<PAGE> 1
Filed Pursuant to
Rule 424(b)(4)
Registration No.333-50867
PROSPECTUS
4,000,000 SHARES
(FLORIDA BANKS, INC. LOGO)
COMMON STOCK
All of the 4,000,000 shares of Common Stock, $.01 par value per share
("Common Stock"), offered hereby are being sold by Florida Banks, Inc., a
Florida corporation (the "Company"). Prior to the offering (the "Offering"),
there has been no public market for the Common Stock. See "Underwriting" for
information relating to the determination of the initial public offering price.
The Common Stock has been approved for listing on The Nasdaq National Market
under the trading symbol "FLBK." Of the 4,000,000 shares offered hereby, up to
304,000 will be purchased by an underwriter that is a foreign broker-dealer for
sales outside of the United States. See "Underwriting."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN
INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON
STOCK OFFERED HEREBY.
THE SECURITIES OFFERED HEREBY ARE NOT DEPOSITS, SAVINGS ACCOUNTS OR OTHER
OBLIGATIONS OF A DEPOSITORY INSTITUTION AND ARE NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY OR
INSTRUMENTALITY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) THE COMPANY(2)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.......................... $10.00 $0.70 $9.30
- -----------------------------------------------------------------------------------------------------------
Total(3)........................... $40,000,000 $2,800,000 $37,200,000
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(1) See "Underwriting" for a description of certain other items deemed to be
underwriting compensation, the indemnification arrangements with the
Underwriters and certain other matters.
(2) Before deducting Offering expenses payable by the Company estimated to be
$525,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
600,000 additional shares of Common Stock solely to cover over-allotments,
if any. If such option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to the Company will be
$46,000,000, $3,220,000, and $42,780,000, respectively. See "Underwriting."
The shares of Common Stock are offered severally by the Underwriters named
herein, subject to prior sale, when, as and if received and accepted by them,
subject to their right to reject orders, in whole or in part, and to withdraw,
cancel or modify the offer without notice. It is expected that delivery of the
certificates representing such shares will be made against payment therefor in
immediately available funds at the offices of The Robinson-Humphrey Company,
LLC, Atlanta, Georgia, on or about August 4, 1998.
THE ROBINSON-HUMPHREY COMPANY
INTERSTATE/JOHNSON LANE
CORPORATION
KELTON INTERNATIONAL
LIMITED
July 29, 1998
<PAGE> 2
(FLORIDA STATE MAP SHOWING IDENTIFIED MARKETS)
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES
OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION MAINTAINED BY THE
UNDERWRITERS IN THE COMMON STOCK, AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus.
THE COMPANY
GENERAL
Florida Banks, Inc. (the "Company") was incorporated on October 15, 1997 to
create a statewide community banking system focusing on the largest and fastest
growing markets in Florida. Immediately prior to the closing of the Offering,
the Company will acquire First National Bank of Tampa (the "Bank") as its entry
into the Tampa/Hillsborough County market area (the "Merger"). The Company
intends to open a community banking office in the Jacksonville market area as
soon as practicable following consummation of the Offering. Future business
plans include further expansion in the Tampa/Hillsborough County and
Jacksonville market areas and entry into the markets of Orlando/Orange County,
Ft. Lauderdale/Broward County and the Palm Beaches (collectively, the
"Identified Markets"). As opportunities arise, the Company also intends to
expand into other Florida market areas with demographic characteristics similar
to the Identified Markets. Within each of the Identified Markets, the Company
expects to offer a broad range of traditional banking products and services,
focusing primarily on small and medium-sized businesses. See
"Business -- Strategy of the Company -- Market Expansion" and "-- Products and
Services."
The Company will have a community banking approach that emphasizes
responsive and personalized service to its customers. Management's expansion
strategy includes attracting strong local management teams who have significant
banking experience, community contacts and business development potential in the
Identified Markets. Once local management teams are identified, the Company
intends to establish community banking offices in each of the Identified
Markets. Each management team will operate one or more community banking offices
within its particular market area, will have a high degree of local decision-
making authority and will operate in a manner that provides responsive,
personalized services similar to an independent community bank ("Community
Banking Office"). The Company will maintain centralized credit policies and
procedures as well as centralized back office functions to support the Community
Banking Offices. Management expects that upon the Company's entry into a new
market area, it will undertake a marketing campaign utilizing an officer calling
program and community-based promotions. In addition, management will be
compensated based on loan production goals, and each market area will be
supported by a local board of advisory directors, which will be provided with
financial incentives to assist in the development of banking relationships
throughout the community. See "Business -- Strategy of the Company -- Model
'Local Community Bank'."
Management of the Company believes that the significant consolidation in
the banking industry in Florida has disrupted customer relationships as the
larger regional financial institutions increasingly focus on larger corporate
customers, standardized loan and deposit products and other services. Generally,
these products and services are offered through less personalized delivery
systems which has created a need for higher quality services to small and
medium-sized businesses. In addition, consolidation of the Florida banking
market has dislocated experienced and talented management personnel due to the
elimination of redundant functions and the need to achieve cost savings. As a
result of these factors, management believes the Company has a unique
opportunity to attract and maintain its targeted banking customers and
experienced management personnel within the Identified Markets.
Florida is the fourth most populated state in the country with a population
of approximately 14.7 million in 1997. From 1990 to 1996, Florida ranked third
of the ten most populated states in terms of percentage population growth.
Florida's economy has broadened from a base of tourism, agriculture and
retirement living to become increasingly dependent on industrial and commercial
trade. Financial institutions in Florida have experienced substantial growth in
recent years in the amount of total deposits. As of June 30, 1997, these
deposits totaled approximately $200 billion. Management believes that the major
metropolitan areas in Florida
1
<PAGE> 4
have benefited the most from this economic and population expansion, and thus
has selected the Identified Markets as the focus of its expansion strategy.
The Company has assembled an initial management team which includes
individuals who have significant experience in the banking industry in Florida.
Charles E. Hughes, Jr. is the President and Chief Executive Officer of the
Company. Prior to joining the Company, Mr. Hughes served as Chairman of the
Board, President and Chief Executive Officer of SouthTrust Bank of Florida, N.A.
which, as of June, 1997, had approximately $5.4 billion in total deposits. The
Company's Chief Credit Officer is Richard B. Kensler who, prior to joining the
Company, had served since 1987 as a senior credit officer with Signet Banking
Corporation of Richmond, Virginia. The Company has also hired Don D. Roberts to
be President of the Jacksonville Market. Mr. Roberts previously served as
President and Chief Executive Officer of Barnett Bank, N.A., Lake County,
Florida. In addition, the Company will continue to have the resources of current
Bank management, including John S. McMullen who will serve as a Director and
President of the Tampa Market and T. Edwin Stinson, Jr. who will serve as Chief
Financial Officer of the Company.
STRATEGY OF THE COMPANY
The Company's business strategy is to create a statewide community banking
system in Florida. The major elements of this strategy are to:
- EXPAND THE BANK'S OPERATIONS IN THE TAMPA MARKET AND, AS SOON AS
PRACTICABLE FOLLOWING THE OFFERING, COMMENCE OPERATIONS IN THE
JACKSONVILLE MARKET;
- ESTABLISH COMMUNITY BANKING OFFICES IN EACH OF THE THREE REMAINING
IDENTIFIED MARKETS AS SOON AS LOCAL MANAGEMENT TEAMS ARE IDENTIFIED;
- ESTABLISH COMMUNITY BANKING OFFICES WITH LOCALLY RESPONSIVE MANAGEMENT
TEAMS EMPHASIZING A HIGH LEVEL OF PERSONALIZED CUSTOMER SERVICE;
- TARGET SMALL AND MEDIUM-SIZED BUSINESS CUSTOMERS THAT REQUIRE THE
ATTENTION AND SERVICE WHICH A COMMUNITY-ORIENTED BANK IS WELL SUITED TO
PROVIDE;
- PROVIDE A BROAD ARRAY OF TRADITIONAL BANKING PRODUCTS AND SERVICES;
- MAINTAIN CENTRALIZED SUPPORT FUNCTIONS, INCLUDING BACK OFFICE OPERATIONS,
CREDIT POLICIES AND PROCEDURES, INVESTMENT PORTFOLIO MANAGEMENT,
ADMINISTRATION, HUMAN RESOURCES AND TRAINING, TO MAXIMIZE OPERATING
EFFICIENCIES AND FACILITATE RESPONSIVENESS TO CUSTOMERS; AND
- OUTSOURCE CORE PROCESSING AND BACK ROOM OPERATIONS TO INCREASE
EFFICIENCIES.
The Company expects to establish Community Banking Offices in each new
market area primarily through the de novo branching of the Bank. Management will
also, however, evaluate opportunities for strategic acquisitions of financial
institutions in markets that are consistent with its business plan. Upon
consummation of the Merger, the Bank will be renamed Florida Bank, N.A.
BANK ACQUISITION
On March 30, 1998, the Company executed a definitive merger agreement with
the Bank, pursuant to which the Company will acquire all of the outstanding
capital stock of the Bank in exchange for shares of Common Stock. The aggregate
purchase price for the Bank will be $13.75 million. The total number of shares
of Common Stock to be issued in the Merger is based upon the initial public
offering price of the Common Stock. The Merger will be accounted for as if the
Bank had acquired the Company, the financial statements of the Bank will become
the historical financial statements of the Company and there will be no goodwill
recorded as a result of the Merger. On June 17, 1998, the Company received
approval from the Federal Reserve Bank of Atlanta to acquire the Bank, and on
July 29, 1998, the Office of the Comptroller of the Currency (the "OCC")
approved the merger of the Bank and the Company's interim bank subsidiary. At a
special meeting held on July 24, 1998, the Bank's shareholders approved the
Merger, which will be consummated immediately prior to the closing of the
Offering. As of December 31, 1997 and for the fiscal year ended December 31,
1997, the Bank reported total assets of $60.4 million, total shareholders'
equity of $6.3 million and net income of $376,000. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Description
of Bank Acquisition."
2
<PAGE> 5
CURRENT COMPANY OPERATIONS
The Company will remain in the development stage until the consummation of
the Merger and the completion of the Offering. The Company had no operations for
the year ended December 31, 1997 and had no equity and de minimus assets and
liabilities at December 31, 1997. The Company has funded its start-up and
organization costs through the sale of units in a private placement that was
completed in February 1998. The sale of the units, which consist of common
stock, preferred stock and common stock purchase warrants, generated $606,808 in
proceeds to the Company.
The Company's offices are located at 4110 Southpoint Boulevard, Suite 212,
Southpoint Square II, Jacksonville, Florida 32216-0925. The Company's telephone
number is (904) 296-2329. The Company's offices will be relocated upon
consummation of the Merger and the Offering, and the establishment of a
Community Banking Office in Jacksonville.
THE OFFERING
Common Stock offered by the
Company.................. 4,000,000 shares(1)
Common Stock outstanding
after the Offering and the
Merger................... 5,752,800 shares(2)(3)
Use of Proceeds............ To provide the Bank with additional growth capital,
redeem outstanding Company preferred stock, fund
expansion through branching and the acquisition of
existing banks, and for other general corporate
purposes. See "Use of Proceeds."
- ---------------
(1) Excludes 600,000 shares of Common Stock issuable upon full exercise of the
Underwriters' over-allotment option.
(2) Excludes 900,000 shares of Common Stock reserved for issuance under the
Company's 1998 Stock Option Plan. Upon consummation of the Offering, there
will be outstanding options to purchase 465,000 shares of Common Stock, of
which options to purchase 325,000 shares will be immediately exercisable,
with an exercise price equal to the initial public offering price and
outstanding warrants to purchase 80,800 shares of Common Stock issued in
connection with the initial capital offering to certain foreign investors
with an exercise price equal to the initial public offering price. See
"Management -- Stock Option Plan."
(3) Includes 1,375,000 shares of Common Stock to be issued to shareholders of
the Bank in connection with the Merger based on the initial public offering
price of $10.00 per share. In addition, includes 377,800 shares of Common
Stock outstanding prior to the Offering. See "Description of Bank
Acquisition" for a discussion of the exchange ratio formula to be used in
the Merger.
Nasdaq National Market
Symbol................... "FLBK"
RISK FACTORS
Prior to making an investment decision, prospective purchasers should
consider all of the information set forth in this Prospectus and should evaluate
the statements set forth in "Risk Factors" beginning on page 7. Such factors
include, without limitation, the lack of operating history of the Company;
expansion and management of growth; competition; the operating history of the
Bank; dependence on management; the broad discretion in the use of proceeds;
credit risk and the allowance for loan losses; interest rate risk; the absence
of a prior public market; the potential for fluctuation in quarterly results and
the volatility of the stock price; certain unpredictable economic conditions;
the limitation on dividends and the reliance on the Bank for receipt of such
dividends; the impact of technological advances and upgrade to the Company's
internal systems; year 2000 compliance; anti-takeover provisions; the issuance
of preferred stock; the need for future capital; government regulation; the
determination of the initial public offering price; dilution to investors;
restrictions on certain shares eligible for future sale; the fact that the
Common Stock is not an insured bank deposit; and the indemnification of
directors and officers.
3
<PAGE> 6
SUMMARY SELECTED FINANCIAL DATA
The following tables set forth the summary selected financial data of the
Company and the Bank for the periods indicated. As the Company had no operations
during 1997 and had no equity and de minimus assets and liabilities at December
31, 1997, the selected financial data of the Company as of December 31, 1997 and
for the period then ended is not relevant and therefore is not included herein.
The selected financial data of the Bank as of December 31, 1997 and 1996 and for
each of the three years ended December 31, 1997, 1996 and 1995 are derived from
the financial statements of the Bank, which have been audited by Deloitte &
Touche LLP, independent auditors. The selected financial data of the Bank as of
December 31, 1995, 1994 and 1993 and for the years ended December 31, 1994 and
1993 are derived from the financial statements of the Bank, which were audited
by other independent certified public accountants. The selected financial data
of the Bank for the three months ended March 31, 1998 and 1997 have been derived
from the Bank's unaudited financial statements. The selected financial data of
the Company for the three months ended March 31, 1998 have been derived from the
Company's unaudited financial statements. In the opinion of management, all
unaudited financial statements used to derive the information presented have
been prepared on the same basis as the audited financial statements and include
all adjustments consisting only of normal recurring accruals necessary for a
fair presentation of the results for the periods presented. The information for
the three months ended March 31, 1998 is not necessarily indicative of the
operating results to be expected for any future period. These selected financial
data should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the Company's financial
statements and notes thereto, the Bank's financial statements and notes thereto,
and financial and other information included elsewhere herein.
<TABLE>
<CAPTION>
THE COMPANY THE BANK
--------------- -------------------------------------------------------------
THREE MONTHS THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31, YEAR ENDED DECEMBER 31,
--------------- --------------- -------------------------------------------
1998 1998 1997 1997 1996 1995 1994 1993
--------------- ------ ------ ------ ------ ------ ------ -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SUMMARY INCOME
STATEMENT:
Interest income......... $ -- $1,067 $1,037 $4,302 $3,614 $2,937 $2,075 $ 1,772
Interest expense........ -- 595 556 2,296 1,872 1,474 1,005 954
------- ------ ------ ------ ------ ------ ------ -------
Net interest income..... -- 472 481 2,006 1,742 1,463 1,070 818
Provision (benefit) for
loan losses........... -- 15 15 60 60 (138) (15) --
------- ------ ------ ------ ------ ------ ------ -------
Net interest income
after provision for
loan losses........... -- 457 466 1,946 1,682 1,602 1,085 818
Noninterest income...... -- 152 168 504 517 375 385 542
Noninterest
expense(1)............ 4,039 525 455 1,842 1,598 1,621 1,568 2,684
------- ------ ------ ------ ------ ------ ------ -------
Income (loss) before
provision for income
taxes and cumulative
effect of change in
accounting............ (4,039) 84 180 608 601 356 (99) (1,325)
Change in accounting for
organizational
costs................. (26) -- -- -- -- -- -- --
Provision for income
taxes(2).............. -- 32 69 232 217 -- -- --
------- ------ ------ ------ ------ ------ ------ -------
Net income (loss)....... $(4,065) $ 52 $ 111 $ 376 $ 384 $ 356 $ (99) $(1,325)
======= ====== ====== ====== ====== ====== ====== =======
Earnings (loss) per
common share(3):
Basic................. $(19.10) $ .03 $ .06 $ .21 $ 21 $ .20 $ (.05) $ (2.69)
Diluted............... (19.10) .03 .06 .19 .20 .19 (.05) (2.69)
</TABLE>
4
<PAGE> 7
- ---------------
(1) Noninterest expense for the Company for the three months ended March 31,
1998 includes a nonrecurring noncash charge of $3,939,000 relating to the
February 3, 1998 sale of Common Stock and Warrants included in the Units
sold to accredited foreign investors and the February 11, 1998 sale of
297,000 shares of Common Stock to 14 officers, directors and consultants.
See Note 2 to the Company's financial statements.
(2) The provision for income taxes for 1997 and 1996 is comprised solely of
deferred income taxes. The benefit of the utilization of net operating loss
carry forwards for 1997 and 1996 (periods subsequent to the effective date
of the Bank's quasi-reorganization) have been reflected as increases to
additional paid-in capital.
(3) The earnings per share amounts are based upon the Bank's historical weighted
average number of shares outstanding and do not reflect any pro forma
adjustments relating to the Offering or the exchange of shares upon
consummation of the Merger.
5
<PAGE> 8
<TABLE>
<CAPTION>
THE BANK
----------------------------------------------------------------
AT MARCH 31, AT DECEMBER 31,
------------ -------------------------------------------------
1998 1997 1996 1995 1994 1993
------------ ------- ------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
SUMMARY BALANCE SHEET DATA:
Investment securities............... $11,525 $10,765 $ 8,551 $ 6,760 $ 7,495 $ 4,590
Loans, net of deferred loan fees.... 36,116 33,720 31,627 26,571 20,292 17,041
Earning assets...................... 56,731 54,731 52,588 38,801 32,377 26,481
Total assets........................ 62,173 60,396 55,505 41,748 34,959 29,337
Noninterest-bearings deposits....... 6,500 6,442 8,122 5,719 4,660 3,696
Total deposits...................... 45,214 45,460 45,526 34,633 31,886 26,093
Other borrowed funds................ 10,368 8,317 6,408 4,212 780 628
Total shareholders' equity.......... 6,347 6,314 3,269 2,678 2,143 2,421
PERFORMANCE RATIOS(1):
Net interest margin(2).............. 3.51% 3.89% 4.05% 4.13% 3.77% 3.02%
Efficiency ratio(3)................. 84.21 73.39 70.76 88.16 107.84 197.45
Return on average assets............ .35 .70 .85 .95 (.32) (4.22)
Return on average equity............ 3.26 10.62 13.18 14.85 (4.14) (68.70)
ASSET QUALITY RATIOS:
Allowance for loan losses to total
loans............................. 1.40% 1.42% 1.36% 1.28% 2.27% 2.60%
Non-performing loans to total
loans(4).......................... 1.20 -- -- -- .60 .90
Net charge-offs (recoveries) to
average loans..................... (.03) .03 (.11) (.07) (.18) .42
CAPITAL AND LIQUIDITY RATIOS:
Total capital to risk-weighted
assets............................ 14.49% 14.29% 12.26% 12.42% 13.28% 15.41%
Tier 1 capital to risk-weighted
assets............................ 13.24 13.00 11.01 11.17 12.03 14.14
Tier 1 capital to average assets.... 7.88 7.42 6.42 6.64 6.30 7.56
Average loans to average deposits... 75.37 75.77 75.83 67.26 65.11 60.72
Average equity to average total
assets............................ 10.76 6.54 6.45 6.40 7.75 6.15
</TABLE>
- ---------------
(1) Amounts have been annualized.
(2) Computed by dividing net interest income by average earning assets.
(3) Computed by dividing noninterest expense by the sum of net interest income
and noninterest income.
(4) The Bank had no non-performing loans at December 31, 1997, 1996 and 1995.
6
<PAGE> 9
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. In addition to the other information in this Prospectus, the
following factors should be considered carefully in evaluating an investment in
the shares of Common Stock offered hereby. Certain statements included in this
Prospectus concerning the Company's future financial condition and performance
are forward-looking statements, and the factors discussed below, as well as
those discussed elsewhere in this Prospectus, could cause actual results and
developments to differ materially from those expressed in or implied by such
statements.
NO OPERATING HISTORY OF COMPANY
The Company was incorporated on October 15, 1997 and has not engaged in any
operating activities. Accordingly, the Company has no history of operations as a
bank holding company. The Company's prospects must be considered in light of the
risks, expenses and difficulties frequently encountered by companies in their
early stages of development. To address these risks, the Company must, among
other things, consummate the Merger, expand into new markets, build its customer
base, respond to competitive developments, continue to attract, retain and
motivate qualified management and employees and continue to upgrade its
technologies, products and services. There can be no assurance that the Company
will be successful in addressing such risks. As a result of the substantial
start-up expenditures that must be incurred by the Company in connection with
its organization, acquisition of the Bank and expansion into new markets, the
Company may incur operating losses during its initial years of operations.
EXPANSION AND MANAGEMENT OF GROWTH
The Company intends to pursue an aggressive growth strategy for the
foreseeable future, and future results of operations will be affected by its
ability to, among other things, identify suitable markets and sites for new
Community Banking Offices, build its customer base, attract qualified bank
management, negotiate agreements with acceptable terms in connection with the
acquisition of existing banks and maintain adequate working capital. Failure to
manage growth effectively or to attract and retain qualified personnel could
have a material adverse effect on the Company's business, future prospects,
financial condition or results of operations, and could adversely affect the
Company's ability to implement its business strategy successfully.
There can also be no assurance that the Company will be able to expand its
market presence in the Bank's existing Tampa market or successfully enter new
markets or that any such expansion will not adversely affect the Company. In
entering new markets, the Company will encounter competitors with greater
knowledge of such local markets and greater financial and operational resources.
In addition, although the Company intends to expand primarily through selective
de novo Bank branch openings, the Company intends to regularly evaluate
potential acquisition transactions that would complement or expand the Company's
business. In doing so, the Company expects to compete with other potential
bidders, many of which have greater financial resources than the Company. See
"Business -- Competition."
When entering new geographic markets, the Company will need to establish
relationships with additional well-trained local senior management and other
employees. In order to effect the Company's business strategy, the Company will
be substantially reliant upon local management, and accordingly, it will be
necessary for the Company to give significant local decision-making authority to
its senior officers and managers in any new bank office location. There can be
no assurance that the Company will be able to establish such local affiliations
and attract qualified management personnel.
The process of opening new bank locations and evaluating, negotiating and
integrating acquisition transactions may divert management time and resources.
There can be no assurance that the Company will be able to establish any future
de novo branch office or acquire any additional financial institutions.
Moreover, there can be no assurance that the Company will be able to integrate
successfully or operate profitably any newly established branch office or
acquired financial institution. There can be no assurance that the Company will
not incur disruption and unexpected expenses in integrating newly established
operations. The Company's ability to manage growth as it pursues its expansion
strategy will also be dependent upon, among other factors, its ability to (i)
maintain appropriate policies, procedures and systems to ensure that the
Company's loan
7
<PAGE> 10
portfolio maintains an acceptable level of credit risk and loss and (ii) manage
the costs associated with expanding its infrastructure, including systems,
personnel and facilities. The Company's inability to manage growth as it pursues
its expansion strategy could have a material adverse effect on the Company's
business, future prospects, financial condition or results of operations. See
"Business -- Strategy of the Company."
COMPETITION
Competition among financial institutions in Florida and the Identified
Markets is intense. The Company and the Bank will compete with other bank
holding companies, state and national commercial banks, savings and loan
associations, consumer finance companies, credit unions, securities brokerages,
insurance companies, mortgage banking companies, money market mutual funds,
asset-based non-bank lenders and other financial institutions. Many of these
competitors have substantially greater resources and lending limits, larger
branch networks and are able to offer a broader range of products and services
than the Company and the Bank.
Various legislative actions in recent years have led to increased
competition among financial institutions. As a result of such actions, most
barriers to entry to the Florida market by out-of-state financial institutions
have been eliminated. Recent legislative and regulatory changes and
technological advances have enabled customers to conduct banking activities
without regard to geographic barriers through computer and telephone-based
banking and similar services. In addition, with the enactment of the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 and other laws and
regulations affecting interstate bank expansion, financial institutions located
outside of the State of Florida may now more easily enter the markets currently
and proposed to be served by the Company and the Bank. There can be no assurance
that the United States Congress or the Florida Legislature or the applicable
bank regulatory agencies will not enact legislation or promulgate rules that may
further increase competitive pressures on the Company. The Company's failure to
compete effectively for deposit, loan and other banking customers in its market
areas could have a material adverse effect on the Company's business, future
prospects, financial condition or results of operations. See
"Business -- Strategy of the Company -- Market Expansion."
OPERATING HISTORY OF THE BANK
Unsuccessful operating strategies and tactics employed by the former
management of the Bank, which was incorporated in 1988 under the name
"Enterprise National Bank of Tampa," led to loan losses, poor credit quality,
low net interest margins and high overhead expenses, which resulted in
substantial losses in the years 1988 through 1992. In 1991, the Bank was
required to enter into a Formal Agreement with the OCC pursuant to which the
Bank agreed to take certain remedial actions to improve its condition and
operating performance and to address certain specifically identified
deficiencies (the "Formal Agreement"). In July 1994, after successfully
recapitalizing the Bank in November 1993, restructuring the Board and
management, and significantly improving the Bank's operations and asset quality
of the loan portfolio, the OCC terminated the Formal Agreement. See
"Business -- Current Operations of First National Bank of Tampa."
DEPENDENCE ON MANAGEMENT
The Company is, and for the foreseeable future will be, dependent upon the
services of Charles E. Hughes, Jr., the President and Chief Executive Officer of
the Company, as well as other senior officers and managers retained by the
Company and the Bank. The loss of any of these individuals could have a material
adverse effect on the Company's and the Bank's business, future prospects,
financial condition or results of operations. Neither the Company nor the Bank
maintains key person life insurance with respect to any of its officers. The
future success of the Company also depends on its ability to identify, attract
and retain qualified senior management officers and other employees in each of
the Identified Markets. Moreover, the Company's management team has been
recently assembled. Accordingly, it has not been proven that such persons will
be able to work together effectively. See "Management."
8
<PAGE> 11
BROAD DISCRETION IN USE OF PROCEEDS
The Company will have broad discretion in the application of the net
proceeds of the Offering, which are estimated to be $36.7 million (or $42.3
million if the Underwriters' over-allotment is fully exercised). Upon closing of
the Offering, the Company intends to contribute approximately $12.0 million of
the net proceeds to the capital of the Bank to support future growth of the
Bank's business, including the opening of a Community Banking Office in the
Jacksonville market area, and has other specifically identified uses for
approximately $750,000 of the net proceeds. The remainder of the net proceeds
will be applied in the future as needed to implement the Company's expansion
strategy. Such expansion is presently intended to be accomplished primarily
through the opening of additional Community Banking Offices in the Identified
Markets, but could include one or more acquisitions of existing financial
institutions. However, the timing and specific application of the net proceeds
will remain in the discretion of management of the Company, and investors will
not have the opportunity to evaluate the economic, financial and other relevant
information which will be utilized by the Company in determining the application
of such proceeds. See "Use of Proceeds."
CREDIT RISK; ALLOWANCE FOR LOAN LOSSES
There are risks inherent in making any loan, including risks with respect
to the period of time over which the loan may be repaid, risks resulting from
changes in economic and industry conditions including those in the Identified
Markets, risks inherent in dealing with individual borrowers and risks resulting
from uncertainties as to the future value of collateral. The risk of nonpayment
of loans is inherent in commercial banking. Moreover, the Bank expects to focus
on loans to small and medium-sized businesses, which may result in a large
concentration by the Bank of loans to such businesses. Management will attempt
to minimize the Bank's credit exposure by carefully monitoring the concentration
of its loans within specific industries and through prudent loan application
approval procedures, but there can be no assurance that such monitoring and
procedures will reduce such lending risks. Moreover, as the Company expands into
new geographic markets, the Company's credit administration and loan
underwriting policies will be required to adapt to the local lending and
economic environments of these new markets. There is no assurance that the
Company's credit administration personnel, policies and procedures will
adequately adapt to such new geographic markets.
At December 31, 1997, real estate loans, which included residential
mortgages and construction and commercial loans secured by real estate,
comprised 55.0% of the Bank's total loan portfolio, net of deferred loan fees.
The Bank presently generates all of its real estate mortgage loans in Florida.
Therefore, conditions of the Florida real estate market could strongly influence
the level of the Bank's non-performing mortgage loans and the results of
operations and financial condition of the Company and the Bank. Real estate
values and the demand for mortgages and construction loans are affected by,
among other things, changes in general or local economic conditions, changes in
governmental rules or policies, and the availability of loans to potential
purchasers. In addition, Florida historically has been vulnerable to certain
natural disaster risks, such as floods, hurricanes and tornadoes, which are not
typically covered by the standard hazard insurance policies maintained by
borrowers. Uninsured disasters may adversely impact the ability of borrowers to
repay loans made by the Bank. The existence of adverse economic conditions,
declines in real estate values or the occurrence of such natural disasters in
Florida could have a material adverse effect on the Company's business, future
prospects, financial condition or results of operations. In addition, loans
secured by real estate subject the Company to risks associated with
environmental regulation. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business -- Strategy of the Company."
The Bank's allowance for loan losses is and will continue to be established
after consideration of a wide variety of factors and will be maintained at a
level considered adequate by management to absorb anticipated loan losses. The
amount of future losses is susceptible to changes in economic, operating and
other conditions, including changes in interest rates, that may be beyond the
Company's control, and such losses may exceed current estimates. Although
management of the Bank believes that the allowance for loan losses is currently
adequate to absorb losses on any existing loans that may become uncollectible,
there can be no assurance that the allowance will prove sufficient to cover
actual loan losses in the future.
9
<PAGE> 12
The failure by the Company to adapt its credit policies and procedures on
an adequate and timely basis to new markets or to provide sufficient oversight
to its lending activities could result in an increase in nonperforming assets,
thereby causing operating losses, impairing liquidity and eroding capital, and
could have a material adverse effect on the Company's business, future
prospects, financial condition or results of operations.
INTEREST RATE RISK
The Company's results of operations are directly affected by levels of and
fluctuations in interest rates. Changes in interest rates may (i) negatively
affect the Company's net interest income by impairing the Company's ability to
earn a spread between the interest received on its loans and other earning
assets and the cost of deposits and other borrowings, (ii) reduce gains from
loan sales, (iii) result in higher loan losses and (iv) reduce loan originations
and corresponding loan servicing income. A substantial and/or sustained increase
in interest rates could adversely affect the Bank's ability to originate or sell
loans with returns consistent with past practices, and adversely impact the
ability of borrowers with variable rate loans to meet scheduled debt service
requirements. From time to time, as a result of an imbalance in the maturities
of assets and liabilities and the mix of adjustable and fixed rate loans, a
rapid increase or decrease in interest rates could have a material adverse
effect on the Company's net interest margin, future prospects, financial
condition or results of operations.
Interest rates are highly sensitive to many factors which are beyond the
Company's control, including general economic conditions and the policies of
various government and regulatory authorities. Increases in the discount rate by
the Federal Reserve Board usually lead to rising interest rates, which affect
the Company's interest income, interest expense and investment portfolio. Also,
governmental policies such as the creation of a tax deduction for individual
retirement accounts can alter the rate of savings and affect the cost of funds.
The nature, timing and effect of any future changes in federal monetary and
fiscal policies on the Company and its results of operations are not
predictable. Such changes could have a material adverse effect on the Company's
business, future prospects, financial condition or results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Financial Condition -- Interest Rate Sensitivity and Liquidity
Management."
ABSENCE OF PRIOR PUBLIC MARKET
Prior to the Offering, there has been no public market for the Common
Stock. Subject to notice of issuance, the Company has been approved for the
listing of the Common Stock on The Nasdaq National Market. There can be no
assurance, however, that an active trading market will develop or be sustained
for the Common Stock upon completion of the Offering.
POTENTIAL FLUCTUATION IN QUARTERLY RESULTS AND VOLATILITY OF STOCK PRICE
Subsequent to the Offering, prices for the Common Stock will be determined
by the market and may be influenced by a number of factors, including depth and
liquidity of the market for the Common Stock, investor perceptions of the
Company, changes in conditions or trends in the banking industry or in the
industries of the Company's significant customers, publicly traded comparable
companies and general economic, political and other conditions. In addition, the
trading price of the Common Stock could be subject to significant fluctuations
in response to quarterly variations in the Company's actual or anticipated
operating results, changes in general market conditions and other factors. In
particular, the Company's and the Bank's quarterly revenues are difficult to
forecast and the Company's expense levels are based in part on its expansion
plans in anticipation of loan growth and corresponding revenues generated from
new branch locations. If revenue levels are below expectations, the Company may
be unable or unwilling to reduce expenses proportionately and operating results
would likely be adversely affected. As a result, prior to the full
implementation of the Company's business strategy, the Company believes that
period to period comparisons of its results may not necessarily be meaningful
and should not be relied upon as indications of future performance. Due to all
of the foregoing factors, it is possible that in some future quarter the
Company's operating results will be below the expectations of public market
analysts and investors. In such event, the market price of the Common Stock
10
<PAGE> 13
would likely be materially adversely affected. In recent years, significant
price and volume fluctuations have occurred in the stock prices of companies
that often have been unrelated or disproportionate to their operating
performance. There can be no assurance that the market price of the Common Stock
will not decline below the initial public offering price.
UNPREDICTABLE ECONOMIC CONDITIONS
Commercial banks and other financial institutions are affected by economic
and political conditions, both domestic and international, and by governmental
monetary policies. Conditions such as inflation, recession, unemployment, high
interest rates, restricted money supply, scarce natural resources, international
disorders and other factors beyond the control of the Company and the Bank may
adversely affect their profitability. See "Business -- Monetary Policies."
The Company's success will significantly depend upon general economic
conditions in Florida, the Identified Markets, and the other market areas into
which the Company may expand. A prolonged economic dislocation or recession,
whether in Florida generally or in any or all of the Identified Markets, could
cause the Company's non-performing assets to increase, thereby causing operating
losses, impaired liquidity and the erosion of capital. Such an economic
dislocation or recession could result from a variety of causes, including
natural disasters such as hurricanes, floods or tornadoes, or a prolonged
downturn in various industries upon which the economies of Florida and/or
particular Identified Markets depend. Future adverse changes in the Florida
economy or the local economies of the Identified Markets could have a material
adverse effect on the Company's business, future prospects, financial condition
or results of operations.
LIMITATION ON DIVIDENDS; RELIANCE ON THE BANK
It is not anticipated that the Company will distribute any cash dividends
to its shareholders in the foreseeable future. Earnings of the Bank, if any, are
expected to be retained by the Bank to enhance its capital structure or
distributed to the Company to pay its operating costs. As the Company has no
independent sources of revenue, the Company's principal source of funds to pay
dividends on the Common Stock and its other securities, to service indebtedness
and to fund operations will be cash dividends and other payments that the
Company receives from the Bank. The payment of dividends by the Bank to the
Company is subject to certain restrictions imposed by federal banking laws,
regulations and authorities. See "Dividend Policy" and "Supervision and
Regulation."
IMPACT OF TECHNOLOGICAL ADVANCES; UPGRADE TO COMPANY'S INTERNAL SYSTEMS
The banking industry is undergoing, and management believes will continue
to undergo, technological changes with frequent introductions of new
technology-driven products and services. In addition to improving customer
services, the effective use of technology increases efficiency and enables
financial institutions to reduce costs. The Company's future success will
depend, in part, on its ability to address the needs of its customers by using
technology to provide products and services that will satisfy customer demands
for convenience as well as to enhance efficiencies in the Company's operations.
Management believes that keeping pace with technological advances is important
for the Company, as long as its emphasis on personalized services is not
adversely impacted. Many of the Company's competitors will have substantially
greater resources than the Company to invest in technological and infrastructure
improvements. There can be no assurance that the Bank will be able to implement
new technology-driven products and services effectively or to market
successfully such products and services to its clients. Furthermore, the Company
and the Bank outsource many of their core technology-related systems. The Bank's
failure to acquire, implement or market new technology could have a material
adverse effect on the Company's business, future prospects, financial condition
or results of operations. The Company therefore is dependent upon these outside
vendors to provide many of its technology-related products and services. See
"Use of Proceeds" and "Business -- Strategy of the Company."
11
<PAGE> 14
YEAR 2000 COMPLIANCE
As the year 2000 ("Year 2000") approaches, an important business issue has
emerged regarding existing application software programs and operating systems.
Many existing application software products, including the Bank's, were designed
to accommodate a two-digit year. For example, "98" is stored on the system and
represents 1998 and "00" represents 1900. The Bank primarily utilizes M&I Data
Services, Inc. ("M&I"), a third-party vendor, to provide its primary banking
applications, including core processing systems. In addition, the Bank also uses
M&I's software for certain ancillary computer applications. M&I is in the
process of modifying, upgrading or replacing its computer applications to ensure
timely Year 2000 compliance. In addition, the Company and the Bank have
implemented a Year 2000 compliance program whereby the Bank is reviewing the
Year 2000 issues that may be faced by its other third-party vendors and loan and
deposit customers. Under such program, the Company will examine the need for
modifications or replacement of all non-Year 2000 compliant pieces of software.
The Company does not currently expect that the cost of its and the Bank's Year
2000 compliance program will be material to its financial condition and expects
that it will satisfy such compliance program without material disruption of its
operations. Management of the Company has evaluated the potential effect on
M&I's data processing systems resulting from Year 2000 issues. M&I has
represented to the Bank that M&I's core processing systems will be fully Year
2000 compliant prior to December 31, 1998. In the event that the Company, the
Bank, M&I or its other significant vendors or loan customers do not successfully
and timely achieve Year 2000 compliance, the Bank's business, future prospects,
financial condition or results of operations could be materially adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
ANTI-TAKEOVER PROVISIONS
The Company's Second Amended and Restated Articles of Incorporation (the
"Articles of Incorporation") contain provisions requiring supermajority
shareholder approval to effect certain extraordinary corporate transactions with
Interested Persons, which are defined in the Articles of Incorporation as those
persons who own greater than 5% or more of the shares of the Company's stock
entitled to vote in election of directors, unless that transaction is approved
by three quarters of the Company's Board of Directors (the "Board of Directors"
or the "Board"). This approval is in addition to any other required approval of
the Board of Directors or shareholders. In addition, the Articles of
Incorporation provide for the Board of Directors to be classified into three
classes, as nearly equal in number as possible. Directors initially classified
as "Class I" Directors were originally elected for a term expiring at the annual
meeting of shareholders to be held in 1999, directors initially classified as
"Class II" Directors were originally elected for a term expiring at the annual
meeting of shareholders to be held in 2000, and directors initially classified
as "Class III" Directors were originally elected for a term expiring at the
annual meeting of shareholders to be held in 2001. Directors will thereafter be
elected to serve for three year terms. The Company's Amended and Restated
By-Laws (the "By-Laws") also contain provisions which (i) authorize the Board to
determine the precise number of members of the Board and authorize either the
Board or the shareholders to fill vacancies on the Board, (ii) authorize any
action required or permitted to be taken by the Company's shareholders to be
effected by consent in writing; and (iii) establish certain advance notice
procedures for nomination of candidates for election as directors and for
shareholder proposals to be considered at an annual or special meeting of
shareholders. The issuance of preferred stock by the Company could also have the
effect of making it more difficult for a third party to acquire, or of
discouraging a third party from acquiring, a controlling interest in the Company
and could adversely affect the voting power or other rights of holders of the
Common Stock. These provisions may have the effect of impeding the acquisition
of control of the Company by means of a tender offer, a proxy fight, open-market
purchases or otherwise, without approval of such acquisition by the Board of
Directors. Certain of these provisions also make it more difficult to remove the
Company's current Board of Directors and management. See "Description of Capital
Stock."
12
<PAGE> 15
ISSUANCE OF PREFERRED STOCK
The Company has authorized 1,000,000 shares of preferred stock, $.01 par
value per share (the "Preferred Stock"), of which 600,000 shares have been
designated as the Series A Preferred Stock. Of these 600,000 shares designated
as Series A Preferred Stock, 60,600 are presently outstanding. The designation
of the Series A Preferred Stock and the issuance of additional series of
Preferred Stock could affect the holders of Common Stock in a number of
respects, including the following: the issuance of additional shares of
Preferred Stock may subordinate the Common Stock in terms of dividend and
liquidation rights, because preferred stock typically entitles its holder to
satisfaction in full of specified dividend and liquidation rights before any
payment of dividends or distribution of assets or liquidation is made on shares
of common stock; if voting or conversion rights are granted to the holders of
Preferred Stock, the voting power of the Common Stock (including stock held by
any persons who may be seeking to obtain control of the Company) will be
diluted; the issuance of Preferred Stock may result in a dilution of earnings
per share of the Common Stock; and certain fundamental matters requiring
shareholder approval (such as mergers, consolidations, sales of assets and
future amendments to the Articles of Incorporation) may require prior approval
by the separate vote of each class, including the Preferred Stock (or in some
cases each series of Preferred Stock), even if holders of such Preferred Stock
may not otherwise be entitled to voting rights. The Series A Preferred Stock
which is currently outstanding provides for a liquidation preference of $10.00
per share but does not provide for any voting rights. The Company intends to
redeem the Series A Preferred Stock at a redemption price of $10.00 per share
upon consummation of the Offering. See "Use of Proceeds." The Board of Directors
may authorize the issuance of additional series of Preferred Stock from time to
time without shareholder action. See "Description of Capital Stock."
FUTURE CAPITAL NEEDS
The Board of Directors may determine from time to time a need to obtain
additional capital through the issuance of additional shares of Common Stock or
other securities. There can be no assurance that such shares can be issued at
prices or on terms better than or equal to the initial public offering price and
terms of the Offering. In addition, such issuance would dilute the ownership
interests in the Company of the investors in the Offering.
GOVERNMENT REGULATION
The Company and the Bank operate in a highly regulated environment and are
subject to supervision and regulation by several governmental regulatory
agencies, including the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board"), the OCC, the Federal Deposit Insurance Corporation
(the "FDIC"), the Florida Department of Banking and Finance (the "Florida
Banking Department") and the Securities and Exchange Commission (the
"Commission"). These regulations are generally intended to provide protection
for depositors and customers rather than for the benefit of shareholders. The
Company and the Bank are subject to future legislation and government policy,
including bank deregulation and interstate expansion, which could materially
adversely affect the banking industry as a whole, including the operations of
the Company and the Bank. The establishment of branches or the acquisitions of
banks in the Identified Markets and other market areas is subject to the prior
receipt of certain regulatory approvals. Failure to obtain such regulatory
approvals could have a material adverse effect on the Company's business, future
prospects, financial condition or results of operations. See "Supervision and
Regulation."
DETERMINATION OF INITIAL PUBLIC OFFERING PRICE
The initial public offering price of the Common Stock was determined by
negotiations among the Company and The Robinson-Humphrey Company, LLC,
Interstate/Johnson Lane Corporation and Kelton International Limited, as
representatives ("Representatives") of the Underwriters. Among the factors
considered in determining the initial public offering price of the Common Stock,
in addition to prevailing market conditions, were the history of, and prospects
for, the industry in which the Bank operates, the price to
13
<PAGE> 16
earnings and price to book value multiples of publicly traded common stock of
comparable companies, the cash flow and earnings of the Bank and comparable
companies in recent periods and the Bank's business potential and cash flow and
earnings prospects. There can be no assurance that the market price at closing
will equal or exceed the initial public offering price.
DILUTION
Investors in the Offering will incur an immediate and substantial dilution
in the net tangible book value of the Common Stock from the initial public
offering price. Without taking into account any changes in net tangible book
value after December 31, 1997, other than to give effect to the proceeds of
$240,000 upon the exercise of the Bank's stock options, the issuance of
1,375,000 shares of Common Stock in the Merger, the issuance of 377,800 shares
of Common Stock by the Company in February 1998 at $.01 per share and the sale
by the Company of 4,000,000 shares of Common Stock in the Offering, and after
deducting the underwriting discounts and commissions and the estimated offering
expenses, the net tangible book value of the Company at March 31, 1998 would
have been approximately $43.1 million or $7.50 per share. This represents an
immediate increase in net tangible book value of $3.47 per share to the existing
shareholders and an immediate net tangible book value dilution of $2.50 per
share, or 25.0 % to purchasers in the Offering. See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering and the Merger, the Company will have
5,752,800 shares of Common Stock outstanding (assuming no exercise of the
Underwriters' over-allotment option and 1,375,000 shares of Common Stock issued
in the Merger), outstanding options to purchase 465,000 shares of Common Stock,
of which options to purchase 325,000 shares will be immediately exercisable, and
outstanding warrants to purchase 80,800 shares of Common Stock. Of these shares
outstanding, the 4,000,000 shares offered hereby and 1,375,000 shares to be
issued in the Merger will be eligible for sale in the open market without
restriction (except for any such shares purchased by or issued to "affiliates"
of the Company and the Bank). The remaining 377,800 shares of Common Stock will
be "restricted securities" as that term is defined in Rule 144 ("Rule 144")
promulgated under the Securities Act of 1933, as amended (the "Securities Act").
Of the restricted 377,800 shares of Common Stock, 355,300 will be eligible for
sale in the public market 365 days from the date of their purchase from the
Company and, upon expiration of Mr. Robin C. Kelton's one year lock-up period,
an additional 22,500 shares will be eligible for sale in the public market, in
each case subject to compliance with certain volume limitations and other
conditions of Rule 144. The Company, its officers and directors and certain
other persons who upon consummation of the Merger and the Offering will
beneficially own an aggregate of 1,049,217 shares of Common Stock have agreed,
for a period of 180 days from the date of this Prospectus, not to sell or
otherwise dispose, directly or indirectly, of any shares of Common Stock without
prior written consent of The Robinson-Humphrey Company, LLC. In addition, Mr.
Robin C. Kelton who owns 22,500 shares of Common Stock which are "restricted
securities" has agreed with the Company to not sell or otherwise dispose of,
directly or indirectly, such 22,500 shares for a period of one year from the
date of this Prospectus. Accordingly, following the expiration of the 180-day
lock-up period, approximately 466,967 shares will be eligible for sale in the
public market subject to compliance with certain volume limitations and other
conditions of Rule 144. The market price of the Common Stock could be materially
adversely affected by the sale or availability for sale of shares now held by
the existing shareholders of the Company or of shares which may be issued under
the Company's 1998 Stock Option Plan. See "Management," "Shares Eligible for
Future Sale" and "Underwriting."
COMMON STOCK IS NOT AN INSURED BANK DEPOSIT
The shares of Common Stock offered in the Offering are not deposits,
savings accounts or other obligations of the Company, the Bank or any other
depository institution, are not guaranteed by the Company or any other entity,
will not be insured by the FDIC or any other governmental agency and may not be
used as collateral to secure a loan from the Company, the Bank or any of their
affiliates.
14
<PAGE> 17
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Articles of Incorporation and By-Laws provide for the indemnification
of the Company's officers and directors and insulate such officers and directors
from liability for certain breaches of the duty of care. The Bank's By-Laws
contain similar provisions. It is possible that the indemnification obligations
imposed under these provisions could result in a charge against the Company's
earnings and thereby affect the availability of funds for payment of dividends
to the Company's shareholders. See "Description of Capital Stock -- Certain
Provisions of the Articles of Incorporation and By-Laws" and
"-- Indemnification."
15
<PAGE> 18
FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements, including with
respect to the Company's operations, industry, financial condition and
liquidity. These forward-looking statements are subject to risks and
uncertainties, many of which are beyond the Company's control, which could cause
actual results to differ materially from those contemplated in such
forward-looking statements, including in particular the risks and uncertainties
described under "Risk Factors." Prospective investors are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date hereof. The Company undertakes no obligation to update publicly or revise
any of these forward-looking statements, whether as a result of new information,
future events or circumstances or otherwise. There can be no assurance that the
events described in these forward-looking statements will occur.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 4,000,000 shares of
Common Stock offered by the Company are estimated to be approximately $36.7
million (or $42.3 million if the Underwriters' over-allotment option is fully
exercised), after deducting the estimated underwriting discounts and commissions
and Offering expenses payable by the Company.
The Company anticipates that of the net proceeds received by the Company in
the Offering (i) approximately $12 million will be used immediately to provide
the Bank with additional growth capital which will, among other things, enable
the Bank to increase its legal lending limit and expand its operations in Tampa
and other markets; (ii) approximately $606,000 will be used by the Company to
redeem the outstanding 60,600 shares of the Company's Series A Preferred Stock;
and (iii) $137,500 will be paid to an affiliate in connection with the
acquisition of the Bank. The remaining net proceeds will be retained by the
Company to fund its expansion primarily through branching and the acquisition of
existing banks throughout the Florida market and for other general corporate
purposes. Pending such uses, the net proceeds of the Offering will be invested
in short-term, interest-bearing investment grade securities, certificates of
deposits or guaranteed obligations of the United States. See "Certain
Transactions."
The Series A Preferred Stock was issued in February 1998 to investors to
provide capital to the Company primarily to support start-up costs. Directors
and officers of the Company, the Bank and their affiliates do not own any shares
of the Series A Preferred Stock. The Company intends to redeem the Series A
Preferred Stock at a redemption price of $10.00 per share upon the consummation
of the Offering. In addition, the Company intends to pay a $137,500 finder's fee
in connection with the acquisition of the Bank (1.00% of the aggregate purchase
price), which will be paid from the proceeds of the Offering. See "Description
of Capital Stock -- Preferred Stock" and "Certain Transactions."
Other than the acquisition of the Bank, the Company has no understandings
or agreements with respect to any acquisition. See "Description of Bank
Acquisition."
DIVIDEND POLICY
The Company has not declared or distributed any dividends to the holders of
Common Stock since the Company's organization, and it is not likely that any
cash dividends on the Common Stock will be declared for the foreseeable future.
The Board of Directors intends, for the foreseeable future, to follow a policy
of retaining any earnings of the Company to provide funds to operate and expand
the business of the Company and the Bank.
The Bank is restricted in its ability to pay dividends under the national
banking laws and by regulations of the OCC. Pursuant to 12 U.S.C. sec. 56, a
national bank may not pay dividends from its capital. In addition, no dividends
may be made in an amount greater than a national bank's undivided profits,
subject to other applicable provisions of law. Payments of dividends out of
undivided profits are further limited by 12 U.S.C. sec. 60(a), which prohibits a
bank from declaring a dividend on its shares of common stock until its surplus
equals its common capital, unless there has been transferred to surplus not less
than one-tenth of the bank's net income of the preceding two consecutive half
year periods (in the case of an annual dividend). Pursuant to 12 U.S.C.
sec. 60(b), the approval of the OCC is required if the total of all dividends
declared by the bank in any calendar year exceeds the total of its net income
for that year combined with its retained net income for the preceding two years,
less any required transfers to surplus or a fund for the retirement of any
preferred stock.
16
<PAGE> 19
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of March 31, 1998 and as adjusted to reflect the proceeds of $240,000 upon the
exercise of the Bank's stock options, the issuance of 1,375,000 shares of Common
Stock in connection with the Merger, and the sale by the Company of 4,000,000
shares of Common Stock offered hereby and the application of the estimated net
proceeds therefrom as described under "Use of Proceeds." The following table
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and with the Consolidated
Financial Statements and Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
----------------------------------------
AS ADJUSTED
AS ADJUSTED FOR MERGER
THE COMPANY FOR MERGER AND OFFERING
----------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Shareholders' equity:
Preferred Stock, 1,000,000 shares authorized; 60,600,
60,600 and 0 shares issued and outstanding............ $ 606 $ 606 $ --
Common Stock, $.01 par value per share; 30,000,000 shares
authorized; 377,800, 1,752,800 and 5,752,800 shares
issued and outstanding(1)(2).......................... 4 17 57
Additional paid-in capital............................... 3,774 9,551 46,186
Warrants to acquire 80,800 shares of Common Stock at the
initial public offering price......................... 165 165 165
Accumulated deficit...................................... (4,065) (3,253) (3,253)
Unrealized gain (loss) on available for sale investment
securities, net of tax................................ -- (15) (15)
------- ------- -------
Total capitalization............................. $ 484 $ 7,071 $43,140
======= ======= =======
</TABLE>
- ---------------
(1) Excludes 465,000 shares of Common Stock issuable upon the exercise of
options to be granted under the Company's 1998 Stock Option Plan
simultaneously with the closing of the Offering, of which options to
purchase 325,000 shares will be immediately exercisable.
(2) Before issuance of up to 600,000 shares of Common Stock pursuant to the
Underwriters' over-allotment option.
17
<PAGE> 20
DILUTION
The pro forma net tangible book value of the Company at March 31, 1998 was
approximately $7.1 million or $4.03 per share of Common Stock. Pro forma net
tangible book value per share represents the amount of the Company's total
assets less intangible assets and total liabilities, divided by the total number
of shares of Common Stock outstanding. After giving effect to (i) the sale by
the Company of shares of Common Stock offered hereby at the initial public
offering price of $10.00 per share, (ii) the issuance of 1,375,000 shares of
Common Stock in connection with the Merger, (iii) the receipt of proceeds of
$240,000 upon the exercise of the Bank's stock options, and (iv) the application
of the estimated net proceeds therefrom, the pro forma net tangible book value
of the Company at March 31, 1998 would have been $43.1 million or $7.50 per
share of Common Stock. This represents an immediate increase in such pro forma
net tangible book value of $3.47 per share to shareholders and an immediate
dilution in the pro forma net tangible book value of $2.50 per share to
investors purchasing shares of Common Stock in the Offering. The following table
illustrates the resulting per share dilution to new investors:
<TABLE>
<S> <C> <C>
Initial public offering price per share(1).................. $10.00
Net tangible book value per share at March 31, 1998....... $4.03
Increase per share attributable to new investors(2)....... 3.47
-----
Pro forma net tangible book value per share after the
Offering.................................................. 7.50
------
Dilution per share to new investors(3)...................... $ 2.50
======
</TABLE>
- ---------------
(1) Before deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company.
(2) After deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company.
(3) Excludes 900,000 shares of Common Stock reserved for issuance under the
Company's 1998 Stock Option Plan.
The following table summarizes, on a pro forma basis as of March 31, 1998,
the number of shares of Common Stock purchased from the Company and the total
consideration paid, and the average per share consideration paid to the Company
by existing shareholders and by new investors purchasing the shares of Common
Stock offered hereby:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders(1)......... 1,752,800 30.5% $ 7,070,617 15.0% $ 4.03
New investors.................... 4,000,000 69.5 40,000,000 85.0 10.00
--------- ----- ----------- -----
Total.................. 5,752,800 100.0% $47,070,617 100.0%
========= ===== =========== =====
</TABLE>
- ---------------
(1) Includes the issuance of 1,375,000 shares of Common Stock in connection with
the Merger.
18
<PAGE> 21
SELECTED FINANCIAL DATA
The following tables set forth selected financial data of the Company and
the Bank for the periods indicated. As the Company had no operations during 1997
and had no equity and de minimis assets and liabilities at December 31, 1997,
the selected financial data of the Company as of December 31, 1997 and for the
period then ended is not relevant and therefore is not included herein. The
selected financial data of the Bank as of December 31, 1997 and 1996 and for
each of the three years ended December 31, 1997, 1996 and 1995 are derived from
the financial statements of the Bank, which have been audited by Deloitte &
Touche LLP, independent auditors. The selected financial data of the Bank as of
December 31, 1995, 1994 and 1993 and for the years ended December 31, 1994 and
1993 are derived from the financial statements of the Bank, which were audited
by other independent certified public accountants. The selected financial data
of the Bank for the three months ended March 31, 1998 and 1997 have been derived
from the Bank's unaudited financial statements. The selected financial data of
the Company for the three months ended March 31, 1998 have been derived from the
Company's unaudited financial statement. In the opinion of management, all
unaudited financial statements used to derive the information presented have
been prepared on the same basis as the audited financial statements and include
all adjustments consisting of normal recurring accruals necessary for a fair
presentation of the results for the periods presented. The information for the
three months ended March 31, 1998 is not necessarily indicative of the operating
results to be expected for any future period. These selected financial data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the Company's financial
statements and notes thereto, the Bank's financial statements and notes thereto,
and financial and other information included elsewhere herein.
<TABLE>
<CAPTION>
THE COMPANY THE BANK
------------ -------------------------------------------------------------
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31, YEAR ENDED DECEMBER 31,
------------ --------------- -------------------------------------------
1998 1998 1997 1997 1996 1995 1994 1993
------------ ------ ------ ------ ------ ------ ------ -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SUMMARY INCOME STATEMENT:
Interest income.............................. $ -- $1,067 $1,037 $4,302 $3,614 $2,937 $2,075 $1,772
Interest expense............................. -- 595 556 2,296 1,872 1,474 1,005 954
------- ------ ------ ------ ------ ------ ------ -------
Net interest income.......................... -- 472 481 2,006 1,742 1,463 1,070 818
Provision (benefit) for loan losses.......... -- 15 15 60 60 (138) (15) --
------- ------ ------ ------ ------ ------ ------ -------
Net interest income after provision for loan
losses..................................... -- 457 466 1,946 1,682 1,602 1,085 818
Noninterest income........................... -- 152 168 504 517 375 385 542
Noninterest expense(1)....................... 4,039 525 455 1,842 1,598 1,621 1,568 2,684
------- ------ ------ ------ ------ ------ ------ -------
Income (loss) before provision for income
taxes and cumulative effect of change in
accounting................................. (4,039) 84 180 608 601 356 (99) (1,325)
Change in accounting for organizational
costs...................................... (26) -- -- -- -- -- -- --
Provision for income taxes(2)................ -- 32 69 232 217 -- -- --
------- ------ ------ ------ ------ ------ ------ -------
Net income (loss)............................ $(4,065) $ 52 $ 111 $ 376 $ 384 $ 356 $ (99) $(1,325)
======= ====== ====== ====== ====== ====== ====== =======
Earnings (loss) per common share(3):
Basic...................................... $(19.10) $ .03 $ .06 $ .21 $ .21 $ .20 $ (.05) $ (2.69)
Diluted.................................... (19.10) .03 .06 .19 .20 .19 (.05) (2.69)
</TABLE>
- ---------------
(1) Noninterest expense for the Company for the three months ended March 31,
1998 includes a nonrecurring noncash charge of $3,939,000 relating to the
February 3, 1998 sale of Common Stock and Warrants included in the Units
sold to accredited foreign investors and the February 11, 1998 sale of the
297,000 shares of Common Stock to 14 officers, directors and consultants.
See Note 2 to the Company's financial statements.
(2) The provision for income taxes for 1997 and 1996 is comprised solely of
deferred income taxes. The benefit of the utilization of net operating loss
carryforwards for 1997 and 1996 (periods subsequent to the effective date of
the Bank's quasi-reorganization) have been reflected as increases to
additional paid-in capital.
(3) The earnings per share amounts are based upon the Bank's historical weighted
average number of shares outstanding and do not reflect any pro forma
adjustments relating to the exchange of shares upon consummation of the
Merger.
19
<PAGE> 22
<TABLE>
<CAPTION>
THE BANK
----------------------------------------------------------------
AT DECEMBER 31,
AT MARCH 31, -------------------------------------------------
1998 1997 1996 1995 1994 1993
------------ ------- ------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
SUMMARY BALANCE SHEET DATA:
Investment securities............... $11,525 $10,765 $ 8,551 $ 6,760 $ 7,495 $ 4,590
Loans, net of deferred loan fees.... 36,116 33,720 31,627 26,571 20,292 17,041
Earning assets...................... 56,731 54,731 52,588 38,801 32,377 26,481
Total assets........................ 62,173 60,396 55,505 41,748 34,959 29,337
Noninterest-bearings deposits....... 6,500 6,442 8,122 5,719 4,660 3,696
Total deposits...................... 45,214 45,460 45,526 34,633 31,886 26,093
Other borrowed funds................ 10,368 8,317 6,408 4,212 780 628
Total shareholders' equity.......... 6,347 6,314 3,269 2,678 2,143 2,421
PERFORMANCE RATIOS:(1)
Net interest margin(2).............. 3.51% 3.89% 4.05% 4.13% 3.77% 3.02%
Efficiency ratio(3)................. 84.21 73.39 70.76 88.16 107.84 197.45
Return on average assets............ .35 .70 .85 .95 (.32) (4.22)
Return on average equity............ 3.26 10.62 13.18 14.85 (4.14) (68.70)
ASSET QUALITY RATIOS:
Allowance for loan losses to total
loans............................. 1.40% 1.42% 1.36% 1.28% 2.27% 2.60%
Non-performing loans to total
loans(4).......................... 1.20 -- -- -- .60 .90
Net charge-offs (recoveries) to
average loans..................... (.03) .03 (.11) (.07) (.18) .42
CAPITAL AND LIQUIDITY RATIOS:
Total capital to risk-weighted
assets............................ 14.49% 14.29% 12.26% 12.42% 13.28% 15.41%
Tier 1 capital to risk-weighted
assets............................ 13.24 13.00 11.01 11.17 12.03 14.14
Tier 1 capital to average assets.... 7.88 7.42 6.42 6.64 6.30 7.56
Average loans to average deposits... 75.37 75.77 75.83 67.26 65.11 60.72
Average equity to average total
assets............................ 10.76 6.54 6.45 6.40 7.75 6.15
</TABLE>
- ---------------
(1) Amounts have been annualized.
(2) Computed by dividing net interest income by average earning assets.
(3) Computed by dividing noninterest expense by the sum of net interest income
and noninterest income.
(4) The Bank had no non-performing loans at December 31, 1997, 1996 and 1995.
20
<PAGE> 23
PRO FORMA FINANCIAL DATA
On March 30, 1998, the Company executed a definitive merger agreement with
the Bank, pursuant to which the Company will acquire all of the outstanding
capital stock of the Bank in exchange for shares of Common Stock. The aggregate
purchase price for the Bank will be $13.75 million, and 1,375,000 shares of
Common Stock will be issued in the Merger. The Merger will be accounted for as
if the Bank had acquired the Company, the financial statements of the Bank will
become the historical financial statements of the Company and there will be no
goodwill recorded as a result of the Merger.
The unaudited pro forma financial data set forth below assume that the
Company was formed on January 1, 1997 and gives effect to the acquisition of the
Bank as if such acquisition had occurred on January 1, 1997. The pro forma
financial data set forth below does not include the effects of the Offering. The
pro forma financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
Company's Financial Statements and Notes thereto, the Bank's Financial
Statements and Notes thereto, and financial and other information included
elsewhere herein. The pro forma results are not necessarily indicative of the
results that would have been achieved had the acquisition of the Bank occurred
on January 1, 1997, or of future operations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 THREE MONTHS ENDED MARCH 31, 1998
------------------------------------- -------------------------------------
THE COMPANY THE COMPANY
PRO FORMA PRO FORMA
THE COMPANY THE BANK CONSOLIDATED THE COMPANY THE BANK CONSOLIDATED
----------- -------- ------------ ----------- -------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
SUMMARY INCOME STATEMENT:
Interest income................. $ -- $4,302 $4,302 $ -- $ 1,067 $ 1,067
Interest expense................ -- 2,296 2,296 -- 595 595
---- ------ ------ ------- ------- -------
Net interest income............. -- 2,006 2,006 -- 472 472
Provision for loan losses....... -- 60 60 -- 15 15
---- ------ ------ ------- ------- -------
Net interest income after
provision for loan losses..... -- 1,946 1,946 -- 457 457
Noninterest income.............. -- 504 504 -- 152 152
Noninterest expense(1).......... -- 1,842 1,842 4,039(2) 525 4,564
---- ------ ------ ------- ------- -------
Income (loss) before provision
for income taxes and
cumulative effect of change in
accounting.................... -- 608 608 (4,039) 84 (3,955)
Change in accounting for
organizational costs.......... -- -- -- (26) -- (26)
Provision for income taxes...... -- 232 232 -- 32 --
---- ------ ------ ------- ------- -------
Net income (loss)............... $ -- $ 376 $ 376 $(4,065) $ 52 $(3,981)
==== ====== ====== ======= ======= =======
Pro forma earnings (loss) per
share (diluted)............... -- $ .27(3) $ .21(4) $ 19.10 $ 0.04(3) $ (2.27)(4)
==== ====== ====== ======= ======= =======
SUMMARY BALANCE SHEET DATA: AT MARCH 31, 1998
-------------------------------------
Cash and cash equivalents....... $ 409 $11,689 $12,098
Investment securities........... -- 11,525 11,525
Loans, net of deferred loan
fees.......................... -- 36,116 36,116
Earning assets.................. -- 56,731 56,731
Total assets.................... 484 62,173 62,657
Noninterest-bearing deposits.... -- 6,500 6,500
Total deposits.................. -- 45,214 45,214
Other borrowed funds............ -- 10,368 10,368
Total shareholders' equity...... 484 6,347 6,831
</TABLE>
21
<PAGE> 24
- ---------------
(1) The pro forma financial data do not give effect to certain employment
agreements between the Company and Messrs. Hughes, McMullen and Stinson who
will serve as President and Chief Executive Officer, President of the Tampa
Market, and Chief Financial Officer, respectively. On an annual basis, such
contracts will increase noninterest expense by $276,000.
(2) Noninterest expense for the Company for the three months ended March 31,
1998 includes a nonrecurring, noncash charge of $3,939,000 relating to the
February 3, 1998 sale of Common Stock and Warrants included in the Units
sold to accredited foreign investors and the February 11, 1998 sale of the
297,000 shares of Common Stock to 14 officers, directors and consultants.
See Note 2 to the Company's financial statements.
(3) Pro forma earnings per share for the Bank have been computed based on
1,375,000 shares of Common Stock to be issued to the shareholders of the
Bank in connection with the Merger.
(4) Pro forma earnings per share for the Company have been computed based on an
estimated 1,752,800 shares of Common Stock outstanding, which includes
1,375,000 shares of Common Stock to be issued to the shareholders of the
Bank in connection with the Merger and 377,800 shares of Common Stock
outstanding at March 31, 1998.
22
<PAGE> 25
BUSINESS
GENERAL
Florida Banks, Inc. (the "Company") was incorporated on October 15, 1997 to
create a statewide community banking system focusing on the largest and fastest
growing markets in Florida. Immediately prior to the closing of the Offering,
the Company will acquire First National Bank of Tampa (the "Bank") as its entry
into the Tampa/Hillsborough County market area. The Company intends to open a
community banking office in the Jacksonville market area as soon as practicable
following consummation of the Offering. Future business plans include further
expansion in the Tampa/Hillsborough County and Jacksonville market areas and
entry into the markets of Orlando/Orange County, Ft. Lauderdale/Broward County
and the Palm Beaches (collectively, the "Identified Markets"). As opportunities
arise, the Company also intends to expand into other Florida market areas with
demographic characteristics similar to the Identified Markets. Within each of
the Identified Markets, the Company expects to offer a broad range of
traditional banking products and services, focusing primarily on small and
medium-sized businesses. See "-- Strategy of the Company -- Market Expansion"
and "-- Products and Services."
The Company will have a community banking approach that emphasizes
responsive and personalized service to its customers. Management's expansion
strategy includes attracting strong local management teams who have significant
banking experience, community contacts and business development potential in the
Identified Markets. Once local management teams are identified, the Company
intends to establish community banking offices in each of the Identified
Markets. Each management team will operate one or more community banking offices
within its particular market area, will have a high degree of local decision-
making authority and will operate in a manner that provides responsive,
personalized services similar to an independent community bank ("Community
Banking Office"). The Company will maintain centralized credit policies and
procedures as well as centralized back office functions to support the Community
Banking Offices. Management expects that upon the Company's entry into a new
market area, it will undertake a marketing campaign utilizing an officer calling
program and community-based promotions. In addition, management will be
compensated based on loan production goals, and each market area will be
supported by a local board of advisory directors, which will be provided with
financial incentives to assist in the development of banking relationships
throughout the community. See "-- Model 'Local Community Bank."'
Management of the Company believes that the significant consolidation in
the banking industry in Florida has disrupted customer relationships as the
larger regional financial institutions increasingly focus on larger corporate
customers, standardized loan and deposit products and other services. Generally,
these products and services are offered through less personalized delivery
systems which has created a need for higher quality services to small and
medium-sized businesses. In addition, consolidation of the Florida banking
market has dislocated experienced and talented management personnel due to the
elimination of redundant functions and the need to achieve cost savings. As a
result of these factors, management believes the Company has a unique
opportunity to attract and maintain its targeted banking customers and
experienced management personnel within the Identified Markets.
The Community Banking Offices within each market area will be supported by
centralized back office operations. From the Company's main offices located in
Jacksonville and the Bank and its operations center in Tampa, the Company will
provide a variety of support services to each of the Community Banking Offices,
including back office operations, investment portfolio management, credit
administration and review, human resources, administration, training and
strategic planning. Core processing, check clearing and other similar functions
will be outsourced to major vendors. As a result, these operating strategies
will enable the Company to achieve cost efficiencies and to maintain consistency
in policies and procedures and allow the local management teams to concentrate
on developing and enhancing customer relationships.
The Company expects to establish Community Banking Offices in each new
market area, primarily through the de novo branching of the Bank. Management
will also, however, evaluate opportunities for strategic acquisitions of
financial institutions in markets that are consistent with its business plan.
23
<PAGE> 26
There can be no assurances that the Company's objectives will be realized.
See "Risk Factors -- Expansion and Management of Growth," " -- Competition" and
" -- Unpredictable Economic Conditions."
INDUSTRY AND DEMOGRAPHIC OVERVIEW
Management of the Company believes that consolidation within the banking
industry in Florida has created a unique opportunity to build a successful,
locally-oriented banking system. According to the Federal Deposit Insurance
Corporation ("FDIC"), as of December 31, 1987, 560 depository institutions were
located in Florida. By December 31, 1997, there were a total of 311 depository
institutions in Florida, representing a decline of approximately 44% over the
ten-year period. Management attributes this decline to the liberalization of
interstate banking and branching laws allowing the entry into, and expansion in,
Florida by numerous large bank holding companies. The result of this acquisition
activity has been a significant reduction in the number of community-oriented
financial institutions focusing on personalized service to small and medium-
sized business customers. Management of the Company believes that the Company's
strategy, which is based on a community bank model, is better suited to provide
a high level of service to smaller commercial or individual retail customers
than larger financial institutions.
Management of the Company believes that the State of Florida in general and
the Identified Markets in particular have vibrant and growing economies and
represent an attractive opportunity to build a statewide community banking
system. According to the Bureau of Economic and Business Research at the
University of Florida, Florida's population of approximately 14.7 million in
1997 made it the fourth most populated state in the country. From 1990 to 1996,
Florida ranked third among the ten most populated states in terms of percentage
population growth. Florida's economy has broadened from a base of tourism,
agriculture and retirement living to become increasingly dependent on industrial
and commercial trade. According to the FDIC, during 1997, nonagricultural
employment in Florida increased by 3.6% which was substantially above the
national rate of 2.7%. Management believes that Florida's major metropolitan
areas have benefited the most from this economic and population expansion.
Florida has experienced substantial growth in the amount of commercial and
consumer deposits. As of June 30, 1997, commercial and consumer deposits in
Florida totaled approximately $200 billion, an increase of $13.9 billion for the
period from June 30, 1994 to June 30, 1997.
HISTORY OF THE COMPANY
The concept for the Company was developed in late 1997 by T. Stephen
Johnson & Associates, Inc., a financial services consulting firm ("TSJ&A"). The
Company was organized under the laws of the State of Florida on October 15, 1997
to implement this concept. TSJ&A evaluated potential bank acquisition candidates
in various Florida markets and identified the Bank as an independent financial
institution capable of providing a platform to implement the Company's business
plan. The Company and the Bank commenced preliminary merger negotiations late in
1997, and the parties signed a letter of intent in January 1998.
Simultaneously with the search for an acquisition candidate, the Company
sought a chief executive officer who possessed the experience, leadership skills
and management ability to accomplish the Company's objectives. In January 1998,
the Company hired Charles E. Hughes, Jr. to be the President and Chief Executive
Officer of the Company. Prior to joining the Company, Mr. Hughes served as
Chairman, President and Chief Executive Officer of SouthTrust Bank of Florida,
N.A. which, as of June 1997, had approximately $5.4 billion in total deposits.
The Company believes that the combination of Mr. Hughes' experience in the
Florida banking industry, his extensive network of contacts throughout the state
and his management skills will provide the leadership necessary for the Company
to implement its business strategy.
On March 30, 1998, the Company executed a definitive merger agreement with
the Bank, pursuant to which the Company will acquire all of the outstanding
capital stock of the Bank in exchange for shares of Common Stock. The aggregate
purchase price for the Bank will be $13.75 million, and 1,375,000 shares of
Common Stock will be issued in the Merger. The Merger will be accounted for as
if the Bank had acquired the Company, the financial statements of the Bank will
become the historical financial statements of the Company and there will be no
goodwill recorded as a result of the Merger. As of December 31, 1997 and for
24
<PAGE> 27
the fiscal year ended December 31, 1997, the Bank reported total assets of $60.4
million, total shareholders' equity of $6.3 million and net income of $376,000.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Description of Bank Acquisition."
STRATEGY OF THE COMPANY
General
The Company's business strategy is to create a statewide community banking
system in Florida. The major elements of this strategy are to:
- EXPAND THE BANK'S OPERATIONS IN THE TAMPA MARKET AND, AS SOON AS
PRACTICABLE FOLLOWING THE OFFERING, COMMENCE OPERATIONS IN THE
JACKSONVILLE MARKET;
- ESTABLISH COMMUNITY BANKING OFFICES IN EACH OF THE THREE REMAINING
IDENTIFIED MARKETS AS SOON AS LOCAL MANAGEMENT TEAMS ARE IDENTIFIED;
- ESTABLISH COMMUNITY BANKING OFFICES WITH LOCALLY RESPONSIVE MANAGEMENT
TEAMS EMPHASIZING A HIGH LEVEL OF PERSONALIZED CUSTOMER SERVICE;
- TARGET SMALL AND MEDIUM-SIZED BUSINESS CUSTOMERS THAT REQUIRE THE
ATTENTION AND SERVICE WHICH A COMMUNITY-ORIENTED BANK IS WELL SUITED TO
PROVIDE;
- PROVIDE A BROAD ARRAY OF TRADITIONAL BANKING PRODUCTS AND SERVICES;
- MAINTAIN CENTRALIZED SUPPORT FUNCTIONS, INCLUDING BACK OFFICE OPERATIONS,
CREDIT POLICIES AND PROCEDURES, INVESTMENT PORTFOLIO MANAGEMENT,
ADMINISTRATION, HUMAN RESOURCES AND TRAINING, TO MAXIMIZE OPERATING
EFFICIENCIES AND FACILITATE RESPONSIVENESS TO CUSTOMERS; AND
- OUTSOURCE CORE PROCESSING AND BACK ROOM OPERATIONS TO INCREASE
EFFICIENCIES.
Model "Local Community Bank"
In order to achieve its expansion strategy, the Company initially intends
to establish a Community Banking Office within each Identified Market through
the branching of the Bank. The Company may, however, accomplish its expansion
strategy by acquiring existing banks within an Identified Market if an
opportunity for such an acquisition becomes available. Although each Community
Banking Office will legally be a branch of the Bank, the Company's business
strategy envisions that Community Banking Office(s) located within each market
will operate as if it were an independent community bank.
Prior to expanding into a new market area, management of the Company first
will identify an individual who will serve as the president of that particular
market area, as well as those individuals who will serve on the local advisory
board of directors. The Company believes that a management team that is familiar
with the needs of its community can provide higher quality personalized service
to its customers. The local management team will have a significant amount of
decision-making authority and will be accessible to its customers. As a result
of the consolidation trend in Florida, management of the Company believes there
are significant opportunities to attract experienced bank managers who would
like to join an institution promoting a community banking concept.
Within each market area, the Community Banking Office will have a local
advisory board of directors which will be comprised of prominent members of the
community, including business leaders and professionals, and it is anticipated
that certain members of the local advisory boards may serve as members of the
Board of Directors of the Bank and of the Company. These directors will act as
ambassadors of the Bank within the community and will be expected to promote the
business development of each Community Banking Office.
The Company will encourage both the members of its local boards of
directors as well as its lending officers to be active in the civic, charitable
and social organizations located in the local communities. It is anticipated
that members of the local management team will hold leadership positions in a
number of community organizations, and continue to volunteer for other positions
in the future.
Management expects that upon the Company's entry into a new market area, it
will undertake a marketing campaign utilizing an officer calling program, and
community-based promotions and media
25
<PAGE> 28
advertising. A primary component of management compensation will be based on
loan production goals. Such campaigns will emphasize each Community Banking
Office's local responsiveness, local management team and special focus on
personalized service.
The initial Community Banking Office established in an Identified Market
will have the following banking personnel: a President, a Senior Lender, an
Associate Lending Officer, a Credit Analyst, a Branch/Operations Manager and an
appropriate number of financial service managers and tellers. Additional
Community Banking Offices opened within an Identified Market will be staffed
with appropriate personnel. The number of financial service managers and tellers
necessary will be dependent upon the volume of business. Each Community Banking
Office will also be staffed with enough administrative assistants to assist the
officers effectively in their duties and to enable them to market products and
services actively outside of the office.
It is further expected that the lending officers will be primarily
responsible for the sales and marketing efforts of the Community Banking
Offices. Management will emphasize relationship banking whereby each customer
will be assigned to a specific officer, with other local officers serving as
backup or in supporting roles. Through its experience in the Florida banking
industry, management believes that the most frequent customer complaints pertain
to a lack of personalized service and turnover in lending personnel, which
limits the customer's ability to develop a relationship with his or her lending
officer. The Company intends to hire an appropriate number of lending officers
necessary to facilitate the development of strong customer relationships.
Management intends to offer salaries to the lending officers that are
competitive with other financial institutions in each market area. The salaries
of the lending officers will be comprised of base compensation plus an incentive
payment structure that will be based upon the achievement of certain loan
production goals. Those goals will be reevaluated on a quarterly basis and paid
as a percentage of base salary. Management of the Company believes that such a
compensation structure will provide greater motivation for participating
officers.
It is anticipated that the Community Banking Offices will be located in
commercial areas in each market where the local management team determines there
is the greatest potential to reach the maximum number of small and medium-sized
businesses. It is expected that these Community Banking Offices will develop in
the areas surrounding office complexes and other commercial areas, but not
necessarily in a market's downtown area. Such determinations will depend upon
the customer demographics of a particular market area and the accessibility of a
particular location to its customers. Management of the Company expects to lease
facilities of approximately 3,000 to 4,000 square feet at market rates for each
Community Banking Office. Leasing facilities will enable the Company to avoid
investing significant amounts of capital in property and facilities.
Market Expansion
The Company intends to expand into the largest and fastest growing
communities in Florida. Once the Company has assembled a local management team
and local advisory board of directors for a particular market area, the Company
intends to establish one or more Community Banking Offices in that market. Upon
the consummation of the Merger, the Company will have an established Community
Banking Office in the Tampa market area. In addition, the Company has assembled
a management team in Jacksonville and, as soon as practicable following the
completion of the Offering, will open a Community Banking Office in the
Jacksonville market area. On June 8, 1998, the Bank applied to the OCC for
approval to establish a branch location in Jacksonville. The other markets into
which the Company presently intends to expand are Orlando, Ft. Lauderdale and
Palm Beach. Management has identified these markets as providing the most
favorable opportunities for growth and presently intends to establish Community
Banking Offices within these markets as soon as practicable. Management is also
considering expansion into other selected Florida metropolitan areas.
Certain demographic information with respect to each of the Identified
Markets is discussed below. The demographic information has been provided by
Demographics On-Call, a demographic data source provider, and deposit
information has been provided by the FDIC.
26
<PAGE> 29
Tampa Market. The Tampa market area includes the city of Tampa and
Hillsborough County (the "Tampa Market"). Hillsborough County's population,
which includes the city of Tampa, increased from approximately 834,000 in 1990
to approximately 905,000 in 1997, representing an increase of approximately 8.5%
over that period. The population is projected to increase further to
approximately 954,000 over the next five years. In 1997, the median age in Tampa
was 35.4 years, and the median household income was $35,993. In 1997, the
average unemployment rate for Hillsborough County was 3.3%, as compared to the
national unemployment rate of 4.9% for the same period. As of June 30, 1997,
there were 30 depository institutions (including the Bank) represented in the
Tampa Market with aggregate deposits of approximately $7.4 billion. Deposits in
the Tampa Market increased approximately $1.3 billion from June 30, 1994 through
June 30, 1997, at an annual growth rate of 6.8% for that period.
Jacksonville Market. The Jacksonville market area includes the cities of
Jacksonville, Orange Park, St. Augustine and surrounding counties, including
Clay, Duval and St. Johns Counties (the "Jacksonville Market"). The Jacksonville
Market's population increased from approximately 863,000 in 1990 to
approximately 969,000 in 1997, representing an increase of approximately 12.3%
over that period. The population is expected to increase to approximately 1.1
million over the next five years. In 1997, the median age in Jacksonville was
34.5 years, and the median household income was $36,413. In 1997, the average
unemployment rates for Clay, Duval and St. Johns Counties were 3.0%, 3.7% and
3.0%, respectively, as compared to the national unemployment rate of 4.9% for
the same period. As of June 30, 1997, there were 19 depository institutions
represented in the Jacksonville Market with aggregate deposits of approximately
$7.6 billion. Deposits in the Jacksonville Market increased approximately $793
million from June 30, 1994 through June 30, 1997, at an average annual growth
rate of 3.8% for that period.
Ft. Lauderdale Market. The Ft. Lauderdale market area includes the cities
of Ft. Lauderdale, Hollywood and Pompano Beach, as well as Broward County (the
"Ft. Lauderdale Market"). The Ft. Lauderdale Market's population increased from
approximately 1.3 million in 1990 to approximately 1.5 million in 1997,
representing an increase of approximately 16.3% over that period. The population
is expected to increase further to approximately 1.6 million over the next five
years. In 1997, the median age in Ft. Lauderdale was 39.9 years, and the median
household income was $34,960. In 1997, the average unemployment rate for Broward
County was 4.9%, which was the same as the national unemployment rate for the
same period. As of June 30, 1997, there were 45 depository institutions
represented in the Ft. Lauderdale Market with aggregate deposits of
approximately $22.0 billion. Deposits in the Ft. Lauderdale Market increased
approximately $5.2 billion from June 30, 1994 through June 30, 1997, at an
average annual growth rate of 9.7% for that period.
Orlando Market. The Orlando market area includes the cities of Orlando,
Winter Park and Maitland, as well as Orange County (the "Orlando Market"). The
Orlando Market's population increased from approximately 677,000 in 1990 to
approximately 767,000 in 1997, representing an increase of approximately 13.3%
over that period. The population is expected to increase to approximately
830,000 over the next five years. In 1997, the median age in Orlando was 33.7
years, and the median household income was $37,089. In 1997, the average
unemployment rate for Orange County was 3.3%, as compared to the national
unemployment rate of 4.9% for the same period. As of June 30, 1997, there were
24 depository institutions represented in the Orlando Market with aggregate
deposits of approximately $7.2 billion. Deposits in the Orlando Market increased
approximately $752 million from June 30, 1994 through June 30, 1997, at an
average annual growth rate of 3.9% for that period.
Palm Beach Market. The Palm Beach market area includes the cities of Palm
Beach, West Palm Beach, Jupiter and Stuart, as well as Palm Beach and Martin
Counties (the "Palm Beach Market"). The Palm Beach Market's population increased
from approximately 964,000 in 1990 to approximately 1.1 million in 1997,
representing an increase of approximately 16.3% over that period. The population
is expected to increase to approximately 1.2 million over the next five years.
In 1997, the median age in Palm Beach was 42.0 years, and the median household
income was $41,964. In 1997, the average unemployment rates for Palm Beach and
Martin Counties were 6.3% and 6.9%, respectively, as compared to the national
unemployment rate of 4.9% for the same period. As of June 30, 1997, there were
52 depository institutions represented in the Palm
27
<PAGE> 30
Beach Market with aggregate deposits of approximately $20.0 billion. Deposits in
the Palm Beach Market increased approximately $3.6 billion from June 30, 1994
through June 30, 1997, at an average annual growth rate of 6.9% for that period.
Customers
Management believes that the recent bank consolidation within Florida
provides a community-oriented bank significant opportunities to build a
successful, locally-oriented franchise. Management of the Company further
believes that many of the larger financial institutions do not emphasize a high
level of personalized service to the smaller commercial or individual retail
customers. The Company intends to focus its marketing efforts on attracting
small and medium-sized businesses which include: professionals, such as
physicians and attorneys, service companies, manufacturing companies and
commercial real estate developers. Because the Company intends to focus on small
and medium-sized businesses, management believes that the majority of its loan
portfolio will be in the commercial area with an emphasis placed on commercial
and industrial loans secured by real estate, accounts receivable, inventory,
property, plant and equipment. However, in an effort to maintain a high level of
credit quality, the Company expects that the commercial real estate loans will
be made to borrowers who occupy the real estate securing the loans or where a
creditworthy tenant is involved.
Although the Company expects to concentrate its lending to commercial
businesses, management also anticipates that it will attract a significant
amount of consumer business. Management expects that many of its retail
customers will be the principals of the small and medium-sized businesses for
whom a Community Banking Office will provide banking services. Management
intends to emphasize "relationship banking" in order that each customer will
identify and establish a comfort level with the bank officers within a Community
Banking Office. Management intends to develop its retail business with
individuals who appreciate a higher level of personal service, contact with
their lending officer and responsive decision-making. It is further expected
that most of the Company's business will be developed through its lending
officers and local advisory boards of directors and by pursuing an aggressive
strategy of making calls on customers throughout the market area.
Products and Services
The Company intends to offer and the Bank currently offers a broad array of
traditional banking products and services to its customers. The proceeds from
the Offering will enable the Company to infuse additional capital into the Bank
which will enable the Bank to open Community Banking Offices in new markets and
to expand its existing lines of products and services. The Bank currently
provides products and services that are substantially similar to those set forth
below. For additional information with respect to the Bank's current operations,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Loans. The Company intends to offer a wide range of short to long-term
commercial and consumer loans. The allocation of the loans within each category
may change from time to time and will be dependent upon general economic
conditions. The Company does not have any predetermined division of the Bank's
loan portfolio.
Commercial. The Company expects that its commercial lending will
consist primarily of commercial and industrial loans for the financing of
accounts receivable, inventory, property, plant and equipment. The Company
also expects to offer Small Business Administration guaranteed loans ("SBA
loans") and factoring arrangements to certain of its customers. In making
these loans, the Company intends to manage its credit risk by actively
monitoring such measures as advance rate, cash flow, collateral value and
other appropriate credit factors.
Commercial Real Estate. The Company anticipates that it will also
offer commercial real estate loans to developers of both commercial and
residential properties. In making these loans, the Company intends to
manage its credit risk by actively monitoring such measures as advance
rate, cash flow, collateral value and other appropriate credit factors. See
"-- Operations of the Holding Company -- Credit Administration."
28
<PAGE> 31
Residential Mortgage. The Company expects that its real estate loans
will consist of residential first and second mortgage loans, residential
construction loans and home equity lines of credit and term loans secured
by first and second mortgages on the residences of borrowers for home
improvements, education and other personal expenditures. Management expects
that the Company will make mortgage loans with a variety of terms,
including fixed and floating to variable rates and a variety of maturities.
These loans will be made consistent with the Company's appraisal policy and
real estate lending policy which will detail maximum loan-to-value ratios
and maturities. Management expects that these loan-to-value ratios will be
sufficient to compensate for fluctuations in the real estate market to
minimize the risk of loss. Mortgage loans that do not conform to the
Company's asset/liability mix policies will be sold in the secondary
markets.
Consumer Loans. The Company expects that its consumer loans will
consist primarily of installment loans to individuals for personal, family
and household purposes. In evaluating these loans, the Company will require
its lending officers to review the borrower's level and stability of
income, past credit history and the impact of these factors on the ability
of the borrower to repay the loan in a timely manner. In addition, the
Company will require that its banking officers maintain an appropriate
margin between the loan amount and collateral value. The Company expects
that many of its consumer loans will be made to the principals of the small
and medium-sized businesses for whom the Community Banking Offices provide
banking services.
Credit Card and Other Loans. The Company also expects to issue credit
cards to certain of its customers. In determining to whom it will issue
credit cards, the Company intends to evaluate the borrower's level and
stability of income, past credit history and other factors. Finally, the
Company expects to make additional loans which may not be classified in one
of the above categories. In making such loans, the Company will attempt to
ensure that the borrower meets the Company's credit quality standards.
For more detailed information with respect to those loans currently being
offered by the Bank, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Financial Condition -- Loan Portfolio"
and "-- Allowance for Loan Losses and Net Charge-Offs."
Deposits. Management intends to offer a broad range of interest-bearing
and noninterest-bearing deposit accounts, including commercial and retail
checking accounts, money market accounts, individual retirement accounts,
regular interest-bearing savings accounts and certificates of deposit with a
range of maturity date options. Management anticipates that the primary sources
of deposits will be small and medium-sized businesses and individuals within an
Identified Market. In each Identified Market, senior management will have the
authority to set rates within specified parameters in order to remain
competitive with other financial institutions located in the Identified Market.
All deposits will be insured by the FDIC up to the maximum amount permitted by
law. In addition, the Company expects to implement a service charge fee
schedule, similar to the one currently in place at the Bank, which will be
competitive with other financial institutions in a Community Banking Office's
market area, covering such matters as maintenance fees on checking accounts, per
item processing fees on checking accounts, returned check charges and other
similar fees.
Specialized Consumer Services. Management intends to offer specialized
products and services to its customers, such as lock boxes, travelers checks and
safe deposit services.
Courier Services. The Company expects to offer courier services to its
customers. Courier services, which the Company may either provide directly or
through a third party, permit the Company to provide the convenience and
personalized service its customers require by scheduling pick-ups of deposits.
The Company intends to offer courier services to its business customers. The
Bank has received regulatory approval for, and is currently offering courier
services in, the Tampa Market and expects to apply for approval in other market
areas.
Telephone and PC Banking. The Company believes that there is a strong need
within its market niche for telephone banking and on-line banking with personal
computers ("PC Banking"). Both services allow
29
<PAGE> 32
customers to access detailed account information, execute transactions and pay
bills electronically. Management believes that these services are particularly
attractive for its customers who live part-time outside of Florida as it will
enable them to conduct their banking business and monitor their bank accounts
from remote locations. Management of the Company believes that telephone and PC
Banking will assist their Community Banking Offices in retaining customers and
will also encourage its customers to maintain their total banking relationship
with the Community Banking Offices. Both of these services will be provided
through a third-party provider.
Automatic Teller Machines ("ATMs"). Initially, management does not expect
to establish an ATM network, as it believes its resources can be more
effectively deployed elsewhere. As an alternative, management intends to make
other financial institutions' ATMs available to its customers and to offer
customers a certain number of free ATM transactions per month.
Other Products and Services. The Company intends to evaluate other
services such as trust services, brokerage and investment services, insurance,
and other permissible activities. Management expects to introduce these services
as they become economically viable.
Operations of the Holding Company
The Company will remain in the development stage until the consummation of
the Merger and the Offering. The Company's corporate offices will be relocated
to the Jacksonville Community Banking Office, when opened. The Company presently
has four employees, including Mr. Hughes, Richard B. Kensler, the Chief Credit
Officer, Donald D. Roberts, President of the Jacksonville Market, and an
administrative assistant, all of whom work on a full-time basis for the Company.
The Company will provide a variety of support services for each of the
Community Banking Offices. These services will include back office operations,
investment portfolio management, credit administration and review, human
resources, training and strategic planning. By the end of 1998, the Company
expects to hire a Human Resources Officer as well as a Chief Lending Officer.
Until that time, Mr. Hughes will serve as the Company's Chief Lending Officer,
and a human resources officer at the Bank will provide human resources support
for the Company.
The Company intends to use the Bank's facilities for its data processing,
operational and back office support activities. The Community Banking Offices
will utilize the operational support provided by the Bank to perform account
processing, loan accounting, loan support, network administration and other
functions. The Bank has developed extensive procedures for many aspects of its
operations, including operating procedures manuals and audit and compliance
procedures. Specific operating procedures for the Community Banking Offices have
been developed from the procedures that are currently utilized by the Bank.
Management believes that the Bank's existing operations and support management
will be capable of providing continuing operational support for all of the
Community Banking Offices.
Outsourcing. Management of the Company believes that by outsourcing
certain functions of its back room operations, it can realize greater
efficiencies and economies of scale. In addition, various products and services,
especially technology-related services, can be offered through third-party
vendors at a substantially lower cost than the costs of developing these
products internally.
The Bank is currently utilizing M&I to provide its core data processing and
certain customer products, and the Company expects to continue this contract
upon consummation of the Merger. In addition to account level processing for
loans and deposits, the Bank also utilizes M&I for computer network support,
proof of deposit processing, on-line support, telephone and PC banking services,
cash management, automated clearing house services and consulting services. See
"-- Data Processing."
Credit Administration. The Company will oversee all credit operations
while still granting local authority to each Community Banking Office. The Chief
Credit Officer of the Company is Richard B. Kensler who, prior to joining the
Company, had served as a senior credit officer with Signet Banking Corporation
since 1987. Mr. Kensler has experience in the Florida market as he served as a
Relationship Manager and Special Assets Manager for Sun Banks of Florida, Inc.
in Orlando from 1972 to 1980. The Company's Chief Credit
30
<PAGE> 33
Officer will be primarily responsible for maintaining a quality loan portfolio
and developing a strong credit culture throughout the entire organization. The
Chief Credit Officer will be responsible for developing and updating the credit
policy and procedures for the organization. In addition, he will work closely
with each lending officer at the Community Banking Offices to ensure that the
business being solicited is of the quality and structure that fits the Company's
desired risk profile. Credit quality will be controlled through uniform
compliance to credit policy. The Company's risk-decision process will be
actively managed in a disciplined fashion to maintain an acceptable risk profile
characterized by soundness, diversity, quality, prudence, balance and
accountability.
The Company's credit approval process will consist of specific authorities
granted to the lending officers. Loans exceeding a particular lending officer's
level of authority will be reviewed and considered for approval by the next
level of authority. The Chief Credit Officer has ultimate credit decision-making
authority, subject to review by the Chief Executive Officer and the Board of
Directors. Risk management will require active involvement with the Company's
customers and active management of the Company's portfolio. The Chief Credit
Officer will review the Company's credit policy with the local management teams
at least annually but more frequently if necessary. The results of these reviews
will then be presented to the Board of Directors. The purpose of these reviews
will be to attempt to ensure that the credit policy remains compatible with the
short and long-term business strategies of the Company. The Chief Credit Officer
will also generally require all individuals charged with risk management to
reaffirm their familiarity with the credit policy annually.
CURRENT OPERATIONS OF FIRST NATIONAL BANK OF TAMPA
The Bank commenced operations in July 1988 under the name Enterprise
National Bank of Tampa, as a full service commercial bank in Tampa, Florida. In
1993, the Bank changed its name to First National Bank of Tampa. The Bank leases
its facilities in the First National Plaza, located in downtown Tampa.
The Bank offers a variety of loan products, including commercial loans,
real estate loans, home equity loans, consumer/installment loans, SBA loans and
credit cards. The Bank also offers a broad range of interest-bearing and
noninterest-bearing deposit accounts, including commercial and retail checking
accounts, money market accounts, individual retirement accounts, regular
interest-bearing savings accounts and certificates of deposit. In addition, the
Bank provides such consumer services as U.S. Savings Bonds, travelers checks,
cashiers checks, safe deposit boxes, bank-by-mail services, direct deposit,
courier service, telephone banking and PC Banking. See "-- Strategy of the
Company -- Products and Services."
History of First National Bank of Tampa
The Bank was incorporated in 1988 under the name Enterprise National Bank
of Tampa. The operating strategies and tactics employed by the former management
of Enterprise National Bank of Tampa were largely unsuccessful. Loan losses,
poor credit quality, low net interest margins and high overhead expenses
resulted in substantial losses during the Bank's early years. In 1991, the OCC
informed the Board of Directors and management of the Bank that the Bank's
condition had deteriorated significantly. The OCC observed that the Bank's loan
portfolio evidenced deterioration in quality, with increasing levels of
delinquent and non-performing loans. Moreover, in the opinion of the OCC, the
Bank's lending practices evidenced poor underwriting and ineffective loan
administration. In addition, the OCC reported that the Bank's credit
administration and loan review functions as well as the methodology utilized in
evaluating the adequacy of the allowance for loan losses required improvement.
As a consequence of the foregoing, in December 1991, the Bank was required to
enter into a Formal Agreement with the OCC dated December 18, 1991, pursuant to
which the Bank agreed to take certain remedial actions to improve its condition
and operating performance and to address certain identified deficiencies (the
"Formal Agreement"). The Formal Agreement with the OCC was terminated on July
18, 1994, due to the Bank's substantially improved condition.
The provisions of the Formal Agreement prescribed the corrective actions
and remedial measures deemed necessary by the OCC to correct deficiencies and
regulatory violations in the Bank and return it to a safe and sound condition.
Among the provisions of the Formal Agreement were requirements to formalize the
31
<PAGE> 34
compliance process, implement a strategic plan, formulate certain policies and
procedures and maintain certain capital levels.
In 1992, the Board of Directors of the Bank, as a result of the Bank's
financial difficulties, effected a substantial reorganization of the key
management positions through the hiring of John S. McMullen as President and
Chief Executive Officer and T. Edwin Stinson, Jr. as acting Chief Financial
Officer. Since the reorganization, the Bank's management team has remained
relatively unchanged.
The Bank suffered significant loan problems in the years 1988 through 1992.
Net charge-offs due to nonperforming loans were approximately $2.6 million.
Lending policies and procedures were revised in 1992 as part of the
reorganization and the addition of the new management team. The Bank's lending
activities were refocused on the small business sector while avoiding
speculative real estate and other higher risk credits. The Bank's current
portfolio primarily consists of commercial and commercial real estate loans
including SBA loans. Currently, problem loans represent a negligible portion of
the Bank's total loans.
In 1993, as required by the Formal Agreement, the Bank raised $1.6 million
in equity capital through an offering of its common stock (the "1993 Offering").
The 1993 Offering was completed in November 1993. In spite of this infusion of
additional capital, the Bank's growth since the 1993 Offering has been limited
by its capital, and Bank management has primarily focused on increasing its
capital. On July 18, 1994, after successfully recapitalizing the Bank in
November 1993, restructuring the Board and management and significantly
improving the Bank's performance and asset quality of the loan portfolio, the
Board was notified by the OCC that the Formal Agreement was terminated.
ASSET/LIABILITY MANAGEMENT
The objective of the Company and Bank is to manage assets and liabilities
to provide a satisfactory level of consistent operating profitability within the
framework of established liquidity, loan, investment, borrowing and capital
policies. The Chief Operating Officer of the Bank is primarily responsible for
monitoring policies and procedures that are designed to maintain an acceptable
composition of the asset/liability mix while adhering to prudent banking
practices. The overall philosophy of management is to support asset growth
primarily through growth of core deposits. Management intends to continue to
invest the largest portion of the Bank's earning assets in commercial,
industrial and commercial real estate loans.
The Bank's asset/liability mix is monitored on a daily basis, with monthly
reports presented to the Bank's Board of Directors. The objective of this policy
is to control interest-sensitive assets and liabilities so as to minimize the
impact of substantial movements in interest rates on the Bank's earnings.
Management of the Company intends to maintain an asset/liability mix policy
similar to the Bank's current policy. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Financial
Condition -- Interest Rate Sensitivity and Liquidity Management."
COMPETITION
Competition among financial institutions in Florida and the Identified
Markets is intense. The Company and the Bank will compete with other bank
holding companies, state and national commercial banks, savings and loan
associations, consumer finance companies, credit unions, securities brokerages,
insurance companies, mortgage banking companies, money market mutual funds,
asset-based non-bank lenders and other financial institutions. Many of these
competitors have substantially greater resources and lending limits, larger
branch networks and are able to offer a broader range of products and services
than the Company and the Bank.
Various legislative actions in recent years have led to increased
competition among financial institutions. As a result of such actions, most
barriers to entry to the Florida market by out-of-state financial institutions
have been eliminated. Recent legislative and regulatory changes and
technological advances have enabled customers to conduct banking activities
without regard to geographic barriers through computer and telephone-based
banking and similar services. In addition, with the enactment of the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 and other laws and
regulations affecting interstate bank expansion, financial institutions located
outside of the State of Florida may now more easily enter the markets
32
<PAGE> 35
currently and proposed to be served by the Company and the Bank. There can be no
assurance that the United States Congress or the Florida Legislature or the
applicable bank regulatory agencies will not enact legislation or promulgate
rules that may further increase competitive pressures on the Company. The
Company's failure to compete effectively for deposit, loan and other banking
customers in its market areas could have a material adverse effect on the
Company's business, future prospects, financial condition or results of
operations. See "-- Strategy of the Company -- Market Expansion."
DATA PROCESSING
The Bank currently has an agreement with M&I to provide its core processing
and certain customer products, and the Company expects to continue this contract
upon consummation of the Merger. The Company believes that M&I will be able to
provide state-of-the-art data processing and customer service-related processing
at a competitive price to support the Company's future growth. The Company
believes the M&I contract to be adequate for its business expansion plans. See
"Risk Factors -- Impact of Technological Advances; Upgrade to Company's Internal
Systems," "-- Year 2000" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
FACILITIES
The Company's offices are located at 4110 Southpoint Boulevard, Suite 212,
Southpoint Square II, Jacksonville, Florida 32216. The Company's offices will be
relocated to the Jacksonville Community Banking Office, when opened. Initially,
it is expected that the bulk of the Company's operations will be conducted from
the Bank's offices in Tampa, utilizing the Bank's existing personnel.
The Bank's offices are located at 100 West Kennedy Boulevard, Tampa,
Florida 33602. The Bank occupies approximately 8,400 square feet in the
building. Should the Bank require additional space for expansion, the Bank also
has options for additional space at a pre-determined lease rate.
EMPLOYEES
The Company presently employs four persons on a full-time basis. The
Company will hire additional persons as needed to support its growth.
The Bank presently employs 26 persons on a full-time basis and three
persons on a part-time basis, including ten officers. The Bank will hire
additional persons as needed, including additional tellers and financial service
representatives.
LEGAL PROCEEDINGS
From time to time, the Company and the Bank may be involved in litigation
relating to claims arising out of operations in the normal course of business.
As of the date of this Prospectus, neither the Company nor the Bank is engaged
in any legal proceedings that are expected, individually or in the aggregate, to
have a material effect on the Company or the Bank.
33
<PAGE> 36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE COMPANY
The Company was incorporated on October 15, 1997 to acquire or establish a
bank in Florida. Prior to the consummation of the Merger, the Company will have
no operating activities. The Merger will be consummated immediately prior to the
closing of the Offering. Upon consummation of the Merger, the Bank's
shareholders will own greater than 50% of the outstanding Common Stock of the
Company, excluding the issuance of the shares in connection with the Offering.
Accordingly, the Merger will be accounted for as if the Bank had acquired the
Company, the financial statements of the Bank will become the historical
financial statements of the Company and no goodwill will be recorded as a result
of the Merger.
The Company has funded its start-up and organization costs through the sale
of units, consisting of Common Stock, Preferred Stock and warrants to purchase
shares of Common Stock. As the Company had no operations during 1997 and had no
equity and de minimis assets and liabilities at December 31, 1997, the
Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company as of December 31, 1997 and for the period then ended,
is not relevant and therefore is not included herein.
THE BANK
Management believes that the acquisition of the Bank will enable the
Company to implement its strategy in the Tampa market area and provide a
platform for further expansion into other Identified Markets. The purpose of the
following discussion is to focus on significant changes in the results of
operations and the financial condition of the Bank during the three years ended
December 31, 1997, 1996 and 1995. This discussion and analysis is intended to
supplement information contained in the accompanying consolidated financial
statements and the selected financial data and other financial information
presented elsewhere in this Prospectus.
SUMMARY
The Bank's net income for 1997 decreased $8,000 or 2.0% to $376,000 from
$384,000 in 1996. Net income for 1996 increased $28,000 or 7.7% from the 1995
net income of $356,000. Basic earnings per share was $.21 for both 1997 and 1996
and diluted earnings per share, which reflects the dilutive effect of
outstanding options, was $.19 per share for 1997, compared to $.20 for 1996.
These earnings per share amounts are based upon the Bank's historical weighted
average number of shares outstanding and do not reflect any pro forma
adjustments relating to the Offering or the exchange of shares upon consummation
of the Merger.
The decrease in net income from 1996 to 1997 was primarily attributable to
a decrease in noninterest income and increases in noninterest expense and the
provision for income taxes, all of which were partially offset by an increase in
net interest income. Net interest income increased to $2.0 million in 1997 from
$1.7 million in 1996, an increase of 15.1%. Noninterest income decreased 2.5% to
$504,000 in 1997 from $517,000 in 1996. Noninterest expense increased to $1.8
million in 1997 from $1.6 million in 1996, an increase of 15.2%. The provision
for income taxes increased to $232,000 in 1997 from $217,000 in 1996, an
increase of 7.0%.
As a result of poor operating performance from the Bank's inception in 1988
through 1994, the Bank generated approximately $8.5 million in net operating
loss carryforwards. As of December 31, 1997, the Bank had $7.0 million in net
operating loss carryforwards remaining to be utilized and net deferred tax
assets of $2.4 million. At December 31, 1997, the Bank assessed its earnings
history and trends over the past three years, its estimate of future earnings,
and the expiration dates of the loss carryforwards and determined that it was
more likely than not that the deferred tax assets will be realized. Accordingly,
no valuation allowance was required at December 31, 1997 resulting in net
deferred tax assets of $2.4 million and a corresponding increase to additional
paid-in capital. See "-- Provision for Income Taxes."
Total assets at December 31, 1997 were $60.4 million, an increase of $4.9
million, or 8.8%, over the prior year. Total loans increased 6.6% to $33.8
million at December 31, 1997, from $31.7 million at December 31,
34
<PAGE> 37
1996. Total deposits remained relatively constant at $45.5 million.
Shareholders' equity increased to $6.3 million in 1997 from $3.3 million at
December 31, 1996. This increase was attributable to retained net income, the
decrease in the deferred tax asset valuation allowance and an increase in
unrealized gains in available for sale investment securities.
The earnings performance of the Bank is reflected in the calculations of
net income as a percentage of average total assets ("Return on Average Assets")
and net income as a percentage of average shareholders' equity ("Return on
Average Equity"). During 1997, the Return on Average Assets and Return on
Average Equity were .70% and 10.62%, respectively, compared to .85% and 13.18%,
respectively, during 1996. The Bank's ratio of total equity to total assets
increased to 10.45% at December 31, 1997 from 5.89% at December 31, 1996,
primarily as a result of the elimination of the deferred tax asset valuation
allowance.
35
<PAGE> 38
RESULTS OF OPERATIONS
Net Interest Income
The following table sets forth, for the periods indicated, certain
information related to the Bank's average balance sheet, its yields on average
earning assets and its average rates on interest-bearing liabilities. Such
yields and rates are derived by dividing income or expense by the average
balance of the corresponding assets or liabilities. Average balances have been
derived from the daily balances throughout the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1997 1996
--------------------------- ---------------------------
INTEREST INTEREST
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
------- -------- ------ ------- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Earning assets:
Loans, net of deferred loan fees(1).......... $34,264 $3,353 9.79% $29,519 $2,890 9.79%
Investment securities(2)..................... 9,971 583 5.85 7,740 460 5.95
Federal funds sold........................... 7,398 366 4.94 5,778 264 4.56
------- ------ ------- ------
Total earning assets................. 51,633 4,302 8.33 43,037 3,614 8.40
Cash and due from banks........................ 2,092 1,684
Premises and equipment, net.................... 500 516
Other assets................................... 342 309
Allowance for loan losses...................... (478) (391)
------- -------
Total assets......................... $54,089 $45,155
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits............. $ 2,894 $ 73 2.52% $ 2,943 $ 74 2.52%
Savings deposits............................. 5,707 273 4.77 3,941 184 4.66
Money market deposits........................ 1,511 38 2.51 1,360 34 2.50
Certificates of deposit of $100,000 or
more...................................... 10,530 585 5.55 8,128 436 5.36
Other time deposits.......................... 18,974 1,107 5.84 17,831 1,017 5.70
Repurchase agreements........................ 3,957 178 4.50 2,589 108 4.19
Other borrowed funds......................... 949 42 4.44 420 19 4.49
------- ------ ------- ------
Total interest-bearing liabilities... 44,522 2,296 5.16 37,212 1,872 5.03
------- ------ ------- ------
Noninterest-bearing demand deposits............ 5,729 4,805
Other liabilities.............................. 298 226
Shareholders' equity........................... 3,540 2,912
------- -------
Total liabilities and shareholders'
equity............................. $54,089 $45,155
======= =======
Net interest income............................ $2,006 $1,742
====== ======
Net interest spread............................ 3.17% 3.37%
Net interest margin............................ 3.89% 4.05%
</TABLE>
- ---------------
(1) During 1997 and 1996, all loans were accruing interest. Loan amounts are net
of deferred loan fees which were $94,000 in 1997 and $62,000 in 1996.
(2) The yield on investment securities is computed based upon the average
balance of investment securities at amortized cost and does not reflect the
unrealized gains or losses on such investments.
Net interest income is the principal component of a financial institution's
income stream and represents the difference or spread between interest and
certain fee income generated from earning assets and the interest expense paid
on deposits and other borrowed funds. Fluctuations in interest rates, as well as
volume and mix changes in earning assets and interest-bearing liabilities, can
materially impact net interest income. The Bank
36
<PAGE> 39
had no investments in tax-exempt securities during 1997, 1996 and 1995.
Accordingly, no adjustment is necessary to facilitate comparisons on a taxable
equivalent basis.
Net interest income increased 15.1% to $2.0 million in 1997 from $1.7
million in 1996. This increase in net interest income can be attributed to the
growth in average earning assets, partially offset by the growth in time
deposits and short-term borrowings and by lower margins. The trend in net
interest income is commonly evaluated using net interest margin and net interest
spread. The net interest margin, or net yield on average earning assets, is
computed by dividing fully taxable equivalent net interest income by average
earning assets. The net interest margin decreased 16 basis points to 3.89% in
1997 on average earning assets of $51.6 million from 4.05% in 1996 on average
earning assets of $43.0 million. This change is primarily due to a seven basis
point decrease in the average yield on earning assets to 8.33% in 1997 from
8.40% in 1996 and a 13 basis point increase in the average rate paid on
interest-bearing liabilities to 5.16% in 1997 from 5.03% in 1996. The decreased
yield on earning assets was primarily the result of lower market rates on
investment securities. The increase in the cost of interest-bearing liabilities
is attributable to an increase in rates on time deposits, savings deposits and
repurchase agreements.
Net interest income increased $279,000, or 19.1%, to $1.7 million in 1996
from $1.5 million in 1995. This increase in net interest income is attributable
to the growth in average earning assets, partially offset by the growth in
interest-bearing liabilities and by lower margins. Net interest margin decreased
eight basis points to 4.05% in 1996 on average earning assets of $43.0 million
from 4.13% in 1995 on average earning assets of $35.5 million. Management
attributes this decrease in the net interest margin to higher rates on
interest-bearing liabilities, which were partially offset by higher yields on
earning assets, resulting from higher market rates.
The net interest spread decreased 20 basis points to 3.17% in 1997 from the
1996 net interest spread of 3.37%, as the cost of interest-bearing liabilities
increased 13 basis points and the yield on average earning assets decreased
seven basis points. The net interest spread measures the absolute difference
between the yield on average earning assets and the rate paid on average
interest-bearing sources of funds. The net interest spread eliminates the impact
of noninterest-bearing funds and gives a direct perspective on the effect of
market interest rate movements. This measurement allows management to evaluate
the variance in market rates and adjust rates or terms as needed to maximize
spreads.
The net interest spread decreased 13 basis points to 3.37% in 1996 from a
net interest spread of 3.50% in 1995. The decrease resulted from an increase in
the yield on average earning assets of 12 basis points offset by a 25 basis
point increase in the cost of average interest-bearing liabilities.
During recent years, the net interest margins and net interest spreads have
been under pressure, due in part to intense competition for funds with non-bank
institutions and changing regulatory supervision for some financial
intermediaries. The pressure was not unique to the Bank and was experienced by
the banking industry nationwide.
To counter potential declines in the net interest margin and the interest
rate risk inherent in the balance sheet, the Bank adjusts the rates and terms of
its interest-bearing liabilities in response to general market rate changes and
the competitive environment. The Bank monitors Federal funds sold levels
throughout the year, investing any funds not necessary to maintain appropriate
liquidity in higher yielding investments such as short-term U.S. government and
agency securities. The Bank will continue to manage its balance sheet and its
interest rate risk based on changing market interest rate conditions.
37
<PAGE> 40
Rate/Volume Analysis of Net Interest Income
The table below presents the changes in interest income and interest
expense attributable to volume and rate changes between 1996 and 1997. The
effect of a change in average balance has been determined by applying the
average rate in 1996 to the change in average balance from 1996 to 1997. The
effect of change in rate has been determined by applying the average balance in
1996 to the change in the average rate from 1996 to 1997. The net change
attributable to the combined impact of the volume and rate has been allocated to
both components in proportion to the relationship of the absolute dollar amounts
of the change in each.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
COMPARED WITH
DECEMBER 31, 1996
--------------------------------
INCREASE (DECREASE)
DUE TO:
---------------------
VOLUME YIELD/RATE TOTAL
-------- ---------- --------
<S> <C> <C> <C>
Interest Earned On:
Taxable securities........................................ $123,712 $ (443) $123,269
Federal funds sold........................................ 78,715 23,391 102,106
Net loans................................................. 462,537 -- 462,537
-------- -------- --------
Total earning assets.............................. 664,964 22,948 687,912
-------- -------- --------
Interest Paid On:
Money market deposits..................................... 2,327 391 2,718
Savings deposits.......................................... 84,389 4,445 88,834
Time deposits............................................. 202,423 37,047 239,470
Repurchase agreements..................................... 61,268 8,575 69,843
Other borrowed funds...................................... 23,434 (213) 23,221
-------- -------- --------
Total interest-bearing liabilities................ 373,841 50,245 424,086
-------- -------- --------
Net interest income............................... $291,123 $(27,297) $263,826
======== ======== ========
</TABLE>
Provision for Loan Losses
The provision for loan losses is the expense of providing an allowance or
reserve for anticipated future losses on loans. The amount of the provision for
each period is dependent upon many factors, including loan growth, net
charge-offs, changes in the composition of the loan portfolio, delinquencies,
management's assessment of loan portfolio quality, the value of loan collateral
and general business and economic conditions.
The provision for loan losses charged to operations in both 1997 and 1996
was $60,000. Management's analysis of the allowance for loan losses during 1997
and 1996 indicated no material changes in the quality of the loan portfolio,
economic outlook or other factors generally considered by management.
Accordingly, the provision for loan losses for 1997 and 1996 were generally due
to increases in the amount of loans outstanding.
The provision for loan losses charged to operations was $60,000 in 1996
compared to a benefit (a reduction in the allowance for loan losses) of $138,000
in 1995. The benefit in 1995 was a result of the improvement in the Bank's loan
charge-off experience, the level of problem loans, the current and anticipated
economic conditions, and other factors generally considered by management in
determining the adequacy of the allowance for loan losses. For additional
information regarding provision for loan losses, charge-offs and allowance for
loan losses, see "-- Financial Condition -- Asset Quality."
Noninterest Income
Noninterest income consists of revenues generated from a broad range of
financial services, products and activities, including fee-based services,
service fees on deposit accounts and other activities. In addition, gains
realized from the sale of the guaranteed portion of SBA loans, other real estate
owned, and available for sale investments are included in noninterest income.
38
<PAGE> 41
Noninterest income decreased 2.5% to $504,000 in 1997 from $517,000 in
1996. This change resulted from a small decrease in the amount of service fees
on deposits and lower gains on the sale of the guaranteed portion of SBA loans.
Service fees on deposits decreased 2.0% to $325,000 in 1997 from $331,000 in
1996 due to a decrease in insufficient funds and returned check fees resulting
from the closure of certain commercial deposit accounts in 1997 that
consistently carried insufficient funds on deposit. Gains on sales of the
guaranteed portion of SBA loans decreased 31.1% to $95,000 in 1997 from $138,000
in 1996 due to a reduction in the principal amount of such loans sold. During
1997, the Bank sold $1.1 million principal balance of SBA loans of which $1.0
million were originated in 1997, compared to $1.7 million of loans sold in 1996
of which $1.0 million were originated in 1996. Other income, which includes
various recurring noninterest income items such as travelers checks fees and
safe deposit box fees, increased 53.2% to $76,000 in 1997 from $50,000 in 1996.
Noninterest income increased 37.7% to $517,000 in 1996 from $375,000 in
1995. This increase resulted primarily from higher service fees on deposits and
higher gains on the sales of the guaranteed portion of SBA loans, partially
offset by lower gains on sale of available for sale investments and other real
estate owned. Deposit volume growth increased fees on deposits 34.8% to $331,000
in 1996 from $246,000 in 1995. Gains on sales of the guaranteed portion of SBA
loans increased 229.6% to $138,000 in 1996 from $42,000 in 1995 due to an
increase in the principal amount of loans sold. In 1996, the Bank sold $1.7
million principal balance of loans of which $1.0 million were originated in
1996, compared to $529,000 of loans sold in 1995 of which $186,000 were
originated in 1995. In 1996, there was a small loss on sale of available for
sale investments, but in 1995, gain on sale of available for sale investments
and other real estate owned totaled $23,000. Other income decreased 21.9% to
$50,000 in 1996 from $64,000 in 1995.
The following table presents an analysis of the noninterest income for the
periods indicated with respect to each major category of noninterest income:
<TABLE>
<CAPTION>
% CHANGE % CHANGE
1997 1996 1995 1997-1996 1996-1995
---- ---- ---- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Service fees.................................... $325 $331 $246 (2.0)% 34.8%
Gain on sale of loans........................... 95 138 42 (31.1) 229.6
Gains/(loss) on sale of available for sale
investment securities, net.................... 8 (2) 13 N/A N/A
Gain on sale of other real estate owned......... -- -- 10 N/A N/A
Other........................................... 76 50 64 53.2 (21.9)
---- ---- ----
Total................................. $504 $517 $375 (2.5)% 37.7%
==== ==== ====
</TABLE>
Noninterest Expense
Noninterest expense increased 15.2% to $1.8 million in 1997 from $1.6
million in 1996. Management attributes this increase to an increase in personnel
expense, occupancy expense, data processing expense and other operating
expenses. Salaries and benefits increased 14.5% to $999,000 in 1997 from
$872,000 in 1996. This increase is attributable to an increase of $41,000 due to
an increase in the Bank's administrative lending staff, additional incentive
awards of $23,000 under an expanded officer incentive program, increases of
$17,000 in the cost of employee's group insurance and normal salary increases.
Occupancy and equipment expense increased 12.9% to $256,000 in 1997 from
$227,000 in 1996 primarily as a result of the addition of 967 square feet of
leased space for the Bank's SBA department at an annualized cost of $11,000.
Data processing expense increased 22.9% to $93,000 in 1997 from $75,000 in 1996.
This increase in data processing expense is primarily attributable to the growth
in loan and deposit transactions and the addition of new services. Other
operating expenses increased 16.6% to $494,000 in 1997 from $423,000 in 1996.
The increase in other operational expenses is attributable primarily to an
increase of $26,000 in FDIC insurance premiums associated with deposit growth,
an increase of $18,000 in directors' fees and increases in SBA expenses of
$28,000 related to the liquidation and collection of problem loans.
39
<PAGE> 42
Noninterest expense remained constant at $1.6 million in 1996 and 1995.
Increases in personnel costs and data processing expense were offset by
decreases in occupancy and equipment expense and other operating expenses.
Salaries and benefits expense increased 11.2% to $872,000 in 1996 from $784,000
in 1995. This increase resulted from the normal salary increases and an increase
in the Bank's lending staff. Occupancy and equipment expense decreased 23.2% to
$227,000 in 1996 from $296,000 in 1995 due to cost savings which were realized
upon the Bank's relocation of its permanent banking facilities on July 1, 1995.
Data processing expense increased 21.4% to $75,000 in 1996 from $62,000 in 1995.
Other operating expenses decreased 11.5% to $424,000 in 1996 from $479,000 in
1995. The decrease in operating expenses is attributed primarily to a reduction
of $38,000 in FDIC insurance premiums and a loss of $55,000 during 1995 relating
to the write off of leasehold improvements and disposition of furniture and
equipment associated with the Bank's relocation, which were partially offset by
an increase of $19,000 in data processing expense and an increase of $23,000 in
directors' fees.
The following table presents an analysis of the noninterest expense for the
periods indicated with respect to each major category of noninterest expense:
<TABLE>
<CAPTION>
% CHANGE % CHANGE
1997 1996 1995 1997 - 1996 1996 - 1995
------ ------ ------ ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Salaries and benefits.................... $ 999 $ 873 $ 784 14.5% 11.2%
Occupancy and equipment.................. 256 227 296 12.9 (23.2)
Data processing.......................... 93 75 62 22.9 21.4
Other.................................... 494 423 479 16.6 (11.5)
------ ------ ------ ---- -----
Total.......................... $1,842 $1,598 $1,621 15.2% (1.4)%
====== ====== ======
</TABLE>
Provision for Income Taxes
The provision for income taxes increased to $232,000 for 1997 from $217,000
for 1996, reflecting an effective tax rate of 38.2% for 1997, compared to an
effective tax rate of 36.1% for 1996. The increase in the effective tax rate is
due to the effect of a higher level of nondeductible expenses in 1997 over 1996.
The Bank paid no income taxes during 1997 and 1996 due to the availability of
net operating loss carryforwards. The provision for income taxes for 1997 and
1996 represents deferred income taxes.
Certain income and expense items are recognized in different periods for
financial reporting purposes and for income tax return purposes. Deferred income
tax assets and liabilities reflect the differences between the values of certain
assets and liabilities for financial reporting purposes and for income tax
purposes, computed at the current tax rates. Deferred income tax expense is
computed as the change in the Bank's deferred tax assets, net of deferred tax
liabilities and the valuation allowance. The Bank's deferred income tax assets
consist principally of net operating loss carryforwards. A deferred tax
valuation allowance is established if it is more likely than not that all or a
portion of the deferred tax assets will not be realized.
The Bank reported losses from operations each year from the Bank's
inception in 1988 through 1994. These losses primarily resulted from loan losses
and high overhead costs. Management of the Bank was replaced during 1992 and
additional capital of $1.6 million was raised through a private placement of
common stock during 1993. Largely as a result of these changes, the Bank became
profitable in 1995. In order to reflect this fresh start, the Bank elected to
restructure its capital accounts through a quasi-reorganization. A quasi-
reorganization is an accounting procedure that allows a company to restructure
its capital accounts to remove an accumulated deficit without undergoing a legal
reorganization. Accordingly, the Bank charged against additional paid-in capital
its accumulated deficit of $8.1 million at December 31, 1995. As a result of the
quasi-reorganization, the future benefit from the utilization of the net
operating loss carryforwards generated prior to the date of the
quasi-reorganization was required to be accounted for as an increase to
additional paid-in capital. Such benefits are not considered to have resulted
from the Bank's results of operations subsequent to the quasi-reorganization.
40
<PAGE> 43
As of December 31, 1997, the Bank had $7.0 million in net operating loss
carryforwards available to reduce future taxable earnings, which resulted in net
deferred tax assets of $2.4 million. These net operating loss carryforwards will
expire in varying amounts in the years 2004 through 2009 unless fully utilized
by the Bank.
Prior to 1997, because of the uncertain nature of the Bank's earnings, the
Bank recorded a valuation allowance equal to the full amount of the deferred tax
assets. At December 31, 1997, the Bank assessed its earnings history and trends
over the past three years, its estimate of future earnings, and the expiration
dates of the net operating loss carryforwards and determined that it was more
likely than not that the benefit of the deferred tax assets will be realized.
Accordingly, no valuation allowance was required at December 31, 1997, and the
elimination of the valuation allowance of $2.4 million has been reflected as an
increase to additional paid-in capital.
The following table presents the components of net deferred tax assets:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------
1997 1996 1995
------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax assets......................................... $2,525 $2,729 $2,951
Deferred tax liabilities.................................... 105 85 108
Valuation allowance......................................... -- 2,644 2,843
------ ------ ------
Net deferred tax assets..................................... $2,420 $ -- $ --
====== ====== ======
</TABLE>
No provision for income taxes was recorded in 1995 due to the benefit of
the utilization of net operating loss carryforwards prior to the Bank's
quasi-reorganization.
The utilization of the net operating loss carryforwards reduces the amount
of the related deferred tax asset by the amount of such utilization at the
current enacted tax rates. Other deferred tax items resulting in temporary
differences in the recognition of income and expenses such as the allowance for
loan losses, loan fees, accumulated depreciation and cash to accrual adjustments
will fluctuate from year-to-year.
As a result of the elimination of the deferred tax valuation allowance, the
Bank recognized the full benefit of the deferred tax assets at December 31,
1997. Accordingly, the Bank will record a provision for income taxes in future
periods that includes a current and deferred income tax component. The deferred
income tax provision will reflect the benefit of the utilization of the net
operating loss carryforwards.
Subsequent to the completion of the Merger, the Bank's operating results
will be included in the Company's consolidated income tax returns. As a result
of the Merger, the Company will have the use of the Bank's net operating loss
carryforwards. However, the portion of the Bank's net operating loss
carryforwards which will be usable each year by the Company will be limited
under provisions of Section 382 of the Internal Revenue Code relating to the
change in control. The annual limitation is based upon the purchase price of the
Bank multiplied by the applicable Long-Term Tax-Exempt Rate (as defined in the
Internal Revenue Code) at the date of acquisition. Based upon the applicable
Long-Term Tax-Exempt Rate for March 1998 acquisitions, this annual limitation
would be approximately $700,000. Management believes it is more likely than not
that following the Merger, the Bank will produce sufficient taxable income to
allow the Company to fully utilize the Bank's net operating loss carryforwards
prior to their expiration.
Net Income
Net income decreased 2.0% to $376,000 in 1997 from $384,000 in 1996. Net
income decreased primarily as a result of a decrease in noninterest income, and
increases in noninterest expense and the provision for income taxes, all of
which were partially offset by an increase in net interest income. Basic
earnings per share was $.21 for both 1997 and 1996.
Return on Average Assets decreased 15 basis points to .70% in 1997 from
.85% in 1996. The decrease in the Return on Average Assets resulted primarily
from an increase in average assets and a decrease in net interest margin.
Average assets increased 19.8%, or $8.9 million to $54.1 million in 1997 from
$45.2 million in
41
<PAGE> 44
1996. The net interest margin decreased 16 basis points to 3.89% in 1997 from
4.05% in 1996. The growth in average assets from 1996 to 1997 included $3.9
million in investments securities and Federal funds sold and was partially
funded by a $1.9 million growth in repurchase agreements and other borrowed
funds during the same period. The net interest spread between these assets and
liabilities is substantially less than the spread between loans and deposits.
Return on Average Equity decreased 256 basis points to 10.62% in 1997 from
13.18% in 1996. The decrease in the Return on Average Equity resulted primarily
from a decrease in net income and an increase in average shareholders equity.
Average shareholders' equity increased $600,000, or 21.6% to $3.5 million in
1997 from $2.9 million in 1996.
Net income increased 7.7% to $384,000 in 1996 from $356,000 in 1995. The
increase in net income for the year ended December 31, 1996, was attributable to
an increase in net interest income, an increase in noninterest income, and a
decrease in noninterest expense, which were partially offset by an increase in
the provision for income taxes. Basic earnings per share was $.21 for 1996 and
$.20 for 1995.
Return on Average Assets decreased ten basis points to .85% in 1996 from
.95% in 1995. The decrease in the Return on Average Assets resulted primarily
from an increase in average assets and an increase in the provision for income
taxes. Average assets increased $7.7 million, or 20.4% to $45.2 million in 1996
from $37.5 million in 1995. The provision for income taxes was $217,000 in 1996.
The Bank did not record a provision for income taxes in 1995. See "-- Results of
Operations -- Provision for Income Taxes."
Return on Average Equity decreased 167 basis points to 13.18% in 1996 from
14.85% in 1995. The decrease in Return on Average Equity resulted from an
increase in net income which was offset by an increase in average shareholders'
equity. Average equity increased $500,000, or 21.4% to $2.9 million in 1996 from
$2.4 million in 1995.
FINANCIAL CONDITION
Earning Assets
Average earning assets increased 20.0% to $51.6 million in 1997 from $43.0
million in 1996. During 1997, loans, net of deferred loan fees, represented
66.4%, investment securities comprised 19.3% and Federal funds sold comprised
14.3% of average earning assets. In 1996, loans, net of deferred loan fees,
comprised 68.6%, investment securities comprised 18.0% and Federal funds sold
comprised 13.4% of average earning assets. The variance in the mix of earning
assets is primarily attributable to an increase in investment securities needed
to pledge against the increase in repurchase agreements. The Bank manages its
securities portfolio to minimize interest rate fluctuation risk and to provide
liquidity.
In 1997, growth in earning assets was funded primarily through an increase
in time deposits, savings deposits, repurchase agreements, other borrowed funds
and an increase in retained earnings.
Loan Portfolio
The Bank's total loans outstanding increased 6.6% to $33.8 million as of
December 31, 1997 from $31.7 million as of December 31, 1996. Loan growth for
1997 was funded primarily through growth in average deposits. The growth in the
loan portfolio primarily was a result of an increase in commercial and
commercial real estate loans of $2.9 million, or 11.6%, from December 31, 1996
to 1997. Average total loans in 1997 were $34.4 million, $559,000 greater than
the year end balance of $33.8 million due to the maturity and payoff of certain
construction loans prior to year end. The Bank engages in a full complement of
lending activities, including commercial, real estate construction, real estate
mortgage, home equity, installment loans, SBA guaranteed loans and credit card
loans.
42
<PAGE> 45
The following table presents various categories of loans contained in the
Bank's loan portfolio for the periods indicated, the total amount of all loans
for such periods, and the percentage of total loans represented by each category
for such periods:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------
1997 1996
--------------- ---------------
% OF % OF
BALANCE TOTAL BALANCE TOTAL
------- ----- ------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
TYPE OF LOAN
Commercial real estate............................... $15,281 45.2% $13,078 41.2%
Commercial........................................... 13,158 38.9 12,413 39.2
Residential mortgage................................. 3,269 9.7 3,953 12.5
Consumer............................................. 1,222 3.6 1,423 4.5
Credit cards and other............................... 869 2.6 838 2.6
------- ---- ------- ----
Total loans................................ 33,799 100% 31,705 100%
==== ====
Net deferred loan fees............................... (79) (78)
------- -------
Loans, net of deferred loan fees........... 33,720 31,627
Allowance for loan losses............................ (481) (432)
------- -------
Net loans.................................. $33,239 $31,195
======= =======
</TABLE>
Commercial Real Estate. Commercial real estate loans consist of loans
secured by owner-occupied commercial properties, income producing properties and
construction and land development. The Bank's underwriting guidelines generally
require a minimum of 20% equity on all commercial real estate transactions.
Loan-to-value ratios are normally supported by a current appraisal performed by
an appraiser which has been pre-approved and engaged by the Bank. These
appraisals are typically updated at the time of the renewal of the credit, if
the terms of the loan are amended, or if the Bank believes that there has been a
substantial negative change in the value or condition of the collateral.
Property insurance, both standard hazard and flood, if applicable, is required
on all transactions where the Bank is relying on the value of the collateral to
support the loan. In the large majority of credits, the Bank requires that the
principals or owners of the borrowing entity guarantee the credit including the
personal guarantees of the corporate officers or partners. It is the Bank's
policy to maintain current financial information, including verification of
income on all borrowers and guarantors. At December 31, 1997, commercial real
estate loans represented 45.2% of outstanding loan balances, compared to 41.2%
at December 31, 1996. The increase in this category of loans is due to increased
emphasis on these real estate collateralized loans which generally have a higher
yield than residential real estate loans.
Commercial. This category of loans includes loans made to individual,
partnership or corporate borrowers, and obtained for a variety of business
purposes. Generally these loans are secured by accounts receivable, marketable
securities, deposit accounts, equipment and other fixed assets. Loan-to-value
ratios range from 50% for loans secured by inventory to 100% for loans secured
by deposit accounts of the Bank. Each category of commercial loans has been
assigned a level of acceptable loan-to-value ratios and specific requirements
for determination of value and monitoring of collateral levels and values.
Property insurance, both standard hazard and flood, if applicable, is required
on all transactions where the Bank is relying on the value of the collateral to
support the loan. The Bank generally requires that the principals or owners of
the borrowing entity guarantee the credit including the personal guarantees of
the corporate officers or partners. The Bank's policy requires that current
financial information, including verification of income, be maintained on all
borrowers and guarantors with the only exception of loans secured by Bank
deposit accounts. At December 31, 1997, commercial loans represented 38.9% of
outstanding loan balances, compared to 39.2% at December 31, 1996.
Residential Mortgage. The Bank's residential mortgage loans consist of
loans secured by first and second mortgages and loans for the construction of
residential properties. Loan-to-value ratios generally do not exceed 80% of the
appraised value of the collateral and are determined by an appraisal performed
by an
43
<PAGE> 46
appraiser approved and engaged by the Bank. The Bank does not engage in home
equity lending where the total debt securing the property exceeds the current
appraised value of the collateral less an acceptable margin. Property insurance,
both standard hazard and flood, if applicable, is required on all transactions
where the Bank is relying on the value of the collateral to support the loan.
The Bank generally requires that all owners of the property guarantee the debt
and provide current financial and income information at the time of application.
At December 31, 1997, residential mortgage loans represented 9.7% of outstanding
loan balances, compared to 12.5% at December 31, 1996. This decrease is due to
the maturity and repayment of low-income housing construction loans originated
during 1996 under government agency supported programs.
Consumer. The Bank's consumer loans consist primarily of installment loans
to individuals for personal, family and household purposes, education and other
personal expenditures. The Bank offers a full range of consumer loan products,
however, management has not actively solicited consumer loans due to the below
market pricing currently offered by non-bank competitors. The Bank's consumer
loan portfolio primarily consists of loans made to consumers affiliated with a
commercial depositor or borrower. The Bank requires standard property insurance
on collateral securing consumer loans as well as financial information on the
borrowers and guarantors. At December 31, 1997, consumer loans represented 3.6%
of outstanding loan balances, compared to 4.5% at December 31, 1996. The
decrease in consumer loans is attributable to increased competition for those
loans principally by non-bank institutions.
Credit Card and Other Loans. This category of loans consist of borrowings
by customers using credit cards, overdrafts and overdraft protection lines. The
Bank offers Visa Gold and Visa Secured Credit Cards. The Bank's credit card
portfolio primarily consists of extensions of credit to existing bank customers
or persons well known to the Bank's management. The Bank does not solicit credit
card accounts outside of its market area nor does it utilize mass marketing for
its credit card products. Overdraft Protection Lines are offered to both
consumer and commercial accounts as a convenience to the Bank's customers. The
Bank underwrites its credit card and overdraft credit lines using generally the
same standards as other types of credits. At December 31, 1997 and 1996, credit
card and other loans represented 2.6% of outstanding loan balances.
The Bank's only area of credit concentration is commercial and commercial
real estate loans. The Bank has not invested in loans to finance
highly-leveraged transactions, such as leveraged buy-out transactions, as
defined by the Federal Reserve Board and other regulatory agencies. In addition,
the Bank had no foreign loans or loans to lesser developed countries as of
December 31, 1997. For a more thorough discussion of the types of loans offered
by the Bank, see "Business."
While risk of loss in the Bank's loan portfolio is primarily tied to the
credit quality of the borrowers, risk of loss may also increase due to factors
beyond the Bank's control, such as local, regional and/or national economic
downturns. General conditions in the real estate market may also impact the
relative risk in the Bank's real estate portfolio. Of the Bank's target areas of
lending activities, commercial loans are generally considered to have greater
risk than real estate loans or consumer loans.
From time to time, management of the Bank has originated certain loans
which, because they exceeded the Bank's legal lending limit, were sold to other
banks. As a result of the Offering, the Bank expects to have an increased
lending limit. Accordingly, the Bank may, at its discretion, repurchase certain
loan participations, thereby increasing earning assets. Loan participation
agreements allow the Bank to repurchase loans at the outstanding principal
balance plus accrued interest, if any, at the Bank's discretion.
The Bank also purchases participations from other banks. When the Bank
purchases these participations, such loans are subjected to the Bank's
underwriting standards as if the loan was originated by the Bank. Accordingly,
management of the Bank does not believe that loan participations purchased from
other banks pose any greater risk of loss than loans that the Bank originates.
44
<PAGE> 47
The repayment of loans in the loan portfolio as they mature is a source of
liquidity for the Bank. The following table sets forth the maturity of the
Bank's loan portfolio within specified intervals as of December 31, 1997:
<TABLE>
<CAPTION>
DUE IN 1 DUE AFTER 1 TO DUE AFTER
YEAR OR LESS 5 YEARS 5 YEARS TOTAL
------------ -------------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
TYPE OF LOAN
Commercial real estate..................... $ 3,405 $ 5,319 $6,557 $15,281
Commercial................................. 7,942 4,968 248 13,158
Residential mortgage....................... 1,099 1,292 878 3,269
Consumer................................... 471 751 -- 1,222
Credit card and other...................... 252 -- 617 869
------- ------- ------ -------
Total............................ $13,169 $12,330 $8,300 $33,799
======= ======= ====== =======
</TABLE>
The following table presents the maturity distribution as of December 31,
1997 for loans with predetermined fixed interest rates and floating interest
rates by various maturity periods:
<TABLE>
<CAPTION>
DUE IN 1 DUE AFTER 1 TO DUE AFTER
YEAR OR LESS 5 YEARS 5 YEARS TOTAL
------------ -------------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
INTEREST CATEGORY
Predetermined fixed interest rate.......... $ 7,181 $ 5,440 $6,147 $18,768
Floating interest rate..................... 5,988 6,890 2,153 15,031
------- ------- ------ -------
Total............................ $13,169 $12,330 $8,300 $33,799
======= ======= ====== =======
</TABLE>
Asset Quality
During 1997 and 1996, all loans were accruing interest. At December 31,
1997, ten loans totaling $774,000 were contractually past due by 90 days or more
as to principal and interest payments. Of this amount, $624,000 are SBA loans,
of which $526,000 are guaranteed by the SBA, subject to certain conditions. No
loans were past due 90 days or more as of December 31, 1996. As of December 31,
1997, five loans totaling $265,000 (two of which, totaling $219,000, are also
included in the amount of loans past due 90 days or more) were classified as
"troubled debt restructurings" as that term is defined in Statement of Financial
Accounting Standards No. 15. As of December 31, 1996, two loans totaling $42,000
were classified as "troubled debt restructurings." See "-- Nonperforming
Assets."
The Bank started an SBA lending program in August 1994. Under this program,
the Bank originates commercial and commercial real estate loans to borrowers
that qualify for various SBA guaranteed loan products. The guaranteed portion of
such loans generally ranges from 75% to 85% of the principal balance, the
majority of which the Bank sells in the secondary market. The majority of the
Bank's SBA loans provide a servicing fee of 1.00% of the outstanding principal
balance. Certain SBA loans provide servicing fees of up to 2.32% of the
outstanding principal balance. The Bank records the premium received upon the
sale of the guaranteed portion of SBA loans as gain on sale of loans. The Bank
does not defer a portion of the gain on sale of such loans as a yield adjustment
on the portion retained, nor does it record a retained interest, as such amounts
are not considered significant. The principal balance of SBA loans in the Bank's
loan portfolio at December 31, 1997 totaled $2.9 million, including the SBA
guaranteed portion of $1.6 million, compared to an outstanding balance of $2.1
million at December 31, 1996, including the SBA guaranteed portion of $1.2
million. At December 31, 1997, the principal balance of the guaranteed portion
of SBA loans cumulatively sold in the secondary market since the commencement of
the SBA program totaled $2.7 million.
The Bank generally repurchases the SBA guaranteed portion of loans in
default to fulfill the requirements of the SBA guarantee or in certain cases,
when it is determined to be in the Bank's best interest, to facilitate the
liquidation of the loans. The guaranteed portion of the SBA loans are
repurchased at the current principal balance plus accrued interest through the
date of repurchase. Upon liquidation, in most cases the Bank is
45
<PAGE> 48
entitled to recover up to 120 days of accrued interest from the SBA on the
guaranteed portion of the loan paid. In certain cases, the Bank has the option
of charging-off the non-SBA guaranteed portion of the loan retained by the Bank
and requesting payment of the SBA guaranteed portion. In such cases, the Bank
will have determined that insufficient collateral exists, or the cost of
liquidating the business exceeds the anticipated proceeds to the Bank. In all
liquidations, the Bank seeks the advice of the SBA and submits a liquidation
plan for approval prior to the commencement of liquidation proceedings. The
payment of any guarantee by the SBA is dependent upon the Bank following the
prescribed SBA procedures and maintaining complete documentation on the loan and
any liquidation services. The total principal balance of the guaranteed portion
of SBA loans repurchased during 1997 was $319,000. No loans were repurchased
during 1996.
As of December 31, 1997, there were no loans other than those disclosed
above that were classified for regulatory purposes as doubtful, substandard or
special mention which (i) represented or resulted from trends or uncertainties
which management reasonably expects will materially impact future operating
results, liquidity, or capital resources, or (ii) represented material credits
about which management is aware of any information which causes management to
have serious doubts as to the ability of such borrowers to comply with the loan
repayment terms. There are no loans other than those disclosed above where known
information about possible credit problems of borrowers causes management to
have serious doubts as to the ability of such borrowers to comply with loan
repayment terms.
Allowance for Loan Losses and Net Charge-Offs
The allowance for loan losses represents management's estimate of an amount
adequate to provide for potential losses inherent in the loan portfolio. In its
evaluation of the allowance and its adequacy, management considers loan growth,
changes in the composition of the loan portfolio, the loan charge-off
experience, the amount of past due and nonperforming loans, current and
anticipated economic conditions, underlying collateral values securing loans and
other factors. While it is the Bank's policy to charge-off in the current period
the loans in which a loss is considered probable, there are additional risks of
future losses which cannot be quantified precisely or attributed to particular
loans or classes of loans. Because these risks include the state of the economy,
management's judgment as to the adequacy of the allowance is necessarily
approximate and imprecise.
46
<PAGE> 49
An analysis of the Bank's loss experience is furnished in the following
table for the periods indicated, as well as a detail of the allowance for loan
losses:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------
1997 1996
---- ----
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Balance at beginning of period.............................. $432 $340
Charge-offs:
Commercial real estate.................................... (24) --
Commercial................................................ (19) (4)
Residential mortgage...................................... -- --
Consumer.................................................. -- (3)
Credit card and other..................................... -- --
---- ----
Total charge-offs................................. (43) (7)
---- ----
Recoveries:
Commercial real estate.................................... 32 39
Commercial................................................ -- --
Residential mortgage...................................... -- --
Consumer.................................................. -- --
Credit card and other..................................... -- --
---- ----
Total recoveries.................................. 32 39
---- ----
Net (charge-offs)/recoveries................................ (11) 32
Provision for loan losses................................... 60 60
---- ----
Balance at end of period.................................... $481 $432
==== ====
Net (charge-offs)/recoveries as a percentage of average
loans..................................................... (.03)% .11%
Allowance for loan losses as a percentage of total loans.... 1.42% 1.36%
</TABLE>
Net charge-offs were $11,000 or .03% of average loans outstanding in 1997
as compared to net recoveries of $32,000 or .11% of average loans outstanding in
1996. The allowance for loan losses increased 11.4% to $481,000 or 1.42% of
loans outstanding at December 31, 1997 from $432,000 or 1.36% at December 31,
1996. The allowance for loan losses as a multiple of net loans charged off was
44.7x for the year ended December 31, 1997.
Net recoveries increased to $32,000 in 1996, representing .11% of average
loans outstanding, from $16,000 in 1995 or .07% of average loans outstanding.
The allowance for loan losses increased to $432,000, or 1.36% of loans
outstanding at December 31, 1996, from $340,000, or 1.28% of loans outstanding
at December 31, 1995.
In assessing the adequacy of the allowance, management relies predominantly
on its ongoing review of the loan portfolio, which is undertaken to ascertain
whether there are probable losses which must be charged off and to assess the
risk characteristics of the portfolio in the aggregate. This review encompasses
the judgment of management, utilizing internal loan rating standards, guidelines
provided by the banking regulatory authorities governing the Bank, their loan
portfolio reviews as part of the bank examination process and semi-annual
independent external loan reviews performed by a consultant.
Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan" ("SFAS 114") was issued in May 1993. SFAS
114 requires that impaired loans be measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate or
the fair value of the collateral if the loan is collateral dependent. The Bank
adopted SFAS 114 on January 1, 1995. At December 31, 1997, the Bank held
impaired loans as defined by SFAS 114 of $372,000 ($300,000 of such balance is
guaranteed by the SBA) for which specific allocations of $72,000 have been
established within the allowance for loan losses which have been measured based
upon the fair value of the collateral. Such reserve is allocated between
commercial and commercial real estate. No loans were impaired as of December 31,
1996.
47
<PAGE> 50
A portion of these impaired loans have also been classified by the Bank as loans
past due over 90 days ($342,000) and as troubled debt restructurings ($249,000).
Interest income on such impaired loans during 1997 was not significant.
As shown in the table below, management determined that as of December 31,
1997, 22.8% of the allowance for loan losses was related to commercial real
estate loans, 37.0% was related to commercial loans, 7.3% was related to
residential mortgage loans, 1.8% was related to consumer loans, 4.7% to credit
card and other loans and 26.4% was unallocated. There was no significant
fluctuation in the allocation of the allowance for loan losses between 1996 and
1997.
For the periods indicated, the allowance was allocated as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------
1997 1996
-------------- --------------
% OF % OF
AMOUNT TOTAL AMOUNT TOTAL
------ ----- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial real estate.................................. $110 22.8% $ 85 19.7%
Commercial.............................................. 178 37.0 157 36.4
Residential mortgage.................................... 35 7.3 44 10.2
Consumer................................................ 9 1.8 15 3.4
Credit card and other loans............................. 23 4.7 11 2.6
Unallocated............................................. 126 26.4 120 27.7
---- ----- ---- -----
Total......................................... $481 100.0% $432 100.0%
==== ===== ==== =====
</TABLE>
In considering the adequacy of the Bank's allowance for loan losses,
management has focused on the fact that as of December 31, 1997, 38.9% of
outstanding loans are in the category of commercial loans and 45.2% are in
commercial real estate loans. Commercial loans are generally considered by
management to have greater risk than other categories of loans in the Bank's
loan portfolio. Generally, such loans are secured by accounts receivable,
marketable securities, deposit accounts, equipment and other fixed assets which
reduces the risk of loss inherently present in commercial loans. Commercial real
estate loans inherently have a higher risk due to depreciation of the
facilities, limited purposes of the facilities and the effect of general
economic conditions. The Bank attempts to limit this risk by generally lending
no more than 75% of the appraised value of the property held as collateral.
Residential mortgage loans constituted 9.7% of outstanding loans at
December 31, 1997. The majority of the loans in this category represent
residential real estate mortgages where the amount of the original loan
generally does not exceed 80% of the appraised value of the collateral. These
loans are considered by management to be well secured with a low risk of loss.
At December 31, 1997, the majority of the Bank's consumer loans were
secured by collateral primarily consisting of automobiles, boats and other
personal property. Management believes that these loans involve less risk than
commercial loans.
A credit review of the loan portfolio by an independent firm is conducted
semi-annually. The purpose of this review is to assess the risk in the loan
portfolio and to determine the adequacy of the allowance for loan losses. The
review includes analyses of historical performance, the level of nonconforming
and rated loans, loan volume and activity, review of loan files and
consideration of economic conditions and other pertinent information. Upon
completion, the report is approved by the Board and management of the Bank. In
addition to the above credit review, the Bank's primary regulator, the OCC, also
conducts a periodic examination of the loan portfolio. Upon completion, the OCC
presents its report of examination to the Board and management of the Bank.
Information provided from the above two independent sources, together with
information provided by the management of the Bank and other information known
to members of the Board, are utilized by the Board to monitor the loan portfolio
and the allowance for loan losses. Specifically, the Board attempts to identify
risks inherent in the loan portfolio (e.g., problem loans, potential problem
loans and loans to be
48
<PAGE> 51
charged off), assess the overall quality and collectibility of the loan
portfolio, and determine amounts of the allowance for loan losses and the
provision for loan losses to be reported based on the results of their review.
Nonperforming Assets
At December 31, 1997 and 1996, no loans were accounted for on a nonaccrual
basis. At December 31, 1997, ten loans totaling $774,000 were accruing interest
and were contractually past due 90 days or more as to principal and interest
payments, compared to no such loans at December 31, 1996. Of this amount,
$624,000 are SBA loans, of which $526,000 are guaranteed by the SBA, subject to
certain conditions.
At December 31, 1997, five loans totaling $265,000 (two of which, totaling
$219,000, are also included in the amount of loans past due 90 days or more)
were defined as "troubled debt restructurings," compared to two loans totaling
$42,000 at the prior year end. During 1997, the Bank restructured three
commercial loans to one borrower that was experiencing financial difficulties.
These loans were temporarily placed on an interest-only basis where the Bank was
not collecting principal payments. At December 31, 1997, these three loans had
an outstanding principal balance of $249,000, including the SBA guaranteed
portion totaling $186,000. These loans have been classified as impaired loans at
December 31, 1997 and the Bank has provided a specific reserve of $63,000
representing the Bank's estimated exposure on these loans. The borrower has been
unable to make the payments under the loans as restructured and the business is
in the process of being liquidated.
The Bank has policies, procedures and underwriting guidelines intended to
assist in maintaining the overall quality of its loan portfolio. The Bank
monitors its delinquency levels for any adverse trends. Nonperforming assets
consist of loans on non-accrual status, real estate and other assets acquired in
partial or full satisfaction of loan obligations and loans that are past due 90
days or more.
The Bank's policy generally is to place a loan on nonaccrual status when it
is contractually past due 90 days or more as to payment of principal or
interest. A loan may be placed on nonaccrual status at an earlier date when
concerns exist as to the ultimate collections of principal or interest. At the
time a loan is placed on nonaccrual status, interest previously accrued but not
collected is reversed and charged against current earnings. Recognition of any
interest after a loan has been placed on nonaccrual is accounted for on a cash
basis. Loans that are contractually past due 90 days or more which are well
secured or guaranteed by financially responsible third parties and are in the
process of collection generally are not placed on nonaccrual status.
Investment Portfolio
Total investment securities increased 25.9% to $10.8 million in 1997 from
$8.6 million in 1996. At December 31, 1997, investment securities available for
sale totaled $10.5 million, with an unrealized gain of $4,000, net of tax
effect. At December 31, 1996, investment securities available for sale totaled
$8.3 million, with an unrealized loss of $10,000. At December 31, 1997,
investment securities available for sale had net unrealized gains of $6,000,
comprised of gross unrealized losses of $25,000 and gross unrealized gains of
$31,000. At December 31, 1996, investment securities available for sale had net
unrealized losses of $10,000, comprised of gross unrealized losses of $31,000
and gross unrealized gains of $21,000. Average investment securities as a
percentage of average earning assets increased to 19.3% in 1997 from 18.0% in
1996.
The Bank invests primarily in direct obligations of the United States,
obligations guaranteed as to principal and interest by the United States and
obligations of agencies of the United States. In addition, the Bank enters into
Federal funds transactions with its principal correspondent banks, and acts as a
net seller of such funds. The sale of Federal funds amounts to a short-term loan
from the Bank to another bank.
Proceeds from sales and maturities of available for sale investment
securities increased 248.7% to $13.5 million in 1997 from $3.9 million in 1996,
with a resulting net gain on sales of $8,000 in 1997. Such proceeds are
generally used to reinvest in additional available for sale investments.
Other investments include Independent Bankers Bank stock, Federal Reserve
Bank stock and Federal Home Loan Bank stock that are required for the Bank to be
a member of and to conduct business with such institutions. Dividends on such
investments is determined by the institutions and is payable semi-annually or
49
<PAGE> 52
quarterly. Other investments increased 15.6% to $313,000 at December 31, 1997
from $271,000 at December 31, 1996. Other investments are carried at cost as
such investments do not have readily determinable fair values.
During 1997 and 1996, the Bank did not invest in collateralized mortgage
obligations ("CMOs"). In addition, at December 31, 1997, the investment
portfolio did not include any U.S. government agency investments which are
defined as derivatives or structured notes.
The following table presents, for the periods indicated, the carrying
amount of the Bank's investment securities, including mortgage-backed
securities.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------------
1997 1996
-------------------- --------------------
INVESTMENT CATEGORY BALANCE % OF TOTAL BALANCE % OF TOTAL
- ------------------- ------- ---------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Available for sale:
U.S. Treasury and other U.S. agency obligations........ $ 3,997 37.1% $2,480 29.0%
Mortgage-backed securities............................. 6,455 60.0 5,800 67.8
------- ---- ------ ----
10,452 97.1 8,280 96.8
Other investments........................................ 313 2.9 271 3.2
------- ---- ------ ----
Total.......................................... $10,765 100% $8,551 100%
======= ==== ====== ====
</TABLE>
The Bank utilizes its available for sale investment securities, along with
cash and Federal funds sold, to meet its liquidity needs. Average investment
securities as a percentage of average earning assets increased to 19.3% in 1997
from 18.0% in 1996.
As of December 31, 1997, $6.5 million or 60.0% of the investment securities
portfolio consisted of mortgage-backed securities compared to $5.8 million or
67.8% of the investment securities portfolio as of December 31, 1996. During
1998, $1.2 million of all mortgage-backed securities will mature. The maturities
of mortgage-backed securities, of which 49.0% were adjustable, may be shortened
by prepayments which tend to increase in a declining interest rate environment.
As a result of the adoption of Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
("SFAS 115"), the Bank has segregated its investment securities portfolio into
securities held to maturity and those available for sale. Investments held to
maturity are those for which management has both the ability and intent to hold
to maturity and are carried at amortized cost. At December 31, 1997 and 1996, no
investments were classified as held to maturity. Investments available for sale
are securities identified by management as securities which may be sold prior to
maturity in response to various factors including liquidity needs, capital
compliance, changes in interest rates or portfolio risk management. The
available for sale investment securities provides interest income and serves as
a source of liquidity for the Bank. These securities are carried at fair market
value, with unrealized gains and losses, net of taxes, reported as a separate
component of shareholders' equity.
Investment securities with a carrying value of approximately $9.3 million
and $6.5 million at December 31, 1997 and 1996, respectively, were pledged to
secure deposits of public funds, repurchase agreements and certain other
deposits as provided by law.
50
<PAGE> 53
The maturities and weighted average yields of the investment securities
portfolio at December 31, 1997 are presented in the following table using
primarily the stated maturities, excluding the effects of prepayments.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
AMOUNT YIELD(1)
--------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
AVAILABLE FOR SALE:
U.S. Treasury and other U.S. agency obligations:
0 - 1 year................................................ $ 2,503 5.60%
Over 1 through 5 years.................................... 1,494 5.75
Over 5 years.............................................. --
-------
Total............................................. 3,997
-------
Mortgage-backed securities:
0 - 1 year................................................ 1,247 5.81
Over 1 through 5 years.................................... 879 6.56
Over 5 through 10 years................................... 524 7.69
Over 10 years............................................. 3,805 6.49
-------
Total............................................. 6,455
-------
Total available for sale.......................... $10,452 6.16%
=======
</TABLE>
- ---------------
(1) The Bank has not invested in any tax-exempt obligations.
As of December 31, 1997, except for the U.S. Government and its agencies,
there was not any issuer within the investment portfolio who represented 10% or
more of the shareholders' equity.
Deposits and Short-Term Borrowings
The Bank's average deposits increased 16.2%, or $6.3 million, to $45.3
million during 1997 from $39.0 million during 1996. This growth is attributed to
a 19.2% increase in noninterest-bearing demand deposits, an 11.1% increase in
money market deposits, a 44.8% increase in savings deposits, a 29.6% increase in
certificates of deposits of $100,000 or more and a 6.4% increase in other time
deposits.
Average noninterest-bearing demand deposits increased 19.2% to $5.7 million
in 1997 from $4.8 million in 1996. As a percentage of average total deposits,
these deposits increased to 12.6% in 1997 from 12.3% in 1996.
Noninterest-bearing demand deposits decreased 20.7% to $6.4 million at December
31, 1997, from $8.1 million at December 31, 1996. This decrease is attributable
to large business deposits received in December 1996 which were not retained by
the Bank during 1997. The increase in average deposit balances more
appropriately reflects the trend of increasing deposits.
Average interest-bearing demand deposits remained relatively constant from
1996 to 1997. The increase in average savings deposits is primarily attributable
to an increase of $1.7 million in the Bank's Prime Investments Account which is
a specialized savings account that pays interest at 60.0% of the prime rate as
quoted in The Wall Street Journal on accounts with a balance of greater than
$25,000. The increase in money market accounts is attributable primarily to
increases in commercial deposit balances. Certificates of deposit of $100,000 or
more increased 29.6% to $10.5 million for 1997, compared to $8.1 million for
1996. This increase is primarily due to additional certificates of deposit
obtained from a single commercial customer which are used as collateral for
loans and letters of credit issued by the Bank. The 6.4% increase in other time
deposits is due to a slight increase in rates. The increase in these deposits
was used to fund the Bank's loan growth.
51
<PAGE> 54
The following table presents, for the periods indicated, the average amount
of and average rate paid on each of the following deposit categories:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1997 1996
----------------- -----------------
AVERAGE AVERAGE AVERAGE AVERAGE
DEPOSIT CATEGORY BALANCE RATE BALANCE RATE
- ---------------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Noninterest-bearing demand........................ $ 5,729 -- $ 4,805 --
Interest-bearing demand........................... 2,894 2.52% 2,943 2.52%
Money market...................................... 1,511 2.51 1,360 2.50
Savings........................................... 5,707 4.77 3,941 4.66
Certificates of deposit of $100,000 or more....... 10,530 5.55 8,128 5.36
Other time........................................ 18,974 5.84 17,831 5.70
------- -------
Total................................... $45,345 4.58% $39,008 4.47%
======= =======
</TABLE>
Interest-bearing deposits, including certificates of deposit, will continue
to be a major source of funding for the Bank. However, there is no specific
emphasis placed on time deposits of $100,000 and over. During 1997, aggregate
average balances of time deposits of $100,000 and over comprised 23.2% of total
deposits compared to 20.8% for the prior year. The average rate on certificates
of deposit of $100,000 or more increased to 5.55% in 1997, compared to 5.36% in
1996. The rates on certificates of deposit of $100,000 or more are generally
lower than the rates on other time deposits as such certificates are generally
shorter in term.
The following table indicates amounts outstanding of time certificates of
deposit of $100,000 or more and respective maturities:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1997 1996
----------------- -----------------
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
3 months or less.................................... $ 3,520 5.18% $ 2,451 4.65%
3-6 months.......................................... 1,253 5.64 1,023 5.19
6-12 months......................................... 3,199 5.41 1,563 5.77
Over 12 months ..................................... 2,242 4.89 4,630 5.93
------- -------
Total..................................... $10,214 5.25% $ 9,667 5.50%
======= =======
</TABLE>
Average short-term borrowings increased 63.0% to $4.9 million in 1997 from
$3.0 million in 1996. Short-term borrowings consist of treasury tax and loan
deposits and repurchase agreements with certain commercial customers. Average
treasury tax and loan deposits increased 125.7% to $949,000 in 1997 from
$420,000 in 1996. Average repurchase agreements increased 52.9% to $4.0 million
in 1997 from $2.6 million in 1996. The treasury tax and loan deposits provide an
additional liquidity resource to the Bank as such funds are invested in Federal
funds sold. The repurchase agreements represent an accommodation to commercial
customers that seek to maximize their return on liquid assets. The Bank invests
these funds in Federal funds sold and earns a contractual margin of 75 to 100
basis points on such invested funds.
Repurchase agreements increased 9.7% to $5.9 million at December 31, 1997
from $5.4 million at December 31, 1996. Management believes that the increase in
average balances more appropriately reflects the trend of increasing repurchase
agreements.
52
<PAGE> 55
The following table presents the components of short-term borrowings and
the average rates on such borrowings for the years ended December 31, 1997 and
1996:
<TABLE>
<CAPTION>
MAXIMUM
AMOUNT AVERAGE
OUTSTANDING AT AVERAGE AVERAGE ENDING RATE AT
YEAR ENDED DECEMBER 31, ANY MONTH END BALANCE RATE BALANCE YEAR END
- ----------------------- -------------- ------- ------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1997
Treasury tax and loan deposits.......... $2,414 $ 949 4.44% $2,406 5.19%
Repurchase agreements................... 6,257 3,958 4.50 5,912 4.66
------ ------
Total......................... $4,907 $8,318
====== ======
1996
Treasury tax and loan deposits.......... $1,019 $ 420 4.49% $1,019 5.09%
Repurchase agreements................... 5,389 2,589 4.19 5,389 4.21
------ ------
Total......................... $3,009 $6,408
====== ======
</TABLE>
Capital Resources
Shareholders' equity increased 93.1% to $6.3 million in 1997 from $3.3
million in 1996. Adjustment to the Bank's deferred tax asset valuation
allowance, retention of earnings and unrealized appreciation on available for
sale investment securities accounted for $2.7 million, $376,000 and $13,000
respectively, of the $3.0 million increase in shareholders' equity during 1997.
The majority of the increase in shareholders' equity relates to a reduction in
the valuation allowance on deferred tax assets of $2.7 million during 1997 which
was recorded as an increase to additional paid-in capital.
Average shareholders' equity as a percentage of total average assets is one
measure used to determine capital strength. The ratio of average shareholders'
equity to average assets increased to 6.54% in 1997 from 6.45% in 1996 and 6.40%
in 1995.
<TABLE>
<CAPTION>
REGULATORY CAPITAL CALCULATION
-------------------------------------
1997 1996
----------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Tier 1 risk based:
Actual.................................................... $ 4,138 13.00% $ 3,279 11.01%
Minimum required.......................................... 1,273 4.00 1,191 4.00
------- ----- ------- -----
Excess above minimum...................................... $ 2,865 9.00% $ 2,088 7.01%
======= ===== ======= =====
Total risk based:
Actual................................................. $ 4,546 14.29% $ 3,651 12.26%
Minimum required....................................... 2,546 8.00 2,382 8.00
------- ----- ------- -----
Excess above minimum................................... $ 2,000 6.29% $ 1,269 4.26%
======= ===== ======= =====
Leverage:
Actual.................................................... $ 4,138 7.42% $ 3,279 6.42%
Minimum required.......................................... 2,231 4.00 2,044 4.00
------- ----- ------- -----
Excess above minimum...................................... $ 1,907 3.42% $ 1,235 2.42%
======= ===== ======= =====
Total risked based assets......................... $31,819 $29,778
Total average assets.............................. $55,769 $51,109
</TABLE>
The various federal bank regulators, including the Federal Reserve and the
FDIC, have risk-based capital requirements for assessing bank capital adequacy.
These standards define capital and establish minimum capital standards in
relation to assets and off-balance sheet exposures, as adjusted for credit
risks. Capital is classified into two tiers. For banks, Tier 1 or "core" capital
consists of common shareholders' equity, qualifying
53
<PAGE> 56
noncumulative perpetual preferred stock and minority interests in the common
equity accounts of consolidated subsidiaries, reduced by goodwill, other
intangible assets and certain investments in other corporations ("Tier 1
Capital"). Tier 2 Capital consists of Tier 1 Capital, as well as a limited
amount of the allowance for possible loan losses, certain hybrid capital
instruments (such as mandatory convertible debt), subordinated and perpetual
debt and non-qualifying perpetual preferred stock ("Tier 2 Capital").
At December 31, 1994, a risk-based capital measure and a minimum ratio
standard was fully phased in, with a minimum total capital ratio of 8.00% and
Tier 1 Capital equal to at least 50% of total capital. The Federal Reserve also
has a minimum leverage ratio of Tier 1 Capital to total assets of 3.00%. The
3.00% Tier 1 Capital to total assets ratio constitutes the leverage standard for
bank holding companies and BIF-insured state-chartered non-member banks, and
will be used in conjunction with the risk-based ratio in determining the overall
capital adequacy of banking organizations. The FDIC has similar capital
requirements for BIF-insured state-chartered non-member banks.
The Federal Reserve and the FDIC have emphasized that the foregoing
standards are supervisory minimums and that an institution would be permitted to
maintain such minimum levels of capital only if it were rated a composite "one"
under the regulatory rating systems for bank holding companies and banks. All
other bank holding companies are required to maintain a leverage ratio of 3.00%
plus at least 1.00% to 2.00% of additional capital. These rules further provide
that banking organizations experiencing internal growth or making acquisitions
will be expected to maintain capital positions substantially above the minimum
supervisory levels and comparable to peer group averages, without significant
reliance on intangible assets. The Federal Reserve continues to consider a
"tangible Tier 1 leverage ratio" in evaluation proposals for expansion or new
activities. The tangible Tier 1 leverage ratio is the ratio of a banking
organization's Tier 1 Capital less all intangibles, to total average assets less
all intangibles.
The Bank's Tier 1 (to risk-weighted assets) capital ratio increased to
13.00% in 1997 from 11.01% in 1996. The Bank's total risk based capital ratio
increased to 14.29% in 1997 from 12.26% in 1996. These ratios exceed the minimum
capital adequacy guidelines imposed by regulatory authorities on banks and bank
holding companies, which are 4.00% for Tier 1 capital and 8.00% for total risk
based capital. The ratios also exceed the minimum guidelines imposed by the same
regulatory authorities to be considered "well-capitalized," which are 6.00% of
Tier 1 capital and 10.00% for total risk based capital.
The Bank does not have any commitments which it believes would reduce its
capital to levels inconsistent with the regulatory definition of a "well
capitalized" financial institution. See "Business" and "Supervision and
Regulation."
No new shares of common stock were issued by the Bank during the year ended
December 31, 1997.
Interest Rate Sensitivity and Liquidity Management
Liquidity is the ability of a company to convert assets into cash or cash
equivalents without significant loss and to raise additional funds by increasing
liabilities. Liquidity management involves maintaining the Bank's ability to
meet the day-to-day cash flow requirements of its customers, whether they are
depositors wishing to withdraw funds or borrowers requiring funds to meet their
credit needs.
The primary function of asset/liability management is not only to assure
adequate liquidity in order for the Bank to meet the needs of its customer base,
but to maintain an appropriate balance between interest-sensitive assets and
interest-sensitive liabilities so that the Bank can profitably deploy its
assets. Both assets and liabilities are considered sources of liquidity funding
and both are, therefore, monitored on a daily basis.
Interest rate sensitivity is a function of the repricing characteristics of
the Bank's portfolio of assets and liabilities. These repricing characteristics
are the time frames within which the interest-bearing assets and liabilities are
subject to change in interest rates either at replacement, repricing or maturity
during the life of the instruments. Interest rate sensitivity management focuses
on repricing relationships of assets and liabilities during periods of changes
in market interest rates. Interest rate sensitivity is managed with a view to
maintaining a mix of assets and liabilities that respond to changes in interest
rates within an acceptable time frame, thereby managing the effect of interest
rate movements on net interest income. Interest rate sensitivity
54
<PAGE> 57
is measured as the difference between the volume of assets and liabilities that
are subject to repricing at various time horizons. The differences are interest
sensitivity gaps: less than one month, one to three months, four to twelve
months, one to five years, over five years and on a cumulative basis. The
following table shows interest sensitivity gaps for these different intervals as
of December 31, 1997.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------------------------------------------
ONE ONE- FOUR-
MONTH THREE TWELVE ONE-FIVE OVER FIVE NONINTEREST
OR LESS MONTHS MONTHS YEARS YEARS SENSITIVE TOTAL
------- ------- ------- -------- --------- ----------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Earning assets:
Available for sale
investment
securities........ -- $ 959 $ 2,790 $ 2,373 $ 4,330 -- $10,452
Other investments.... -- -- -- -- 313 -- 313
Federal funds sold... $10,245 -- -- -- -- -- 10,245
Loans................ 17,223 520 4,390 5,440 6,226 -- 33,799
------- ------- ------- ------- ------- ------- -------
Total earning
assets..... $27,468 $ 1,479 $ 7,180 $ 7,813 $10,869 -- $54,809
======= ======= ======= ======= ======= ======= =======
LIABILITIES
Interest-bearing
liabilities:
Interest-bearing
demand deposits... $ 3,073 -- -- -- -- -- $ 3,073
Savings deposits..... 5,327 -- -- -- -- $ 548 5,875
Money market
deposits.......... -- -- -- -- 1,348 1,348
Certificates of
deposit of
$100,000 or more.. 2,649 $ 1,388 $ 3,935 $ 2,036 $ 206 -- 10,214
Other time
deposits.......... 997 2,805 5,322 8,175 1,208 -- 18,507
Repurchase
agreements........ 5,912 -- -- -- -- -- 5,912
Other borrowed
funds............. 2,406 -- -- -- -- -- 2,406
------- ------- ------- ------- ------- ------- -------
Total
interest-
bearing
liabilities... $20,364 $ 4,193 $ 9,257 $10,211 $ 1,414 $ 1,896 $47,335
======= ======= ======= ======= ======= ======= =======
Noninterest-bearing
demand deposits...... -- -- -- -- -- $ 6,442 $ 6,442
Other noninterest
liabilities.......... -- -- -- -- -- 1,032 1,032
------- ------- ------- ------- ------- ------- -------
Noninterest-
bearing
sources of
funds -- net... $ -- $ -- $ $ -- $ -- $ 7,474 $ 7,474
------- ------- ------- ------- ------- ------- -------
Interest sensitivity
gap:
Amount............... $ 7,104 $(2,714) $(2,077) $(2,398) $ 9,455 $(9,370) $ --
======= ======= ======= ======= ======= ======= =======
Cumulative amount.... $ 7,104 $ 4,390 $ 2,313 $ (85) $ 9,370 $ -- $ --
Percent of total
earning assets.... 12.98% (4.96)% (3.80)% (4.38)% 17.25% (17.10)%
Cumulative percent of
total earning
assets............ 12.98% 8.02% 4.23% (.15)% 17.10%
Ratio of rate sensitive
assets to rate
sensitive
liabilities.......... 1.35x .35x .78x .77x 7.69x
Cumulative ratio of
rate sensitive assets
to rate sensitive
liabilities.......... 1.35x 1.18x 1.07x 1.00x 1.21x
</TABLE>
55
<PAGE> 58
In the current interest rate environment, the liquidity and maturity
structure of the Bank's assets and liabilities are important to the maintenance
of acceptable performance levels. A decreasing rate environment negatively
impacts earnings as the Bank's rate-sensitive assets generally reprice faster
than its rate-sensitive liabilities. Conversely, in an increasing rate
environment, earnings are positively impacted. This asset/liability mismatch in
pricing is referred to as gap ratio and is measured as rate sensitive assets
divided by rate sensitive liabilities for a defined time period. A gap ratio of
1.00 means that assets and liabilities are perfectly matched as to repricing.
Management has specified gap ratio guidelines for a one year time horizon of
between .80 and 1.20. At December 31, 1997, the Bank had gap ratios of
approximately 1.18 for the next three month time period and 1.07 for the one
year period ending December 31, 1998. Thus, over the next twelve months, rate-
sensitive assets will reprice slightly faster than rate-sensitive liabilities.
The allocations used for the interest rate sensitivity report above were
based on the maturity schedules for the loans and deposits and the duration
schedules for the investment securities. All interest-bearing demand deposits
were allocated to the one month or less category with the exception of personal
savings deposit accounts which were allocated to the noninterest sensitive
category. Changes in the mix of earning assets or supporting liabilities can
either increase or decrease the net interest margin without affecting interest
rate sensitivity. In addition, the net interest spread between an asset and its
supporting liability can vary significantly while the timing of repricing for
both the asset and the liability remain the same, thus impacting net interest
income. This is referred to as basis risk and, generally, relates to the
possibility that the repricing characteristics of short-term assets tied to the
Bank's prime lending rate are different from those of short-term funding sources
such as certificates of deposit.
Varying interest rate environments can create unexpected changes in
prepayment levels of assets and liabilities which are not reflected in the
interest sensitivity analysis report. Prepayments may have significant effects
on the Bank's net interest margin. Because of these factors and in a static
test, interest sensitivity gap reports may not provide a complete assessment of
the Bank's exposure to changes in interest rates. Management utilizes
computerized interest rate simulation analysis to determine the Bank's interest
rate sensitivity. The table above indicates the Bank is in a asset sensitive gap
position for the first year, then moves into a matched position through the five
year period. Overall, due to the factors cited, current simulations results
indicates a relatively low sensitivity to parallel shifts in interest rates. A
liability sensitive bank will generally benefit from a falling interest rate
environment as the cost of interest-bearing liabilities falls faster than the
yields on interest-bearing assets, thus creating a widening of the net interest
margin. Conversely, an asset sensitive bank will benefit from a rising interest
rate environment as the yields on earning assets rise faster than the costs of
interest-bearing liabilities. Management also evaluates economic conditions, the
pattern of market interest rates and competition to determine the appropriate
mix and repricing characteristics of assets and liabilities required to produce
a targeted net interest margin.
In addition to the gap analysis, management uses rate shock simulation to
measure the rate sensitivity of its balance sheet. Rate shock simulation is a
modeling technique used to estimate the impact of changes in rates on the Bank's
net interest margin. The Bank measures its interest rate risk by estimating the
changes in net interest income resulting from instantaneous and sustained
parallel shifts in interest rates of plus or minus 200 basis points over a
period of twelve months. The Bank's most recent rate shock simulation analysis
which was performed as of December 31, 1997, indicates that a 200 basis points
increase in rates would cause an increase in net interest income of $22,000 over
the next twelve month period. Conversely, a 200 basis point decrease in rates
would cause a decrease in net interest income of $22,000 over a twelve month
period.
This simulation is based on management's assumption as to the effect of
interest rate changes on assets and liabilities and assumes a parallel shift of
the yield curve. It also includes certain assumptions about the future pricing
of loans and deposits in response to changes in interest rates. Further, it
assumes that delinquency rates would not change as a result of changes in
interest rates although there can be no assurance that this will be the case.
While this simulation is a useful measure of the Bank's sensitivity to changing
rates, it is not a forecast of the future results and is based on many
assumptions, that if changed, could cause a different outcome. In addition, a
change in U.S. Treasury rates in the designated amounts accompanied by a change
in the shape of the Treasury yield curve would cause significantly different
changes to net interest income than indicated above.
56
<PAGE> 59
Generally, the Bank's commercial and commercial real estate loans are
indexed to the prime rate. A portion of the Bank's investments in
mortgage-backed securities are indexed to U.S. Treasury rates. Accordingly, any
changes in these indices will have a direct impact on the Bank's interest
income. The majority of the Bank's savings deposits are indexed to the prime
rate. Certificates of deposit are generally priced based upon current market
conditions which include changes in the overall interest rate environment and
pricing of such deposits by competitors. Other interest-bearing deposits are not
priced against any particular index, but rather, reflect changes in the overall
interest rate environment. Repurchase agreements are indexed to the average
daily Federal funds sold rate and other borrowed funds are indexed to U.S.
Treasury rates. The Bank adjusts the rates and terms of its loans and
interest-bearing liabilities in response to changes in the interest rate
environment.
The Bank does not currently engage in trading activities or use derivative
instruments to manage interest rate risk.
At December 31, 1997, available for sale investment securities with a
carrying value of approximately $6.1 million are scheduled to mature within the
next five years. Of this amount, $3.7 million is scheduled to mature within one
year. The Bank's main source of liquidity is Federal funds sold. Average Federal
funds sold were $7.4 million in 1997, or 14.3% of average earning assets,
compared to $5.8 million in 1996 or 13.4% of average earning assets. Federal
funds sold totaled $10.2 million at December 31, 1997, or 18.7% of earning
assets, compared to $12.4 million at December 31, 1996, or 23.6% of earning
assets.
At December 31, 1997, loans with a carrying value of approximately $27.6
million are scheduled to mature within the next five years. Of this amount,
$22.1 million is scheduled to mature within one year.
At December 31, 1997, time deposits with a carrying value of approximately
$27.3 million are scheduled to mature within the next five years. Of this
amount, $17.1 million is scheduled to mature within one year.
The Bank's average loan-to-deposit ratio remained constant at 75.8% during
1997 and 1996. The Bank's total loan-to-deposit ratio increased 470 basis points
to 74.3% at December 31, 1997 from 69.6% at December 31, 1996, due to the
receipt of large business deposits in December 1996, which significantly
increased the Bank's total deposits at December 31, 1996. Management attempts to
manage the Bank's loan-to-deposit ratio on an average basis, as opposed to on a
daily basis.
The Bank has short-term funding available through various federal funds
lines of credit with other financial institutions and its membership in the
Federal Home Loan Bank of Atlanta ("FHLBA"). Further, the FHLBA membership
provides the availability of participation in loan programs with varying
maturities and terms. At December 31, 1997, the Bank had no short-term
borrowings from the FHLBA or any other financial institution.
There are no known trends, demands, commitments, events or uncertainties
that will result in or that are reasonably likely to result in liquidity
increasing or decreasing in any material way.
It is not anticipated that the Company will find it necessary to raise
additional funds to meet expenditures required to operate the business of the
Company and the Bank over the next twelve months. All anticipated material
expenditures for such period have been identified and provided for out of the
proceeds of the Offering. See "Use of Proceeds."
FOR THE THREE MONTHS ENDED MARCH 31, 1998
The Company
The Company incurred operating expenses consisting of salaries and
benefits, occupancy and equipment costs and certain other operating, financing
and organizational costs, together totaling approximately $4,065,000 during the
three months ended March 31, 1998, which include a nonrecurring, noncash charge
of $3,939,000 relating to the sale of Common Stock and Warrants included in the
Units sold to accredited foreign investors and the sale of Common Stock to
certain officers, directors and consultants. On February 3, 1998, the Company
sold 101 Units to accredited investors. Each Unit was comprised of (i) 600
shares of Series A Preferred Stock, (ii) 800 shares of Common Stock, and (iii)
Warrants to purchase 800 shares of
57
<PAGE> 60
Common Stock at the initial public offering price. Net proceeds to the Company
from this private placement totaled approximately $600,000. The Series A
Preferred Stock has been valued at its redemption value of $606,000 as the
Company contemplates redeeming the Series A Preferred Stock using a portion of
the proceeds from the initial public offering. The Series A Preferred Stock is
non-voting, and at the option of the Company, the Series A Preferred Stock may
be redeemed at any time in whole or in part at a cash redemption price of $10.00
per share. The Company recorded a nonrecurring noncash charge of $972,000
relating to the issuance of the Common Stock and Warrants, with a corresponding
increase to shareholders' equity. Financing costs relating to the Common Stock
have been measured as the difference between the fair value of the Common Stock
and the allocated proceeds of $.01 per share. The Warrants have been valued at
an aggregate price of $165,000, or $2.04 per share, as determined by an
independent appraisal.
On February 11, 1998, the Company sold 297,000 shares of Common Stock to
certain founding officers and directors of the Company and other individuals
instrumental in the organization of the Company (the "Founder Shares") at a
price of $.01 per share. The difference between the proceeds from the sale and
the fair value of the Common Stock has been recorded as compensation expense of
$2,967,000 with a corresponding increase in additional paid-in capital. During
the quarter ended March 31, 1998, the Company adopted the provisions of SOP 98-5
"Reporting on the Costs of Start-Up Activities", which resulted in the write-off
of $26,000 of organizational costs capitalized as of December 31, 1997.
The Bank
Results of Operations. The Bank's net income for the first quarter of 1998
decreased $59,000, or 53.4% to $52,000 from $111,000 for the corresponding
period in 1997. Basic and diluted earnings per share were $.03 for the first
quarter of 1998 compared to $.06 for the first quarter of 1997. The decrease in
net income from the first quarter of 1997 compared to the first quarter of 1998
was primarily attributable to a decrease in net interest income of $9,000, a
decrease in noninterest income of $16,000 and an increase in noninterest expense
of $71,000, which were partially offset by a decrease in the provision for
income taxes of $37,000.
Net interest income decreased $9,000, or 2.0% for the first quarter of 1998
compared to the first quarter of 1997. Interest income increase $29,000, or 2.8%
while interest expense increased $39,000, or 7.0%. This decrease in net interest
income resulted from increased competition for funds with non-bank institutions.
The provision for loan losses charged to operations in both the first
quarters of 1998 and 1997 totaled $15,000.
Noninterest income decreased $16,000, or 9.6% for the first quarter of 1998
compared to the first quarter of 1997. Increases in services fees and other
noninterest income were offset by a decrease in the gain on sale of loans for
the first quarter of 1998 compared to the corresponding period of 1997. The
decrease in the gain on sale of loans is due to the timing of the sale of such
loans which can fluctuate rather significantly on a quarterly basis.
Noninterest expense increased $71,000, or 15.5% to $526,000 for the first
quarter of 1998, from $455,000 for the first quarter of 1997. The increase in
non interest expenses resulted primarily from increases in salaries and benefits
and occupancy and equipment costs. The increase in salaries and benefits of
$61,000, or 25.6% to $300,000 for the first quarter of 1998, from $239,000 for
the first quarter of 1997, results from normal salary increases and the addition
of lending staff. The increase in occupancy and equipment expense of $16,000, or
25.8% resulted from the additional leased space for the Bank's SBA department
and from additional depreciation and maintenance expense resulting from the
purchase of additional computer equipment.
The effective tax rate for both the first quarter of 1998 and 1997 is 38%,
representing the estimated effective annual tax rates for both periods.
58
<PAGE> 61
Financial Condition. Total assets at March 31, 1998 were $62.2 million, an
increase of $1.8 million, or 3% from $60.4 million at December 31, 1997. Total
loans increased $2.4 million, or 7.1% to $36.2 million at March 31, 1998 from
$33.8 million at December 31, 1997. Investment securities increased $760,000 or
7.1% to $11.5 million at March 31, 1998 from $10.8 million at December 31, 1997.
The increases in total loans and investment securities available for sale were
funded by a reduction in Federal funds sold of $1.2 million or 11.3% from $10.2
million at December 31, 1997 to $9.1 million at March 31, 1998 and an increase
in repurchase agreements of $2.1 million or 34.7% from $5.9 million at December
31, 1997 to $8.0 million at March 31, 1998. Total deposits and shareholders'
equity remained relatively consistent from December 31, 1997 to March 31, 1998.
Nonaccrual loans increased to $435,000 at March 31, 1998, compared to $0 at
December 31, 1997. These nonaccrual loans represent six commercial loans, five
of which are SBA loans of which $362,000 are guaranteed by the SBA, subject to
certain conditions. The Bank reflected these loans as nonaccrual as they are
over 120 days past-due and in liquidation at March 31, 1998. These loans were
classified as impaired loans at December 31, 1997 with an allowance for loan
losses for the Bank's estimated exposure on these loans.
YEAR 2000
The Company is currently evaluating its computer systems as well as those
of its data processing vendor to determine whether modifications and
expenditures will be necessary to make its systems as well as those of its
vendor compliant with Year 2000 requirements. These requirements have arisen due
to the widespread use of computer programs that rely on two-digit date codes to
perform computations or decision-making functions. Many of these programs may
fail as a result of their inability to properly interpret date codes beginning
January 1, 2000. For example, such programs may misinterpret "00" as the year
1900 rather than 2000. In addition, some equipment, being controlled by
microprocessor chips, may not deal appropriately with the year "00." The Company
believes that its critical systems are currently or will be Year 2000 compliant
by December 31, 1998 and does not believe that material expenditures will be
necessary to implement any further modifications. Management of the Company has
also evaluated the potential effect on M&I's data processing systems resulting
from Year 2000 issues. M&I has represented that M&I's core processing systems
will be fully Year 2000 compliant prior to December 31, 1998. However, there can
be no assurance that all necessary modifications will be identified and
corrected or that unforeseen difficulties or costs will not arise. In addition,
there can be no assurance that the systems of M&I or other companies on which
the Company's systems rely will be modified on a timely basis, or that the
failure by another company to properly modify its systems will not negatively
impact the Company's systems or operations.
ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
130). This statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. SFAS 130 requires that
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statements that is
displayed with the same prominence as other financial statements. SFAS 130 does
not require a specific format for that financial statements but requires that an
enterprise display an amount representing total comprehensive income for the
period in that financial statements. Additionally, SFAS 130 requires that an
enterprise (a) classify items of other comprehensive income by their nature in a
financial statements and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. This
Statement is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. Management has not determined the effect of
this statement on its financial statements disclosure.
59
<PAGE> 62
EFFECTS OF INFLATION AND CHANGING PRICES
Inflation generally increases the cost of funds and operating overhead, and
to the extent loans and other assets bear variable rates, the yields on such
assets. Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on the performance of a
financial institution than the effects of general levels of inflation. Although
interest rates do not necessarily move in the same direction or to the same
extent as the prices of goods and services, increases in inflation generally
have resulted in increased interest rates. At the beginning of 1996 the Federal
Reserve decreased interest rates 75 basis points. The prime rate has remained
unchanged since that time. In addition, inflation affects financial
institutions' increased cost of goods and services purchased, the cost of
salaries and benefits, occupancy expense, and similar items. Inflation and
related increases in interest rates generally decrease the market value of
investments and loans held and may adversely effect liquidity, earnings, and
shareholders' equity. Mortgage originations and refinancings tend to slow as
interest rates increase, and can reduce the Banks' earnings from such activities
and the income from the sale of residential mortgage loans in the secondary
market.
MONETARY POLICIES
The results of operations of the Bank will be affected by credit policies
of monetary authorities, particularly the Federal Reserve Board. The instruments
of monetary policy employed by the Federal Reserve Board include open market
operations in U.S. Government securities, changes in the discount rate on member
bank borrowings, changes in reserve requirements against member bank deposits
and limitations on interest rates which member banks may pay on time and savings
deposits. In view of changing conditions in the national economy and in the
money markets, as well as the effect of action by monetary and fiscal
authorities, including the Federal Reserve Board, no prediction can be made as
to possible future changes in interest rates, deposit levels, loan demand or the
business and earnings of the Company or the Bank.
SUPERVISION AND REGULATION
GENERAL
The Company and the Bank will operate in a highly regulated environment,
and the business activities of the Company and the Bank will be supervised by a
number of federal regulatory agencies, including the Federal Reserve Board, the
OCC, the Florida Banking Department and the FDIC.
The Company will be regulated by the Federal Reserve Board under the
federal Bank Holding Company Act of 1956, which requires every bank holding
company to obtain the prior approval of the Federal Reserve Board before
acquiring more than 5% of the voting shares of any bank or all or substantially
all of the assets of a bank, or before merging or consolidating with another
bank holding company. The Federal Reserve Board (pursuant to regulation and
published policy statements) has maintained that a bank holding company must
serve as a source of financial strength to its subsidiary banks. In adhering to
the Federal Reserve Board policy, the Company may be required to provide
financial support to its subsidiary bank at a time when, absent such Federal
Reserve Board policy, the Company would not deem it advisable to provide such
assistance.
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994, which became effective in November 1994, the restrictions on interstate
acquisitions of banks by bank holding companies were repealed as of September
29, 1995, such that the Company and any other bank holding company located in
Florida is able to acquire a bank located in any other state, and a bank holding
company located outside Florida can acquire any Florida-based bank, in either
case subject to certain deposit percentage and other restrictions. Beginning on
June 1, 1997, the legislation provides that unless an individual state has
elected to prohibit out-of-state banks from operating interstate branches within
its territory, adequately capitalized and managed bank holding companies will be
able to consolidate their multi-state bank operations into a single bank
subsidiary and to branch on an interstate basis. De novo branching by an
out-of-state bank would be permitted only if it is expressly permitted by the
laws of the host state. Florida does not permit de novo branching by an
out-of-state bank. Therefore, the only method by which an out-of-state bank or
bank holding
60
<PAGE> 63
company may enter Florida is through an acquisition. The authority of a bank to
establish and operate branches within a state will continue to be subject to
applicable state branching laws.
A bank holding company is generally prohibited from acquiring control of
any company which is not a bank and from engaging in any business other than the
business of banking or managing and controlling banks. However, there are
certain activities which have been identified by the Federal Reserve Board to be
so closely related to banking as to be a proper incident thereto and thus
permissible for bank holding companies. Effective April 21, 1997, the Federal
Reserve Board revised and expanded the list of permissible non-banking
activities, which now includes the following activities: extending credit and
servicing loans; acting as investment or financial advisor to subsidiaries and
certain outside companies; leasing personal and real property or acting as a
broker with respect thereto; providing management and employee benefits
consulting and career counseling services to nonaffiliated banks and nonbank
depository institutions; operating certain nonbank depository institutions;
performing certain trust company functions; providing certain agency
transactional services, including securities brokerage services, riskless
principal transactions, private placement services, and acting as a futures
commission merchant; providing data processing and data transmission services;
acting as an insurance agent or underwriter with respect to certain limited
types of insurance; performing real estate appraisals; arranging commercial real
estate equity financing; providing check-guaranty, collection agency and credit
bureau services; engaging in asset management, servicing and collection
activities; providing real estate settlement services; acquiring certain debt
which is in default; underwriting and dealing in obligations of the United
States, the states and their political subdivisions; engaging as a principal in
foreign exchange trading and dealing in precious metals; providing other support
services such as courier services and the printing and selling of checks; and
investing in programs designed to promote community welfare.
In determining whether an activity is so closely related to banking as to
be permissible for bank holding companies, the Federal Reserve Board is required
to consider whether the performance of such activities by a bank holding company
or its subsidiaries can reasonably be expected to produce benefits to the public
such as greater convenience, increased competition and gains in efficiency that
outweigh the possible adverse effects such as undue concentration of resources,
decreased or unfair competition, conflicts of interest and unsound banking
practices. Generally, bank holding companies are required to obtain the prior
approval of the Federal Reserve Board to engage in any new activity not
previously approved by the Federal Reserve Board.
The Company is also regulated by the Florida Banking Department under the
Florida Financial Institutions Code, which requires every bank holding company
to obtain the prior approval of the Florida Commissioner of Banking before
acquiring more than 5% of the voting shares of any Florida bank or all or
substantially all of the assets of a Florida bank, or before merging or
consolidating with any Florida bank holding company. A bank holding company is
generally prohibited from acquiring ownership or control of 5% or more of the
voting shares of any Florida bank or Florida bank holding company unless the
Florida bank or all subsidiaries of the Florida bank holding company to be
acquired have been in existence and continuously operating, on the date of such
acquisition, for a period of three years or more. However, approval of the
Florida Banking Department is not required if the bank to be acquired or all
bank subsidiaries of the Florida bank holding company to be acquired are
national banks.
The Bank, as a subsidiary of the Company, is subject to restrictions under
federal law in dealing with the Company and other affiliates, if any. These
restrictions apply to extensions of credit to an affiliate, investments in the
securities of an affiliate and the purchase of assets from an affiliate.
Loans and extensions of credit by national banks are subject to legal
lending limitations. Under federal law, a national bank may grant unsecured
loans and extensions of credit in an amount up to 15% of its unimpaired capital
and surplus to any person if the loans and extensions of credit are not fully
secured by collateral having a market value at least equal to their face amount.
In addition, a national bank may grant loans and extensions of credit to a
single person in an amount up to 10% of its unimpaired capital and surplus,
provided that the transactions are fully secured by readily marketable
collateral having a market value determined by reliable and continuously
available price quotations, at least equal to the amount of funds outstanding.
This 10% limitation is separate from, and in addition to, the 15% limitation for
unsecured loans. Loans and extensions of credit may exceed the general lending
limit if they qualify under one of several
61
<PAGE> 64
exceptions. Such exceptions include certain loans or extensions of credit
arising from the discount of commercial or business paper, the purchase of
bankers' acceptances, loans secured by documents of title, loans secured by U.S.
obligations and loans to or guaranteed by the federal government.
CAPITAL ADEQUACY REQUIREMENTS
Both the Company and the Bank are subject to regulatory capital
requirements imposed by the Federal Reserve Board and the OCC. The Federal
Reserve Board and the OCC have issued risk-based capital guidelines for bank
holding companies and banks which make regulatory capital requirements more
sensitive to differences in risk profiles of various banking organizations. The
capital adequacy guidelines issued by the Federal Reserve Board are applied to
bank holding companies on a consolidated basis. The OCC's risk capital
guidelines apply directly to national banks regardless of whether they are
subsidiaries of a bank holding company. Both agencies' requirements (which are
substantially similar), provide that banking organizations must have capital
equivalent to 8% of weighted risk assets. The risk weights assigned to assets
are based primarily on credit risks. Both the Federal Reserve Board and the OCC
have also implemented new minimum capital leverage ratios to be used in tandem
with the risk-based guidelines in assessing the overall capital adequacy of
banks and bank holding companies. Under these rules, banking institutions are
required to maintain a ratio of 3% "Tier 1" capital to total assets (net of
goodwill). Tier 1 capital includes common shareholders equity, noncumulative
perpetual preferred stock and minority interests in the equity accounts of
consolidated subsidiaries, less certain intangible assets.
The OCC's guidelines provide that intangible assets are generally deducted
from Tier 1 capital in calculating a bank's risk-based capital ratio. However,
certain intangible assets which meet specified criteria ("qualifying
intangibles") such as mortgage servicing rights are retained as a part of Tier 1
capital. The OCC currently maintains that only mortgage servicing rights and
purchased credit card relationships meet the criteria to be considered
qualifying intangibles. The OCC's guidelines formerly provided that the amount
of such qualifying intangibles that may be included in Tier 1 capital was
strictly limited to a maximum of 25% of total Tier 1 capital. The OCC has
amended its guidelines to increase the limitation on such qualifying intangibles
from 25% to 50% of Tier 1 capital and further to permit the inclusion of
purchased credit card relationships as a qualifying intangible asset.
In addition, the OCC has adopted rules which clarify treatment of asset
sales with recourse not reported on a bank's balance sheet. Among assets
affected are mortgages sold with recourse under Federal National Mortgage
Association, Federal Home Loan Mortgage Corporation and Federal Farm Credit Bank
programs. The rules clarify that even though those transactions are treated as
asset sales for bank Call Report purposes, those assets will still be subject to
a capital charge under the risk-based capital guidelines.
Both the risk-based capital guidelines and the leverage ratio are minimum
requirements, applicable only to top-rated banking institutions. Institutions
operating at or near these levels are expected to have well diversified risk,
high asset quality, high liquidity, good earnings and in general, have to be
considered strong banking organizations rated composite 1 under the CAMEL rating
system for banks. Institutions with lower ratings and institutions with high
levels of risk or experiencing or anticipating significant growth would be
expected to maintain ratios 100 to 200 basis points above the stated minimums.
The OCC, the Federal Reserve Board and the FDIC have adopted regulations
revising their risk-based capital guidelines to ensure that the guidelines take
adequate account of interest rate risk. Interest rate risk is the adverse effect
that changes in market interest rates may have on a bank's financial condition
and is inherent to the business of banking. Under the new regulations, when
evaluating a bank's capital adequacy, the agency's capital standards now
explicitly include a bank's exposure to declines in the economic value of its
capital due to changes in interest rates. The exposure of a bank's economic
value generally represents the change in the present value of its assets, less
the change in the value of its liabilities, plus the change in the value of its
interest rate off-balance sheet contracts. Concurrently, the agencies issued a
joint policy statement, effective June 26, 1996, to provide guidance on sound
practices for managing interest rate risk. In the policy statement, the agencies
emphasize the necessity of adequate oversight by a bank's Board of Directors and
senior management and of a comprehensive risk management process. The policy
statement also describes the
62
<PAGE> 65
critical factors affecting the agencies' evaluations of a bank's interest rate
risk when making a determination of capital adequacy. The agencies' risk
assessment approach used to evaluate a bank's capital adequacy for interest rate
risk relies on a combination of quantitative and qualitative factors. Banks that
are found to have high levels of exposure and/or weak management practices will
be directed by the agencies to take corrective action. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
PROMPT CORRECTIVE ACTION
The Federal Deposit Insurance Corporation Improvement Act of 1991 (the
"FDICIA"), enacted on December 19, 1991, provides for the development of a
regulatory monitoring system requiring prompt corrective action on the part of
banking regulators with regard to certain classes of undercapitalized
institutions. While the FDICIA does not change any of the minimum capital
requirements, it directs each of the federal banking agencies to issue
regulations putting the monitoring plan into effect. The FDICIA creates five
"capital categories" ("well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" and "critically
undercapitalized") which are defined in the FDICIA and which will be used to
determine the severity of corrective action the appropriate regulator may take
in the event an institution reaches a given level of undercapitalization. For
example, an institution which becomes "undercapitalized" must submit a capital
restoration plan to the appropriate regulator outlining the steps it will take
to become adequately capitalized. Upon approving the plan, the regulator will
monitor the institution's compliance. Before a capital restoration plan will be
approved, any entity controlling a bank (i.e., holding companies) must guarantee
compliance with the plan until the institution has been adequately capitalized
for four consecutive calendar quarters. The liability of the holding company is
limited to the lesser of five percent of the institution's total assets or the
amount which is necessary to bring the institution into compliance with all
capital standards. In addition, "undercapitalized" institutions will be
restricted from paying management fees, dividends and other capital
distributions, will be subject to certain asset growth restrictions and will be
required to obtain prior approval from the appropriate regulator to open new
branches or expand into new lines of business.
As an institution's capital levels decline, the extent of action to be
taken by the appropriate regulator increases, restricting the types of
transactions in which the institution may engage and ultimately providing for
the appointment of a receiver for certain institutions deemed to be critically
undercapitalized.
In order to comply with the FDICIA, the Federal Reserve Board, the OCC and
the FDIC have adopted regulations defining operational and managerial standards
relating to internal controls, loan documentation, credit underwriting criteria,
interest rate exposure, asset growth, and compensation, fees and benefits.
In response to the directive issued under the FDICIA, the regulators have
established regulations which, among other things, prescribe the capital
thresholds for each of the five capital categories established by the FDICIA.
The following table reflects the capital thresholds:
<TABLE>
<CAPTION>
TOTAL RISK- TIER 1 RISK- TIER 1
BASED CAPITAL BASED CAPITAL LEVERAGE
RATIO RATIO RATIO
------------- ------------- --------
<S> <C> <C> <C>
Well capitalized(1)................................. >=10% >=6% >=5%
Adequately Capitalized(1)........................... >=8 >=4 >=4(2)
Undercapitalized(4)................................. <l8 <4 <4(3)
Significantly Undercapitalized(4)................... <l6 <3 <3
Critically Undercapitalized......................... -- -- <=2(5)
</TABLE>
- ---------------
(1) An institution must meet all three minimums.
(2) 3% for composite 1-rated institutions, subject to appropriate federal
banking agency guidelines.
(3) <3% for composite 1-rated institutions, subject to appropriate federal
banking agency guidelines.
(4) An institution falls into this category if it is below the specified capital
level for any of the three capital measures.
(5) Ratio of tangible equity to total assets.
63
<PAGE> 66
The scope of regulation and permissible activities of the Company and the
Bank is subject to change by future federal and state legislation. In addition,
regulators sometimes require higher capital levels on a case-by-case basis based
on such factors as the risk characteristics or management of a particular
institution. The Company and the Bank are not aware of any attributes of their
operating plan that would cause regulators to impose higher requirements.
64
<PAGE> 67
DESCRIPTION OF BANK ACQUISITION
GENERAL
On March 30, 1998, the Company and the Bank entered into an agreement (the
"Merger Agreement") whereby the Bank will be merged with and into Florida
Interim Bank No. 1, N.A. ("Interim"), a national bank. Interim will be the
surviving entity in the Merger, and, immediately upon consummation of the
Merger, will change its name to "Florida Bank, N.A."
The closing of the transactions contemplated by the Merger Agreement (the
"Closing") will be immediately prior to the closing of the Offering, at a time,
place and date specified by the parties. The Merger and other transactions
contemplated by the Merger Agreement will become effective on the date and at
the time certification of the Merger is received from the OCC (the "Effective
Time").
The aggregate purchase price for the Bank will be $13.75 million. At the
Effective Time, each outstanding share of the Bank's capital stock ("Bank
Stock")(other than shares held by holders who perfect and do not withdraw their
dissenters' rights) will be converted into and exchanged for the right to
receive .66586 shares of Common Stock, which is equal to the quotient obtained
by dividing 6.6586 by the initial public offering price of the Common Stock
offered hereby, rounded to the nearest third decimal point (the "Exchange
Ratio"), and 1,375,000 shares of Common Stock will be issuable upon conversion
and exchange of all shares of Bank Stock. Cash will be paid in lieu of
fractional shares. The value of the consideration to be paid to Bank
shareholders in the Merger was arrived at as a result of the Company's due
diligence review of the Bank's financial condition and negotiations between
management of the Company and the Bank. If the Company changes the number of
shares of Common Stock issued and outstanding prior to the Effective Time as a
result of a stock split, stock dividend, recapitalization, reclassification, or
similar transaction and the record date or the effective date thereof will be
prior to the Effective Time, the Exchange Ratio will be proportionately
adjusted.
The aggregate purchase price of $13.75 million corresponds to 209.8% of the
Bank's reported shareholders' equity (plus proceeds on the exercise of the
Bank's 240,000 outstanding options) of $6.6 million as of December 31, 1997 and
36.6 times its reported net income for 1997 of $376,000. Shareholders' equity as
of December 31, 1997 includes a one-time, non-recurring increase to additional
paid-in capital of approximately $2.4 million due to the elimination of the
valuation allowance on the Bank's net deferred tax assets.
The Boards of Directors of both the Company and the Bank have approved the
Merger, and the Bank's shareholders approved the Merger at a special meeting
that was held on July 24, 1998. Approval of the Merger by the Company's
shareholders was not required.
REPRESENTATIONS AND WARRANTIES; CONDUCT OF BUSINESS PENDING THE CONSUMMATION OF
THE MERGER
The Merger Agreement contains various customary representations and
warranties including, without limitation, representations and warranties by the
Company and the Bank as to their organization, existence and good standing,
capitalization, authority and power to carry out the transactions contemplated
by the Merger Agreement, compliance with all regulatory filing requirements,
compliance with laws, possession of required consents and approvals, absence of
undisclosed liabilities, absence of pending litigation, payment of taxes,
possession of good and marketable title with respect to each party's assets,
compliance with environmental laws, compliance with the Employee Retirement
Income Security Act of 1974, as amended, absence of default in Material
Contracts (as defined in the Merger Agreement) and absence of certain events,
changes or occurrences which, individually or in the aggregate would, with
respect to the Company or the Bank: (i) in the aggregate result in an adverse
impact of at least $200,000 on the financial position or results of operations
of either the Company or the Bank or (ii) impair the ability of either the
Company or the Bank to perform its respective obligations under the Merger
Agreement or to consummate the Merger or the other transactions contemplated by
the Merger Agreement (collectively, a "Material Adverse Effect"), provided that
a Material Adverse Effect will not be deemed to include the impact of (a)
changes in banking and similar laws of general applicability or interpretations
thereof by courts or governmental authorities, (b) changes in GAAP or regulatory
accounting principals generally applicable to banks and their holding companies,
65
<PAGE> 68
(c) actions and omissions of any of the Company, the Bank or any of their
respective subsidiaries taken with the prior informed consent of the other party
in contemplation of the transactions contemplated by the Merger Agreement, (d)
circumstances affecting regional bank holding companies generally and (e) the
Merger and compliance with the provisions of the Merger Agreement on the
operating performance of the Company and the Bank.
The Bank has agreed, during the period from the date of the Merger
Agreement to the earlier of the Effective Time or termination of the Merger
Agreement, to (a) operate its business only in the usual, regular, and ordinary
course, (b) use its reasonable best efforts to preserve its business
organization and assets and maintain its rights and franchises, (c) use its
reasonable best efforts to maintain its current employee relationships, and (d)
take no action which would materially adversely affect the ability of any party
to obtain any consents of regulatory authorities required for the transactions
contemplated by the Merger Agreement. In addition, the Company has agreed during
such time period to (i) continue to conduct its business and the business of its
subsidiaries in a manner designed in its reasonable judgment, to enhance the
long-term value of its Common Stock and the business prospects of its companies
and (ii) take no action which would (x) materially adversely affect the ability
of any party to obtain any consents required for the transactions contemplated
by the Merger Agreement or (y) materially adversely affect the ability of any
party to perform its covenants and agreements under the Merger Agreement. In
addition, the Company and the Bank have agreed that they will not, without the
other party's prior approval, and unless otherwise expressly permitted by the
Merger Agreement, take certain specified actions that would have the effect of
changing such party's capital or ownership structure, loan portfolio, or balance
sheet.
TERMINATION
The Merger Agreement may be terminated and the Merger abandoned at any time
prior to the Effective Time; (a) by mutual written consent of the boards of
directors of the Company and the Bank; (b) by the board of directors of either
the Bank or the Company: (i) in the event of the inaccuracy of any
representation or warranty of the other party contained in the Merger Agreement
which cannot or has not been cured within 30 days after providing written notice
of such inaccuracy and which inaccuracy would provide the terminating party the
ability to refuse to consummate the Merger, provided that the terminating party
is not then in breach of any representation or warranty, or in material breach
of any covenant or agreement, contained in the Merger Agreement; (ii) if the
other party has materially breached any covenant, agreement or obligation under
the Merger Agreement, and such breach cannot or will not be cured within 30 days
after giving written notice to the breaching party of the breach; (iii) if any
application for necessary regulatory approval consent is denied by final
nonappealable action; (iv) if the Bank's shareholders fail to approve the Merger
Agreement; (v) the Merger has not been consummated by September 30, 1998; or
(vi) any of the conditions precedent to the party's obligations to consummate
the Merger cannot be satisfied, or cannot be satisfied or fulfilled by September
30, 1998; (c) by the Company if (i) dissenters' rights are claimed by persons
owning in the aggregate more than 10% of the issued and outstanding Bank Stock
or (ii) the Bank does not receive an opinion from Deloitte & Touche LLP, dated
as of the Effective Time and with contents acceptable to the Company in its sole
discretion, to the effect that no ownership change (as defined in Section 382(g)
of the Code), of the Bank has occurred during or after any taxable period in
which the Bank incurred a net operating loss that carries over to any taxable
period ending after December 31, 1996 or (d) by the Bank, if any time prior to
the Effective Time, (i) Mercer Capital withdraws its fairness opinion or (ii) a
third-party makes a bona fide Acquisition Proposal that the Bank's Board of
Directors determines in its good faith and in the exercise of its fiduciary
duties, is more favorable to the Bank's shareholders than the Merger Agreement
and that the failure to terminate the Merger Agreement and accept such
alternative would be inconsistent with the proper exercise of such fiduciary
duties.
66
<PAGE> 69
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information concerning the Company's
executive officers, directors and significant employees upon completion of the
Offering and consummation of the Merger.
<TABLE>
<CAPTION>
NAME POSITION(1)
- ---- -----------
<S> <C>
M.G. Sanchez.................................... Chairman of the Board
Charles E. Hughes, Jr. ......................... President, Chief Executive Officer and
Director
T. Edwin Stinson, Jr. .......................... Chief Financial Officer(2)
Nancy E. LaFoy.................................. Secretary, Treasurer and Director(2)
Richard B. Kensler.............................. Chief Credit Officer
John S. McMullen................................ President of the Tampa Market and Director(3)
Don D. Roberts.................................. President of the Jacksonville Market
T. Stephen Johnson.............................. Vice Chairman of the Board
Clay M. Biddinger............................... Director
P. Bruce Culpepper.............................. Director
J. Malcolm Jones, Jr. .......................... Director
W. Andrew Krusen, Jr. .......................... Director(4)
Wilford C. Lyon, Jr. ........................... Director
David McIntosh.................................. Director
</TABLE>
- ---------------
(1) The Board of Directors of the Company is divided into three classes,
designated Class I, Class II and Class III. See "-- Board of Directors."
(2) Upon completion of the Offering and the Merger, Mr. Stinson will be named
Chief Financial Officer, Secretary and Treasurer of the Company.
Accordingly, Ms. LaFoy will resign as Secretary and Treasurer of the
Company, but will remain a member of the Board of Directors.
(3) Upon completion of the Offering and the Merger, Mr. McMullen will be named
President of the Tampa Market and will become a director of the Company.
(4) Upon completion of the Offering and the Merger, Mr. Krusen will become a
director of the Company.
M. G. Sanchez, age 63, has served as Chairman of the Board and a Class II
Director of the Company since February 1998. Prior to his service with the
Company, Mr. Sanchez worked independently as a bank management consultant,
periodically performing contract work with TSJ&A. From 1986 to 1997, Mr. Sanchez
has served as President and Chief Executive Officer of The FBF Management Group,
a provider of management consulting services to banks in Florida. Prior to his
service with The FBF Management Group, from 1979 to 1986, Mr. Sanchez served as
the President and Chief Executive Officer of First Bankers Corporation of
Florida, a bank holding company with nine subsidiary banks in Florida that was
acquired by First Union Corporation in 1986. Mr. Sanchez has also served as a
Member of the Board of Directors for the Miami branch of the Federal Reserve
Bank of Atlanta and a Member of the Governors Advisory Committee on Interstate
Banking. Mr. Sanchez is also a past National President of Robert Morris
Associates, the association of bank loan and credit officers. Mr. Sanchez serves
on the Advisory Board at the College of Business at the University of Florida
and is a former President of Gator Boosters, Inc. at the University of Florida.
Upon completion of the Offering and the Merger, Mr. Sanchez will serve as
Chairman of the Board of the Directors of the Bank.
Charles E. Hughes, Jr., age 55, has served as President, Chief Executive
Officer and a Class III Director of the Company since January 1998. Prior to his
appointment as President and Chief Executive Officer and election as Director,
Mr. Hughes served as Chairman of the Board, President and Chief Executive
Officer of SouthTrust Bank of Florida, N.A. ("SouthTrust"). At SouthTrust, Mr.
Hughes was responsible for negotiating bank acquisitions in Florida and
overseeing the entire Florida operations for SouthTrust. Prior to joining
SouthTrust, Mr. Hughes served as Executive Vice President and Chief Financial
Officer of Baptist Health System, Inc., a hospital management corporation from
1990 to 1992. Prior to Baptist Health System,
67
<PAGE> 70
Inc., Mr. Hughes served as Executive Vice President of Florida National Banks of
Florida, Inc. and President of Florida National Bank in Jacksonville from 1983
until Florida National Bank merged with First Union National Bank in 1990. Mr.
Hughes is a past Chairman and a present member of the Board of Trustees of the
Jacksonville Chamber of Commerce. Upon consummation of the Merger, Mr. Hughes
will serve as President and Chief Executive Officer of the Bank.
T. Edwin Stinson, Jr., age 45, has served as Executive Vice President,
Chief Operating Officer and as a director of the Bank since 1993. Prior to his
service with the Bank, Mr. Stinson served as the President of Florida State Bank
and Emerald Coast State Bank in Northwest Florida. Mr. Stinson has been involved
in the banking industry since 1978. Upon completion of the Offering and the
Merger, Mr. Stinson will serve as the Secretary, Treasurer, and Chief Financial
Officer of the Company and Secretary and Chief Financial Officer of the Bank.
Nancy E. LaFoy, age 43, has served as a Class I Director of the Company
since its inception and as Secretary and Treasurer of the Company since January
1998. Ms. LaFoy has served as Senior Vice President of TSJ&A since 1987. Prior
to her service with TSJ&A, Ms. LaFoy served as Assistant Vice President with
Wachovia Corporation in Atlanta, Georgia, formerly First National Bank of
Atlanta, from 1984 to 1987. Ms. LaFoy has been involved in the banking industry
since 1977. Upon the completion of the Offering and the Merger, Ms. LaFoy will
resign from her position as Secretary and Treasurer of the Company, but will
remain a director of the Company.
Richard B. Kensler, age 48, has served as the Chief Credit Officer of the
Company since April 1998. Prior to his service with the Company, Mr. Kensler
served as a senior credit officer for Signet Banking Corporation, since 1987.
Mr. Kensler's banking career began in the Florida market when he served as an
Assistant Vice President and Special Assets Manager for Sun Banks of Florida,
Inc. in Orlando from 1972 to 1980.
John S. McMullen, age 54, has served as President and Chief Executive
Officer of the Bank since 1992. Prior to First National Bank of Tampa, Mr.
McMullen served as Senior Vice President of Corporate Banking in Tampa from 1990
to 1992 and Area Executive Vice President for Pinellas County of First Florida
Bank, N.A. from 1985 to 1990. Mr. McMullen also held various senior officer
positions with First Florida Bank in Tampa since 1970. Mr. McMullen serves as a
director of Merchants Association of Florida, Inc., and Tampa Downtown
Partnership. Upon the completion of the Offering and the Merger, Mr. McMullen
will become a director of the Company and the Bank and will be named President
of the Tampa Market.
Don D. Roberts, age 49, has served as President of the Jacksonville Market
since April 1998. Prior to his service with the Company, Mr. Roberts served as
President and Chief Executive Officer of Barnett Bank, N.A., Lake County,
Florida since 1993. Prior to his service in Lake County, he served as President
and Chief Executive Officer of Barnett Bank of Atlanta from 1990 through 1994.
During his 13 year tenure with Barnett Banks, he served in several positions,
including Executive Vice President in charge of the Corporate Banking Group.
T. Stephen Johnson, age 48, has served as a Class I Director of the Company
since its inception in October 1997, and as its Vice Chairman since February
1998. Mr. Johnson has served as the Chairman of the Board of T. Stephen Johnson
& Associates, Inc. ("TSJ&A"), a financial services consulting firm, since its
inception in 1987. TSJ&A specializes in mergers, acquisitions and regulatory
consulting for financial institutions. Mr. Johnson currently serves as Chairman
of the Board of Directors of NetB@nk, Inc. a publicly traded company. In
addition, he is the principal owner of Bank Assets, Inc., a provider of benefit
programs for directors and officers of banks.
Clay M. Biddinger, age 42, has served as a Class II Director of the Company
since April 1998. Since 1991, Mr. Biddinger has served as Chairman of the Board
and sole shareholder of CMB Holdings, Inc. Mr. Biddinger served as President,
Chief Executive Officer and director of Sun Financial Group, Inc., Tampa,
Florida ("Sun") from its founding in 1981 through June 1998. In October 1995,
Sun was sold to GATX Corporation, a publicly traded corporation. In addition,
since 1995 Mr. Biddinger has served as a director of Centron DPL Company, a
wholly-owned subsidiary of GATX Corporation. Mr. Biddinger is a member of the
Executive Committee of Dominion Financial Group International, LDC, a merchant
banking company which
68
<PAGE> 71
provides investment capital to various emerging business enterprises. Mr.
Biddinger is the past Founding Chairman and a present member of the Council of
Growing Companies. Mr. Biddinger also serves on the Boards of Directors of
various charitable organizations.
P. Bruce Culpepper, age 56, has served as a Class III Director of the
Company since April 1998. Mr. Culpepper has been an attorney with the
Florida-based law firm of Akerman, Senterfitt & Eidson, P.A. since 1997. Prior
to 1997, Mr. Culpepper was a partner with the law firm of Pennington, Culpepper,
P.A. from 1992 to 1997.
J. Malcolm Jones, Jr., age 45, has served as a Class I Director of the
Company since April 1998. Since 1997, Mr. Jones has been Senior Vice President
of St. Joe Corporation, a publicly traded paper and forestry concern, and from
1995 to 1997, Mr. Jones served as St. Joe Corporation's Vice President and Chief
Financial Officer. Mr. Jones formerly served as President, Chief Executive
Officer and Vice Chairman of the Board of FloridaBank, a Florida savings bank
from 1990 to 1994. Mr. Jones also serves on the Board of Directors of Holmes
Lumber Company.
W. Andrew Krusen, Jr., age 50, has served as Chairman of the Board of First
National Bank of Tampa since 1991. Since 1988, Mr. Krusen has served as Chairman
of the Board of Dominion Energy and Minerals Corporation, an oil and gas
concern, and is Chairman of the Executive Committee of Dominion Financial Group
International, LDC, a merchant banking company which provides investment capital
to various emerging business enterprises. He also serves as a director of
General Group Holdings, Inc., a family controlled business involved in real
estate development, construction, leasing and manufacturing. Mr. Krusen is also
a director of publicly traded Northstar Energy Inc., Memry Corporation and
Raymond James Trust Company. Mr. Krusen will become a director of the Company
upon the completion of the Offering and the Merger.
Wilford C. Lyon, Jr., age 63, has served as a Class II Director of the
Company since April 1998. Prior to his service with the Company, Mr. Lyon served
as Chairman of the Board and Chief Executive Officer of the Independent
Insurance Group, Inc., a publicly traded company. Mr. Lyon retired from that
position on February 29, 1996 when the company merged with the American General
Corporation, a publicly traded company. Mr. Lyon has also served on the Board of
Florida National Banks of Florida, Inc. from 1983 to 1990 when it merged with
First Union National Bank of Florida; and thereafter he served on the Board of
First Union National Bank of Florida until 1991. Mr. Lyon is active in community
affairs, having served as Chairman of the Jacksonville Chamber of Commerce, and
Past-District Governor of Rotary International.
David McIntosh, age 51, has served as a Class III Director of the Company
since April 1998. Prior to his service with the Company, Mr. McIntosh served as
the Chief Executive Officer of Gunster, Yoakley, Valdes-Fauli & Stewart, P.A., a
150-attorney law firm based in West Palm Beach since 1984. Effective March 31,
1998, Mr. McIntosh retired from his position as Chief Executive Officer but will
remain as a consultant to the firm through December 1998 to assist in the
transition and search for a successor. Over the past two years, Mr. McIntosh has
served as Chairman of the Governor's Task Force on Telecommunications, Chairman
of the Florida Intangible Tax Task Force, Chairman of Florida TaxWatch and
Chairman of the Advisory Board of the College of Business at Florida Atlantic
University. Since 1980, Mr. McIntosh has served as a member of the Board of
Directors of the University of Florida Foundation and is also a past President
of the Foundation.
BOARD OF DIRECTORS
The number of directors of the Company is currently fixed at nine. The
Articles of Incorporation and the By-Laws provide for the Board of Directors to
consist of not less than two, nor more than twenty-five persons, with the
precise number to be determined from time to time by the Board of Directors. The
directors are divided into three classes, designated Class I, Class II and Class
III. Each class will consist, as nearly as may be possible, of one-third of the
total number of directors constituting the entire Board of Directors. The term
of the Company's initial Class I Directors expires at the Company's annual
meeting of shareholders in 1999; the term of the Company's initial Class II
Directors expires at the Company's annual meeting of shareholders in 2000; and
the term of the Company's initial Class III Directors expires at the Company's
annual meeting of
69
<PAGE> 72
shareholders in 2001. At each annual meeting of shareholders, successors to the
class of directors whose term expires at the annual meeting will be elected for
a three-year term. If the number of directors is changed, an increase or
decrease will be apportioned among the classes so as to maintain the number of
directors in each class as nearly equal as possible. Any director elected to
fill a vacancy will have the same remaining term as that of his predecessor. In
the case of the removal of a director from office, the resulting vacancy on the
Board of Directors shall be filled by the vote of at least seventy-five percent
(75%) of the outstanding shares of Common Stock. Any other vacancy on the Board
of Directors may be filled by a majority vote of the remaining directors then in
office or by action of the shareholders. Any director may be removed, with or
without cause, at any regular or special meeting of shareholders called for that
purpose.
The effect of the classified Board of Directors is to make it more
difficult for a person, entity or group to effect a change in control of the
Company through the acquisition of a large block of the Company's voting stock.
The executive officers of the Company serve at the pleasure of the Board of
Directors.
The Board of Directors has an Executive Committee, an Audit Committee and a
Compensation Committee. The Executive Committee, which is currently comprised of
Charles E. Hughes, Jr., T. Stephen Johnson, J. Malcolm Jones, Jr., Wilford C.
Lyon, Jr. and M. G. Sanchez, exercises the authority of the Board of Directors
in accordance with the By-Laws of the Company between regular meetings of the
Board of Directors. The Audit Committee, which is currently comprised of P.
Bruce Culpepper, Wilford C. Lyon, Jr. and David McIntosh, reviews and makes
recommendations to the Board of Directors on the Company's audit procedures and
independent auditors' report to management and recommends to the Board of
Directors the appointment of the independent auditors for the Company. The
Compensation Committee, currently comprised of Clay M. Biddinger, J. Malcolm
Jones, Jr. and David McIntosh, reviews and makes recommendations to the Board of
Directors with respect to the compensation of officers of the Company and will
assist the Board in the administration of the Company's 1998 Stock Option Plan.
EXECUTIVE COMPENSATION
For the fiscal year ended December 31, 1997, the Company was in a
development stage and no one served as the Chief Executive Officer of the
Company during that period. Charles E. Hughes, Jr. entered into an employment
agreement with the Company in January 1998, the terms of which are discussed
below. Accordingly, no compensation was paid during the fiscal year ended
December 31, 1997.
EMPLOYMENT AGREEMENTS
The Company and Charles E. Hughes, Jr. have entered into an employment
agreement (the "Employment Agreement") which provides that Mr. Hughes will serve
as the President and Chief Executive Officer of the Company and as President and
Chief Executive Officer of the Bank upon completion of the Merger and the
Offering. Mr. Hughes also serves as a member of the Board of Directors and will
serve on the Bank's board of directors after the closing of the Offering. The
Employment Agreement has a three-year term and provides for a minimum annual
base salary of $220,000 until the closing of the Offering and an annual base
salary of $250,000 subsequent to the completion of the Merger and the Offering.
In addition to the compensation to be paid under the terms of the Employment
Agreement, the Board will issue an option to Mr. Hughes to purchase 80,000
shares of Common Stock at the initial public offering price of the Common Stock
sold in the Offering. This option will be exercisable for a period of ten years.
After the closing of the Offering, in the event of a "change in control" of
the Company (as defined in the Employment Agreement), Mr. Hughes will be
entitled to give written notice to the Company of termination of the Employment
Agreement and to receive a cash payment equal to approximately 300% times the
compensation received by Mr. Hughes in the one-year period immediately preceding
the change in control.
In the event that the Board of Directors determines in its sole discretion
that the Company is unable to close the Offering, then the Employment Agreement
may be terminated by the Board of Directors at any time during the term of the
Employment Agreement without notice upon the condition that Mr. Hughes will be
entitled, as liquidated damages, to be paid the sum of $100,000. The Employment
Agreement may be terminated by the Board of Directors without notice and without
further obligation than for monies already
70
<PAGE> 73
paid, if Mr. Hughes is terminated for Cause (as that term is defined in the
Employment Agreement). Upon thirty days' written notice to Mr. Hughes, the Bank
may terminate the Employment Agreement without Cause upon the condition that Mr.
Hughes will be entitled to the same compensation as he would have been entitled
to receive in the event of a change of control of the Company. Likewise, Mr.
Hughes may upon thirty days' written notice to the Company terminate the
Employment Agreement without Cause. In the event of termination by Mr. Hughes,
the Company will have no further obligation than for monies paid and the Company
shall be entitled to enforcement of the non-compete and non-solicitation
provisions. After the closing of the Offering, in the event of Mr. Hughes'
death, the Company will pay to Mr. Hughes' designated beneficiary an amount
equal to Mr. Hughes' base salary through the end of the month in which Mr.
Hughes' death occurred. The Employment Agreement also provides a non-compete
provision which provides that in the event of termination of employment without
cause under the Employment Agreement by Mr. Hughes pursuant to the giving of
notice by Mr. Hughes, Mr. Hughes has agreed that for a period of twelve months
after such termination date, Mr. Hughes shall not, without the prior written
consent of the Company, within Duval County, Florida either directly or
indirectly, serve as an executive officer of any bank, bank holding company or
other financial institution.
The Company anticipates entering into employment agreements with John S.
McMullen and T. Edwin Stinson, Jr. The agreements provide for three year terms
commencing upon the closing of the Offering. Mr. McMullen's employment agreement
provides for an annual base salary of $135,000 and the grant of options to
purchase 60,000 shares of Common Stock at the first Board of Directors meeting
subsequent to the closing of the Offering. In addition, Mr. McMullen's
employment agreement provides that his title following the Merger and the
Offering will be President of the Tampa Market. Mr. Stinson's employment
agreement provides for an annual base salary of $117,000 and the grant of
options to purchase 39,999 shares of Common Stock at the first Board of
Directors meeting subsequent to the closing of the Offering. Upon the
consummation of the Offering, Mr. Stinson's title will be Chief Financial
Officer of the Company. The options to be granted under both Mr. McMullen's and
Mr. Stinson's employment agreements will be exercisable at the initial public
offering price. In the event of a "change in control" (as defined in their
respective agreements) of the Company, both agreements provide that Mr. Stinson
and Mr. McMullen may elect to give written notice to the Company of termination
of their respective agreements and to receive a cash payment equal to
approximately 300% times the compensation received by them in the one year
period immediately preceding the change in control. Each of Mr. McMullen's and
Mr. Stinson's employment agreements contain a non-compete provision which
provides that in the event of termination of employment without cause, both Mr.
McMullen and Mr. Stinson have agreed that for a period of twelve months after
such termination date, Mr. McMullen and Mr. Stinson will not, without the prior
written consent of the Company, within Hillsborough and Pinellas Counties,
Florida either directly or indirectly, serve as an executive officer of any
bank, bank holding company or other financial institution.
The Company also anticipates entering into employment agreements with Don
D. Roberts and Richard B. Kensler. Mr. Roberts' employment agreement provides
that he will serve as the President of the Jacksonville Market for a three year
term. Mr. Roberts' employment agreement further provides for an annual base
salary of $130,000 and the grant of options to purchase 20,000 shares of Common
Stock at the first Board of Directors meeting subsequent to the completion of
the Offering. Mr. Kensler's employment agreement provides that he will serve as
the Chief Credit Officer of the Company for a three year term. Mr. Kensler's
employment agreement further provides for an annual base salary of $110,000 and
the grant of options to purchase 20,000 shares of Common Stock at the first
Board of Directors meeting subsequent to the completion of the Offering. Both
Mr. Roberts' and Mr. Kensler's employment agreements contain "change in
control," termination, and non-compete provisions similar to those discussed
above in the Employment Agreement.
STOCK OPTION PLAN
In March 1998, the Board of Directors of the Company adopted the Florida
Banks, Inc. 1998 Stock Option Plan (the "1998 Plan") to promote the Company's
growth and financial success. The 1998 Plan was approved by the Company's
shareholders on June 4, 1998. Options may be granted under the 1998 Plan to the
71
<PAGE> 74
Company's directors, officers and employees, as well as certain consultants and
advisors. The 1998 Plan contemplates the grant of non-qualified stock options
and incentive stock options as defined in Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"). The 1998 Plan is not qualified under
Section 401(a) of the Code and is not subject to the provisions of the Employee
Retirement Income Security Act of 1974, as amended. The 1998 Plan provides for
option grants to purchase up to an aggregate of 900,000 shares of Common Stock,
subject to adjustment under certain circumstances (the "Option Shares"). The
aggregate fair market value (determined at the time the option is granted) of
the shares of Common Stock with respect to which incentive stock options are
exercisable for the first time by an optionee during a calendar year may not
exceed $100,000. This limitation does not apply to non-qualified stock options.
The 1998 Plan will expire upon the earlier to occur of: (i) the date on which
all Option Shares have been issued upon exercise of options under the 1998 Plan;
or (ii) the tenth anniversary of the 1998 Plan's effective date. The 1998 Plan
will be administered by the Board of Directors or by a Stock Option Committee
appointed by the Board and consisting of least two non-employee Board members.
The exercise price of options granted under the 1998 Plan will be determined by
the Board of Directors, but will in no event be less than 100% of the Market
Price (as defined in the 1998 Plan) of one share of Common Stock on the option
grant date (110% in the case of a Ten Percent Owner, as defined in the 1998
Plan); provided, however, that non-qualified stock options may be granted at an
exercise price of no less than 75% of the Market Price of the Common Stock on
the date of grant. Vested options under the 1998 Plan may be exercised in whole
or in part, but in no event later than ten (10) years from the grant date (five
years in the case of an incentive stock option granted to a Ten Percent Owner).
If the optionee of an incentive stock option during his or her lifetime ceases
to be an officer, director, or employee of the Company or any subsidiary of the
Company for any reason other than his or her death or total disability, any
option or unexercised portion thereof which is exercisable on the date the
optionee ceases employment will expire three months following the date the
optionee ceases to be an officer, director or employee of the Company or of a
subsidiary of the Company, but in no event after the term provided in the
optionee's option agreement. If an optionee dies or becomes totally disabled
while he or she is an officer, director or employee of the Company or of a
subsidiary of the Company, the option may be exercised by a legatee or legatees
of the optionee under his or her last will or by his or her personal
representative or representatives at any time within one year following his or
her death or total disability, but in no event after the term provided in his or
her option agreement. The foregoing limitations with respect to termination of
employment or death do not apply to optionees of non-qualified stock options.
Options granted under the 1998 Plan will only be assignable or transferable by
the optionee by will or the laws of descent and distribution. During the
optionee's lifetime, options are only exercisable by him or her. The Board of
Directors may at any time terminate, modify or amend the 1998 Plan in any
respect, except that without shareholder approval the Board of Directors may not
(i) increase the number of Option Shares, (ii) extend the period during which
options may be granted or exercised, (iii) change the class of 1998 Plan
participants, or (iv) otherwise materially modify the requirements as to
eligibility for participation in the 1998 Plan. In no event will the
termination, modification or amendment of the 1998 Plan, without the written
consent of an optionee, affect his or her rights under an option or right
previously granted to him or her.
COMPENSATION OF DIRECTORS
Directors of the Company and the Bank will not receive any compensation
based on their attendance at Board of Directors meetings until the Bank is
profitable for three consecutive quarters following the consummation of the
Offering. Upon consummation of the Offering, directors of the Company will be
entitled to receive stock option awards under the 1998 Plan. In addition,
members of the Board of Directors will be reimbursed for out-of-pocket expenses
incurred in connection with attendance at Board meetings. The members of the
local advisory boards of directors will receive compensation in a format to be
determined by the Board of Directors of the Bank. Such compensation may be
incentive-based and include cash and options to purchase Common Stock.
72
<PAGE> 75
CERTAIN TRANSACTIONS
TSJ&A has provided consulting services during the organization and
formation of the Company. T. Stephen Johnson, Vice-Chairman of the Company, is
the President of TSJ&A and Nancy E. LaFoy, Secretary and Treasurer of the
Company, is the Senior Vice President of TSJ&A. In addition, from time to time,
M. G. Sanchez has performed consulting work for TSJ&A. Specific responsibilities
undertaken by TSJ&A include assisting management of the Company in formulating
the Company's business plan, conducting a feasibility analysis, drafting
proposed administrative and operational procedures, and preparing the necessary
regulatory filings for approval of the formation of the Company and the
acquisition of the Bank. As compensation for its services, TSJ&A has been paid a
monthly fee of $15,000 for the six month period commencing in January 1998 and
ending in June 1998. In addition, TSJ&A will receive a finder's fee in
connection with the acquisition of the Bank of $137,500 (one percent of the
aggregate purchase price), which finder's fee shall be paid from the proceeds of
the Offering. Furthermore, the Company temporarily operated from the corporate
offices of TSJ&A which are located at 9755 Dogwood Road, Suite 310, Roswell,
Georgia 30075. There was no consideration paid to TSJ&A by the Company for the
use of its offices.
Mr. Robin C. Kelton, who beneficially owns greater than five percent of the
outstanding shares of Common Stock (prior to the issuance of the shares in
connection with the Offering), serves as Chairman of the Board of Directors of
Kelton International Limited, an Underwriter in the Offering. Kelton
International Limited received a fee of $45,450 for its services as placement
agent in connection with the issuance of units consisting of shares of Common
Stock, Preferred Stock and warrants to purchase shares of Common Stock (the
"Units") to certain foreign investors on February 3, 1998. The Units were issued
in a private placement in reliance upon the exemption from the registration
provisions of the Securities Act, pursuant to the provisions of Rule 506
promulgated thereunder. In addition, on February 11, 1998, Mr. Kelton purchased
22,500 shares of Common Stock at a purchase price of $.01 per share. It is
anticipated that upon the consummation of the Offering, Mr. Kelton will receive
immediately exercisable options to purchase 22,500 shares of Common Stock with
an exercise price equal to the initial public offering price of the Common
Stock.
The Bank has extended loans from time to time to certain of its directors,
their associates and members of the immediate families of the directors and
executive officers of the Bank. These loans have been made in the ordinary
course of business on substantially the same terms, including interest rates,
collateral and repayment terms, as those prevailing at the time for comparable
transactions with persons not affiliated with the Bank, and did not involve more
than the normal risk of collectibility or present other unfavorable features.
Once the Bank becomes a wholly-owned subsidiary of the Company, the Bank may
extend similar loans from time to time to certain of the Company's directors and
executive officers, their associates and members of the immediate families of
the directors and executive officers of the Company.
73
<PAGE> 76
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the beneficial
ownership of shares of the Common Stock as of July 29, 1998, and as adjusted to
reflect the sale of the shares offered hereby and the shares offered in
connection with the Merger, with respect to (i) each director of the Company;
(ii) each person, including any "group" as that term is used in Section 13(d)(3)
of the Securities Exchange Act of 1934, as amended, who is known by the Company
to own beneficially more than 5.0% of the outstanding shares of the Common Stock
and (iii) all directors and executive officers of the Company as a group. Unless
otherwise indicated, each shareholder has sole voting and investment power with
respect to the indicated shares.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
BENEFICIAL OWNERSHIP AFTER THE MERGER
PRIOR TO THE OFFERING AND THE OFFERING
--------------------- ------------------------
COMMON COMMON
NAME OF BENEFICIAL OWNER STOCK(1) PERCENT STOCK(1) PERCENT(2)
- ------------------------ --------- -------- -------- ----------
<S> <C> <C> <C> <C>
Clay M. Biddinger................................... -- * -- *
P. Bruce Culpepper.................................. -- * -- *
Charles E. Hughes, Jr. ............................. 80,000 21.2% 160,000(3) 2.7%
T. Stephen Johnson.................................. 93,750(4) 24.8 177,250(5) 3.0
J. Malcolm Jones, Jr. .............................. -- * -- *
W. Andrew Krusen, Jr. .............................. -- * 135,784(6) 2.3
Richard B. Kensler.................................. -- * -- *
Nancy E. LaFoy...................................... 10,000 2.6 20,000(7) *
Wilford C. Lyon, Jr. ............................... -- * -- *
David McIntosh...................................... -- * -- *
John S. McMullen.................................... -- * 247,250(8) 4.3
Don D. Roberts...................................... -- * -- *
M.G. Sanchez........................................ 70,000 18.5 140,000(9) 2.4
T. Edwin Stinson, Jr. .............................. -- * 103,957(10) 1.8
Robin C. Kelton..................................... 22,500 6.0 45,000(11) *
Bank Julius Baer & Co., Ltd......................... 24,000 6.4% 48,000(12) *
All executive officers and directors as a group
(14 persons)...................................... 253,750 67.2% 984,241(13) 16.3%
</TABLE>
- ---------------
* Less than 1%.
(1) Pursuant to the rules of the Commission, the determinations of "beneficial
ownership" of Common Stock are based upon Rule 13d-3 under the Exchange
Act, which provides that shares will be deemed to be "beneficially owned"
where a person has, either solely or in conjunction with others, the power
to vote or to direct the voting of shares and/or the power to dispose, or
to direct the disposition of, shares or where a person has the right to
acquire any such power within 60 days after the date such "beneficial
ownership" is determined. Shares of Common Stock that a beneficial owner
has the right to acquire within 60 days pursuant to the exercise of stock
options or warrants are deemed to be outstanding for the purpose of
computing the percentage ownership of such owner but are not deemed
outstanding for the purpose of computing the percentage ownership of any
other person.
(2) The percentages are based upon the aggregate number of shares of Common
Stock issued and outstanding as of July 29, 1998, as adjusted to reflect
the 4,000,000 shares issuable pursuant to the Offering (assuming no
exercise of the Underwriters' overallotment option) and 1,375,000 shares
issuable pursuant to the Merger.
(3) Includes 80,000 shares issuable upon the exercise of immediately
exercisable options to be granted simultaneously with the closing of the
Offering.
(4) Includes 13,500 shares which are owned by Mr. Johnson's wife, 10,000 shares
held by Mr. Johnson's wife as a custodian for their children, and 250
shares held by Mr. Johnson as a custodian for his nephew.
(5) Includes 70,000 shares issuable upon the exercise of immediately
exercisable options to be granted simultaneously with the closing of the
Offering and 13,500 shares issuable upon the exercise of
74
<PAGE> 77
immediately exercisable options to be granted to Mr. Johnson's wife
simultaneously with the closing of the Offering.
(6) Includes 40,000 shares issuable upon the exercise of immediately
exercisable options to be granted simultaneously with the closing of the
Offering and 95,784 shares issuable upon conversion and exchange of shares
of the Bank's common stock pursuant to the Merger.
(7) Includes 10,000 shares issuable upon the exercise of immediately
exercisable options to be granted simultaneously with the closing of the
Offering.
(8) Comprised of shares issuable upon conversion and exchange of shares of the
Bank's common stock pursuant to the Merger. Does not include 60,000 shares
issuable upon the exercise of options to be granted at the first Board of
Directors meeting subsequent to the closing of the Offering which will not
be exercisable within 60 days of the date of this Prospectus.
(9) Includes 70,000 shares issuable upon the exercise of immediately
exercisable options to be granted simultaneously with the closing of the
Offering.
(10) Comprised of shares issuable upon conversion and exchange of shares of the
Bank's common stock pursuant to the Merger. Does not include 39,999 shares
issuable upon the exercise of options to be granted at the first Board of
Directors meeting subsequent to the closing of the Offering which will not
be exercisable within 60 days of the date of this Prospectus.
(11) Includes 22,500 shares issuable upon the exercise of immediately
exercisable options to be granted simultaneously with the closing of the
Offering.
(12) Includes immediately exercisable warrants to purchase 24,000 shares at the
initial public offering price.
(13) Includes 283,500 shares upon the exercise of immediately exercisable
options to be granted simultaneously with the closing of the Offering and
446,991 shares upon conversion and exchange of shares of the Bank's common
stock pursuant to the Merger.
75
<PAGE> 78
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company is authorized to issue 30,000,000 shares of Common Stock, $.01
par value per share, and 1,000,000 shares of Preferred Stock, $.01 par value per
share, of which 600,000 shares of Preferred Stock have been designated as the
Series A Preferred Stock. As of the date hereof, 377,800 shares of Common Stock
and 60,600 shares of Series A Preferred Stock are issued and outstanding, held
by 28 and eight shareholders of record, respectively.
The following summary of the Common Stock and Preferred Stock is qualified
in its entirety by reference to the Articles of Incorporation, the By-Laws, and
the Florida Business Corporation Act, as amended (the "FBCA").
COMMON STOCK
Subject to such preferential rights as may be granted by the Board of
Directors in connection with any issuances of Preferred Stock, holders of shares
of Common Stock are entitled to receive such dividends as may be declared by the
Board of Directors in its discretion from funds legally available therefor. At
this time, the Board of Directors intends to retain all earnings to support
anticipated growth in the current operations of the Company and the Bank and to
finance future expansion. Additional restrictions on the payment of cash
dividends may be imposed in connection with future issuances of Preferred Stock
and indebtedness by the Company. Further declarations and payments of cash
dividends, if any, will also be determined in light of then-current conditions,
including the Company's earnings, operations, capital requirements, liquidity,
financial condition, restrictions in financing agreements and other factors
deemed relevant by the Board of Directors. Upon the liquidation, dissolution or
winding up of the Company, after payment of creditors, the remaining net assets
of the Company will be distributed pro rata to the holders of Common Stock,
subject to any liquidation preference of the holders of Preferred Stock. See
"-- Preferred Stock." There are no preemptive rights, conversion rights, or
redemption or sinking fund provisions with respect to the shares of Common
Stock. All of the outstanding shares of Common Stock are, and the shares to be
outstanding upon completion of the Offering will be, duly and validly authorized
and issued, fully paid and nonassessable.
Holders of Common Stock are entitled to one vote per share of Common Stock
held of record on all such matters submitted to a vote of the shareholders.
Holders of Common Stock do not have cumulative voting rights. As a result, the
holders of a majority of the outstanding shares of Common Stock voting for the
election of directors can elect all the directors, and, in such event, the
holders of the remaining shares of Common Stock will not be able to elect any
persons to the Board of Directors.
PREFERRED STOCK
The Board of Directors may, without approval of the Company's shareholders,
from time to time authorize the issuance of Preferred Stock in one or more
series for such consideration and, within certain limits, with such relative
rights, preferences and limitations as the Board of Directors may determine. The
relative rights, preferences and limitations that the Board of Directors has the
authority to determine as to any such series of Preferred Stock include, among
other things, dividend rights, voting rights, conversion rights, redemption
rights and liquidation preferences. Because the Board of Directors has the power
to establish the relative rights, preferences and limitations of each series of
Preferred Stock, it may afford to the holders of any such series, preferences
and rights senior to the rights of the holders of shares of Common Stock.
Although the Board of Directors has no intention at the present time of doing
so, it could cause the issuance of Preferred Stock that could discourage an
acquisition attempt or other transactions that some, or majority of, the
shareholders might believe to be in their best interests or in which the
shareholders might receive a premium for their shares of Common Stock over the
market price of such shares.
The Company presently has 60,600 shares of Preferred Stock outstanding,
designated as the Series A Preferred Stock. The terms of the Series A Preferred
Stock provide that no dividends or other distributions shall be declared or
payable on the Series A Preferred Stock. The terms of the Series A Preferred
Stock
76
<PAGE> 79
provide for a liquidation preference in the event of a winding up, liquidation
or dissolution of the Company in the amount of $10.00 per share for an aggregate
liquidation preference of $606,000. Except as may be required by law, the
holders of the Series A Preferred Stock do not have any voting rights. The terms
of the Series A Preferred Stock may be redeemed, at the option of the Company,
at a price of $10.00 per share. The Company intends to redeem the outstanding
shares of Series A Preferred Stock with the proceeds of the Offering. See "Use
of Proceeds."
CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION AND BY-LAWS
The Company's Articles of Incorporation contain provisions requiring
supermajority shareholder approval to effect certain extraordinary corporate
transactions which are not approved by three-quarters of the Board of Directors.
The Articles of Incorporation require, in addition to any other approval or
consent required under the affirmative vote or consent of the holders of at
least two-thirds (66 2/3%) of the shares of each class of stock entitled to vote
in elections of directors to approve any merger or consolidation of the Company
or any subsidiary of the Company with or into any Interested Person (as
defined), regardless of the identity of the surviving corporation, sale, lease
or other disposition of all or any substantial part (assets having an aggregate
fair market value of twenty-five percent (25%) of the total assets of the
Company) of the assets of the Company or any subsidiary of the Company to any
Interested Person for cash, real or personal property, including securities, or
any combination thereof, issuance or delivery of securities of the Company or a
subsidiary of the Company to any Interested Person in consideration for or in
exchange of any securities or other property (including cash), or liquidation of
the Company ("Covered Transaction"), if any person who, as of the record date
for the determination of shareholders entitled to notice of any Covered
Transaction and to vote thereon or consent thereto, as of the date of such vote
or consent, or immediately before consummation of any Covered Transaction owns
beneficially five percent or more of any voting stock of the Company entitled to
vote in elections of directors ("Interested Person") is a party to the
transaction, unless three-fourths (75%) of the entire Board of Directors has
approved the transaction, in which case the affirmative vote of a majority of
each class of stock entitled to vote in elections of directors is required. In
addition, the Articles of Incorporation require, in addition to any approval or
consent required under Florida law, any other provision in the Articles of
Incorporation or otherwise, the separate approval by the holders of a majority
of the shares of each class of stock of the Company entitled to vote in
elections of directors which are not beneficially owned, directly or indirectly,
by an Interested Person, of any Covered Transaction other than a liquidation of
the Company ("Business Combination"), if an Interested Person is a party to such
transaction; provided, that such approval is not required if (a) the
consideration to be received by the holders of the stock of the Company meets
certain minimal levels determined by a formula under the Articles of
Incorporation (generally the highest price paid by the Interested Person for any
shares which he has acquired), (b) there has been no reduction in the average
dividend rate from that which was obtained prior to the time the Interested
Person became such, and (c) the consideration to be received by shareholders who
are not Interested Persons shall be paid in cash or in the same form as the
Interested Person previously paid for shares of such class of stock. These
Articles of the Company's Articles of Incorporation, as well as the Article
establishing a classified Board of Directors, may be amended, altered, or
repealed only by the affirmative vote or consent of the holders of at least 75%
of the shares entitled to vote in elections of directors.
The effect of these provisions is to make it more difficult for a person,
entity or group to effect a change in control of the Company through the
acquisition of a large block of the Company's voting stock.
INDEMNIFICATION
The Articles of Incorporation and By-Laws require the Company to indemnify
the directors and officers of the Company to the fullest extent permitted by
law. In addition, as permitted by the FBCA, the Articles of Incorporation and
By-Laws provide that no director of the Company shall be personally liable to
the Company or its shareholders for monetary damages for breach of duty of care
or other duty as a director if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
Company and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. This provision, however,
shall not eliminate or limit the liability of a director (i) for a
77
<PAGE> 80
violation of the criminal law, unless the director had reasonable cause to
believe his conduct was lawful or had no reasonable cause to believe his conduct
was unlawful, (ii) for any transaction from which the director derived an
improper personal benefit, (iii) for unlawful distributions to shareholders of
the Company in violation of Section 607.06401 of the FBCA, or (iv) for willful
misconduct or a conscious disregard for the best interests of the Company in a
proceeding by or in the right of the Company to procure judgment in its favor or
in a proceeding by or in the right of a shareholder. This provision of the
Articles of Incorporation will limit the remedies available to a shareholder who
is dissatisfied with a decision of the Board of Directors protected by this
provision, and such shareholder's only remedy in that circumstance may be to
bring a suit to prevent the action of the Board of Directors. In many
situations, this remedy may not be effective, including instances when
shareholders are not aware of a transaction or an event prior to action of the
Board of Directors in respect of such transaction or event.
TRANSFER AGENT AND REGISTRAR
SunTrust Bank, Atlanta will serve as the Transfer Agent and Registrar for
the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering and the Merger, the Company will have
5,752,800 shares of Common Stock outstanding (assuming no exercise of the
Underwriters' over-allotment option), outstanding options to purchase 465,000
shares of Common Stock, of which options to purchase 325,000 shares will be
immediately exercisable and outstanding warrants to purchase 80,800 shares of
Common Stock. Of these shares, the 4,000,000 shares offered hereby and 1,375,000
shares to be issued in the Merger will be eligible for sale in the open market
without restriction (except for any such shares purchased by or issued to
"affiliates" of the Company and the Bank). The remaining 377,800 shares of
Common Stock will be "restricted securities" as that term is defined in Rule 144
("Rule 144") promulgated under the Securities Act and will become eligible for
sale under Rule 144 after February 3, 1999. Such shares must be held for one
year from the date of acquisition before they may be resold pursuant to Rule
144, unless the resale of such shares is made pursuant to an effective
registration statement under the Securities Act or another exemption from
registration is available.
Generally, Rule 144 provides that beginning 90 days after the date of this
Prospectus, a person (or persons whose shares are aggregated) who has
beneficially owned "restricted" securities for a least one year, including a
person who may be deemed an "affiliate" of the Company, as the term "affiliate"
is defined under the Securities Act, is entitled to sell in "broker's
transactions" or in transactions directly with a "market marker," within any
three-month period, a number of shares that does not exceed the greater of one
percent of the then outstanding shares of Common Stock or the average weekly
trading volume of the Common Stock on any national securities exchange and/or
over-the-counter market during the four calendar weeks preceding such sale.
Sales under Rule 144 are also subject to certain notice requirements and the
availability of current public information about the Company. A person (or
persons whose shares are aggregated) who is not deemed an "affiliate" of the
Company would be entitled to sell such shares under Rule 144 without regard to
the volume, public information, manner of sale or notice provisions and
limitations described above, once a period of at least two years had elapsed
since the later of the date the shares were acquired from the Company or from an
"affiliate" of the Company.
Upon completion of the Offering, options to purchase 465,000 shares of
Common Stock, of which options to purchase 325,000 shares will be immediately
exercisable, will be granted pursuant to the Company's 1998 Plan. After the
Offering, the Company intends to file a registration statement on Form S-8 under
the Securities Act to register the shares of Common Stock issuable upon exercise
of such options. Mr. Robin C. Kelton has agreed with the Company to not sell or
otherwise dispose of, directly or indirectly, (i) options to purchase 22,500
shares of Common Stock which are anticipated to be granted to Mr. Kelton or (ii)
the shares underlying such options for a period of one year from the date of
this Prospectus. Accordingly, other than the 22,500 shares underlying Mr.
Kelton's options, such shares will be freely tradeable by holders who are not
78
<PAGE> 81
affiliates of the Company and, subject to the volume and manner of sale
limitations of Rule 144, by holders who are affiliates of the Company.
The Company, its officers and directors and certain other persons who upon
consummation of the Merger and the Offering will beneficially own an aggregate
of 1,049,217 shares of Common Stock have agreed, for a period of 180 days from
the date of this Prospectus, not to sell or otherwise dispose, directly or
indirectly, of any shares of Common Stock without prior written consent of The
Robinson-Humphrey Company, LLC. In addition, Mr. Robin C. Kelton who owns 22,500
shares which are "restricted securities" has agreed with the Company to not sell
or otherwise dispose of, directly or indirectly, such 22,500 shares for a period
of one year from the date of this Prospectus. Of the restricted 377,800 shares
of Common Stock, 355,300 will be eligible for sale pursuant to Rule 144 in the
public market 365 days from the date of their purchase from the Company and,
upon expiration of Mr. Kelton's one year lock-up period, an additional 22,500
shares will be eligible for sale in the public market. Upon expiration of the
180-day lockup period, approximately 466,967 shares will be eligible for sale in
the public market, in each case subject to compliance with certain volume
limitations and other conditions of Rule 144.
Warrants to purchase 80,800 shares of Common Stock were granted to certain
foreign investors in February 1998. The exercise price for such warrants will be
the initial public offering price of the Common Stock, and the warrants will be
exercisable for a seven-year period commencing on the date on which the Offering
is completed. The shares underlying the warrants will be "restricted
securities," within the meaning of Rule 144 and must therefore be held for one
year following the date of acquisition before they may be resold pursuant to
Rule 144, unless the resale of such shares is made pursuant to an effective
registration statement under the Securities Act or another exemption from
registration is available.
Prior to the Offering, there has been no public market for the Common Stock
of the Company, and no prediction can be made as to the effect, if any, that
future sales of shares or the availability of shares for sale will have on the
market price for Common Stock prevailing from time to time. Sales of substantial
amounts of Common Stock in the public market, or the perception of the
availability of shares for sale, could adversely affect the prevailing market of
the Common Stock and could impair the Company's ability to raise capital through
the sale of its equity securities. See "Risk Factors -- Shares Eligible for
Future Sale" and "-- Absence of Prior Public Market and; Potential Fluctuation
in Quarterly Results and Volatility of Stock Price."
79
<PAGE> 82
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement among the
Company and the Underwriters named below (the "Underwriting Agreement"), the
Underwriters for whom The Robinson-Humphrey Company, LLC, Interstate/Johnson
Lane Corporation and Kelton International Limited are acting as representatives
(the "Representatives"), have severally agreed to purchase from the Company and
the Company has agreed to sell to the Underwriters, the number of shares of
Common Stock set forth opposite their respective names.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- ----------- ---------
<S> <C>
The Robinson-Humphrey Company, LLC.......................... 1,520,000
Interstate/Johnson Lane Corporation......................... 1,216,000
Kelton International Limited................................ 304,000
Advest, Inc. ............................................... 70,000
Robert W. Baird & Co. Incorporated.......................... 70,000
J.C. Bradford & Co. ........................................ 70,000
Morgan Keegan & Company, Inc. .............................. 70,000
Raymond James & Associates, Inc. ........................... 70,000
Scott & Stringfellow, Inc. ................................. 70,000
Stephens Inc. .............................................. 70,000
Wheat First Securities...................................... 70,000
J.W. Charles Securities Inc. ............................... 40,000
Allen C. Ewing & Co. ....................................... 40,000
Florida Atlantic Securities Corporation..................... 40,000
Hoefer & Arnett Inc. ....................................... 40,000
William R. Hough & Co. ..................................... 40,000
Howe Barnes Investments Inc. ............................... 40,000
Johnston, Lemon & Co. Incorporated.......................... 40,000
Redwine & Company, Inc. .................................... 40,000
Southeast Research Partners Inc. ........................... 40,000
Sterne, Agee & Leach, Inc. ................................. 40,000
---------
Total............................................. 4,000,000
=========
</TABLE>
Of the 4,000,000 shares offered hereby, up to 304,000 will be purchased by
an underwriter that is a foreign broker-dealer for sales outside of the United
States. See "Underwriting."
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares are subject to
approval of certain legal matters by counsel and certain other conditions. The
Underwriters are obligated to take and pay for all shares of Common Stock
offered hereby (other than those covered by the over-allotment option described
below) if any such shares are taken.
The Underwriters propose to offer part of the shares of the Common Stock
directly to the public at the public offering price set forth on the cover page
of this Prospectus and part of the shares to certain dealers at such price less
a concession not in excess of $0.40 per share. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of $0.10 per share in sales
to certain other dealers. After the initial public offering of the shares to the
public, the public offering price, such concessions and other selling terms may
be changed by the Underwriters.
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales of any shares of Common Stock to any accounts over which
they exercise discretionary authority.
In connection with the Offering, the Underwriters may purchase and sell
shares of Common Stock in the open market. These transactions may include
over-allotment and stabilizing transactions and purchases to cover syndicate
short positions created in connection with the Offering. Stabilizing
transactions consist of certain bids or purchases for the purpose of preventing
or retarding a decline in the market price of the
80
<PAGE> 83
Common Stock, and syndicate short positions involve the sale by the Underwriters
of a greater number of shares of Common Stock than they are required to purchase
from the Company in the Offering. The Underwriters also may impose a penalty
bid, whereby selling concessions allowed to syndicate members or other
broker-dealers in respect of the shares sold in the Offering may be reclaimed by
the syndicate if such shares of Common Stock are repurchased by the syndicate in
stabilizing or covering transactions. These activities may stabilize, maintain
or otherwise prevail in the open market price of the Common Stock, which may be
higher than the price that might otherwise prevail in the open market; and these
activities, if commenced, may be discontinued at any time. These transactions
may be effected in the Nasdaq National Market, in the over-the-counter market or
otherwise. The Representatives intend to make a market in the Common Stock after
completion of the Offering.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to 600,000 additional
shares of Common Stock at the price to the public set forth on the cover page of
this Prospectus less the underwriting discounts and commissions. The
Underwriters may exercise such option solely for the purpose of covering
over-allotments, if any, incurred in connection with the sale of the shares of
Common Stock offered hereby. To the extent such option is exercised, the
Underwriters will be obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares as the number of
shares of Common Stock set forth opposite such Underwriter's name in the
preceding table bears to the total number of shares of Common Stock listed in
such table.
Prior to the Offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price for the shares of Common
Stock has been determined by negotiations among the Company and the
Representatives and was not based upon any independent appraisal or valuation of
the Company. Among the factors considered in determining such price were the
history of, and the prospects for, the Company's business and the industry in
which it competes, an assessment of the Company's management and the present
state of the Company's development, the past and present revenues and earnings
of the Company, the prospects for growth of the Company's revenues and earnings,
the current state of the economy in the United States and the current level of
economic activity in the industry in which the Company competes and in related
or comparable industries, currently prevailing conditions in the securities
markets, including current market valuations of publicly trade companies which
are comparable to the Company and other factors deemed relevant.
Upon consummation of the Merger and the Offering (assuming no exercise of
the Underwriter's over-allotment option), the Company, the Company's officers
and directors, and certain other persons, who upon consummation of the Merger
and the Offering will beneficially own in the aggregate approximately 1,049,217
shares of Common Stock (approximately 18.2% of the outstanding Common Stock),
will enter into lock-up agreements with the Representatives pursuant to which
they will agree not to, directly or indirectly, sell, offer to sell, contract to
sell, solicit an offer to buy, grant any option for the purchase or sale of,
assign, pledge, distribute or otherwise transfer, dispose of or encumber(or make
any announcement with respect to any of the foregoing) any shares of Common
Stock or any options, rights, warrants or other securities convertible into or
exercisable or exchangeable for Common Stock or evidencing any right to purchase
or subscribe for shares of Common Stock for a period of 180 days from the date
of this Prospectus without the prior written consent of The Robinson-Humphrey
Company, LLC.
From time to time in the ordinary course of their respective businesses,
The Robinson-Humphrey Company, LLC may in the future provide investment banking
or other services to the Company.
Mr. Robin C. Kelton, who beneficially owns greater than five percent of the
outstanding shares of Common Stock (prior to the issuance of the shares in
connection with the Offering), serves as Chairman of the Board of Directors of
Kelton International Limited, an Underwriter and one of the Representatives. The
following items of value have been deemed by the NASD Regulation, Inc. ("NASDR")
to be additional underwriting compensation in connection with the Offering: (i)
Mr. Kelton purchased 22,500 shares of Common Stock at a purchase price of $.01
per share on February 11, 1998 and (ii) it is anticipated that upon the
consummation of the Offering, Mr. Kelton will receive immediately exercisable
options to purchase 22,500 shares of Common Stock with an exercise price equal
to the initial offering price of the Common Stock. In
81
<PAGE> 84
addition, Kelton International Limited received a fee of $45,450 for its
services as placement agent in connection with the issuance of units consisting
of shares of Common Stock, Preferred Stock and warrants to purchase shares of
Common Stock to certain foreign investors in a private placement on February 3,
1998. Kelton International Limited (i) is a foreign broker-dealer with a
principal place of business in the United Kingdom, (ii) is not registered with
the SEC as a broker-dealer, (iii) is not a member of the National Association of
Securities Dealers, Inc., (iv) has agreed not to sell any of the shares of
Common Stock offered hereby within the United States, its territories or it
possessions, or to nationals or residents of the United States, except for
certain underwriting syndicate sales, and (v) has agreed to comply with certain
rules of the NASDR as if it were a member of the NASD. In addition, Kelton
International Limited was organized and first registered as a broker-dealer
within the past three years. Prior to the organization of Kelton International
Limited, its principals and officers have been actively involved in investment
banking activities with other broker-dealers.
The Company has been approved for listing of the Common Stock on the Nasdaq
National Market.
The Company has agreed to indemnify the Underwriters against and to
contribute to losses arising out of, certain liabilities, including liabilities
under the Securities Act.
LEGAL MATTERS
Certain legal matters in connection with the Offering are being passed upon
for the Company by Smith, Gambrell & Russell, LLP, Suite 3100, 1230 Peachtree
Street, N.E., Atlanta, Georgia 30309, counsel to the Company. Certain legal
matters in connection with the Offering are being passed upon for the
Underwriters by Alston & Bird LLP, One Atlantic Center, 1201 West Peachtree
Street, Atlanta, Georgia 30309.
EXPERTS
The financial statements of the Company and the Bank included in this
Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their reports appearing herein, and are included in reliance upon the
reports of such firm given upon their authority as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (the "Registration Statement") under the Securities Act with respect to the
Common Stock offered hereby. This Prospectus, which is part of the Registration
Statement, does not contain all the information set forth in the Registration
Statement and the exhibits and schedules thereto, certain items of which are
omitted in accordance with the rules and regulations of the Commission. For
further information with respect to the Company and the Common Stock, reference
is hereby made to the Registration Statement and such exhibits and schedules
filed as a part thereof, which may be inspected, without charge, at the public
reference facilities of the Commission maintained by the Commission at its
principal office located at Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, the New York Regional Office located at Seven World Trade Center,
New York, New York 10048 and the Chicago Regional Office located at Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of all or any portion of the Registration Statement may be obtained from
the Public Reference Section of the Commission, upon payment of prescribed fees.
Such material also may be accessed electronically by means of the Commission's
home page on the Internet at http://www.sec.gov.
Statements made in this Prospectus as to the contents of any contract,
agreement or other document referred to are necessarily summaries of such
documents. All material elements of the contracts and documents referenced
herein are disclosed in the Prospectus. With respect to each such contract,
agreement or other document filed as an exhibit to the Registration Statement,
reference is made to the exhibit for a more complete description of the matter
involved, and each such statement shall be deemed qualified in its entirety by
such reference.
82
<PAGE> 85
The Company intends to furnish its shareholders with annual reports
containing financial statements audited by independent accountants and with
quarterly reports containing unaudited financial information for each of the
first three quarters of each fiscal year.
83
<PAGE> 86
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENTS FOR FLORIDA BANKS, INC.
Independent Auditors' Report.............................. F-2
Balance Sheets as of March 31, 1998 (unaudited) and
December 31, 1997...................................... F-3
Statement of Operations for the Period from October 15,
1997 (Date of Incorporation) to March 31, 1998 and
Three Months Ended March 31, 1998 (unaudited).......... F-4
Statement of Shareholders' Equity for the Three Months
Ended March 31, 1998 (unaudited)....................... F-5
Statement of Cash Flows for the Period from October 15,
1997 (Date of Incorporation) to March 31, 1998 and
Three Months Ended March 31, 1998 (unaudited).......... F-6
Notes to Financial Statement.............................. F-7
FINANCIAL STATEMENTS FOR FIRST NATIONAL BANK OF TAMPA
Independent Auditors' Report.............................. F-10
Balance Sheets as of March 31, 1998 (unaudited) and
December 31, 1997 and 1996............................. F-11
Statements of Income for the Three Months Ended March 31,
1998 and 1997 (unaudited) and for the Years Ended
December 31, 1997, 1996 and 1995....................... F-12
Statements of Shareholders' Equity for the Three Months
Ended March 31, 1998 (unaudited) and for the Years
Ended December 31, 1997, 1996 and 1995................. F-13
Statements of Cash Flows for the Three Month Period Ended
March 31, 1998 and 1997 (unaudited) and for the Years
Ended December 31, 1997, 1996 and 1995................. F-14
Notes to Financial Statements............................. F-16
</TABLE>
F-1
<PAGE> 87
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Florida Banks, Inc.:
We have audited the accompanying balance sheet of Florida Banks, Inc. (the
Company) (a development stage corporation) as of December 31, 1997. This
financial statement is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement based on our
audit.
We conducted our audit 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 statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. 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 audit provides a reasonable basis for our opinion.
In our opinion, the accompanying balance sheet of the Company as of
December 31, 1997 presents fairly in all material respects, the financial
position of the Company in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
March 20, 1998
Jacksonville, Florida
F-2
<PAGE> 88
FLORIDA BANKS, INC.
(A DEVELOPMENT STAGE CORPORATION)
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CASH........................................................ $ 409,218
DEFERRED PUBLIC OFFERING COSTS.............................. 74,645
ORGANIZATIONAL COSTS........................................ $26,442
----------- -------
TOTAL ASSETS...................................... $ 483,863 $26,442
=========== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
ACCRUED EXPENSES............................................ $ 100 $26,442
----------- -------
Total liabilities................................. 100 26,442
----------- -------
COMMITMENTS
SHAREHOLDERS' EQUITY:
Preferred Stock, $.01 par value; 1,000,000 shares
authorized; 60,600 and 0 shares issued and outstanding
(redemption value of $606,000)......................... 606,000
Common Stock, $.01 par value; 30,000,000 shares
authorized; 377,800 and 0 shares issued and
outstanding............................................ 3,778
Additional paid-in capital................................ 3,774,222
Warrants to acquire 80,800 shares of Common Stock......... 164,832
Deficit accumulated during development stage.............. (4,065,069)
----------- -------
Total shareholders' equity........................ 483,763
----------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $ 483,863 $26,442
=========== =======
</TABLE>
See notes to financial statements.
F-3
<PAGE> 89
FLORIDA BANKS, INC.
(A DEVELOPMENT STAGE CORPORATION)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 15, 1997
(DATE OF INCORPORATION)
TO
MARCH 31, 1998
AND
THREE MONTHS ENDED
MARCH 31, 1998
-----------------------
(UNAUDITED)
<S> <C>
EXPENSES:
Salaries and benefits..................................... $ 3,028,199
Financing costs........................................... 972,024
Occupancy and equipment................................... 3,455
Other..................................................... 34,949
-----------
Net loss before cumulative effect of changes in accounting
for organizational costs............................... (4,038,627)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR ORGANIZATIONAL
COSTS (Note 1)............................................ (26,442)
-----------
NET LOSS.................................................... $(4,065,069)
===========
LOSS PER SHARE:
Basic and diluted......................................... $ (19.10)
===========
</TABLE>
See notes to financial statements.
F-4
<PAGE> 90
FLORIDA BANKS, INC.
(A DEVELOPMENT STAGE CORPORATION)
STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
DEFICIT
WARRANTS ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL TO ACQUIRE DURING
----------------- ---------------- PAID-IN COMMON DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCK STAGE TOTAL
------ -------- ------- ------ ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,
1997
Issuance of Common
Stock................ 297,000 $2,970 $2,967,030 $ 2,970,000
Issuance of units...... 60,600 $606,000 80,800 808 807,192 $164,832 1,578,832
Net loss............... $(4,065,069) (4,065,069)
------ -------- ------- ------ ---------- -------- ----------- -----------
Balance, March 31,
1998................. 60,600 $606,000 377,800 $3,778 $3,774,222 $164,832 $(4,065,069) $ 483,763
====== ======== ======= ====== ========== ======== =========== ===========
</TABLE>
See notes to financial statements.
F-5
<PAGE> 91
FLORIDA BANKS, INC.
(A DEVELOPMENT STAGE CORPORATION)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 15, 1997
(DATE OF INCORPORATION)
TO
MARCH 31, 1998
AND
THREE MONTHS ENDED
MARCH 31, 1998
-----------------------
(UNAUDITED)
<S> <C>
OPERATING ACTIVITIES:
Net loss.................................................. $(4,065,069)
Adjustments to reconcile net loss to net cash used in
operating activities...................................
Noncash charge on issuance of Common Stock............. 3,939,054
Decrease in organizational costs....................... 26,442
Decrease in accrued liabilities........................ (26,342)
-----------
Net cash used in operating activities............. (125,915)
-----------
FINANCING ACTIVITIES:
Proceeds from the issuance of stock....................... 609,778
Increase in deferred public offering costs................ (74,645)
-----------
Net cash provided by financing activities......... 535,133
-----------
NET INCREASE IN CASH........................................ 409,218
CASH, BEGINNING OF PERIOD................................... --
-----------
CASH, END OF PERIOD......................................... $ 409,218
===========
</TABLE>
See notes to financial statements.
F-6
<PAGE> 92
FLORIDA BANKS, INC.
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO FINANCIAL STATEMENT
AS OF DECEMBER 31, 1997 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1998 (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization -- Florida Banks, Inc. (the "Company") was incorporated on
October 15, 1997 for the purpose of becoming a bank holding company and
acquiring First National Bank of Tampa. The Company is in the development stage
and will remain in the development stage until the consummation of the merger
with First National Bank of Tampa and the proposed initial public offering.
Operations through December 31, 1997, relate primarily to expenditures for
incorporating and organizing the Company.
Organizational Costs -- Through December 31, 1997, incurred organizational
costs (consisting principally of legal, regulatory, consulting and incorporation
fees) were deferred and were to be amortized over the Company's initial sixty
months of operations. During the quarter ended March 31, 1998, the Company
elected to early adopt the provision of SOP 98-5, "Reporting on the Costs of
Start-Up Activities", which provides that start-up costs (including
organizational costs) should be expensed as incurred. The cumulative effect of
adoption of SOP 98-5 has been reflected in the Statement of Operations.
New Accounting Pronouncements -- During the quarter ended March 31, 1998,
the Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (SFAS 130). This Statement establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains, and losses) in a full set of general-purpose
financial statements. SFAS 130 requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. SFAS 130 does not require a specific format for the
financial statement but requires that an enterprise display an amount
representing total comprehensive income for the period in the financial
statement. Additionally, SFAS 130 requires that an enterprise (a) classify items
of other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position. This Statement is effective for fiscal years
beginning after December 15, 1997. Reclassification of financial statements for
earlier periods provided for comparative purposes is required. The Company has
no other comprehensive income in the three months ended March 31, 1998.
Interim Financial Information. Interim Financial Information at March 31,
1998 and for the three months ended March 31, 1998 is unaudited. The unaudited
interim financial statements reflect all adjustments consisting of only normal
accruals, which are, in the opinion of management, necessary to a fair statement
of the results for the interim period. Information for the interim period is not
necessarily indicative of results to be achieved for the full year.
2. SUBSEQUENT EVENTS (UNAUDITED)
In January 1998, the Company entered into an employment agreement with its
President and Chief Executive Officer (the "President"). The agreement has a
three-year term and provides for a minimum annual base salary of $220,000 until
the closing of the offering and $250,000 subsequent to the offering. In
addition, the Board will issue an option to the President to purchase 80,000
shares of common stock at the initial public offering price. This option will be
exercisable for a period of ten years. The agreement provides that if the
Company is unable to close on the public offering or if the President is
terminated without cause, the President is entitled to liquidated damages of
$100,000.
On February 3, 1998, the Company sold 101 Units to accredited foreign
investors. Each Unit was comprised of (i) 600 shares of Series A Preferred
Stock, (ii) 800 shares of Common Stock, and
F-7
<PAGE> 93
FLORIDA BANKS, INC.
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO FINANCIAL STATEMENT -- (CONTINUED)
(iii) Warrants to purchase 800 shares of Common Stock at the initial public
offering price, at the price of $6,008 per Unit. The net proceeds to the Company
from this private placement was approximately $600,000. The Series A Preferred
Stock has been valued at its redemption value of $606,000 as the Company
contemplates redeeming the Series A Preferred Stock using a portion of the
proceeds from the initial public offering. The Series A Preferred Stock is
non-voting, and at the option of the Company, the Series A Preferred Stock may
be redeemed at any time in whole or in part at a cash redemption price of $10.00
per share. The Company recorded a nonrecurring noncash charge of $972,000
relating to the issuance of the Common Stock and Warrants, with a corresponding
increase to shareholders' equity. Financing costs relating to the Common Stock
have been measured as the difference between the fair value of the Common Stock,
based on the initial public offering price of $10.00 per share, and the
allocated proceeds of $.01 per share. The Warrants have been valued at an
aggregate price of $165,000, or $2.04 per share, as determined by an independent
appraisal. The proceeds from the issuance of such Units provided funding for the
Company's development stage operations.
On February 11, 1998, the Company sold 297,000 shares of Common Stock to 14
investors as Founder Shares at the price of $.01 per share. Such investors
include the President and Chief Executive Officer, certain directors of the
Company, T. Stephen Johnson and other employees of T. Stephen Johnson &
Associates ("TSJ&A"). The difference between the proceeds from the sale and the
fair value of the Common Stock, based on the initial public offering price of
$10.00 per share, has been recorded as compensation expense of $2,967,000 with a
corresponding increase in additional paid-in capital.
On March 30, 1998, the Company executed a definitive agreement with First
National Bank of Tampa, pursuant to which the Bank will be merged with and into
Interim Bank No. 1, N.A., a wholly-owned subsidiary of the Company, which will
be renamed "Florida Bank, N.A." Shareholders of First National Bank of Tampa
will receive $13,750,000 payable in common stock of Florida Banks, Inc. The
number of shares to be issued is based upon the price per share in the proposed
initial public offering. The Merger is contingent, among other things, upon the
receipt of approval of the Merger by the Board of Governors of the Federal
Reserve System, the OCC and the FDIC. In addition, the Merger must be approved
by shareholders of First National Bank of Tampa. The Merger is considered a
reverse acquisition for accounting purposes, with the Bank identified as the
accounting acquirer. The Merger will be accounted for as a purchase, but no
goodwill will be recorded in the Merger and the financial statements of the Bank
will become the historical financial statements of the Company.
As compensation for consulting services during the organization and
formation of the Company and acquisition of the Bank, TSJ&A will be paid a fee
of $15,000 per month for a term of six months. In addition, TSJ&A will receive
finder's fee of $137,500, which represents 1% of the purchase price of First
National Bank of Tampa, to be paid upon consummation of the public offering. T.
Stephen Johnson is Vice-Chairman of the Company and is Chairman of TSJ&A.
Mr. Robin Kelton, a significant shareholder of the Company, serves as the
Chairman of Kelton International Limited which received a fee of $45,450 in
connection with the offering of Units to foreign investors.
On June 4, 1998, the Company adopted the 1998 Stock Option Plan (the
"Plan"), effective March 31, 1998, which provides for the grant of incentive or
non-qualified stock options to certain directors, officers and key employees who
participate in the Plan. An aggregate of 900,000 shares of Common Stock are
reserved for issuance pursuant to the Plan. The Company has committed to issue
options for a total of 465,000 shares of Common Stock upon completion of the
initial public offering, of which 325,000 options are immediately exercisable.
The exercise price will be the equal to the initial public offering price.
F-8
<PAGE> 94
FLORIDA BANKS, INC.
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO FINANCIAL STATEMENT -- (CONTINUED)
Also on June 4, 1998, the shareholders of the Company voted to increase the
total number of authorized shares of the Company's capital stock from 10,000,000
to 31,000,000 and to increase the total number of authorized shares of the
Company's Common Stock from 9,000,000 to 30,000,000. The financial statements
have been restated to reflect this increase in authorized shares.
F-9
<PAGE> 95
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
First National Bank of Tampa
Tampa, Florida
We have audited the accompanying balance sheets of First National Bank of
Tampa (the "Bank") as of December 31, 1996 and 1997, and the related statements
of income, shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Bank as of December 31, 1996 and 1997,
and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
February 27, 1998
Jacksonville, Florida
F-10
<PAGE> 96
FIRST NATIONAL BANK OF TAMPA
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, -------------------------
1998 1997 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CASH AND DUE FROM BANKS..................................... $ 2,598,921 $ 2,788,211 $ 2,488,784
FEDERAL FUNDS SOLD.......................................... 9,090,000 10,245,000 12,410,000
----------- ----------- -----------
Total cash and cash equivalents.................... 11,688,921 13,033,211 14,898,784
INVESTMENT SECURITIES:
Available for sale, at fair value (cost $11,256,956
(unaudited), $10,445,885 and $8,289,420 at March 31,
1998 and December 31, 1997 and 1996 respectively)....... 11,233,108 10,452,185 8,279,765
Other investments......................................... 291,850 313,050 270,850
LOANS:
Commercial real estate.................................... 16,236,639 15,281,442 13,078,357
Commercial................................................ 14,394,770 13,157,905 12,412,325
Residential mortgage...................................... 3,395,685 3,268,704 3,952,731
Consumer.................................................. 1,287,123 1,222,045 1,423,161
Credit card and other loans............................... 885,645 869,031 838,108
----------- ----------- -----------
Total loans........................................ 36,199,862 33,799,127 31,704,681
Allowance for loan losses................................. (505,103) (481,462) (432,238)
Net deferred loan fees.................................... (84,269) (78,765) (77,621)
----------- ----------- -----------
Net loans.......................................... 35,610,490 33,238,900 31,194,822
PREMISES AND EQUIPMENT, NET................................. 533,499 511,503 488,077
ACCRUED INTEREST RECEIVABLE................................. 345,223 332,031 285,420
DEFERRED INCOME TAXES, NET.................................. 2,400,114 2,420,271
OTHER ASSETS................................................ 69,784 94,628 87,391
----------- ----------- -----------
TOTAL ASSETS....................................... $62,172,989 $60,395,779 $55,505,109
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS:
Noninterest-bearing demand................................ $ 6,500,383 $ 6,441,785 $ 8,121,621
Interest-bearing demand................................... 2,581,607 3,073,535 3,917,819
Regular savings........................................... 6,450,486 5,874,911 2,712,877
Money market accounts..................................... 1,389,538 1,348,431 1,386,291
Time $100,000 and over.................................... 10,686,727 10,214,403 9,666,810
Other time................................................ 17,605,691 18,507,107 19,720,653
----------- ----------- -----------
Total deposits..................................... 45,214,432 45,460,172 45,526,071
REPURCHASE AGREEMENTS....................................... 7,964,257 5,911,513 5,389,440
OTHER BORROWED FUNDS........................................ 2,403,563 2,405,604 1,018,636
ACCRUED INTEREST PAYABLE.................................... 174,642 198,817 178,828
ACCOUNTS PAYABLE AND ACCRUED EXPENSES....................... 69,241 106,038 122,692
----------- ----------- -----------
Total liabilities.................................. 55,826,135 54,082,144 52,235,667
----------- ----------- -----------
COMMITMENTS (NOTES 6 and 8)
SHAREHOLDERS' EQUITY:
Common stock, $1 par value; 5,000,000 shares authorized
1,825,000 shares issued and outstanding................. 1,825,000 1,825,000 1,825,000
Additional paid-in capital................................ 3,725,148 3,725,148 1,070,359
Retained earnings (deficit of $8,134,037 eliminated upon
quasi-reorganization on December 31, 1995) (Note 11).... 811,492 759,707 383,738
Unrealized gain (loss) on available for sale investment
securities, net of tax.................................. (14,786) 3,780 (9,655)
----------- ----------- -----------
Total shareholders' equity......................... 6,346,854 6,313,635 3,269,442
----------- ----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY......... $62,172,989 $60,395,779 $55,505,109
=========== =========== ===========
</TABLE>
See notes to financial statements.
F-11
<PAGE> 97
FIRST NATIONAL BANK OF TAMPA
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
----------------------- ------------------------------------
1998 1997 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans, including fees.............. $ 807,818 $ 796,532 $3,352,741 $2,890,204 $2,187,558
Investment securities.............. 162,716 140,132 583,590 460,321 436,973
Federal funds sold................. 96,289 100,757 365,658 263,552 312,512
---------- ---------- ---------- ---------- ----------
Total interest income...... 1,066,823 1,037,421 4,301,989 3,614,077 2,937,043
---------- ---------- ---------- ---------- ----------
INTEREST EXPENSE:
Deposits........................... 509,486 508,976 2,075,429 1,744,407 1,380,650
Repurchase agreements.............. 60,702 40,480 178,200 108,357 68,494
Borrowed funds..................... 24,715 6,634 42,099 18,878 24,414
---------- ---------- ---------- ---------- ----------
Total interest expense..... 594,903 556,090 2,295,728 1,871,642 1,473,558
---------- ---------- ---------- ---------- ----------
NET INTEREST INCOME.................. 471,920 481,331 2,006,261 1,742,435 1,463,485
PROVISION (BENEFIT) FOR LOAN
LOSSES............................. 15,000 15,000 60,000 60,000 (138,394)
---------- ---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION
(BENEFIT) FOR LOAN LOSSES.......... 456,920 466,331 1,946,261 1,682,435 1,601,879
---------- ---------- ---------- ---------- ----------
NONINTEREST INCOME:
Service fees....................... 94,963 86,126 324,693 331,421 245,942
Gain on sale of loans.............. 19,709 64,375 94,805 137,655 41,767
Gain (loss) on sale of available
for sale investment
securities...................... 8,197 7,391 7,635 (2,446) 12,868
Gain on sale of other real estate
owned........................... 10,546
Other noninterest income........... 29,363 10,594 76,596 50,005 64,058
---------- ---------- ---------- ---------- ----------
152,232 168,486 503,729 516,635 375,181
---------- ---------- ---------- ---------- ----------
NONINTEREST EXPENSES:
Salaries and benefits.............. 299,870 238,782 999,382 872,643 784,517
Occupancy and equipment............ 75,710 60,165 256,160 226,965 295,562
Data processing.................... 25,465 22,767 92,633 75,366 62,068
Other.............................. 124,583 133,235 493,848 423,462 478,742
---------- ---------- ---------- ---------- ----------
525,628 454,949 1,842,023 1,598,436 1,620,889
---------- ---------- ---------- ---------- ----------
INCOME BEFORE PROVISION FOR INCOME
TAXES.............................. 83,524 179,868 607,967 600,634 356,171
PROVISION FOR INCOME TAX EXPENSES.... 31,739 68,637 231,998 216,896
---------- ---------- ---------- ---------- ----------
NET INCOME........................... $ 51,785 $ 111,231 $ 375,969 $ 383,738 $ 356,171
========== ========== ========== ========== ==========
EARNINGS PER SHARE:
Basic.............................. $ 0.03 $ 0.06 $ 0.21 $ 0.21 $ 0.20
========== ========== ========== ========== ==========
Diluted............................ $ 0.03 $ 0.06 $ 0.19 $ 0.20 $ 0.19
========== ========== ========== ========== ==========
</TABLE>
See notes to financial statements.
F-12
<PAGE> 98
FIRST NATIONAL BANK OF TAMPA
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
(LOSS) GAIN ON
AVAILABLE
FOR SALE
COMMON STOCK ADDITIONAL RETAINED INVESTMENT
----------------------- PAID-IN EARNINGS SECURITIES,
SHARES PAR VALUE CAPITAL (DEFICIT) NET OF TAX TOTAL
---------- ---------- ----------- ----------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995....... 1,825,000 $1,825,000 $ 8,987,500 $(8,490,208) $(179,152) $2,143,140
Net income................... 356,171 356,171
Unrealized loss on available
for sale investment
securities, net............ 179,152 179,152
Quasi-reorganization......... (8,134,037) 8,134,037
---------- ---------- ----------- ----------- --------- ----------
BALANCE, DECEMBER 31, 1995..... 1,825,000 1,825,000 853,463 2,678,463
Net income................... 383,738 383,738
Adjustment to deferred tax
asset valuation allowance
subsequent to quasi-
reorganization............. 216,896 216,896
Unrealized loss on available
for sale investment
securities, net............ (9,655) (9,655)
---------- ---------- ----------- ----------- --------- ----------
BALANCE, DECEMBER 31, 1996..... 1,825,000 1,825,000 1,070,359 383,738 (9,655) 3,269,442
Net income................... 375,969 375,969
Adjustment to deferred tax
asset valuation allowance
subsequent to quasi-
reorganization............. 2,654,789 2,654,789
Unrealized gain on available
for sale investment
securities, net............ 13,435 13,435
---------- ---------- ----------- ----------- --------- ----------
BALANCE, DECEMBER 31, 1997..... 1,825,000 1,825,000 3,725,148 759,707 3,780 6,313,635
Net income (unaudited)....... 51,785 51,785
Unrealized loss on available
for sale investment
securities, net
(unaudited)................ (18,566) (18,566)
---------- ---------- ----------- ----------- --------- ----------
BALANCE, MARCH 31, 1998
(unaudited).................. 1,825,000 $1,825,000 $ 3,725,148 $ 811,492 $ (14,786) $6,346,854
========== ========== =========== =========== ========= ==========
</TABLE>
See notes to financial statements.
F-13
<PAGE> 99
FIRST NATIONAL BANK OF TAMPA
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
--------------------------- ----------------------------------------
1998 1997 1997 1996 1995
------------ ------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income................. $ 51,785 $ 111,231 $ 375,969 $ 383,738 $ 356,171
Adjustments to reconcile
net income to net cash
provided by operating
activities:
SBA loans originated for
resale................ -- (1,064,674) (1,261,766) (1,121,977) (857,383)
Proceeds from sale of
SBA loans............. -- 846,218 1,454,895 1,852,401 570,650
Depreciation and
amortization.......... 31,587 24,915 109,595 87,056 111,726
Deferred income taxes... 31,739 68,637 231,998 216,896
Loss on disposition of
furniture and
equipment............. 57,253
Gain on sale of
securities............ (8,197) (7,391) (7,635) (12,868)
Gain on disposal of
other real estate
owned................. (10,546)
Amortization of premiums
on investments, net... (21,048) (1,709) 6,072 4,824
Provision (benefit) for
loan losses........... 15,000 15,000 60,000 60,000 (138,394)
Increase in accrued
interest receivable... (13,192) (12,092) (46,611) (60,350) (42,245)
Increase in accrued
interest payable...... (24,175) 11,226 19,989 41,779 17,503
Decrease (increase) in
other assets.......... 24,844 (14,398) (7,237) (42,797) 247,374
Increase (decrease) in
other liabilities..... (36,797) (51,227) (16,654) 35,288 57,405
------------ ------------ ------------ ----------- -----------
Net cash (used in)
provided by
operating
activities....... 51,546 (74,264) 918,615 1,452,034 361,470
------------ ------------ ------------ ----------- -----------
INVESTING ACTIVITIES:
Proceeds from sales,
paydowns and maturities
of investment
securities:
Available for sale...... 3,716,159 5,753,841 13,543,810 3,884,442 4,415,664
Other................... 28,600
Purchases of investment
securities:
Available for sale...... (4,497,985) (6,521,388) (15,698,714) (5,683,851) (3,494,601)
Other investments....... (7,400) (17,000) (42,200)
Net increase in loans...... (2,371,590) (2,186,757) (2,297,207) (5,753,768) (6,065,863)
Purchases of premises and
equipment............... (53,583) (28,304) (133,020) (33,709) (424,905)
</TABLE>
F-14
<PAGE> 100
FIRST NATIONAL BANK OF TAMPA
STATEMENTS OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
--------------------------- ----------------------------------------
1998 1997 1997 1996 1995
------------ ------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Proceeds from sale of other
real estate owned....... 45,000 55,546
Proceeds from sale of fixed
assets.................. 480,024
------------ ------------ ------------ ----------- -----------
Net cash used in
investing
activities....... (3,200,799) (2,999,608) (4,627,331) (7,541,886) (5,034,135)
------------ ------------ ------------ ----------- -----------
FINANCING ACTIVITIES:
Net increase in demand
deposits, money market
accounts and savings
accounts................ 183,352 (1,987,032) 600,054 3,436,405 1,328,694
Net increase (decrease) in
time deposits........... (429,092) 201,995 (665,952) 7,456,862 1,417,852
Increase in repurchase
agreements.............. 2,052,744 867,656 522,073 1,780,682 3,608,758
Increase (decrease) in
other borrowed funds.... (2,041) 278,094 1,386,968 415,002 (176,354)
------------ ------------ ------------ ----------- -----------
Net cash provided
by (used in)
financing
activities....... 1,804,963 (639,287) 1,843,143 13,088,951 6,178,950
------------ ------------ ------------ ----------- -----------
NET INCREASE (DECREASE) IN
CASH AND CASH
EQUIVALENTS................ (1,344,290) (3,713,159) (1,865,573) 6,999,099 1,506,285
CASH AND CASH EQUIVALENTS:
Beginning of year.......... 13,033,211 14,898,784 14,898,784 7,899,685 6,393,400
------------ ------------ ------------ ----------- -----------
End of year................ $ 11,688,921 $ 11,185,625 $ 13,033,211 $14,898,784 $ 7,899,685
============ ============ ============ =========== ===========
</TABLE>
See notes to financial statements.
F-15
<PAGE> 101
FIRST NATIONAL BANK OF TAMPA
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 AND THREE MONTHS ENDED
MARCH 31, 1998 AND 1997 (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
First National Bank of Tampa (the "Bank") is a nationally chartered bank
regulated by the Office of the Comptroller of the Currency. The Bank is a member
of the Federal Reserve System and commenced operations on July 11, 1988.
The accounting and reporting policies of the Bank conform to generally
accepted accounting principles and to general practices within the banking
industry. The following summarizes these policies and practices:
Use of Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Investment Securities -- Debt securities for which the Bank has the
positive intent and ability to hold to maturity are classified as held to
maturity and reported at amortized cost. Securities are classified as
trading securities if bought and held principally for the purpose of
selling them in the near future. No investments are held for trading
purposes. Securities not classified as held to maturity are classified as
available for sale, and reported at fair value with unrealized gains and
losses excluded from earnings and reported net of tax as a separate
component of stockholders' equity until realized. Other investments, which
include Federal Reserve Bank stock and Federal Home Loan Bank stock, are
carried at cost as such investments do not have readily determinable fair
values.
Realized gains and losses on sales of investment securities are
recognized in the statements of income upon disposition based upon the
adjusted cost of the specific security. Declines in value of investment
securities judged to be other than temporary are recognized as losses in
the statement of income.
Loans -- Loans are stated at the principal amount outstanding, net of
unearned income and an allowance for loan losses. Interest income on all
loans is accrued based on the outstanding daily balances.
Management has established a policy to discontinue accruing interest
(non-accrual status) on a loan after it has become 90 days delinquent as to
payment of principal or interest unless the loan is considered to be well
collateralized and the Bank is actively in the process of collection. In
addition, a loan will be placed on non-accrual status before it becomes 90
days delinquent if management believes that the borrower's financial
condition is such that collection of interest or principal is doubtful.
Interest previously accrued but uncollected on such loans is reversed and
charged against current income when the receivable is estimated to be
uncollectible. Interest income on non-accrual loans is recognized only as
received.
Nonrefundable fees and certain direct costs associated with
originating or acquiring loans are recognized over the life of related
loans on a method that approximates the interest method.
Allowance for Loan Losses -- The determination of the balance in the
allowance for loan losses is based on an analysis of the loan portfolio and
reflects an amount which, in management's judgment, is adequate to provide
for probable loan losses after giving consideration to the growth and
composition of the loan portfolio, current economic conditions, past loss
experience, evaluation of potential losses in the current loan portfolio
and such other factors that warrant current recognition in estimating loan
losses.
Loans which are considered to be uncollectible are charged-off against
the allowance. Recoveries on loans previously charged-off are added to the
allowance.
F-16
<PAGE> 102
FIRST NATIONAL BANK OF TAMPA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Impaired loans are loans for which it is probable that the Bank will
be unable to collect all amounts due according to the contractual terms of
the loan agreement. Impairment losses are included in the allowance for
loan losses through a charge to the provision for loan losses. Impairment
losses are measured by the present value of expected future cash flows
discounted at the loan's effective interest rate, or, as a practical
expedient, at either the loan's observable market price or the fair value
of the collateral. Interest income or impaired loans is recognized only as
received.
Large groups of smaller balance homogeneous loans (consumer loans) are
collectively evaluated for impairment. Commercial loans and larger balance
real estate and other loans are individually evaluated for impairment.
Premises and Equipment -- Premises and equipment are stated at cost
less accumulated depreciation computed on the straight-line method over the
estimated useful lives of 3 to 20 years. Leasehold improvements are
amortized on the straight-line method over the shorter of their estimated
useful life or the period the Bank expects to occupy the related leased
space. Maintenance and repairs are charged to operations as incurred.
Income Taxes -- Deferred tax liabilities are recognized for temporary
differences that will result in amounts taxable in the future and deferred
tax assets are recognized for temporary differences and tax benefit
carryforwards that will result in amounts deductible or creditable in the
future. Net deferred tax liabilities or assets are recognized through
charges or credits to the deferred tax provision. A deferred tax valuation
reserve is established if it is more likely than not that all or a portion
of the deferred tax assets will not be realized. Subsequent to the Bank's
quasi-reorganization (see note 11) reductions in the deferred tax valuation
allowance are credited to paid in capital.
Loan Origination Fees and Costs -- Loan fees, net of certain specific
incremental direct loan origination costs, are deferred and accreted into
income over the life of each loan as a yield adjustment.
Repurchase Agreements -- Repurchase agreements consist of agreements
with customers to pay interest daily on funds swept into a repo account
based on a rate of .75% to 1.00% below the Federal funds rate. Such
agreements generally mature within one to four days from the transaction
date. Information concerning repurchase agreements at December 31, 1997 and
1996 is summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Average balance during the year............. $3,957,381 $2,588,850
Average interest rate during the year....... 4.50% 4.19%
Maximum month-end balance during the year... $6,257,096 $5,389,440
</TABLE>
Other Borrowed Funds -- Other borrowed funds consist of treasury tax
and loan deposits and generally are repaid within one to 120 days from the
transaction date.
Stock Options -- The Bank has elected to account for its stock options
under the intrinsic value based method with pro forma disclosures of net
earnings and earnings per share, as if the fair value based method of
accounting defined in SFAS No. 123 "Accounting for Stock Based
Compensation" had been applied. Under the intrinsic value based method,
compensation cost is the excess, if any, of the quoted market price of the
stock at the grant date or other measurement date over the amount an
employee must pay to acquire the stock. Under the fair value based method,
compensation cost is measured at the grant date based on the value of the
award and is recognized over the service period, which is usually the
vesting period.
Earnings Per Share -- In March 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings per Share" ("SFAS No. 128"). SFAS No. 128
establishes standards for computing and presenting earnings per share
F-17
<PAGE> 103
FIRST NATIONAL BANK OF TAMPA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
("EPS") and applies to all entities with publicly held common stock or
potential common stock. Basic EPS excludes dilution and is computed by
dividing earnings available to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects
the potential dilutive securities that could share in the earnings. The
Company adopted the requirements of SFAS No. 128 in the year ended December
31, 1997 (Note 12).
New Accounting Pronoucements -- During the quarter ended March 31,
1998, the Bank adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (SFAS 130). This Statement establishes
standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains, and losses) in a full set of
general-purpose financial statements. SFAS 130 requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. SFAS 130 does not
require a specific format for the financial statement but requires that an
enterprise display an amount representing total comprehensive income for
the period in the financial statement. Additionally, SFAS 130 requires that
an enterprise (a) classify items of other comprehensive income by their
nature in a financial statement and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position.
This Statement is effective for fiscal years beginning after December 15,
1997. Total comprehensive income for the three months ended March 31, 1998
was $33,219. Other comprehensive income was comprised solely of the change
in unrealized gain (loss) on available for sale investment securities, net.
Supplementary Cash Flow Information -- For purposes of reporting cash
flows, cash and cash equivalents include cash and due from banks and
Federal funds sold. Generally, Federal funds are sold for one day periods.
Interest paid on deposits and borrowed funds for the years ended December
31, 1997, 1996 and 1995 was $2,275,739, $1,829,863 and $1,456,055
respectively. Interest paid on deposits and borrowed funds for the three
month periods ended March 31, 1998 and 1997 was $619,078 and $544,864
(unaudited), respectively.
Interim Financial Information -- Interim Financial Information at
March 31, 1998 and for the three months ended March 31, 1998 and 1997 is
unaudited. The unaudited interim financial statements reflect all
adjustments consisting of normal reoccuring accruals which are, in the
opinion of management, necessary to a fair statement of the results for the
interim periods. Information for the interim periods is not necessarily
indicative of results to be achieved for the full year.
F-18
<PAGE> 104
FIRST NATIONAL BANK OF TAMPA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. INVESTMENT SECURITIES
The amortized cost and estimated fair value of available for sale
investment securities as of December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
U.S. Treasury securities and other U.S.
agency obligations..................... $ 3,998,153 $ 4,288 $ (4,862) $ 3,997,579
Mortgage-backed securities............... 6,447,732 27,303 (20,429) 6,454,606
----------- ------- -------- -----------
$10,445,885 $31,591 $(25,291) $10,452,185
=========== ======= ======== ===========
DECEMBER 31, 1996
U.S. Treasury securities and other U.S.
agency obligations..................... $ 2,483,771 $ 1,231 $ (5,002) $ 2,480,000
Mortgage-backed securities............... 5,805,649 20,417 (26,301) 5,799,765
----------- ------- -------- -----------
$ 8,289,420 $21,648 $(31,303) $ 8,279,765
=========== ======= ======== ===========
</TABLE>
Expected maturities of debt securities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without prepayment penalties. The amortized cost and estimated fair
value of debt securities available for sale, at December 31, 1997, by
contractual maturity, are shown below:
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
----------- -----------
<S> <C> <C>
Due within one year......................................... $ 2,502,712 $ 2,502,944
Due after one year through five years....................... 1,495,441 1,494,635
Due after five years through ten years......................
Due after ten years.........................................
----------- -----------
3,998,153 3,997,579
Mortgage-backed securities.................................. 6,447,732 6,454,606
----------- -----------
Total............................................. $10,445,885 $10,452,185
=========== ===========
</TABLE>
Investment securities with a carrying value of $9,303,244 and $6,467,682
were pledged as security for certain borrowed funds and public deposits held by
the Bank at December 31, 1997 and 1996, respectively.
3. LOANS
Changes in the allowance for loan losses are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Balance, beginning of year.................................. $432,238 $339,837
Provision for loan losses................................... 60,000 60,000
Charge-offs................................................. (43,292) (7,349)
Recoveries.................................................. 32,516 39,750
-------- --------
Balance, end of year........................................ $481,462 $432,238
======== ========
</TABLE>
The Bank's primary lending area is Tampa, Florida and surrounding areas.
Although the Bank's loan portfolio is diversified, a significant portion of its
loans are collateralized by real estate. Therefore the Bank
F-19
<PAGE> 105
FIRST NATIONAL BANK OF TAMPA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
could be susceptible to economic downturns and natural disasters. It is the
Bank's lending policy to collateralize real estate loans based upon certain loan
to appraised value ratios.
The Bank had no loans on nonaccrual as of December 31, 1997 and 1996.
Loans considered impaired totaled $372,111 at December 31, 1997 of which
$299,611 is guaranteed by the SBA. The total allowance for loan losses related
to these loans was $72,500 at December 31, 1997. There were no impaired loans at
December 31, 1997 that did not have an allowance. The Bank's average investment
in impaired loans was approximately $186,000 in 1997. The amount of interest
income and interest collected on these impaired loans during 1997 was not
significant. No loans were impaired as of December 31, 1996.
The Bank lends to shareholders, directors, officers, and their related
business interests on substantially the same terms as loans to other individuals
and businesses of comparable credit worthiness. Such loans outstanding were
approximately $249,000 and $496,000 at December 31, 1997 and 1996. During the
year ended December 31, 1997, such shareholders, directors, officers and their
related business interest borrowed approximately $15,000 from the Bank and
repaid approximately $262,000.
4. PREMISES AND EQUIPMENT
Major classifications of these assets are as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
Leasehold improvements...................................... $ 271,456 $ 261,136
Furniture, fixtures and equipment........................... 742,810 620,110
---------- ---------
1,014,266 881,246
Accumulated depreciation and amortization................... (502,763) (393,169)
---------- ---------
$ 511,503 $ 488,077
========== =========
</TABLE>
Depreciation and amortization amounted to $109,595, $87,056 and $111,726
for the years ended December 31, 1997, 1996 and 1995, respectively.
5. INCOME TAXES
The components of the provision for income tax expenses for the years ended
December 31, 1997, 1996 and 1995, all of which are Federal, are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Deferred tax expense................................... $231,998 $216,896 $ --
-------- -------- --------
$231,998 $216,896 $ --
======== ======== ========
</TABLE>
Income taxes for the years ended December 31, 1997, 1996 and 1995, differ
from the amount computed by applying the federal statutory corporate rate to
earnings before income taxes as summarized below:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Provision based on Federal income tax rate............. $204,216 $206,709 $121,098
Change in deferred tax asset valuation allowance....... (125,151)
Nondeductible items, state income taxes net of federal
benefit and other.................................... 27,782 10,187 4,053
-------- -------- --------
$231,998 $216,896 $ --
======== ======== ========
</TABLE>
At December 31, 1997 and 1996, the Bank had tax operating loss
carryforwards of approximately $7,001,000 and $7,628,000, respectively. During
the years ended December 31, 1997, 1996 and 1995 the Bank
F-20
<PAGE> 106
FIRST NATIONAL BANK OF TAMPA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
utilized net operating loss carryforwards to reduce current taxes payable by
approximately $236,000, $272,000 and $128,000, respectively. The utilization of
net operating losses for the years ended December 31, 1997 and 1996 (periods
subsequent to the date of the Bank's quasi reorganization) and the complete
recognition of all remaining deferred tax assets at December 31, 1997, totaling
approximately $2,423,000, have been reflected as an increase to additional
paid-in capital.
The components of net deferred income taxes at December 31, 1997 and 1996
are as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $2,467,698 $2,689,133
Allowance for loan losses................................. 24,478 7,127
Loan fees................................................. 19,733 19,330
Unrealized loss on investment securities.................. -- 3,862
Other..................................................... 13,078 9,627
---------- ----------
2,524,987 2,729,079
---------- ----------
Deferred tax liabilities:
Accumulated depreciation.................................. 53,143 53,143
Cash to accrual adjustment................................ 49,053 31,958
Unrealized gain in investment securities.................. 2,520 --
---------- ----------
104,716 85,101
---------- ----------
Valuation allowance....................................... -- 2,643,978
---------- ----------
Deferred tax assets, net.................................... $2,420,271 $ --
========== ==========
</TABLE>
At December 31, 1997, the Bank had tax net operating loss carryforwards of
approximately $7,001,000. Such carryforwards expire as follows: $611,000 in
2004, $1,588,000 in 2005, $1,171,000 in 2006, $1,919,000 in 2007, $1,620,000 in
2008 and $92,000 in 2009. Future changes in ownership, as defined in section 382
of the Internal Revenue Code, could limit the amount of net operating loss
carryforwards used in any one year.
At December 31, 1997, the Bank assessed its earnings history and trends
over the past three years, its estimate of future earnings, and the expiration
dates of the loss carryforwards and has determined that it is more likely than
not that the deferred tax assets will be realized. Accordingly, no valuation
allowance is recorded at December 31, 1997.
6. COMMITMENTS
The Bank is obligated under certain noncancellable operating leases for
office space and office property. Rental expense for 1997, 1996 and 1995 was
approximately $116,000, $101,000 and $134,000, respectively, and is included in
net occupancy and equipment expense in the accompanying statements of income.
The following is a schedule of future minimum lease payments at December 31,
1997.
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
- ------------------------
<S> <C>
1998........................................................ $ 94,354
1999........................................................ 98,547
2000........................................................ 102,741
2001........................................................ 104,838
2002........................................................ 104,838
Later years................................................. 1,436,274
----------
$1,941,592
==========
</TABLE>
F-21
<PAGE> 107
FIRST NATIONAL BANK OF TAMPA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. STOCK OPTIONS
During 1994, the Bank's Board of Directors approved a Stock Option Plan
(the "Plan") for certain key officers, employees and directors whereby 300,000
shares of the Bank's common stock were made available through qualified
incentive stock options and non-qualified stock options. The Plan specifies that
the exercise price per share of common stock under each option shall not be less
than the fair market value of the common stock on the date of the grant, except
for qualified stock options granted to individuals who own either directly or
indirectly more than 10% of the outstanding stock of the Bank. For qualified
stock options granted to those individuals owning more than 10% of the Bank's
outstanding stock, the exercise price shall not be less than 110% of the fair
market value of the common stock on the date of grant. Options issued under the
Plan expire ten years after the date of grant, except for qualified stock
options granted to more than 10% shareholders as defined above. For qualified
stock options granted to more than 10% shareholders, the expiration date shall
be five years from the date of grant or earlier if specified in the option
agreement. During 1994, the Bank granted stock options to purchase 240,000
shares of the Bank's common stock at an exercise price of $1.00. No options were
granted during 1995, 1996 or 1997.
During July, 1988, the Bank granted stock warrants to purchase 225,000
shares of the Bank's common stock at an exercise price of $10.25. Such warrants
expire June 10, 1998.
8. FINANCIAL INSTRUMENTS
The Bank originates financial instruments with off-balance sheet risk in
the normal course of business, usually for a fee, primarily to meet the
financing needs of its customers. The financial instruments include letters of
credit and unused lines of credit. These commitments involve varying degrees of
credit risk, however, management does not anticipate losses upon the fulfillment
of these commitments.
At December 31, 1997, financial instruments having credit risk in excess of
that reported in the balance sheet totaled approximately $6,507,000.
9. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory, and possibly additional discretionary, actions
by regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1997, that the Bank
meets all capital adequacy requirements to which it is subject.
F-22
<PAGE> 108
FIRST NATIONAL BANK OF TAMPA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1997 and 1996, notifications from the Office of the
Comptroller of the Currency categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier I risk-based,
and Tier I leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
institution's category. The Bank's actual capital amounts and ratios are also
presented in the following table.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------ ----------------------- -----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1997:
Total capital (to risk-weighted
assets).......................... $4,545,625 14.29% >= $2,545,537 >= 8.0% >= $3,181,922 >= 10.0%
Tier I capital (to risk-weighted
assets).......................... 4,137,864 13.00 >= 1,272,769 >= 4.0 >= 1,909,153 >= 6.0
Tier I capital (to average
assets).......................... 4,137,864 7.42 >= 2,230,741 >= 4.0 >= 2,788,426 >= 5.0
AS OF DECEMBER 31, 1996:
Total capital (to risk-weighted
assets).......................... $3,651,326 12.26% >= $2,382,265 >= 8.0% >= $2,977,832 >= 10.0 $
Tier I capital (to risk-weighted
assets).......................... 3,279,097 11.01 >= 1,191,133 >= 4.0 >= 1,786,699 >= 6.0
Tier I capital (to average
assets).......................... 3,279,097 6.42 >= 2,044,372 >= 4.0 >= 1,488,916 >= 5.0
</TABLE>
The following is a reconciliation of shareholders' equity as reported in
the financial statements to regulatory capital as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
TIER I TOTAL
LEVERAGE RISK BASED RISK BASED
CAPITAL CAPITAL CAPITAL
----------- ----------- -----------
<S> <C> <C> <C>
DECEMBER 31, 1997:
Shareholders' equity.......................... $ 6,313,635 $ 6,313,635 $ 6,313,635
Unrealized gain on available for sale
investment securities...................... (3,780) (3,780) (3,780)
Allowance for loan loss....................... 407,761
Deferred tax asset in excess of projected
benefit for 1998........................... (2,171,991) (2,171,991) (2,171,991)
----------- ----------- -----------
Regulatory capital.............................. $ 4,137,864 $ 4,137,864 $ 4,545,625
=========== =========== ===========
December 31, 1996:
Shareholders' equity.......................... $ 3,269,442 $ 3,269,442 $ 3,269,442
Unrealized loss on available for sale
investment securities...................... 9,655 9,655 9,655
Allowance for loan loss....................... 372,229
----------- ----------- -----------
Regulatory capital.............................. $ 3,279,097 $ 3,279,097 $ 3,651,326
=========== =========== ===========
</TABLE>
10. FAIR VALUE OF FINANCIAL INSTRUMENT
The following methods and assumptions were used by the Bank in estimating
financial instrument fair values:
General Comment -- The financial statements include various estimated fair
value information as required by Statement of Financial Accounting Standards No.
107, Disclosures about Fair Value of Financial Instruments (Statement 107). Such
information, which pertains to the Bank's financial instruments is based on the
requirement set forth in Statement 107 and does not purport to represent the
aggregate net fair value of the Bank. Furthermore, the fair value estimates are
based on various assumptions, methodologies and
F-23
<PAGE> 109
FIRST NATIONAL BANK OF TAMPA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
subjective considerations, which vary widely among different financial
institutions and which are subject to change.
Cash and Cash Equivalents -- The carrying amount for cash and cash
equivalents approximate the estimated fair values of such assets.
Available for Sale Investment Securities -- Fair values for securities
available for sale are based on quoted market prices, if available. If quoted
market prices are not available, fair values are based on quoted market prices
of comparable instruments.
Other Investment Securities -- Fair value of the Bank's investment in
Federal Reserve Bank stock and Federal Home Loan Bank stock is based on its
redemption value, which is its cost of $100 per share.
Loans -- For variable rate loans that reprice frequently, the carrying
amount is a reasonable estimate of fair value. The fair value of other types of
loans is estimated by discounting the future cash flows using the current rates
at which similar loans would be made to borrowers with similar credit ratings
for the same remaining maturities.
Accrued Interest Receivable and Payable -- The carrying amount of accrued
interest receivable and payable approximates the estimated fair value of such
asset.
Deposits -- The fair value of demand deposits, savings deposits and certain
money market deposits is the amount payable on demand at the reporting date. The
fair value of fixed rate certificates of deposit is estimated using a discounted
cash flow calculation that applies interest rates currently being offered to a
schedule of aggregated expected monthly time deposit maturities.
Repurchase Agreements and Other Borrowed Funds -- The carrying amounts of
repurchase agreements and other borrowed funds approximates the estimated fair
value of such liabilities due to the short maturities of such instruments.
Commitments to Originate Loans -- The fair value of commitments is
estimated using fees currently charged to enter into similar agreements, taking
into account the remaining term of the agreements and the present
creditworthiness of the counterparties. The carrying amount of deferred fees
relating to such commitments approximates the fair value and such amounts are
insignificant.
A comparison of the carrying amount to the fair values of the Bank's
significant financial instruments as of December 31, 1997 and 1996 is as
follows:
<TABLE>
<CAPTION>
1997 1996
------------------ ------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents....................... $13,033 $13,033 $14,899 $14,899
Investment available for sale................... 10,452 10,452 8,280 8,280
Other investments............................... 313 313 271 271
Loans........................................... 33,799 33,444 31,705 31,464
Accrued interest receivable..................... 332 332 285 285
Financial liabilities:
Deposits........................................ 45,460 45,460 45,526 45,432
Repurchase agreements........................... 5,912 5,912 5,389 5,389
Other borrowed funds............................ 2,406 2,406 1,019 1,019
Accrued interest payable........................ 199 199 178 178
</TABLE>
F-24
<PAGE> 110
FIRST NATIONAL BANK OF TAMPA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
11. QUASI-REORGANIZATION
Effective December 31, 1995, the Bank completed a quasi-reorganization of
its capital accounts. A quasi-reorganization is an accounting procedure provided
for under current banking regulations that allows a bank to restructure its
capital accounts to remove a deficit in undivided profits without undergoing a
legal reorganization. A quasi-reorganization allows a bank that has previously
suffered losses and subsequently corrected its problems to restate its records
as if it had been reorganized. A quasi-reorganization is subject to regulatory
approval and is contingent upon compliance with certain legal and accounting
requirements of the banking regulations. The Bank's quasi-organization was
authorized by the Office of the Comptroller of the Currency upon final approval
of the Bank's shareholders which was granted November 15, 1995.
As a result of the quasi-reorganization, the Bank charged against
additional paid-in capital its accumulated deficit through December 31, 1995 of
$8,134,037.
12. EARNINGS PER SHARE
Following is a reconciliation of the denominator used in the computation of
basic and diluted earnings per common share.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
--------------------- ---------------------------------
1998 1997 1997 1996 1995
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Weighted average number of common shares
outstanding -- Basic.................... 1,825,000 1,825,000 1,825,000 1,825,000 1,825,000
Incremental shares from the assumed
conversion of stock options............. 155,840 129,010 129,010 82,570 50,919
--------- --------- --------- --------- ---------
Total -- Diluted................ 1,980,840 1,954,010 1,954,010 1,907,570 1,875,919
========= ========= ========= ========= =========
</TABLE>
The incremental shares from the assumed conversion of stock options were
determined using the treasury stock method under which the assumed proceeds were
equal to (1) the amount that the Bank would receive upon the exercise of the
options plus (2) the amount of the tax benefit that would be credited to
additional paid-in capital assuming exercise of the options. The assumed
proceeds are used to purchase outstanding common shares at an assumed fair value
equal to the Bank's average book value per common share as the Bank's stock is
not actively traded and limited trades during 1996 through 1997 indicate that
book value is a reasonable estimate of fair value.
13. SUBSEQUENT EVENT (UNAUDITED)
On March 30, 1998, the Bank executed a definitive agreement with Florida
Banks, Inc. (a development stage corporation), pursuant to which the Bank will
be merged with and into Interim Bank No. 1, N.A., a wholly-owned subsidiary of
the Company, which will be renamed "Florida Bank, N.A." Shareholders of the Bank
will receive $13,750,000 payable in common stock of Florida Banks, Inc. The
number of shares to be issued is based upon the price per share in Florida
Banks, Inc.'s proposed initial public offering. The Merger is contingent, among
other things, upon the receipt of approval of the Merger by the Board of
Governors of the Federal Reserve System, the Office of the Comptroller of the
Currency and the Federal Deposit Insurance Corporation. In addition, the Merger
must be approved by shareholders of the Bank. The Merger is considered to be a
reverse acquisition for accounting purposes, with the Bank identified as the
accounting acquirer. The Merger will be accounted for as a purchase, but no
goodwill will be recorded in the Merger and the financial statements of the Bank
will become the historical financial statements of Florida Banks, Inc.
F-25
<PAGE> 111
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY UNDERWRITER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE
REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION OF,
ANY PERSON IN ANY CIRCUMSTANCES IN WHICH SUCH AN OFFER OR SOLICITATION IS
UNLAWFUL.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 7
Forward-Looking Statements............ 16
Use of Proceeds....................... 16
Dividend Policy....................... 16
Capitalization........................ 17
Dilution.............................. 18
Selected Financial Data............... 19
Pro Forma Financial Data.............. 21
Business.............................. 23
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 34
Supervision and Regulation............ 60
Description of Bank Acquisition....... 65
Management............................ 67
Certain Transactions.................. 73
Security Ownership of Certain
Beneficial Owners and Management.... 74
Description of Capital Stock.......... 76
Shares Eligible for Future Sale....... 78
Underwriting.......................... 80
Legal Matters......................... 82
Experts............................... 82
Additional Information................ 82
Index to Financial Statements......... F-1
</TABLE>
Until August 23, 1998 (25 days after the date of this Prospectus), all dealers
effecting transactions in the Common Stock offered hereby, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This delivery requirement is in addition to the obligation of dealers to deliver
a Prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
4,000,000 SHARES
(FLORIDA BANKS, INC. LOGO)
COMMON STOCK
-------------------------
PROSPECTUS
-------------------------
THE ROBINSON-HUMPHREY
COMPANY
INTERSTATE/JOHNSON LANE
CORPORATION
KELTON INTERNATIONAL
LIMITED
July 29, 1998
- ------------------------------------------------------
- ------------------------------------------------------
