SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Fiscal Year Ended December 31, 1999
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Commission File No. 0-24683
FLORIDA BANKS, INC.
A Florida Corporation
(IRS Employer Identification No. 58-2364573)
5210 Belfort Road
Suite 310, Concourse II
Jacksonville, Florida 32256
(904) 332-7770
Securities Registered Pursuant to Section 12(b)
of the Securities Exchange Act of 1934:
None
Securities Registered Pursuant to Section 12(g)
of the Securities Exchange Act of 1934:
Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[ ]
The aggregate market value of the common stock of the registrant held by
nonaffiliates of the registrant (5,052,554 shares) on March 24, 2000 was
approximately $29,052,186 based on the closing price of the registrant's common
stock as reported on the Nasdaq National Market on March 24, 2000. For the
purposes of this response, officers, directors and holders of 5% or more of the
registrant's common stock are considered the affiliates of the registrant at
that date.
The number of shares outstanding of the registrant's common stock, as of March
24, 2000: 5,642,643 shares of $.01 par value common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement to be delivered to
shareholders in connection with the 2000 Annual Meeting of Shareholders
scheduled to be held on May 15, 2000 are incorporated by reference in response
to Part III of this Report.
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PART I
Item 1. Business.
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General
Florida Banks, Inc. (the "Company") was formed to create a statewide
community banking system focusing on the largest and fastest growing markets in
Florida. The Company operates through its wholly owned banking subsidiary,
Florida Bank, N.A. (the "Bank"). The Company currently operates community
banking offices in the Tampa, Jacksonville, Alachua County (Gainesville),
Broward County (Ft. Lauderdale) and Pinellas County (St Petersburg - Clearwater)
markets and recently announced it plan to expand to the Ocala/Marion County
area. Future business plans include entry into the markets of Orlando and the
Palm Beaches (collectively, the "Identified Markets"). As opportunities arise,
the Company may also 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 has 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, strong community contacts and strong 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 remaining
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. The
Company maintains centralized credit policies and procedures as well as
centralized back office functions from its operations center in Tampa to support
the community banking offices. Upon the Company's entry into a new market area,
it undertakes a marketing campaign utilizing an officer calling program and
community-based promotions. In addition, management is compensated based on
profitability, growth and loan production goals, and each market area is
supported by a local board of advisory directors, which is 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 are supported by
centralized back office operations. From the Company's main offices located in
Jacksonville and its operations center in Tampa, the Company provides 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, compliance, internal audit, administration, training
and strategic planning. Core processing, check clearing and other similar
functions are currently outsourced to major vendors. As a result, these
operating strategies 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 new
market areas, 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.
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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:
o Establish community banking offices in additional markets including
the remaining Identified Markets as soon as local management teams
are identified;
o Establish community banking offices with locally responsive
management teams emphasizing a high level of personalized customer
service;
o Target small and medium-sized business customers that require the
attention and service which a community-oriented bank is well suited
to provide;
o Provide a broad array of traditional banking products and services;
o Provide non-traditional products and services through strategic
partnerships with third party vendors
o Utilize technology to provide a higher level of customer service and
enhance deposit growth.
o Maintain centralized support functions, including back office
operations, credit policies and procedures, investment portfolio
management, administration, compliance, internal audit, human
resources and training, to maximize operating efficiencies and
facilitate responsiveness to customers; and
o Outsource core processing and back room operations to increase
efficiencies.
Model "Local Community Bank"
In order to achieve its expansion strategy, the Company intends to
establish community banking offices in the remaining Identified Markets through
the de novo 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 is legally 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 identifies an individual who will serve as the president of that
particular market area, as well as those individuals who will serve on the local
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 their customers. The local management teams have a significant amount of
decision-making authority and are accessible to their 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 offices have a local
board of directors that are comprised of prominent members of the community,
including business leaders and professionals. It is anticipated that certain
members of the local boards may serve as members of the Board of Directors of
the Bank and of the Company. These directors act as representatives of the Bank
within the community and are expected to promote the business development of
each community banking office.
The Company encourages 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. Many members of the
local management team hold leadership positions in a number of community
organizations, and will continue to volunteer for other positions in the future.
Upon the Company's entry into a new market area, it undertakes a
marketing campaign utilizing an officer calling program, and community-based
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promotions and media advertising. A primary component of management compensation
is based on loan production goals. Such campaigns emphasize each community
banking office's local responsiveness, local management team and special focus
on personalized service.
The community banking office established in a market will typically
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. The number of
financial service managers and tellers necessary will be dependent upon the
volume of business generated by that particular community banking office. 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.
The lending officers are primarily responsible for the sales and
marketing efforts of the community banking offices. Management emphasizes
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 has and will
continue to hire an appropriate number of lending officers necessary to
facilitate the development of strong customer relationships.
Management has and will continue to offer salaries to the lending
officers that are competitive with other financial institutions in each market
area. The salaries of the lending officers are comprised of base compensation
plus an incentive payment structure that is based upon the achievement of
certain loan production goals. Those goals will be reevaluated on a semi-annual
basis and paid annually as a percentage of base salary. Management of the
Company believes that such a compensation structure provides greater motivation
for participating officers.
The community banking offices are 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 4,000 to 6,000 square feet at market rates for each community
banking office. The Company is currently leasing its facilities in the Tampa,
Jacksonville, Gainesville, Ft. Lauderdale and St. Petersburg-Clearwater markets
and expects to lease its facility in the Ocala/Marion County market. To better
serve the Alachua County (Gainesville) market, future plans are to build and own
a free-standing office with traditional drive-in and lobby banking facilities.
The Company plans to continue to lease facilities in the other Identified
Markets to avoid investing significant amounts of capital in property and
facilities.
Loan Production Offices
In order to achieve its expansion strategy in a timely manner, the
Company may establish loan production offices ("LPO") as a prelude to
establishing full service community banking offices in the remaining Identified
Markets and other locations. Loan production offices would provide the same
lending products and services to the local market as the community banking
office with substantially less overhead expense. These offices would typically
be staffed with the President, Senior Lender and one administrative assistant.
By opening loan production offices, the Company can begin to generate
loans during the period it is preparing to open and staff the banking office and
reduce the overall cost of expansion into a new market. The same philosophy of
marketing, growth, customer service and incentive based compensation would be
followed in a loan production office. These offices would also establish local
boards which would be responsible for promoting the growth of the office.
The Company's first loan production office will be established in the
Ocala/Marion County market. The local President and Senior Lender have been
employed and the office is expected to open early in the second quarter of this
year. The Company expects to open a full service community banking office prior
to year end 2000.
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Market Expansion
The Company intends to expand into the largest and fastest growing
communities in Florida as well as other markets within the state which offer
strategic opportunities. In order to achieve its expansion strategy, the Company
intends to establish community banking offices through the de novo branching of
the Bank. The Company may, however, accomplish its expansion strategy by
acquiring existing banks if an opportunity for such an acquisition becomes
available. 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 a community banking office in that market either through the opening
of an LPO or a full service bank. The Company has established community banking
offices in the Tampa, Jacksonville Alachua County (Gainesville), Broward County
(Ft. Lauderdale) and Pinellas County (St. Petersburg - Clearwater) markets. In
addition, the Company has recently employed a local management team for the
Ocala/Marion County market. The Company is in the process of establishing a loan
production office in this market followed by the opening of a full service bank.
The other markets into which the Company presently intends to expand are Orlando
and the greater Palm Beach area. Management has identified these markets as
providing the most favorable opportunities for growth and intends to establish
community banking offices within these markets as soon as practicable.
Management is also considering expansion into other selected Florida
metropolitan areas.
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 focuses 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 focuses on small and medium-sized businesses,
the majority of its loan portfolio is 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 attempts to ensure that the
commercial real estate loans are made to borrowers who occupy the real estate
securing the loans or where a creditworthy tenant is involved.
Although the Company has concentrated on lending to commercial
businesses, management has attracted and will continue to attract consumer
business. Many of its retail customers are the principals of the small and
medium-sized businesses for whom a community banking office provides banking
services. Management emphasizes "relationship banking" in order that each
customer can identify and establish a comfort level with the bank officers
within a community banking office. Management intends to further 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 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 currently offers a broad array of traditional banking
products and services to its customers through the Bank. 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 "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Loans. The Bank offers a wide range of short to long-term commercial
and consumer loans. As of December 31, 1999, the Bank has established an
internal limit for loans of up to $5,000,000 to any one borrower.
Commercial. The Bank's commercial lending consists primarily of
commercial and industrial loans for the financing of accounts
receivable, inventory, property, plant and equipment. In making these
loans, the Bank manages its credit risk by actively monitoring such
measures as advance rate, cash flow, collateral value and other
appropriate credit factors.
Commercial Real Estate. The Bank offers commercial real estate loans
to developers of both commercial and residential properties. In making
these loans, the Bank manages 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."
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Residential Mortgage. The Bank's real estate loans 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. The Bank makes
mortgage loans with a variety of terms, including fixed and floating to
variable rates and a variety of maturities. These loans are made
consistent with the Bank's appraisal policy and real estate lending
policy which detail maximum loan-to-value ratios and maturities.
Management believes that these loan-to-value ratios are sufficient to
compensate for fluctuations in the real estate market to minimize the
risk of loss. Mortgage loans that do not conform to the Bank's
asset/liability mix policies are sold in the secondary markets.
Consumer Loans. The Bank's consumer loans consist primarily of
installment loans to individuals for personal, family and household
purposes. In evaluating these loans, the Bank requires 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 Bank
requires that its banking officers maintain an appropriate margin
between the loan amount and collateral value. Many of the Bank's
consumer loans are 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 Bank has issued credit cards to
certain of its customers. In determining to whom it will issue credit
cards, the Bank evaluates the borrower's level and stability of income,
past credit history and other factors. Finally, the Bank makes
additional loans which may not be classified in one of the above
categories. In making such loans, the Bank attempts to ensure that the
borrower meets its credit quality standards.
Deposits. The Bank offers a broad range of interest-bearing and
non-interest-bearing deposit accounts, including commercial and retail checking
accounts, money market accounts, individual retirement accounts, regular and
premium rate interest-bearing savings accounts and certificates of deposit with
a range of maturity date options. The primary sources of deposits are small and
medium-sized businesses and individuals. In each identified market, senior
management has the authority to set rates within specified parameters in order
to remain competitive with other financial institutions located in the
identified market. In additional to deposits within the local markets, the Bank
utilizes brokered certificates of deposits to supplement its funding needs.
Brokered CDs are sold by various investment firms which are paid a fee by the
Bank for placing the deposit. Generally, the cost of brokered deposits is
slightly higher that the cost of the same deposit in one of the local markets.
All deposits are insured by the FDIC up to the maximum amount permitted by law.
In addition, the Bank has implemented a service charge fee schedule, which is
competitive with other financial institutions in the community banking offices'
market areas, 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. The Bank offers specialized products and
services to its customers, such as lock boxes, traveler's checks and safe
deposit services.
Courier Services. The Bank offers courier services to its customers.
Courier services, which the Bank may either provide directly or through a third
party, permit the Bank to provide the convenience and personalized service its
customers require by scheduling pick-ups of deposits. The Bank currently offers
courier services only to its business customers. The Bank has received
regulatory approval for and is currently offering courier services in all of its
existing markets and expects to apply for approval in other market areas.
Telephone Banking. The Bank believes that there is a need within its
market niche for consumer and commercial telephone banking. These services allow
customers to access detailed account information, via a toll free number 24
hours a day. Management believes that telephone banking services assist their
community banking offices in retaining customers and also encourages its
customers to maintain their total banking relationships with the community
banking offices. This service is provided through the Bank's third-party
provider.
Internet Banking. In the fourth quarter of 1999, the Bank began
offering its "DirectNet" Internet banking product. This service allows customers
to access detailed account information, execute transactions, download account
information, and pay bills electronically. Management believes that this service
is particularly attractive for its commercial customers since most transactions
can be handled over the Internet rather than over the phone or in person. In
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addition, DirectNet offers the opportunity of opening deposit accounts both
within and outside of the local markets. The Bank intends to expand its Internet
banking services in the future to offer additional bank services as well as
non-traditional products and services. The DirectNet banking service is provided
by the Bank's third-party data processor.
ACH EFT Services The Bank offers various Automated Clearing House and
Electronic Funds Transfer services to its commercial customers. These services
include payroll direct deposits, payroll tax payments, electronic payments and
other funds transfers. The services are customized to meet the needs of the
customer and offer an economical alternative to paper checks and drafts.
Automatic Teller Machines ("ATMs"). Presently, management does not
expect to establish an ATM network although certain banking offices may provide
one or more ATMs in the local market. As an alternative, management has made
other financial institutions' ATMs available to its customers and offers
customers up to ten free ATM transactions per month.
Other Products and Services. The Bank intends to evaluate other
services such as trust services, brokerage and investment services, insurance,
and other permissible activities. Management expects to introduce these services
in the future as they become economically viable.
Operations of the Holding Company
From its main offices in Jacksonville and its operations center in
Tampa, the Company provides a variety of support services for each of the
community banking offices. These services include back office operations,
investment portfolio management, credit administration and review, human
resources, training and strategic planning.
The Company uses the Bank's facilities for its data processing,
operational and back office support activities. The community banking offices
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 procedure manuals and audit and compliance
procedures. Management believes that the Bank's existing operations and support
management are 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 Data Services, Inc.
("M&I") to provide its core data processing and certain customer products.
Credit Administration. The Company oversees all credit operations while
still granting local authority to each community banking office. The Company's
Chief Credit Officer is primarily responsible for maintaining a quality loan
portfolio and developing a strong credit culture throughout the entire
organization. The Chief Credit Officer is also responsible for developing and
updating the credit policy and procedures for the organization. In addition, he
works 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 is controlled through
uniform compliance to credit policy. The Company's risk-decision process is
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 consists of specific authorities
granted to the lending officers. Loans exceeding a particular lending officer's
level of authority are 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 requires active involvement with the Company's
customers and active management of the Company's portfolio. The Chief Credit
Officer reviews the Company's credit policy with the local management teams at
least annually but will review it more frequently if necessary. The results of
these reviews are then presented to the Board of Directors. The purpose of these
reviews is 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.
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Asset/Liability Management
The objective of the 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 Financial Officer of the Company 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. See "Item 7. 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 markets
into which the Company may expand is intense. The Company and the Bank 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. 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. In addition, the recently
passed Gramm-Leach-Bliley Act repeals certain sections of the Glass-Steagall Act
and amends sections of the Bank Holding Company Act. See "---Supervision and
Regulation". Although final regulations have not been promulgated, the future
effect of these changes in regulations could be far ranging in their impact on
traditional banking activities. Mergers, partnerships and acquisitions between
banks and other financial and service companies could dramatically effect
competition within the Bank's markets.
There can be no assurance that the United States Congress, 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. 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 "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Employees
The Company presently employs ten persons on a full-time basis and one
person on a part-time basis. The Company will hire additional persons as needed
to support its growth.
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The Bank presently employs 69 persons on a full-time basis and 6
persons on a part-time basis, including 32 officers. The Bank will hire
additional persons as needed, including additional tellers and financial service
representatives.
Supervision and Regulation
The Company and the Bank operate in a highly regulated environment, and
their business activities will be governed by statute, regulation, and
administrative policies. The business activities of the Company and the Bank are
closely supervised by a number of regulatory agencies, including the Federal
Reserve Board, the Office of the Comptroller of the Currency (the "OCC"), the
Florida Department of Banking and Finance (the "Florida Banking Department") (to
a limited extent) and the FDIC.
The Company is regulated by the Federal Reserve Board under the federal
Bank Holding Company Act, 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, and 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 a subsidiary
bank at a time when, absent such Federal Reserve Board policy, the Company may
not deem it advisable to provide such assistance.
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994, 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 other restrictions. In addition, adequately capitalized and managed bank
holding companies may consolidate their multi-state bank operations into a
single bank subsidiary and may branch interstate through acquisitions unless an
individual state has elected to prohibit out-of-state banks from operating
interstate branches within its territory. De novo branching by an out-of-state
bank is lawful only if it is expressly permitted by the laws of the host state.
Entry into Florida is permitted only by acquisition of existing banks. The
authority of a bank to establish and operate branches within a state remains
subject to applicable state branching laws.
Until March of 2000, a bank holding company was generally prohibited
from acquiring control of any company which was not a bank and from engaging in
any business other than the business of banking or managing and controlling
banks. In April 1997, the Federal Reserve Board revised and expanded the list of
permissible non-banking activities in which a bank holding company could engage,
however limitations continued to exist under certain laws and regulations. The
recently passed Gramm-Leach-Bliley Act repeals certain regulations pertaining to
Bank Holding Companies and eliminates many of the previous prohibitions.
Specifically, Title I of the Gramm-Leach-Bliley Act repeals sections 20 and 32
of the Glass-Steagall Act (12 U.S.C. ss.ss. 377 and 78, respectively) and is
intended to facilitate affiliations among banks, securities firms, insurance
firms, and other financial companies. To further this goal, the
Gramm-Leach-Bliley Act amends section 4 of the Bank Holding Company Act (12
U.S.C.ss. 1843) ("BHC Act") to authorize bank holding companies and foreign
banks that qualify as "financial holding companies" to engage in securities,
insurance and other activities that are financial in nature or incidental to a
financial activity. The activities of bank holding companies that are not
financial holding companies would continue to be limited to activities
authorized currently under the BHC Act, such as activities -that the Federal
Reserve Board previously has determined in regulations and orders issued under
section 4(c)(8) of the BHC Act to be closely related to banking and permissible
for bank holding companies.
The Gramm-Leach-Bliley Act defines a financial holding company as a
bank holding company that meets certain eligibility requirements. In order for a
bank holding company to become a financial holding company and be eligible to
engage in the new activities authorized under the Gramm-Leach-Bliley Act, the
Act requires that all depository institutions controlled by the bank holding
company be well capitalized and well managed.
To become a financial holding company, the Gramm-Leach-Bliley Act
requires a bank holding company to submit to the Federal Reserve Board a
declaration that the company elects to be a financial holding company and a
certification that all of the depository institutions controlled by the company
are well capitalized and well managed. The Act also provides that a Bank holding
company's election to become a financial holding company will not be effective
if the Board finds that, as of the date the company submits its election to the
Board, not all of the insured depository institutions controlled by the company
have achieved at least a "satisfactory" rating at the most recent examination of
the institution under the Community Reinvestment Act (12 U.S.C.ss. 2903 et seq.)
8
<PAGE>
The Gramm-Leach-Bliley Act grants the Federal Reserve Board discretion
to impose imitations on the conduct or activities of any financial holding
company that controls a depository institution that does not remain both well
capitalized and well managed following the company's elections to be a financial
holding company.
As of the date of this report the Federal Reserve Board has issued
interim rules relating to the Gramm-Leach-Bliley Act which may be amended prior
to final adoption. Final rules by the Federal Reserve Board and the Office of
the Comptroller of the Currency could substantially affect the Company's future
business strategies, including its products and services. When final rules are
promulgated, the Company plans to submit the necessary documentation to become a
Financial Holding Company. The Company currently meets the requirements of the
interim rules, however there is no assurance that it will meet the requirements
of the final rules or will continue to meet these requirements on an ongoing
basis.
The State of Florida has adopted an interstate banking statute that
allows banks to branch interstate through mergers, consolidations and
acquisitions. Establishment of de novo bank branches in Florida by out-of-state
financial institutions is not permitted under Florida law.
The Company is also regulated by the Florida Banking Department under
the Florida Banking 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
Florida bank subsidiaries of the bank holding company to be acquired have been
in existence and continuously operating, on the date of the 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 is also subject to the Florida banking and usury laws
restricting the amount of interest which it may charge in making loans or other
extensions of credit. In addition, 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.
A national bank may grant loans and extensions of credit to such person up to an
additional 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 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.
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 with the banks owned by the
holding company. The OCC's risk capital guidelines apply directly to national
banks regardless of whether they are a subsidiary of a bank holding company.
Both agencies' requirements (which are substantially similar) provide that
banking organizations must have capital equivalent to at least 8% of
risk-weighted assets. The risk weights assigned to assets are based primarily on
credit risks. Depending upon the risk of a particular asset, it is assigned to a
risk category. For example, securities with an unconditional guarantee by the
United States government are assigned to the lowest risk category, while a risk
weight of 50% is assigned to loans secured by owner-occupied one to four family
residential mortgages, provided that certain conditions are met. The aggregate
amount of assets assigned to each risk category is multiplied by the risk weight
assigned to that category to determine the weighted values, which are added
together to determine total risk-weighted assets. Both the Federal Reserve Board
and the OCC have also implemented new minimum capital leverage ratios to be used
9
<PAGE>
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 at least 3% "Tier 1" capital to
total weighted risk assets (net of goodwill). Tier 1 capital includes common
shareholders equity, non-cumulative perpetual preferred stock and related
surplus, and minority interests in the equity accounts of consolidated
subsidiaries.
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 risks, excellent control systems high asset quality, high
liquidity, good earnings and in general, must be considered strong banking
organizations, rated composite 1 under the CAMELS 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'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") are retained as a part of Tier 1 capital. The OCC has modified the
list of qualifying intangibles, currently including only purchased credit card
relationships and mortgage and non-mortgage servicing assets. 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 50% of
total Tier 1 capital. The OCC has amended its guidelines to increase the
limitation on such qualifying intangibles from 50% to 100% of Tier 1 capital, of
which no more than 25% may consist of purchased credit card relationships and
non-mortgage servicing assets.
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 Fannie Mae, Freddie Mac and
Farmer Mac 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.
The risk-based capital guidelines of the OCC, the Federal Reserve Board
and the FDIC explicitly include provisions a bank's exposure to declines in the
economic value of its capital due to changes in interest rates 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. 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 to bankers, 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 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.
The Comptroller, the Federal Reserve Board and the FDIC recently added
a provision to the risk-based capital guidelines that supplements and modifies
the usual risk-based capital calculations to ensure that institutions with
significant exposure to market risk maintain adequate capital to support that
exposure. Market risk is the potential loss to an institution resulting from
changes in market prices. The modifications are intended to address two types of
market risk: general market risk, which includes changes in general interest
rates, equity prices, exchange rates, or commodity prices, and specific market
risk, which includes particular risks faced by the individual institution, such
as event and default risks. The provision defines a new category of capital,
Tier 3, which includes certain types of subordinated debt. The provision
automatically applies only to those institutions whose trading activity, on a
worldwide consolidated basis, equals either (i) 10% or more of total assets or
(ii) $1 billion or more, although the agencies may apply the provision's
requirements to any institution for which application of the new standard is
deemed necessary or appropriate for safe banking practices. For institutions to
which the modifications apply, Tier 3 capital may not be included in the
calculation rendering the 8% credit risk ratio; the sum of Tier 2 and Tier 3
capital may not exceed 100% of Tier 1 capital; and Tier 3 capital is used in
both the numerator and denominator of the normal risk-based capital ratio
calculation to account for the estimated maximum amount that the value of all
positions in the institution's trading account, as well as all foreign exchange
and commodity positions, could decline within certain parameters set forth in a
model defined by the statute. Furthermore, beginning no later than January 1,
10
<PAGE>
1999, covered institutions must "backtest," comparing the actual net trading
profit or loss for each of its most recent 250 days against the corresponding
measures generated by the statutory model. Once per quarter, the institution
must identify the number of times the actual net trading loss exceeded the
corresponding measure and must then apply a statutory multiplication factor
based on that number for the next quarter's capital charge for market risk.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (the
"FDICIA"), enacted on December 19, 1991, provides for a number of reforms
relating to the safety and soundness of the deposit insurance system,
supervision of domestic and foreign depository institutions and improvement of
accounting standards. One aspect of the FDICIA involves the development of a
regulatory monitoring system requiring prompt 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.
The FDICIA also provides that banks have to meet new safety and
soundness standards. 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, interest rate exposure, asset growth, and compensation, fees and
benefits.
Both the capital standards and the safety and soundness standards which
the FDICIA seeks to implement are designed to bolster and protect the deposit
insurance fund.
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>
Total Risk-Based Tier 1 Risk-Based Tier 1
Capital Ratio Capital Ratio Leverage Ratio
---------------- ----------------- --------------
<S> <C> <C> <C> <C>
Well Capitalized(1)...................... 10.0% 6.0% 5.0%
Adequately Capitalized(1)................ 8.0% 4.0% 4.0%(2)
Undercapitalized(3)...................... < 8.0% < 4.0% < 4.0%(4)
Significantly Undercapitalized(3)........ < 6.0% < 3.0% < 3.0%
Critically Undercapitalized.............. - - < 2.0%(5)
- ---------------------------
<FN>
(1) An institution must meet all three minimums.
(2) 3.0% for composite 1-rated institutions subject to appropriate federal
banking agency guidelines.
(3) An institution falls into this category if it is below the specified capital
level for any of the three capital measures.
(4) Less than 3.0% for composite 1-rated institutions, subject to appropriate
federal banking agency guidelines.
(5) Ratio of tangible equity to total assets.
</FN>
</TABLE>
As a national bank, the Bank is subject to examination and review by
the OCC. This examination is typically completed on-site at least every eighteen
months and is subject to off-site review at call. The OCC, at will, can access
quarterly reports of condition, as well as such additional reports as may be
required by the national banking laws.
11
<PAGE>
As a bank holding company, the Company is required to file with the
Federal Reserve Board an annual report of its operations at the end of each
fiscal year and such additional information as the Federal Reserve Board may
require pursuant to the Act. The Federal Reserve Board may also make
examinations of the Company and each of its subsidiaries.
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.
Item 2. Properties.
The Company's occupies 3,375 sq. ft. of leased space for its main
offices located at 5210 Belfort Road, Suite 310, Concourse II, Jacksonville,
Florida 32256. The Bank operates five banking offices and an operations center
in the following locations:
Florida Bank, N.A. - Alachua County (1)
3600 N.W. 43rd Street, Suite 1A
Gainesville, Florida 32606
Facilities: Leased - 2,710 sq. ft.
Florida Bank, N.A. - Jacksonville
5210 Belfort Road, Suite 140
Jacksonville, Florida 32256
Facilities: Leased 6001 sq. ft.
Florida Bank, N.A. - Tampa (2)
100 West Kennedy Boulevard
Tampa, Florida 33602
Facilities: Leased 12,573 sq. ft.
Florida Bank, N.A. - Broward County
600 North Pine Island Rd., Suite 350
Plantation, Florida 33324
Facilities: Leased 4,893 sq. ft.
Florida Bank, N.A. - Pinellas County
8250 Bryan Dairy Road
Suite 150
Largo, Florida 33777
Facilities: Leased 5,428 sq. ft.
Florida Bank, N.A. - Operations Center
6301 Benjamin Road
Suite 105
Tampa, Florida 33634
Facilities: Leased 5,056 sq. ft.
(1) The Alachua County Bank has contracted for the purchase and construction of
a 7,581 sq. ft. free-standing banking office to be located in a new
development known as the Florida Bank Office Park. The facility will be
located near the intersection of Newberry Road and NW 43rd Street in
Gainesville. A portion of the facility may be subleased until needed for
future expansion by the Bank.
(2) Approximately 5,546 sq. ft. of the Tampa Bank facility has been subleased
to a local law firm. The term of the sublease expires on June 30, 2003 in
conjunction with the expiration of Bank's lease.
12
<PAGE>
This company is in the process of identifying a location for the
establishment of the Ocala/Marion County loan production office. It is
anticipated that this office will occupy approximately 1,500 square feet of
leased space prior to the opening of the full service community banking office.
Item 3. Legal Proceedings.
- ------ -----------------
There are no material pending legal proceedings to which the Company or
the Bank is a party or of which any of their properties are subject, nor are
there material proceedings known to the Company or the Bank to be contemplated
by any governmental authority.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------ ---------------------------------------------------
No matter was submitted during the fourth quarter ended December 31,
1999 to a vote of security holders of the Company.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
- ------ ---------------------------------------------------------------------
The Company's Common Stock is traded on the Nasdaq National Market
under the symbol "FLBK." The Common Stock began trading on the Nasdaq National
Market on July 30, 1998. The following table sets forth for the periods
indicated the quarterly high and low bid quotation per share as reported by the
Nasdaq National Market. These quotations also reflect inter-dealer prices
without retail mark-ups, mark-downs, or commissions and may not necessarily
represent actual transactions.
High Low
Fiscal year ended December 31, 1999
First Quarter $8.688 $6.813
Second Quarter 43.000 7.500
Third Quarter 11.125 6.625
Fourth Quarter 10.000 5.625
As of March 15, 2000, there were approximately 200 holders of record of
the Common Stock. Management of the Company believes that there are in excess of
4,000 beneficial holders of its Common Stock.
The Company has never declared or paid any dividends on its capital
stock. The Company currently anticipates that all of its earnings will be
retained for development of the Company's business, and does not anticipate
paying any cash dividends in the foreseeable future. Future cash dividends, if
any, will be at the discretion of the Company's Board of Directors and will
depend upon, among other things, the Company's future earnings, operations,
capital requirements and surplus, general financial condition, contractual
restrictions, and such other factors as the Board of Directors may deem
relevant.
In September of 1999, the Company's Board of Directors authorized a
stock repurchase plan covering up to ten percent (10%) of the outstanding shares
of common stock (approximately 585,000 shares). The share repurchase plan
authorizes the purchase of shares at any price below the then current book value
per share. As of December 31, 1999 the Company has repurchased 135,100 shares
for a total cost of $858,843.85 or an average cost of $6.36 per share.
Item 6. Selected Financial Data.
- ------ -----------------------
SELECTED FINANCIAL DATA
The following tables set forth selected financial data of the Company for the
periods indicated. Florida Banks, Inc. (the "Company") was incorporated on
October 15, 1997 for the purpose of becoming a bank holding company and
13
<PAGE>
acquiring First National Bank of Tampa (the "Bank"). On August 4, 1998, the
Company completed its initial public offering and its merger (the "Merger") with
the Bank pursuant to which the Bank was merged with and into Florida Bank No. 1,
N.A., a wholly-owned subsidiary of the Company, and renamed Florida Bank, N.A.
Shareholders of the Bank received 1,375,000 shares of common stock of the
Company valued at $13,750,000. The Merger was considered a reverse acquisition
for accounting purposes, with the Bank identified as the accounting acquiror.
The Merger has been accounted for as a purchase, but no goodwill has been
recorded in the Merger and the financial statements of the Bank have become the
historical financial statements of the Company.
The number of shares of common stock, the par value of common stock and per
share amounts have been restated to reflect the shares exchanged in the Merger.
The selected financial data of the Company as of December 31, 1999, 1998, 1997,
1996 and 1995 and for each of the years then ended are derived from the
financial statements of the Company, which have been audited by Deloitte &
Touche LLP, independent auditors. The selected financial data of the Company as
of December 31, 1996 and 1995 and for the year ended December 31, 1995 are
derived from the financial statements of the Company, which were audited by
other independent certified public accountants. 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, and financial and other information included
elsewhere herein.
<TABLE>
Year Ended December 31,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
Summary Income Statement:
<S> <C> <C> <C> <C> <C>
Interest income $ 11,184 $ 5,432 $ 4,302 $ 3,614 $ 2,937
Interest expense 4,696 2,436 2,296 1,872 1,474
------ ------ ------ ------ ------
Net interest income 6,487 2,996 2,006 1,742 1,463
Provision (benefit) for loan losses 1,610 629 60 60 (138)
------ ------ ------ ------ ------
Net interest income after
provision for loan losses 4,877 2,367 1,946 1,682 1,602
Noninterest income 542 594 504 517 375
Noninterest expense (1) 8,342 7,903 1,842 1,598 1,621
------ ----- ------ ------ ------
Income (loss) before provision for
income taxes (2,923) (4,943) 608 601 356
(Benefit) provision for income taxes (2) (1,076) (350) 232 217 -
------ ------ ------ ------ ------
Net income (loss) $ (1,847) $(4,593) $ 376 $ 384 $ 356
====== ====== ====== ====== ======
Earnings (loss) per common share(3):
Basic $ (0.32) $ (1.46) $ 0.31 $ 0.32 $ 0.29
Diluted (0.32) (1.46) 0.29 0.30 0.28
<FN>
(1) Noninterest expense for the Company for 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.
(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 Company's quasi-reorganization) have been reflected as increases to
additional paid-in capital.
(3) The earnings per share amounts have been restated to reflect the shares
exchanged in the Merger.
</FN>
</TABLE>
14
<PAGE>
<TABLE>
At December 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------ ------------ ------------ -----------
Summary Balance Sheet Date:
<S> <C> <C> <C> <C>
Investment securities $ 28,511 $22,242 $10,765 $ 8,551 $ 6,670
Loans, net of deferred loan fees 157,517 67,131 33,720 31,627 25,571
Earning assets 205,898 106,022 54,731 52,588 38,801
Total assets 218,142 113,566 60,396 55,505 41,748
Noninterest-bearing deposits 22,036 11,840 6,442 8,122 5,719
Total deposits 159,106 64,621 45,460 45,526 34,633
Other borrowed funds 18,279 5,718 8,317 6,480 4,212
Total shareholders' equity 39,235 42,588 6,314 3,269 2,678
Performance Ratios:
Net interest margin (1) 4.57 % 4.28 % 3.89 % 4.05 % 4.13%
Efficiency ratio (2) (118.68) (220.18) 73.39 70.76 88.16
Return on average assets (1.07) (5.42) 0.70 0.85 0.95
Return on average equity (3.12) (16.54) 10.62 13.18 14.85
Asset Quality Ratios:
Allowance for loan losses to total loans 1.18 % 1.60 % 1.42 % 1.36 % 1.28%
Non-performing loans to total loans (3) 1.46 2.80 - - -
Net charge-offs (recoveries) to average loans 0.80 0.09 0.03 (0.11) (0.07)
Capital and Liquidity Ratios:
Total capital to risk-weighted assets 18.19 % 63.25 % 14.29 % 12.26 % 12.42
Tier 1 capital to risk-weighted assets 17.29 61.59 13.00 11.01 11.17
Tier 1 capital to average assets 20.01 36.44 7.42 6.42 6.64
Average loans to average deposits 108.2 81.04 75.77 75.83 67.26
Average equity to average total assets 34.30 32.8 6.54 6.45 6.40
- ------------
<FN>
(1) Computed by dividing net interest income by average earning assets.
(2) Computed by dividing noninterest expense by the sum of net interest income and noninterest income.
(3) The Bank had no non-performing loans at December 31, 1997, 1996 and 1995.
</FN>
</TABLE>
15
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
- ------ -----------------------------------------------------------------------
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This Report contains statements that constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These statements appear in a
number of places in this Report and include statements regarding the intent,
belief or current expectations of the Company, its directors or its officers
with respect to, among other things: (i) potential acquisitions by the Company;
(ii) trends affecting the Company's financial condition or results of
operations; and (iii) the Company's business and growth strategies. Investors
are cautioned that any such forward-looking statements are not guarantees of
future performance and involve risks and uncertainties, and that actual results
may differ materially from those projected in the forward-looking statements as
a result of various factors. These factors include the following: (a)
competitive pressure in the banking industry; (b) changes in the interest rate
environment; (c) the fact that general economic conditions may be less favorable
than we expect; and (d) changes in our regulatory environment. The accompanying
information contained in this Report, including, without limitation, the
information set forth under the headings "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business," as well as in
the Company's Securities Act filings, identifies important additional factors
that could adversely affect actual results and performance. Prospective
investors are urged to carefully consider such factors.
All forward-looking statements attributable to the Company are
expressly qualified in their entirety by the foregoing cautionary statements.
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Company (including the notes thereto)
contained elsewhere in this Report. The following discussion compares results of
operations for the years ended December 31, 1999, 1998 and 1997.
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 with First
National Bank of Tampa (the "Merger"), the Company had no operating activities.
The Merger was consummated immediately prior to the closing of the Company's
initial public offering (the "Offering") on August 4, 1998. After the
consummation of the Merger, the Bank's shareholders owned 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 was accounted
for as if the Bank had acquired the Company, the financial statements of the
Bank have become the historical financial statements of the Company and no
goodwill was recorded as a result of the Merger. In addition, the operating
results of the Company incurred prior to the Merger, which consisted of
organizational and start-up costs, are not included in the consolidated
operating results.
The Company 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, the
Management's Discussion and Analysis of Results of Operations of the Company as
of December 31, 1997 includes only information relevant to the Bank. Discussions
and financial information for December 31, 1999 and 1998 and for the period then
ended, includes consolidated financial data of the Company and Bank. As the
Company was not formed until 1997, the term "Company" used throughout
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" refers to the Company and the Bank for the period ended December 31,
1999 and 1998 and for the Bank only for the period ended December 31, 1997 and
prior periods. Unless otherwise indicated, the "Bank" refers to Florida Bank,
N.A., formerly First National Bank of Tampa.
Summary
The Company's net loss for 1999 decreased $2.8 million to a loss of
$1.8 million or 59.8% from $4.6 million in 1998. Net income for 1998 decreased
$5.0 million to a net loss of $4.6 million from a net income of $376,000 in
1997. Basic and diluted earnings per share was a loss of $.32 for 1999 as
compared to basic and diluted earnings of $1.46 for 1998 and basic and diluted
earnings of $.31 and $.29, respectively, for 1997. Diluted earnings per share
reflects the dilutive effect of outstanding options and has been adjusted for
the Offering and the exchange of shares related to the consummation of the
Merger.
16
<PAGE>
The decrease in net income from 1998 to 1999 was primarily attributable
to an increase in net interest income, offset by increases in the provision for
loan losses and noninterest expenses. Net interest income increased to $6.5
million in 1999 from $3.0 million in 1998, an increase of 116.5%. The provision
for loan losses increased by 156.0% to $1.6 million in 1999 from $629,000 in
1998. Noninterest income decreased 8.7% to $542,000 in 1999 from $594,000 in
1998. Noninterest expense increased to $8.3 million in 1999 from $7.9 million in
1998, an increase of 5.6%. The provision for income taxes increased to $1.1
million in 1999 from $350,000 in 1998, an increase of 207.4%.
The decrease in net income from 1997 to 1998 primarily resulted from
expenses associated with the opening of the Jacksonville and Gainesville
offices, expenses related to the Merger, noncash compensation and financing
costs of $3.9 million or $1.26 per share related to the February 3, 1998 sale of
common stock and warrants included in the units sold to foreign investors and
the February 11, 1998 sale of the 297,000 shares of common stock to 14 officers,
directors and consultants and an increase in the provision for loan losses, all
of which were partially offset by an increase in net interest income. The
Company recorded such non-cash, non-recurring compensation expense and financing
costs measured as the difference between the fair value of common stock, based
upon the initial public offering price of $10.00 per share, and the sale price
or allocated proceeds of $.01 per share. These non-cash charges were recorded
with a corresponding increase in additional paid-in capital and therefore had no
effect on the Company's total shareholders' equity or book value. Net interest
income increased to $3.0 million in 1998 from $2.0 million in 1997, an increase
of 49.3%, reflecting the investment of the proceeds from the Offering. The
provision for loan losses increased to $629,000 in 1998 from $60,000 in 1997, an
increase of 948.3%. Noninterest expenses increased to $7.9 million in 1998 from
$1.8 million in 1997, an increase of 329.0%.
Total assets at December 31, 1999 were $218.1 million, an increase of
$104.6 million, or 92.1%, over the prior year. Total loans increased 134.2% to
$157.6 million at December 31, 1999, from $67.3 million at December 31, 1998.
Total deposits increased $94.5 million, or 146.2%, to $159.1 million at December
31, 1999 from $64.6 million at December 31, 1998. Shareholders' equity decreased
to $39.2 million at December 31, 1999 from $42.6 million at December 31, 1998.
These increases and decrease were attributable to the opening of the Pinellas
and Broward branches and a full year of start-up operations for the Gainesville
and Jacksonville branches.
The earnings performance of the Company is reflected in the
calculations of net income (loss) as a percentage of average total assets
("Return on Average Assets") and net income (loss) as a percentage of average
shareholders' equity ("Return on Average Equity"). During 1999, the Return on
Average Assets and Return on Average Equity were (1.07%) and (3.12%)
respectively, compared to (5.43%) and (16.54%), respectively, for 1998. The
Company's ratio of total equity to total assets decreased to 18.0% at December
31, 1999 from 37.5% at December 31, 1998, primarily as a result of growth from
the new branch operations.
17
<PAGE>
Results of Operations
Net Interest Income
The following table sets forth, for the periods indicated, certain
information related to the Company'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>
Year Ended December 31,
------------------------------------------------------------------------
1999 1998
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- -------- ------ ------- -------- ------
ASSETS (Dollars in thousands)
Earning assets:
<S> <C> <C> <C> <C> <C> <C> <C>
Loans, net of deferred loan fees (1 $103,492 $9,075 8.77% $39,917 $3,826 9.58%
Investment securities(2) 26,670 1,518 5.69 15,766 875 5.55
Repurchase agreements 6,420 333 5.19 5,342 277 5.19
Federal funds sold 5,512 257 4.66 9,033 454 5.03
------- ------ ------- -----
Total earning assets 142,094 11,183 7.87 70,058 5,432 7.75
Cash and due from banks 5,448 ------ 4,588 -----
Premises and equipment, net 1,428 627
Other assets 24,591 9,882
Allowance for loan losses (1,197) (550)
------- ------
Total assets $172,364 $84,605
======= ======
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits $4,912 99 2.02% $2,956 75 2.54%
Savings deposits 24,427 1,153 4.72 7,353 347 4.72
Money market deposits 1,674 37 2.21 1,417 35 2.47
Certificates of deposit of $100,000 or more 21,165 1,166 5.51 10,548 579 5.49
Other time deposits 28,723 1,598 5.56 18,161 1,071 5.90
Repurchase agreements 12,510 553 4.42 5,237 231 4.41
Other borrowed funds 1,657 90 5.43 1,641 98 5.97
------- ----- ------ -----
Total interest-bearing liabilities 95,068 4,696 4.94 47,313 2,436 5.15
Noninterest-bearing demand deposits 14,727 ----- 8,818 -----
Other liabilities 3,445 711
Shareholders' equity 59,124 27,763
------- ------
Total liabilities and shareholders' equity $172,364 $84,605
======= =======
Net interest income $6,487 $2,996
===== =====
Net interest spread 2.93% 2.60%
Net interest margin 4.57% 4.28%
- --------------------------
<FN>
(1) At December 31, 1999 and 1998, $1.1 million and $725,000 of loans,
respectively were accounted for on a non-accrual basis.
(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.
</FN>
</TABLE>
18
<PAGE>
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 Company had no
investments in tax-exempt securities during 1999, 1998 and 1997. Accordingly, no
adjustment is necessary to facilitate comparisons on a taxable equivalent basis.
Net interest income increased 116.6% to $6.5 million in 1999 from $3.0
million in 1998. This increase in net interest income is attributable to growth
in loan volume due to new branch operations, and is partially offset by the
growth in savings deposits and repurchase agreements. 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 increased 29 basis points to 4.57% in 1999 on average
earning assets of $142.1 million from 4.28% in 1998 on average earning assets of
$70.1 million. This increase is primarily due to the significant increase in
average earning assets from the operations of the new branches and to an overall
decrease in interest rates on interest-bearing liabilities. There was a 12 basis
point increase in the average yield on earning assets to 7.87% in 1999 from
7.75% in 1998 and a 21 basis point decrease in the average rate paid on
interest-bearing liabilities to 4.94% in 1999 from 5.15% in 1998. The increased
yield on earning assets was primarily the result of slightly higher market rates
on loans and investment securities. The decrease in the cost of interest-bearing
liabilities is attributable to decreases in rates on interest-bearing demand
deposits, other time deposits, money market accounts and other borrowed funds.
Net interest income increased 49.3% to $3.0 million in 1998 from $2.0
million in 1997. This increase in net interest income is attributable to growth
in average earning assets due to the investment of the proceeds from the
Offering, partially offset by the growth in savings deposits and repurchase
agreements. The net interest margin increased 39 basis points to 4.28% in 1998
on average earning assets of $70.1 million from 3.89% in 1997 on average earning
assets of $51.6 million. This increase is primarily due to the significant
increase in average earning assets from the investment of proceeds from the
Offering. The effect of the investment of the proceeds from the Offering more
than offset a 58 basis point decrease in the average yield on earning assets to
7.75% in 1998 from 8.33% in 1997 and a one basis point decrease in the average
rate paid on interest-bearing liabilities to 5.15% in 1998 from 5.16% in 1997.
The decreased yield on earning assets was primarily the result of lower market
rates on loans and investment securities. The decrease in the cost of
interest-bearing liabilities is attributable to minimal decreases in rates on
time deposits, money market and savings deposits and repurchase agreements.
The net interest spread increased 33 basis points to 2.93% in 1999 from
2.60% in 1998, as the yield on average earning assets increased 12 basis points
while the cost of interest-bearing liabilities decreased 21 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 57 basis points to 2.60% in 1998 from
3.17% in 1997, as the yield on average earning assets decreased 58 basis points
while the cost of interest-bearing liabilities increased one basis point.
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 Company 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 Company adjusts the rates
and terms of its interest-bearing liabilities in response to general market rate
changes and the competitive environment. The Company 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 Company will continue to manage its
balance sheet and its interest rate risk based on changing market interest rate
conditions.
19
<PAGE>
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 1998 and 1999 and
between 1997 and 1998. The effect of a change in average balance has been
determined by applying the average rate in 1998 and 1997 to the change in
average balance from 1998 to 1999 and from 1997 to 1998, respectively. The
effect of change in rate has been determined by applying the average balance in
1998 and 1997 to the change in the average rate from 1998 to 1999 and from 1997
to 1998, respectively. 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>
Year Ended December 31, 1999 Year Ended December 31, 1998
Compared With Compared With
December 31, 1998 December 31, 1997
Increase (Decrease) Due to: Increase (Decrease) Due to:
Volume Yield/Rate Total Volume Yield/Rate Total
------ ---------- ----- ------ ---------- -----
Interest Earned On:
<S> <C> <C> <C> <C> <C> <C>
Taxable securities .............. $ 623,000 $ 21,000 $ 644,000 $ 322,000 $ (31,000) $291,000
Federal funds sold ............. (197,000) (197,000) 72,000 17,000 89,000
Net loans ...................... 5,543,000 (294,000) 5,249,000 544,000 (71,000) 473,000
Repurchase agreements .......... 89,000 (33,000) 56,000 277,000 N/A 277,000
--------- --------- --------- --------- -------- ---------
Total earning assets .......... 6,058,000 (306,000) 5,752,000 1,215,000 (85,000) 1,130,000
--------- --------- --------- --------- -------- ---------
Interest Paid On:
Money market and
interest-bearing, demand 32,000 (5,000) 27,000 (1,000) (1,000)
Savings deposits ............... 1,122,000 4,000 1,126,000 78,000 (3,000) 75,000
Time deposits .................. 1,171,000 (58,000) 1,113,000 (46,000) 4,000 (42,000)
Repurchase agreements .......... 320,000 2,000 322,000 56,000 (3,000) 53,000
Other borrowed funds ........... 1,000 (9,000) (8,000) 38,000 18,000 56,000
--------- --------- --------- --------- ------- --------
Total interest-bearing........ 2,646,000 (66,000) 2,580,000 126,000 16,000 142,000
--------- --------- --------- --------- -------- --------
Net interest income .......... $8,704,000 $ (372,000) $8,332,000 S1,089,000 $(101,000) $988,000
========= ========= ========= ========= ======== ========
</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 1999 was $1.6
million as compared to $629,000 for 1998. The increase in the provision from
1998 to 1999 was generally due to the increases in the amount of loans
outstanding.
The provision for loan losses charged to operations in 1998 was
$629,000 as compared to $60,000 for 1997. Management's analysis of the allowance
for loan losses prepared as of December 31, 1998 indicated the need for a
specific reserve in the amount of $529,000 for an impaired credit in the Tampa
market. The remaining $100,000 provision in 1998 was generally due to increases
in the amount of loans outstanding. For additional information regarding
provision for loan losses, charge-offs and allowance for loan losses, see "--
Financial Condition--Asset Quality."
20
<PAGE>
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.
Noninterest income decreased 8.7% to $542,000 in 1999 from $594,000 in
1998. This change resulted from an increase in the amount of service fees on
deposit accounts offset by decreased gains on the sale of the guaranteed portion
of SBA loans and available for sale securities. Service fees on deposit accounts
increased 18.9% to $455,000 in 1999 from $382,000 in 1998 due to an increase in
insufficient funds and returned check fees and increased volume in the number of
wire transfers transacted for customers. Gains on sale of the guaranteed portion
of SBA loans decreased 98.9% to $1,000 in 1999 from $106,000 in 1998 due to a
decrease in the principal amount of such loans sold. There were no sales of SBA
loans during 1999, compared to $1.2 million of loans sold in 1998, all of which
were originated in 1998. The Company substantially reduced its SBA lending
operations in 1998 due to the cost of maintaining this specialized lending
practice and due to recent charge-offs in the unguaranteed portion of the SBA
loans that were retained by the Bank. Other income, which includes various
recurring noninterest income items such as travelers checks fees and safe
deposit box fees, decreased 7.1% to $90,000 in 1999 from $98,000 in 1998.
Noninterest income increased 17.8% to $594,000 in 1998 from $504,000 in
1997. This change resulted from an increase in the amount of service fees on
deposit accounts and increased gains on the sale of the guaranteed portion of
SBA loans. Service fees on deposit accounts increased 17.8% to $382,000 in 1998
from $325,000 in 1997 due to an increase in insufficient funds and returned
check fees and increased volume in the number of wire transfers transacted for
customers. Gains on sale of the guaranteed portion of SBA loans increased 11.4%
to $106,000 in 1998 from $95,000 in 1997 due to an increase in the principal
amount of such loans sold. During 1998, the Company sold $1.2 million principal
balance of SBA loans all of which were originated in 1998, compared to $1.1
million of loans sold in 1997, of which $1.0 million were originated in 1997.
Other income, which includes various recurring noninterest income items such as
travelers checks fees and safe deposit box fees, increased 27.0% to $98,000 in
1998 from $76,000 in 1997.
The following table presents an analysis of the noninterest income for
the periods indicated with respect to each major category of noninterest income:
<TABLE>
% Change % Change
1999 1998 1997 1999-1998 1998-1997
---- ---- ---- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Service fees .................................. $455 $382 $325 18.9% 17.8%
Gain on sale of loans ......................... 1 106 95 (98.9) 11.4
(Loss) gain on sale of available for sale
investment securities, net .................... (4) 8 8 (152.1) N/A
Other ......................................... 90 98 76 (7.1) 27.0
--- --- ---
Total ......................................... $542 $594 $504 (8.7%) 17.8%
=== === ===
</TABLE>
21
<PAGE>
Noninterest Expense
Noninterest expense increased 5.6% to $8.3 million in 1999 from $7.9
million in 1998. These increases are primarily attributable to increases in
personnel, occupancy, data processing and other expenses relating to opening of
the Broward County and Pinellas County banking offices. Salaries and benefits
decreased 1.7% to $5.3 million in 1999 from $5.4 million in 1998. This decrease
is attributable to a non-cash, non-recurring charge of approximately $3 million
in 1998 related to the sale of stock and warrants to the founders of the Company
and foreign investors and offset by increases in the number of personnel at the
holding company level and for the Broward and Pinellas County offices. Occupancy
and equipment expense increased 95.7% to $951,000 in 1999 from $486,000 in 1998
primarily as a result of the addition of the Broward and Pinellas County banking
offices. Data processing expense increased 86.6% to $265,000 in 1999 from
$142,000 in 1998 which is primarily attributable to the growth in loan and
deposit transactions and the addition of new services. Financing costs for 1998
represents a non-cash non-recurring charge of $972,000 for financing costs
relating to the issuance of common stock and warrants to foreign investors.
Other operating expenses increased 98.9% to $1.8 million in 1999 from $923,000
in 1998. This increase is attributable primarily to an increase of $40,000 in
marketing and advertising expenses, an increase of $106,000 in legal and
accounting fees associated with the growth of the Bank and the opening of new
banking offices, an increase of $138,000 in communications expense associated
with the network expansion at the holding company and the openings of new
banking offices and an increase of $109,000 in stationary, printing and supplies
associated with the opening of the Broward and Pinellas County banking offices.
Noninterest expense increased 329.0% to $7.9 million in 1998 from $1.8
million in 1997. Management attributes this increase to the $3.9 million
non-cash compensation and financing costs, the costs of the Merger and increases
in personnel expense, occupancy expense and data processing expense relating to
opening the Jacksonville and Gainesville banking offices. Salaries and benefits
increased 438.3% to $5.4 million in 1998 from $999,000 in 1997. This increase is
attributable to a non-cash, non-recurring charge of approximately $3 million
related to the sale of stock and warrants to the founders of the Company and
foreign investors and to increases in the number of personnel at the holding
company level and for the Jacksonville and Gainesville offices. Occupancy and
equipment expense increased 89.8% to $486,000 in 1998 from $256,000 in 1997
primarily as a result of the addition of the holding company and Jacksonville
banking offices. Data processing expense increased 53.6% to $142,000 in 1998
from $93,000 in 1997 which is primarily attributable to the growth in loan and
deposit transactions and the addition of new services. Financing costs for 1998
represents a non-cash non-recurring charge of $972,000 for financing costs
relating to the issuance of common stock and warrants to foreign investors.
Other operating expenses increased 86.8% to $923,000 in 1998 from $494,000 in
1997. This increase is attributable primarily to an increase of $47,000 in
marketing and advertising expenses, an increase of $137,000 in legal and
accounting fees associated with the Merger, an increase of $68,000 in
communications expense associated with the network expansion at the holding
company and Jacksonville banking offices and an increase of $49,000 in
stationary, printing and supplies associated with the Company name change and
opening of the Jacksonville banking office.
The following table presents an analysis of the noninterest expense for
the periods indicated with respect to each major category of noninterest
expense:
<TABLE>
% Change % Change
1999 1998 1997 1999-1998 1998-1997
---- ---- ---- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Salaries and benefits $5,291 $5,380 $999 (1.7%) 483.3%
Occupancy and equipment 951 486 256 95.7% 89.8
Data processing 265 142 93 86.6 53.6
Financing cost 0 972 0 N/A N/A
Other 1,835 923 494 98.9 86.8
----- ----- ---- ---- -----
Total $8,342 $7,903 $1,842 5.6% 329.0%
===== ===== =====
</TABLE>
22
<PAGE>
Provision for Income Taxes
The benefit for income taxes was $1.1 million for 1999 compared to
$350,000 for 1998. The effective tax rate for 1999 was a benefit of 36.8% as
compared to 1998 which was a benefit of 7.1%. The increase in the effective tax
rate is due to the effect of a higher level of nondeductible expenses in 1998 as
compared to 1999. These nondeductible expenses for 1998 are comprised primarily
of the $3.9 million in compensation and financing costs resulting from the sale
of common stock and warrants to founders and foreign investors. The Company paid
no income taxes during 1999 and 1998 due to the availability of net operating
loss carryforwards.
The provision (benefit) for income taxes was ($350,000) for 1998
compared to a provision of $232,000 for 1997. The effective tax rate for 1998
was a benefit of 7.1% as compared to an effective tax rate of 38.2% for 1997.
The decrease in the effective tax rate is due to the effect of a higher level of
nondeductible expenses in 1998 as compared to 1997. These nondeductible expenses
for 1998 are comprised primarily of the $3.9 million in compensation and
financing costs resulting from the sale of common stock and warrants to founders
and foreign investors. The Company paid no income taxes during 1998 due to the
availability of net operating loss carryforwards.
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 Company's deferred tax assets, net of deferred tax
liabilities and the valuation allowance. The Company'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.
First National Bank of Tampa reported losses from operations each year
from its inception in 1988 through 1994. These losses primarily resulted from
loan losses and high overhead costs. Management of First National Bank of Tampa
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 Company 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.
As of December 31, 1999, the Company had $9.2 million in net operating
loss carryforwards available to reduce future taxable earnings, which resulted
in net deferred tax assets of $4.4 million. These net operating loss
carryforwards will expire in varying amounts in the years 2004 through 2019
unless fully utilized by the Company. Based on management's estimate of future
earnings and the expiration dates of the net operating loss carry forwards as of
December 31, 1999 and 1998, it was determined that it is more likely than not
that the benefit of the deferred tax assets will be realized.
Prior to 1997, because of the uncertain nature of the Company's
earnings, the Company recorded a valuation allowance equal to the full amount of
the deferred tax assets. At December 31, 1997, the Company 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.
24
<PAGE>
The following table presents the components of net deferred tax assets:
<TABLE>
As of December 31,
1999 1998 1997
(Dollars in thousands)
<S> <C> <C> <C>
Deferred tax assets .................... $4,426 $3,026 $2,525
Deferred tax liabilities ............... 61 133 105
Valuation allowance .................... - - -
------ ------ ------
Net deferred tax assets ................ $4,365 $2,893 $2,420
====== ====== ======
</TABLE>
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 Merger, the Company will have the use of the
Company's net operating loss carryforwards. However, the portion of the
Company'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 Company 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 December 1998 acquisitions,
this annual limitation would be approximately $700,000. Management believes it
is more likely than not that the Company will produce sufficient taxable income
to allow the Company to fully utilize its net operating loss carryforwards prior
to their expiration.
Net Income
The Company reported a net loss of $1.8 million in 1999 compared to a
net loss of $4.6 million in 1998. The net loss for 1999 resulted primarily from
the openings of the Broward and Pinellas County Banking offices. Basic loss per
share were $.32 for 1999 and $1.46 for 1998.
Return on Average Assets increased 436 basis points to a deficit of
1.07% in 1999 from 5.43% in 1998. Return on Average Equity increased 1346 basis
points to a deficit of 3.12% in 1999 from 16.54% in 1998.
The Company reported a net loss of $4.6 million in 1998 compared to net
income of $376,000 in 1997. The net loss for 1998 resulted from the $3.9 million
non-cash non-recurring compensation and financing costs, expenses associated
with the opening of the Jacksonville and Gainesville offices, expenses related
to the Merger and an increase in the provision for loan losses, partially offset
by an increase in net interest income. Basic (loss) earnings per share were
$(1.46) for 1998 and $.31 for 1997.
Return on Average Assets decreased 643 basis points to a deficit of
5.43% in 1998 from .70% in 1997. Return on Average Equity decreased 2716 basis
points to a deficit of 16.54% in 1998 from 10.62% in 1997.
Financial Condition
Earning Assets
Average earning assets increased 102.8% to $142.1 million in 1999 from
$70.1 million in 1998. During 1999, loans, net of deferred loan fees,
represented 72.8% of average earning assets, investment securities comprised
18.8%, Federal funds sold comprised 3.9%, and repurchase agreements comprised
4.5%. In 1998, loans, net of deferred loan fees, comprised 57.0% of average
earning assets, investment securities comprised 22.5%, Federal funds sold
comprised 7.6% and repurchase agreements comprised 12.9%. The variance in the
mix of earning assets is primarily attributable to the growth in the Company's
loan portfolio. The Company manages its securities portfolio and additional
funds to minimize interest rate fluctuation risk and to provide liquidity.
25
<PAGE>
In 1999, growth in earning assets was funded primarily through an
increase in total loans due to new branch operations.
Loan Portfolio
The Company's total loans outstanding increased 135.6% to $157.6
million as of December 31, 1999 from $67.3 million as of December 31, 1998. Loan
growth for 1999 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 $79.8 million, or 136.6%, from December 31,
1998 to 1999. Average total loans in 1999 were $103.5 million, $54.1 million
less than the year end balance of $157.6 million due to the increase in loan
production for the third and fourth quarters of 1999. The Company engages in a
full complement of lending activities, including commercial, real estate
construction, real estate mortgage, home equity, installment, SBA guaranteed
loans and credit card loans.
The following table presents various categories of loans contained in
the Company'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>
As of December 31,
--------------------------------------------
1999 1998
% of % of
Balance Total Balance Total
---------------------------------------------
(Dollars in thousands)
Type of Loans
<S> <C> <C> <C> <C>
Commercial real estate ................................................ $69,261 43.9% $25,326 37.6%
Commercial ............................................................ 68,991 43.8 33,103 49.2
Residential mortgage .................................................. 10,846 6.9 6,047 9.0
....................................................................... 7,246 4.6 2,021 3.0
Credit cards and other ................................................ 1,244 0.8 796 1.2
------- ---- ------ ----
Total loans ........................................................... 157,588 100% 67,293 100%
==== ====
Net deferred loan fees ................................................ (71) (162)
------- ------
Loans, net of deferred loan fees ...................................... 157,517 67,131
Allowance for loan losses ............................................. (1,858) (1,074)
------- ------
Net loans ............................................................. $155,659 $66,057
======= ======
</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. At December 31, 1999, commercial real estate
loans represented 43.9% of outstanding loan balances, compared to 37.6% at
December 31, 1998. The increase in this category of loans is due to the
increased emphasis on commercial 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. At December 31, 1999, commercial loans represented 43.8% of
outstanding loan balances, compared to 49.2% at December 31, 1998. The decrease
in commercial loans corresponds with management's strategy to diversify risk.
Residential Mortgage. The Company's residential mortgage loans consist
of first and second mortgage loans and construction loans. At December 31, 1999,
residential mortgage loans represented 6.9% of outstanding loan balances,
compared to 9.0% at December 31, 1998. The Company does not actively market
residential mortgages and its portfolio primarily consists of loans to the
principals of other commercial relationships.
Consumer. The Company's consumer loans consist primarily of installment
loans to individuals for personal, family and household purposes, education and
26
<PAGE>
other personal expenditures. At December 31, 1999, consumer loans represented
4.6% of outstanding loan balances, compared to 3.0% at December 31, 1998. The
Company does not actively market consumer loans and its portfolio primarily
consists of loans to the principals of other commercial relationships.
Credit Card and Other Loans. This category of loans consists of
borrowings by customers using credit cards, overdrafts and overdraft protection
lines. At December 31, 1999, credit card and other loans represented 0.8% of
outstanding loan balances as compared to 1.2% at December 31, 1998. These
credits are primarily extended to the principals of commercial customers.
The Company's only area of credit concentration is commercial and
commercial real estate loans. The Company 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 Company had no foreign loans or loans to lesser developed countries as of
December 31, 1999.
While risk of loss in the Company's loan portfolio is primarily tied to
the credit quality of the borrowers, risk of loss may also increase due to
factors beyond the Company'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 Company's real estate portfolio. Of the Company's
target areas of lending activities, commercial loans are generally considered to
have greater risk than real estate loans or consumer loans. For this reason the
Company seeks to diversify its commercial loan portfolio by industry, geographic
distribution and size of credits.
From time to time, management of the Company has originated certain
loans which, because they exceeded the Company's legal lending limit, were sold
to other institutions. As a result of the Offering, the Company has an increased
lending limit and has repurchased certain loan participations, thereby
increasing earning assets. Loan participation agreements allow the Company to
repurchase loans at the outstanding principal balance plus accrued interest, if
any, at the Company's discretion.
The Company also purchases participations from other institutions. When
the Company purchases these participations, such loans are subjected to the
Company's underwriting standards as if the loan was originated by the Company.
Accordingly, management of the Company does not believe that loan participations
purchased from other institutions pose any greater risk of loss than loans that
the Company originates.
The repayment of loans in the loan portfolio as they mature is a source
of liquidity for the Company. The following table sets forth the maturity of the
Company's loan portfolio within specified intervals as of December 31, 1999:
<TABLE>
Due after Due
Due in 1 1 to After
Year or Less 5 years 5 years Total
------------ ---------- --------- -----
Type of Loan (Dollars in thousands)
<S> <C>
Commercial real estate ....................... $8,889 $23,842 $36,530 $ 69,261
Commercial ................................... 45,954 19,684 3,343 68,991
Residential mortgage ......................... 3,122 4,642 3,082 10,846
Consumer ..................................... 3,132 3,936 178 7,246
Credit card and other loans .................. 1,244 0 0 1,244
----- ------- ------- -------
Total ........................................ $62,341 $52,114 $43,133 $157,588
====== ======= ======= ========
</TABLE>
27
<PAGE>
The following table presents the maturity distribution as of December
31, 1999 for loans with predetermined fixed interest rates and floating interest
rates by various maturity periods:
<TABLE>
Due in 1 Due after Due
Year or Less 1 to 5 After Total
years 5 years
------------ ---------- -------- ----------
Interest Category (Dollars in thousands)
<S> <C> <C> <C>
Predetermined fixed interest rate.........................$12,715 $38,242 $38,206 $89,163
Floating interest rate ................................... 49,626 13,872 4,927 68,425
------ ------ ------- -------
Total ....................................................$62,341 $52,114 $43,133 $157,588
====== ====== ======= =======
</TABLE>
Asset Quality
At December 31, 1999, $1.1 million of loans were accounted for on a
non-accrual basis as compared to $725,000 at December 31, 1998. Included in the
non-accrual loans as of December 31, 1999 were $733,000 of SBA guaranteed loans
compared to $150,000 at December 31, 1998. The SBA loans consist of the
remaining balance of liquidated loans pending payment of the SBA guarantee. At
December 31, 1999, $293,000 loans past due 90 days or more were still accruing
interest. None of these loans are guaranteed by the SBA. All of the loans past
due 90 days at December 31, 1998 were SBA loans, of which $236,000 were
guaranteed by the SBA, subject to certain conditions. See "-- Non-performing
Assets."
First National Bank of Tampa started its SBA lending program in August
1994. Under this program, the Company 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 Company sells in the secondary
market. The majority of the Company'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 Company records the
premium received upon the sale of the guaranteed portion of SBA loans as gain on
sale of loans. The Company 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 Company's loan portfolio at December 31, 1999
totaled $4.1 million, including the SBA guaranteed portion of $3.1 million,
compared to an outstanding balance of $3.9 million at December 31, 1998,
including the SBA guaranteed portion of $2.1 million. At December 31, 1999, the
principal balance of the guaranteed portion of SBA loans cumulatively sold in
the secondary market since the commencement of the SBA program totaled $4.0
million.
The Company 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 Company'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 Company is 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 Company has the option of
charging-off the non-SBA guaranteed portion of the loan retained by the Company
and requesting payment of the SBA guaranteed portion. In such cases, the Company
will have determined that insufficient collateral exists, or the cost of
liquidating the business exceeds the anticipated proceeds to the Company. In all
liquidations, the Company 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 Company 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 1999 and 1998 were approximately $356,000 and $0
The Company substantially reduced SBA lending operations in 1998 due to
the cost of maintaining this specialized lending practice and due to recent
charge-offs in the unguaranteed portion of the SBA loans that were retained by
the Bank.
As of December 31, 1999, 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
28
<PAGE>
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 non-performing loans, current and
anticipated economic conditions, underlying collateral values securing loans and
other factors. While it is the Company's policy to provide for a full reserve or
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.
An analysis of the Company'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>
Years Ended
December 31,
------------
1999 1998 1997
------ ----- ----
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of period $1,073 $481 $432
Charge-offs:
Commercial real estate (0) (39) (24)
Commercial (819) (16) (19)
Residential mortgage (5) - -
Consumer (19) - -
Consumer credit card and other (14) (10) -
--- -- --
Total charge-offs (857) (65) (43)
--- -- --
Recoveries:
Commercial real estate 15 28 32
Commercial 14 - -
Residential mortgage 2 - -
Consumer --- ------ -----
Credit card and other 1 - -
--- ------ -----
Total recoveries 32 28 32
--- ---- ---
Net (charge-offs)/ recoveries (825) (36) (11)
Provision for loan losses 1,610 629 60
----- ----- ---
Balance at end of period $1,858 $1,073 $481
----- ----- ---
Net (charge-offs)/ recoveries as a percentage of average loans (.80)% (.09)% (.02)%
Allowance for loan losses as a percentage of total loans 1.18% 1.60% 1.42%
</TABLE>
Net charge-offs were $825,000 or .80% of average loans outstanding in
1999 as compared to net charge-offs of $36,000 or .09% of average loans
outstanding in 1998. The allowance for loan losses increased 73.1% to $1.9
million or 1.18% of loans outstanding at December 31, 1999 from $1.1 million or
1.60% of loans outstanding at December 31, 1998. The allowance for loan losses
as a multiple of net loans charged-off was 2.3x for the year ended December 31,
1999 as compared to 28.9x for the year ended December 31, 1998. The increase in
29
<PAGE>
the provision from 1998 to 1999 was generally due to increases in the amount of
loans outstanding. Net recoveries increased to $32,000 in 1998, representing
.03% of average loans outstanding, from $28,000 in 1998, representing .09% of
average loans outstanding. See "-- Asset Quality."
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 Company, their loan portfolio reviews as part of the company 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
Company adopted SFAS 114 on January 1, 1995. At December 31, 1999, the Company
held impaired loans as defined by SFAS 114 of $2.3 million ($497,000 of such
balance is guaranteed by the SBA) for which specific allocations of $63,000 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. A portion of these impaired loans have
also been classified by the Company as loans past due over 90 days ($2.1
million) and none have been classified as troubled debt restructurings. At
December 31, 1998, the Company held impaired loans as defined by SFAS 114 of
$1.9 million ($649,000 of such balance is guaranteed by the SBA) for which
specific allocations of $580,000 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. A portion of these impaired loans have also been classified by the
Company as loans past due over 90 days ($315,000) and none have been classified
as troubled debt restructurings. Interest income on such impaired loans during
1999 and 1998 was not significant.
As shown in the table below, management determined that as of December
31, 1999, 34.2% of the allowance for loan losses was related to commercial real
estate loans, 55.3% was related to commercial loans, 4.8% was related to
residential mortgage loans, 4.1% was related to consumer loans, 1.6% to credit
card and other loans and 0.0% was unallocated. As shown in the table below,
management determined that as of December 31, 1998, 21.3% of the allowance for
loan losses was related to commercial real estate loans, 64.0% was related to
commercial loans, 8.5% was related to residential mortgage loans, 1.5% was
related to consumer loans, 4.4% to credit card and other loans and .3% was
unallocated. The fluctuations in the allocation of the allowance for loan losses
between 1998 and 1997 is attributed to the establishment of a specific reserve
in the amount of $529,000 for commercial loans and allocation of reserves for
future loans growth which were previously unallocated.
30
<PAGE>
For the periods indicated, the allowance was allocated as follows:
<TABLE>
As of December 31,
1999 1998
% of % of
Amount Total Amount Total
------- ------ ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial real estate .......................... $636 34.2% $229 21.3%
Commercial ...................................... 1,027 55.3 687 64.0
Residential mortgage ............................ 89 4.8 91 8.5
Consumer ........................................ 77 4.1 16 1.5
Credit card and other loans ..................... 29 1.6 47 4.4
Unallocated ..................................... 0 0 3 .3
------ ----- ------ -----
Total ........................................... $1,858 100.0% $1,073 100.0%
====== ===== ====== =====
</TABLE>
In considering the adequacy of the Company's allowance for loan losses,
management has focused on the fact that as of December 31, 1999, 43.9% of
outstanding loans are in the category of commercial real estate and 43.8% are in
commercial loans. Commercial loans are generally considered by management to
have greater risk than other categories of loans in the Company'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 Company 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 6.9% of outstanding loans at
December 31, 1999. 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, 1999, the majority of the Company'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 has
historically been conducted semi-annually with future reviews planned on a
quarterly basis. 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 Company.
In addition to the above credit review, the Company's primary regulator, the
OCC, also conducts a periodical examination of the loan portfolio. Upon
completion, the OCC presents its report of examination to the Board and
management of the Company. Information provided from the above two independent
sources, together with information provided by the management of the Company 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 charged off), assess the overall
quality and collectability 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.
31
<PAGE>
Non-performing Assets
At December 31, 1999, $1.1 million of loans were accounted for on a
nonaccrual basis as compared to $725,000 at December 31, 1998 The remaining
balance of non-accrual loans consists of $733,000 which is guaranteed by the
SBA. At December 31, 1999, two loans totaling $293,000 were accruing interest
and were contractually past due 90 days or more as to principal and interest
payments, compared to two loans totaling $315,000 which were accruing interest
and were contractually past due 90 days or more at December 31, 1998. The loans
past due 90 days at December 31, 1999 represented the un-guaranteed portion of
SBA loans, as compared to $624,000 in SBA loans, of which $526,000 are
guaranteed by the SBA,, subject to certain conditions as of December 31, 1998.
At December 31, 1999, no loans were considered troubled debt
restructurings. At December 31, 1998, two loans totaling $35,000 (none of which
are also included in the amount of loans past due 90 days or more) were defined
as "troubled debt restructurings."
The Company has policies, procedures and underwriting guidelines
intended to assist in maintaining the overall quality of its loan portfolio. The
Company monitors its delinquency levels for any adverse trends. Non-performing
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 Company'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 28.2% to $28.5 million in 1999
from $22.2 million in 1998. At December 31, 1999, investment securities
available for sale totaled $27.6 million compared to $21.9 million at December
31, 1998. At December 31, 1999, investment securities available for sale had net
unrealized losses of $1.1 million, comprised of gross unrealized losses of $1.1
million and gross unrealized gains of $6,000. At December 31, 1998, investment
securities available for sale had net unrealized losses of $19,000, comprised of
gross unrealized losses of $88,000 and gross unrealized gains of $69,000.
Average investment securities as a percentage of average earning assets
decreased to 18.8% in 1999 from 22.5% in 1998.
The Company invests primarily in direct obligations of the United
States, obligations guaranteed as to principal and interest by the United
States, obligations of agencies of the United States and mortgage-backed
securities. In addition, the Company 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 Company to another
company.
Proceeds from sales and maturities of available for sale investment
securities increased 148.2% to $29.0 million in 1999 from $11.7 million in 1998,
with a resulting net loss on sales of $4,000 in 1999 and gain on sale of $8,000
in 1998. 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
Company 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 quarterly. Other investments increased 209.0% to $902,000 at
December 31, 1999 from $292,000 at December 31, 1998. Other investments are
carried at cost as such investments do not have readily determinable fair
values.
At December 31, 1999, the investment portfolio included $20.1 million
in CMOs compared to $12.3 million at December 31, 1998. At December 31, 1999,
the investment portfolio included $3.9 million in other mortgage-backed
securities compared to $4.6 million at December 31, 1998.
32
<PAGE>
The following table presents, for the periods indicated, the carrying
amount of the Company's investment securities, including mortgage-backed
securities.
<TABLE>
As of December 31,
1999 1998
Balance % of Total Balance % of Total
------- ---------- ------- ----------
Investment Category (Dollars in thousands)
Available for sale:
<S> <C> <C> <C> <C>
U.S. Treasury and other U.S. agency obligations ...... $2,965 10.4% $5,050 22.7%
State & Municipal Securities ......................... 481 1.7
Mortgage-backed securities ........................... 23,974 84.1 16,900 76.0
Marketable equity securities ......................... 189 0.7
------- ----- ------ -----
27,609 96.9 21,950 98.7
Other investments .................................... 902 3.1 292 1.3
------ ----- ------ -----
Total ................................................ $28,511 100.0% $22,242 100.0%
====== ===== ====== =====
</TABLE>
The Company utilizes its available for sale investment securities,
along with cash and Federal funds sold, to meet its liquidity needs.
As of December 31, 1999, $24.0 million, or 84.1%, of the investment
securities portfolio consisted of mortgage-backed securities compared to $16.9
million, or 76.0%, of the investment securities portfolio as of December 31,
1998. During 2000, approximately $654,000 of mortgage-backed securities will
mature.
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 Company 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, 1999 and 1998, 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 provide
interest income and serve as a source of liquidity for the Company. 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 $16.3
million and $16.1 million at December 31, 1999 and 1998, respectively, were
pledged to secure deposits of public funds, repurchase agreements and certain
other deposits as provided by law.
33
<PAGE>
The maturities and weighted average yields of debt securities at
December 31, 1999 are presented in the following table using primarily the
stated maturities, excluding the effects of prepayments.
<TABLE>
Weighted
Average
Amount Yield (1)
------ ----------
Available for Sale: (Dollars in thousands)
U.S. Treasury and other U.S. agency obligations:
<S> <C> <C> <C>
0 - 1 year .......................................................................... $ 501 5.50%
Over 1 through 2,464 5.42%
Over 5 years ........................................................................ --- N/A
Total ............................................................................... 2,965
------
State and municipal:
0-1 year ............................................................................. -- N/A
Over 1 through 5 years ............................................................... -- N/A
Over 5 years ......................................................................... 481 6.95%
------
Total ................................................................................ 481
------
Mortgage-backed securities:
0-1 year .............................................................................. 652 5.00%
Over 1 through 5 years ................................................................ 15,441 6.51
Over 5 years .......................................................................... 7,882 6.06
Over 10 years ------ N/A
Total 23,975
------
Total available for sale debt securities ........................................... 27,421
======
(1) The Company has not invested in any tax-exempt obligations.
</TABLE>
As of December 31, 1999, 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 Company's average deposits increased 94.2%, or $46.4 million, to
$95.6 million during 1999 from $49.2 million during 1998. This growth is
attributed to a 67.0% increase in noninterest-bearing demand deposits, a 66.2%
increase in interest-bearing deposits, a 18.1% increase in money market
deposits, a 232.2% increase in savings deposits, a 100.7% increase in
certificates of deposits of $100,000 or more and a 58.2% increase in other time
deposits.
Average noninterest-bearing demand deposits increased 67.0% to $14.7
million in 1999 from $8.8 million in 1998. As a percentage of average total
deposits, these deposits decreased to 15.4% in 1999 from 17.9% in 1998.
Noninterest-bearing demand deposits increased 86.1% to $22.0 million at December
31, 1999, from $11.8 million at December 31, 1998. This increase is attributable
to large business deposits retained by the Company during 1999.
Average interest-bearing demand deposits increased 66.2% to $4.9
million in 1999 from $3.0 million in 1998. Savings deposits increased 232.2% to
$24.4 million at December 31, 1999, form $7.4 million at December 31, 1998. The
increase in average savings deposits is primarily attributable to an increase in
the Company'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. Savings deposits
increased 117.5% to $39.0 million at December 31, 1999 from $17.9 million at
December 31, 1998. The average money market deposits increased 18.1% to $1.7
million at December 31, 1999 from $1.4 million at December 31, 1998. The year
end balance of money market deposits increased 18.9% to $1.6 million at December
34
<PAGE>
31, 1999 from $1.3 million at December 31, 1998. This increase is attributable
primarily to increases in commercial deposit balances. Average balances of
certificates of deposit of $100,000 or more increased 100.7% to $21.2 million at
December 31, 1999 from $10.5 million at December 31, 1998. The year end balance
of certificates of deposit of $100,000 or more increased 439.7% to $51.5 million
at December 31, 1999 from $9.5 million at December 31, 1998. The average balance
for other time deposits increased 58.2% to $28.7 million at December 31, 1999
from $18.2 million at December 31, 1998. Other time deposits increased 68.3% to
$33.8 million at December 31, 1999 compared to $20.1 million at December 31,
1998. The increases in overall deposit balances results primarily from new
deposits obtained as a result of the new branch openings.
The following table presents, for the periods indicated, the average
amount of and average rate paid on each of the following deposit categories:
<TABLE>
Years Ending December 31,
-------------------------
1999 1998
---- ----
Average Average Average Average
Balance Rate Balance Rate
------- ------- ------- -------
Deposit Category (Dollars in thousands)
<S> <C> <C>
Noninterest-bearing demand ...........................14,727 ----- % $ 8,818 -----%
Interest-bearinQ demand ...............................4,912 2.02 2,956 2.54
Monev market ..........................................1,674 2.21 1,417 2.47
Savings...............................................24,427 4.72 7,353 4.72
Certificates of devosit of $100,000 or more ..........21,165 5.51 10,548 5.49
Other time ...........................................28,723 5.56 18,161 5.90
------ ------
Total ........................................... $95,628 4.24% $ 49,253 4.28%
</TABLE>
Interest-bearing deposits, including certificates of deposit, will
continue to be a major source of funding for the Company. However, there is no
specific emphasis placed on time deposits of $100,000 and over. During 1999,
aggregate average balances of time deposits of $100,000 and over comprised 22.1%
of total deposits compared to 22.2% for the prior year. The average rate on
certificates of deposit of $100,000 or more increased to 5.51% in 1999, compared
to 5.49% in 1998. 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>
December 31,
------------
1999 1998
---- ----
(Dollars in thousands)
Amount Average Amount Average
Rate Rate
------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
3 months or less ............................. $13,475 5.20% $2,861 4.61%
3-6 months ................................... 15,191 5.90 1,847 5.22
6-12 months .................................. 17,180 6.02 1,914 5.69
Over 12 months ............................... 5,693 5.91 2,927 6.11
------- ------
Total ........................................ $51,539 5.84% $9,549 5.49%
======= ======
</TABLE>
Average short-term borrowings increased 106.0% to $14.2 million in
1999 from $6.9 million in 1998. Short-term borrowings consist of treasury tax
and loan deposits, Federal Home Loan Bank borrowings, and repurchase agreements
35
<PAGE>
with certain commercial customers. In addition, the Company has securities sold
under agreements to repurchase, which are classified as secured borrowings.
Average treasury tax and loan deposits decreased 7.9% to $1.5 million in 1999
from $1.6 million in 1998. Average Federal Home Loan Bank borrowings were
$147,000 in 1999 compared with no borrowings during 1998. Average repurchase
agreements with customers increased 138.9% to $12.5 million in 1999 from $5.2
million in 1998. The treasury tax and loan deposits provide an additional
liquidity resource to the Company 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 Company
invests these funds in Federal funds sold and earns a contractual margin of 50
to 100 basis points on such invested funds.
Repurchase agreements increased 94.7% to $11.0 million at December 31,
1999 from $5.7 million at December 31, 1998.
The following table presents the components of short-term borrowings
and the average rates on such borrowings for the years ended December 31, 1999
and 1998:
<TABLE>
Maximum
Amount Average
Outstanding at Average Average Ending Rate at
Year Ended December 31, Any Month Balance Rate Balance Year End
End
(Dollars in thousands)
1999
<S> <C> <C> <C> <C> <C>
Treasury tax and loan deposits ........ $2,473 $1,510 5.39% $2,242 4.78%
Repurchase agreements ................. 19,293 12,510 4.42 11,037 5.95
Federal Home Loan Bank borrowings...... 5,000 147 5.98 5,000 5.48
------ ------
Total ............................... $14,167 $18,279
====== ======
1998
Treasury tax and loan deposits ......... $2,539 $1,641 5.97% $50 4.22%
Repurchase agreements .................. 7,964 5,237 4.41 5,669 3.72
------ -----
Total ...................................... $6,878 $5,719
====== =====
</TABLE>
Capital Resources
Shareholders' equity decreased 7.9% to $39.2 million in 1999 from $42.6
million in 1998. This decrease results primarily from the Company's net loss for
the year of $1.8 million, the repurchase of 135,100 shares of its stock totaling
$859,000, and an increase of $657,000 in the net unrealized loss on available
for sale securities.
36
<PAGE>
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 34.3% in 1999 from 32.8% in
1998.
<TABLE>
Regulatory Capital Calculation
1999 1998
Amount Percent Amount Percent
-------- ------- ------- -------
(Dollars in thousands)
Tier I risk based:
<S> <C> <C> <C> <C>
Actual .....................................$35,778 17.29% $42,600 61.59%
Minimum required .............................8,278 4.00 2,579 4.00
------ ----- ------ -----
Excess above minimum .......................$27,500 15.02% $37,128 57.59%
====== ===== ====== =====
Total risk based:
Actual .................................. $37,636 18.19% $40,780 63.25%
Minimum required ......................... 16,567 8.00 5,159 8.00
------ ----- ------ -----
Excess above minimum ................... $21,O69 12.00% $35,621 55.25%
====== ===== ====== =====
Leverage:
Actual .....................................$35,778 20.01% $39,707 36.44%
Minimum required .............................6,895 4.00 4,359 4.00
------ ----- ------ -----
Excess above minimum .......................$28,625 16.10% $35,348 32.44%
====== ===== ====== =====
Total risked based assets .................$206,957 $64,487
Total average assets ......................$172,364 $84,605
</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 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.
37
<PAGE>
The Company's Tier 1 (to risk-weighted assets) capital ratio decreased
to 19.02% in 1999 from 61.59% in 1998. The Company's total risk based capital
ratio decreased to 20.00% in 1999 from 63.25% in 1998. 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 Company 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--Supervision and Regulation."
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 Company'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 Company 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 Company 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 Company'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 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, 1999.
38
<PAGE>
<TABLE>
One Four
Month One-Three Twelve One-Five One-Five Noninterest
or Less Months Months Years Years Sensitive Total
-------- --------- ------- -------- --------- ----------- ------
(December 31, 1999) (Dollars in thousands)
ASSETS
Earning assets:
Available for sale investment
<S> <C> <C> <C>
Securities .......................... ---- ---- --- $3,267 $24,343 --- $27,610
Other investments .................. ---- ---- --- --- 902 --- 902
Federal funds sold and
repurchase...................... $19,870 ---- --- --- --- --- 19,870
Loans ............................... 53,566 $18,042 $9,188 38,242 38,550 --- 157,588
------- ------- ----- ----- ------ ----- -------
Total earning assets ................ 73,436 18,042 9,188 41,509 63,795 --- 205,970
------- ------- ----- ----- ------- ----- -------
LIABILITIES
Interest-bearing liabilities:
Interest-bearing demand deposits........ $11,211 --- --- --- --- --- $11,211
Savings deposits .................... 38,025 $ 929 38,954
Money market deposits ............... --- --- --- --- --- 1,594 1,594
Certificates of deposit of $100,000 or
more................................. 2,834 $ 10,641 $ 32,371 $ 5,693 --- --- 51,539
Other time deposits ................. 1,796 5,394 10,235 16,347 --- --- 33,772
Repurchase agreements ............... 11,037 --- --- --- --- --- 11,037
Other borrowed funds ................ 2,242 --- 5,000 --- --- --- 7,242
------ ------ ------ ------- ------- ------- --------
Total interest-bearing
Liabilities ....................... 67,145 16,035 47,606 22,040 0 2,523 155,349
------ ------ ------ ------- ------- ------- --------
Noninterest-bearing demand --- --- --- --- --- 22,036 22,036
deposits
Other noninterest liabilities and
shareholders' equity .......... --- --- --- --- --- 28,585 28,585
------ ------ ------ ------- ------- ------- -------
Noninterest-bearing sources
of funds-net .......................... $ --- $ --- $ --- $ --- $ --- $50,621 $50,621
------ ------ ------ ------- ------- ------- -------
Interest sensitivity gap:
Amount .............................. $ 6,291 $ 2,007 $(38,418) $19,469 $63,795 $(53,144) $ ---
------ ------ ------- ------- ------- ------
Cumulative amount ....................$ 6,291 $ 8,298 $(30,120) $(10,651) $53,144 $ --- $ ---
Percent of total earning assets ...... 3.05% 0.97% (18.65%) 9.45% 30.97% (25.80%)
Cumulative percent of total
earning assets...................... 3.05% 4.03% (14.62%) (5.17%) 25.80%
Ratio of rate sensitive assets to
rate sensitive liabilities................ 1.09X 1.13x .19X 1.88x N/A
Cumulative ratio of rate sensitive
assets to rate sensitive liabilities ... 1.09X 1.10x .77x .93x 1.35x
</TABLE>
In the current interest rate environment, the liquidity and maturity
structure of the Company's assets and liabilities are important to the
maintenance of acceptable performance levels. A decreasing rate environment
negatively impacts earnings as the Company'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 .60 and 1.20 years for the Bank. At December 31,
1999, the Company had cumulative gap ratios of approximately 1.10 for the three
month time period and .77 for the one year period ending December 31, 1999.
39
<PAGE>
Thus, over the next twelve months, rate-sensitive liabilities will reprice
faster than rate-sensitive assets.
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
Company'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 Company'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 Company's exposure to changes in interest rates. Management utilizes
computerized interest rate simulation analysis to determine the Company's
interest rate sensitivity. The table above indicates the Company is in an 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 indicate a relatively low sensitivity to parallel shifts in
interest rates. A liability sensitive company 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 company 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
Company's net interest margin. The Company 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 Company's most recent rate shock simulation
analysis which was performed as of February 29, 2000, indicates that a 200 basis
point decrease in rates would cause an increase in net interest income of
$798,000 over the next twelve month period. Conversely, a 200 basis point
increase in rates would cause a decrease in net interest income of $798,000 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 Company'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.
Generally, the Company's commercial and commercial real estate loans
are indexed to the prime rate. A portion of the Company'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 Company's interest
income. The majority of the Company'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 Company adjusts the rates and terms of its loans and
interest-bearing liabilities in response to changes in the interest rate
environment.
The Company does not currently engage in trading activities or use
derivative instruments to manage interest rate risk.
40
<PAGE>
At December 31, 1999, available for sale debt securities with a
carrying value of approximately $19.4 million are scheduled to mature within the
next five years. Of this amount, $1.2 million is scheduled to mature within one
year. The Company's main source of liquidity is Federal funds sold and
repurchase agreements. Average Federal funds sold and repurchase agreements were
$11.9 million in 1999, or 8.4% of average earning assets, compared to $14.4
million in 1998, or 20.5% of average earning assets. Federal funds sold and
repurchase agreements totaled $19.9 million at December 31, 1999, or 9.6% of
earning assets, compared to $16.7 million at December 31, 1998, or 15.7% of
earning assets.
At December 31, 1999, loans with a carrying value of approximately
$114.5 million are scheduled to mature within the next five years. Of this
amount, $62.3 million is scheduled to mature within one year.
At December 31, 1999, time deposits with a carrying value of
approximately $85.3 million are scheduled to mature within the next five years.
Of this amount, $63.3 million is scheduled to mature within one year.
The Company's average loan-to-deposit ratio increased 27 basis points
to 108.2% for 1999 and 81.0% for 1998. The Company's total loan-to-deposit ratio
decreased 5 basis points to 99.0% at December 31, 1999 from 104.1% at December
31, 1998.
The Company 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, 1999, the Company had borrowings from the
FHLBA in the amount of $5.0 million.
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 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.
Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and hedging activities. In June
1999, the FASB issued SFAS No. 137, which deferred the effective date of
adoption of SFAS No. 133 for one year. SFAS No. 133 will be effective for the
first quarter of the year ending December 31, 2001. Retroactive application to
financial statements of prior periods is not required. The Company does not
currently have any derivative instruments nor is it involved in hedging
activities.
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. 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 Company's earnings from such
activities and the income from the sale of residential mortgage loans in the
secondary market.
41
<PAGE>
Monetary Policies
The results of operations of the Company 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 Company borrowings, changes in reserve requirements against
member Company deposits and limitations on interest rates which member Company
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 Company.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
------- ----------------------------------------------------------
The Company's financial performance is subject to risk from interest
rate fluctuations. This interest rate risk arises due to differences between the
amount of interest-earning assets and the amount of interest-earning liabilities
subject to repricing over a specified period and the amount of change in
individual interest rates. In the current interest rate environment, the
liquidity and maturity structure of the Company's assets and liabilities are
important to the maintenance of acceptable performance levels. A decreasing rate
environment negatively impacts earnings as the Company'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 .60 and 1.20 years for the Bank. At December 31,
1999, the Company had cumulative gap ratios of approximately 1.10 for the three
month time period and .77 for the one year period ending December 31, 1999.
Thus, over the next twelve months, rate-sensitive liabilities will reprice
faster than rate-sensitive assets.
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 Company'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 Company's exposure to changes in interest rates. Management utilizes
computerized interest rate simulation analysis to determine the Company's
interest rate sensitivity. The table above on page 37 indicates the Company is
in an liability 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 indicate a relatively low sensitivity to
parallel shifts in interest rates. A liability sensitive company 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
company 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
Company's net interest margin. The Company 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 Company's most recent rate shock simulation
analysis which was performed as of February 29, 2000, indicates that a 200 basis
point increase in rates would cause an increase in net interest income of
$798,000 over the next twelve month period. Conversely, a 200 basis point
decrease in rates would cause a decrease in net interest income of $798,000 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 Company'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.
42
<PAGE>
The Company does not currently engage in trading activities or use
derivative instruments to manage interest rate risk.
Item 8. Financial Statements and Supplementary Data.
------ -------------------------------------------
The following financial statements are filed with this report:
Consolidated Balance Sheets - December 31, 1999 and 1998
Consolidated Statements of Operations - Years ended December 31, 1999,
1998 and 1997
Consolidated Statements of Shareholders' Equity - Years ended December
31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows - Years ended December 31, 1999,
1998 and 1997
Notes to Consolidated Financial Statements
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Florida Banks, Inc.
Jacksonville, Florida
We have audited the accompanying consolidated balance sheets of Florida Banks,
Inc. (the "Company") as of December 31, 1999 and 1998, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with 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 consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 1999
and 1998, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1999, in conformity with generally
accepted accounting principles.
/s/Deloitte & Touche LLP
Jacksonville, Florida
Certified Public Accountants
February 11, 2000
<PAGE>
FLORIDA BANKS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
1999 1998
ASSETS
<S> <C> <C>
CASH AND DUE FROM BANKS $ 6,088,628 $ 4,295,139
FEDERAL FUNDS SOLD AND REPURCHASE AGREEMENTS 19,870,000 16,650,000
---------- ----------
Total cash and cash equivalents 25,958,628 20,945,139
INVESTMENT SECURITIES:
Available for sale, at fair value (cost $28,681,760 and
$21,968,826 at December 31, 1999 and 1998) 27,609,601 21,949,929
Other investments 901,800 291,850
LOANS:
Commercial real estate 69,260,661 25,325,557
Commercial 68,991,516 33,103,488
Residential mortgage 10,845,841 6,046,666
Consumer 7,245,919 2,020,954
Credit card and other loans 1,244,256 796,120
----------- ----------
Total loans 157,588,193 67,292,785
Allowance for loan losses (1,858,040) (1,073,346)
Net deferred loan fees (71,341) (162,334)
----------- ----------
Net loans 155,658,812 66,057,105
PREMISES AND EQUIPMENT, NET 2,440,818 822,283
ACCRUED INTEREST RECEIVABLE 1,021,175 478,700
DEFERRED INCOME TAXES, NET 4,365,270 2,893,078
OTHER ASSETS 185,467 128,086
----------- -----------
TOTAL ASSETS $ 218,141,571 $ 113,566,170
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS:
Noninterest-bearing demand $ 22,035,567 $ 11,840,430
Interest-bearing demand 11,211,366 3,913,509
Regular savings 38,954,093 17,910,355
Money market accounts 1,593,930 1,340,779
Time $100,000 and over 51,538,664 9,549,263
Other time 33,772,060 20,066,271
----------- -----------
Total deposits 159,105,680 64,620,607
REPURCHASE AGREEMENTS 11,037,111 5,668,664
OTHER BORROWED FUNDS 7,242,352 49,813
ACCRUED INTEREST PAYABLE 616,549 218,897
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 905,024 420,340
----------- -----------
Total liabilities 178,906,716 70,978,321
----------- -----------
COMMITMENTS (NOTE 8)
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value; 30,000,000 shares authorized
5,853,756 and 5,852,756 shares issued, respectively 58,538 58,528
Additional paid-in capital 46,219,104 46,209,114
Warrants 164,832 164,832
Accumulated deficit (deficit of $8,134,037
eliminated upon quasi-reorganization on December 31, 1995) (5,680,069) (3,832,909)
Treasury stock, 135,100 shares at cost (858,844)
Accumulated other comprehensive loss, net of tax (668,706) (11,716)
----------- -----------
Total shareholders' equity 39,234,855 42,587,849
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 218,141,571 $ 113,566,170
=========== ===========
See notes to consolidated financial statements.
</TABLE>
44
<PAGE>
FLORIDA BANKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
1999 1998 1997
------------ ------------ ------------
INTEREST INCOME:
<S> <C> <C> <C>
Loans, including fees $ 9,075,607 $ 3,826,324 $ 3,352,741
Investment securities 1,518,052 874,374 583,590
Federal funds sold 257,042 454,257 365,658
Repurchase agreements 332,871 277,165
---------- ---------- ----------
Total interest income 11,183,572 5,432,120 4,301,989
---------- ---------- ----------
INTEREST EXPENSE:
Deposits 4,053,353 2,107,343 2,075,429
Repurchase agreements 552,499 230,840 178,200
Borrowed funds 90,442 98,272 42,099
---------- ---------- ----------
Total interest expense 4,696,294 2,436,455 2,295,728
---------- ---------- ----------
NET INTEREST INCOME 6,487,278 2,995,665 2,006,261
PROVISION FOR LOAN LOSSES 1,610,091 629,000 60,000
---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 4,877,187 2,366,665 1,946,261
---------- ---------- ----------
NONINTEREST INCOME:
Service fees 454,660 382,359 324,693
Gain on sale of loans 1,135 105,635 94,805
(Loss) gain on sale of available for sale investment securities (4,274) 8,197 7,635
Other noninterest income 90,442 97,315 76,596
---------- ---------- ----------
541,963 593,506 503,729
---------- ---------- ----------
NONINTEREST EXPENSES:
Salaries and benefits 5,290,803 5,379,989 999,382
Occupancy and equipment 951,155 486,148 256,160
Data processing 265,499 142,315 92,633
Financing costs 972,000
Other 1,834,634 922,342 493,848
---------- ---------- ----------
8,342,091 7,902,794 1,842,023
---------- ---------- ----------
(LOSS) INCOME BEFORE (BENEFIT) PROVISION
FOR INCOME TAXES (2,922,941) (4,942,623) 607,967
(BENEFIT) PROVISION FOR INCOME TAXES (1,075,781) (350,007) 231,998
---------- ---------- ----------
NET (LOSS) INCOME $ (1,847,160) $ (4,592,616) $ 375,969
========== ========== ==========
(LOSS) EARNINGS PER SHARE:
Basic $ (0.32) $ (1.46) $ 0.31
========== ========== ==========
Diluted $ (0.32) $ (1.46) $ 0.29
========== ========== ==========
See notes to consolidated financial statements.
</TABLE>
45
<PAGE>
FLORIDA BANKS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
Additional
Preferred Stock Common Stock Paid-In
-------------------------- --------------------------
Shares Par Value Shares Par Value Capital
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997 1,215,194 $ 12,152 $ 2,883,207
Comprehensive income:
Net income
Unrealized gain on available for sale
investment securities, net of tax of $2,520
Comprehensive income
Adjustment to deferred tax asset
valuation allowance subsequent
to quasi-reorganization 2,654,789
--------- --------- ---------
BALANCE, DECEMBER 31, 1997 1,215,194 12,152 5,537,996
Comprehensive loss:
Net loss
Unrealized loss on available for sale
investment securities, net of tax of $7,181
Comprehensive loss
Issuance of common stock, net 4,100,000 41,000 37,351,948
Exercise of stock options 159,806 1,598 238,402
Income tax benefit resulting from the
exercise of stock options 118,265
Issuance of common stock to founders 297,000 2,970 2,155,718
Issuance of units 80,800 808 807,192
Issuance of preferred stock 60,600 $ 606,000
Redemption of preferred stock (60,600) (606,000)
Purchase of fractional shares (44) (407)
------- -------- ----- ------ -----
BALANCE, DECEMBER 31, 1998 5,852,756 58,528 46,209,114
Comprehensive loss:
Net loss
Unrealized loss on available for sale
investment securities, net of tax of $396,270
Comprehensive loss
Exercise of stock options 1,000 10 9,990
Purchase of treasury stock
--------- -------- --------- --------- ------------
BALANCE, DECEMBER 31, 1999 $ 5,853,756 $ 58,538 $ 46,219,104
========= ======== ========= ========= ============
See notes to consolidated financial statements.
</TABLE>
46
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
Accumulated
Other
Retained Comprehensive
Treasury Earnings Income (Loss),
Warrants Stock (Deficit) Net of Tax Total
<S> <C> <C> <C>
$ 383,738 $ (9,655) $ 3,269,442
375,969 375,969
13,435 13,435
------
389,404
2,654,789
------- ------- ---------
759,707 3,780 6,313,635
(4,592,616) (4,592,616)
(15,496) (15,496)
----------
(4,608,112)
37,392,948
240,000
118,265
2,158,688
$ 164,832 972,832
606,000
(606,000)
(407)
------- ---------- ------- ---------
164,832 (3,832,909) (11,716) 42,587,849
(1,847,160) (1,847,160)
(656,990) (656,990)
---------
(2,504,150)
10,000
$ (858,844) (858,844)
---------- ----------- ------------ ---------- -----------
$ 164,832 $ (858,844) $(5,680,069) $(668,706) $ 39,234,855
========== =========== ============ ========== ============
</TABLE>
47
<PAGE>
FLORIDA BANKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
1999 1998 1997
------------- ------------- -------------
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net (loss) income $ (1,847,160) $ (4,592,616) $ 375,969
Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities:
Depreciation and amortization 350,204 165,327 109,595
Loss on disposition of furniture and equipment 450
Deferred income tax (benefit) expense (1,075,781) (350,007) 231,998
Loss (gain) on sale of securities 4,274 (8,197) (7,635)
Amortization of premiums on investments, net 41,064 35,070 6,072
Provision for loan losses 1,610,091 629,000 60,000
Increase in accrued interest receivable (542,475) (126,748) (46,611)
Increase in other assets (57,381) (74,380) (7,237)
Increase in accrued interest payable 397,652 20,080 19,989
Increase (decrease) in other liabilities 484,684 (552,531) (16,654)
Noncash compensation and financing costs 3,939,054
------------- ------------- -------------
Net cash (used in) provided by operating activities (634,378) (915,948) 725,486
------------- ------------- -------------
INVESTING ACTIVITIES:
Proceeds from sales, paydowns and maturities
of investment securities:
Available for sale 28,974,876 11,672,088 13,543,810
Other 28,600
Purchases of investment securities:
Available for sale (35,733,287) (23,221,902) (15,698,714)
Other (609,950) (7,400) (42,200)
Net increase in loans (91,211,798) (33,447,205) (2,104,078)
Purchases of premises and equipment (1,969,539) (435,620) (133,020)
Proceeds from the sale of premises and equipment 350
Cash resulting from merger 163,971
------------ ---------- -------------
Net cash used in investing activities (100,549,348) (45,247,468) (4,434,202)
------------- ------------- -------------
FINANCING ACTIVITIES:
Net increase in demand deposits,
money market accounts and savings accounts 38,789,882 18,266,411 600,054
Net increase (decrease) in time deposits 55,695,191 894,024 (665,952)
Proceeds from issuance of common stock, net 38,129,956
Exercise of stock options 10,000 240,000
Redemption of preferred stock (606,000)
Payment of note payable (250,000)
Purchase of treasury stock (858,844)
Purchase of fractional shares (407)
Proceeds from FHLB advances 5,000,000
Increase (decrease) in repurchase agreements 5,368,447 (242,849) 522,073
Increase (decrease) in other borrowed funds 2,192,539 (2,355,791) 1,386,968
------------- ------------- -------------
Net cash provided by financing activities 106,197,215 54,075,344 1,843,143
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 5,013,489 7,911,928 (1,865,573)
CASH AND CASH EQUIVALENTS:
Beginning of year 20,945,139 13,033,211 14,898,784
------------- ------------- -------------
End of year $ 25,958,628 $ 20,945,139 $ 13,033,211
============= ============= =============
See notes to consolidated financial statements.
</TABLE>
48
<PAGE>
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
l. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 "Bank"). On August 4, 1998, the Company
completed its initial public offering and its merger (the "Merger") with
the Bank pursuant to which the Bank was merged with and into Florida Bank
No. 1, N.A., a wholly-owned subsidiary of the Company, and renamed Florida
Bank, N.A. Shareholders of the Bank received 1,375,000 shares of common
stock of the Company valued at $13,750,000. The Merger was considered a
reverse acquisition for accounting purposes, with the Bank identified as
the accounting acquiror. The Merger has been accounted for as a purchase,
but no goodwill has been recorded in the Merger and the financial
statements of the Bank have become the historical financial statements of
the Company.
The number of shares of common stock, the par value of common stock and
per share amounts have been restated to reflect the shares exchanged in
the Merger.
The consolidated financial statements include the accounts of the Company
and the Bank. All significant intercompany balances and transactions have
been eliminated in consolidation.
The accounting and reporting policies of the Company 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 Company 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 other comprehensive income or loss until realized. Other
investments, which include Federal Reserve Bank stock and Federal Home
Loan Bank stock, are carried at cost as such investments are not readily
marketable.
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.
<PAGE>
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (Continued)
- --------------------------------------------------------------------------------
Management has established a policy to discontinue accruing interest
(nonaccrual 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 Company is actively in the process of collection.
In addition, a loan will be placed on nonaccrual 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 nonaccrual 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.
Impaired loans are loans for which it is probable that the Company 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 on 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 Company 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
allowance 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
Company's quasi-reorganization (see note 14) reductions in the deferred
tax valuation allowance are credited to paid in capital.
<PAGE>
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (Continued)
- --------------------------------------------------------------------------------
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. In
addition, the Company has securities sold under agreements to repurchase,
which are classified as secured borrowings. Such borrowings generally
mature within one to thirty days from the transaction date. Securities
sold under agreements to repurchase are reflected at the amount of cash
received in connection with the transaction. Information concerning
repurchase agreements for the years ended December 31, 1999 and 1998 is
summarized as follows:
1999 1998
Average balance during the year $ 12,505,681 $ 5,236,857
Average interest rate during the year 4.42% 4.41%
Maximum month-end balance during the year $ 19,293,496 $ 7,964,257
Other Borrowed Funds - Other borrowed funds consist of Federal Home Loan
Bank borrowings and treasury tax and loan deposits. Treasury tax and loan
deposits generally are repaid within one to 120 days from the transaction
date.
Stock Options - The Company 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 Statement of Financial Accounting Standards ("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 fair value of the award and is recognized over
the service period, which is usually the vesting period.
Earnings Per Share - The Company accounts for earnings per share in
accordance with SFAS No. 128, "Earnings per Share". Basic earnings per
share ("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.
Supplementary Cash Flow Information - Cash and cash equivalents include
cash and due from banks, Federal funds sold and repurchase agreements.
Generally, Federal funds and repurchase agreements are sold for one day
periods. Interest paid on deposits and borrowed funds for the years ended
December 31, 1999, 1998 and 1997 was $4,298,642, $2,416,375 and
$2,275,739, respectively.
Recent Accounting Pronouncements - In June 1998, the FASB issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". This
statement establishes accounting and reporting standards for derivative
instruments and hedging activities. In June 1999, the FASB issued SFAS No.
137, which deferred the effective date of adoption of SFAS No. 133 for one
year. SFAS No. 133 will be effective for the first quarter of the year
ending December 31, 2001. Retroactive application to financial statements
of prior periods is not required. The Company does not currently have any
derivative instruments nor is it involved in hedging activities.
<PAGE>
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (Continued)
- --------------------------------------------------------------------------------
2. INVESTMENT SECURITIES
The amortized cost and estimated fair value of available for sale
investment securities as of December 31, 1999 and 1998 are as follows:
<TABLE>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 1999
U.S. Treasury securities and
<S> <C> <C> <C>
other U.S. agency obligations $ 3,002,132 $ (37,568) $ 2,964,564
State and municipal 500,000 (18,630) 481,370
Mortgage-backed securities 24,990,628 $ 5,933 (1,021,894) 23,974,667
------------ ------------ ------------ ------------
Total debt securities 28,492,760 5,933 (1,078,092) 27,420,601
Marketable equity securities 189,000 189,000
------------ ------------ ------------ ------------
Total securities available for sale $ 28,681,760 $ 5,933 $ (1,078,092) $ 27,609,601
============ ============ ============ ============
December 31, 1998
U.S. Treasury securities and
other U.S. agency obligations $ 5,011,331 $ 38,312 $ 5,049,643
Mortgage-backed securities 16,957,495 31,158 $ (88,367) 16,900,286
------------ ------------ ------------ ------------
$ 21,968,826 $ 69,470 $ (88,367) $ 21,949,929
============ ============ ============ ============
</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, 1999, by contractual maturity, are shown below:
Amortized Fair
Cost Value
Due before one year $ 501,162 $ 501,094
Due after one year through five years 2,500,970 2,463,471
Due after five years through ten years 500,000 481,369
-------- -------
3,502,132 3,445,934
Mortgage-backed securities 24,990,628 23,974,667
----------- ----------
Total $ 28,492,760 $ 27,420,601
============= ============
<PAGE>
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (Continued)
- --------------------------------------------------------------------------------
Investment securities with a carrying value of $16,316,693 and $16,135,926
were pledged as security for certain borrowed funds and public deposits
held by the Company at December 31, 1999 and 1998, respectively.
3. LOANS
Changes in the allowance for loan losses are summarized as follows:
1999 1998
Balance, beginning of year $ 1,073,346 $ 481,462
Provision for loan losses 1,610,091 629,000
Charge-offs (857,732) (64,981)
Recoveries 32,335 27,865
------------ -----------
Balance, end of year $ 1,858,040 $ 1,073,346
============ ===========
The Company's primary lending area is the state of Florida. Although the
Company's loan portfolio is diversified, a significant portion of its
loans are collateralized by real estate. Therefore the Company could be
susceptible to economic downturns and natural disasters. It is the
Company's lending policy to collateralize real estate loans based upon
certain loan to appraised value ratios.
Nonaccrual loans totaled approximately $1,100,000 and $725,000 of which
approximately $733,000 and $150,000 is guaranteed by the SBA at December
31, 1999 and 1998, respectively. The effects of carrying nonaccrual loans
during 1999, 1998, and 1997 resulted in a reduction of interest income of
approximately $76,000, $38,000 and $0, respectively.
Loans considered impaired totaled approximately $2,284,000 and $1,870,000
of which approximately $497,000 and $649,000 is guaranteed by the SBA at
December 31, 1999 and 1998, respectively. The total allowance for loan
losses related to these loans was approximately $63,000 and $580,000 at
December 31, 1999 and 1998, respectively. The interest income recognized
on impaired loans for the year ended December 31, 1999, 1998, and 1997 was
not significant.
The Company 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 $186,000 and $199,000 at December 31, 1999
and 1998. During the year ended December 31, 1999, such shareholders,
directors, officers and their related business interest borrowed
approximately $799,000 from the Company and repaid approximately $655,000.
<PAGE>
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (Continued)
- --------------------------------------------------------------------------------
4. PREMISES AND EQUIPMENT
Major classifications of these assets are as follows:
1999 1998
Land $ 95,000
Construction in process 37,500
Leasehold improvements 753,463 $ 292,096
Furniture, fixtures and equipment 2,519,854 1,154,681
------------ ----------
3,405,817 1,446,777
Accumulated depreciation and
amortization (964,999) (624,494)
------------- ----------
$ 2,440,818 $ 822,283
============= ==========
Depreciation and amortization amounted to $350,204, $165,327 and $109,595
for the years ended December 31, 1999, 1998 and 1997, respectively.
5. INCOME TAXES
The components of the provision for income tax expenses for the years ended
December 31, 1999, 1998 and 1997 are as follows:
1999 1998 1997
Deferred tax (benefit) expense $(1,075,781) $(350,007) $ 231,998
------------- ----------- ---------
$(1,075,781) $(350,007) $ 231,998
============= =========== =========
Income taxes for the years ended December 31, 1999, 1998 and 1997, differ
from the amount computed by applying the federal statutory corporate rate
to earnings before income taxes as summarized below:
<TABLE>
1999 1998 1997
(Benefit) provision based on Federal income
<S> <C> <C> <C>
tax rate $ (993,800) $(1,680,491) $ 204,216
Noncash compensation and financing costs 1,339,279
Nondeductible items, state income taxes
net of federal benefit and other (81,981) (8,795) 27,782
------------ ---------- ---------
$(1,075,781) $ (350,007) $ 231,998
============= ========== =========
</TABLE>
At December 31, 1999 and 1998, the Bank had tax operating loss
carryforwards of approximately $9,193,000 and $7,597,000, respectively.
During the year ended December 31, 1997, the Bank utilized net operating
loss carryforwards to reduce current taxes payable by approximately
<PAGE>
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (Continued)
- --------------------------------------------------------------------------------
$236,000. The utilization of net operating losses for the year ended
December 31, 1997 (a period 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, 1999 and 1998
are as follows:
1999 1998
Deferred tax assets:
Net operating loss carryforwards $ 3,278,623 $ 2,693,993
Allowance for loan losses 544,137 249,007
Loan fees 26,846 61,086
Unrealized loss on investment securities 403,451 7,181
Cash to accrual adjustment 150,343
Other 22,362 14,561
---------- ----------
4,425,762 3,025,828
---------- ----------
Deferred tax liabilities:
Accumulated depreciation 60,492 60,492
Cash to accrual adjustment 72,258
------ ------
60,492 132,750
------- -------
Deferred tax assets, net $ 4,365,270 $ 2,893,078
============ ============
At December 31, 1999, the Bank had tax net operating loss carryforwards of
approximately $9,193,000. Such carryforwards expire as follows: $597,000
in 2004, $1,588,000 in 2005, $1,171,000 in 2006, $1,919,000 in 2007,
$1,620,000 in 2008, $92,000 in 2009, $643,000 in 2018 and $1,563,000 in
2019. A change in ownership on August 4, 1998, as defined in section 382
of the Internal Revenue Code, limits the amount of net operating loss
carryforwards utilized in any one year to approximately $700,000.
At December 31, 1999 and 1998, 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, 1999 and
1998.
6. DEPOSITS
At December 31, 1999, the scheduled maturities of time deposits are as
follows:
2000 $ 63,271,768
2001 10,539,925
2002 2,604,287
2003 3,375,854
2004 5,518,890
---------
Total $ 85,310,724
==========
<PAGE>
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (Continued)
- --------------------------------------------------------------------------------
7. OTHER BORROWED FUNDS
Other borrowed funds at December 31, 1999 and 1998 are summarized as
follows:
1999 1998
Treasury tax and loan deposits $ 2,242,352 $ 49,813
Federal Home Loan Bank advance,
maturing on December 21, 2009,
subject to early
termination;
interest is fixed at 5.48% 5,000,000
--------- --------
$ 7,242,352 $ 49,813
=========== ========
Treasury tax and loan deposits are generally repaid within one to 120 days
form the transaction date.
The Federal Home Loan Bank of Atlanta has the option to convert the above
$5,000,000 advance into a three month LIBOR-based floating rate advance
effective June 21, 2000 and any payment date thereafter with at least two
business days prior notice to the Company.
If the Federal Home Loan Bank elects to convert this advance, then the
Company may elect, with at least two business days prior written notice,
to terminate in whole or part this transaction without payment of a
termination amount on any subsequent payment date. The Company may elect
to terminate the advance and pay a prepayment penalty, with two days prior
written notice, if the Federal Home Loan Bank does not elect to convert
this advance.
8. COMMITMENTS
The Bank is obligated under certain noncancellable operating leases for
office space and office property. Rental expense for 1999, 1998 and 1997
was approximately $455,000, $160,000 and $116,000, 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, 1999.
Year Ending December 31:
2000 $ 743,483
2001 720,961
2002 690,287
2003 692,986
2004 498,815
Later years 3,635,318
---------
$6,981,850
=========
9. 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
<PAGE>
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (Continued)
- --------------------------------------------------------------------------------
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. Such stock
options were exercised during 1998 and the Company recorded an increase to
additional paid-in capital of $118,265 equal to the resulting income tax
benefit. No options were granted during 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 expired June 10, 1998.
On June 4, 1998, the Company adopted the 1998 Stock Option Plan (the "1998
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 1998
Plan. During 1999 and 1998, the Company granted stock options to purchase
98,350 and 524,498 shares, respectively, of the Company's common stock at
an exercise price of $10.00 per share.
If compensation cost for stock options granted in 1999 and 1998 was
determined based on the fair value at the grant date consistent with the
method prescribed by SFAS No. 123, the Company's net loss and loss per
share would have been adjusted to the pro forma amounts indicated below:
1999 1998
Net loss
As reported $ (1,847,160) $ (4,592,616)
Pro forma (1,969,054) (5,621,732)
Loss per share - Basic
As reported (0.32) (1.46)
Pro forma (0.34) (1.79)
Under SFAS No. 123, the fair value of each option is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for options granted in 1999 and 1998,
respectively: dividend yield of 0%, expected volatility of 27.50% and
27.70%, risk-free interest rate of 4.30% and 4.60%, and an expected life
of 10 years. There were no stock options granted in 1997.
<PAGE>
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (Continued)
- --------------------------------------------------------------------------------
A summary of the status of fixed stock option grants under the Company's
stock-based compensation plans as of December 31, 1999, 1998 and 1997, and
changes during the years ending on those dates is presented below:
<TABLE>
1999 1998 1997
Weighted Average Weighted Average Weighted Average
Options Exercise Price Options Exercise Price Options Exercise Price
Outstanding -
<S> <C> <C> <C> <C> <C> <C>
Beginning of year 524,498 $ 10.00 159,806 $ 1.50 159,806 $ 1.50
Granted 98,350 10.00 524,498 10.00
Cancelled (60,000) 10.00
Exercised (1,000) 10.00 (159,806) 1.50
-------- ------ --------- ---- -------- ------
Outstanding -
End of year 561,848 $ 10.00 524,498 $ 10.00 159,806 $ 1.50
======== ======== ======== ======== ======== ======
Options exercisable
at year end 387,491 $ 10.00 339,000 $ 10.00 159,806 $ 1.50
Fair value of options
granted during the year $ 314,110 $ 2,504,382
Weighted average
remaining life 8.73 9.61
</TABLE>
Remaining non-exercisable options as of December 31, 1999 become
exercisable as follows:
2000 52,606
2001 45,506
2002 40,990
2003 23,865
2004 11,390
------
174,357
=======
10. FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK
The Company 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
commitments to fund loans, 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, 1999, financial instruments having credit risk in excess
of that reported in the balance sheet totaled approximately $69,000,000.
<PAGE>
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (Continued)
- --------------------------------------------------------------------------------
11. CONDENSED FINANCIAL INFORMATION OF FLORIDA BANKS, INC. (PARENT ONLY)
The following represents the parent only condensed balance sheet as of
December 31, 1999 and 1998 and the related condensed statement of
operations and statement of cash flows for the year ending December 31,
1999 and the period from August 4, 1998, the effective date of the merger,
through December 31, 1998.
<TABLE>
Condensed Balance Sheet 1999 1998
Assets
<S> <C> <C>
Cash and repurchase agreements $ 7,181,793 $ 12,718,376
Due from Florida Bank, N.A 898
Available for sale investment securities, at
fair value (cost $9,775,921 and $5,834,057, respectively) 9,639,524 5,810,033
Loans
Commercial 3,920,588 4,176,193
Commercial real estate 3,557,234 1,749,848
Consumer 300,000
------------ ------------
Total loans 7,777,822 5,926,041
Allowance for loan losses (74,411)
------------ ------------
Net loans 7,703,411 5,926,041
Premises and equipment, net 250,344 45,281
Accrued interest receivable 112,504 27,930
Deferred income taxes, net 350,292 162,435
Prepaid and other assets 43,904
Investment in subsidiary 20,918,586 18,210,770
------------ ------------
Total assets $ 46,200,358 $ 42,901,764
============ ============
Liabilities and Stockholders' Equity
Repurchase agreements $ 6,058,000
Accounts payable and accrued expenses 323,868 $ 326,223
Stockholders' Equity
Common stock 58,538 58,528
Additional paid-in capital 46,219,104 46,209,114
Warrants 164,832 164,832
Treasury stock (858,844)
Accumulated deficit (5,680,069) (3,832,909)
Accumulated other comprehensive loss,
net of tax (85,071) (24,024)
------------ ------------
Total liabilities and stockholders' equity $ 46,200,358 $ 42,901,764
============ ============
</TABLE>
<PAGE>
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (Continued)
- --------------------------------------------------------------------------------
<TABLE>
Condensed Statement of Operations 1999 1998
<S> <C> <C>
Income $ 1,330,858 $ 529,337
Equity in undistributed loss of Florida Bank, N.A (1,289,184) (615,598)
Expenses (2,063,983) (4,873,126)
Income tax benefit 175,149 162,435
----------- -----------
Net loss $(1,847,160) $(4,796,952)
=========== ===========
</TABLE>
<TABLE>
Condensed Statement of Cash Flows
Operating activities:
<S> <C> <C>
Net loss $ (1,847,160) $ (4,796,952)
Adjustments to reconcile net loss to net
cash used in operating activities:
Noncash compensation and financing costs 3,939,054
Equity in undistributed loss of Florida Bank, N.A 1,289,184 615,598
Depreciation and amortization 37,289 8,582
Deferred income tax benefit (136,531) (162,435)
Gain on sale of investment securities (42,250)
Amortization of premiums on investments, net 8,720
Provision for loan losses 74,411
Amortization of loan premiums 3,043
Increase in accrued interest receivable (84,574) (8,009)
Decrease (increase) in due from Florida Bank, N.A 898 (898)
Increase in prepaid and other assets (43,904)
Decrease in accounts payable and accrued expenses (2,355) (540,610)
------------ ------------
Net cash used in operating activities (743,229) (945,670)
------------ ------------
Investing activities:
Purchase of premises and equipment (250,822) (13,376)
Proceeds from sales, paydowns and maturities
of investment securities 4,929,200
Purchase of investment securities (8,837,534) (5,834,057)
Net increase in loans (1,854,824) (5,926,041)
Capital contributed to Florida Bank, N.A (4,000,000) (12,000,000)
------------ ------------
Net cash used in financing activities (10,013,980) (23,773,474)
------------ ------------
Financing activities:
Increase in repurchase agreements 6,058,000
Proceeds from advance from Florida Bank, N.A 11,470
Proceeds from sale of common stock 38,129,956
Net proceeds from the exercise of stock options 10,000
Payment of note payable (250,000)
Redemption of preferred stock (606,000)
Purchase of fractional shares (407)
Purchase of treasury stock (858,844)
------------ -----------
Net cash provided by financing activities 5,220,626 37,273,549
------------ -----------
Net (decrease) increase in cash and cash equivalents (5,536,583) 12,554,405
Cash and cash equivalents at beginning of period 12,718,376 163,971
------------ -----------
Cash and cash equivalents at end of period $ 7,181,793 $ 12,718,376
============ ============
</TABLE>
<PAGE>
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (Continued)
- --------------------------------------------------------------------------------
12. 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,
1999, that the Bank meets all capital adequacy requirements to which it is
subject.
As of December 31, 1999 and 1998, notifications from the Office of the
Comptroller of the Currency categorized the Bank as adequately capitalized
and well capitalized, respectively, under the regulatory framework for
prompt corrective action. To be categorized as adequately or 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 Company's and Bank's
actual capital amounts and ratios are also presented in the following
table.
<TABLE>
To be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1999:
Total capital
(to risk-weighted assets)
<S> <C> <C> <C> <C>
Florida Banks, Inc. $ 37,636,000 18.19 % > $ 16,567,000 > 8.00 % N/A N/A
- -
Florida Bank, N.A. 18,926,000 10.53 > 14,380,000 > 8.00 > $ 17,974,000 > 10.00 %
- - - -
Tier I capital
(to risk-weighted assets)
Florida Banks, Inc. 35,778,000 17.29 > 8,278,000 > 4.00 N/A N/A
- -
Florida Bank, N.A. 17,142,000 9.54 > 7,190,000 > 4.00 > 10,785,000 > 6.00
- - - -
Tier I capital
(to average assets)
Florida Banks, Inc. 35,778,000 20.01 > 6,915,000 > 4.00 N/A N/A
- -
Florida Bank, N.A. 17,142,000 10.35 > 6,627,000 > 4.00 > 8,284,000 > 5.00
- - - -
</TABLE>
<PAGE>
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (Continued)
- --------------------------------------------------------------------------------
<TABLE>
To be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1998:
Total capital
(to risk-weighted assets)
<S> <C> <C> <C> <C>
Florida Banks, Inc. $ 40,780,000 63.25 % > $ 5,159,000 > 8.00 % N/A N/A
- -
Florida Bank, N.A. 15,446,000 26.34 > 4,690,000 > 8.00 > $ 5,863,000 > 10.00 %
- - - -
Tier I capital
(to risk-weighted assets)
Florida Banks, Inc. 39,707,000 61.59> 2,579,000 > 4.00 N/A N/A
- -
Florida Bank, N.A. 14,576,000 24.86> 2,345,000 > 4.00 > 3,518,000 > 6.00
- - - -
Tier I capital
(to average assets)
Florida Banks, Inc. 39,707,000 36.44> 4,359,000 > 4.00 N/A N/A
- -
Florida Bank, N.A. 14,576,000 17.01> 3,427,000 > 4.00 > 4,284,000 > 5.00
- - - -
</TABLE>
The following is a reconciliation of shareholders' equity as reported in
the financial statements to regulatory capital for Florida Banks, Inc. as
of December 31, 1999 and 1998:
<TABLE>
Tier I Total
Leverage Risk Based Risk Based
Capital Capital Capital
December 31, 1999:
<S> <C> <C> <C>
Shareholders' equity $ 39,235,000 $ 39,235,000 $ 39,235,000
Disallowed deferred tax asset (4,126,000) (4,126,000) (4,126,000)
Unrealized loss on available for sale
investment securities 669,000 669,000 669,000
Allowance for loan loss 1,858,000
------------- ------------- ------------
Regulatory capital $ 35,778,000 $ 35,778,000 $ 37,636,000
============= ============= ============
December 31, 1998:
Shareholders' equity $ 42,588,000 $ 42,588,000 $ 42,588,000
Disallowed deferred tax asset (2,893,000) (2,893,000) (2,893,000)
Unrealized loss on available for sale
investment securities 12,000 12,000 12,000
Allowance for loan loss 1,073,000
------------- ------------- ------------
Regulatory capital $ 39,707,000 $ 39,707,000 $ 40,780,000
============= ============= ============
</TABLE>
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company 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
<PAGE>
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (Continued)
- --------------------------------------------------------------------------------
Instruments (SFAS 107). Such information, which pertains to the Company's
financial instruments is based on the requirement set forth in SFAS 107
and does not purport to represent the aggregate net fair value of the
Company. Furthermore, the fair value estimates are based on various
assumptions, methodologies and subjective considerations, which vary
widely among different financial institutions and which are subject to
change.
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.
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.
A comparison of the carrying amount to the fair values of the Company's
significant financial instruments as of December 31, 1999 and 1998 is as
follows:
<TABLE>
1999 1998
---------------------------- ----------------------------
Carrying Fair Carrying Fair
Amounts in Thousands Amount Value Amount Value
Financial assets:
<S> <C> <C> <C> <C>
Available for sale investment securities $ 27,610 $ 27,610 $ 21,950 $ 21,950
Other investments 902 902 292 292
Loans 157,588 152,602 67,293 66,303
Financial liabilities:
Deposits 159,106 159,197 64,621 64,501
Repurchase agreements 11,037 11,037 5,669 5,669
Other borrowed funds 7,242 7,242 50 50
</TABLE>
<PAGE>
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (Continued)
- --------------------------------------------------------------------------------
14. 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.
15. EARNINGS PER SHARE
Following is a reconciliation of the denominator used in the computation
of basic and diluted earnings per common share.
<TABLE>
1999 1998 1997
---------------- ---------------- ----------------
Weighted average number of common
<S> <C> <C> <C>
shares outstanding - Basic 5,829,937 3,137,644 1,215,194
Incremental shares from the assumed
conversion of stock options 85,903
---------------- --------------- ---------------
Total - Diluted 5,829,937 3,137,644 1,301,097
================ =============== ===============
</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 Company 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 Company 's average book value
per common share for 1997 as the Company 's stock was not actively traded
and limited trades during 1997 indicated that book value was a reasonable
estimate of fair value.
16. BENEFIT PLAN
The Company has a 401(k) defined contribution benefit plan (the "Plan")
which covers substantially all of its employees. The Company matches 50%
of employee contributions to the Plan, up to 6% of all participating
employees compensation. The Company contributed $63,055 , $23,562 and
$10,353 to the Plan in 1999, 1998 and 1997, respectively.
<PAGE>
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (Concluded)
- --------------------------------------------------------------------------------
17. EMPLOYEE STOCK PURCHASE PLAN
On January 22, 1999, the Board of Directors of the Company adopted the
Employee Stock Purchase Plan (the "Plan"). The Plan was approved by the
Company's shareholders at the Company's 1999 Annual Meeting of
Shareholders on April 23, 1999. The Plan provides for the sale of not more
than 200,000 shares of common stock to eligible employees of the Company
pursuant to one or more offerings under the Plan. The purchase price for
shares purchased pursuant to the Plan is the lesser of (a) 85% of the fair
market value of the common stock on the grant date, or if no shares were
traded on that day, on the last day prior thereto on which shares were
traded, or (b) an amount equal to 85% of the fair market value of the
common stock on the exercise date, or if no shares were traded on that
day, on the last day prior thereto on which shares were traded. For the
year ended December 31, 1999, there were no purchases of common stock
pursuant to the Plan.
* * * * * *
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
------ --------------------------------------------------------------
There has been no occurrence requiring a response to this Item.
PART III
Item 10. Directors and Executive Officers of the Registrant.
------- --------------------------------------------------
The information relating to directors and executive officers of
the Company contained in the Company's definitive proxy statement to be
delivered to shareholders in connection with the 2000 Annual Meeting of
Shareholders scheduled to be held May 15, 2000 is incorporated herein by
reference.
Item 11. Executive Compensation.
------- ----------------------
The information relating to executive compensation contained in
the Company's definitive proxy statement to be delivered to shareholders in
connection with the 2000 Annual Meeting of Shareholders scheduled to be held May
15, 2000 is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
------- -------------------------------------------------------------
The information relating to security ownership of certain
beneficial owners and management contained in the Company's definitive proxy
statement to be delivered to shareholders in connection with the 2000 Annual
Meeting of Shareholders scheduled to be held May 15, 1999 is incorporated herein
by reference.
Item 13. Certain Relationships and Related Transactions.
------- ----------------------------------------------
The information relating to related party transactions
contained in the registrant's definitive proxy statement to be delivered to
shareholders in connection with the 2000 Annual Meeting of Shareholders
scheduled to be held May 15, 2000 is incorporated herein by reference.
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.
------- -------------------------------------------------------------
(a) 1.Financial Statements. The following financial statements
and accountants' reports have been filed as Item 8 in Part II of this Report:
Report of Independent Public Accountants
Consolidated Balance Sheets - December 31, 1999 and 1998
Consolidated Statements of Operations - Years ended December 31,
1999, 1998 and 1997
Consolidated Statements of Shareholders' Equity - Years
ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows - Years ended December 31,
1999, 1998 and 1997
Notes to Consolidated Financial Statements
2. Exhibits.
--------
Exhibit Number Description of Exhibits
*3.1 - Articles of Incorporation of the
Company, as amended
*3.1.1 - Second Amended and Restated Articles
of Incorporation
*3.2 - By-Laws of the Company
<PAGE>
*3.2.1 - Amended and Restated By-Laws of the
Company
*4.1 - Specimen Common Stock Certificate
*4.2 - See Exhibits 3.1.1 and 3.2.1 for
provisions of the Articles of
Incorporation and By-Laws of the
Company defining rights of the
holders of the Company's Common Stock
*10.1 - Form of Employment Agreement between
the Company and Charles E. Hughes,
Jr.
*10.2 - The Company's 1998 Stock Option Plan
*10.2.1 - Form of Incentive Stock Option
Agreement
*10.2.2 - Form of Non-qualified Stock Option
Agreement
*10.3 - Form of Employment Agreement between
the Company and T. Edwin Stinson,
Jr., Donald D. Roberts and Richard B.
Kensler
**21.1 - Subsidiaries of the Registrant
**23.1 - Consent of Deloitte & Touche LLP
**27.1 - Financial Data Schedule
(b) Reports on Form 8-K
-------------------
* Incorporated by reference to the Company's Registration
Statement on Form S-1, Commission File No. 333-5087
** Filed herewith
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, in the City of Jacksonville, State
of Florida on March 30, 2000.
FLORIDA BANKS, INC.
By:/s/ Charles E. Hughes, Jr.
--------------------------
Charles E. Hughes, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
Signature Title Date
/s/ Charles E. Hughes, Jr. President, Chief Executive March 30, 2000
- ---------------------------- Officer and Director (Principal
Charles E. Hughes, Jr. Executive Officer)
/s/T. Edwin Stinson, Jr. Chief Financial Officer, March 30, 2000
- ---------------------------- Secretary, Treasurer and
T. Edwin Stinson, Jr. Director (Principal Financial
and Accounting Officer)
/s/M. G. Sanchez Chairman of the Board March 30, 2000
- ---------------------------
M. G. Sanchez
/s/ T. Stephen Johnson Vice-Chairman of the Board March 30, 2000
- ---------------------------
T. Stephen Johnson
<PAGE>
/s/ Clay M. Biddinger Director March 30, 2000
- ---------------------------
Clay M. Biddinger
/s/ P. Bruce Culpepper Director March 30, 2000
- ---------------------------
P. Bruce Culpepper
/s/ J. Malcolm Jones, Jr. Director March 30, 2000
- ---------------------------
J. Malcolm Jones, Jr.
/s/ W. Andrew Krusen, Jr. Director March 30, 2000
- ---------------------------
W. Andrew Krusen, Jr.
/s/ Nancy E. LaFoy Director March 30, 2000
- ---------------------------
Nancy E. LaFoy
/s/ Wilford C. Lyon, Jr. Director March 30, 2000
- ----------------------------
Wilford C. Lyon, Jr.
/s/ David McIntosh Director March 30, 2000
- ----------------------------
David McIntosh
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
21.1 Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP
27.1 Financial Data Schedule
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Florida Bank, N.A., a national banking association organized
under the laws of the United States
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-64073 of Florida Banks, Inc. on Form S-8 of our report dated February 11,
2000, appearing in this Annual Report on Form 10-K of Florida Banks, Inc. for
the year ended December 31, 1999.
/s/ DELOITTE & TOUCHE LLP
Certified Public Accountants
Jacksonville, Florida
March 30, 2000
<TABLE> <S> <C>
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-END> Dec-31-1999
<CASH> 6,088,628
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<INCOME-PRETAX> (2,922,941)
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<NET-INCOME> (1,847,160)
<EPS-BASIC> (0.32)
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<LOANS-NON> 1,100,000
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