Bank is a pretax charge of
$348,000 on deposits of $52.9 million at March 31, 1995. This amount
was paid in November, 1996.
28
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
24. SUBSEQUENT EVENTS:
MERGER - On March 23, 1998, the Company completed its merger with
Murdock Florida Bank, headquartered in Charlotte County, Florida. Under
the terms of the merger agreement, each outstanding share of Murdock
Florida Bank's common stock was converted into 2.4 shares of the
Company's common stock. A total of 924,024 shares of the Company's
common stock was issued. At December 31, 1997, Murdock Florida Bank had
total assets, deposits, and net interest income of $64 million, $58.2
million, and $2.4 million, respectively. As required by generally
accepted accounting principles, the consolidated financial statements
included herein have been restated to give retroactive effect to the
merger and are considered the historical financial statements of the
Company.
29
<PAGE> 32
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
The Company's principal asset is its ownership of the Bank.
Accordingly, the Company's results of operations is primarily dependent on the
results of the operations of the Bank. The Bank conducts a commercial banking
business which consists of attracting deposits from the general public and
applying those funds to the origination of loans for commercial, consumer, and
real estate loans (including commercial loans collateralized by real estate).
The Bank'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 on these balances.
Net interest income is dependent upon the Bank'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 approximate or exceed
interest-bearing liabilities, any positive interest rate spread will generate
net interest income. The interest rate spread is impacted by interest rates,
deposit flows, and loan demands. Additionally, and to a lesser extent, the
Bank'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 loan and other fees and income from
the sale of loans, servicing rights, and investment securities. Non-interest
expenses consist of compensation and benefits, occupancy related expenses,
deposit insurance premiums paid to the FDIC, expenses of opening branch
offices, and other operating expenses.
The Bank enjoys an excellent reputation in its market areas and
strives for quality customer service. During 1997, the Bank opened a new full
service branch in Palmetto, Florida. As part of its continued growth, the Bank
has obtained approval to open a new full service banking office in Ruskin,
Florida located in Hillsborough County. All necessary regulatory approvals
were obtained and this new office opened in April 1998.
This Management's Discussion and Analysis or Plan of Operations
discusses material changes in the financial condition of the Company from
December 31, 1996 to December 31, 1997, and material changes in the results of
operations with respect to the year ended December 31, 1997 compared to the
year ended December 31, 1996. This discussion and analysis is intended to
assist in understanding the financial condition and results of operation of the
Company and the Bank. This section should be read in conjunction with the
consolidated financial statements and the related notes and the other
statistical information contained herein.
RESULTS OF OPERATIONS
COMPARISON OF FISCAL YEARS ENDED DECEMBER 1997 AND 1996
For the year ended December 31, 1997, the Company reported net income
of $1,920,000, or $0.38 per share, as compared to net income of $782,000 or
$.17 per share for 1996. From 1996 to 1997, net interest income increased by
$2,248,000 and non-interest income increased by $2,008,000. The increase in
non-interest income from 1996 to 1997 is primarily attributable to increases in
collection of service charges on deposits of $620,000, credit card merchant fee
income of $217,000, and gains on sale of loan servicing of $250,000. These
changes contributing to income were offset by increases in start-up costs in
the form of general and administrative expenses associated with the opening of
a new full service branch in early 1997
-30-
<PAGE> 33
and an increase of $406,000 in the provision for loan losses. Management
believes the long term benefits associated with the new branch will provide
additional income which will contribute to the growth and profitability of the
Bank.
The Company's total assets at December 31, 1997 were $353,901,000, an
increase of $80,271,000 or approximately 29% from December 31, 1996. The
majority of the increase was invested in loans receivable and in U.S.
government agency securities. Asset growth was funded by an increase in
deposits from the opening of new branches as well as continued growth at
existing branches.
The Bank's loans at December 31, 1997 totalled $252,991,000, net, or
approximately 71% of total assets. Of this total, portfolio loans consisted of
$50,104,000 in commercial loans, $61,935,000 in commercial real estate,
$54,243,000 in residential real estate, and $48,827,000 in consumer loans, net
of deferred costs, and allowance for loan losses of $1,704,000. Loans held for
sale were $21,127,000 in residential real estate loans and $18,461,000 in real
estate construction loans. The allowance for loan losses increased from
$1,761,000 at December 31, 1996 to $2,311,000 at December 31, 1997. The
allowance for loan losses represented approximately 0.91% of total loans, up
from 0.89% at December 31, 1996. However, the allowance for loan losses
represents 1.07% of portfolio loans at December 31, 1997, as compared to 1.00%
at December 31, 1996.
COMPARISON OF FISCAL YEARS ENDED DECEMBER 1996 AND 1995
For the year ended December 31, 1996, the Company reported net income
of $782,000 or $.17 per share, as compared to net income of $850,000 or $.27
per share for 1995. Per share results reflect the effect of the 67% increase
in the weighted average number of shares outstanding resulting from the public
offering completed in February 1996. From 1995 to 1996, net interest income
increased by $2,093,000 and non-interest income increased by $62,000. The
increase in non-interest income from 1995 to 1996 is primarily attributable to
increases in collection of service charges on deposits of $155,000, decrease of
gains on loans held for sale of $131,000, and increased gains on sale of
securities of $65,000. In addition, loan loss provision expense decreased by
$187,000 from 1995 to 1996. These changes contributing to income were offset
by increases in start-up costs in the form of general and administrative
expenses associated with two new full service branches which were opened by the
Bank in March and September of 1996. Management believes the long term
benefits associated with these two branches will provide additional income
which will contribute to the growth and profitability of the Bank.
The Company's total assets at December 31, 1996 were $273,630,000, an
increase of $54,637,000 or approximately 25% from December 31, 1995. This
increase was due primarily to the increase in loans originated by the Bank.
The Bank's loans at December 31, 1996 totalled $195,616,000, net, or
approximately 71% of total assets. Of this total, portfolio loans consisted of
$41,382,000 in commercial loans, $40,790,000 in commercial real estate,
$49,575,000 in residential real estate, and $44,691,000 in consumer loans, net
of deferred costs, and allowance for loan losses of $1,174,000. Loans held for
sale were $4,335,000 in residential real estate loans and $16,016,000 in real
estate construction loans. The allowance for loan losses increased from
$1,609,000 at December 31, 1995 to $1,761,000 at December 31, 1996. The
allowance for loan losses represented approximately 0.89% of total loans, down
from 1.00% at December 31, 1995.
-31-
<PAGE> 34
NET INTEREST INCOME
Net interest income, which constitutes the principal source of income
for the Bank, represents the difference between interest income on
interest-earning assets and interest expense on interest-bearing liabilities.
The principal interest-earning assets are loans made to businesses and
individuals. Interest-bearing liabilities primarily consist of time deposits,
interest-paying check accounts ("NOW Accounts"), retail savings deposits, and
money market accounts. Funds deposited to these interest-bearing liabilities
are invested in interest-earning assets. Accordingly, net interest income
depends on the volume of average interest-earning assets and average
interest-bearing liabilities and the interest rates earned or paid on them.
The growth in loans resulted in a steady increase in net interest
income during 1997. Net interest income for the year ended December 31, 1997
amounted to $11,715,000 on a $294,634,000 average outstanding balance of
interest-earning assets, an increase of $2,254,000 over the $9,466,000 recorded
in 1996 on average interest-earning assets of $229,103,000. Interest income
from loans during the same period comprised 81.61% and 83.11%, respectively, of
the total interest income and earned an average yield of 8.89% and 9.05%,
respectively, while interest income from investments and federal funds sold
earned an average yields of 6.70% and 6.47%, respectively. Total interest
expense for 1997 was $12,917,000 on average outstanding balances of
interest-bearing liabilities of $253,255,000 compared to interest expense of
$9,965,000 on average interest-bearing liabilities of $196,712,000 for the same
period in 1996. The average cost of interest-bearing liabilities for 1997 and
1996 was 5.10% and 5.07%, respectively. The Bank experienced a decrease in the
net yield on average earning assets to 3.98% in 1997, from 4.13% in 1996, due
in part to a decrease in the average yield on interest-earning assets due to
changes in the marketplace.
The following tables show for each category of interest-earning assets
and interest-bearing liabilities, the average amount outstanding, the interest
earned or paid on such amount, and the average rate earned or paid for the
years ended December 31, 1997, 1996, and 1995. These tables also show the
average rate earned on all interest-earning assets, the average rate paid on
all interest-bearing liabilities, and the net yield on average interest-earning
assets for the same periods.
-32-
<PAGE> 35
COMPARATIVE AVERAGE BALANCES, INTEREST, AND AVERAGE YIELDS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------- ------------------------------- ----------------------------
INTEREST INTEREST INTEREST
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE(1) EXPENSE RATE BALANCE(1) EXPENSE RATE BALANCE(1) EXPENSE RATE
---------- ------- ------ --------- ------- ------ ---------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cash and due from banks . . . . . . $ 8,938 $ 7,989 $ 8,179
Bank premises and equipment, net . 6,869 5,902 3,882
Other assets . . . . . . . . . . . 4,438 2,335 1,570
-------- -------- --------
Total non-interest earning
assets 20,245 16,226 13,631
-------- -------- --------
INTEREST-EARNING ASSETS:
Federal funds sold and other
interest-earning assets . . . . 9,459 $ 535 5.66% 5,842 336 5.75% 5,113 285 5.57%
Investment securities (2) . . . . . 58,119 3,996 6.88 44,898 2,945 6.56 38,271 2,449 6.40
Loans, net (3)(4) . . . . . . . . . 227,056 20,101 8.89 178,363 16,150 9.05 145,674 13,092 8.99
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-earning
assets/interest/income
average rates paid . . . . . . . 294,634 $24,632 8.36% 229,103 19,431 8.48% 189,058 $15,826 8.37%
-------- ======= ==== -------- ======= ==== -------- ======= ====
Total assets . . . . . . . . . . . $314,879 $245,329 $202,689
======== ======== ========
Other liabilities . . . . . . . . . $ 40,351 $ 27,082 $ 20,234
-------- -------- --------
Total non-interest bearing
liabilities . . . . . . . . . . 40,351 27,082 20,234
-------- -------- --------
INTEREST-BEARING LIABILITIES:
NOW . . . . . . . . . . . . . . . 22,901 433 1.89% 19,161 368 1.92% 15,636 338 2.16%
Money market . . . . . . . . . . . 59,466 2,773 4.66 36,692 1,719 4.68 32,371 1,457 4.50
Savings . . . . . . . . . . . . . . 12,773 304 2.38 12,682 312 2.46 13,193 331 2.51
Time. . . . . . . . . . . . . . . . 137,986 8,395 6.08 117,407 7,075 6.03 99,887 5,962 5.97
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-bearing deposits. 233,126 11,905 5.11 185,942 9,474 5.10 161,087 8,088 5.02
Securities sold under agreement
to repurchase . . . . . . . . . 14,374 653 4.54 8,628 352 4.08 7,123 293 4.11
Federal funds purchased . . . . . . 77 4 5.19 47 3 6.38 630 37 5.87
FHLB advances . . . . . . . . . . . 5,678 355 6.25 2,095 136 6.49 691 34 4.92
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-bearing liabilities/
interest expense/average
rate paid . . . . . . . . . . 253,255 12,917 5.10% 196,712 9,965 5.07% 169,531 8,452 4.99%
-------- ======= ==== -------- ======= ==== -------- ======= ====
Total liabilities . . . . . . . . . 293,606 223,794 189,765
Shareholders' equity . . . . . . . 21,273 21,535 12,924
-------- -------- --------
Total liabilities and
shareholders' equity . . . . $314,879 $245,329 $202,689
======== ======== ========
Net interest income . . . . . . . . $11,715 $ 9,466 $ 7,374
======= ======= =======
Net yield on average earning
assets (5) . . . . . . . . . . 3.98% 4.13% 3.90%
==== ==== ====
</TABLE>
- --------------
(1) Average balances represent the average daily balance year to date.
(2) Principally taxable. The yield information does not give effect to
changes in fair value that are reflected as a component of
shareholders' equity.
(3) Non-accruing loans included in computation of average balance.
(4) Interest income on loans includes fees of $352,000 in 1997, $525,000 in
1996, and $131,000 for 1995.
(5) The net yield on average earning assets is the net interest income
divided by average interest-earning assets.
-33-
<PAGE> 36
The effect on interest income, interest expense, and net interest
income for the periods indicated, of changes in average balance and rate, is
shown below for the Bank. The effect of a change in average balance has been
determined by applying the average rate at the year-end for the earlier period
to the change in average balance at the year-end for the later period. Changes
resulting from average balance/rate variances are included in changes resulting
from volume.
RATE/VOLUME INTEREST ANALYSIS
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------------------------------------------------
1997 COMPARED TO 1996 1996 COMPARED TO 1995
INCREASE (DECREASE) DUE INCREASE (DECREASE) DUE
TO CHANGE IN: TO CHANGE IN:
------------------------------------- -------------------------------------
AVERAGE AVERAGE TOTAL AVERAGE AVERAGE TOTAL
VOLUME (1) RATE CHANGE VOLUME (1) RATE CHANGE
---------- ------ ------ ---------- ----- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Federal funds sold . . . . . . $ 208 $ (9) $ 199 $ 41 $ 10 $ 51
Investment securities . . . . . 867 184 1,051 424 72 496
Loans, net (2) . . . . . . . . 4,409 (458) 3,951 2,938 120 3,058
------ ------ ------ ------ ------ ------
Total interest income . . . . $5,484 $(283) $5,201 $3,403 $ 202 $3,605
====== ====== ====== ====== ====== ======
INTEREST BEARING LIABILITIES:
NOW . . . . . . . . . . . . . . $ 72 $ (7) $ 65 $ 76 $ (46) $ 30
Money market . . . . . . . . . 1,067 (13) 1,054 194 68 262
Savings . . . . . . . . . . . . 2 (10) (8) (13) (6) (19)
Time . . . . . . . . . . . . . 1,240 80 1,320 1,046 67 1,113
------ ----- ------ ------ ------ ------
Total interest on deposits . 2,381 50 2,431 1,303 83 1,386
Securities sold under agreement to
repurchase and borrow funds . . 427 94 521 100 27 127
------ ----- ------ ------ ------ ------
Total interest expense . . . 2,808 144 2,952 1,403 110 1,513
====== ===== ====== ====== ====== ======
Change in net interest income $2,676 $(427) $2,249 $2,000 $ 92 $2,092
====== ===== ====== ====== ====== ======
</TABLE>
- -------------
(1) Non-accruing loans are excluded form the average volumes used in
calculating this table.
(2) Includes loan fees of 352,000 in 1997 and 525,000 in 1996.
PROVISION FOR LOAN LOSSES
For the year ended December 31, 1997, $921,000 was recorded to the
loan loss provision, compared to the $514,654 recorded to the provision during
the year ended 1996.
The targeted level of loan loss allowance is based on management's
continual review of the loan portfolio. Management reviews the loan by type
and nature of collateral and establishes an appropriate provision for loan
losses based upon industry standards, management's experience, historical
charge-off experience, the present and prospective financial condition of
specific borrowers, industry concentrations within the loan portfolio, size of
the credit, existence and quality of any collateral, profitability, and general
economic conditions. The Bank has experienced relative low delinquency and
default rates in its portfolio due in part to adherence to established
underwriting guidelines. Management believes the allowance for loan losses is
adequate based on its assessment of the risks of loan defaults. However, the
Bank intends to review its allowance for loan losses on a monthly basis and to
provide increases in the allowance, if necessary, based on the results of this
review.
-34-
<PAGE> 37
The total allowance for loan losses increased from $1,761,000 in 1996
to $2,311,000 in 1997. During 1997, the Bank experienced $471,000 in
charge-offs and $101,000 in recoveries on previously charged-off loans. As of
December 31, 1997, the Bank had $986,000 of loans in non-accrual status. The
year end 1997 and 1996 allowance for loan losses reflect the growth in the
Bank's loan portfolio and management's philosophy of maintaining adequate loan
loss allowances.
Although management uses the best information available to make
determinations with respect to the allowance for loan losses, future
adjustments may be necessary if economic conditions differ substantially from
the assumptions used or adverse developments arise with respect to the Bank's
nonperforming or performing loans.
NON-INTEREST INCOME
For the years ended December 31, 1997 and 1996, non-interest income
totalled $4,156,000 and $2,148,000, respectively, an increase of approximately
93%. During 1997, service fees on customer deposits contributed $1,812,000,
mortgage banking operations, including broker loan fees, gains on sale of loans
and servicing rights, contributed $1,198,000, fees on credit card merchant
services contributed $479,000 gains from sales of securities contributed
$145,000, and other income increased to $337,000. For the year ended 1996,
mortgage banking operations contributed $547,000, service fees on customer
deposits $1,192,000, fees on credit card merchant services $262,000, and
miscellaneous other income $249,000. This increase reflects the Company's
increase in its mortgage banking operations through its acquisition of
DesChamps in early 1997, a full year of credit card merchant service fees in
1997 versus a partial year in 1996 and continued sales of both its mortgage
loans held for sale and the mortgage servicing rights.
NON-INTEREST EXPENSE
Non-interest expense for the years ended December 31, 1997 and 1996,
totaled $11,912,000 and $9,856,000, respectively, substantially all of which
was general and administrative expenses. The increase in non-interest expense
is due primarily to the opening of the new full service banking office in
Palmetto replacing the prior drive-thru facility located there, additional
lending staff, and additional support staff for backroom operations and the
related costs associated with these areas. For the years ended December 31,
1997 and 1996, general and administrative expenses were 3.78% and 4.02%,
respectively, of average assets. The largest component, salaries and employee
benefits, amounted to $5,181,000, or 43%, and $4,361,000, or 44%, respectively,
of total other expenses for the years ended 1997 and 1996. Management
continuously monitors general and administrative expenses and the efficiency
ratio to maintain non-interest expenses at a level within industry standards.
INCOME TAX EXPENSE
For the year ended December 31, 1997, an income tax provision totaling
$1,117,000 was recorded, compared to a $461,000 provision for the year ended
1996 as a result of increased earnings during the 1997 period. The effective
tax rate was 37% for the years ended 1996 and 1997.
ASSET/LIABILITY MANAGEMENT
One of the Bank's primary objectives is to control fluctuations in net
interest income caused by changes in interest rates. To manage interest rate
risk, the Bank's Board of Directors has established interest rate risk policies
and procedures which delegate to the Asset/Liability Management Committee
("ALCO") the
-35-
<PAGE> 38
responsibility to monitor and report on interest rate risk, devise strategies
to manage interest rate risk, monitor loan origination and deposit activity,
and approve all pricing strategies.
The management of interest rate risk is one of the most significant
factors affecting the Bank's ability to achieve future earnings. The principal
measure of the Bank's exposure to interest rate risk is the difference between
interest rate sensitive assets and liabilities for the periods being measured,
commonly referred to as the "gap" for such period. An asset or liability is
considered interest rate sensitive if it will reprice or mature within the time
period being analyzed. Controlling the maturity or repricing of an
institution's liabilities and assets in order to minimize interest rate risk is
commonly referred to as gap management. A gap is considered positive when the
amount of interest rate assets exceed the amount of interest rate sensitive
liabilities. When the opposite occurs, the gap is considered to be negative.
During periods of increasing interest rates, negative gap would tend to
adversely affect income while a positive gap would tend to result in net
interest income. During periods of decreasing interest rates, the inverse
would tend to occur. If the maturities of interest rate sensitive assets and
liabilities were equally flexible and moved concurrently, the impact of any
material or prolonged increase or decrease in interest rates or net interest
income on existing assets or liabilities would be minimal. It is common to
focus on the one year gap, which is the difference between the dollar amount of
assets and the dollar amount of liabilities maturing or repricing within the
next twelve months.
ALCO uses an external asset/liability modeling service to analyze the
Bank's current financial position and develop strategies prior to
implementation. The systems attempt to simulate the Bank's asset and liability
base and project future operating results under several interest rate and
spread assumptions.
Under asset/liability management guidelines, the Bank's policy is to
maintain a cumulative one-year gap of no more than 15% of total assets,
primarily by managing the maturity distribution of its investment portfolio and
emphasizing loan originations tied to interest sensitive indices.
Additionally, the Bank has joined the FHLB to enhance its liquidity position
and provide the ability to utilize fixed rate advances to improve the match
between interest-earning assets and interest-bearing liabilities in certain
periods.
The Bank's cumulative one year gap at December 31, 1997 was a negative
$53,639,000 (or -15.16%, expressed as a percentage of total assets). This
represents a significant shift from the positive cumulative one year gap at
December 31, 1996 of $7,750,000. This $45,889,000 shift is reflected primarily
in the $32,000,000 increase in certificates of deposits which mature in 1 year
or less and the increase in NOW and money market accounts of $21,000,000.
Management believes its negative gap position is mitigated by its $86,000,000
in NOW and money market accounts, the majority of which it considers to be core
deposits.
The following table presents the interest rate-sensitive assets and
liabilities of the Bank at December 31, 1997, which are expected to mature or
are subject to repricing in each of the time periods indicated. The tables may
not be indicative of the Bank's rate sensitive position at other points in
time. The balances have been derived based on the financial characteristics of
the various assets and liabilities. Adjustable and floating rate assets are
included in the period in which interest rates are next scheduled to adjust
rather than their scheduled maturity dates. Fixed rate loans are shown in the
periods in which they are scheduled to be repaid. Repricing of time deposits
is based on their scheduled maturities. Deposits without a stated maturity are
shown as repricing within ninety (90) days.
-36-
<PAGE> 39
INTEREST RATE SENSITIVITY ANALYSIS AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
TERM TO REPRICING
-----------------------------------------------------------------------
90-180 181 DAYS 1-2 2-3 3-4 4+
90 DAYS DAYS TO 365 DAYS YEARS YEARS YEARS YEARS TOTAL
------- ------ ----------- ----- ----- ----- ----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Federal funds sold . . . . . . . . . . . . . . . 5,120 0 0 0 0 0 0 5,120
Interest-bearing due from banks . . . . . . . . . 3,727 0 0 0 0 0 0 3,727
Fixed rate loans . . . . . . . . . . . . . . . . 36,047 11,624 6,658 8,505 17,982 21,484 53,661 155,961
Variable rate loans . . . . . . . . . . . . . . . 55,613 12,293 15,046 4,176 4,848 941 5,819 98,736
Treasuries . . . . . . . . . . . . . . . . . . . 0 0 1,002 2,032 1,005 0 0 4,039
Governmental agencies . . . . . . . . . . . . . . 0 500 923 4,082 5,084 7,237 43,926 61,752
State and municipal . . . . . . . . . . . . . . . 0 0 501 663 0 0 0 1,164
Federal Home Loan Bank Stock . . . . . . . . . . 1,709 0 0 0 0 0 0 1,709
------- ------- ------- ------- ------- ------- ------- -------
Total interest-earning assets . . . . . . . . 102,216 24,417 24,130 19,458 28,919 29,662 103,406 332,208
NOW . . . . . . . . . . . . . . . . . . . . . . . 24,390 0 0 0 0 0 0 24,390
Money market . . . . . . . . . . . . . . . . . . 61,998 0 0 0 0 0 0 61,998
Savings . . . . . . . . . . . . . . . . . . . . . 8,543 199 397 645 645 422 2,407 13,258
Certificates/IRS's<$100,000 . . . . . . . . . . . 22,783 17,623 34,506 29,760 9,812 20,941 7,631 143,056
Certificates/IRS's>$100,000 . . . . . . . . . . . 3,916 2,336 5,183 2,976 584 930 0 15,925
Securities sold under agreements to repurchase . 17,528 0 0 0 0 0 0 17,528
Federal Home Loan Bank advances . . . . . . . . . 0 0 5,000 0 0 0 0 5,000
------- ------- ------- ------- ------- ------- ------- -------
Total interest-bearing liabilities . . . . . . . 139,158 20,158 45,086 33,381 11,041 22,293 10,038 281,155
------- ------- ------- ------- ------- ------- ------- -------
Interest sensitivity gap . . . . . . . . . . . . (36,942) 4,259 (20,956) (13,923) 17,878 7,369 93,368 51,053
======= ======= ======= ======= ======= ======= ======= =======
Cumulative gap . . . . . . . . . . . . . . . . . (36,942) (32,683) (53,639) (67,562) (49,684) (42,315) 51,053
======= ======== ======= ======= ======= ======= =======
Cumulative gap ratio . . . . . . . . . . . . . . 73.45% 79.49% 73.76% 71.59% 80.03% 81.38% 118.17%
======= ======= ======= ======= ======= ======= =======
Cumulative gap as a percentage of total assets . -10.44% -9.24% -15.16% -19.09% -14.04% -11.96% 14.43%
======= ======= ======= ======= ======= ======= =======
</TABLE>
FINANCIAL CONDITION
LENDING ACTIVITIES
The Bank offers a broad range of personal and business loans and
mortgage loan products. The Bank aggressively pursues quality indirect lending
through local automobile dealerships, small to medium sized commercial business
loans, and direct residential loans. Also, through its Mortgage Banking
Division, the Bank has focused efforts on residential loan originations that
can be sold in the secondary market while it retains or packages for sale the
servicing rights. The Mortgage Banking Division of the Bank maintains
relationships with correspondent lenders throughout the State of Florida,
ensuring continued lending efforts without a concentration in any one area.
Management believes this to be a prudent practice in the mortgage banking area
as it minimizes risks associated with the localized economic downturns. The
Mortgage Banking Division originates primary construction-to-permanent
financing loans, which are considered to have less risk of nonpayment than
construction only financings.
In addition, with its acquisition of DesChamps &
Gregory Mortgage Company, Inc., a Bradenton based residential mortgage
brokerage company, in early 1997, the Bank also increased its origination of
residential mortgage loans in Manatee and Sarasota counties.
LOAN PORTFOLIO COMPOSITION. At December 31, 1997, total loans
included portfolio loans of approximately $213.4 million, net, and loans held
for sale of approximately $39.6 million. Total loans represent approximately
71% of the Bank's total assets. Management's objective is to maintain its
one-to-four family residential and construction loans at 30% of total loans.
At December 31, 1997, approximately 37%, or $93.8 million, of its total loans
were in one-to-four family residential and construction loans, including
approximately $21.1 million in mortgage loans held for sale and $18.5 million
of construction loans held for
-37-
<PAGE> 40
sale. The remainder of the Bank's loans included in its loan portfolio was
commercial and commercial real estate loans of $112 million and consumer and
other loans of $48.8 million.
The following table summarizes the composition of Bank's loan
portfolio (excluding loans held for sale) by type of loan on the dates
indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------- --------------- --------------- --------------- ---------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
--------- --- --------- --- --------- --- --------- --- --------- ---
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TYPE OF LOAN:
Residential mortgage (1) . . . . . . $ 54,243 25.2% $ 49,575 28.1% $ 46,032 33.1% $ 37,041 34.2% $ 37,551 41.0%
Commercial (2) . . . . . . . . . . . 112,039 52.1 82,172 46.6 61,064 43.8 46,774 43.2 39,826 43.4
Consumer and other loans (3) . . . . 48,827 22.7 44,691 25.3 32,169 23.1 24,479 22.6 14,300 15.6
--------- ------ -------- ----- -------- ----- -------- ----- ------- -----
Total loans . . . . . . . . . . . $ 215,109 100.0% $176,438 100.0% $139,265 100.0% $108,294 100.0% $ 91,677 100.0%
====== ===== ===== ===== =====
LESS:
Allowance for loan losses . . . . . . (2,311) (1,761) (1,609) (1,374) (1,191)
Net deferred costs (fees) . . . . . . 607 588 430 450 (49)
--------- -------- ------- ------- --------
Total loans, net . . . . . . . . . $ 213,405 $175,265 $138,086 $107,370 $ 90,437
========= ======== ======== ======== ========
</TABLE>
- ------------
(1) Substantially all single family loans. Real estate construction loans are
included in loans held for sale.
(2) Commercial consists of commercial real estate and other commercial loans.
(3) Includes consumer installment loans.
LOAN MATURITY SCHEDULE. The following table sets forth the maturities
of loans outstanding as of December 31, 1997.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
--------------------------------------------------
DUE AFTER 1
DUE IN 1 YEAR BUT DUE AFTER
YEAR OR LESS BEFORE 5 YEARS 5 YEARS TOTAL
------------- -------------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
1-4 Family Residential . . . . . . . . . . . . . . . $ 12,143 $ 11,189 $ 26,335 $ 49,667
Other loans collateralized by real estate . . . . . . 10,198 24,587 22,874 57,659
Commercial and consumer loans . . . . . . . . . . . . 38,761 56,520 12,502 107,783
--------- --------- --------- ---------
Total loans (1) . . . . . . . . . . . . . . . . . $ 61,102 $ 92,296 $ 61,711 $ 215,109
========= ========= ========= =========
</TABLE>
- ---------------
(1) Excluding deferred fees, allowance for loan losses, and loans held for
sale.
-38-
<PAGE> 41
SENSITIVITY OF LOANS TO CHANGES IN INTEREST RATES. The following
table sets forth as of December 31, 1997, the dollar amounts of loans due after
one year which had predetermined interest rates and loans due after one year
which had floating or adjustable interest rates.
<TABLE>
<CAPTION>
DOLLAR AMOUNT OF LOANS
----------------------------
DECEMBER 31, 1997
-----------------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Type of Interest Rate:
Predetermined rate, maturity greater than one year . . . . . . . . . . . . $ 102,076
Floating or adjustable rate due after one year . . . . . . . . . . . . . . 51,931
-----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 154,007
===========
</TABLE>
LOAN CLASSIFICATION
Management seeks to maintain a level of high quality assets through
conservative underwriting and sound lending practices. Management intends to
follow this policy even though it may result in foregoing the funding of higher
yielding loans. Approximately 44% of the Bank's loan portfolio, including
loans held for sale, is collateralized by first liens on primarily
owner-occupied residential homes which have historically carried a relatively
low credit risk. The Bank also maintains a commercial real estate portfolio
comprised primarily of owner-occupied commercial businesses. The Bank has
experienced low delinquency and default rates since opening in 1989.
In an effort to maintain the quality of the loan portfolio, management
seeks to minimize higher risk types of lending and additional precautions have
been taken when such loans are made in order to reduce the Bank's risk of loss.
Generally, construction loans present a higher degree of risk to a lender
depending upon, among other things, whether the borrower has permanent
financing at the end of the loan period, whether the project is an income
producing transaction in the interim, and the nature of changing economic
conditions including changing interest rates. While there is no assurance that
the Bank will not suffer losses on its construction loans or its commercial
real estate loans, management believes that it has reduced the risks associated
therewith because, among other things, primarily all such loans relate to
owner-occupied projects where the borrower has demonstrated to the Bank's
management that its business will generate sufficient income to repay the loan.
The Bank primarily enters into agreements with individuals who are familiar to
Bank personnel, are residents of the Bank's primary market area and are
believed by management to be good credit risks.
Commercial and financial loans also entail certain risks since they
usually involve large loan balances to single borrowers or a related group of
borrowers, resulting in a more concentrated loan portfolio. Further, since
their repayment is usually dependent upon the successful operation of the
commercial enterprise, they also are subject to adverse conditions in the
economy. Commercial loans are generally riskier than residential mortgages
because they are typically made on the basis of the ability to repay from the
cash flow of a business rather than on the ability of the borrower or guarantor
to repay. Further, the collateral underlying commercial loans may depreciate
over time, and occasionally cannot be appraised with as much precision as
residential real estate, and may fluctuate in value based on the success of the
business.
While there is no assurance that the Bank will not suffer any losses
on its construction loans or its commercial real estate loans, management
believes that it has reduced the risks associated therewith because, among
other things, substantially all of such loans relate to owner-occupied
projects, projects where the borrower has received permanent financing
commitments from which the Bank will be repaid, and projects
-39-
<PAGE> 42
where the borrower has demonstrated to management that its business will
generate sufficient income to repay the loan.
In addition to maintaining high quality assets, management attempts to
limit the Banks' risk exposure to any one borrower or borrowers with similar or
related entities. As of December 31, 1997, the Bank has extended credit in
excess of $1.3 million to 20 borrowers.
Loan concentrations are defined as amounts loaned to a number of
borrowers engaged in similar activities which would cause them to be similarly
impacted by economic or other conditions. The Company, on a routine basis,
evaluates these concentrations for purposes of policing its concentrations and
to make necessary adjustments in its lending practices that most clearly
reflect the economic times, loan to deposit ratios, and industry trends. As of
December 31, 1997, total loans to any particular group of customers engaged in
similar activities or having similar economic characteristics did not exceed
10% of total loans.
The Board of Directors of the Bank concentrates its efforts and
resources, and that of its senior management and lending officials, on loan
review and underwriting procedures. The Bank utilizes the services of an
independent consultant to perform periodic loan documentation and compliance
reviews as well as deposit and operations compliance reviews. Internal
controls include a loan review specialist employed by the Bank, who performs
on-going reviews of new and existing loans to monitor documentation and ensure
the existence and valuations of collateral. Senior loan officers of the Bank
have established a review process with the objective of quickly identifying,
evaluating, and initiating necessary corrective action for substandard loans.
The goal of the loan review process is to address the watch list, and
substandard and non-performing loans as early as possible. Combined, these
components are integral elements of the Bank's loan program which has resulted
in its loan portfolio performance to date. Nonetheless, management maintains a
cautious outlook in anticipating the potential effects of uncertain economic
conditions (both locally and nationally) and the possibility of more stringent
regulatory standards.
Loans, including impaired loans, are generally classified by the Bank
as non-accrual loans if they are past due as to maturity or payment of
principal or interest for a period of more than ninety 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 classified as a non-accrual loan. Loans that are on a current payment
status or past due less than ninety days may also be classified as non-accrual
if repayment in full of principal and/or interest is in doubt.
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. 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 had 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. Cash interest receipts in
excess of that amount are recorded as recoveries to the allowance for credit
losses until prior charge-offs have been fully recovered.
As of December 31, 1997, the Bank had 23 loans on non-accrual status
totaling $986,000, or 0.46% of total loans. As of December 31, 1997, the Bank
had other real estate owned ("OREO") of approximately $364,000 represented by
four loans collateralized by single family residences. The Bank has not
acquired any other real estate owned by means of foreclosure.
In addition, the Bank performs ongoing reviews of its new and existing
loans to identify, evaluate, and initiate corrective action for substandard
loans. As of December 31, 1997, the Bank has identified 134
-40-
<PAGE> 43
loans to 79 borrowers to be monitored on its watch list and substandard list of
loans, representing aggregate borrowings of approximately $8,739,000. Of this
aggregate amount, management has assessed the maximum risk of loss to be
$1,616,000 based on management's assessment of the ability of such borrowers to
comply with their present loan repayment terms and assuming that the collateral
for such loans must be liquidated. These loans have been considered by
management in its assessment of the allowance for loan losses and none of these
borrowers have failed to comply with their present loan repayment terms.
The following table sets forth certain information, as of the date
indicated, regarding non-accrual loans, restructured loans and loans 90 days or
more past due.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ----- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
NON-ACCRUAL LOANS:
Residential mortgage . . . . . . . . 762 934 130 685 280
Commercial and commercial
real estate . . . . . . . . . 153 133 1,017 341 1,137
Consumer . . . . . . . . . . . . . . 71 67 96 71 4
Total non-accrual loans . . . . . 986 1,134 1,243 1,097 1,421
Total non-performing loans (1) . . . 687 227 0 0 0
Restructured loans . . . . . . . . . 22 24 0 0 0
</TABLE>
- ---------
(1) Accruing loans which are contractually past due 90 days or more as to
principal or interest.
The Bank has experienced relatively low default rates and low
delinquency as a percent of total loans. As of December 31, 1997, the total
amount of loans over 30, 60, and 90 days past due totalled $3,495,000,
$762,340, and $67,620 (or 1.62%, 0.35% and 0.03% of total loans, respectively).
The approximate amount of interest on non-accrual loans which would have been
recorded as income under the original terms was $42,000 and $60,000 for the
fiscal years ended December 31, 1997 and 1996, respectively. The amount of
interest income collected on non-accrual loans, that was included in net income
for the year ended December 31, 1997 was approximately $25,600. At December
31, 1997 the amount of interest income accrued on loans contractually past due
90 days or more was approximately $4,500.
ALLOWANCE FOR CREDIT LOSSES
In originating loans, the Bank recognizes that credit losses will be
experienced and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower over the term of
the loan and, in the case of a collateralized loan, the quality of the
collateral for the loan as well as general economic conditions. It is
management's policy to maintain an adequate allowance for loan losses based on,
among other things, the Bank's historical loan loss experience, evaluation of
economic conditions and regular reviews of delinquencies and loan portfolio
quality.
Management continues to actively monitor the Bank's asset quality and
to charge-off loans against the allowance for credit losses when appropriate or
to provide specific loss allowances when necessary. Although management
believes it uses the best information available to make determinations with
respect to the allowance for credit losses, future adjustments may be necessary
if economic conditions differ from the economic conditions in the assumptions
used in making the initial determinations. The Bank increased its allowance to
$2,311,000 as of December 31, 1997, reflecting management's intent to maintain
the level of the Bank's allowance for credit losses at a level management
believes to be adequate to cushion it against the reasonably expected economic
conditions. Excluding loans held for sale of $39,588,000 at December 31,
-41-
<PAGE> 44
1997, the allowance for loan losses represented 1.07% of portfolio loans held
as of such date. Total loan charge-offs for the fiscal year ended December 31,
1997 were approximately $471,000 with recoveries on previously charged-off
loans of approximately $100,000.
The Bank's allowance for loan losses at December 31, 1996 amounted to
$1,761,000 (or 0.89% of total loans). Excluding loans held for sale of
$20,351,000 at December 31, 1996, the allowance for loan losses represented
1.0% of portfolio loans as of December 31, 1996. Total loan charge-offs for
the year ended December 31, 1996 were $412,000, with recoveries on previously
charged-off loans totalling $49,000.
The Bank increased the allowance to $1,761,000 at December 31, 1996,
reflecting the growth in the loan portfolio and management's assessment of
risks inherent in the loan portfolio.
The following table sets forth an analysis of the Bank's allowance for
loan losses for the periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total loans at end of period (1) . . . . . . . . $ 215,109 $ 176,438 $ 139,265 $ 108,294 $ 91,677
========= ========= ========= ========= =========
Allowance at beginning of period . . . . . . . . $ 1,761 $ 1,609 $ 1,374 $ 1,191 $ 1,021
--------- --------- ---------- ---------- ----------
Loans charged-off during the period . . . . . . . (471) (412) (534) (165) (595)
Recoveries of loans previously charged-off . . . 100 49 67 57 55
--------- --------- --------- --------- ---------
Net loans charged-off during the period . . . . . (371) (363) (467) (108) (540)
--------- --------- --------- --------- ---------
Provisions charged to income . . . . . . . . . . 921 515 702 291 710
--------- --------- --------- --------- ---------
Allowance at end of period . . . . . . . . . . . $ 2,311 $ 1,761 $ 1,609 $ 1,374 $ 1,191
========= ========= ========= ========= =========
Ratio of net charge-offs to
average loans outstanding . . . . . . . . . . 0.21% 0.23% 0.37% 0.14% 0.69%
========= ========= ========= ======== =========
Allowance as a percentage of total loans . . . . 1.07% 1.00% 1.16% 1.27% 1.30%
========= ========= ========= ======== =========
</TABLE>
- --------------
(1) Excludes loans held for sale.
The following table sets forth a breakdown of the allowance for credit
losses by loan category for the periods indicated. Management believes that
the allowance can be allocated by category only on an approximate basis. The
allocation of an allowance to each category is not necessarily indicative of
future losses and does not restrict the use of the allowance to absorb losses
in any other category.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------- -------------- ---------------- --------------- ---------------
% OF % OF % OF % OF % OF
LOANS TO LOANS TO LOANS TO LOANS TO LOANS TO
TOTAL TOTAL TOTAL TOTAL TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential mortgage (1) . . . $ 773 25.2% $ 615 28.1% $ 468 33.1% $ 463 34.2% $ 422 41.0%
Commercial and commercial
real estate . . . . . . . . 861 52.1 773 46.6 630 43.8 512 43.2 469 43.4
Consumer loans . . . . . . . . 641 22.7 342 25.3 233 23.1 251 22.6 235 15.6
Unallocated . . . . . . . . . . 36 0.0 31 0.0 278 0.0 148 0.0 65 0.0
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total allowance for
loan losses . . . . . . $2,311 100.0% $1,761 100.0% $1,609 100.0% $1,374 100.0% $1,191 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
- -------
(1) No allowance has been allocated to real estate construction since the
amount such loans held in the Bank's loan portfolio at the periods
indicated was not material.
-42-
<PAGE> 45
The measurement of impaired loans is based on the fair value of the
loan's collateral. The measurement of non-collateral dependent loans is based
on the present value of expected future cash flows discounted at the historical
effective interest rate. The components for the allowance for credit losses
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996
------------ -------------
<S> <C> <C>
Impaired loans . . . . . . . . . . . . . $ 246,000 $ 331,400
Other . . . . . . . . . . . . . . . . . . 1,135,000 668,600
---------- ----------
$1,381,000 $1,000,000
========== ==========
</TABLE>
INVESTMENT ACTIVITIES
At December 31, 1997 and 1996, the Bank's investment portfolio
totalled $68,664,000 and $43,509,000, respectively. The investment portfolio
consists of U.S. Treasury and federal agency securities, municipal bonds, and
FHLB stock. Maturities range from three months to fifteen years with a
portfolio average maturity of approximately 5 years.
The following table summarizes the Bank's investment portfolio as of
the dates indicated.
INVESTMENT SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------
1997 1996 1995
--------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
AVAILABLE FOR SALE (1):
U.S. Treasury Securities . . . . . . . . 4,039 7,424 13,114
U.S. Government Agencies . . . . . . . . 55,847 22,080 13,120
State and Municipal . . . . . . . . . . 1,164 1,034 1,160
-------- -------- --------
Total Debt Securities . . . . . . . . 61,050 30,538 27,394
FHLB Stock (restricted) . . . . . . . . 1,709 1,075 490
Mortgage-Backed Securities . . . . . . . 5,905 11,895 11,963
Other Investments . . . . . . . . . . . 0 0 0
-------- -------- --------
Total available for sale . . . . . . . 68,664 43,508 39,847
======== ======== ========
- --------------
</TABLE>
(1) Carried at estimated market value.
-43-
<PAGE> 46
The following table summarizes the Bank's securities (excluding the
restricted FHLB Stock and mortgage-backed securities) by maturity and weighted
average yields at December 31, 1997. Yields on tax exempt securities are
stated at their nominal rates and have not been adjusted for tax rate
differences.
<TABLE>
<CAPTION>
AFTER ONE YEAR AFTER FIVE YEARS
BUT WITHIN BUT WITHIN
WITHIN ONE YEAR 5 YEARS 10 YEARS AFTER 10 YEARS TOTAL
--------------- ------------- --------------- -------------- -------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
-------- ------- ------ ----- ------ ------ ------ ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AT DECEMBER 31, 1997:
U.S. Treasury securities . . .$ 1,003 5.19% $ 2,516 5.31% $ 520 6.38% $ 0 0.00% $ 4,039 5.40%
U.S. Government agencies . . . 1,096 5.24% 18,099 6.35% 34,654 6.93% 1,998 7.39% 55,847 6.71%
State and municipals . . . . . 501 5.75% 0 0.00% 514 8.66% 149 5.40% 1,164 6.69%
-------- ----- -------- ----- ------- ----- ------ ----- ------- -----
Total Debt . . . . . . . . .$ 2,600 5.31% $ 20,615 6.20% $35,688 6.94% $2,147 7.21% $61,050 7.18%
======== ===== ======== ===== ======= ===== ====== ===== ======= =====
</TABLE>
DEPOSIT ACTIVITIES AND OTHER SOURCE OF FUNDS
GENERAL. Deposit accounts are the primary source of funds of the Bank
for use in lending and other investment purposes. In addition to deposits, the
Bank draws funds from interest payments, loan principal payments, loan and
security sales, and funds from operations (including various types of loan
fees). Scheduled loan payments of principal and interest are a relatively
stable source of funds, while deposit inflows and outflows are significantly
influenced by general interest rates and money market conditions. The Bank and
the Company may use borrowings on a short-term basis if necessary to compensate
for reductions in the availability of other sources of funds, or borrowings may
be used on a longer term basis for general business purposes.
DEPOSIT ACTIVITIES. Deposits are attracted principally from within
the Bank's primary market area through the offering of a broad variety of
deposit instruments, including checking accounts, money market accounts,
savings accounts, certificates of deposit (including jumbo certificates in
denominations of $100,000 or more), and retirement savings plans. Total
deposits were $302,746,000 at December 31, 1997, compared to $232,433,000 at
December 31, 1996. The introduction of new products and the continued focus on
quality customer service have contributed to strong deposit growth. The Bank
continues to develop consumer and commercial deposit relationships through
referrals and additional contacts within its market area. As of December 31,
1997 and December 31, 1996, jumbo certificates accounted for $36,170,000 and
$24,702,000, respectively, of the Bank's deposits. The Bank has not
aggressively attempted to obtain large denomination, high interest-bearing
certificates except to address a particular funding need. In an effort to fund
the rapid growth of the loan volume originated by the Mortgage Banking Division
during the fourth quarter of 1994, the Bank offered a five year certificate of
deposit and money market product at above market rates at that time. In
addition, in an effort to fund strong loan demand during 1996, the Bank offered
a five year certificate and money market product at above market rates at that
time. Although all of such deposits were originated within the Bank's market
area and substantially all were not jumbo products, the regulators required the
Bank to classify these deposits as brokered deposits because the rate exceeded
75 basis points over the then existing market rate.
Maturity terms, service fees, and withdrawal penalties are established
by the Bank on a periodic basis. The determination of rates and terms is
predicated on funds acquisition and liquidity requirements, rates paid by
competitors, growth goals and federal regulations.
-44-
<PAGE> 47
DEPOSIT FLOWS AND AVERAGE BALANCE AND RATES. The following table sets
forth the average balance and weighted average rates for the Bank's categories
of deposits for the period indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------------------------------
1997 1996 1995
--------------------------- ------------------------- ----------------------------
AVERAGE AVERAGE % OF AVERAGE AVERAGE % OF AVERAGE AVERAGE % OF
BALANCE RATE DEPOSITS BALANCE RATE DEPOSITS BALANCE RATE DEPOSITS
------- ------- -------- ------- ------- -------- ------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest checking . $ 38,753 0.00% 14% $ 25,787 0.00% 12% $ 20,178 0.00% 11%
Interest checking and
money market . . . . 82,367 3.90% 30 55,853 3.74% 26 48,007 3.74% 26
Savings . . . . . . . . 12,773 2.38% 5 12,682 2.46% 6 13,193 2.50% 7
Certificates of deposit 137,986 6.08% 51 117,407 6.03% 56 99,887 5.97% 55
------- ----- -------- --- ------- ---
Total . . . . . . $271,879 100% $211,729 100% $181,265 100%
======= ==== ======== === ======== ===
</TABLE>
CERTIFICATES OF DEPOSIT. At December 31, 1997, certificates of
deposit represented approximately 52.5% of the Bank's total deposits, as
compared to 53.8% of total deposits at December 31, 1996. The Bank does not
have a concentration of deposits from any one source, the loss of which would
have a material adverse effect on the business of the Company. Management
believes that substantially all of the Bank's depositors are residents, either
full or part time, in its primary market area.
The following table summarizes the amount of the Bank's certificates
of deposit of $100,000 or more by time remaining until maturity at December 31,
1997.
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------
1997
----------------------
MATURITY PERIOD (DOLLARS IN THOUSANDS)
- ---------------
<S> <C>
Less than three months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,486
Over three months through six months . . . . . . . . . . . . . . . . . . . . . . . 5,197
Over six months through twelve months . . . . . . . . . . . . . . . . . . . . . . . 10,208
Over twelve months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,279
--------
$ 36,170
========
</TABLE>
DEPOSIT ACTIVITY. The following table sets forth the deposit flows of
the Bank during the periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
-------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net increase before interest credited . . . . . $ 58,717 $ 38,800 $ 15,645
Net credited . . . . . . . . . . . . . . . . . 11,596 6,906 5,474
-------- -------- --------
Net deposit increase . . . . . . . . . . . $ 70,313 $ 45,706 $ 21,119
======== ======== ========
</TABLE>
BORROWINGS. The Bank has borrowed funds during the past to fund
short-term cash requirements. None of such funds were used to fund loan
activity. In the future, if there are periods when the supply of funds from
deposits cannot meet the demand for loans, the Bank has the ability to seek a
portion of the needed funds through loans (advances) from the FHLB of Atlanta
where the Bank currently has a $25 million line
-45-
<PAGE> 48
of credit. As of December 31, 1997, $5 million has been borrowed on the line
and $20 million remained available for future use.
In addition, the Company has obtained a $5 million Commercial
Revolving Line of Credit (the "Credit Line") from Barnett Banks, N.A. South
Florida (now Nationsbank, N.A.). Although this credit facility will be used in
part to fund the construction of the Company's new administrative offices, the
Company may utilize the credit facility for other general corporate purposes as
its Board of Directors or management shall determine from time to time. This
Credit Line is collateralized with the all of the capital stock of the Bank.
Interest is calculated quarterly on either a one or three month LIBOR plus 175
basis points. After two years the loan is converted into a ten-year term note
with a five-year balloon payment. See "Item 6. Management's Discussion and
Analysis or Plan of Operation - Recent Developments -- Administrative Offices".
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is defined as the ability of the Company and the Bank to
generate sufficient cash to fund current loan demand, deposit withdrawals,
other cash demands and disbursement needs, and otherwise to operate on an
ongoing basis. The Bank's principal sources of funds are deposits, principal
and interest payments on loans, sale of loans, interest on investments, the
sale of investments, and capital contributions from the Company. During 1997,
the Company received $70.3 million from deposit growth, $18.0 million for the
sale of investments, and $14.0 million from maturing investments. In addition,
the Bank also has the ability to borrow from the FHLB to supplement its
liquidity needs. At December 31, 1997, the Bank had outstanding borrowings of
approximately $5 million under its line of credit with the FHLB. The Company's
liquidity needs and funding are provided through the sale of its equity
securities and through borrowings from a nonaffiliated correspondent bank. As
of December 31, 1997, the Company had drawn approximately $500,000 under the $5
million Credit Line.
At December 31, 1997, shareholders' equity was approximately
$26,079,000, or 7.37% of total assets, as compared to $23,504,000 at December
31, 1996, or 8.59% of total assets. At December 31, 1997 and December 31,
1996, respectively, the Company's Tier I leverage ratio was 7.28% and 7.30%,
the Tier I risk-based capital ratio was 9.81% and 9.27% and the total
risk-based capital ratio was 10.67% and 10.09%, all in excess of FDIC
guidelines for a "well capitalized" bank.
At December 31, 1997 and December 31, 1996, the liquidity ratio of the
Company was 35.79% and 31.95%, respectively, well in excess of regulatory
requirements.
Management believes that there are adequate funding sources to meet
its future liquidity needs for the foreseeable future. Primary among these
funding sources are the repayment of principal and interest on loans, the
renewal of time deposits, and the growth in the deposit base. Management does
not believe that the terms and conditions that will be present at the renewal
of these funding sources will significantly impact the Company's operations,
due to its management of the maturities of its assets and liabilities.
However, in order to finance the continued growth of the Bank at current
levels, additional funds may be necessary in order to provide sufficient
capital to fund loan growth. In this regard, the Company is considering and
evaluating a variety of additional sources of funds, including other debt
financing vehicles, sales of equity securities, and other financing
alternatives. In particular, the Company is considering the possible issuance
of junior subordinated debentures to a trust to be formed by it for the sole
purpose of issuing trust preferred securities to investors, the proceeds of
which will be invested in such junior subordinated debentures. There can be no
assurance that the Company will be able to obtain such additional financing, if
needed, or, if available, that it can be obtained on terms favorable to the
Company.
-46-
<PAGE> 49
RETURN ON EQUITY AND ASSETS
The following table sets forth certain selected performance ratios of
the Bank for the periods indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------
1997 1996 1995
----------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Return on average assets . . . . . . . . . . . . . . . . .61 .32 .42
Return on average equity . . . . . . . . . . . . . . . . 9.03 3.63 6.58
Dividend payout ratios not not not
applicable applicable applicable
Average equity to average assets . . . . . . . . . . . . 6.76 8.76 6.38
</TABLE>
RECENT DEVELOPMENTS
ADMINISTRATIVE OFFICES. On March 25, 1997, the Company purchased
approximately 2 acres of land located adjacent to the Bank's main office for
the purpose of constructing administrative offices. To the extent not utilized
by the Company, management expects to lease space to the Bank and possible
other subsidiaries and other unrelated businesses. This new facility will
total approximately 30,000 square feet with a construction cost of
approximately $2.5 million. On October 30, 1997, the Company obtained the $5
million Credit Line from Barnett Banks, N.A. South Florida. The proceeds from
this facility will be applied, in part, to fund the construction the Company's
new administrative offices, as well as other general corporate purposes as
shall be determined from time to time by the Board of Directors of the Company
or its management.
FINANCE COMPANY. The Company has completed the organization and
formation of the Finance Company, hired employees to work at the Finance Company
upon commencement of operations, and has filed all necessary license
applications with the relevant regulatory authorities. The Company believes
that it has all necessary licenses to commence the operations of the Finance
Company. During the second quarter of 1998, the Bank extended a $2.4 million
loan to the Finance Company in order to provide the Finance Company with the
funds necessary to commence its operations. Any such loan will be made on
substantially the same terms, including interest rates and collateral on loans,
as those prevailing at the time for comparable transactions with unrelated
parties. Upon the closing of the loan transaction, the Finance Company will
commence operations.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related financial data presented herein
concerning the Company have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
operating results in terms of historical dollars, without considering changes
in the relative purchasing power of money over time due to inflation. The
primary impact of inflation on the operations of the Company is reflected in
increased operating costs. Unlike most industrial companies, virtually all of
the assets and liabilities of a financial institution are monetary in nature.
As a result, changes in interest rates have a more significant impact on the
performance of the Company than do the effects of changes in the general rate
of inflation and changes in prices. Interest rates do not necessarily move in
the same direction or in the same magnitude as the prices of goods and
services.
-47-
<PAGE> 50
FEDERAL AND STATE TAXATION
Federal Income Taxation. Although a bank's income tax liability is
determined under provisions of the Code, which is applicable to all taxpayers
or corporations, Sections 581 through 597 of the Code apply specifically to
financial institutions.
The two primary areas in which the treatment of financial institutions
differ from the treatment of other corporations under the Code are in the areas
of bond gains and losses and bad debt deductions. Bond gains and losses
generated from the sale or exchange of portfolio instruments are generally
treated for financial institutions as ordinary gains and losses as opposed to
capital gains and losses for other corporations, as the Code considers bond
portfolios held by banks to be inventory in a trade or business rather than
capital assets. Banks are allowed a statutory method for calculating a reserve
for bad debt deductions.
State Taxation. The Company files state income tax returns in
Florida. Florida taxes banks under primarily the same provisions as other
corporations. Generally, state taxable income is calculated under applicable
Code sections with some modifications required by state law.
FUTURE ACCOUNTING REQUIREMENTS
The Financial Accounting Standards Board ("FASB") has issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130"). This statement establishes new standards for reporting and
disclosure of comprehensive income and its components in a full set of general
purpose financial statements. Comprehensive income is defined as the change in
equity during a period from transactions and other events and circumstances
from non-shareholder sources, such as changes in net unrealized securities
gain. It includes all changes in equity during a period except those resulting
from investments by shareholders and distributions to shareholders. This
statement is effective for the Company's fiscal year ending December 31, 1998.
Application of this statement will not impact amounts previously reported for
net income or affect the comparability of previously issued financial
statements.
The FASB also has issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). This statement establishes standards for the reporting of
financial information from operating segments in annual and interim financial
statements. It requires that financial information be reported on the same
basis that it is reported internally for evaluating segment performance and
deciding how to allocate resources to segments. Because this statement
addresses how supplemental financial information is disclosed in annual and
interim reports, the adoption will have no material impact on the financial
statements. This statement is effective for the Company's fiscal year ending
December 31, 1998.
YEAR 2000 COMPLIANCE
The Bank utilizes and is dependent upon data processing systems and
software to conduct its business. The data processing systems and software
include those developed and maintained by the Bank's third-party data
processing vendor and purchased software which is run on in-house computer
networks. In 1997, the Bank initiated a review and assessment of all hardware
and software to confirm that it will function properly in the year 2000. To
date, those vendors which have been contacted have indicated that their
hardware or software is or will be Year 2000 compliant in time frames that meet
regulatory requirements. The costs associated with the compliance efforts are
not expected to have significant impact on the Bank's ongoing results of
operations.
-48-
<PAGE> 1
EXHIBIT 99.2
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Murdock Florida Bank
Murdock, Florida:
We have audited the balance sheets of Murdock Florida Bank (the "Bank")
at December 31, 1997 and 1996, and the related statements of operations,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Bank's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of the Bank at December
31, 1997 and 1996, and the results of its operations and its cash flows for the
years then ended, in conformity with generally accepted accounting principles.
HACKER, JOHNSON, COHEN & GRIEB PA
Tampa, Florida
February 27, 1998
<PAGE> 1
EXHIBIT 99.3
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
American Bancshares, Inc. and Subsidiaries
Bradenton, Florida
We have audited the accompanying consolidated balance sheets of American
Bancshares, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, shareholders' equity, and cash flows
for the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
American Bancshares, Inc. and Subsidiaries as of December 31, 1997 and 1996, and
the consolidated results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Tampa, Florida
February 13, 1998
