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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE
FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
COMMISSION FILE NUMBER 0-27474
AMERICAN BANCSHARES, INC.
(Exact name of Registrant as Specified in its Charter)
FLORIDA 65-0624640
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) (Identification No.)
4702 CORTEZ ROAD WEST 34210-2801
BRADENTON, FLORIDA (Zip Code)
(Address of Principal Executive Offices)
(941) 795-3050
(Registrant's Telephone Number, Including Area Code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE ACT:
Common Shares, par value $1.175 per share
Indicate by check mark whether registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [X]
The aggregate market value of the Common Shares of the registrant held by
non-affiliates as of February 26, 1999, was approximately $50,914,413, as
computed by reference to the closing price of the Common Shares as quoted on the
Nasdaq National Market System on such date. As of February 26, 1999, there were
5,028,584 issued and outstanding Common Shares of the issuer.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement of American Bancshares, Inc. for the
1999 Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission no later than 120 days after the end of the issuer's 1998 fiscal year
are incorporated by reference into Part III of this Form 10-K.
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AMERICAN BANCSHARES, INC.
FORM 10-K
Fiscal Year Ended December 31, 1998
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ITEM NUMBER IN
FORM 10-K PAGE
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PART I
1. Business......................................................................................1
2. Properties...................................................................................19
3. Legal Proceedings............................................................................20
4. Submission of Matters to a Vote of Security Holders..........................................20
4A. Executive Officers of the Registrant.........................................................21
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters........................23
6. Selected Financial Data......................................................................25
7. Management's Discussion and Analysis of Financial Condition and Results of Operations........26
7A. Quantitative and Qualitative Disclosure About Market Risk....................................46
8. Financial Statements and Supplementary Data..................................................46
9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.........46
PART III
10. Directors and Executive Officers of the Registrant...........................................46
11. Executive Compensation.......................................................................46
12. Security Ownership of Certain Beneficial Owners and Management...............................47
13. Certain Relationships and Related Transactions...............................................47
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............................47
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THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND ARE SUBJECT
TO RISKS, UNCERTAINTIES, AND OTHER FACTORS WHICH COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING
STATEMENTS. SEE "ITEM 1. BUSINESS-FORWARD LOOKING STATEMENTS."
PART I
ITEM 1. BUSINESS
GENERAL
American Bancshares, Inc. (the "Company"), a Florida corporation
organized on June 30, 1995, is a bank holding company registered under the Bank
Holding Company Act of 1956, as amended (the "BHCA"), and, on December 1, 1995,
became the bank holding company for American Bank (the "Bank"). The Bank is the
largest independent bank in Manatee County, Florida, based on 1998 year-end
asset size. The Bank, whose capital stock is wholly-owned by the Company, is
the Company's primary subsidiary and principal asset. Through its ownership of
the Bank, the Company is engaged in a general commercial banking business and
its primary source of earnings is derived from income generated by the Bank. In
1998, the Company commenced the operations of Freedom Finance Company, a
wholly-owed Florida subsidiary which engages in full service consumer financing
operation. As of December 31, 1998, the Company, on a consolidated basis, had
total assets of approximately $455,164,000, net portfolio loans of
approximately $248,808,000, total deposits of approximately $344,845,000, and
shareholders' equity of approximately $27,427,000. Unless the context otherwise
requires, references herein to the Company include the Company and its
subsidiaries on a consolidated basis.
The Bank, which commenced operations in 1989, is a Florida
state-chartered commercial bank and is not a member of the Federal Reserve
System. The Bank is a general commercial bank which provides a variety of
corporate and personal banking services to consumers and small to mid-sized
businesses in its primary market areas from nine banking offices located on the
west coast of central Florida. In 1998, the Company expanded the geographic base
of its operations from Manatee County to include Charlotte, Sarasota, and
Hillsborough counties through its acquisition of Murdock Florida Bank
("Murdock"), a Charlotte county based institution, and the opening of full
service branches in Ruskin, Florida, a Hillsborough county branch ("Ruskin
Branch"), and Beneva Road South, a Sarasota county branch ("Beneva Branch").
The business of the Bank consists of attracting deposits from the
general public in areas served by its banking offices and using those deposits,
together with funds derived from other sources, to originate a variety of
commercial, consumer, and residential real estate loans. In addition, the Bank
offers customized accounts receivable financing and billing services, and credit
card merchant services. The Bank presently does not provide fiduciary, trust, or
appraisal services. The Bank, however, has existing arrangements with Advest,
Inc. whereby the Bank's customers may obtain trust services. The Bank also
offers computer-based home banking services.
The Bank maintains a mortgage banking department which generates,
closes, and services single family residential home mortgages. Its primary
function is to originate fixed and adjustable rate construction-to-permanent
residential real estate mortgage loans which fit the needs of borrowers for the
purchase and construction of homes. These loans are originated, approved, and
serviced from the Bank's mortgage banking department offices located in
Bradenton, Florida. Since the establishment of the mortgage banking department
in 1994, the Bank has substantially expanded its mortgage banking operations by
emphasizing the origination of construction-to-permanent residential real estate
mortgage loans for sale in the secondary mortgage market while retaining or
packaging for sale the fee generating mortgage servicing
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rights associated with such loans. A majority of the mortgage loans made by the
Bank since 1994 have been sold in the secondary market to the Federal National
Mortgage Association ("FNMA") and other institutional investors. Consideration
may be given to making such sales to other governmental agencies in the future.
During the fiscal year ended December 31, 1998, the mortgage banking
department originated approximately $128,211,000 in mortgage loans and sold in
the secondary market approximately $67,614,000 of such loans, including those
held in inventory from the previous year.
The revenues of the Bank are primarily derived from interest on, and
fees received in connection with, real estate and other loans, from the sales of
loans, and from interest and dividends from investment securities and short-term
investments. The principal sources of funds for the Bank's lending activities
are its deposits, amortization and prepayment of loans, sales of loans, and the
sale of investment securities. The principal expenses of the Bank are the
interest paid on deposits and operating and general administrative expenses.
As is the case with banking institutions generally, the Bank's
operations are materially and significantly influenced by general economic
conditions and by related monetary and fiscal policies of financial institution
regulatory agencies, including the Board of Governors of the Federal Reserve
System (the "FRB") and the Federal Deposit Insurance Corporation (the "FDIC").
Deposit flows and cost of funds are influenced by interest rates on competing
investments and general market rates of interest. Lending activities are
affected by the demand for financing of real estate and other types of loans,
which in turn is affected by the interest rates at which such financing may be
offered and other factors affecting local demand and availability of funds.
MARKET AREA
The Company's primary market areas now consists of the counties on the
west coast of central Florida. Six of the nine banking offices of the Bank
currently are located in Manatee County. Its three other branches are the
Murdock Branch located in Charlotte County, the Ruskin Branch located in
Hillsborough County, and the Beneva Branch located in Sarasota County. These
market areas have all experienced substantial growth during recent decades. This
population growth has resulted in continued construction of residential housing
and related commercial support facilities. While changing conditions involving
the infrastructural requirements of various geographic locations around the
country have limited economic growth and population expansion, management
believes that the Bank's primary market areas have continued to grow because of
the ability of Florida, and these areas in particular, to attract new residents
to its favorable year round climate and its relatively stable economic
environment. Although the major economic bases in the primary market areas are
service, retail, and manufacturing, there also has been a growth of tourism. The
Company believes that it is situated to take advantage of the expected economic
and demographic growth in the Bank's primary market areas.
The Company will continue to evaluate and identify areas into which it
can further expand its operations and improve market share and, in the future,
may consider further strategic expansion through branching and/or acquisitions
of banks or banking assets in those geographic areas that management believes
will complement its existing business and would most effectively achieve market
penetration within its primary market areas or expand its existing markets. The
Company believes that it can continue to improve its market share and long-term
profitability by identifying locations for opening or acquiring additional
branch offices. Further, the Company will consider and evaluate potential
strategic market expansion and acquisitions which are brought to its attention
to determine whether such opportunities are in the best interests of the Company
and should be pursued. Although the Company has identified certain financial
institutions that it believes would be suitable acquisition candidates, it does
not have any understandings,
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arrangements, or agreements, whether written or oral, with respect to any
specific acquisitions prospect, and is not presently negotiating with any party
with respect thereto. Accordingly, there is no assurance that any acquisition
candidate will be interested in such a transaction, and if not, that the Company
will be able to identify any additional acquisition candidates, or to the extent
that suitable acquisition candidates have been or are identified, that an
acquisition will receive regulatory approval or be consummated.
MARKET FOR SERVICES
Management believes that the Bank's principal markets are: (i) the
established and expanding commercial and small-to-medium sized businesses within
its primary market areas; (ii) the real estate mortgage market within the
primary market areas for retail lending and throughout Florida for wholesale
lending; and (iii) the growing consumer loan market.
Businesses are solicited through the personal efforts of the Bank's
directors and officers. Management believes a locally-based independent bank is
often perceived by the local business community as possessing a clearer
understanding of local commerce and its needs. Consequently, the Company expects
that the Bank will be able to make prudent lending decisions quickly and more
equitably than its competitors without compromising asset quality or the Bank's
profitability.
The Bank focuses on the smaller commercial customer because management
believes that this segment offers the greatest concentration of potential
business. Also, the small to mid-size commercial market segment has historically
shown a willingness to borrow and carry larger balances. Finally, the Company
believes that this market segment tends to be more loyal in its banking
relationships.
LENDING ACTIVITIES
GENERAL. The primary source of income generated by the Bank is from the
interest earned from both the loan and investment portfolios. The Bank maintains
diversification when considering investments and the granting of loan requests.
Lending activities include commercial and consumer loans, and loans for
residential purposes. Commercial loans are originated for commercial
construction, acquisition, remodeling, and general business purposes. In this
regard, the Bank, among other things, also originates loans to small businesses
in association with the Small Business Administration. In addition, the Bank
offers customized accounts receivable financing and billing services that enable
customers to convert their receivables into cash on a daily basis and eliminate
the expense of billing. Consumer loans include those for the purchase of
automobiles, boats, home improvements and personal investments. The Bank also
offers credit card merchant services which are competitive with credit card
agencies, but provide the merchant with the local attention of the Bank's
representatives. Residential loans include the origination of conventional
mortgages and residential acquisition, development, and construction loans for
the purchase or construction of single-family homes.
The Bank primarily enters into lending arrangements for its portfolio
loans with individuals who are familiar to the Bank and are residents of the
Bank's primary market areas. Emphasis is placed on the borrower's ability to
generate cash flow to supports its debt obligations and other cash related
expenses. 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 department, 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 department 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
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in the mortgage banking area as it minimizes risks associated with potential
localized economic downturns. The mortgage banking department originates
primary construction-to-permanent financing loans, which are considered to have
less risk of nonpayment than construction only financings.
At December 31, 1998, the Bank's total loans included portfolio loans
of approximately $250,303,000, representing approximately 55% of its total
assets. As of such date, the loan portfolio consisted of 64% commercial and
financial loans, 12% real estate mortgage loans, and 24% installment loans. In
addition, at December 31, 1998, approximately $88 million of residential real
estate mortgage loans were being held for sale.
COMMERCIAL LENDING. The Bank offers a variety of commercial loan
services including term loans, lines of credit, and equipment receivables
financing. A broad range of short-to-medium term commercial loans, both
collateralized and uncollateralized, are made available to businesses for
working capital (including inventory and receivables), business expansion
(including acquisitions of real estate and improvements), and the purchase of
equipment and machinery. The purpose of a particular loan generally determines
its structure.
The Bank's commercial loans primarily are underwritten in the Bank's
primary market area on the basis of the borrowers' ability to service such debt
from income. As a general practice, the Bank takes as collateral a security
interest in any available real estate, equipment, or other chattel, although
such loans may be made on an uncollateralized basis. Collateralized working
capital loans are primarily collateralized by short term assets whereas term
loans are primarily collateralized by long term assets.
Unlike residential mortgage loans, which generally are made on the
basis of the borrower's ability to make repayment from his employment and other
income and which are collateralized by real property whose value tends to be
easily ascertainable, commercial loans typically are made on the basis of the
borrower's ability to make repayment from the cash flow of their business and
generally are collateralized by business assets, such as accounts receivable,
equipment, and inventory. As a result, the availability of funds for the
repayment of commercial loans may be substantially dependent on the success of
the business itself. Further, the collateral underlying the loans, which may
depreciate over time, occasionally cannot be appraised with as much precision as
residential real estate, and may fluctuate in value based on the success of the
business.
RESIDENTIAL LENDING. A large portion of the Bank's lending activities
consist of the origination of single-family residential mortgage loans
collateralized by owner-occupied property located in the Bank's primary service
areas. The Bank also offers adjustable rate mortgages ("ARMs") and either
retains these ARMs in its portfolio or sells them in the secondary market. The
ability to retain the ARMs in the Bank's portfolio allows the Bank the
opportunity to originate loans to borrowers who may not meet the underwriting
criteria of strict secondary market standards (but are still quality credits).
The Bank offers one-year ARMs with rate adjustments tied to the weekly
average rate of U.S. Treasury securities adjusted to a constant one-year
maturity with specified minimum and maximum interest rate adjustments. The
interest rates on a majority of these mortgages are adjusted yearly with
limitations on upward adjustments of 2% per adjustment period and 6% over the
life of the loan. The Bank also originates 15-year and 30-year fixed-rate
mortgage loans on single-family residential real estate. The Bank generally
charges a higher interest rate if the property is not owner-occupied. Fixed-rate
mortgage loans are generally underwritten according to FNMA or Federal Home Loan
Mortgage Corporation ("FHLMC") guidelines so that the loans qualify for sale in
the secondary market to FNMA or FHLMC. It has been the Bank's experience that
the proportion of fixed-rate and adjustable-rate loan origination's depend in
large part on the level of interest rates. As interest rates fall, there is
generally a reduced demand for ARMs and, as interest rates rise, there is
generally an increased demand for ARMs.
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Fixed rate and adjustable rate mortgage loans collateralized by single
family residential real estate generally have been originated in amounts of no
more than 80% of appraised value. The Bank may, however, lend up to 95% of the
value of the property collateralizing the loan, but if such loans are required
to be made in excess of 80% of the value of the property, they must be insured
by private or federally guaranteed mortgage insurance. In the case of mortgage
loans, the Bank will procure mortgagee's title insurance to protect against
defects in its lien on the property which may collateralize the loan. The Bank
in most cases requires title, fire, and extended casualty insurance to be
obtained by the borrower, and, where required by applicable regulations, flood
insurance. The Bank maintains its own errors and omissions insurance policy to
protect against loss in the event of failure of a mortgagor to pay premiums on
fire and other hazard insurance policies. Although the contractual loan payment
period for single-family residential real estate loans is generally for a 15 to
30 year period, such loans often remain outstanding for significantly shorter
periods than their contractual terms. In addition, the Bank charges no penalty
for prepayment of mortgage loans. Mortgage loans originated by the Bank
customarily include a "due on sale" clause giving the Bank the right to declare
a loan immediately due and payable in the event, among other matters, that the
borrower sells or otherwise disposes of the real property subject to a mortgage.
In general, the Bank enforces due on sale clauses. Borrowers are typically
permitted to refinance or prepay loans at their option without penalty.
CONSUMER LOANS. Consumer loans made by the Bank have included
automobiles, recreation vehicles, boats, second mortgages, home improvements,
home equity lines of credit, personal (collateralized and uncollateralized), and
deposit account collateralized loans. The Bank's consumer loan portfolio
consists primarily of loans to individuals for various consumer purposes, but
includes some business purpose loans which are payable on an installment basis.
A majority of these loans are for terms of less than 60 months and although
generally collateralized by liens on various personal assets of the borrower may
be made uncollateralized. Consumer loans are made at fixed and variable interest
rates and may be made based on up to a 10 year amortization schedule.
Consumer loans are attractive to the Bank because they typically have a
shorter term and carry higher interest rates than that charged on other types of
loans. Consumer loans, however, do pose additional risks of collectability when
compared to traditional types of loans granted by commercial banks such as
residential mortgage loans. In many instances, the Bank is required to rely on
the borrower's ability to repay since the collateral may be of reduced value at
the time of collection. Accordingly, the initial determination of the borrower's
ability to repay is of primary importance in the underwriting of consumer loans.
CONSTRUCTION LOANS. The Bank originates residential construction
contractor loans to finance the construction of single-family dwellings. Most of
the residential construction loans are made to individuals who intend to erect
owner-occupied housing on a purchased parcel of real estate. The Bank's
construction loans to individuals typically range in size from $100,000 to
$200,000. Construction loans also are made to contractors to erect single-family
dwellings for resale. At December 31, 1998, approximately 4.0% of the Bank's
construction loans have been made to contractors. Construction loans are
generally offered on the same basis as other residential real estate loans,
except that a larger percentage down payment is typically required.
The Bank may also make residential construction loans to real estate
developers for the acquisition, development, and construction of residential
subdivisions. The Bank has limited involvement with this type of loan. Such
loans may involve additional risk attributable to the fact that funds will be
advanced to fund the project under construction, which is of uncertain value
prior to completion and because it is relatively difficult to evaluate
accurately the total amount of funds required to complete a project.
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The Bank finances the construction of individual, owner-occupied houses
on the basis of written underwriting and construction loan management
guidelines. Construction loans are structured either to be converted to
permanent loans with the Bank at the end of the construction phase or to be paid
off upon receiving financing from another financial institution. Construction
loans on residential properties are generally made in amounts up to 80% of
appraised value. Construction loans to developers generally have terms of up to
12 months. Loan proceeds on builders' projects are disbursed in increments as
construction progresses and as inspections warrant. The maximum loan amounts for
construction loans are based on the lesser of the current appraisal value or the
purchase price for the property.
Construction loans are generally considered to involve a higher degree
of risk than long-term financing collateralized by improved, occupied real
estate. A lender's risk of loss on a construction loan is dependent largely upon
the accuracy of the initial estimate of the property's value at the completion
of construction and estimated cost (including interest) of construction. If the
estimate of construction cost proves to be inaccurate, the lender could be
required to advance funds beyond the amount originally committed in order to
permit completion of the project. If the estimate of anticipated value proves to
be inaccurate, the lender may have collateral which has value insufficient to
assure full repayment.
Loans collateralized by subdivisions and multi-family residential real
estate generally are larger than loans collateralized by single-family,
owner-occupied housing and also generally involve a greater degree of risk.
Payments on these loans depend to a large degree on the results of operations
and management of the properties, and repayment of such loans may be more
subject to adverse conditions in the real estate market or the economy.
LOAN SOLICITATION AND PROCESSING
Loan originations are derived from a number of sources. Residential
loan originations can be attributed to real estate broker referrals, mortgage
loan brokers, direct solicitation by the Bank's loan officers, present savers
and borrowers, builders, attorneys, walk-in customers and, in some instances,
other lenders. Loan applications, whether originated through the Bank or through
mortgage brokers, are underwritten and closed based on the same standards, which
generally meet FNMA underwriting guidelines. Consumer and commercial real estate
loan originations emanate from many of the same sources. The legal lending limit
of the Bank, as of December 31, 1998, was $9,383,750 for collateralized loans
and $5,630,250 for uncollateralized loans.
The loan underwriting procedures followed by the Bank conform to
regulatory specifications and are designed to assess with the borrower's ability
to make principal and interest payments and the value of any assets or property
serving as collateral for the loan. Generally, as part of the process, a bank
loan officer meets with each applicant to obtain the appropriate employment and
financial information as well as any other required loan information. Upon
receipt of the borrower's completed loan application, the Bank then obtains
reports with respect to the borrower's credit record, and orders and reviews an
appraisal of any collateral for the loan (prepared for the Bank through an
independent appraiser). The loan information supplied by the borrower is
independently verified. Once a loan application has been completed and all
information has been obtained and verified, the loan request is submitted to a
final review process. As part of the loan approval process, all uncollateralized
loans of $100,000 or more and all collateralized loans of $500,000 or more
require preapproval by the Bank's loan committee, which is currently comprised
of seven directors of the Bank and meets on such basis as is deemed necessary to
promptly service loan demand. The loan committee has the authority to approve
loans up to the legal lending limits of the Bank.
Loan applicants are notified promptly of the decision of the Bank by
telephone and a letter. If the loan is approved, the commitment letter specifies
the terms and conditions of the proposed loan including the amount of the loan,
interest rate, amortization term, a brief description of the required
collateral, and
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required insurance coverage. Prior to closing any long-term loan, the borrower
must provide proof of fire and casualty insurance on the property serving as
collateral which insurance must be maintained during the full term of the loan.
Title insurance is required on loans collateralized by real property. Interest
rates on committed loans are normally locked in at the time of application for a
30 to 45 day period. The commitment issued at the time of approval will be for
the time remaining, based on the application date.
MORTGAGE BANKING AND RESIDENTIAL LENDING OPERATIONS
The Company provides mortgage banking services through the mortgage
banking department and residential lending services from the retail residential
lending department. The retail residential lending department was formed in
connection with the acquisition of DesChamps & Gregory Mortgage Company, Inc.
("DesChamps") in 1997. Both the mortgage banking department and the retail
residential lending departments were established for the purpose of increasing
the Bank's residential loan portfolio and resulting interest income, and to
increase non-interest income through sales of loans in the secondary market and
the retention or sale of the fee generating mortgage servicing rights. The Bank
also established the mortgage banking department in an effort to pursue the
strong residential mortgage loan demand that management believes exists outside
of its primary market areas in Florida and established the retail residential
lending department to pursue the residential mortgage loan demand that the Bank
believes exists in its primary market areas.
The mortgage banking department's lending efforts are widely disbursed
throughout Florida and are not reliant on a specific region. Management
considers this to be a prudent business practice by reducing risks inherent in
localized economic down turns or adverse weather conditions. Such loans are
originated through a variety of contacts that the staff has in the mortgage
banking industry throughout Florida and parts of Georgia. Furthermore, the
mortgage banking department is not dependent on any single source for a
significant portion of its volume of loan originations. This division
originates, underwrites, closes, and services a broad line of residential
mortgage loan products, including construction-to-permanent mortgages, both for
the Bank's loan portfolio and for resale in the secondary mortgage market. The
division's primary function is to originate fixed and adjustable rate
construction-to-permanent residential real estate mortgage loans which fit the
needs of borrowers for the purchase and construction of homes. These loans are
originated, approved, and serviced from the mortgage banking department's
offices in Bradenton.
The mortgage banking department has expanded significantly during the
past three years by emphasizing the origination of loans for sale in the
secondary market while retaining or packaging for sale the fee generating
mortgage servicing rights associated with such loans. A majority of the mortgage
loans made by the Bank since 1994 have been sold in the secondary market to FNMA
and other institutional investors. The Bank is an approved lender and seller
servicer for FNMA. Consideration may be given to making sales of such loans to
other governmental agencies in the future.
The construction phase of loans made by the mortgage banking department
has certain risks, including the viability of the contractor, the contractor's
ability to complete the project and changes in interest rates. The goal of the
mortgage banking department is to take a residential mortgage loan from the
construction stage to permanent financing with a fixed interest rate, then to
sell the permanent financing in the secondary market. The sale of the loans in
the secondary market allows the Bank to hedge against the interest rate risks
related to such lending operations. Since the Bank intends to sell these loans
in the secondary market upon conversion to permanent financing, these
construction loans have been included in the classification "loans held for
sale" on the Company's balance sheet.
In addition to the fees collected at the closing of a loan, the Bank
attempts to sell the loan for a gain at completion of construction. Such a
brokerage arrangement permits the Bank to accommodate its client's demands while
eliminating the interest rate risk for the fixed 15-to-30 year term of the loan.
By selling the
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mortgage while retaining the servicing rights, the Bank will receive servicing
fees and ancillary fees associated with the servicing rights.
In addition to interest earned on loans and fees generated from
mortgage servicing activities, the Bank receives loan origination fees or
"points" for originating loans. Origination fees are calculated as a percentage
of the principal amount of the mortgage loan and are charged to the borrower for
creation of the loan. Loan origination fees are volatile sources of income, and
are affected by the volume and types of loans and commitments made, competitive
conditions in the mortgage markets, and the demand for and availability of
money.
All mortgage banking department loans of $250,000 to $500,000 must be
approved by the President or Executive Vice President of Lending for the Bank.
Such loans of $500,000 to $2,000,000 must be approved by the Bank's loan
committee, and such loans over $2,000,000 must be approved by the Bank's Board
of Directors. The Bank does not intend to significantly increase the size of its
Mortgage Banking Division operations, but intends to continue to originate a
significant volume of loans for sale in the secondary market.
FINANCE COMPANY OPERATIONS
The Company has organized a wholly-owned Florida subsidiary
corporation, Freedom Finance Company (the "Finance Company"), pursuant to which
it engages in full service consumer financing operations. The Finance Company,
which began commercial operations at the end of March 1998, offers
consumer-driven products and services ranging from mortgages to automobile
loans, home equity loans, and education financing. The Finance Company has the
ability to extend financing to individuals and entities which may not be able to
satisfy the Bank's underwriting requirements or loan standards. In April 1998,
the Bank extended a $2.4 million line of credit to the Finance Company to
finance its start-up costs and initial lending operations. As of December 31,
1998, the Finance Company had borrowed $1,625,000 under this line of credit and
its total loan portfolio, which was comprised primarily of automobile loans, was
approximately $1,639,000. In March 1999, the Bank increased the line of credit
to $3.7 million.
SUPERVISION AND REGULATION
The banking industry is extensively regulated under both federal and
state law, and is undergoing significant change. These laws and regulations are
intended primarily to protect depositors and the federal deposit insurance
funds, and not for the protection of shareholders. The following discussion
summarizes certain aspects of the banking laws and regulations that affect the
Company or the Bank. Proposals to change the laws and regulations governing the
banking industry are frequently raised in Congress, in state legislatures, and
before the various banking agencies. The likelihood and timing of any changes,
and the impact that such changes might have on the Company, are impossible to
predict with any certainty. A change in the applicable laws or regulations, or a
change in the way such laws or regulations are interpreted by regulatory
agencies or the courts, may have a material impact on the business or prospects
of the Company and the Bank.
To the extent that the following information describes statutory and
regulatory provisions, it is qualified in its entirety by reference to the
particular statutory and regulatory provisions.
BANK HOLDING COMPANY REGULATION
General. As a bank holding company registered under the BHCA, the
Company is subject to the regulation and supervision of, and inspection by, the
FRB. The Company is required to file with the FRB annual reports and other
information regarding its business operations and those of its subsidiaries.
Under
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the BHCA, the Company's activities and those of its subsidiaries are limited to
banking, managing or controlling banks, furnishing services to or performing
services for its subsidiaries or engaging in any other activity which the FRB
determines to be so closely related to banking or managing or controlling banks
as to be properly incident thereto. In this regard, the BHCA prohibits a bank
holding company, with certain limited exceptions, from (i) acquiring or
retaining direct or indirect ownership or control of more than 5% of the
outstanding voting stock of any company which is not a bank or bank holding
company, or (ii) engaging directly or indirectly in activities other than those
of banking, managing or controlling banks, or performing services for its
subsidiaries; unless such nonbanking business is determined by the FRB to be so
closely related to banking or managing or controlling banks as to be properly
incident thereto. Some of the activities that have been determined by regulation
to be closely related to banking are making and servicing loans, performing
certain data processing services, acting as an investment or financial advisor
to certain investment trusts and investment companies, and providing securities
brokerage services. Other activities approved by the FRB include the provision
of consumer financial counseling, tax planning and preparation, futures and
options advisory services, check guarantee services, collection agency and
credit bureau services, and personal property appraisals. In making such
determinations, the FRB is required to weigh the expected benefit to the public,
such as greater convenience, increased competition, or gains in efficiency,
against the possible adverse effects such as undue concentration of resources,
decreased or unfair competition, conflicts of interest, or unsound banking
practices. Generally, bank holding companies, such as the Company, are required
to obtain prior approval of the FRB to engage in any new activity not previously
approved by the FRB.
The BHCA also requires, among other things, the prior approval of the
FRB in any case where a bank holding company proposes to (i) acquire all or
substantially all of the assets of any bank, (ii) acquire direct or indirect
ownership or control of more than 5% of the outstanding voting stock of any bank
(unless it owns a majority of such bank's voting shares) or (iii) merge or
consolidate with any other bank holding company. The FRB will not approve any
acquisition, merger, or consolidation that would result in a monopoly, or which
would be in the furtherance of any attempt to monopolize the business of banking
in any part of the United States, or which would have a substantially
anti-competitive effect, unless the anti-competitive impact of the proposed
transaction is clearly outweighed by a greater public interest in meeting the
convenience and needs of the community to be served. The FRB also considers
capital adequacy and other financial and managerial factors when reviewing
acquisitions or mergers. As described in greater detail below, pursuant to the
Riegle-Neal Interstate Banking and Branch Efficiency Act of 1994 (the
"Interstate Banking and Branching Act"), a bank holding company is permitted to
acquire banks in states other than its home state. See "Item 1. Business -
Supervision and Regulation-Bank Holding Company Regulation--Interstate Banking"
below for additional information.
There are a number of obligations and restrictions imposed on bank
holding companies and their depository institution subsidiaries by law and
regulatory policies that are designed to minimize potential loss to the
depositors of such depository institutions and the FDIC insurance funds in the
event the depository institution becomes in danger of default or is in default.
For example, under the Federal Deposit Insurance Company Improvement Act of 1991
("FDICIA"), in order to avoid receivership of an insured depository institution
subsidiary, a bank holding company is required to guarantee the compliance of
any insured depository institution subsidiary that may become "undercapitalized"
with the terms of any capital restoration plan filed by such subsidiary with its
appropriate federal banking agency up to the lesser of (i) an amount equal to 5%
of the institution's total assets at the time the institution became
undercapitalized or (ii) the amount that is necessary (or would have been
necessary) to bring the institution into compliance with all applicable capital
standards as of the time the institution fails to comply with such capital
restoration plan. See "Item 1. Business - Supervision and Regulation - Capital
Adequacy Guidelines."
Under a policy of the FRB with respect to bank holding company
operations, a bank holding company is required to serve as a source of financial
strength to its subsidiary depository institutions and to
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commit all available resources to support such institutions in circumstances
where it might not do so absent such policy. Although this "source of strength"
policy has been challenged in litigation, the FRB continues to take the position
that it has authority to enforce it. The FRB under the BHCA also has cease and
desist authority pursuant to which it may require a bank holding company to
terminate any activity or to relinquish control of a nonbank subsidiary (other
than a nonbank subsidiary of a bank) upon the FRB's determination that such
activity or control constitutes a serious risk to the financial soundness and
stability of any bank subsidiary of the bank holding company.
In addition, the "cross-guarantee" provisions of the Federal Deposit
Insurance Act ("FDI Act") require insured depository institutions which are
under common control to reimburse the FDIC for any loss suffered by the Bank
Insurance Fund ("BIF") of the FDIC as a result of the default of a commonly
controlled insured depository institution or for any assistance provided by the
FDIC to a commonly controlled insured depository institution in danger of
default. Accordingly, the corss-guarantee provisions enable the FDIC to access a
bank holding company's healthy BIF members. The FDIC may decline to enforce the
cross-guarantee provisions if it determines that a waiver is in the best
interest of the BIF. The FDIC's claims are superior to claims of stockholders of
the insured depository institution or its holding company, but are subordinate
to claims of depositors, secured creditors, and holders of subordinated debt
(other than affiliates) of the commonly controlled insured depository
institutions.
The FRB and the FDIC collectively have extensive enforcement authority
over commercial banks, which authority was enhanced substantially by the
Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA")
and the FDICIA. This enforcement authority includes, among other things, the
ability to assess civil money penalties, to issue cease and desist or removal
orders, to initiate injunctive actions, and, in extreme cases, to terminate
deposit insurance. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with the federal banking agencies. FIRREA
significantly increased the amount of and the grounds for civil money penalties
and generally requires public disclosure of final enforcement actions.
Community Reinvestment Act. Bank holding companies and their subsidiary
banks are subject to the provisions of the Community Reinvestment Act of 1977
("CRA") and the regulations promulgated thereunder by the appropriate bank
regulatory agency. Under the terms of the CRA, a state bank has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the FDIC, in connection with its examination of a state bank, to assess
the association's record of meeting the credit needs of its community and to
take such record into account in its evaluation of certain applications by such
association. The CRA also requires all institutions to make public disclosure of
their CRA ratings. Further, such assessment also is required of any state bank
that, among other things, has applied to merge or consolidate with, or acquire
the assets or assume the liabilities of, a federally regulated financial
institution, or to open or relocate a branch office. In the case of a bank
holding company applying for approval to acquire a bank or a bank holding
company, the FRB will assess the record of each subsidiary bank of the applicant
bank holding company in considering the application.
Pursuant to current CRA regulations, an institution's CRA rating is
based on its actual performance in meeting community needs. In particular, the
rating system focuses on three tests: (i) a lending test, which evaluates the
institution's record of making loans in its service areas; (ii) an investment
test, which evaluates the institution's record of investing in community
development projects, affordable housing, and programs benefiting low or
moderate income individuals and business; and (iii) a service test, which
evaluates the
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institution's delivery of services through its branches, ATMs, and other
offices. The current CRA regulations also clarify how an institution's CRA
performance will be considered in the application process.
Interstate Banking. Prior to the Interstate Banking and Branching Act,
the BHCA prohibited the FRB from approving a bank holding company's application
to acquire a bank or a bank holding company located outside the state in which
the operations of its banking subsidiaries are principally conducted, unless
such acquisition is specifically authorized by statute of the state in which the
bank or bank holding company to be acquired is located. The Interstate Banking
and Branching Act significantly altered interstate banking rules. Under the
Interstate Banking and Branching Act, regardless of any previously applicable
state law, bank holding companies which meet specified capital and management
adequacy standards are eligible to acquire banks in states other than their home
states, but will need to retain a separate bank charter in each state where
subsidiaries conduct banking business. Various restrictions on interstate
acquisitions will continue to apply, including: (1) federal and state antitrust
laws, as currently in effect; (2) prohibitions on a single holding company
system accounting for more than 10% of all deposits nationwide or, subject to
various opt-in and opt-out provisions for various states on a nondiscriminatory
basis, accounting for more than 30% or more of deposits in any state; (3)
state-imposed prohibitions on acquiring banks within up to five years after they
commence operations; and (4) compliance by the acquirer with the CRA and fair
lending laws.
Furthermore, beginning June 1, 1997, the Interstate Banking and
Branching Act authorized adequately capitalized and managed banks to cross state
lines to merge with other banks, thereby creating interstate branches, subject
to individual state's adoption of various nondiscriminatory opt-in and opt-out
provisions. Under such legislation, each state had the opportunity to "opt-in"
at an earlier time thereby allowing interstate banking in that state prior to
1997, or to "opt-out". Furthermore a state may opt-in with respect to de novo
branching thereby permitting a bank to open new branches in a state in which the
bank does not already have a branch. Without de novo branching, an out-of-state
bank can enter the state only by acquiring an existing bank. Antitrust and
anti-concentration restrictions will apply as described above. It will not be
necessary to keep multiple state charters in effect or to have a holding company
system. Generally, all banks that are parties to a proposed post-1997 merger
must satisfy applicable CRA, management quality, and capital adequacy standards.
Florida Interstate Banking Laws. In this context, the Florida
legislature enacted legislation in 1996, the Florida Interstate Banking Act
("FIBA"), which specifically authorizes out-of-state bank holding companies
located in any state or the District of Columbia that meet certain prescribed
criteria to acquire Florida bank holding companies or banks which have been in
existence and continuously operated as a bank for more than three years. Entry
into the State of Florida by interstate branching or by means other than such an
acquisition is expressly prohibited by the FIBA. Furthermore, except for initial
entry into the State of Florida by an out-of-state bank or bank holding company,
no acquisition of a Florida bank or Florida bank holding company is permitted if
the resulting bank holding company and its affiliates would control 30% or more
of total deposits in the state.
In addition, the Florida legislature also enacted the Florida
Interstate Branching Act ("Florida Branching Act") which permits interstate
branching in Florida by a merger transaction and grants Florida state-chartered
banks the same interstate branching opportunities as will be afforded to
national banks under the newly enacted federal law.
An out-of-state bank that does not operate a branch in the State of
Florida is prohibited from establishing a de novo branch in Florida. Accordingly
an out-of-state bank or bank holding company can only enter Florida by acquiring
an existing Florida bank which has been operating continuously for at least
three years. The same deposit concentration limits referred to above apply. Any
out-of-state bank or bank
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holding company that has acquired a Florida bank under either the FIBA or the
Florida Branching Act, may establish additional branches in Florida to the same
extent as any Florida bank may do so.
Proposals to change the laws and regulations governing the banking
industry are frequently introduced in Congress, in state legislatures, and
before the various bank regulatory agencies. The likelihood and timing of any
such changes and the potential impact of such changes on the Company or the Bank
cannot be determined at this time.
BANK REGULATION
General. The Bank is a Florida state-chartered commercial bank and, as
such, is subject to the primary supervision, examination, and regulation by the
Florida Department of Banking and Finance (the "Department") and the FDIC. It is
not a member of the Federal Reserve System.
As a state-chartered commercial bank, the Bank is subject to the
applicable provisions of Florida law and the regulations adopted by the
Department. The Bank must file various reports with, and is subject to periodic
examinations by the Department. Florida law and the Department regulate (in
conjunction with applicable federal laws and regulations), among other things,
the Bank's capital, permissible activities, reserves, investments, lending
authority, branching, the issuance of securities, payment of dividends,
transactions with affiliated parties, and borrowing.
The FDIC insures the deposits of the Bank to the current maximum
allowed by law. Applicable statutes and regulations administered by the FDIC
also relate to required reserves against deposits, investments, loans, mergers
and consolidations, issuance of securities, payment of dividends, establishment
of branches, and other aspects of the Bank's operations. Various consumer laws
and regulations also affect the operations of the Bank, including state usury
laws, laws relating to fiduciaries, consumer credit and equal credit, and fair
credit reporting.
Transactions with Affiliates. There are various legal restrictions on
the event to which the Company and any future nonbank subsidiaries can borrow or
otherwise obtain credit from the Bank. There also are legal restrictions on the
Bank's purchase of or investments in the securities of and purchases of assets
from the Company and any of its future nonbank subsidiaries, a bank's loans or
extensions of credit to third parties collateralized by the securities or
obligations of the Company and any of its future nonbank subsidiaries, the
issuance of guaranties, acceptances and letters of credit on behalf of the
Company and any of its future nonbank subsidiaries, or with respect to which the
Company and nonbank subsidiaries, act as agent, participate or have a financial
interest. Subject to certain limited exception, the Bank may not extend credit
to the Company or to any other affiliate in an amount which exceeds 10% of the
Bank's capital stock and surplus and may not extend credit in the aggregate to
such affiliates in an amount which exceeds 20% of its capital stock and surplus.
Further, there are legal requirement as to the type, amount and quality of
collateral which must secure such extensions of credit transactions between the
Bank and the Company or such affiliates, and such transactions must be on terms
and under circumstances, including credit standards, that are substantially the
same or at least as favorable to the Bank as those prevailing at the time for
comparable transactions with non-affiliated companies. These regulations and
restrictions may limit the Company's ability to obtain funds from the Bank for
its cash needs, including funds for acquisitions, and the payment of dividends,
interest and operating expenses.
Further, the Bank and the Company are prohibited from engaging in
certain tie-in arrangements in connection with any extension of credit, lease or
sale of property, or furnishing of services. For example, the Bank may not
generally require a customer to obtain other services from the Bank or the
Company, and may not require the customer to promise not to obtain other
services from a competitor, as a condition to an extension of credit.
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The Bank also is subject to certain restrictions imposed by the Federal
Reserve Act on extensions of credit to executive officers, directors, principal
shareholders or any related interest of such persons. Extensions of credit (i)
must be made on substantially the same terms, including interest rates and
collateral as, and following credit underwriting procedures that are not less
stringent than those prevailing at the time for comparable transactions with
persons not covered above and who are not employees and (ii) must not involve
more than the normal risk of repayment or present other unfavorable features.
The Bank also is subject to certain lending limits and restrictions on
overdrafts to such persons. A violation of these restrictions may result in the
assessment of substantial civil monetary penalties on the Bank or any officer,
director, employee, agent or other person participating in the conduct of the
affairs of the Bank or the imposition of a cease and desist order.
Dividend Restrictions and Transfers of Funds. Under various banking
laws, the declaration and payment of dividends by a state banking institution is
subject to certain restrictions, including those relating to the amount and
frequency of such dividends. Under the FDICIA, an insured depository institution
is prohibited from making any capital distribution to its owner, including any
dividend, if, after making such distribution, the depository institution fails
to meet the required minimum level for any relevant capital measure, including
the risk-based capital adequacy and leverage standards described below.
If, in the opinion of the applicable federal bank regulatory authority,
a depository institution or holding company is engaged in or is about to engage
in an unsafe or unsound practice (which, depending on the financial condition of
the depository institution or holding company, could include the payment of
dividends), such authority may require, after notice and hearing (except in the
case of an emergency proceeding where there is no notice or hearing), that such
institution or holding company cease and desist from such practice. The federal
banking agencies have indicated that paying dividends that deplete a depository
institution's or holding company's capital base to an inadequate level would be
such an unsafe and unsound banking practice. Moreover, the FRB and the FDIC have
issued policy statements which provide that bank holding companies and insured
depository institutions generally should only pay dividends out of current
operating earnings.
In addition, Florida law places certain restrictions on the declaration
of dividends form state chartered banks to their holding companies. Pursuant to
the Florida Banking Code, the Board of Directors of state-chartered banks, after
charging off bad debts, depreciation, and other worthless assets, if any, and
making provisions for reasonably anticipated future losses on loans and other
assets, may quarterly, semiannually or annually declare a dividend of up to the
aggregate net profits of that period combined with bank's retained net profits
for the preceding two years and, with the approval of the Department, declare a
dividend from retained net profits which accrued prior to the preceding two
years. Before declaring such dividends, 20% of the net profits for the preceding
period as is covered by the dividend must be transferred to the surplus fund of
the bank until the fund becomes equal to the amount of the bank's common stock
then issued and outstanding. A state-chartered bank may not declare any dividend
if (i) its net income from the current year combined with the retained net
income from the preceding two years is a loss, or (ii) the payment of such
dividend would cause the capital account of the bank to fall below the minimum
amount required by law, regulation, order, or any written agreement with the
Department or a federal regulatory agency.
CAPITAL ADEQUACY GUIDELINES
Minimum Capital Requirements. The federal banking agencies, including
the FRB and the FDIC, have adopted substantially similar risk-based capital
guidelines for bank holding companies and banks under their supervision. The
risk-based capital guidelines are designed to make regulatory capital
requirements more sensitive to differences in risk profile among banks and bank
holding companies, to account for off-balance sheet exposure, and to minimize
disincentives for holding liquid assets. Under these guidelines,
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assets and off-balance sheet items are assigned to broad risk categories each
with appropriate weights. The resulting capital ratios represent capital as a
percentage of total risk-weighted assets and off-balance sheet items. In
addition, these regulatory agencies may from time to time require that a banking
organization maintain capital above the minimum limits, whether because of its
financial condition or actual or anticipated growth.
These risk-based capital guidelines define a two-tier capital
framework. Under these regulations, the minimum ratio of total capital to
risk-weighted assets (including certain off-balance sheet activities, such as
stand-by letters of credit) is 8%. At least half of the total capital must be
"Tier I Capital," consisting of common shareholders' equity, noncumulative
perpetual preferred stock, and a limited amount of cumulative perpetual
preferred stock, less certain goodwill items and other intangible assets (i.e.,
at least 4% of the risk weighted assets). The remainder ("Tier II Capital") may
consist of (a) the allowance for loan losses of up to 1.25% of risk-weighted
risk assets, (b) excess of qualifying perpetual preferred stock, (c) hybrid
capital instruments, (d) perpetual debt, (e) mandatory convertible securities,
and (f) subordinated debt and intermediate term-preferred stock up to 50% of
Tier I capital. Total capital is the sum of Tier I and Tier II capital less
reciprocal holdings of other banking organizations' capital instruments and
investments in unconsolidated subsidiaries and any other deductions as
determined on a case by case basis or as a matter of policy after formal rule
making.
In computing total risk-weighted assets, an institution's assets are
given risk-weights of 0%, 20%, 50% and 100%. In addition, certain off-balance
sheet items are given similar credit conversion factors to convert them to asset
equivalent amounts to which an appropriate risk-weight will apply. These
computations result in the total risk-weighted assets. Most loans will be
assigned to the 100% risk category, except for first mortgage loans fully
collateralized by residential property which carry a 50% risk rating. Most
investment securities (including, primarily, general obligation claims on states
or other political subdivisions of the United States) will be assigned to the
20% category, except for municipal or state revenue bonds, which have a 50%
risk-weight, and direct obligations of the U.S. treasury or obligations backed
by the full faith and credit of the U.S. Government, which have a 0%
risk-weight. In converting off-balance sheet items, direct credit substitutes
including general guarantees and standby letters of credit backing financial
obligations, are given a 100% conversion factor. Transaction related
contingencies such as bid bonds, standby letters of credit backing non-financial
obligations, and undrawn commitments (including commercial credit lines with an
initial maturity or more than one year) have a 50% conversion factor. Short term
or trade letters of credit are converted at 20% and certain short-term
unconditionally cancelable commitments have a 0% factor.
As of December 31, 1998, the total risk-based capital ratio of the
Company and the Bank were 11.40% and 12.40%, respectively. In addition to the
risk-based capital guidelines, the FRB and the FDIC also have adopted a leverage
standard to supplement the risk-based ratios. This leverage standard focuses on
the institution's ratio of Tier I capital to average total assets, adjusted for
goodwill and certain other items. Under these guidelines, institutions which
have received the highest regulatory rating and exhibit certain other high
standards, must maintain a minimum level of Tier I capital to average
consolidated assets of at least 3%. All other institutions are expected to
maintain a ratio of at least 1% or 2% above the stated minimum. As of December
31, 1998, the leverage capital ratio of the Company and the Bank were 8.19% and
8.30%, respectively.
Federal banking agencies also have adopted regulations which require
regulators to take into consideration concentrations of audit risk and risks
from non-traditional activities, as well as an institution's ability to manage
those risks. This evaluation will be made as part of the institution's regular
safety and soundness examination. In addition, pursuant to the requirements of
the FDICIA, federal banking agencies all have adopted regulations requiring
regulators to consider interest rate risk (when interest rate sensitivity of an
institution's assets does not match its liabilities or its off-balance sheet
position) in the evaluation of a
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bank's capital adequacy. Concurrently, the federal banking agencies have
prepared a new methodology for evaluating interest rate risk.
Classification of Banking Institutions. FDICIA substantially revised
the bank regulatory and funding provisions of the FDI Act and made revisions to
several other federal banking statutes. Among other things, the FDICIA provided
federal banking agencies broad powers to take "prompt corrective action" in
respect of depository institutions that do not meet minimum capital
requirements. The extent of those powers depend upon whether the institutions in
question are "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," or "critically undercapitalized." A depository
institution's capital tier will depend upon where its capital levels are in
relation to various relevant capital measures, which include a risk-based
capital measure and a leverage ratio capital measure, and certain other factors.
Under implementing regulations adopted by the federal banking agencies,
a bank would be considered "well capitalized" if it has (i) a total risk-based
capital ratio of 10% or greater, (ii) a Tier I risk-based capital ratio of 6% or
greater, (iii) a leverage ratio of 5% or greater and (iv) is not subject to any
order or written directive to meet and maintain a specific capital level for any
capital measure. An "adequately capitalized" bank would be defined as one that
has (i) a total risk-based capital ratio of 8% or greater, (ii) a Tier I
risk-based capital ratio of 4% of greater, and (iii) a leverage ratio of 4% or
greater (or 3% or greater in the case of a bank with a composite CAMEL rating of
1). A bank would be considered (A) "undercapitalized" if it has (i) a total
risk-based capital ratio of less than 8%, (ii) a Tier I risk-based capital ratio
of less than 4%, or (iii) a leverage ratio of less than 4% (or 3% in the case of
a bank with a composite CAMEL rating of 1); (B) "significantly undercapitalized"
if the bank has (i) a total risk-based capital ratio of less than 6%, or (ii) a
Tier I risk-based capital ratio of less than 3%, or (iii) a leverage ratio of
less than 3%; and (C) "critically undercapitalized" if the bank has a ratio of
tangible equity to total assets equal to or less than 2%. The FRB may reclassify
a "well classified" bank as "adequately capitalized" or subject an "adequately
capitalized" or "undercapitalized" institution to supervisory actions applicable
to the next lower capital category if it determines that the bank is in an
unsafe or unsound condition or deems the bank to be engaged in an unsafe or
unsound practice and not have corrected the deficiency. As of December 31, 1998,
the Bank met the definition of a "well capitalized" institution.
FDICIA
FDICIA was enacted on December 19, 1991. Some of the more significant
provisions of FDICIA are outlined below:
Real Estate Lending Policies. Pursuant to FDICIA, the FDIC and the
other federal banking agencies adopted real estate lending guidelines pursuant
to which each insured depository institution is required to adopt and maintain
written real estate lending policies in conformity with the prescribed
guidelines. Under these guidelines, each institution is expected to set loan to
value ratios not exceeding the supervisory limits set forth in the guidelines. A
loan to value ratio is generally defined as the total loan amount divided by the
appraised value of the property at the time the loan is originated. The
guidelines also require that the institution's real estate policy require proper
loan documentation and that it establishes prudent under-writing standards.
Brokered Deposits. The FDICIA also amended the prior law with respect
to the acceptance of brokered deposits by insured depository institutions to
permit only a "well capitalized" depository institution to accept brokered
deposits without prior regulatory approval. Under implementing regulations,
"well capitalized" banks may accept brokered deposits without restriction,
"adequately capitalized" banks may accept brokered deposits with a waiver from
the FDIC (subject to certain restrictions on payments of rates), while
"undercapitalized" banks may not accept brokered deposits. The regulations
contemplate that the
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definitions of "well capitalized," "adequately capitalized" and
"undercapitalized" will be the same as the definitions adopted by the agencies
to implement the prompt corrective action provisions of the FDICIA (as described
above).
Other FDICIA Provisions. FDICIA contains numerous other provisions,
including new accounting, audit, and reporting requirements, termination of the
"too big to fail" doctrine except in special cases, limitations on the FDIC's
payment of deposits at foreign branches, new regulatory standards in such areas
as asset quality, earnings and compensation and revised regulatory standards
for, among other things, powers of state banks, real estate lending and capital
adequacy. FDICIA also requires that a depository institution provide 90 days
prior notice of the closing of any branches. Complete regulations have not yet
been issued under FDICIA.
FDIC INSURANCE PREMIUMS
The Bank is required to pay semiannual FDIC deposit insurance
assessments. Under the FDIC's risk-based insurance system, BIF-insured
institutions are currently assessed premiums of between zero and $0.27 per $100
of insured deposits, depending on the institution's capital position and other
supervisory factors. Each financial institution is assigned to one of three
capital groups - well capitalized, adequately capitalized or undercapitalized -
and further assigned to one of three subgroups - within a capital group, on the
basis of supervisory evaluations by the institution's primary federal and, if
applicable, state supervisors and other information relevant to the
institution's financial condition and the risk posed to the applicable FDIC
deposit insurance fund. The actual assessment rate applicable to a particular
institution (and any applicable refund) will, therefore, depend in part upon the
risk assessment classification so assigned to the institution by the FDIC.
Under EGRPRA, BIF-insured institutions will be assessed for certain
payments to be used to pay certain Financing Corporation ("FICO") obligations.
In addition to any BIF Insurance assessments, BIF-insured banks are expected to
make payments from the FICO obligations equal to an estimated $0.0129 per $100
of eligible deposits each year during 1997 through 1999, and an estimated $0.024
per $100 of eligible deposits thereafter.
DEPOSITOR PREFERENCE
The Omnibus Budget Reconciliation Act of 1993 provides that deposits
and certain claims for administrative expenses and employee compensation against
an insured depository institution would be afforded a priority over other
general unsecured claims against such an institution, including federal funds
and letters of credit, in the "liquidation or other resolution" of such an
institution by any receiver.
MONETARY POLICY AND ECONOMIC CONTROL
The commercial banking business in which the Bank engages is affected
not only by general economic conditions, but also by the monetary policies of
the FRB. Changes in the discount rate on member bank borrowing, availability of
borrowing at the "discount window," open market operations, the imposition of
changes in reserve requirements against members banks' deposits and assets of
foreign branches and the imposition of and changes in reserve requirements
against certain borrowings by banks and their affiliates are some of the
instruments of monetary policy available to the FRB. These monetary policies are
used in varying combinations to influence overall growth and distributions of
bank loans, investments and deposits, and this use may affect interest rates
charged on loans or paid on deposits. The monetary policies of the FRB have had
a significant effect on the operating results of commercial banks and are
expected to do so in the future. The monetary policies of these agencies are
influenced by various factors, including inflation, unemployment, short-term and
long-term changes in the international trade
16
<PAGE> 19
balance and in the fiscal policies of the United States Government. Future
monetary policies and the effect of such policies on the future business and
earnings of the Company cannot be predicted.
COMPETITION
The Bank encounters strong competition both in making loans and
attracting deposits. The deregulation of the banking industry and the widespread
enactment of state laws which permit multi-bank holding companies as well as the
availability of nationwide interstate banking has created a highly competitive
environment for financial services providers in the Bank's primary service
areas. In one or more aspects of its business, the Bank competes with other
commercial banks, savings and loan associations, credit unions, finance
companies, mutual funds, insurance companies, brokerage and investment banking
companies, and other financial intermediaries operating in the Bradenton area
and elsewhere. Most of the Bank's primary competitors, some of which are
affiliated with large bank holding companies, have substantially greater
resources and lending limits, and may offer certain services, such as trust
services, that the Bank does not currently provide. In addition, many of the
Company's non-bank competitors are not subject to the same extensive federal
regulations that govern bank holding companies and state chartered and federally
insured banks.
Management believes that the Company and the Bank are well positioned
to compete successfully in their primary market areas, although no assurances
can be given. Competition among financial institutions generally is based upon
interest rates offered on deposit accounts, interest rates charged on loans and
other credit and service charges, the quality of the services rendered, the
convenience of banking facilities, and, in the case of loans to commercial
borrowers, relative lending limits. Management believes that the Bank's
commitment to personal service, innovation, and involvement in the community and
its primary market areas, as well as its commitment to quality, are factors that
contribute to the Bank's competitiveness.
EMPLOYEES
At December 31, 1998, the Company and the Bank together employed 208
full-time and 26 part-time employees. None of these employees are covered by a
collective bargaining agreement and the Company believes that its employee
relations are good.
STATISTICAL DISCLOSURES REQUIRED BY INDUSTRY GUIDE 3
The statistical information contained in Item 7 of this Form 10-K,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" is incorporated herein by reference.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (including the Exhibits hereto)
contains certain "forward-looking statements" within the meaning of the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995, such
as statements relating to, among other things, the financial conditions and
prospects of the Company and its subsidiaries, loan loss reserve adequacy, Year
2000 readiness, market risks and simulation of changes in interest rates,
results of operations, plans for future business development activities and the
opportunities available within its market areas, capital spending plans,
financing sources, projections of financial results or economic performance,
capital structure, the effects of regulation and competition, statements of
plans or objectives of the Company, and the business of the Company and its
subsidiaries. These forward-looking statements are typically identified by words
or phrases such as "believe," "expect," "anticipate," "plan," "estimate,"
"intend," and other similar words and expressions, or future or conditional
verbs such as "will," "should," "would," and "could." In addition, the Company
may from time to time make such written or oral "forward-looking statements" in
future filings with the
17
<PAGE> 20
Securities and Exchange Commission (including exhibits thereto), in its reports
to shareholders, and in other communications made by or with the approval of the
Company.
These forward-looking statements reflect the current views of the
Company at the time they are made and are based on information currently
available to the management of the Company and upon current expectations,
estimates, and projections regarding the Company and its industry, management's
beliefs with respect thereto, and certain assumptions made by management. These
forward-looking statements are not guarantees of future performance and are
subject to risks, uncertainties, and other factors (many of which are outside
the control of the Company) which could cause actual results to differ
materially from those expressed or implied by such forward-looking statements.
Potential risks, uncertainties, and other factors which could cause the
Company's financial performance or results of operations to differ materially
from current expectations or such forward-looking statements include, but are
not limited to:
(a) general economic conditions becoming less favorable than
expected, either nationally or in the markets where the
Company or its subsidiaries offer their financial products or
services, resulting in, among other things, a deterioration of
credit quality or in a decreased demand for the Company's
products or services;
(b) competitive pressure in the banking and financial services
industry increasing significantly and, more particularly,
competition in the Company's market areas as described under
"Business - Competition";
(c) changes in the interest rate environment which reduces
margins, including those described under " Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Asset/Liability Management" and "Market Risks";
(d) the adequacy of the allowance for loan losses and the Bank's
asset quality, including those matters described in
"Management's Discussion and Analysis of Financial Condition
and Results of Operations--Allowance for Loan Losses," and
"--Loan Classification";
(e) changes in political conditions or changes occurring in the
legislative or regulatory environment, including the impact of
any changes in laws and regulations relating to banking,
securities, taxes, and insurance;
(f) the ability to increase market share and to control expenses,
and changes in consumer spending, borrowing, and saving
habits;
(g) changes in trade, tax, monetary, or fiscal policies,
including the interest rate policies of the FRB;
(h) money market and monetary fluctuations, and changes in
inflation or in the securities markets;
(i) technological changes and factors relating to the Year 2000
issues, including those described under "Business - Year 2000
Issues";
(j) future acquisitions and the integration of acquired businesses
and assets;
(k) changes in the Company's organizational structure and in its
compensation and benefit plans, including those necessitated
by pressures in the labor market for attracting and retaining
qualified personnel;
18
<PAGE> 21
(l) the effect of changes in accounting policies and practices, as
may be adopted by regulatory agencies as well as the Financial
Accounting Standards Board;
(m) unanticipated litigation, regulatory, or other judicial
proceedings;
(n) the success of the Company at managing the risks involved in
the foregoing;
(o) other one-time events, risks and uncertainties detailed from
time to time in the filings of the Company with the Securities
and Exchange Commission.
Such forward-looking statements speak only to the date that such
statements are made, and the Company undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events.
The Company's results are strongly influenced by general economic
conditions in its market areas on the west coast of central Florida. A
deterioration in these conditions could have a material adverse effect on the
quality of the Bank's loan portfolio and the demand for its products and
services. In particular, changes in the real estate or service industries, or a
slow-down in population growth may adversely impact the Company's performance.
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Asset/Liability Management," "--Market Risk," "--Loan
Classification," and "--Allowance for Loan Losses."
All forward-looking statements presume a continuation of the existing
regulatory environment and monetary policy. The banking industry is subject to
extensive state and federal regulation, and significant new laws or regulations,
or changes in or repeals of existing laws or regulations may cause results of
the Company to differ materially. Further federal monetary policy, particularly
as implemented by the FRB, significantly affect credit conditions for the Bank
and its customers. Such changes could adversely impact the Company's financial
results. See "Item 1. Business - Supervision and Regulation."
A significant source of risks arise from the possibility that losses
will be sustained because borrowers, guarantors, and related parties fail to
perform in accordance with the terms of their loans. The Bank has adopted
underwriting and credit monitoring procedures and credit policies, including the
establishment and review of the allowance for loan losses, that management
believes are appropriate to minimize the risks in assessing the likelihood of
nonperformance, tracking loan performance, and diversifying the Bank's loan
portfolio. However, such policies may not prevent unexpected losses that could
adversely affect the Company's results and the allowance for loan losses may not
be adequate in all instances. See "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations - Asset/Liability Management,"
"--Market Risk," "--Loan Classification," and "--Allowance for Loan Losses."
Further, certain types of lending relationships carry greater risks of
nonperformance and collectability, such as commercial and consumer loans. For a
discussion of the risks associated with such lending relationships, see "Item 1.
Business - Lending Activities."
ITEM 2. PROPERTIES
The principal executive offices of the Company are located at 4502
Cortez Road West, Bradenton, Florida, 34210, a 30,000 square foot administrative
office building situated on two acres of land adjacent to the Bank's main
office. The building serves as the Company's administrative offices and, in an
effort to centralize administrative and backroom operations of the Bank, the
Company has relocated the Bank's accounting and operations departments, the
Mortgage Banking Division, and the Retail Residential Lending
19
<PAGE> 22
Division to these facilities. Both the administrative office building and the
real property are owned in fee simple by the Bank.
The Bank's main office is located at 4702 Cortez Road West, Bradenton,
Florida, 34210 and consists of approximately 7,700 square feet on two floors,
containing a lobby, executive and customer service offices, teller stations,
safe deposit booths and related non-vault area and vault operations. A drive
through facility and adequate paved parking also is on the premises. Both the
land and all improvements are owned by the Bank.
The Bank has nine banking office locations. Four of these offices, the
main office, two full service branches and a drive-thru branch, are in
Bradenton. The remaining offices include a full service branch in Palmetto and
in Ellenton, both in Manatee County, the recently acquired branch in Murdock,
Florida which is located in Charlotte County, the recently opened Ruskin Branch
located in Hillsborough County, and recently opened Beneva Branch in Sarasota
County. All of the branch offices are owned in fee simple by the Bank, with the
exception of the Murdock and the Ruskin branches. The Murdock facility,
consisting of approximately 10,300 square feet, is subject to a lease which
expires on July 31, 2000, with an option to renew the lease for two additional
five-year terms. The Murdock lease requires rental payments of $145,000 per
year. The Ruskin office, which is approximately 1,750 square feet, is subject to
a lease which expires in April 2003, with an option to renew the lease for two
additional five year terms, and requires an annual rent of $24,000 payable in
monthly installments.
The Finance Company has assumed a lease for a 1,700 square foot
facility located in Bradenton from which it conducts its operations. The Finance
Company lease, which was assumed as of February 10, 1998, expires on April 1,
2002, with an option to renew the lease for two additional three-year terms, and
requires an annual rent of $16,662 payable in monthly installments.
Management believes that each of its banking locations provide
sufficient parking for its customers as well as visibility from highly traveled
thoroughfares.
ITEM 3. LEGAL PROCEEDINGS
The Company and the Bank are periodically parties to or otherwise
involved in legal proceedings arising in the normal course of business, such as
claims to enforce liens, foreclose on loan defaults, claims involving the
making and servicing of real property loans, and other issues incident to the
Bank's business. Management does not believe that there is any proceeding
threatened or pending against the Company or the Bank which, if determined
adversely, would have a material effect on the business or financial position
of the Company or the Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's
security-holders during the fourth quarter of its fiscal year ended December 31,
1998.
20
<PAGE> 23
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to the Instructions of Form 10-K and Item 401(b) of Regulation
S-K, the name, age, and position of each executive officer of the Company and
the Bank are set forth below, together with such officer's business experience
during the past five years. Officers are elected annually by the respective
Boards of Directors of the Company and the Bank to hold office until the earlier
of their death, resignation, or removal.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH COMPANY AND/OR BANK
<S> <C> <C>
Jerry L. Neff................................... 57 President and Chief Executive Officer of the Bank
Gerald L. Anthony............................... 56 President and Chief Executive Officer of the Company
Philip W. Coon.................................. 45 Senior Vice President, Mortgage Banking Division of Bank
Andrea M. Franco................................ 50 Vice President, Credit Cards and Marketing
Stuart M. Gregory............................... 40 Executive Vice President, Retail Residential Lending for
Bank
Michael R. Lewis................................ 51 Vice President, Consumer Lending for Bank
David R. Mady................................... 37 Senior Vice President, Secondary Market Manager for Bank
John S. Nash.................................... 39 Executive Vice President, Senior Commercial Lending Officer
for Bank
Susan W. Short.................................. 40 Vice President, Human Resources Director for Bank
Brian M. Watterson.............................. 41 Executive Vice President, Chief Financial Officer,
Secretary, and Chief Operating Officer(1)
</TABLE>
- ----------------
(1) Serve both the Company and the Bank in the same capacities as indicated
above.
JERRY L. NEFF has been President and Chief Executive Officer of the
Bank since February 1999. From 1997 to 1999, Mr. Neff served as the Branch
Administrator for the Bank with responsibilities for supervising all of the
Bank's branch operations. Prior to joining the Bank, he was a marketing
executive (1996-1997) and retail area manager (1993-1996) for Barnett Bank, N.A.
of Manatee County. From 1968 to 1993, Mr. Neff served in the following officer
positions for First Florida Bank, N.A., Manatee County, until its acquisition by
Barnett Banks, Inc. from 1988 to 1993, he served as the County President; from
1982-1988, he served in various capacities, including that as the Area Executive
Vice President; and from 1968-1982, he served in a number of positions,
including Senior Vice President and Senior Trust Officer. Mr. Neff is a graduate
of the University of the State of New York with a bachelor of science degree in
Liberal Arts.
GERALD L. ANTHONY has been President, Chief Executive Officer, and a
director of the Company since its inception in 1995. Mr. Anthony also has been a
director of the Bank since its inception and served as President and Chief
Executive Officer of the Bank from 1995 through February 1999.
PHILIP W. COON has been the Senior Vice President, Mortgage Banking
Division of the Bank since the start-up of the Bank's mortgage banking
operations in 1994. Mr. Coon has engaged in mortgage banking activities for the
past 17 years. He was employed as Director of Residential Lending with Key
Florida Bank, Bradenton from 1991 to 1994, as Regional Manager with Southeast
Mortgage Company, Tampa from 1985 to 1991, as a Branch Manager with Collateral
Mortgage Company from 1984 to 1985,
21
<PAGE> 24
and as a Loan Officer with Cameron-Brown Company in Charlotte, North Carolina
and Tampa, Florida from 1979 to 1984.
ANDREA M. FRANCO has been the Vice President, Credit Cards and
Marketing of the Bank since 1994. Previously, Ms. Franco was the District
Manager of Financial Alliance, an independent sales organization for credit card
sales, from 1992 to 1994; Vice President of Credit Card operations for First
Florida Banks from 1982 to 1992; credit card sales for Telecredit, a credit card
processing company, from 1978 to 1982; and credit card processing for First
National Bank of Ft. Myers, Florida from 1972 to 1978.
STUART M. GREGORY has been the Executive Vice President, Retail
Residential Lending since February 1999 and served as a Senior Vice President
from January 1997 to 1999. Previously, Mr. Gregory was the founder and President
of DesChamps & Gregory Mortgage Company, Inc. ("DesChamps"), a Bradenton based
mortgage brokerage company originating residential mortgage loans, from 1991
until its acquisition by the Bank in 1997. Prior to forming DesChamps, Mr.
Gregory served for eleven years as a Senior Account Executive for Republic
Mortgage Insurance Company and General Electric Capital Corporation in the State
of Florida. Both companies specialize in high loan to value risk insurance for
residential mortgage loans. Mr. Gregory is a graduate of Florida Southern
College with a bachelor of science degree in Sports Administration.
MICHAEL R. LEWIS has been the Vice President, Consumer Lending of the
Bank since 1993. Previously, Mr. Lewis has worked as Vice President, Consumer
Lending, at Barnett Bank, Tallahassee (1969-75), as Vice President, Consumer
Lending at Southeast Bank, Bradenton (1975-80), as Business Manager for Sands
Toyota, Bradenton (1980-83), as a Consumer Lending Officer as Island Bank,
Bradenton (1983-84), and a Director of Indirect Consumer Lending at Barnett
Bank, Bradenton (1985-93). Mr. Lewis attended Florida State University and is a
graduate of the University of Oklahoma Banking School.
DAVID R. MADY has been the Senior Vice President, Secondary Market
Manager of the Bank since February 1999, and a Vice President from the start-up
of the Bank's mortgage banking operations in 1994 to 1999. Previously, Mr. Mady
served as the Secondary Market Manager for Key Florida Bank, F.S.B., from 1991
to 1994. From 1990 to 1991, he was employed by First Union Bank of Florida in
charge of their residential lending operations for Hillsborough County, Florida,
and from 1984 to 1989, Mr. Mady served as a loan officer for Southeast Mortgage.
Mr. Mady is a graduate of the University of Connecticut with a bachelor of
science degree in finance.
JOHN S. NASH has been the Executive Vice President, Senior Commercial
Lending Officer of the Bank since February 1999, and as Senior Vice President
from 1989 to 1999. Prior to joining the Bank, from 1982 to 1989, Mr. Nash worked
with Barnett Bank in Bradenton as a consumer lending officer, corporate lending
officer and finally as Branch Manager/Commercial Officer in the downtown office
of Barnett Bank in Bradenton. He holds a bachelor of science degree in business
administration, conferred by the University of Florida in 1981.
SUSAN W. SHORT has been the Vice President, Human Resources Director of
the Bank since December 1998. From 1992 to 1998, Ms. Short has held positions at
the Bank as its Human Resources Administrator, Asset/Liability Manager, and
Operations Assistant. Prior to joining the Bank, from 1977 to 1992, she served
in various capacities with First Commercial Bank of Manatee County, including
positions as a customer service representative, teller, bookkeeper, and
Assistant Cashier/Internal Auditor.
BRIAN M. WATTERSON has been a Executive Vice President and the Chief
Operations Officer of the Company and the Bank since January 15, 1996. February
1997 Mr. Watterson took over the responsibilities of the Chief Financial Officer
of the Company and the Bank. Previously, Mr. Watterson served as a Senior Vice
President and Chief Financial Officer at SouthTrust Bank, Sarasota, Florida from
August 1995 to
22
<PAGE> 25
December 1995. Senior Vice President and Chief Financial Officer at Key Florida
Bank, F.S.B., Bradenton, Florida from September 1992 to July 1995; insurance
agent for Nationwide Insurance and Metropolitan Insurance Company, Bradenton
from September 1990 to February 1992; Vice President, Chief Financial Officer,
and Cashier at SouthTrust Bank, Sarasota, Florida from February 1992 to August
1992; and as Assistant Controller at Barnett Bank of Manatee County, N.A. from
July 1979 to May 1990. Mr. Watterson graduated in 1981 from the University of
South Florida with a degree in Business Administration. He also graduated form
the Florida School of Banking at the University of Florida, Gainesville, Florida
in 1985 and from the B.A.I. School for Banking Administration at the University
of Wisconsin, Madison, Wisconsin in 1989.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET FOR COMMON SHARES
The Company's Common Shares are quoted on the Nasdaq Stock Market
National Market System ("Nasdaq-NMS") under the symbol ABAN. At the close of
business on February 26, 1999, there were outstanding 5,028,584 Common Shares
which were held by approximately 1,074 shareholders of record.
The following table sets forth the high and low closing sales prices
for the Common Shares as quoted by Nasdaq-NMS for the periods indicated:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1997:
First Quarter............................................... $ 9.25 $ 7.50
Second Quarter.............................................. $ 9.625 $ 8.00
Third Quarter............................................... $ 12.75 $ 9.00
Fourth Quarter.............................................. $ 13.25 $11.625
YEAR ENDED DECEMBER 31, 1998:
First Quarter............................................... $ 13.125 $11.75
Second Quarter.............................................. $ 13.875 $11.50
Third Quarter .............................................. $ 11.50 $ 8.625
Fourth Quarter.............................................. $ 10.25 $ 8.00
YEAR ENDED DECEMBER 31, 1999:
First Quarter (through February 26, 1999)................... $ 11.125 $ 8.25
</TABLE>
On February 26, 1999, the last reported sale price of the Common Shares
as quoted by Nasdaq-NMS was $10.125 per share.
In connection with the merger with Murdock, the Company issued
approximately 924,024 Common Shares. In addition, options to acquire Murdock
common stock were converted into options to acquire up to 33,600 of the
Company's Common Shares.
23
<PAGE> 26
Holders of the Company's Common Shares are entitled to receive
dividends when and if declared by its Board of Directors out of funds legally
available therefor. The Company however, has never declared any cash dividends
on its Common Shares and does not anticipate the payment of cash dividends in
the foreseeable future.
The Company is a legal entity separate and distinct from the Bank and
its revenues are derived principally from the Bank. Accordingly, the ability of
the Company to pay cash dividends on its Common Shares in the future generally
will be largely dependent upon the earnings of the Bank and the ability of the
Bank to pay dividends to the Company. The Bank, as a Florida state chartered
bank, is subject to certain legal restrictions on the amount of dividends it is
permitted to pay. The amount of cash dividends that may be paid is based on the
Bank's net profits during the current year combined with the Bank's retained net
profits of the preceding two years, as defined by applicable Florida Department
of Banking regulations. At December 31, 1998, the Bank had approximately
$5,503,000 available for the payment of cash dividends to the Company as
determined by applicable regulations.
The payment of dividends by the Bank is subject to a determination by
the Bank's Board of Directors and will depend upon a number of factors,
including capital requirements, regulatory limitations, the Bank's results of
operations and financial condition, tax considerations, and general economic
conditions. National banking laws regulate and restrict the ability of the Bank
to pay dividends to the Company. The Florida Department of Banking, which
regulates the Bank, not only has established certain financial and capital
requirements that affect the ability of the Bank to pay dividends, but it also
has the general authority to prohibit the Bank from engaging in an unsafe or
unsound practice in conducting its business. Depending upon the financial
condition of the Bank, the payment of cash dividends could be deemed to
constitute such an unsafe or unsound practice. See "Item 1. Business -
Supervision and Regulation -- Bank Regulation."
24
<PAGE> 27
ITEM 6 SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
AT AND FOR THE
YEAR ENDED DECEMBER 31
------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
SELECTED OPERATIONS DATA:
Interest income ............................ $ 31,185 $ 24,631 $ 19,431 $ 5,826 $ 11,187
Interest expense ........................... 16,172 12,917 9,965 8,452 5,558
-------- -------- -------- -------- --------
Net interest income ........................ 15,013 11,714 9,466 7,374 5,629
Provision for loan losses .................. 1,180 921 515 702 291
-------- -------- -------- -------- --------
Net interest income after provision for
loan losses .............................. 13,833 10,793 8,951 6,672 5,338
Non-interest income ........................ 5,245 4,156 2,148 2,086 1,124
Non-interest expenses ...................... 16,574 11,912 9,856 7,437 5,354
Provision for income taxes ................. 877 1,117 461 471 396
-------- -------- -------- -------- --------
Net Income ............................... $ 1,627 $ 1,920 $ 782 $ 850 $ 712
======== ======== ======== ======== ========
CONSOLIDATED PER SHARE DATA:
Net income:
Basic .................................... $ 0.33 $ 0.38 $ 0.17 $ 0.27 $ 0.26
Diluted .................................. 0.32 0.38 0.17 0.27 0.26
Book value, end of period .................. 5.49 5.22 4.77 4.40 3.80
SELECTED BALANCE SHEET DATA:
Total assets ............................... $455,164 $353,901 $273,630 $218,993 $183,901
Cash (including interest bearing accounts) . 20,319 18,396 23,563 11,230 7,762
Loans receivable, net ...................... 248,808 213,405 175,265 138,086 107,370
Mortgage loans held for sale ............... 88,158 39,588 20,351 21,011 21,640
Investment securities and other interest-
bearing assets ........................... 77,078 68,664 43,509 40,423 36,746
Deposits ................................... 344,845 302,746 232,433 186,727 165,608
Borrowed funds ............................. 64,492 23,028 16,413 16,067 5,977
Guaranteed preferred beneficial
interests in the Company's junior
subordinated debentures .................... 16,249 0 0 0 0
Shareholders' equity ....................... 27,427 26,079 23,504 14,632 11,484
SELECTED FINANCIAL RATIOS AND OTHER DATA:
Return on average assets ................... 0.40% 0.61% 0.32% 0.42% 0.43%
Return on average equity ................... 6.02 9.03 3.63 6.58 6.91
Net interest margin ........................ 3.32 3.98 4.13 3.90 3.85
Asset quality ratio (1) .................... 0.32 0.43 0.57 1.15 1.82
Average equity to average total assets ..... 6.63 6.76 8.76 6.38 6.48
Risk-based capital ratios:
Tier 1 capital ........................... 11.40 10.11 10.82 10.02 10.41
Total risk based capital ............. 12.10 10.90 11.60 10.97 11.58
Leverage ratio (2) ......................... 8.10 6.87 7.31 6.69 6.67
Efficiency ratio (3) ....................... 81.81 75.06 84.86 78.62 79.28
Allowance for loan losses to portfolio loans 0.94 1.07 1.00 1.16 1.27
Allowance for loan losses to non-performing
loans .................................... 5.10 1.38 1.29 1.29 1.25
Net charge-offs to average loans, net ...... 0.34 0.21 0.23 0.37 0.14
</TABLE>
- -------------------
(1) Non-performing loans and other real estate owned to total assets.
Non-performing loans consist of non-accrual loans and accruing loans
contractually past due 90 days or more.
(2) Leverage ratio is Tier 1 Capital to average total assets.
(3) Non-interest expense divided by net interest income plus non-interest
income.
25
<PAGE> 28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 earned or 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 1998, the Bank completed its
merger with Charlotte County-based Murdock Florida Bank located in Murdock,
Florida and opened full service branches in Ruskin and Sarasota, Florida. The
former Murdock Florida Bank was converted into a full service branch of the
Bank.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations presents a review of the consolidated operating results
and financial condition of the Company for the fiscal years ended December 31,
1998, 1997 and 1996. This discussion and analysis is intended to assist in
understanding the financial condition and results of operation of the Company
and its subsidiaries. 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 1998 AND 1997
For the year ended December 31, 1998, the Company reported net income
of $1,627,000, or $0.33 per share, as compared to net income of $1,920,000 or
$0.38 per share for 1997. This decrease was due primarily to the one-time costs
associated with the acquisition of Murdock, the settlement of an outstanding
lawsuit, and an increase in the allowance for loan losses. From 1997 to 1998,
net interest income increased by $3,299,000 and non-interest income increased by
$1,089,000. The increase in non-interest income was primarily attributable to
the gain on the sale of loans and the sale of securities. These increases to
income were offset by a $4,662,000 increase in non-
26
<PAGE> 29
interest expenses. The increase in non-interest expense was attributed to
increased salaries and benefits and occupancy expenses, the costs to settle a
significant litigation matter, and certain other expenses.
The Company's total assets at December 31, 1998 were $455,164,000, an
increase of $101,263,000 approximately 28.6% from December 31, 1997. The
majority of the increase was invested in loans receivable. Asset growth was
funded by an increase in deposits from the opening of new branches, continued
growth at existing branches, and through FHLB advances.
The Company's loans at December 31, 1998 totaled $336,966,000 net, or
approximately 74% of total assets. Of this total, portfolio loans consisted of
$59,027,267 in commercial loans, $99,765,515 in commercial real estate loans,
$28,532,261 in residential real estate loans, and $61,417,581 in consumer loans,
net of deferred costs, and allowance for loan losses of $2,355,000. The
allowance for loan losses represents approximately 0.70% of total loans, down
from 0.91% at December 31, 1997. The allowance for loan losses represents 0.95%
of portfolio loans at December 31, 1998, as compared to 1.07% at December 31,
1997.
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 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 Company's loans at December 31, 1997 totaled $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 represents 1.07% of portfolio loans at December 31,
1997, as compared to 1.00% at December 31, 1996.
NET INTEREST INCOME
Net interest income, which constitutes the principal source of income
for the Company, 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 checking accounts ("NOW Accounts"), retail savings deposits,
and money market accounts. Funds deposited to these interest-bearing
liabilities are
27
<PAGE> 30
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 Company has experienced a steady increase in net interest income
during the past three fiscal years primarily as a result of the growth in loans.
Net interest income for the fiscal years ended December 31, 1998, 1997, and 1996
was $15,013,000, $11,714,000, and $9,466,000, respectively, on average
outstanding balances of interest-earning assets of $375,235,000, $294,634,000,
and $229,103,000, respectively. Total interest income for the fiscal years ended
December 31, 1998, 1997, and 1996, was $31,185,000, $24,631,000, and
$19,431,000, respectively. Interest income from loans for the fiscal years 1998,
1997, and 1996 comprised approximately 84.2%, 81.6%, and 83.1%, respectively, of
the total interest income, and earned an average yield of 8.74%, 8.89%, and
9.05%, respectively. Interest income from investments and federal funds sold
earned an average yield of 6.60%, 6.70%, and 6.47%, respectively.
Total interest expense for fiscal years 1998, 1997, and 1996 was
$16,172,000, $12,917,000, and $9,965,000, respectively, on average outstanding
balances of interest-bearing liabilities of $323,973,000, $253,255,000, and
$196,712,000, respectively. The average cost of interest-bearing liabilities for
fiscal years 1998, 1997, and 1996 was 4.99%, 5.10%, and 5.07% respectively.
Average interest-earning assets to average interest-bearing liabilities
was 1.16 for the fiscal years ended December 31, 1998, 1997, and 1996. The
Company's net yield on average earning assets was 4.00%, 3.98%, and 4.13% for
1998, 1997, and 1996, respectively. The decrease in net yield on average earning
assets from 1997 to 1998 and from 1996 to 1997 were due, in part, to a decrease
in average yield on interest-earning assets as a result of interest rate changes
in the market place.
28
<PAGE> 31
COMPARATIVE AVERAGE BALANCES, INTEREST, AND AVERAGE YIELDS
The following table shows 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, 1998, 1997, and 1996. This table also shows 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.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997 1996
--------------------------- ---------------------------- ----------------------------
INTEREST INTEREST INTEREST
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE(1) EXPENSE RATE BALANCE(1) EXPENSE RATE BALANCE(1) EXPENSE RATE
---------- ------- ---- ---------- ------- ---- ---------- ------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cash and due from banks.................. $ 13,806 $ 8,938 $ 7,989
Bank premises and equipment, net......... 11,368 6,869 5,902
Other assets............................. 7,332 4,438 2,335
--------- -------- ---------
Total non-interest earning assets........ 32,506 20,245 16,226
--------- -------- ---------
INTEREST-EARNING ASSETS:
Federal funds sold and other
interest-earning assets............... $ 4,762 $ 265 5.56% $ 9,459 $ 535 5.66% $ 5,842 $ 336 5.75%
Investment securities (2)................ 70,028 4,670 6.67 58,119 3,994 6.88 44,898 2,946 6.56
Loans, net (3)(4)........................ 300,445 26,250 8.74 227,055 20,101 8.89 178,363 16,150 9.05
--------- -------- ---- -------- ------- ---- --------- -------- ----
Total interest-earning assets/interest/
income average rates earned........... $ 375,235 $ 31,185 8.31% $294,634 $24,631 8.36% $ 229,103 $ 19,431 8.48%
========= ======== ==== ======== ======= ==== ========= ======== ====
Total assets............................. $ 407,741 $314,879 $ 245,329
========= ======== =========
Total non-interest bearing liabilities... $ 56,752 $ 40,351 $ 27,082
========= ======== =========
INTEREST-BEARING LIABILITIES:
NOW ..................................... $ 27,743 $ 471 1.70% $ 22,901 $ 433 1.89% $ 19,161 $ 368 1.92%
Money market............................. 69,537 2,914 4.19 59,466 2,773 4.66 36,692 1,720 4.69
Savings.................................. 14,504 308 2.12 12,773 304 2.38 12,682 312 2.46
Time. ................................... 157,172 9,449 6.01 137,986 8,395 6.08 117,407 7,075 6.03
--------- -------- ---- -------- ------- ---- --------- -------- ----
Total interest-bearing deposits.......... 268,956 13,142 4.89 233,126 11,905 5.11 185,942 9,475 5.10
Securities sold under agreement
to repurchase......................... 26,039 1,206 4.63 14,374 653 4.54 8,628 352 4.08
Federal funds purchased.................. 0 0 0.00 77 4 5.19 47 3 6.38
FHLB advances............................ 20,313 1,114 5.48 5,678 355 6.25 2,095 136 6.49
Guaranteed preferred beneficial
interests in the Company's junior
subordinated debentures ................. 7,822 685 8.75 0 0 0.00 0 0 0.00
Other borrowed money..................... 843 25 2.95 0 0 0.00 0 0 0.00
--------- -------- ---- -------- ------- ---- --------- -------- ----
Total interest-bearing liabilities/
interest/expense/average
rate paid.......................... $ 323,973 $ 16,172 4.99% $253,255 $12,917 5.10% $ 196,712 $ 9,965 5.07%
========= ======== ==== ======== ======= ==== ========= ======== ====
Total liabilities........................ $ 380,725 $293,606 $ 223,794
Shareholders' equity..................... 27,016 21,273 21,535
--------- -------- ---------
Total liabilities and
shareholders' equity.................. $ 407,741 $314,879 $ 245,329
========= ======== =========
Net interest income...................... $ 15,013 $11,714 $ 9,466
======== ======= ========
Net yield on average earning
assets (5)............................ 4.00% 3.98% 4.13%
==== ==== ====
</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 $492,000 in 1998, $352,000 in
1997, and $525,000 in 1996.
(5) The net yield on average earning assets is the net interest income divided
by average interest-earning assets.
29
<PAGE> 32
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 Company. 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 DECEMBER 31,
----------------------------------------------------------------------------------------
1998 COMPARED TO 1997 1997 COMPARED TO 1996
INCREASE (DECREASE) DUE TO CHANGE IN: INCREASE (DECREASE) DUE 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 ............... $ (264) $ (6) $ (270) $ 208 $ (9) $ 199
Investment securities ............ 819 (145) 674 867 184 1,051
Loans, net (2) ................... 6,468 (319) 6,149 4,409 (458) 3,951
------- ------- ------- ------- ------- -------
Total interest income .......... $ 7,023 $ (469) $ 6,553 $ 5,484 $ (283) $ 5,201
======= ======= ======= ======= ======= =======
INTEREST BEARING LIABILITIES:
NOW .............................. $ 98 $ (54) $ 38 $ 72 $ (7) $ 65
Money market ..................... 470 (329) 141 1,067 (13) 1,054
Savings .......................... 42 (38) 4 2 (10) (8)
Time ............................. 1,167 (113) 1,054 1,240 80 1,320
------- ------- ------- ------- ------- -------
Total interest on deposits ..... 1,777 (540) 1,237 2,381 50 2,431
Securities sold under agreement to
repurchase and borrow funds ...... $ 1,488 $ (155) $ 1,333 $ 427 $ 94 $ 521
Guaranteed preferred beneficial
interests in the Company's junior
subordinated debentures .............. 685 0 685 0 0 0
------- ------- ------- ------- ------- -------
Total interest expense ......... $ 3,950 $ (695) $ 3,255 2,808 $ 144 $ 2,952
======= ======= ======= ======= ======= =======
Change in net interest income... $ 3,073 $ 226 $ 3,298 $ 2,676 $ (427) $ 2,249
======= ======= ======= ======= ======= =======
</TABLE>
- -------------------
(1) Non-accruing loans are excluded form the average volumes used in calculating
this table.
(2) Includes loan fees of $492,000 in 1998 and $352,000 in 1997.
PROVISION FOR LOAN LOSSES
For the years ended December 31, 1998, 1997, and 1996, the loan loss
provisions recorded were in the amounts of $1,180,000, $921,000, and $515,000,
respectively. The allowance for loan losses represented 0.94%, 1.07%, and 1.00%
of portfolio loans as of December 31, 1998, 1997, and 1996, respectively. The
recorded loan loss provision has steadily increased during the past three years
as a result of management's estimate of the required allowance for its growing
loan portfolio coupled with an increase of loans written-off and increased
portfolio risk in 1998 as compared to 1997 and in 1997 as compared to 1996.
NON-INTEREST INCOME
For the years ended December 31, 1998, 1997, and 1996, non-interest
income totaled $5,245,000, $4,156,000, and $2,148,000, respectively, an increase
of approximately 26% from 1997 to 1998, and 93% from 1996 to 1997. During 1998,
service charges and fees increased to $1,878,000, mortgage banking operations
contributed $1,473,000, gain on the sale of securities contributed $410,000,
merchant fees
30
<PAGE> 33
increased to $750,000, and other income contributed $734,000. For the 1997
fiscal year, service fees on customer deposits contributed $1,812,000, mortgage
banking operations (including brokered loan fees and gains on the sale of
loans) contributed $1,198,000, fees on credit card merchant services
contributed $479,000, gains from sales of securities contributed $140,000, and
other income increased to $337,000. The increase in non-interest income in 1998
as compared to 1997 is primarily due to gain on sales of loans and securities,
mortgage servicing rights, and merchant fees. Non-interest income increased in
1997 approximately 93% from the amounts generated in 1996. The increase in
non-interest income in 1997 as compared to 1996 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.
The following table summarizes the major components of non-interest
income for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1998 1997 1996
------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Service charges and fees...................................... $1,878 $1,812 $1,192
Gain on sale of mortgage loans................................ 1,321 870 514
Gain on sale of securities.................................... 410 140 107
Broker loan fees.............................................. 152 327 33
Merchant fees................................................. 750 479 262
Other income.................................................. 734 528 40
------ ------ ------
Total.................................................... $5,245 $4,156 $2,148
====== ====== ======
</TABLE>
NON-INTEREST EXPENSE
Non-interest expense for the years ended December 31, 1998, 1997, and
1996, totaled $16,574,000, and $11,912,000, $9,856,000, respectively,
substantially all of which was general and administrative expenses. The increase
in non-interest expense in 1998 was due primarily to salaries and benefits,
occupancy costs, and the settlement of certain litigation. The increase in 1997
and 1996 was due primarily to the start-up costs associated with the opening of
new branches, hiring of additional lending staff and support staff for backroom
operations, and the related costs associated with such activities. For the years
ended December 31, 1998, 1997, and 1996, non-interest expenses were 4.06%,
3.78%, and 4.02%, respectively, of average assets. The largest component,
salaries and employee benefits, amounted to $7,015,000 or 42% in 1998,
$5,181,000 or 43% in 1997, and $4,361,000 or 44% in 1996, respectively, of total
other expenses for the years ended 1998, 1997, and 1996. Management continuously
monitors non-interest expenses and the efficiency ratio in an effort to maintain
non-interest expenses at a level within industry standards, to the extent
consistent with the Company's growth activities.
The following table summarizes the various categories of non-interest
expense for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Salaries and employee benefits............................ $ 7,015 $ 5,181 $4,361
Net occupancy and equipment expense....................... 1,953 1,627 1,184
Data processing fees...................................... 946 917 925
Litigation settlement..................................... 525 0 0
ATM and credit card fees.................................. 943 631 206
Professional fees......................................... 634 534 244
Other expenses............................................ 4,558 3,022 2,936
------- ------- ------
Total $16,574 $11,912 $9,856
======= ======= ======
</TABLE>
31
<PAGE> 34
INCOME TAX EXPENSE
For the three years ended December 31, 1998, 1997, and 1996, income
tax provisions totaling $877,000, $1,117,000, and $461,000 were recorded. The
decrease in income tax provisions in 1998 from 1997 is the result of decreased
earnings. The increase in income tax provision in 1997 from 1996 is the result
of increased earnings. The effective tax rate was 35%, 36.7% and 37% for each
of the years ended 1998, 1997, and 1996, respectively.
ASSET/LIABILITY MANAGEMENT
One of the Company'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 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 Company's ability to achieve future earnings. The
principal measure of the Company'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, a
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. Management utilizes a simulation model, complete with rate shock
scenarios, to determine the Company's sensitivity to rate changes. Using
historical data and prepayment assumptions, management places each category of
asset and liability in a time frame that it expects its assets and liabilities
to reprice.
Under asset/liability management guidelines, the Company'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 Company's cumulative one year gap at December 31, 1998 was a
negative $58,191,000 (or -20.16%, expressed as a percentage of total assets).
This represents an increase of $4,552,000 in interest sensitive liabilities over
interest sensitive assets from December 31, 1997. This increase was due
primarily to the growth in NOW and money market accounts and repurchase
agreements. Management believes its
32
<PAGE> 35
negative gap position is mitigated by its $119,438,000 in NOW, money market,
and savings deposits, 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, 1998, 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 Company'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.
INTEREST RATE SENSITIVITY ANALYSIS AS OF DECEMBER 31, 1998
<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............................... 0 0 0 0 0 0 0 0
Interest-bearing due from banks.................. 104 0 0 0 0 0 0 104
Fixed rate loans................................. 86,467 8,633 7,613 13,956 27,806 24,821 74,487 243,783
Variable rate loans.............................. 57,719 7,218 9,843 4,504 1,102 3,922 9,940 94,248
Treasuries....................................... 0 0 505 1,537 0 0 0 2,042
Governmental agencies............................ 20,881 10,984 6,010 0 0 0 0 37,875
State and municipal.............................. 0 0 0 0 0 0 1,647 1,647
Mortgage-backed securities....................... 0 0 0 0 0 0 18,780 18,780
Collateralized Mortgage Obligations.............. 0 0 0 0 0 0 9,975 9,975
Trust Preferred Securities....................... 0 0 0 0 0 781 4,108 4,889
Federal Home Loan Bank Stock..................... 1,870 0 0 0 0 0 0 1,870
------- ------ ------- ------- ------- ------- ------- -------
Total interest-earning assets............... 167,041 26,835 23,971 19,997 28,908 29,524 118,937 415,213
NOW ............................................ 32,266 0 0 0 0 0 0 32,266
Money market..................................... 72,497 0 0 0 0 0 0 72,497
Savings.......................................... 14,675 0 0 0 0 0 0 14,675
Certificates/IRS's<$100,000...................... 14,962 18,180 46,506 19,080 16,064 3,940 5,837 124,569
Certificates/IRS's>$100,000...................... 5,795 6,990 14,675 4,090 4,550 912 1,703 38,715
Securities sold under agreements to repurchase... 29,592 0 0 0 0 0 0 29,592
Guaranteed preferred beneficial
interests in the Company's junior
subordinated debentures.......................... 0 0 0 0 0 0 16,249 16,249
Federal Home Loan Bank advances.................. 8,900 0 11,000 15,000 0 0 0 34,900
------- ------ ------- ------- ------- ------- ------- -------
Total interest-bearing liabilities.......... 178,687 25,170 72,181 38,170 20,614 4,852 23,784 363,463
------- ------ ------- ------- ------- ------- ------- -------
Interest sensitivity gap......................... (11,646) 1,665 (48,210) (18,173) 8,294 24,672 95,148 51,750
Cumulative gap................................... (11,646) (9,981) (58,191) (76,364) (68,070) (43,398) 51,750
======= ====== ======= ======= ======= ======= =======
Cumulative gap ratio............................. 0.93 0.95 0.79 0.76 0.80 0.87 1.14
======= ====== ======= ======= ======= ======= =======
Cumulative gap as a percentage of total assets... (4.03)% (3.46)% (20.16)% (26.45)% (23.58)% (15.03)% 17.93%
======= ====== ======= ======= ======= ======= =======
</TABLE>
MARKET RISK
In addition to gap analysis, the ALCO utilizes a model that further
takes into account and evaluates the market risk of the Bank's financial
position. Market risk represents to risk of loss from adverse changes in market
prices and interest rates. ALCO monitors the impact of changes in the interest
rates through the use of an Economic Value of Equity ("EVE") model. EVE is the
net present value of the balance sheet cash flows. This measures a sudden
increase or decrease in interest rates in 100 basis point increments and the
effect of such change on the net present value of equity. The following table
sets froth the estimated impact on immediate changes in interest rates as of
December 31, 1998:
33
<PAGE> 36
<TABLE>
<CAPTION>
RATE CHANGE EVE % CHANGE
----------- --------- --------
<S> <C> <C>
- 400 $ 39,114 - 8.58%
- 300 38,594 - 9.79
- 200 38,582 - 9.82
- 100 40,075 - 6.33
0 42,783 0.00
+ 100 46,172 7.92
+ 200 49,481 15.66
+ 300 52,708 23.19
+ 400 55,832 30.50
</TABLE>
The preceding table indicates that at December 31, 1998, in the event
of a sudden and sustained increase in market rates the EVE would be expected to
increase and given a decrease in market rates the EVE would be expected to
decrease. Computations of forecasted efforts of interest rates are based on
numerous assumptions, such as market interest rates, loan growth and prepayment,
deposit maturities and retention and should not be relied upon as indicative of
future results. Also, the computations do not take into effect any actions that
the ALCO could undertake in response to changes in interest rates.
FINANCIAL CONDITION
LENDING ACTIVITIES
The Company offers a broad range of personal and business loans and
mortgage loan products. The Company 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 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, 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, 1998, total loans included
portfolio loans of approximately $248.8 million, net, and loans held for sale of
approximately $88.2 million. Total loans represented approximately 74% of the
Company's total assets at December 31, 1998. Management's objective is to
maintain its one-to-four family residential and construction loans at 30% of
total loans. At December 31, 1998, approximately 35%, or $118.5 million, of its
total loans were in one-to-four family residential and construction loans,
including approximately $59.1 million in mortgage loans held for sale and $29.1
million of construction loans held for sale. The following table summarizes the
composition of Bank's loan portfolio (excluding loans held for sale) by type of
loan on the dates indicated.
34
<PAGE> 37
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------- --------------- --------------- --------------- ---------------
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)....... $ 30,304 12.1% $ 54,243 25.2% $ 49,575 28.1% $ 46,032 33.1% $ 37,041 34.2%
Commercial (2)................. 159,356 63.6 112,039 52.1 82,172 46.6 61,064 43.8 46,774 43.2
Consumer and other loans (3)... 60,768 24.3 48,827 22.7 44,691 25.3 32,169 23.1 24,479 22.6
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans.................. $250,428 100.0% $215,109 100.0% $176,438 100.0% $139,265 100.0% $108,294 100.0%
===== ===== ===== ===== =====
LESS:
Allowance for loan losses...... (2,355) (2,311) (1,761) (1,609) (1,374)
Net deferred costs (fees)...... 735 607 588 430 450
-------- -------- -------- -------- --------
Total loans, net............... $248,808 $213,405 $175,265 $138,086 $107,370
======== ======== ======== ======== ========
</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.
Residential Mortgage Loans. This category of loans is
comprised of mainly 1 to 4 single family residential loans. The decrease
of this category of loans during the period covered by the table is due to
the reclassification of Murdock's mortgage portfolio as held for sale. The
loans held as portfolio loans are primarily variable rate loans.
Commercial Loans. The category of loan is comprised of
commercial and commercial real estate loans to local business involved
primarily in light manufacturing, service, retail, and wholesale
activities. The growth in these loans is attributable to the continued
economic growth of the region and the Bank's solicitation efforts in this
area.
Consumer Loans. This category of loans is comprised of
consumer and other loans that include automobile, personal lines of credit,
boat, and credit cards. The increase in these loans is primarily due to the
Bank's continued branching activities and solicitation of local automobile
dealers.
LOAN MATURITY SCHEDULE. The following table sets forth the maturities
of loans outstanding as of December 31, 1998.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
------------------------------------------------------
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.................................... $ 3,670 $ 9,117 $ 17,517 $ 30,304
Other loans collateralized by real estate................. 11,886 43,248 45,060 100,194
Commercial and consumer loans............................. 37,125 70,395 12,410 119,930
-------- -------- -------- ---------
Total loans (1)........................................... $ 52,681 $122,760 $ 74,987 $ 250,428
======== ======== ======== =========
</TABLE>
- ---------------
(1) Excluding deferred fees, allowance for loan losses, and loans held for sale.
SENSITIVITY OF LOANS TO CHANGES IN INTEREST RATES. The following table
sets forth as of December 31, 1998 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.
35
<PAGE> 38
<TABLE>
<CAPTION>
DOLLAR AMOUNT OF LOANS
----------------------
DECEMBER 31, 1998
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Type of Interest Rate:
Predetermined rate, maturity greater than one year.................................. $ 157,886
Floating or adjustable rate due after one year...................................... 39,861
---------
Total............................................................................. $ 197,747
=========
</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 35% of the Company'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 Company also maintains a commercial real estate portfolio
comprised primarily of owner-occupied commercial businesses.
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 Company'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 Company 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, projects where the borrower has received permanent
financing commitments from which the Company will be repaid, and projects where
the borrower has demonstrated to the Company's management that its business
will generate sufficient income to repay the loan. The Company primarily enters
into agreements with individuals who are familiar to Bank personnel, are
residents of the Company'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.
In addition to maintaining high quality assets, management attempts to
limit the Company's risk exposure to any one borrower or borrowers with similar
or related entities. As of December 31, 1998, the Bank has extended credit in
excess of $2 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, 1998, total loans to any particular group of customers engaged in similar
activities or having similar economic characteristics did not exceed 10% of
total loans.
36
<PAGE> 39
The Board of Directors of the Company concentrates its efforts and
resources, and that of its senior management and lending officials, on loan
review and underwriting procedures. The Company 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 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 Company'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
Company as non-accrual loans if they are past due as to maturity or payment of
principal or interest for a period of ninety days or more, 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. Loans are not
returned to accrual status until the principal and interest payments are brought
current and future payments appear certain.
Interest accrued and unpaid at the time a loan is placed in non-accrual
status is charged against interest income. During the time that 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.
Real estate acquired by the Company as a result of foreclosure or
acceptance of deeds in lieu of foreclosure is classified as foreclosed real
estate. These properties are recorded on the date acquired at the lower of fair
value less estimated selling costs or the recorded investment in the related
loan. If the fair value after deducting the estimated selling costs of the
acquired property is less than the recorded investment in the related loan, the
estimated loss is charged to the allowance for loan losses at that time. The
resulting carrying value established at the date of foreclosure becomes the new
cost basis for subsequent accounting. After foreclosure, if the fair value less
estimated selling costs of the property becomes less than its costs, the
deficiency is charged to the provision for losses on foreclosed real estate.
Costs relating to the developmental improvement of the property are capitalized,
whereas those relating to holding the property for sale are charged as an
expense.
As of December 31, 1998, the Company had 20 loans on non-accrual status
totaling $429,000, or 0.17% of total loans. As of December 31, 1998, the Company
had other real estate owned ("OREO") of approximately $1,003,000, which
consisted of six single family residences.
In addition, the Company performs ongoing reviews of its new and
existing loans to identify, evaluate, and initiate corrective action for
substandard loans. As of December 31, 1998, the Company has identified
approximately 125 loans to 86 borrowers to be monitored on its watch list and
substandard list of loans, representing aggregate borrowings of approximately
$6,480,000. Of this aggregate amount, management has assessed the maximum risk
of loss to be $1,154,000 based on management's assessment of the ability of such
borrowers to comply with their present loan repayment terms and assuming that
the
37
<PAGE> 40
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,
--------------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
NON-ACCRUAL LOANS:
Residential mortgage ................... $ 225 $ 762 $ 934 $ 130 $ 685
Commercial and commercial real estate... 71 153 133 1,017 341
Consumer ............................... 133 71 67 96 71
------ ------ ------ ------ ------
Total non-accrual loans ................ 429 986 1,134 1,243 1,097
TOTAL NON-PERFORMING LOANS (1) ................ 33 687 229 0 0
RESTRUCTURED LOANS ............................ 2,320 22 24 0 0
------ ------ ------ ------ ------
TOTAL .................................. $2,782 $1,695 $1,387 $1,243 $1,097
====== ====== ====== ====== ======
Percentage non-accrual, non-performing and
Restructured loans to total loans ........ 1.11% 0.8% 0.8% 0.9% 1.0%
</TABLE>
- ------------
(1) Accruing loans which are contractually past due 90 days or more as to
principal or interest.
ALLOWANCE FOR LOAN LOSSES
In originating loans, the Company recognizes that loan 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 Company's historical loan loss experience, evaluation of
economic conditions, and regular reviews of delinquencies and loan portfolio
quality.
Management continues to actively monitor the Company'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 loan losses, future adjustments may be necessary if
economic conditions differ from the economic conditions in the assumptions used
in making the initial determinations.
The following table sets forth an analysis of the Company's allowance
for loan losses for the periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total loans at end of period (1) ....................... $ 250,428 $ 215,109 $ 176,438 $ 139,265 $ 108,294
========= ========= ========= ========= =========
Allowance at beginning of period ....................... $ 2,311 $ 1,761 $ 1,609 $ 1,374 1,021
--------- --------- --------- --------- ---------
Loans charged-off during the period .................... (1,258) (471) (412) (534) (165)
Recoveries of loans previously charged-off ............. 122 100 49 67 57
--------- --------- --------- --------- ---------
Net loans charged-off during the period ................ (1,136) (371) (363) (467) (108)
--------- --------- --------- --------- ---------
Provisions charged to income ........................... 1,180 921 515 702 291
--------- --------- --------- --------- ---------
Allowance at end of period ............................. $ 2,355 $ 2,311 $ 1,761 1,609 1,374
========= ========= ========= ========= =========
Ratio of net charge-offs to average loans outstanding... 0.38% 0.21% 0.23% 0.37% 0.14%
========= ========= ========= ========= =========
Allowance as a percentage of total loans ............... 0.94% 1.07% 1.00% 1.16% 1.27%
========= ========= ========= ========= =========
Allowance as a percentage of non-performing
And non-accrual loans .............................. 509.7% 138.1% 129.2% 129.4% 125.2%
</TABLE>
- ---------
(1) Excludes loans held for sale.
38
<PAGE> 41
The following table sets forth a breakdown of the allowance for loan
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,
---------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------- --------------- --------------- -------------- ---------------
% 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)... $ 310 12.1% $ 773 25.2% $ 615 28.1 $ 468 33.1% $ 463 34.2%
Commercial and commercial
real estate .......... 914 63.6 861 52.1 773 46.6 630 43.8 512 43.2
Consumer loans ............ 639 24.3 641 22.7 342 25.3 233 23.1 251 22.6
Unallocated ............... 492 0.0 36 0.0 31 0.0 278 0.0 148 0.0
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total allowance for
loan losses .......... $2,355 100.0% $2,311 100.0% $1,761 100.0% $1,609 100.0% $1,374 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
- ---------------------
(1) No allowance has been allocated to real estate construction since the
amount such loans held in the Company's loan portfolio at the periods
indicated was not material.
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,
--------------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Impaired loans............................ $ 556,000 $ 246,000 $ 331,400
Other..................................... 1,799,000 2,065,000 1,429,600
----------- ----------- -----------
$ 2,355,000 $ 2,311,000 $ 1,761,000
=========== =========== ===========
</TABLE>
INVESTMENT ACTIVITIES
At December 31, 1998, 1997 and 1996, the Company's investment
portfolio totaled $77,078,000, $68,664,000, and $43,509,000, respectively. The
investment portfolio consists of U.S. Treasury and federal agency securities,
trust preferred securities, municipal bonds, and FHLB stock. Maturities range
from three months to fifteen years with a portfolio average maturity of
approximately 5 years.
Funds generated by the Bank as a result of increases in deposits or
decreases in loans which are not immediately used by the Bank are invested in
securities held in its investment portfolio. The investment portfolio is used as
a source of liquidity for the Bank. The investment portfolio is structured so
that it provides an ongoing source of funds for meeting loan and deposit demands
and for reinvestment opportunities to take advantage of changes in interest
rates.
The following table summarizes the Bank's investment portfolio as of
the dates indicated.
39
<PAGE> 42
INVESTMENT SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------
1998 1997 1996
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
AVAILABLE FOR SALE (1):
U.S. Treasury securities .......... $ 2,042 $ 4,039 $ 7,425
U.S. Government Agencies .......... 37,875 55,847 22,080
State and municipal ............... 1,647 1,164 1,034
Trust Preferred Securities ........ 4,889 0 0
------- ------- -------
Total debt securities ........... 46,453 61,050 30,539
FHLB stock (restricted) ........... 1,870 1,709 1,075
Mortgage-backed securities ........ 28,755 5,905 11,895
------- ------- -------
Total available for sale (2)..... $77,078 $68,664 $43,509
======= ======= =======
</TABLE>
- -------------------
(1) Carried at estimated market value. The Company does not have any securities
being held to maturity.
(2) Cost of such securities (dollars in thousands) was $77,309 as of December
31, 1998, $68,438 as of December 31, 1997, and $43,664 as of December 31,
1996.
The following table summarizes the Company's securities (excluding the
restricted FHLB Stock and mortgage-backed securities) by maturity and weighted
average yields at December 31, 1998. 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
------ ----- ------ ----- ------- ----- ------- ----- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AT DECEMBER 31, 1998:
U.S. Treasury securities..... $ 505 5.30% $1,014 5.34% $ 523 7.46% $ 0 0.00% $ 2,042 5.87%
U.S. Government agencies..... 0 0.00 2,015 6.54 11,030 6.75 24,830 6.64 37,875 6.67
State and municipals......... 0 0.00 0 0.00 0 0.00 1,647 6.69 1,647 6.69
Trust preferred securities... 0 0.00 0 0.00 0 0.00 4,889 8.67 4,889 8.67
----- ---- ------ ---- ------- ---- ------- ---- ------- ----
$ 505 5.30% $3,029 6.13% $11,553 6.78% $31,366 6.71% $46,453 6.69%
===== ==== ====== ==== ======= ==== ======= ==== ======= ====
</TABLE>
DEPOSIT ACTIVITIES AND OTHER SOURCE OF FUNDS
GENERAL. Deposit accounts are the primary source of funds of the
Company for use in lending and other investment purposes. In addition to
deposits, the Company 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 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
Company'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
$344,845,000, $302,746,000, and
40
<PAGE> 43
$232,433,000 at December 31, 1998, 1997, and 1996 respectively. The
introduction of new products and the continued focus on quality customer
service have contributed to strong deposit growth. The Company continues to
develop consumer and commercial deposit relationships through referrals and
additional contacts within its market area. As of December 31, 1998, 1997, and
1996, jumbo certificates accounted for $38,716,000, $36,170,000, and
$24,702,000, respectively, of the Company's deposits. The Company 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 Company 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 Company
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
Company's market area and substantially all were not jumbo products, the
regulators required the Company 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 Company 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.
AVERAGE DEPOSIT 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,
1998 1997 1996
--------------------------- ---------------------------- --------------------------
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...... $ 56,275 0.00% 17 $ 38,753 0.00% 14 $ 25,787 0.00% 12
Interest checking and
Money Market............ 97,280 3.48% 30 82,367 3.90% 30 55,853 3.74% 26
Savings.................... 14,504 2.12% 4 12,773 2.38% 5 12,682 2.46% 6
Certificates of deposit.... 157,172 6.01% 49 137,986 6.08% 51 117,407 6.03% 56
-------- --- -------- --- -------- ---
Total................. $325,231 100 $271,879 100 $211,729 100
======== === ======== === ======== ===
</TABLE>
CERTIFICATES OF DEPOSIT. At December 31, 1998, certificates of deposit
represented approximately 49% of the Company's total deposits, as compared to
51% of total deposits at December 31, 1997, and 56% at December 31, 1996. The
Company 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 Company's depositors are
residents, either full or part time, in its primary market area.
The following table summarizes the amount of the Company's certificates
of deposit of $100,000 or more by time remaining until maturity at December 31,
1998 and December 31, 1997.
<TABLE>
<CAPTION>
AT DECEMBER 31, AT DECEMBER 31,
----------------- -----------------
1998 1997
----------------- -----------------
MATURITY PERIOD (DOLLARS IN THOUSANDS)
<S> <C> <C>
Less than three months.................................................. $ 5,795 $ 6,486
Over three months through six months.................................... 6,990 5,197
Over six months through twelve months................................... 14,675 10,208
Over twelve months...................................................... 11,256 14,279
-------- -------
Totals............................................................. $ 38,716 $36,170
======== =======
</TABLE>
The following table indicates the scheduled maturities of time deposits
of the Company as of December 31, 1998 and December 31, 1997.
<TABLE>
<CAPTION>
AT DECEMBER 31, AT DECEMBER 31,
----------------- -----------------
1998 1997
----------------- -----------------
MATURITY PERIOD (DOLLARS IN THOUSANDS)
<S> <C> <C>
Due within one year..................................................... $ 107,108 $ 86,347
Due after one through two years......................................... 23,170 34,662
Due after two through three years....................................... 20,614 13,487
Due after three through four years...................................... 4,852 19,389
Due after four years.................................................... 7,540 5,095
--------- --------
$ 163,284 $158,980
========= ========
</TABLE>
41
<PAGE> 44
DEPOSIT FLOWS. The following table sets forth the deposit flows of the
Company during the periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1998 1997 1996
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net increase before interest credited....................... $28,961 $58,717 $35,966
Net credited................................................ 13,138 11,596 9,740
------- ------- -------
Net deposit increase .................................... $42,099 $70,313 $45,706
======= ======= =======
</TABLE>
BORROWINGS. The Company 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 Company has the ability to seek a
portion of the needed funds through loans (advances) from the FHLB of Atlanta
where the Company, as of December 31, 1998, had a $50 million line of credit. As
of December 31, 1998, $34.9 million has been borrowed on the line and $15.1
million remained available for future use. As of March 26, 1999, the line of
credit has been increased to $75 million, of which $45.6 million have been
borrowed.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is defined as the ability of the Company 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, and the sale of
investments. During 1998, the Bank received $42.1 million from deposit growth,
$50.5 million from the sale of investments, and $50.1 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, 1998, the Bank had
outstanding borrowings of approximately $34.9 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 the issuance of certain debt instruments.
In this regard, on May 21, 1998, the Company formed ABI Capital Trust, a
Delaware statutory trust and a wholly-owned subsidiary of the Company (the
"Trust"), for the purpose of (i) issuing and selling in common securities to
the Company and its trust preferred securities to the public, and (ii) using
the proceeds therefrom to purchase 8.5% Deferrable Interest Debentures ("Junior
Subordinated Debentures") from the Company. Accordingly, the Junior
Subordinated Debentures were to be, and are, the sole asset of the Trust. In
July 1998 and August 1998, the Trust sold $16,249,420 of its trust preferred
securities to the public and $502,570 of its common securities to the Company.
The Trust
42
<PAGE> 45
used the proceeds to purchase $16,751,990 Junior Subordinated Debentures issued
by the Company. Of the net proceeds of approximately $15.4 million, the Company
has invested $8.0 million in the Bank as an additional capital contribution,
and repaid other outstanding indebtedness totaling approximately $3.0 million.
The balance of the funds will be used for general corporate purposes, including
but not limited to (a) making additional capital contributions to the Bank, (b)
making additional capital contributions to the Finance Company, (c) investing
in other business opportunities as may present themselves from time to time,
and (d) working capital. Following the offer and sale of the Trust's
securities, the Company owned and currently holds all of the outstanding common
securities of the Trust, its only voting securities, and as a result the Trust
is a subsidiary of the Company.
At December 31, 1998, shareholders' equity was approximately
$27,427,000, or 6.03% of total assets, as compared to $26,079,000 at December
31, 1997, or 7.37% of total assets. At December 31, 1998 and December 31, 1997,
respectively, the Company's Tier I leverage ratio was 8.1% and 7.28%, the Tier I
risk-based capital ratio was 11.4% and 9.81% and the total risk-based capital
ratio was 12% and 10.48%, all in excess of FRB guidelines for a "well
capitalized" bank holding company.
At December 31, 1998 and December 31, 1997, the liquidity ratio of the
Company was 42.53%, and 35.79%, 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. 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.
RETURN ON EQUITY AND ASSETS
The following table sets forth certain selected performance ratios of
the Company for the periods indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------
1998 1997 1996
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Return on average assets.................................... 0.40% 0.61% 0.32%
Return on average equity.................................... 6.02% 9.03% 3.63%
Dividend payout ratios...................................... (1) (1) (1)
Average equity to average assets............................ 6.63% 6.79% 8.76%
</TABLE>
- ----------------
(1) The Company has not paid any dividends since inception.
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
43
<PAGE> 46
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.
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
Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities ("SFAS 133")." This statement requires all derivatives to
be recorded on the balance sheet at fair value and establishes standard
accounting methodologies for hedging activities. The standard will result in the
recognition of offsetting changes in value or cash flows of both the hedge and
the hedged item in earnings or comprehensive income in the same period. The
statement is effective for the Company's fiscal year ending December 31, 2000.
Because the Company does not currently hold any derivative instruments, the
adoption of this statement will have no impact on the financial statements.
FASB also has issued Statement of Financial Accounting Standards No.
134, "Accounting for Mortgage-Backed Securities retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Entity
("SFAS 134")". This statement amends SFAS No. 65 allowing mortgage-backed
securities or other retained interests arising from the securitization of
mortgage loans to be classified based on the mortgage banking entities' ability
and intent to sell or hold those securities. Previously these securities had to
be held within a trading account. This statement is effective for the Company's
fiscal year ending December 31, 1999. The adoption of this standard is not
expected to have a significant impact on the financial statements.
YEAR 2000 COMPLIANCE
YEAR 2000 ISSUES AND STATE OF READINESS. The Company is aware of the
issues associated with existing computer-controlled systems properly
recognizing and processing information relating to dates in and after the Year
2000. Systems that cannot adequately process dates beyond the year 1999 could
generate erroneous data or cause a system to fail. Because the Year 2000 issue
poses an unprecedented enterprise
44
<PAGE> 47
wide challenge for every organization, the Company formed a Year 2000 Committee
("Y2K Committee"). The Y2K Committee developed a Year 2000 Project Plan ("Y2K
Plan") which addresses both internal and external technology. The data
processing systems and software include those developed and maintained by the
Company's third-party data processing vendors and purchased software which is
run on in-house computer networks.
In 1997 the Company, through the Y2K Committee, initiated a review and
assessment of all hardware and software to confirm that it will function
properly in the Year 2000. Each system was evaluated for its degree of
significance to the operations of the Company and detailed test plans were
developed for those systems determined to be of a critical nature.
Third-party data processing vendors (primarily M&I Data Services, Inc.
for its general ledger, deposits, and portfolio loans; Essex Home Mortgage
Servicing Corp. for its loans held for sale; Compass Bank for its investment
portfolio, and Contour, Inc. for its mortgage loan processing systems) have
been contacted and the Company has obtained verification from these vendors
that these systems will function properly in the Year 2000.
With respect to purchased software and electronic hardware devices
currently in use, the Company has inventoried these items to determine which of
these devices rely on a valid date in order to function. The Company has
contacted those vendors identified through this inventory, who have indicated
that their hardware and software is or will be Year 2000 compliant in time
frames that meet regulatory requirements.
Non-information technology embedded systems consisting primarily of
security systems, HVAC controls and elevators have also been reviewed. These
systems were found to be generally year 2000 compliant.
The Company also has relationships with suppliers and other companies.
The Company has contacted key suppliers of goods or services regarding their
Year 2000 readiness. They are in the process of reviewing their systems. The
Company will continue to monitor these suppliers as to their Year 2000
readiness.
RISKS ASSOCIATED WITH YEAR 2000 AND CONTINGENCY PLAN. Based on
information currently available to the Company, the Company believes that the
most reasonably likely worst case Year 2000 scenario with respect to the
Company relate to the potential failure of third party data processing vendors
to become Year 2000 compliant. The inability of these third party data
processing vendors to complete their Year 2000 remediation processes in a
timely fashion could result in delays in processing daily transactions and
could result in a material and adverse effect on the Company's results of
operations and financial condition. The Company has developed a contingency
plan to address potential failures in these systems. The Company believes that
modifications to existing systems, conversion to new systems, and vendor
compliance upgrades will be resolved on a timely basis.
EXPENSES RELATED TO YEAR 2000 COMPLIANCE. The Company's current
assessment of cost associated with the completion of its Y2K Plan is not
considered by management to be material to the Company's future operations.
Through December 31, 1998, the Company has expended $25,000 on its Y2K Plan and
anticipates additional costs of approximately $155,000, to be incurred in 1999.
The cost of completing the Company's Y2K Plan and the dates on which all
procedures will be completed are based on management's best estimates. These
estimates were derived utilizing various assumptions about future events,
including the continued availability of resources, external technology,
modification plans and other significant factors. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those currently anticipated.
45
<PAGE> 48
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
See Item 7 of this Form 10-K, "Management's Discussions and Analysis of
Financial Conditions and Results of Operations - Market Risk" for quantitative
and qualitative disclosures about market risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements are contained on pages F-1 through
F-31 of this Report:
Report of Independent Certified Public Accountants;
Consolidated Balance Sheets - December 31, 1998 and 1997;
Consolidated Statements of Income - Years ended December 31, 1998, 1997
and 1996
Consolidated Statements of Shareholders' Equity - Years ended December
31, 1998, 1997 and 1996;
Consolidated Statements of Cash Flows - Years ended December 31, 1998,
1997 and 1996;
Notes to Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by Item 10 of Form 10-K is incorporated herein by
reference to the Registrant's definitive Proxy Statement for the 1999 Annual
Meeting of Shareholders which will be filed with the Securities and Exchange
Commission no later than 120 days after the close of the Registrant's fiscal
year.
ITEM 11. EXECUTIVE COMPENSATION
Information required by Item 11 of Form 10-K is incorporated herein by
reference to the Registrant's definitive Proxy Statement for the 1999 Annual
Meeting of Shareholders which will be filed with the Securities and Exchange
Commission no later than 120 days after the close of the Registrant's fiscal
year.
46
<PAGE> 49
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by Item 12 of Form 10-K is incorporated herein by
reference to the Registrant's definitive Proxy Statement for the 1999 Annual
Meeting of Shareholders which will be filed with the Securities and Exchange
Commission no later than 120 days after the close of the Registrant's fiscal
year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by Item 13 of Form 10-K is incorporated herein by
reference to the Registrant's definitive Proxy Statement for the 1999 Annual
Meeting of Shareholders which will be filed with the Securities and Exchange
Commission no later than 120 days after the close of the Registrant's fiscal
year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON
FORM 8-K
(a) EXHIBITS
3.1 -- Amended and Restated Articles of Incorporation of the
Company, incorporated herein by reference to Exhibit 3.1 to
the Company's Form 10-KSB for the fiscal year ended December
31, 1997 previously filed with the Commission.
3.2 -- Amended and Restated Bylaws, incorporated herein by reference
to Exhibit 3.2 to the Company's Registration Statement on Form
S-4 (Registration No. 333-45401) previously filed with the
Commission.
4.1 -- See Exhibits 3.1 and 3.2 for provisions of the Amended and
Restated Articles of Incorporation and the Amended and
Restated Bylaws of the Company defining the rights of holders
of the Company's Common Shares.
10.1 -- Employment Agreement, dated December 1, 1995, by and
between the Bank and Gerald L. Anthony, incorporated herein by
reference to Exhibit 10.1 to the Company's Registration
Statement on Form SB-2 (Registration No. 33-99972) previously
filed with the Commission.
10.2 -- Employment Agreement, dated June 30, 1996, by and between
the Bank and Philip W. Coon, incorporated herein by reference
to Exhibit 10.2 to the Company's Registration Statement on
Form SB-2 (Registration No. 33-99972) previously filed with
the Commission.
*10.3 -- Addendum, dated May 14, 1998, to Employment Agreement by and
between the Bank and Philip W. Coon.
10.4 -- Employment Agreement, dated June 30, 1996, by and between the
Bank and David R. Mady, incorporated herein by reference to
Exhibit 10.3 to the Company's Registration Statement on Form
SB-2 (Registration No. 33-99972) previously filed with the
Commission.
47
<PAGE> 50
*10.5 -- Addendum, dated May 14, 1998, to Employment Agreement by and
between the Bank and David R. Mady.
10.6 -- Employment Agreement, dated January 1, 1996, by and between
the Bank and John S. Nash, incorporated herein by reference to
Exhibit 10.5 to the Company's Registration Statement on Form
SB-2 (Registration No. 33-99972) previously filed with the
Commission.
10.7 -- Employment Agreement, dated January 1, 1996, by and between
the Bank and Michael Lewis, incorporated herein by reference
to Exhibit 10.6 to the Company's Registration Statement on
Form SB-2 (Registration No. 33-99972) previously filed with
the Commission.
10.8 -- Employment Agreement, dated January 22, 1997, by and between
the Bank and Stuart M. Gregory, incorporated herein by
reference to Exhibit 10.7 to the Company's Form 10-KSB for the
fiscal year ended December 31, 1997.
10.9 -- Employment Agreement, dated February 1, 1998, by and between
the Bank and Brian M. Watterson, incorporated herein by
reference to Exhibit 10.1 to the Company's Form 10-Q for the
quarter ended March 31, 1998.
10.10 -- Data Processing Agreement, dated April 1, 1995, by and
between the Bank and M & I Data Services, Inc., incorporated
herein by reference to Exhibit 10.5 to the Company's
Registration Statement on Form SB-2 (Registration No.
33-99972) previously filed with the Commission.
10.11 -- Mortgage Loan Subservice Agreement between Dovenmuehle
Mortgage, Inc. and American Bank of Bradenton, dated May 17,
1994, incorporated herein by reference to Exhibit 10.8 to the
Company's Registration Statement on Form SB-2 (Registration
No. 33-99972) previously filed with the Commission.
10.12 -- American Bancshares, Inc. and American Bank of Bradenton
Incentive Stock Option Plan of 1996, dated May 28, 1996, and
Form of Incentive Stock Option Agreement, incorporated herein
by reference to Exhibit 10.9 to the Company's Form 10-KSB for
the fiscal year ended December 31, 1996 previously filed with
the Commission.
10.13 -- American Bancshares, Inc. 1997 Nonqualified Share Option
Plan for Non-Employee Directors, dated March 18, 1997, and
Form of Nonqualified Share Option Agreement, incorporated
herein by reference to Exhibit 10.11 to the Company's Form
10-KSB for the fiscal year ended December 31, 1997.
10.14 -- Assignment of Lease and Consent to Assignment, dated
February 15, 1998, by and between the Finance Company, G.J.M.
Properties, Inc., and First Enterprise Acceptance Corporation,
and Lease Agreement assumed thereby, incorporated herein by
reference to Exhibit 10.13 to the Company's Form 10-KSB for
the fiscal year ended December 31, 1997.
48
<PAGE> 51
*21.1 -- Subsidiaries of the Company.
*27.1 -- Financial Data Schedule (for SEC use only).
*99.1 -- Report of Independent Auditors Hacker, Johnson, Cohen &
Grieb, P.A. for the 1997 and 1996 Audits of Murdock Florida
Bank
- -----------------------
* Exhibit filed herewith.
(b) FINANCIAL STATEMENT SCHEDULES
See Item 8 of this Form 10-K, "Financial Statements and
Supplementary Data" for a description of the financial statements and schedules
filed with the Annual Report on Form 10-K.
(c) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the last quarter of the
fiscal year ended December 31, 1998.
With the exception of the information expressly incorporated
herein by reference, the Company's proxy statement for the 1999 Annual Meeting
of Shareholders is not to be deemed filed as part of this Annual Report on Form
10-K.
49
<PAGE> 52
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMERICAN BANCSHARES, INC.
Date: March 29, 1999 By:/s/ Gerald L. Anthony
-------------------------------------
Gerald L. Anthony
President and Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ J. Gary Russ Chairman of the Board March 29, 1999
- ----------------------------------------
J. Gary Russ
/s/ Gerald L. Anthony President, Chief Executive Officer and March 29, 1999
- ---------------------------------------- Director (Principal Executive Officer)
Gerald L. Anthony
/s/ Ronald L. Larson Director March 29, 1999
- ----------------------------------------
Ronald L. Larson
/s/ Timothy I. Miller Director March 29, 1999
- ----------------------------------------
Timothy I. Miller
/s/ Dan E. Molter Director March 29, 1999
- ----------------------------------------
Dan E. Molter
/s/ Kirk D. Moudy Director March 29, 1999
- ----------------------------------------
Kirk D. Moudy
/s/ Lindell W. Orr Director March 29, 1999
- ----------------------------------------
Lindell W. Orr
/s/ Lynn B. Powell, III Director March 29, 1999
- ----------------------------------------
Lynn B. Powell, III
/s/ Walter L. Presha Director March 29, 1999
- ----------------------------------------
Walter L. Presha
/s/ R. Jay Taylor Director March 29, 1999
- ----------------------------------------
R. Jay Taylor
/s/ Edward D. Wyke Director March 29, 1999
- ----------------------------------------
Edward D. Wyke
/s/ Brian M. Watterson Chief Financial Officer March 29, 1999
- ---------------------------------------- (Principal Financial Officer)
Brian M. Watterson
</TABLE>
<PAGE> 53
AMERICAN BANCSHARES, INC. AND
SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
WITH REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
<PAGE> 54
Table of Contents
<TABLE>
<CAPTION>
Pages
<S> <C>
Report of Independent Certified Public Accountants F-1
Consolidated Financial Statements:
Consolidated Balance Sheets F-2
Consolidated Statements of Income F-3
Consolidated Statements of Shareholders' Equity F-4
and Comprehensive Income
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6 - 30
</TABLE>
<PAGE> 55
Report of Independent Certified Public Accountants
To the Board of Directors and Shareholders of
American Bancshares, Inc. and Subsidiaries
Bradenton, Florida
In our opinion, based upon our audits and the report of the other auditors, the
accompanying consolidated balance sheets and the related consolidated
statements of income, shareholders' equity and comprehensive income and cash
flows present fairly, in all material respects, the financial position of
American Bancshares, Inc. and its subsidiaries (the "Company") at December 31,
1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. 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 did not audit the financial statements of Murdock Florida
Bank which statements reflect total assets of 18% and 23% at December 31,
1997 and 1996, respectively, and net income of 15% and 13% for the years
ended December 31, 1997 and 1996, respectively. Those statements were audited
by other auditors whose report thereon has been furnished to us, and our
opinion expressed herein, insofar as it relates to the amounts included for
Murdock Florida Bank, is based solely on the report of the other auditors. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits and the report of other auditors provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
Tampa, Florida
February 13, 1999
F-1
<PAGE> 56
American Bancshares, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 1998 and 1997 (in thousands except share amounts)
<TABLE>
<CAPTION>
ASSETS 1998 1997
<S> <C> <C>
Cash and due from banks $ 20,319 $ 13,276
Federal funds sold 0 5,120
Loans held for sale 88,158 39,588
Investment securities available for sale (at aggregate fair value) 77,078 68,664
Loans receivable (net of allowance for loan losses and deferred loan
fees/costs of $1,620 in 1998 and $1,705 in 1997) 248,808 213,405
Premises and equipment, net 12,894 9,161
Other assets 7,907 4,687
--------- --------
Total assets $ 455,164 $353,901
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits $ 344,845 $302,746
Securities sold under agreements to repurchase 29,592 17,528
Federal Home Loan Bank advances 34,900 5,000
Note payable 0 500
Guaranteed Preferred Beneficial Interests in the
Company's Junior Subordinated Debentures 16,249 0
Other liabilities 2,151 2,048
--------- --------
Total liabilities 427,737 327,822
--------- --------
COMMITMENTS AND CONTINGENCIES (Note 14)
SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Common stock - $1.175 par value; 10,000,000 shares authorized;
4,994,984 and 4,994,484 shares issued and outstanding at 5,870 5,870
December 31, 1998 and 1997, respectively
Additional paid-in capital 15,551 15,548
Accumulated other comprehensive income, net of tax of $(87) and $86
at December 31, 1998 and 1997, respectively (143) 139
Retained earnings 6,149 4,522
--------- --------
Total shareholders' equity 27,427 26,079
--------- --------
Total liabilities and shareholders' equity $ 455,164 $353,901
========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE> 57
American Bancshares, Inc. and Subsidiaries
Consolidated Statements of Income
for the years ended December 31, 1998, 1997 and 1996
(in thousands except share amounts)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 26,250 $ 20,101 $ 16,150
Interest on federal funds sold 265 534 336
Interest on investment securities 4,670 3,996 2,945
---------- ---------- ----------
Total interest income 31,185 24,631 19,431
---------- ---------- ----------
Interest expense:
Deposits 13,142 11,905 9,475
Borrowings 3,030 1,012 490
---------- ---------- ----------
Total interest expense 16,172 12,917 9,965
---------- ---------- ----------
Net interest income 15,013 11,714 9,466
Provision for loan losses 1,180 921 515
---------- ---------- ----------
Net interest income after provision for loan losses 13,833 10,793 8,951
---------- ---------- ----------
Other income 5,245 4,156 2,148
Other expenses 16,574 11,912 9,856
---------- ---------- ----------
Income before income tax provision 2,504 3,037 1,243
Income tax provision 877 1,117 461
---------- ---------- ----------
Net income $ 1,627 $ 1,920 $ 782
========== ========== ==========
Weighted average basic shares outstanding 4,994,765 4,988,318 4,637,565
========== ========== ==========
Weighted average diluted shares outstanding 5,019,291 5,019,484 4,692,093
========== ========== ==========
Earnings per share:
Basic $ 0.33 $ 0.38 $ 0.17
========== ========== ==========
Diluted $ 0.32 $ 0.38 $ 0.17
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 58
American Bancshares, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity and Comprehensive Income
for the years ended December 31, 1998, 1997 and 1996 (in thousands
except share amounts)
<TABLE>
<CAPTION>
Common Stock
--------------------------------------
Comprehensive Authorized Outstanding Additional Retained
Income Shares Shares Par Value Paid-In Capital Earnings
------------- ---------- ------------ --------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 10,000,000 3,325,094 $3,907 $ 8,725 $ 1,820
Exercise of warrants 0 163,695 192 790 0
Issuance of stock 0 1,436,979 1,689 5,689 0
Net income $ 782 0 0 0 0 782
Change in net unrealized gain on
investment securities available (270) 0 0 0 0 0
for sale
-------
Comprehensive income $ 512 0 0 0 0 0
======= ---------- --------- ------ ------- -------
Balance, December 31, 1996 10,000,000 4,925,768 5,788 15,204 2,602
Exercise of warrants 0 61,597 73 297 0
Issuance of stock 0 7,119 9 47 0
Net income $ 1,920 0 0 0 0 1,920
Change in net unrealized loss on
investment securities available
for sale 230 0 0 0 0 0
-------
Comprehensive income $ 2,150 0 0 0 0 0
======= ---------- --------- ------ ------- -------
Balance, December 31, 1997 10,000,000 4,994,484 5,870 15,548 4,522
Exercise of stock option 0 500 0 3 0
Net income $ 1,627 0 0 0 0 1,627
Change in net unrealized gain on
investment securities available
for sale
(282) 0 0 0 0 0
-------
Comprehensive income $ 1,345 0 0 0 0 0
======= ---------- --------- ------ ------- -------
Balance, December 31, 1998 10,000,000 4,994,984 $5,870 $15,551 $ 6,149
========== ========= ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
Accumulated Other
Comprehensive
Income,Net Total
------------------ --------
<S> <C> <C>
Balance, January 1, 1996 $ 179 $ 14,631
Exercise of warrants 0 982
Issuance of stock 0 7,378
Net income 0 782
Change in net unrealized gain on
investment securities available (270) (270)
for sale
Comprehensive income 0 0
----- --------
Balance, December 31, 1996 (91) 23,503
Exercise of warrants 0 370
Issuance of stock 0 56
Net income 0 1,920
Change in net unrealized loss on
investment securities available
for sale 230 230
Comprehensive income 0 0
----- --------
Balance, December 31, 1997 139 26,079
Exercise of stock option 0 3
Net income 0 1,627
Change in net unrealized gain on
investment securities available
for sale
(282) (282)
Comprehensive income 0 0
----- --------
Balance, December 31, 1998 $(143) $ 27,427
===== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 59
American Bancshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
for the years ended December 31, 1998, 1997 and 1996 (in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,627 $ 1,920 $ 782
--------- -------- --------
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Deferred taxes (177) (199) (420)
Depreciation 964 718 486
Amortization of investment securities 6 18 120
Provision for loan losses 1,180 921 515
Net gain on sale of investment securities available for sale (410) (140) (107)
Gain on sale of loans (1,321) (678) (514)
(Gain) loss on sale of other real estate owned 0 (13) 336
Origination of loans held for sale, net of repayments (116,184) (58,452) (38,628)
Proceeds from sales of loans held for sale 68,179 44,113 38,159
Increase in deferred loan costs 0 23 150
Increase in other liabilities 103 767 71
(Increase) decrease in other assets (2,036) (962) 682
--------- -------- --------
Total adjustments (49,696) (13,884) 850
--------- -------- --------
Net cash (used in) provided by operating activities (48,069) (11,964) 1,632
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Net loans to customers (35,949) (43,153) (36,812)
Purchases of bank premises and equipment (4,697) (2,744) (3,332)
Proceeds from sales of available for sale investment securities 50,445 17,998 33,501
Proceeds from maturities of available for sale investment securities 50,779 14,178 12,338
Purchases of available for sale investment securities (109,516) (56,936) (49,449)
Recoveries on loans charged off 122 101 46
--------- -------- --------
Net cash used in investing activities (48,816) (70,556) (43,708)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, NOW, money market and savings
accounts 37,795 36,469 28,231
Net increase in time deposits 4,304 33,844 17,475
Net increase in securities sold under agreements to repurchase 12,064 7,415 546
Net proceeds (repayments) from advances and from borrowings 29,400 (800) (200)
Payments for debt issue costs (1,007) 0 0
Proceeds from issuance of Guaranteed Preferred Beneficial
Interests in the Company's Junior Subordinated Debentures 16,249 0 0
Proceeds from stock sale 3 425 8,359
--------- -------- --------
Net cash provided by financing activities 98,808 77,353 54,411
--------- -------- --------
Net increase (decrease) in cash and cash equivalents 1,923 (5,167) 12,335
Cash and cash equivalents at beginning of year 18,396 23,563 11,228
--------- -------- --------
Cash and cash equivalents at end of year $ 20,319 $ 18,396 $ 23,563
========= ======== ========
DISCLOSURES
Interest paid $ 15,934 $ 12,711 $ 9,787
========= ======== ========
Income taxes paid $ 1,330 $ 1,415 $ 542
========= ======== ========
Reclassification of loans to foreclosed real estate $ 1,002 $ 160 $ 518
========= ======== ========
Loans originated for sale of foreclosed real estate $ 0 $ 95 $ 570
========= ======== ========
Unrealized appreciation (depreciation) on investment securities $ (282) $ 230 $ (270)
========= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 60
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 three wholly owned
subsidiaries, which include a banking subsidiary, American Bank (Bank), a
state-chartered bank; Freedom Finance Company (Finance), a Florida
Corporation; and ABI Capital Trust (ABICT), a Delaware Statutory trust. The
Bank is a general commercial bank with all the rights, powers, and
privileges granted and conferred by the Florida Banking Code. Finance is a
full service consumer financing company incorporated in 1997. ABICT is a
trust formed in 1998 existing for the exclusive purpose of issuing and
selling common securities and preferred securities (together trust
securities) and investing the proceeds from the sale of the trust
securities in junior subordinated debentures issued by the Holding Company.
The sole assets of the ABICT are the Junior Subordinated Debentures of the
Holding Company.
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:
Basis of Presentation - The consolidated financial statements give
retroactive effect to the merger with Murdock Florida Bank, American Bank
of Bradenton, and the Holding Company. The merger was consummated on March
23, 1998 and resulted in the Holding Company issuing a total of 924,024
shares of common stock in exchange for all of the outstanding stock of
Murdock Florida Bank. The transaction has been accounted for on a
pooling-of-interests basis, and the financial statements are presented as
if the merger had been consummated for the period presented. As required
by generally accepted accounting principles, the consolidated financial
statements became the historical consolidated financial statements upon
issuance of the Holding Company's consolidated financial statements for
the quarter ended March 31, 1998. The Company's combined net interest
income and continuing net income through the date of acquisition for the
periods ended December 31, 1998, 1997 and 1996, respectively is as
follows:
<TABLE>
<CAPTION>
(amounts in thousands)
--------------------------------
Net Interest Income
--------------------------------
1998 1997 1996
------- ------- ------
<S> <C> <C> <C>
American Bancshares, Inc. $12,724 $ 9,271 $7,137
Murdock Florida Bank 2,289 2,443 2,329
------- ------- ------
Combined total $15,013 $11,714 $9,466
======= ======= ======
</TABLE>
F-6
<PAGE> 61
Notes To Consolidated Financial Statements, Continued
2. Summary of Significant Accounting Policies, continued:
<TABLE>
<CAPTION>
(amounts in thousands)
-----------------------------
Net Income
-----------------------------
1998 1997 1996
------ ------ -----
<S> <C> <C> <C>
American Bancshares, Inc. $1,268 $1,631 $ 883
Murdock Florida Bank 359 289 (101)
------ ------ -----
Combined total $1,627 $1,920 $ 782
====== ====== =====
</TABLE>
Principles of Consolidation - The consolidated financial statements include
the accounts of the Holding Company and its wholly owned subsidiaries,
American Bank of Bradenton, Freedom Finance Company, and ABI Capital Trust
collectively referred to herein as the Company. All significant intercompany
accounts and transactions have been eliminated.
Use of 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.
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.
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.
Gains or losses on the disposition of investment securities are recognized
using the specific identification method.
F-7
<PAGE> 62
Notes To Consolidated Financial Statements, Continued
2. Summary of Significant Accounting Policies, continued:
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.
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, 1998 and 1997, the unamortized premiums totaled
approximately $611,000 and $449,000, respectively.
F-8
<PAGE> 63
Notes To Consolidated Financial Statements, Continued
2. Summary of Significant Accounting Policies, continued:
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.
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.
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.
Mortgage Servicing Rights - The Company recognizes an asset for rights to
service mortgage loans for others by management periodically. The value of
mortgage servicing rights related to loans sold was approximately $715,000
and $145,000 at December 31, 1998 and 1997, respectively. The Company had
no valuation allowance for capitalized mortgage servicing rights at
December 31, 1998 and 1997.
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
F-9
<PAGE> 64
Notes To Consolidated Financial Statements, Continued
2. Summary of Significant Accounting Policies, continued:
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 approximately $1,003,000 and
$363,000 at December 31, 1998 and 1997, respectively.
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 Company adopted Financial Accounting
Standards Board 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.
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>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Weighted average common shares outstanding $4,994,765 $4,988,318 $4,637,565
Weighted average common shares equivalents 24,526 31,166 54,528
---------- ---------- ----------
Shares used in diluted earnings per share calculation $5,019,291 $5,019,484 $4,692,093
========== ========== ==========
</TABLE>
Reclassifications - Certain amounts in the prior years' 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.
F-10
<PAGE> 65
Notes To Consolidated Financial Statements, Continued
3. Investment Securities Available for Sale:
The amortized costs and approximate fair value of investment securities
available for sale at December 31, 1998 and 1997 are summarized as
follows:
<TABLE>
<CAPTION>
(amounts in thousands)
----------------------------------------------
1998
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
--------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Available for sale:
U.S. Treasury Securities $ 2,026 $ 16 $ 0 $ 2,042
U.S. Government agencies 37,974 79 (178) 37,875
State and municipals 1,656 48 (57) 1,647
Trust preferred securities 4,975 8 (94) 4,889
------- ---- ----- -------
Total debt securities 46,631 151 (329) 46,453
------- ---- ----- -------
FHLB stock 1,870 0 0 1,870
Mortgage-backed securities 28,808 37 (90) 28,755
------- ---- ----- -------
Total available for sale $77,309 $188 $(419) $77,078
======= ==== ===== =======
</TABLE>
<TABLE>
<CAPTION>
(amounts in thousands)
----------------------------------------------
1997
----------------------------------------------
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
--------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Available for sale:
U.S. Treasury Securities $ 4,057 $ 0 $(19) $ 4,038
U.S. Government agencies 55,765 126 (43) 55,848
State and municipals 1,118 46 0 1,164
------- ---- ---- -------
Total debt securities 60,940 172 (62) 61,050
------- ---- ---- -------
FHLB stock 1,709 0 0 1,709
Mortgage-backed securities 5,789 129 (13) 5,905
------- ---- ---- -------
Total available for sale $68,438 $301 $(75) $68,664
======= ==== ==== =======
</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, 1998, 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.
F-11
<PAGE> 66
Notes To Consolidated Financial Statements, Continued
3. Investment Securities Available for Sale, continued:
<TABLE>
<CAPTION>
(amounts in thousands)
------------------------
Amortized Approximate
Cost Fair Value
--------- -----------
<S> <C> <C>
Due in one year or less $ 503 $ 505
Due after one year through five years 3,026 3,029
Due after five years through ten years 11,498 11,553
Due after ten years 31,604 31,366
------- -------
Total debt securities 46,631 46,453
FHLB stock 1,870 1,870
Mortgage-backed securities 28,808 28,755
------- -------
$77,309 $77,078
======= =======
</TABLE>
Proceeds from the sale of investment securities available for sale during
the years ended December 31, 1998, 1997 and 1996 was approximately
$50,455,000, $17,998,000, and $33,501,000 respectively. Gross gains of
approximately $435,000, $148,000 and $160,000 were realized on these sales
for the years ended December 31, 1998, 1997 and 1996, respectively. Gross
losses of approximately $25,000, $8,000 and $53,000 were realized on these
sales for the years ended December 31, 1998, 1997 and 1996, respectively.
At December 31, 1998, the Company had pledged securities with a carrying
value of approximately $1,019,000 and market value of approximately
$1,029,000 to the State of Florida for public fund deposits. The current
value of pledged securities is adequate to meet the pledging requirements.
4. Loans Receivable, Net:
The Company's loan portfolio consisted of the following at December 31:
<TABLE>
<CAPTION>
(amounts in thousands)
-------------------------
1998 1997
--------- ---------
<S> <C> <C>
Residential mortgage loans, substantially all single-family $ 30,304 $ 54,243
Commercial and commercial real estate loans 159,356 112,039
Consumer loans 60,768 48,827
--------- ---------
250,428 215,109
Less allowance for loan losses (2,355) (2,311)
Net deferred costs 735 607
--------- ---------
Loans, net $ 248,808 $ 213,405
========= =========
</TABLE>
F-12
<PAGE> 67
Notes To Consolidated Financial Statements, Continued
4. Loans Receivable, Net, continued:
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>
(amounts in thousands)
-----------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Balance at beginning of year $ 2,311 $ 1,761 $ 1,609
Provision charged to income 1,180 921 515
Recoveries on loans previously charged off 122 100 49
Loans charged off (1,258) (471) (412)
------- ------- -------
Balance at end of year $ 2,355 $ 2,311 $ 1,761
======= ======= =======
</TABLE>
In management's opinion, the allowance is adequate to reflect the risk in
the loan portfolio.
At December 31, 1998 and 1997, the recorded investment in loans for which
impairment has been recognized totaled approximately $1,629,000 and
$662,000, respectively. The total allowance for loan losses related to
these loans was approximately $556,000 and $246,000 at December 31, 1998
and 1997, respectively. Interest income on impaired loans of approximately
$108,000, $49,000 and $87,000 was recognized for cash payments received in
1998, 1997 and 1996, respectively. For the years ended December 31, 1998
and 1997, the average recorded investment in impaired loans was $854,000
and $312,000.
At December 31, 1998 and 1997, the Company had approximately $429,000 and
$986,000 in nonaccrual loans, respectively. For the years ended December
31, 1998, 1997 and 1996, the amount of interest income not recorded related
to nonaccrual loans was approximately $14,000, $42,000 and $60,000,
respectively. There were 8 and 2 accruing loans that were 90 days or more
past due amounting to $33,000 and $140,000 for December 31, 1998 and 1997,
respectively.
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:
F-13
<PAGE> 68
Notes To Consolidated Financial Statements, Continued
4. Loans Receivable, Net, continued:
<TABLE>
<CAPTION>
(amounts in thousands)
---------------------
1998 1997
------- ------
<S> <C> <C>
Balance at beginning of year $ 6,459 $6,892
New loans 4,722 2,164
Repayments on loans (1,473) (2,597)
------- ------
Balance at end of year $ 9,708 $6,459
======= ======
</TABLE>
5. Premises and Equipment:
A summary of premises and equipment at December 31, 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
(amounts in thousands)
-----------------------
1998 1997
-------- --------
<S> <C> <C>
Land $ 2,802 $ 2,802
Building and improvements 8,174 5,405
Furniture, fixtures, and equipment 5,629 4,034
-------- --------
16,605 12,241
Less accumulated depreciation (3,711) (3,080)
-------- --------
$ 12,894 $ 9,161
======== ========
</TABLE>
Depreciation expense totaled approximately $964,000, $718,000 and 486,000
for the years ended December 31, 1998, 1997 and 1996, respectively.
The Company leases facilities and certain equipment under operating leases
with noncancelable terms. Rent expense amounted to approximately $220,000
for the year ended December 31, 1998. Operating lease commitments at
December 31, 1998 were $186,000, $125,000, $41,000, $28,000, and $8,000
for 1999, 2000, 2001, 2002, and 2003, respectively.
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 $51,033,000 and $10,998,000 at
December 31, 1998 and 1997, respectively.
Custodial escrow balances maintained in connection with the foregoing loan
servicing, and included in demand deposits, were approximately $144,000
and $41,000 at December 31, 1998 and 1997, respectively.
F-14
<PAGE> 69
Notes To Consolidated Financial Statements, Continued
6. Loan Servicing, continued:
Mortgage servicing rights of approximately $654,000 and $188,000 were
capitalized in 1998 and 1997, respectively. Amortization of mortgage
servicing rights was approximately $84,000, $26,000 and $29,000 during
1998, 1997 and 1996, respectively. The value of mortgage servicing rights
sold was $0, $243,100 and $0 for 1998, 1997 and 1996, respectively. At
December 31, 1998 and 1997, the capitalized mortgage servicing rights
totaled approximately $715,000 and $145,000, respectively, which
approximated fair value.
7. Deposits:
Deposits consisted of the following at December 31:
<TABLE>
<CAPTION>
(amounts in thousands)
----------------------
1998 1997
<S> <C> <C>
Demand $ 62,123 $ 44,120
NOW 32,266 24,390
Money market 72,497 61,998
Savings 14,675 13,258
-------- --------
181,561 143,766
-------- --------
Certificate accounts:
Under $100,000 108,888 111,339
Over $100,000 36,200 34,838
IRAs 18,196 12,803
-------- --------
163,284 158,980
-------- --------
$344,845 $302,746
======== ========
</TABLE>
The aggregate amount of certificates of deposit of $100,000 or more at
December 31, 1998 and 1997 was approximately $38,716,000 and $36,170,000,
respectively.
A summary of certificate accounts at December 31, 1998 by year of
scheduled maturity follows:
<TABLE>
<CAPTION>
(amounts in thousands)
----------------------
1998 1997
-------- --------
<S> <C> <C>
Due within one year $107,108 $ 86,347
Due after one year through two years 23,170 34,662
Due after two years through three years 20,614 13,487
Due after three years through four years 4,852 19,389
Due after four years 7,540 5,095
-------- --------
$163,284 $158,980
======== ========
</TABLE>
F-15
<PAGE> 70
Notes To Consolidated Financial Statements, Continued
7. Deposits, continued:
Interest expense on deposit accounts is summarized as follows:
<TABLE>
<CAPTION>
(amounts in thousands)
---------------------------------
1998 1997 1996
------- ------- ------
<S> <C> <C> <C>
Interest on NOW accounts and money market deposit
accounts $ 3,386 $ 3,206 $2,087
Interest on savings accounts 308 304 312
Interest on certificate accounts 9,448 8,395 7,076
------- ------- ------
$13,142 $11,905 $9,475
======= ======= ======
</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, 1998 and 1997 is
presented below, segregated by the type of securities sold and by due date
of the agreement:
<TABLE>
<CAPTION>
(dollar amounts in thousands)
----------------------
1998 1997
------- -------
<S> <C> <C>
Average balance during the year $26,039 $14,374
Average interest rate during the year 4.63% 4.54%
Maximum month-end balance during the year $31,433 $21,589
U.S. Government agencies and Mortgage-backed securities
underlying the agreements at year-end:
Cost $31,050 $19,285
Fair value $30,862 $19,332
</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, 1998 and 1997 were $34,900,000 and $5,000,000 at 5.04% through 5.15% and
6.95%, respectively, with the December 31, 1998 balance maturing at various
dates through August 2008.
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,
1998, the Bank has a credit availability of $50,000,000.
F-16
<PAGE> 71
Notes To Consolidated Financial Statements, Continued
9. Federal Home Loan Bank Advances, continued:
Uncollateralized lines amounting to $4.9 million at December 31, 1998 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, 1998 and 1997, 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. In 1998
all amounts related to the line of credit were repaid and the line was
closed.
11. Guaranteed Preferred Beneficial Interests in the Company's Junior
Subordinated Debentures
In 1998, ABICT was created by the Company for the exclusive purpose of
issuing and selling common securities and preferred securities (together
trust securities) and investing the proceeds from the sale of the trust
securities in junior subordinated debentures issued by the Holding Company.
The common securities are wholly owned by the Holding Company, and such
securities are the only class of ABICT's securities possessing general
voting powers. In May 1998, ABICT issued $15,000,000 in the aggregate
liquidation amount of its 8.50% preferred securities, liquidation amount
$10 per preferred security ("capital securities") in a registered public
offering. In August 1998, the underwriter exercised its over-allotment
option, in part, and an additional $1,249,420 in aggregate liquidation
amount of capital securities were issued. The surety obligations constitute
a full and unconditional guarantee by the Company of the issue trust
obligations under the capital securities.
The trust securities are scheduled to mature on June 30, 2028.
Distributions on these securities are payable quarterly, commencing
September 30, 1998; such distributions can be deferred at the option of the
Company for up to five years. In 1998, the Company exercised this option.
The trust securities can be prepaid in whole or in part on or after June
30, 2003 in accordance with the terms of the trust agreement. Distributions
on the securities are included in interest expense.
F-17
<PAGE> 72
Notes To Consolidated Financial Statements, Continued
12. Income Taxes:
The Company's provision for income taxes consisted of the following for the
years ended December 31:
<TABLE>
<CAPTION>
(amounts in thousands)
----------------------------------
1998 1997 1996
------- ------- -----
<S> <C> <C> <C>
Current:
Federal $ 992 $ 1,240 $ 535
State 62 76 29
------- ------- -----
1,054 1,316 564
------- ------- -----
Deferred:
Federal (161) (184) (91)
State (16) (15) (12)
------- ------- -----
(177) (199) (103)
------- ------- -----
$ 877 $ 1,117 $ 461
======= ======= =====
</TABLE>
Deferred income taxes consisted of the following for the years ended
December 31:
<TABLE>
<CAPTION>
(amounts in thousands)
-----------------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Provision for loan losses $ 163 $(163) $ 134
Cash to accrual adjustment (58) (58) 58
Merger expense (58) (128) 0
Net operating loss carryforward 0 219 (219)
Market value of loans held for sale (179) 0 0
Other (45) (69) (76)
----- ----- -----
$(177) $(199) $(103)
===== ===== =====
</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. The items
which comprise a significant portion of deferred tax assets and liabilities
at December 31 are as follows:
F-18
<PAGE> 73
Notes To Consolidated Financial Statements, Continued
12. Income Taxes. continued:
<TABLE>
<CAPTION>
(amounts in thousands)
-------------------------------
1998 1997 1996
------- ----- -----
<S> <C> <C> <C>
Deferred tax assets:
Book over tax bad debts $ 641 $ 657 $ 495
Market value of loans held for sale 285 106 101
Merger expense 128 128 0
Net operating loss carryforward 0 0 219
Other 11 32 15
------- ----- -----
Deferred tax assets 1,065 923 830
------- ----- -----
Deferred tax liabilities:
Loan origination fees (95) (71) (50)
Cash to accrual adjustment 0 (58) (117)
Other 0 0 (64)
------- ----- -----
Deferred tax liabilities (95) (129) (231)
------- ----- -----
Net deferred tax asset $ 970 $ 794 $ 599
======= ===== =====
</TABLE>
The Company's effective income tax rates of 35%, 36.7% and 37% for the years
ended December 31, 1998, 1997 and 1996, respectively, vary from the
statutory federal income tax rate of 34% due primarily to state income taxes
and tax exempt interest income.
13. Other Income:
Other income consisted of the following for the years ended December 31:
<TABLE>
<CAPTION>
(amounts in thousands)
-------------------------------
1998 1997 1996
------ ------ -------
<S> <C> <C> <C>
Service charges on deposit accounts $1,878 $1,812 $ 1,192
Broker loan fees 152 327 33
Net gains on sales of investment securities 410 140 107
Net gains on sales of loans 1,321 870 514
Net gain (loss) on sale of other real estate owned 0 13 (336)
Merchant fees on credit cards 750 479 262
Late fees 223 171 127
Other 511 344 249
------ ------ -------
$5,245 $4,156 $ 2,148
====== ====== =======
</TABLE>
F-19
<PAGE> 74
Notes To Consolidated Financial Statements, Continued
14. Other Expenses:
Other expenses consisted of the following for the years ended December 31:
<TABLE>
<CAPTION>
(amounts in thousands)
--------------------------------
1998 1997 1996
------- ------- ------
<S> <C> <C> <C>
Compensation and related benefits $ 7,015 $ 5,181 $4,361
Occupancy and equipment 1,953 1,627 1,184
SAIF assessment 0 0 348
FDIC insurance 131 82 148
Data processing 946 917 925
Advertising and promotion 487 307 351
Printing supplies and postage 634 434 322
Directors fees and expenses 138 157 124
Professional fees 634 534 244
ATM and credit card fees 943 631 206
Foreclosed real estate expense 23 29 223
Intangible taxes 167 157 126
Litigation settlement 525 0 0
Other 2,978 1,856 1,294
------- ------- ------
$16,574 $11,912 $9,856
======= ======= ======
</TABLE>
Loan origination costs of approximately $985,000, $686,000 and $342,000 in
1998, 1997 and 1996, respectively, have been offset against compensation and
related benefits.
15. Comprehensive Income:
The components of comprehensive income, net of related tax, are as follows:
<TABLE>
<CAPTION>
(amounts in thousands)
----------------------------------
Year ended December 31, 1998 1997 1996
------- ------- -----
<S> <C> <C> <C>
Net income $ 1,627 $ 1,920 $ 782
Other comprehensive income:
Unrealized gains (losses) on securities:
Arising during the period, net of tax expense
(benefit) of $(8), $173 and $(108) (16) 321 (200)
Less: reclassification adjustment for gains included
in income, net of tax expense of $144, $49
and $37 (266) (91) (70)
------- ------- -----
Other comprehensive income (expense) (282) 230 (270)
------- ------- -----
Comprehensive income $ 1,345 $ 2,150 $ 512
======= ======= =====
</TABLE>
F-20
<PAGE> 75
Notes To Consolidated Financial Statements, Continued
16. 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, 1998 and 1997 financial instruments
with off-balance-sheet risk were as follows:
<TABLE>
<CAPTION>
(amounts in thousands)
----------------------
Contractual or Notional Amounts 1998 1997
- -------------------------------- ------- -------
<S> <C> <C>
Commitments to extend credit $75,799 $56,598
Standby letters of credit $ 986 $ 537
Credit cards $ 6,840 $ 4,742
</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 at December 31, 1998 are short-term, expiring
in 1999.
F-21
<PAGE> 76
Notes To Consolidated Financial Statements, Continued
17. Employee Benefit and Stock Option Plans:
The Company has 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, 1998, 1997 and 1996 was approximately $49,000, $28,000
and $18,0000 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) (together Option Plans) under which the Company may grant options for
up to 150,000 and 75,000 shares of common stock, respectively. Under the
Option 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 Option
Plans. Accordingly, no compensation cost has been recognized for options
granted under the Option Plans. Had compensation cost for the Company's
Option Plans been determined based on the fair value at the grant dates for
awards under the Option Plans consistent with the method of Financial
Accounting Standards Statement No. 123, "Accounting for Stock-Based
Compensation," the Company's net income and net income per share would have
been reduced to the pro forma amounts of approximately $1,562,000,
$1,891,000 and $775,000 net income and basic earnings per share of .31, .38
and .17 for the years ended December 31, 1998, 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 1998; dividend yield of 0% in each period, as
there has been no regular dividend payment history, expected stock price
volatility of 27.1%, 23.6% and 23.6%, risk-free interest rates of 5.36%,
6.35%, and 6.39% for December 31, 1998, 1997 and 1996, respectively; and
expected lives of five years.
A summary of the status of the Company's Option Plans as of December 31,
1998, 1997 and 1996, respectively, and changes during the years ending on
those dates is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------- -------------------------- ---------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 63,600 $ 6.71 28,800 $ 5.24 24,000 $ 5.25
Granted 122,698 11.13 34,800 7.93 4,800 5.17
Forfeited (1,000) 8.37 0 0
Exercised (500) 8.37 0 0
------- ------ ------
Outstanding at end of year 184,798 10.94 63,600 6.71 28,800 5.24
======= ====== ======
Options exercisable at year-end 184,798 33,600 43,600
======= ====== ======
</TABLE>
F-22
<PAGE> 77
Notes To Consolidated Financial Statements, Continued
17. Employee Benefit and Stock Option Plans, continued:
The following table summarizes information about the Option Plans' stock
options at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------- ---------------------------------
Number Weighted-Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices Contractual Life Exercise Price Exercise Price
--------------- ----------- ---------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
5.00 - 11.125 186,798 10 years $ 10.94 43,600 $ 11.57
======= ============= ==============
</TABLE>
18. 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 187,000 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
$7,378,000.
In January 1997, the Company acquired the net assets of Deschamps & Gregory
Mortgage Company, Inc., a mortgage brokerage company, for approximately
$56,000. 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 for December
31, 1997 and 1996. There were no warrants issued or outstanding at December
31, 1998.
<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
Warrants expired -18594 0.00 (1,932) 6.00
Warrants exercised -- 0.00 (61,597) 6.00
------------------------ -------------------------
Balance, December 31, 1997 0 $4.00 0 $6.00
=========== ===== ======= =====
</TABLE>
F-23
<PAGE> 78
Notes To Consolidated Financial Statements, Continued
19. 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, 1998, approximately
$5,503,000 are available for payment of dividends without prior regulatory
approval.
20. 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 and Federal Funds Sold - For cash and due from banks
and Federal Funds Sold, 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, 1998. 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, 1998 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 payables interest rate reprices quarterly. The estimated
fair value approximates the carrying value.
Guaranteed Preferred Beneficial Interests in the Company's Junior
Subordinated Debentures - The fair values are estimated based on bid
prices published in financial newspapers.
F-24
<PAGE> 79
Notes To Consolidated Financial Statements, Continued
20. 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>
(amounts in thousands)
--------------------------------------------------
1998 1997
----------------------- ------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from bank $ 20,215 $ 20,215 $ 13,276 $ 13,276
Federal funds sold 0 0 5,120 5,120
Loans held for sale 88,158 89,674 39,588 39,747
Investment securities available for
sale 77,078 77,078 68,664 68,664
Loans receivable, net 248,808 253,008 213,405 218,927
Financial liabilities:
Deposits 344,845 190,670 302,746 303,586
Securities sold under agreements to
repurchase 29,592 29,592 17,528 17,528
FHLB advances 34,900 34,900 5,000 5,000
Note payable 0 0 500 500
Guaranteed Preferred Beneficial
Interests in the Company's Junior
Subordinated Debentures 16,249 16,249 0 0
</TABLE>
<TABLE>
<CAPTION>
Contract Contract
Amount Fair Value Amount Fair Value
------ ---------- -------- ----------
<S> <C> <C> <C> <C>
Unrecognized financial instruments:
Loan commitments $75,799 $114 $56,598 $80
Standby letters of credit 986 0 537 0
Credit cards 6,840 0 4,742 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.
F-25
<PAGE> 80
Notes To Consolidated Financial Statements, Continued
20. 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.
21. 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.
22. 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.
F-26
<PAGE> 81
Notes To Consolidated Financial Statements, Continued
22. Regulatory Capital, continued:
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). Management believes, as of December 31, 1998,
that the Bank meets all capital adequacy requirements to which it is
subject.
As of December 31, 1998, 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 1998 or 1997.
<TABLE>
<CAPTION>
(amounts in thousands)
-----------------------------------------------------------------
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, 1998:
Total Capital (to Risk Weighted
Assets) $ 39,642 12.40% >=$ 24,496 >=8.0 >=$ 31,869 >=10.0
Tier I Capital (to Risk Weighted
Assets) $ 37,319 11.70% >=$ 12,748 >=4.0 >=$ 19,122 >=6.0
Tier I Capital (to Averaged
Assets) $ 37,319 8.40% >=$ 13,297 >=3.0 >=$ 22,162 >=5.0
As of December 31, 1997:
Total Capital (to Risk Weighted
Assets) $ 25,709 10.90% >=$ 18,857 >=8.0% >=$ 23,571 >=10.0%
Tier I Capital (to Risk Weighted
Assets) $ 23,820 10.11% >=$ 9,428 >=4.0% >=$ 14,143 >=6.0%
Tier I Capital (to Averaged
Assets) $ 23,820 6.87% >=$ 10,398 >=3.0% >=$ 17,330 >=5.0%
</TABLE>
23. Future Accounting Pronouncements:
Financial Accounting Standards Board Statement (FAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities," requires all derivatives
to be recorded on the balance sheet at fair value and establishes standard
accounting methodologies for hedging activities. The standard will result in
the recognition of offsetting changes in value or cash flows of both the
hedge and the hedged item in earnings or comprehensive income in the same
period. The statement is effective for the Company's fiscal year ending
December 31, 2000. Because the Company does not currently hold any
derivative investments, the adoption of this statement is not expected to
have an impact on the financial statements.
F-27
<PAGE> 82
Notes To Consolidated Financial Statements, Continued
23. Future Accounting Pronouncements, continued:
FAS No. 134, "Accounting for Mortgage-Backed Securities retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Entity," amends FAS No. 65 allowing mortgage-backed securities or other
retained interests arising from the securitization of mortgage loans to be
classified based on the mortgage banking entities' ability and intent to
sell of hold those securities. Previously these securities had to be held
within a trading account. This statement is effective for the Company's
fiscal year ending December 31, 1999. The adoption of this standards is not
expected to have a significant impact on the financial statements.
24. Condensed Parent Company Financial Statements:
The condensed financial statements of American Bancshares, Inc., as the
parent organization, are presented as follows:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEET (amounts in thousands)
---------------------------
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Assets:
Cash $ 4,335 $ 374
Investment in banking subsidiary 37,535 24,040
Investment in finance subsidiary 245 0
Investment in trust subsidiary 503 0
Premises and equipment 0 2,160
Prepaid expense 588 156
Debt issue costs 1,007 0
Other assets 6 3
-------- -------
Total assets $ 44,219 $26,733
======== =======
Liabilities:
Junior subordinated debentures $ 16,752 $ 0
Other liabilities 40 654
-------- -------
Total liabilities 16,792 654
-------- -------
Shareholders' equity:
Common stock 5,870 5,870
Additional paid-in capital 15,551 15,548
Unrealized gain (loss) on investment securities available for
sale, net (143) 139
Retained earnings 6,149 4,522
-------- -------
Total shareholders' equity 27,427 26,079
-------- -------
Total liabilities and shareholders' equity $ 44,219 $26,733
======== =======
</TABLE>
F-28
<PAGE> 83
Notes To Consolidated Financial Statements, Continued
24. Condensed Parent Company Financial Statements, continued:
CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
(amounts in thousands)
----------------------------------------
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Equity in undistributed earnings of banking
subsidiaries $ 2,576 $ 2,021 852
Operating expense (949) (101) (70)
------- ------- -----
Net income $ 1,627 $ 1,920 $ 782
======= ======= =====
</TABLE>
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
(amounts in thousands)
------------------------------------------
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows (used in) provided by operating
activities $ 670 $ 399 (76)
-------- ------- -------
Cash flows (used in) investing activities:
Investments and advances to subsidiary (11,957)
Acquisition of premises and equipment 0 (3,843) (4,891)
-------- ------- -------
(11,957) (3,843) (4,891)
Cash flows provided by (used in) financing activities:
Proceeds from sale of common stock (net of
stock offering costs) 3 425 8,360
Proceeds from junior subordinate
debentures 16,752 0 0
Payments of debt issue costs (1,007) 0 0
Net repayment of line of credit (500) 0 0
-------- ------- -------
15,248 425 8,360
Net increase (decrease) in cash 3,961 (3,019) 3,393
Cash at beginning of year 374 3,393 0
-------- ------- -------
Cash at end of year $ 4,335 $ 374 $ 3,393
======== ======= =======
</TABLE>
F-29
<PAGE> 84
Notes To Consolidated Financial Statements, Continued
25. 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.
F-30
<PAGE> 85
American Bancshares and Subsidiaries
Quarterly Earnings Summary (Unaudited)
(amounts in thousands, except per share)
<TABLE>
<CAPTION>
Quarter Ended 1998 March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Interest income 7,101 7,482 8,241 8,361
Interest expense 3,583 3,675 4,527 4,387
Net interest income 3,518 3,807 3,714 3,974
Provision for loan losses 124 151 154 751
Net interest income after provision for loan
losses 3,394 3,656 3,560 3,223
Other income 1,103 1,172 1,477 1,493
Other expenses 3,876 4,531 4,060 4,107
Provision for income taxes 217 104 342 214
Net income 404 193 635 395
Earnings per share:
Basic 0.08 0.04 0.13 0.08
Diluted 0.08 0.04 0.13 0.07
</TABLE>
<PAGE> 86
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION OF EXHIBITS NUMBERED PAGES
------ ----------------------- --------------
<S> <C> <C> <C>
3.1 -- Amended and Restated Articles of Incorporation of the Company,
incorporated herein by reference to Exhibit 3.1 to the
Company's Form 10-KSB for the fiscal year ended December 31,
1997 previously filed with the Commission.
3.2 -- Amended and Restated Bylaws, incorporated herein by reference
to Exhibit 3.2 to the Company's Registration Statement on Form
S-4 (Registration No. 333-45401) previously filed with the
Commission.
4.1 -- See Exhibits 3.1 and 3.2 for provisions of the Amended and
Restated Articles of Incorporation and the Amended and
Restated Bylaws of the Company defining the rights of holders
of the Company's Common Shares.
10.1 -- Employment Agreement, dated December 1, 1995, by and between
the Bank and Gerald L. Anthony, incorporated herein by
reference to Exhibit 10.1 to the Company's Registration
Statement on Form SB-2 (Registration No. 33-99972) previously
filed with the Commission.
10.2 -- Employment Agreement, dated June 30, 1996, by and between the
Bank and Philip W. Coon, incorporated herein by reference to
Exhibit 10.2 to the Company's Registration Statement on Form
SB-2 (Registration No. 33-99972) previously filed with the
Commission.
*10.3 -- Addendum, dated May 14, 1998, to Employment Agreement by and
between the Bank and Philip W. Coon.
10.4 -- Employment Agreement, dated June 30, 1996, by and between the
Bank and David R. Mady, incorporated herein by reference to
Exhibit 10.3 to the Company's Registration Statement on Form
SB-2 (Registration No. 33-99972) previously filed with the
Commission.
*10.5 -- Addendum, dated May 14, 1998, to Employment Agreement by and
between the Bank and David R. Mady.
10.6 -- Employment Agreement, dated January 1, 1996, by and between
the Bank and John S. Nash, incorporated herein by reference to
Exhibit 10.5 to the Company's Registration Statement on Form
SB-2 (Registration No. 33-99972) previously filed with the
Commission.
10.7 -- Employment Agreement, dated January 1, 1996, by and between
the Bank and Michael Lewis, incorporated herein by reference
to Exhibit 10.6 to the Company's Registration Statement on
Form SB-2 (Registration No. 33-99972) previously filed with
the Commission.
10.8 -- Employment Agreement, dated January 22, 1997, by and between
the Bank and Stuart M. Gregory, incorporated herein by
reference to Exhibit 10.7 to the Company's Form 10-KSB for the
fiscal year ended December 31, 1997.
</TABLE>
<PAGE> 87
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION OF EXHIBITS NUMBERED PAGES
------ ----------------------- --------------
<S> <C> <C> <C>
10.9 -- Employment Agreement, dated February 1, 1998, by and between
the Bank and Brian M. Watterson, incorporated herein by
reference to Exhibit 10.1 to the Company's Form 10-Q for the
quarter ended March 31, 1998.
10.10 -- Data Processing Agreement, dated April 1, 1995, by and between
the Bank and M & I Data Services, Inc., incorporated herein by
reference to Exhibit 10.5 to the Company's Registration
Statement on Form SB-2 (Registration No. 33-99972) previously
filed with the Commission.
10.11 -- Mortgage Loan Subservice Agreement between Dovenmuehle
Mortgage, Inc. and American Bank of Bradenton, dated May 17,
1994, incorporated herein by reference to Exhibit 10.8 to the
Company's Registration Statement on Form SB-2 (Registration
No. 33-99972) previously filed with the Commission.
10.11 -- American Bancshares, Inc. and American Bank of Bradenton
Incentive Stock Option Plan of 1996, dated May 28, 1996, and
Form of Incentive Stock Option Agreement, incorporated herein
by reference to Exhibit 10.9 to the Company's Form 10-KSB for
the fiscal year ended December 31, 1996 previously filed with
the Commission.
10.12 -- American Bancshares, Inc. 1997 Nonqualified Share Option Plan
for Non-Employee Directors, dated March 18, 1997, and Form of
Nonqualified Share Option Agreement, incorporated herein by
reference to Exhibit 10.11 to the Company's Form 10-KSB for
the fiscal year ended December 31, 1997.
10.13 -- Assignment of Lease and Consent to Assignment, dated February
15, 1998, by and between the Finance Company, G.J.M.
Properties, Inc., and First Enterprise Acceptance Corporation,
and Lease Agreement assumed thereby, incorporated herein by
reference to Exhibit 10.13 to the Company's Form 10-KSB for
the fiscal year ended December 31, 1997.
*21.1 -- Subsidiaries of the Company.
*27.1 -- Financial Data Schedule (for SEC use only)
*99.1 -- Report of Independent Auditors Hacker, Johnson, Cohen &
Grieb, P.A. for the 1997 and 1996 Audits of Murdock Florida
Bank
</TABLE>
- --------------------------
* Exhibit filed herewith.
<PAGE> 1
EXHIBIT 10.3
ADDENDUM TO SECOND RESTATED EMPLOYMENT AGREEMENT
This Addendum to the Second Restated Employment Agreement is dated
this 14th day of May, 1998 (the "Effective Date"), between American Bank of
Bradenton ("Employer"), whose address is 4702 Cortez Road West, Bradenton,
Florida 34210 and Philip W. Coon ("Employee"), whose address is 510 Rooks Road,
Seffner, Florida 33584.
WITNESSETH:
WHEREAS, Employer and Employee have entered into a Second Restated
Employment Agreement dated June 30, 1995, whereby Employee agreed to develop
and operate a wholesale residential mortgage loan department of Employer;
WHEREAS, Employee is currently employed by Employer under the terms
and conditions of the Second Restated Employment Agreement;
WHEREAS, the parties desire to amend certain provisions of the Second
Restated Employment Agreement by the terms of this Addendum;
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, Employer and Employee agree as follows:
1. Employment. Employer hereby employs Employee, and Employee
hereby accepts the employment, upon the terms and conditions of the Second
Restated Employment Agreement as amended by this Addendum. To the extent that
this Addendum conflicts with the Second Restated Employment Agreement, this
Addendum shall control. The Second Restated Employment Agreement shall continue
accept as modified herein.
2. Term. The initial term of this Agreement shall be four (4)
years. Thirty (30) days prior to the first anniversary of this Addendum, either
party may give the other written notice that this Agreement shall not be
renewed upon the lapse of the original four (4) year term. If no notice of
termination is given thirty (30) days prior to the first anniversary, the term
shall automatically be extended annually on a three (3) year revolving basis
unless one or both parties shall give written notice to the other of an intent
to terminate thirty (30) days prior to an anniversary date. Once a timely
written notice of termination is delivered, this Agreement shall terminate
three (3) years after the anniversary date following the notice of termination.
For example, should Employer give Employee written notice of its intent not to
renew thirty (30) days prior to the first anniversary of this Addendum, this
Agreement shall terminate at the end of the original four (4) year term. If
thirty (30) days prior to the second anniversary of this Addendum, Employer
shall give Employee written notice of its intent to terminate, this Agreement
shall terminate three (3) years from the second anniversary date. Notice as
specified by this provision shall be in writing, sent certified mail to the
other party at its last known address.
<PAGE> 2
3. Change of Control. If Employer changes its name or a single entity
acquires fifty percent (50%) or more of Employer's outstanding shares, Employer
shall immediately pay Employee a lump sum payment equal to the amount of
Employee's previous annual compensation as shown on Employee's W-2 wage
statement. This Agreement shall not be affected by the payment required by this
provision.
4. Binding Effect. The Second Restated Employment Agreement and
this Addendum shall be binding upon Employer, its successors,
successors-in-interest, assigns and any purchaser of a controlling interest in
shares and/or of Employer's assets, and shall be disclosed to any
prospective purchaser of a controlling interest in Employer's shares and/or
assets prior to any such purchase.
5. Commission Rebates. If Employee has been paid commissions on any
loan for which payments are ninety (90) days past due, Employee shall return
the commissions earned on the non-accruing loan. Employee shall not be entitled
to a return of the commissions until the subject loan becomes current for ninety
(90) days or is sold.
WITNESSES EMPLOYER:
as to Employer: AMERICAN BANK OF BRADENTON
/s/ LYNDA G. GRAY By: /s/ GERALD ANTHONY
- -------------------------------------- ----------------------------------
Print Name: Gerald L. Anthony
----------------------------
WITNESSES EMPLOYEE:
as to Employee:
/s/ JULIE FRANKE /s/ PHILIP W. COON
- -------------------------------------- -------------------------------------
Print Name: Julie Franke Philip W. Coon
---------------------------
/s/ MELISSA HONE
- --------------------------------------
Print Name: Melissa Hone
----------------------------
<PAGE> 1
EXHIBIT 10.5
ADDENDUM TO SECOND RESTATED EMPLOYMENT AGREEMENT
This Addendum to the Second Restated Employment Agreement is dated
this 14th day of May, 1998 (the "Effective Date"), between American Bank of
Bradenton ("Employer"), whose address is 4702 Cortez Road West, Bradenton,
Florida 34210 and David R. Mady ("Employee"), whose address is 3209 Riverview
Boulevard West, Bradenton, Florida 34205.
WITNESSETH:
WHEREAS, Employer and Employee have entered into a Second Restated
Employment Agreement dated June 30, 1995, whereby Employee agreed to develop
and operate a wholesale residential mortgage loan department of Employer;
WHEREAS, Employee is currently employed by Employer under the terms
and conditions of the Second Restated Employment Agreement;
WHEREAS, the parties desire to amend certain provisions of the Second
Restated Employment Agreement by the terms of this Addendum;
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, Employer and Employee agree as follows:
1. Employment. Employer hereby employs Employee, and Employee hereby
accepts the employment, upon the terms and conditions of the Second Restated
Employment Agreement as amended by this Addendum. To the extent that this
Addendum conflicts with the Second Restated Employment Agreement, this Addendum
shall control. The Second Restated Employment Agreement shall continue accept as
modified herein.
2. Term. The initial term of this Agreement shall be four (4) years.
Thirty (30) days prior to the first anniversary of this Addendum, either party
may give the other written notice that this Agreement shall not be renewed upon
the lapse of the original four (4) year term. If no notice of termination is
given thirty (30) days prior to the first anniversary, the term shall
automatically be extended annually on a three (3) year revolving basis unless
one or both parties shall give written notice to the other of an intent to
terminate thirty (30) days prior to an anniversary date. Once a timely written
notice of termination is delivered, this Agreement shall terminate three (3)
years after the anniversary date following the notice of termination. For
example, should Employer give Employee written notice of its intent not to renew
thirty (30) days prior to the first anniversary of this Addendum, this
Agreement shall terminate at the end of the original four (4) year term. If
thirty (30) days prior to the second anniversary of this Addendum, Employer
shall give Employee written notice of its intent to terminate, this Agreement
shall terminate three (3) years from the second anniversary date. Notice as
specified by this provision shall be in writing, sent certified mail to the
other party at its last known address.
<PAGE> 2
3. Change of Control. If Employer changes its name or a single
entity acquires fifty percent (50%) or more of Employer's outstanding shares,
Employer shall immediately pay Employee a lump sum payment equal to the amount
of Employee's previous annual compensation as shown on Employee's W-2 wage
statement. This Agreement shall not be affected by the payment required by this
provision.
4. Binding Effect. The Second Restated Employment Agreement and
this Addendum shall be binding upon Employer, its successors,
successors-in-interest, assigns and any purchaser of a controlling interest in
shares and/or of Employer's assets, and shall be disclosed to any prospective
purchaser of a controlling interest in Employer's shares and/or assets prior to
any such purchase.
5. Commission Rebates. If Employee has been paid commissions on
any loan for which payments are ninety (90) days past due, Employee shall
return the commissions earned on the non-accruing loan. Employee shall not be
entitled to a return of the commissions until the subject loan becomes current
for ninety (90) days or is sold.
WITNESSES EMPLOYER:
as to Employer: AMERICAN BANK OF BRADENTON
/s/ LYNDA G. GRAY By: /s/ GERALD ANTHONY
- ------------------------------------- ----------------------------------
Print Name: Gerald L. Anthony
---------------------------
WITNESSES EMPLOYEE:
as to Employee:
/s/ JULIE FRANKE By: /s/ DAVID R. MADY
- ------------------------------------- ----------------------------------
Print Name: Julie Franke David R. Mady
---------------------------
/s/ MELISSA HONE
- -------------------------------------
Print Name: Melissa Hone
--------------------------
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF AMERICAN BANCSHARES, INC.
American Bank, a Florida Banking Corporation
Freedom Finance Company, a Florida Corporation
ABI Capital Trust, a Delaware Statutory Business Trust
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL DATA FROM AMERICAN BANCSHARES' GENERAL
LEDGER AND BOARD OF DIRECTORS FINANCIAL REPORT PACKAGE AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> DEC-31-1997
<PERIOD-END> DEC-31-1998
<CASH> 20,215
<INT-BEARING-DEPOSITS> 104
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 77,078
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 339,321
<ALLOWANCE> (2,355)
<TOTAL-ASSETS> 455,164
<DEPOSITS> 344,845
<SHORT-TERM> 8,900
<LIABILITIES-OTHER> 47,922
<LONG-TERM> 26,000
0
0
<COMMON> 5,870
<OTHER-SE> 21,557
<TOTAL-LIABILITIES-AND-EQUITY> 455,164
<INTEREST-LOAN> 26,250
<INTEREST-INVEST> 4,670
<INTEREST-OTHER> 265
<INTEREST-TOTAL> 31,185
<INTEREST-DEPOSIT> 13,142
<INTEREST-EXPENSE> 16,172
<INTEREST-INCOME-NET> 15,013
<LOAN-LOSSES> 1,180
<SECURITIES-GAINS> 410
<EXPENSE-OTHER> 16,574
<INCOME-PRETAX> 2,504
<INCOME-PRE-EXTRAORDINARY> 1,627
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,627
<EPS-PRIMARY> 0.33
<EPS-DILUTED> 0.32
<YIELD-ACTUAL> 8.31
<LOANS-NON> 429
<LOANS-PAST> 33
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,083
<ALLOWANCE-OPEN> 2,311
<CHARGE-OFFS> 1,258
<RECOVERIES> 122
<ALLOWANCE-CLOSE> 2,355
<ALLOWANCE-DOMESTIC> 2,355
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE> 1
EXHIBIT 99.1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
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 (not presented
seperatley herein). 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 of these statements 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
