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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _________.
COMMISSION FILE NUMBER 0-24891
ADMIRALTY BANCORP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 65-0405207
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
4400 PGA BOULEVARD, PALM BEACH GARDENS, FLORIDA 33410
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(561) 624-4701
(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)
(FORMER NAME, FORMER ADDRESS AND FORMER YEAR, IF CHANGED SINCE LAST REPORT)
---------------
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 and 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-B is not contained herein, and will not be contained, to
the best of Issuer's knowledge, in definitive proxy or information statements
incorporated by referenced in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of February 26, 1999 was $16,700,121.
For the fiscal year ended December 31, 1998, the Registrant had total
revenues of $4.8 million.
As of December 31, 1998, there were 2,381,640 shares of common stock,
consisting of shares of Class A Common Stock and Class B Common Stock,
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
<TABLE>
<CAPTION>
10-KSB ITEM DOCUMENT INCORPORATED
------------------------------------------ -------------------------------------------------------
<S> <C> <C>
Item 9. Directors and Executive Officers of the Proxy Statement for 1999 Annual Meeting of
Company; Compliance with Shareholders to be filed no later than April 30, 1999.
Section 16(a) of the Exchange Act.
Item 10. Executive Compensation Proxy Statement for 1999 Annual Meeting of
Shareholders to be filed no later than April 30, 1999.
Item 11. Security Ownership of Certain Beneficial Proxy Statement for 1999 Annual Meeting of
Owners and Management Shareholders to be filed no later than April 30, 1999.
Item 12. Certain Relationships and Related Proxy Statement for 1999 Annual Meeting of
Transactions Shareholders to be filed no later than April 30, 1999.
</TABLE>
================================================================================
<PAGE>
PART I
ITEM 1.--DESCRIPTION OF BUSINESS
GENERAL
Admiralty Bancorp, Inc. ("Admiralty" or the "Company") is a one bank
holding company incorporated under the laws of Delaware and a registered bank
holding company under the Bank Holding Company Act of 1956, as amended (the
"BHCA"). The Company is a holding company for Admiralty Bank, a Florida state
chartered commercial bank and member of the Federal Reserve System (the
"Bank"). The Bank operates through its main office located in Palm Beach
Gardens, Florida and three branch offices located in Juno Beach, Boca Raton and
Jupiter, Florida.
The Bank's deposits are insured by the Bank Insurance Fund ("BIF") of the
Federal Deposit Insurance Corporation ("FDIC") up to applicable limits. The
operations of the Bank are subject to the supervision and regulation of the
Federal Reserve Bank and the Florida Department of Banking (the "Department").
The principal executive offices of the Bank are located at 4400 PGA Boulevard,
Palm Beach Gardens, Florida 33410 and the telephone number is (561) 624-4701.
BUSINESS OF THE COMPANY
The Company conducts a traditional commercial banking business and offers
services including personal and business checking accounts and time deposits,
money market accounts and regular savings accounts. The Company structures its
specific services and charges in a manner designed to attract the business of
(i) small and medium-sized businesses, and the owners and managers of these
entities; (ii) professionals and middle managers of locally-based corporations;
and (iii) individuals residing, working and shopping in the Palm Beach and
Broward Counties, Florida trade area serviced by the Company. The Company
engages in a wide range of lending activities and offers commercial, consumer,
residential and non-residential mortgage and construction loans.
SERVICE AREA
The Company's service area primarily consists of Palm Beach and Broward
Counties, Florida, although the Company makes loans throughout Florida. The
Company operates through its main office in Palm Beach Gardens, Florida and
branch offices in Juno Beach, Boca Raton and Jupiter, Florida.
COMPETITION
The Company operates in a highly competitive environment competing for
deposits and loans with commercial banks, thrifts and other financial
institutions, many of which have greater financial resources than the Company.
Many large financial institutions compete for business in the Company's service
area. Certain of these institutions have significantly higher lending limits
than the Company and provide services to their customers which the Company does
not offer.
Management believes the Company is able to compete favorably with its
competitors because it provides responsive personalized services through
management's knowledge and awareness of the Company's service area, customers
and business.
EMPLOYEES
At December 31, 1998, the Company employed 42 full-time employees and 5
part-time employees. None of these employees is covered by a collective
bargaining agreement and the Company believes that its employee relations are
good.
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SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under both
federal and state law. These laws and regulations are intended to protect
depositors, not stockholders. To the extent that the following information
describes statutory and regulatory provisions, it is qualified in its entirety
by reference to the particular statutory and regulatory provisions. Any change
in the applicable law or Regulation may have a material effect on the business
and prospects of the Company and the Bank.
BANK HOLDING COMPANY REGULATION
As a bank holding company registered under the BHCA, the Company is
subject to the regulation and supervision of the Board of Governors of the
Federal Reserve System ("FRB"). The Company is required to file with the FRB
annual reports and other information regarding its business operations and
those of its subsidiaries. Under the BHCA, Admiralty's activities and those of
its subsidiaries are limited to banking, managing or controlling banks,
furnishing services to or performing services for its subsidiaries or engaging
in any other activity which the FRB determines to be so closely related to
banking or managing or controlling banks as to be properly incident thereto.
The BHCA requires, among other things, the prior approval of the FRB in
any case where a bank holding company proposes to (i) acquire all or
substantially all of the assets of any other bank, (ii) acquire direct or
indirect ownership or control of more than 5% of the outstanding voting stock
of any bank (unless it owns a majority of such Company's voting shares) or
(iii) merge or consolidate with any other bank holding company. The FRB will
not approve any acquisition, merger, or consolidation that would have a
substantially anti-competitive effect, unless the anti-competitive impact of
the proposed transaction is clearly outweighed by a greater public interest in
meeting the convenience and needs of the community to be served. The FRB also
considers capital adequacy and other financial and managerial resources and
future prospects of the companies and the banks concerned, together with the
convenience and needs of the community to be served, when reviewing
acquisitions or mergers.
Additionally, the BHCA prohibits a bank holding company, with certain
limited exceptions, from (i) acquiring or retaining direct or indirect
ownership or control of more than 5% of the outstanding voting stock of any
company which is not a bank or bank holding company, or (ii) engaging directly
or indirectly in activities other than those of banking, managing or
controlling banks, or performing services for its subsidiaries, unless such
non-banking business is determined by the FRB to be so closely related to
banking or managing or controlling banks as to be properly incident thereto. In
making such determinations, the FRB is required to weigh the expected benefits
to the public, such as greater convenience, increased competition or gains in
efficiency, against the possible adverse effects, such as undue concentration
of resources, decreased or unfair competition, conflicts of interest, or
unsound banking practices.
There are a number of obligations and restrictions imposed on bank holding
companies and their depository institution subsidiaries by law and regulatory
policy that are designed to minimize potential loss to the depositors of such
depository institutions and the FDIC insurance funds in the event the
depository institution becomes in danger of default. Under a policy of the FRB
with respect to bank holding company operations, a bank holding company is
required to serve as a source of financial strength to its subsidiary
depository institutions and to commit resources to support such institutions in
circumstances where it might not do so absent such policy. The FRB also has the
authority under the BHCA to require a bank holding company to terminate any
activity or to relinquish control of a non-bank subsidiary upon the FRB's
determination that such activity or control constitutes a serious risk to the
financial soundness and stability of any bank subsidiary of the bank holding
company.
CAPITAL ADEQUACY GUIDELINES FOR BANK HOLDING COMPANIES. In January 1989,
the FRB adopted risk-based capital guidelines for bank holding companies. The
risk-based capital guidelines are designed to make regulatory capital
requirements more sensitive to differences in risk profile among
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banks and bank holding companies, to account for off-balance sheet exposure,
and to minimize disincentives for holding liquid assets. Under these
guidelines, assets and off-balance sheet items are assigned to broad risk
categories each with appropriate weights. The resulting capital ratios
represent capital as a percentage of total risk-weighted assets and off-balance
sheet items.
The risk-based guidelines apply on a consolidated basis to bank holding
companies with consolidated assets of $150 million or more. For bank holding
companies with less than $150 million in consolidated assets, the guidelines
will be applied on a bank-only basis unless: (a) the parent bank holding
company is engaged in nonbank activity involving significant leverage; or (b)
the parent company has a significant amount of outstanding debt that is held by
the general public.
The minimum ratio of total capital to risk-weighted assets (including
certain off-balance sheet activities, such as standby letters of credit) is 8%.
At least 4% of the total capital is required to be "Tier I Capital," consisting
of common stockholders' equity and qualifying preferred stock, less certain
goodwill items and other intangible assets. The remainder ("Tier II Capital")
may consist of (a) the allowance for loan losses of up to 1.25% of
risk-weighted assets, (b) non-qualifying preferred stock, (c) hybrid capital
instruments, (d) perpetual debt, (e) mandatory convertible securities, and (f)
qualifying subordinated debt and intermediate-term preferred stock up to 50% of
Tier I capital. Total capital is the sum of Tier I and Tier II capital less
reciprocal holdings of other banking organizations' capital instruments,
investments in unconsolidated subsidiaries and any other deductions as
determined by the FRB (determined on a case by case basis or as a matter of
policy after formal rule-making).
Bank holding company assets are given risk-weights of 0%, 20%, 50% and
100%. In addition, certain off-balance sheet items are given similar credit
conversion factors to convert them to asset equivalent amounts to which an
appropriate risk-weight will apply. These computations result in the total
risk-weighted assets. Most loans are assigned to the 100% risk category, except
for performing first mortgage loans fully secured by residential property which
carry a 50% risk-weighting and loans secured by deposits in the Bank which
carry a 20% risking weighting. Most investment securities (including,
primarily, general obligation claims of states or other political subdivisions
of the United States) are assigned to the 20% category, except for municipal or
state revenue bonds, which have a 50% risk-weight, and direct obligations of
the U.S. Treasury or obligations backed by the full faith and credit of the
U.S. Government, which have a 0% risk-weight. In converting off-balance sheet
items, direct credit substitutes including general guarantees and standby
letters of credit backing financial obligations are given a 100%
risk-weighting. Transaction related contingencies such as bid bonds, standby
letters of credit backing nonfinancial obligations, and undrawn commitments
(including commercial credit lines with an initial maturity of more than one
year) have a 50% risk-weighting. Short term commercial letters of credit have a
20% risk-weighting and certain short-term unconditionally cancelable
commitments have a 0% risk-weighting.
In addition to the risk-based capital guidelines, the FRB has adopted a
minimum Tier I capital (leverage) ratio, under which a bank holding company
must maintain a minimum level of Tier I capital to average total consolidated
assets of at least 3% in the case of a bank holding company that has the
highest regulatory examination rating and is not contemplating significant
growth or expansion. All other bank holding companies are expected to maintain
a leverage ratio of at least 100 to 200 basis points above the stated minimum.
BANK REGULATION
As a Florida chartered commercial bank, the Bank is subject to the
regulation, supervision, and control of the Department. As a member of the
Federal Reserve System, the Bank is subject to regulation, supervision and
control of the FRB. As an FDIC-insured institution, the Bank is subject to
regulation, supervision and control of the FDIC, an agency of the federal
government. The regulations of the Federal Reserve, the FDIC and the Department
impact virtually all activities of the Bank,
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including the minimum level of capital the Bank must maintain, the ability of
the Bank to pay dividends, the ability of the Bank to expand through new
branches or acquisitions and various other matters.
INSURANCE OF DEPOSITS. The deposits of the Bank are insured up to
applicable limits by the Bank Insurance Fund ("BIF") of the FDIC. Accordingly,
the Bank is subject to deposit insurance assessments to maintain the BIF. Under
the FDIC's insurance premium assessment system, each institution is assigned to
one of nine assessment risk classifications based on its capital ratios and
supervisory evaluations. The lowest risk institutions do not pay any insurance
premium, while the highest risk institutions pay a premium assessed at the rate
of .27% of domestic deposits. Each institution's classification under the
system is re-examined semiannually. In addition, the FDIC is authorized to
increase or decrease such rates on a semiannual basis. In addition to insurance
premium assessments, under the Deposit Insurance Funds Act of 1996 (the
"Deposit Act"), commercial banks like the Bank are required for the first time
to pay a portion of the interest and principal owed on bonds issued by the
Federal Financing Corporation ("FICO") to assist the thrift bailout in the mid-
1980's. BIF insured commercial banks like the Bank are assessed 1.3 basis
points of their assessed deposits in satisfaction of this FICO payment, in
addition to deposit insurance premiums. The Deposit Act also calls for the
federal banking agencies to study the various financial institution charters
and propose a single standard federal charter, thereby doing away with the
separate bank and thrift charters. Management of the Company is not able to
predict at this time whether the federal regulators will adopt a unified
charter nor to predict the impact of any proposed change upon the Bank.
DIVIDEND RIGHTS. Pursuant to the provisions of the Florida Banking Code, a
Florida state chartered bank may quarterly, semi-annually or annually declare a
dividend out of the Company's net profits for the dividend period and retained
net profits from the preceding two years. In addition, with the approval of the
Florida Department of Banking and Finance, a bank may declare a dividend from
retained profits which have accrued in periods prior to the preceding two
years, provided that in this circumstance the bank must make an addition to its
surplus fund equal to at least 20% of its net profits from the preceding
period. No Florida state chartered bank may declare a dividend if it has
incurred a loss for its current period plus the two preceding years, or which
would cause the capital account of the bank to fall below the minimum amount
required by law or regulation.
ITEM 2.--DESCRIPTION OF PROPERTY
The Bank leases its main office in Palm Beach Gardens and its branch
offices in Juno Beach, Jupiter and Boca Raton, Florida. In addition, the Bank
maintains an operations center in North Palm Beach. The following table sets
forth certain information regarding these leases:
<TABLE>
<CAPTION>
LOCATION SQUARE FEET MONTHLY RENTAL TERM
- ----------------------------- ------------- ---------------- ------------------
<S> <C> <C> <C>
Palm Beach Gardens .......... 7,930 $ 16,190 October 31, 2003
Juno Beach .................. 2,508 4,348 December 31, 2000
Jupiter (old) ............... 1,500 1,500 June 15, 1999
Jupiter (new) ............... 4,067 8,000 August 31, 2008
Boca Raton .................. 5,000 11,917 November 30, 2008
Boca Temporary .............. 1,900 3,800 January 31, 1999
North Palm Beach ............ 1,800 1,762 July 31, 2001
</TABLE>
ITEM 3.--LEGAL PROCEEDINGS
The Company and the Bank are periodically parties to or otherwise involved
in legal proceedings arising in the normal course of business, such as claims
to enforce liens, claims involving the making and servicing of real property
loans, and other issues incident to the business of the Company and the
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Bank. Management does not believe that there is any pending or threatened
proceeding against the Company or the Bank which, if determined adversely,
would have a material effect on the business or financial position of the
Company.
ITEM 4.--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted for a vote of the Registrant's shareholders
during the fourth quarter of fiscal 1998.
PART II
ITEM 5.--MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since September 30, 1998, the Company's Class B common stock has been
traded on the NASDAQ National Market under the symbol "AAABB". The following
table shows the high and low bid prices for the common stock as reported on the
NASDAQ National Market for the fourth quarter of 1998. These quotations reflect
inter-dealer prices, without retail market, mark-down or commission and may not
represent actual transactions.
1998
------------------------
HIGH LOW
----------- ----------
4th Quarter ......... $ 10.75 $ 9.50
We have not paid cash dividends and do not anticipate paying cash
dividends in the foreseeable future.
As of December 31, 1998, we had 71 record holders of our Class A Stock and
83 record holders of our Class B Stock.
6
<PAGE>
ITEM 6A.--SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The current management team and board of directors of the Company acquired
the Company on January 22, 1998 (the "Change In Control"). Prior to the Change
In Control and the Company's public offering in the fall of 1998, the Company
was a privately held institution (the "Predecessor Company"). The Company's
historic financial statements included in this filing for the 12-months ended
December 31, 1998 do not include the first 21-days of operations of the Bank in
January of 1998, prior to the Change In Control. To ensure comparability with
prior year periods, the income statement data discussed in the Management
Discussion and Analysis section hereof are based upon pro forma data for the
Company after the Change In Control and the Predecessor Company during 1998
prior to the Change In Control. To assist in the review of the following
management discussion and analysis, the Company is presenting the following
selected information regarding the Company and the Predecessor Company, which
should be read in conjunction with the Company's consolidated financial
statements, including the notes thereto, and the Management's Discussion and
Analysis section hereof. This selected financial data and other data for the
12-months ended December 31, 1998 were prepared from the historical and pro
forma data of the Company.
<TABLE>
<CAPTION>
PREDECESSOR
ADMIRALTY BANCORP, INC. COMPANY
--------------------------------------------- ----------------------
AS OF
DECEMBER 31, 1997
AND FOR THE PERIOD
AUGUST 11, 1997
AS OF AND FOR (DATE OF INCEPTION) AS OF AND FOR
THE YEAR ENDED THROUGH THE YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 (PRO FORMA)(1) 1997 1997
--------------------- --------------------- ----------------------
(IN THOUSANDS, EXCEPT
(IN THOUSANDS, EXCEPT PER SHARE DATA) PER SHARE DATA)
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Interest income ......................................... $4,249 $84 $3,630
Interest expense ........................................ 1,165 8 1,197
------ --- ------
Net interest income ..................................... 3,084 76 2,433
Provision for loan losses ............................... 385 -- 435
------ --- ------
Net interest income after provision
for loan losses ....................................... 2,699 76 1,998
------ --- ------
Non-interest income ..................................... 773 -- 1,729
Non-interest expense .................................... 3,910 2 2,698
Income (loss) before income taxes ....................... (438) 74 1,029
------ --- ------
Income tax (benefit) expense ............................ -- 15 (288)
Income before minority interest ......................... (438) 59 1,317
------ --- ------
Minority interest in net income of subsidiaries ......... (6) -- (53)
--------- --- ------
Net income (loss) ....................................... $ (444) $59 $1,264
======== === ======
PER COMMON SHARE DATA:
Net income--basic and diluted--Class A(2) ............... .50 -- --
Net income (loss) basic and diluted--
Class B(2) ............................................ (1.68) -- --
Book value(5) ........................................... 8.19 -- --
</TABLE>
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<TABLE>
<CAPTION>
PREDECESSOR
ADMIRALTY BANCORP, INC. COMPANY
--------------------------------------------- ----------------------
AS OF
DECEMBER 31, 1997
AND FOR THE PERIOD
AUGUST 11, 1997
AS OF AND FOR (DATE OF INCEPTION) AS OF AND FOR
THE YEAR ENDED THROUGH THE YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 (PRO FORMA)(1) 1997 1997
--------------------- --------------------- ----------------------
(IN THOUSANDS, EXCEPT
(IN THOUSANDS, EXCEPT PER SHARE DATA) PER SHARE DATA)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Total assets ............................................ $ 80,748 $ 8,045 $ 48,206
Total loans ............................................. 47,414 -- 23,232
Allowance for loan losses ............................... (602) -- (378)
Investment Securities(4) ................................ 10,074 -- 20,308
Goodwill, net ........................................... 3,834 -- --
Deposits ................................................ 60,718 -- 42,776
Minority interest ....................................... -- -- 376
Shareholders' equity .................................... 19,503 8,005 4,245
SELECTED OPERATING RATIOS:(3)
Return on average assets ................................ ( 0.77%) -- 2.85%
Return on average common equity ......................... (3.96%) -- 35.56%
Net interest margin ..................................... 6.21% -- 5.94%
SELECTED CAPITAL AND ASSET
QUALITY RATIOS:
Equity/assets ........................................... 19.51% -- 8.01%
Non-accrual loans/total loans ........................... 0.23% -- 0.41%
Non-performing assets/total loans and other real
estate owned .......................................... 0.25% -- 0.52%
Allowance for loan losses/total loans ................... 1.27% -- 1.63%
Allowance for loan losses/non-performing assets ......... 514.94% -- 315.00%
Net charge-offs/average loans ........................... 0.56% -- 2.02%
</TABLE>
- ----------------
(1) Financial information for the year ended December 31, 1998 is based upon
the Pro Forma Consolidated Income Statement for that time period.
(2) Per share calculations for the period August 11, 1997 (date of inception),
through December 31, 1997, and for the Predecessor Company have not been
presented because the presentation is not considered meaningful.
(3) Ratios for the period August 11, 1997 (date of inception) through December
31, 1997 for Admiralty Bancorp, Inc. have not been presented because
presentation is not meaningful.
(4) Investment Securities include Federal Reserve Bank stock and Federal Home
Loan Bank stock.
(5) Book value per common stock calculated by dividing the aggregate
outstanding Class A common shares of 888,881 and Class B common shares of
1,492,759 into Total Shareholders' Equity at December 31, 1998.
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ITEM 6.--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The current management team and board of directors of the Company acquired
the Company in connection with the Change In Control. The Company's historic
financial statements included in this filing for the twelve (12) months ended
December 31, 1998 do not include the first 21-days of operations in January of
1998, prior to the Change In Control. However, to ensure comparability with
prior year periods, the income statement data discussed for the twelve months
ended December 31, 1998 are based upon pro forma data for the Company after the
Change In Control and the Predecessor Company during 1998 prior to the Change
In Control. All data for 1997 are from the Predecessor Company.
Subsequent to year end December 31, 1998, the Company determined that, in
light of its capital structure, consisting of both Class A and Class B Common
Stock, the more appropriate presentation of basic earnings per share should be
the "two class" method of computing earnings per share. The "if converted"
method should be used for earnings per share, if dilutive. The earnings per
share figures disclosed herein reflect this application of calculating earnings
per share, which was not applied in previous filings.
For the year ended December 31, 1998, the Company incurred a pro forma net
loss of $444,000 or $1.68 per share of Class B Stock, a decrease from earnings
of $1.3 million for the year ended December 31, 1997. This loss reflects the
costs of the Company's expansion, as the Company hired a new management team,
relocated its Jupiter office to larger quarters and opened its fourth office in
Boca Raton. The Company has incurred the expenses for these investments prior
to recognition of income from the assets developed through these investments.
At December 31, 1998, the Company's total assets reached $80.7 million, an
increase of 67.5% over total assets at December 31, 1997, the Company's net
loans totaled $46.8 million, an increase of 104.8% over net loans at December
31, 1997 and the Company's deposits totaled $60.7 million, an increase of 41.9%
over total deposits at December 31, 1997.
RESULTS OF OPERATIONS
The Company's results of operations depend primarily on its net interest
income, which is the difference between the interest earned on its
interest-earning assets and fees earned servicing loans which the Company has
sold and the interest paid on funds borrowed to support those assets, such as
deposits. In addition, the Company earns commission income in connection with
sales of the guaranteed portion of loans originated under the SBA loan program.
Net interest margin is a function of the difference between the weighted
average rate received on interest-earning assets and the weighted average rate
paid on interest-bearing liabilities, as well as the average level of interest-
bearing assets as compared with that of interest-bearing liabilities. Net
income is also affected by the amount of non-interest income and operating
expenses.
NET INCOME
For the year ended December 31, 1998, the Company incurred a pro forma net
loss of $444,000, a decrease of $1.7 million, or 135.1%, from net income of
$1.3 million for the year ended December 31, 1997. The period to period
decrease in reported net income is attributable to the increases in the
Company's non-interest expenses as the Company incurred costs to enhance the
value of its franchise and reductions in the gain on sales of securities and
sales of loans from those recognized in 1997.
During the year ended December 31, 1998, interest income increased to $4.2
million from $3.6 million for the year ended December 31, 1997, an increase of
17.1%. This increase reflects an increase
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in the average balance of interest earning assets of $8.6 million, or 21.0%, as
the Company began to deploy the proceeds of its public offering during the
fourth quarter of 1998. The increases in the average balance of interest
earning assets were partially offset by a decline in yield on interest earnings
assets. For the 12-months ended December 31, 1998, the Company's yield on its
average interest earning assets declined to 8.56% from 8.85% for the 12-months
ended December 31, 1997. This decline in yield reflects decreases in current
market rates of interest, which had a significant impact on the Company as a
large percentage of the Company's interest-earning assets were either
originated or repriced during 1998.
The Company's interest expense for the year ended December 31, 1998
remained relatively stable at $1.2 million despite an increase of $5.4 million
in the average balance of liabilities outstanding. Factors affecting the level
of the Company's interest expense include a reduction of 34 basis points in the
average yield on interest bearing liabilities to 3.59% in 1998 from 3.93% for
the year ended December 31, 1997, as well as an increase of $3.4 million in the
average balance of non-interest bearing liabilities. These changes reflect both
a decrease in market rates of interests and the Company's strategy to build
non-interest bearing demand deposits through enhanced relationships with
commercial customers and a shift away from more expensive time deposits.
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COMPARATIVE AVERAGE BALANCE SHEETS
The following table reflects the components of the Company's net interest
income, setting forth for the periods presented herein, (1) average assets,
liabilities and stockholders' equity, (2) interest income earned on
interest-earning assets and interest expenses paid on interest-bearing
liabilities, (3) average yields earned on interest-earning assets and average
rates paid on interest-bearing liabilities, (4) the Company's net interest
spread (i.e., the average yield on interest-earnings assets less the average
rate on interest-bearing liabilities) and (5) the Company's net yield on
interest-earning assets. Rates are computed on a tax equivalent basis.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1998(1) 1997
---------------------------------- ----------------------------------
AVERAGE AVERAGE
INTEREST RATES INTEREST RATES
AVERAGE INCOME EARNED/ AVERAGE INCOME/ EARNED/
BALANCE EXPENSE PAID BALANCE EXPENSE PAID
----------- ---------- ----------- ----------- ---------- -----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-Earning assets:
Taxable loans (net of unearned
income) ...................................... $28,925 $3,084 10.66% $20,907 $2,329 11.14%
Taxable investment securities(2) ............... 14,842 866 5.83% 17,899 1,179 6.59%
Federal funds sold ............................. 5,882 299 5.08% 2,234 122 5.45%
------- ------ ------- ------
Total interest-earning assets .................. 49,649 4,249 8.56% 41,040 3,630 8.85%
Non-interest earning assets .................... 8,190 -- -- 3,687 -- --
Allowance for possible loan losses ............. (434) -- -- (372) -- --
------- -------
Total Assets ................................. $57,405 -- -- $44,355 -- --
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Federal funds purchased ........................ $ 241 $ 14 5.81% $ 72 $ 5 6.94%
NOW deposits ................................... 7,102 84 1.18% 5,149 74 1.43%
Savings deposits ............................... 2,315 42 1.81% 2,271 42 1.85%
Money market deposits .......................... 7,541 212 2.81% 6,082 166 2.73%
Time deposits .................................. 15,247 813 5.33% 16,859 910 5.40%
------- ------ ------- ------
Total interest-bearing liabilities ............. 32,446 1,165 3.59% 30,433 1,197 3.93%
------- ------ ------- ------
Non-interest bearing liabilities:
Demand deposits ................................ 13,028 -- -- 10,091 -- --
Other liabilities .............................. 732 -- -- 277 -- --
------- -------
Total non-interest bearing liabilities ......... 13,760 -- -- 10,368 -- --
------- -------
Shareholders' equity ........................... 11,199 -- -- 3,554 -- --
------- -------
Total liabilities and shareholders'
equity ....................................... $57,405 -- -- $44,355 -- --
======= =======
Net interest differential ...................... -- -- 4.97% -- -- 4.92%
===== =====
Net yield on interest earning assets ........... -- $3,084 6.21% -- $2,433 5.94%
====== ===== ====== =====
</TABLE>
- ----------------
(1) Financial information for the year ended December 31, 1998 is based upon
the Pro Forma Consolidated Income Statement for that time period.
(2) Includes Federal Reserve Bank of Atlanta stock and Federal Home Loan Bank
of Atlanta stock.
11
<PAGE>
The following table presents by category the major factors that
contributed to the changes in net interest income for the periods presented.
Amounts have been computed on a fully tax-equivalent basis.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 VERSUS 1997(1)
----------------------------------
INCREASE (DECREASE) DUE TO CHANGE
IN:
----------------------------------
AVERAGE AVERAGE
VOLUME RATE NET
--------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
INTEREST INCOME:
Taxable loans (net of unearned income) ......... $ 859 $ (104) $ 755
Taxable investment securities .................. (188) (125) (313)
Federal funds sold ............................. 186 (9) 177
------ ------- ------
Total interest income .......................... 857 (238) 619
INTEREST EXPENSE:
Federal funds purchased ........................ 11 (1) 10
NOW deposits ................................... 25 (15) 10
Savings deposits ............................... 1 (1) --
Money Market ................................... 41 5 46
Time Deposits .................................. (86) (11) (97)
------ ------ ------
Total interest expense ......................... (8) (23) (31)
------- ------ ------
Net interest income ............................ $ 865 $ (215) $ 650
====== ====== ======
</TABLE>
- ----------------
(1) Financial information for the year ended December 31, 1998 is based upon
the Pro Forma Consolidated Income Statement for that time period.
PROVISION FOR LOAN LOSSES
For the year ended December 31, 1998, the Company recognized a provision
for loan losses of $385,000, a decline of $50,000, or 11.5%, over the provision
of $435,000 recognized for 1997. During 1997, the Bank was subject to a cease
and desist order with the Federal Reserve Bank of Atlanta and the Department
(the "C&D"). Among other things, the C&D required a certain allowance for loan
losses and quarterly provisions to maintain the allowance. The C&D was lifted
in the first quarter of 1998, and the Company established a provision based
upon management's view of the risks inherent in the Company's loan portfolio.
NON-INTEREST EXPENSES
Total non-interest expense for the year ended December 31, 1998, was $3.9
million, an increase of $1.2 million, or 49.9%, over non-interest expense
recognized in 1997. The increase in non-interest expense in 1998 reflects
investments made by the Company in enhancing its franchise. During 1998, the
Company hired a new senior management team, including Ward Kellogg, the
Company's new president, and his team of community bankers. In addition, the
Company incurred an increase in occupancy expense as the Company opened its
fourth office in Boca Raton, Florida and relocated its Jupiter office to
larger, more modern quarters. In addition, in 1998, the Company recognized
expense through the amortization of goodwill created in the Change in Control.
Goodwill amortization totaled $147,000 in 1998. The Company believes that it
will continue to experience the higher level of non-interest expense incurred
in 1998 in future periods, and that non-interest expense may continue to
increase somewhat as the Company continues to expand.
NON-INTEREST INCOME
Non-interest income for the year ended December 31, 1998 totaled $773,000,
a reduction of $955,000, or 55.3%, from total non-interest income of $1.7
million recognized for 1997. This reduction
12
<PAGE>
in non-interest income is primarily attributable to reductions in gains on
sales of securities and loans. During 1997, the Company recognized $87,000 in
net gain on the sale of securities, while the Company recognized a net loss of
$39,000 on the sale of securities during 1998. In addition, the Company
recognized a net gain on the sale of loans of $975,000 during 1997 compared to
a net gain on the sale of loans of $164,000 in 1998.
INCOME TAX EXPENSES
For the year ended December 31, 1998, the Company recorded no income tax
expense due to its net operating losses for the year, as compared to a tax
benefit of $288,000 for the year ended December 31, 1997. The 1997 benefit was
a result of the Company's utilization of certain net operating loss
carry-forwards to offset its taxable income and its recording of certain net
deferred tax assets believed to be realizable in future years.
At December 31, 1998, the Bank had unused net operating loss
carry-forwards of approximately $1.3 million for Federal and Florida Income Tax
purposes expiring through 2018. These loss carry-forwards reflect the maximum
benefit that can be obtained from the net operating losses due to limitation
under the Internal Revenue Code of 1986.
FINANCIAL CONDITION
At December 31, 1998, the Company's total assets were $80.7 million,
compared to $48.2 million at December 31, 1997. Total loans, net increased to
$46.8 million at December 31, 1998 from $22.9 million at December 31, 1997.
Total deposits were $60.7 million at December 31, 1998 compared to $42.8
million at December 31, 1997.
LOAN PORTFOLIO
At December 31, 1998, the Company's total loans were $47.4 million, an
increase of $24.2 million over total loans of $23.2 million at December 31,
1997. The increase in loans was primarily in loans secured by real estate and
commercial loans, and reflects the Company's continued efforts to achieve
greater penetration in its market areas and new customer activity following the
Change in Control in January, 1998, the efforts of the Company's new management
team and deployment of the capital raised by the Company in its initial public
offering in September, 1998.
The Company's loan portfolio consists primarily of loans secured by real
estate, and, to a lesser extent, commercial and consumer loans. Real estate
loans consist of loans secured by commercial or residential real property and
loans for the construction of commercial or residential property. Consumer
loans are made for the purpose of financing the purchase of consumer goods,
home improvements, and other personal needs, and are generally secured by the
personal property being purchased.
The Company's loans are primarily to businesses and individuals located in
Palm Beach and Broward Counties, Florida. The Company has not made loans to
borrowers outside of the United States. Commercial lending activities are
focused primarily on lending to small business borrowers. The Company believes
that its strategy of customer service, competitive rate structures and
selective marketing have enabled the Company to gain market entry to local
loans. Bank mergers by larger banks competing with the Company have also
contributed to the Company's efforts to attract borrowers.
13
<PAGE>
The following table sets forth the classification of the Company's loans
by major category for the periods presented.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1998 1997
---------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT
---------- --------- ---------- --------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C>
Commercial and Industrial ...................... $ 10,557 22% $ 6,033 26%
Real Estate Non-Residential Properties ......... 30,292 64% 14,676 63%
Residential Properties ......................... 3,694 8% 1,808 8%
Construction ................................... 1,912 4% 0 --
Consumer ....................................... 959 2% 715 3%
-------- -- -------- --
Total Loans .................................... $ 47,414 100% $ 23,232 100%
======== === ======== ===
</TABLE>
The following table sets forth, in terms of interest rate sensitivity,
certain components of the Company's loan portfolio as well as its fixed and
adjustable rate loans within that portfolio at December 31, 1998.
<TABLE>
<CAPTION>
WITHIN 1 YEAR 1 TO 5 YEARS AFTER 5 YEARS TOTAL
--------------- -------------- --------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial and Industrial ......... $3,325 $6,406 $826 $10,557
Construction Loans ................ 1,766 146 -- 1,912
------ ------ ---- -------
Total ........................... $5,091 $6,552 $826 $12,469
====== ====== ==== =======
Fixed Rate Loans .................. $ 1,075
Variable Rate Loans ............... 11,394
-------
Total ........................... $12,469
=======
</TABLE>
ASSET QUALITY
The Company's principal earning assets are its loans. Inherent in the
lending function is the risk of the borrower's inability to repay their loan
under its existing terms. Risk elements include non-accrual loans, past due and
restructured loans, potential problem loans, loan concentrations and other real
estate.
Non-performing assets include loans that are not accruing interest
(non-accrual loans) as a result of principal or interest being in default for a
period of 90 days or more. When a loan is classified as non-accrual, interest
accruals discontinue and all past due interest, including interest applicable
to prior years, is reversed and charged against current income. Until the loan
becomes current, any payments received from the borrower are applied to
outstanding principal until such time as management determines that the
financial condition of the borrower and other factors merit recognition of such
payments as interest.
The Company attempts to minimize overall credit risk through loan
diversification and its loan approval procedures. The Company's due diligence
begins at the time a borrower and the Company begin to discuss the origination
of a loan. Documentation, including a borrower's credit history, materials
establishing the value and liquidity of potential collateral, the purpose of
the loan, the source and timing of the repayment of the loan, and other factors
are analyzed before a loan is submitted for approval. Loans made are also
subject to periodic review.
During December 31, 1998, the Company's non-accrual loans increased by
$13,000 to $109,000 at December 31, 1998 from $96,000 at December 31, 1997.
This balance represents one loan placed in non-accrual status during December
1998. This loan is subject to a workout agreement, and management believes that
the loan is adequately secured and does not anticipate that the Company will
incur a material loss on this credit.
14
<PAGE>
The following table sets forth information concerning The Company's
non-performing assets as of the dates indicated:
NON-PERFORMING LOANS
DECEMBER 31,
-----------------------
1998 1997
---------- ----------
(IN THOUSANDS, EXCEPT
PERCENTAGES)
Non-accrual loans ............................. $ 109 $ 96
Other real estate owned ....................... 8 24
-------- --------
Total non-performing assets(1) ................ $ 117 $ 120
======== ========
Non-accrual loans to total loans .............. 0.23% 0.41%
Non-performing assets to total assets ......... 0.14% 0.25%
Allowance for possible loan losses as a
percentage of non-performing assets ......... 514.94% 315.00%
- ----------------
(1) Excludes loans past due 90 days or more and still accruing interest of
approximately $0 and $213,000 at December 31, 1998 and 1997, respectively.
If the above described non-accruing loans had been current, the Company's
interest income would have increased by $7,000, and $11,000, for the years
ended December 31, 1998 and 1997, respectively.
At the dates indicated in the above table, there were no concentration of
loans exceeding 10% of the Company's total loans and the Company had no foreign
loans.
ALLOWANCE FOR LOAN LOSSES
The Company attempts to maintain an allowance for loan losses at a
sufficient level to provide for potential losses in the loan portfolio. Loan
losses are charged directly to the allowance when they occur and any recovery
is credited to the allowance. Risks within the loan portfolio are analyzed on a
continuous basis by the Company's officers, by outside, independent loan review
auditors and by the Company's Directors Loan Committee. A risk system,
consisting of multiple grading categories, is utilized as an analytical tool to
assess risk and appropriate reserves. Along with the risk system, management
further evaluates risk characteristics of the loan portfolio under current and
anticipated economic conditions and considers such factors as the financial
condition of the borrower, past and expected loss experience, and other factors
management feels deserve recognition in establishing an appropriate reserve.
These estimates are reviewed at least quarterly, and, as adjustments become
necessary, they are realized in the periods in which they become known.
Additions to the allowance are made by provisions charged to expense and the
allowance is reduced by net charge-offs ( i.e., loans judged to be
uncollectible and charged against the reserve, less any recoveries on such
loans). Although management attempts to maintain the allowance at a level
deemed adequate, future additions to the allowance may be necessary based upon
changes in market conditions. In addition, various regulatory agencies
periodically review the Company's allowance for loan losses. These agencies may
require the Company to take additional provisions based on their judgments
about information available to them at the time of their examination.
The Company's allowance for possible loan losses totaled $602,000 and
$378,000 at December 31, 1998 and 1997, respectively.
15
<PAGE>
The following is a summary of the reconciliation of the allowance for loan
losses for the periods presented.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997
---------- ----------
(IN THOUSANDS, EXCEPT
PERCENTAGES)
<S> <C> <C>
Balance at Beginning of Period ................................ $ 378 $ 365
CHARGE-OFFS:
Real Estate ................................................... 58 104
Installment ................................................... -0- 3
Commercial .................................................... 141 340
------- -------
Total Charge-Offs ........................................... 199 447
RECOVERIES:
Real Estate ................................................... -0- 4
Installment ................................................... 13 -0-
Commercial .................................................... 25 21
------- -------
Total Recoveries ............................................ 38 25
------- -------
Net Charge-Offs ............................................... 161 422
Provision Charged to Expense .................................. 385 435
------- -------
Balance of Allowance at End of Period ......................... $ 602 $ 378
======= =======
Ratio of Net Charge-Offs to Average Loans Outstanding ......... 0.56% 2.02%
Balance of Allowance at Period End as of
% of Total Loans at Period End .............................. 1.27% 1.63%
</TABLE>
The following table sets forth, for each of the Company's major lending
areas, the amount and percentage of the Company's allowance for loan losses
attributable to such category, and the percentage of total loans represented by
such category, as of the periods indicated:
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES BY CATEGORY
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
1998 1997
------------------------ -----------------------
% OF % OF
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
-------- ------------- -------- ------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C>
Balance Applicable to:
Commercial and Industrial .......... $123 22% $105 26%
Real Estate:
Non-Residential Properties ......... 306 64% 175 63%
Residential Properties ............. 59 8% 35 8%
Construction ....................... 19 4% 0 0%
Consumer ........................... 8 2% 5 3%
---- -- ---- --
Subtotal ........................... 515 100% 320 100%
Unallocated Reserves ............... 87 -- 58 --
---- --- ---- ---
Total ............................ $602 100% $378 100%
==== === ==== ===
</TABLE>
INVESTMENT SECURITIES
The Company maintains an investment portfolio to fund increased loan
demand or decreased deposits and other liquidity needs and to provide an
additional source of interest income. The portfolio is composed primarily of
U.S. Treasury Securities and obligations of U.S. Government agencies and
government sponsored entities, including collateralized mortgage obligations
issued by such agencies and entities, and to a lesser extent collateralized
mortgage obligations issued by non-public entities. The Bank also owns shares
in the Bankers' Bancorporation of Florida,
16
<PAGE>
Inc.. As a Federal Reserve Member Bank, the Bank also holds stock in the
Federal Reserve Bank of Atlanta and, as a member of the Federal Home Loan Bank
of Atlanta, the Bank also owns Federal Home Loan Bank Stock. For purposes of
the following discussion, the Company does not consider the Federal Reserve
Bank stock and Federal Home Loan Bank stock to be investment securities.
The Company adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," (SFAS 115),
effective January 1, 1994. Under SFAS 115, securities are classified as
securities held to maturity based on management's intent and the Company's
ability to hold them to maturity. Such securities are stated at cost, adjusted
for unamortized purchase premiums and discounts. Securities that are bought and
held principally for the purpose of selling them in the near term are
classified as trading securities, which are carried at market value. Realized
gains and losses and gains and losses from marking the portfolio to market
value are included in trading revenue. Securities not classified as securities
held to maturity or trading securities are classified as securities available
for sale, and are stated at fair value. Unrealized gains and losses on
securities available for sale are excluded from results of operations, and are
reported as a separate component of stockholders' equity, net of taxes.
Securities classified as available for sale include securities that may be sold
in response to changes in interest rates, changes in prepayment risks, the need
to increase regulatory capital or other similar requirement.
Management determines the appropriate classification of securities at the
time of purchase. At December 31, 1998, the Company's entire investment
securities portfolio of $9.4 million was classified as available for sale.
Investment securities at December 31, 1998 represent a decrease of $10.8
million, or 53.5%, over total investment securities of $20.2 million at
December 31, 1997. This decrease in investment securities represents proceeds
of maturing and called securities being invested in new loan originations. In
addition, as part of the Company's restructuring of its securities portfolio,
the Company sold $2.9 million of investment securities in early 1998 and
incurred a net loss of $39 thousand.
At December 31, 1997, the majority of the Company's investment securities
were held to maturity. Pursuant to the Change In Control, and as part of the
purchase accounting adjustments made in connection with the transaction,
securities were reclassified as available for sale.
17
<PAGE>
The following table sets forth the carrying value of the Company's
securities portfolio as of the dates indicated.
A comparative summary of investment securities available for sale for the
periods presented is as follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED COST GAINS LOSSES FAIR VALUE
---------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
December 31, 1998
U.S. Government and Agency Securities ......... $4,500 $ 1 $ (4) $4,497
Mortgage Backed Securities .................... 4,870 11 (1) 4,880
Other Securities .............................. 14 0 0 14
------ --- ---- ------
Total ......................................... $9,384 $12 $ (5) $9,391
====== === ==== ======
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED COST GAINS LOSSES FAIR VALUE
---------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
December 31, 1997
Mortgage backed securities ......... $3,607 $ 16 $ (4) $3,619
Other securities ................... 14 0 0 14
------ ---- ----- ------
Total .............................. $3,621 $ 16 $ (4) $3,633
====== ==== ===== ======
</TABLE>
A comparative summary of investment securities held to maturity for the
periods presented is as follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED COST GAINS LOSSES FAIR VALUE
---------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
December 31, 1997
U.S. Government and Agency Securities ......... $ 501 $ -- $ -- $ 501
Mortgage backed securities .................... 16,060 73 (28) 16,105
------- ---- ----- -------
Total ......................................... $16,561 $ 73 $ (28) $16,606
======= ==== ===== =======
</TABLE>
The following table sets forth as of December 31, 1998, the maturity
distribution of the Company's investment portfolio.
MATURITY SCHEDULE OF INVESTMENT SECURITIES
<TABLE>
<CAPTION>
ONE YEAR OR LESS ONE TO FIVE YEARS
--------------------- --------------------
CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Government and
Agency Securities ......... $ 0 $ 0 $4,497 5.65%
Mortgaged Backed
Securities(1) ............. $3,324 6.12% $1,556 6.26%
Other Securities(2) ........ $ 0 0% $ 0 0%
<CAPTION>
FIVE TO TEN YEARS MORE THAN TEN YEARS TOTAL
-------------------- -------------------- ---------------------
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD
---------- --------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
U.S. Government and
Agency Securities ......... $ 0 0% $ 0 0% $4,497 6.16%
Mortgaged Backed
Securities(1) ............. $ 0 0% $ 0 0% $4,880 6.16%
Other Securities(2) ........ $ 0 0% $696 6.18% $ 696 6.18%
</TABLE>
- ----------------
(1) Mortgage backed maturities are based on current estimated prepayment
speeds.
(2) Other securities also include Federal Reserve Bank stock and Federal Home
Loan Bank stock that the Bank must own as a condition of membership. The
Bank does not anticipate that it will discontinue these memberships, and
has therefore classified the maturity of these securities as more than ten
years.
Proceeds from the sales of securities available for sale during the years
ended December 31, 1998 and 1997 were $2.9 million and $9.5 million,
respectively. Gross gains of $3,000 and $87,000 and gross losses of $42,000 and
$0 were realized on those sales in 1998 and 1997, respectively. Securities with
a carrying value of $0 and $5.3 million at December 31, 1998 and 1997 were
pledged to secure public funds on deposit.
18
<PAGE>
DEPOSITS
Deposits are the Company's primary source of funds. During 1998, the
Company's deposits increased by $17.9 million, or 41.9%, to $60.7 million at
December 31, 1998 from $42.8 million at December 31, 1997. During 1998, the
Company's deposit portfolio shifted away from higher priced time deposits and
toward non-interest bearing demand deposits. This shift reflected the Company's
increased emphasis on business accounts. At December 31, 1998 and 1997, demand
deposits represented 33.2% and 27.3%, respectively, of total deposits and time
deposits represented 31.9% and 37.8%, respectively of total deposits. The
Company's cost of funds for 1998 was 2.56%, compared to 2.95% for the year
ended December 31, 1997.
The following table sets forth the average amounts of various types of
deposits for each of the periods indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
1998 1997
----------------------- ------------------------
AVERAGE AVERAGE
AMOUNT YIELD AMOUNT YIELD
----------- --------- ----------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C>
Non-Interest Bearing Demand ......... $ 13,028 -- $ 10,091 --
Interest-Bearing Demand ............. 7,102 1.18% 5,149 1.43%
Savings Deposits .................... 9,856 2.58% 8,353 2.49%
Time Deposits ....................... 15,247 5.33% 16,859 5.40%
-------- --------
Total ............................... $ 45,233 $ 40,452
======== ========
</TABLE>
The Company does not actively solicit short-term deposits of $100,000 or
more because of the liquidity risks posed by such deposits. The following table
summarizes the maturity distribution of certificates of deposits of
denominations of $100,000 or more as of December 31, 1998 (in thousands):
Time Deposits ($100,000 and over)
Three months or less ........................... $ 2,557
Over three months through nine months .......... 2,854
Over nine months through twelve months ......... 1,801
Over twelve months ............................. 568
-------
Total ........................................ $ 7,780
=======
INTEREST RATE RISK MANAGEMENT
Interest rate risk management involves managing the extent to which
interest-sensitive assets and interest-sensitive liabilities are matched.
Interest rate sensitivity is the relationship between market interest rates and
earnings volatility due to the repricing characteristics of assets and
liabilities. The Company's net interest income is affected by changes in the
level of market interest rates. In order to maintain consistent earnings
performance, the Company seeks to manage, to the extent possible, the repricing
characteristics of its assets and liabilities.
The ratio between assets and liabilities repricing in specific time
intervals is referred to as an interest rate sensitivity gap. Interest rate
sensitivity gaps can be managed to take advantage of the slope of the yield
curve as well as forecasted changes in the level of interest rate changes.
One major objective of the Company when managing the rate sensitivity of
its assets and liabilities is to stabilize net interest income. The management
of and authority to assume interest rate risk is the responsibility of the
Company's Asset/Liability Committee ("ALCO"), which is comprised of senior
management and Board members. The process to review interest rate risk
management is a regular part of management of the Company. Consistent policies
and practices of measuring and reporting interest rate risk exposure,
particularly regarding the treatment of non-contractual assets and
19
<PAGE>
liabilities, are in effect. In addition, there is an annual process to review
the interest rate risk policy with the Board of Directors which includes limits
on the impact to earnings from shifts in interest rates.
To manage the interest sensitivity position, an asset/liability model
called "gap analysis" is used to monitor the difference in the volume of the
Company's interest sensitive assets and liabilities that mature or reprice
within given periods. A positive gap (asset sensitive) indicates that more
assets reprice during a given period compared to liabilities, while a negative
gap (liability sensitive) has the opposite effect. The Company employs
computerized interest income simulation modeling to assist in quantifying
interest rate risk exposure. This process measures and quantifies the impact on
net interest income through varying interest rate changes and balance sheet
compositions. The use of this model assists the ALCO to gauge the effects of
the interest rate changes on interest sensitive assets and liabilities in order
to determine what impact these rates changes will have upon the net interest
spread.
At December, 1998, the Company maintained a one year positive cumulative
gap of $13.9 million or 17.2% of total assets.
<TABLE>
<CAPTION>
INTEREST SENSITIVITY GAP AT DECEMBER 31, 1998
-----------------------------------------------------------------
3 MONTHS 3 THROUGH 1 THROUGH OVER
OR LESS 12 MONTHS 3 YEARS 3 YEARS TOTAL
------------ ----------- ----------- ------------ -------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C>
Federal funds sold .................................. $ 13,294 -- -- -- 13,294
Investment securities, at amortized cost(1) ......... 1,407 1,907 2,057 4,696 10,067
Loans ............................................... 34,374 1,950 2,538 8,552 47,414
-------- ----- ----- ----- ------
Total Earning Assets ................................ 49,075 3,857 4,595 13,248 70,775
Interest bearing transaction deposits ............... 21,239 21,239
Time deposits ....................................... 6,131 11,663 1,202 354 19,350
-------- ------ ----- ------ ------
Interest bearing liabilities ........................ 27,370 11,663 1,202 354 40,589
-------- ------ ----- ------ ------
Interest sensitivity gap ............................ 21,705 (7,806) 3,393 12,894 30,186
======== ====== ===== ====== ======
Cumulative gap ...................................... $ 21,705 $ 13,899 $ 17,292 $ 30,186
======== ======== ======== ========
Cumulative gap to total assets ...................... 26.88% 17.21% 21.42% 37.38%
======== ======== ======== ========
</TABLE>
- ----------------
(1) Investment securities include Federal Reserve Bank stock and Federal Home
Loan Bank stock, totaling $683,000, which have been included in the over
three (3) years column.
LIQUIDITY
The Company's liquidity is a measure of its ability to fund loans,
withdrawals or maturities of deposits and other cash outflows in a
cost-effective manner. The Company's principal sources of funds are deposits,
scheduled amortization and prepayments of loan principal, sales and maturities
of investment securities and funds provided by operations. While scheduled loan
payments and maturing investments are relatively predictable sources of funds,
deposit flows and loan prepayments are greatly influenced by general interest
rates, economic conditions and competition.
Through the Company's investment portfolio the Company has generally
sought to obtain a safe yet slightly higher yield than would have been
available to the Company as a net seller of overnight Federal Funds while still
maintaining liquidity. Through its investment portfolio, the Company also
attempts to manage its maturity gap by seeking maturities of investments which
coincide as closely as possible with maturities of deposits. The Company's
investment portfolio is all classified as held for sale, to provide additional
liquidity for anticipated loan demand and other liquidity needs. As an
additional source of liquidity, the Company in the latter half of 1998
established an overnight line of credit through one of its correspondent banks
pursuant to which the Company could borrow $4 million. The Company did not draw
on this line of credit during 1998.
20
<PAGE>
The Company's total deposits equaled $60.7 million and $42.8 million as of
December 31, 1998 and 1997, respectively. The funds provided by deposits,
combined with the additional capital raised by the Company and sales and
maturities of investment securities, has been more than sufficient to provide
for the Company's lending demand.
Management believes that the Company's current sources of funds provide
adequate liquidity for the current cash flow needs of the Company.
CAPITAL
A significant measure of the strength of a financial institution is its
capital base. The Company's federal regulators have classified and defined
capital into the following components: (1) Tier I capital, which includes
tangible shareholders' equity for common stock and qualifying preferred stock,
and (2) Tier II capital, which includes a portion of the allowance for possible
loan losses, certain qualifying long-term debt and preferred stock which does
not qualify for Tier I capital. Minimum capital levels are regulated by
risk-based capital adequacy guidelines which require a financial institution to
maintain certain capital as a percent of its assets and certain off-balance
sheet items adjusted for predefined credit risk factors (risk-adjusted assets.)
A financial institution is required to maintain, at a minimum, Tier I capital
as a percentage of risk-adjusted assets of 4.0% and combined Tier I and Tier II
capital as a percentage of risk-adjusted assets of 8.0%.
In addition to the risk-based guidelines, the federal regulators require
that a financial institution which meets the regulators' highest performance
and operation standards maintain a minimum leverage ratio (Tier I capital as a
percentage of tangible assets) of 3%. For those institutions with higher levels
of risk or that are experiencing or anticipating significant growth, the
minimum leverage ratio will be proportionately increased. Minimum leverage
ratios for each bank are evaluated through the ongoing regulatory examination
process.
The Company's federal regulators impose capital standards on bank holding
companies which are substantially similar to those imposed upon the Bank.
However, provided the Company's total assets are less than $150 million, these
standards are applied on a bank only basis.
The following table summarizes the Company's risk-based and leverage
capital ratios at December 31, 1998, as well as the required minimum regulatory
capital ratios:
CAPITAL ADEQUACY
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------------ ------------------------ -------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- ----------- ---------- ----------- ---------- ------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to risk-weighted assets) ......... $14,073 25.41% $>4,430 >8.00% $>5,538 >10.00%
= = = =
Tier I Capital
(to risk-weighted assets) ......... 13,471 24.33% >2,215 >4.00% >3,323 >6.00%
= = = =
Tier I Capital
(to average assets) ............... 13,471 19.21% >2,805 >4.00% >3,507 >5.00%
= = = =
</TABLE>
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements of the Company and notes thereto, presented
elsewhere herein, have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
operating results in terms of historical dollars without considering the change
in the relative purchasing power of money over time and due to inflation. The
impact of inflation is reflected in the increased cost of the Company's
operations. Unlike most
21
<PAGE>
industrial companies, nearly all the assets and liabilities of the Company are
monetary. As a result, interest rates have a greater impact on the Company's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the
prices of goods and services.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Company adopted the provisions of SFAS No. 128, "Earnings Per Share,"
which eliminates primary and fully diluted earnings per share (EPS) and
requires presentation of basic and diluted EPS in conjunction with the
disclosure of the methodology used in computing such EPS. Basic EPS excludes
dilution and is computed by dividing income available to common shareholders by
the weighted average common shares outstanding during the period. The Company's
capital structure requires the use of the "two class" method of computing basic
earnings per share. Diluted EPS take into account the potential dilution that
could occur if securities or other contracts to issue Class B Common Stock,
including Class A Common Stock, were exercised and converted into Class B
Common Stock.
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income" SFAS No. 130 establishes standards to provide prominent
disclosure of comprehensive income items. Other comprehensive income consists
of net unrealized gains on investment securities available for sale. Adoption
of this standard did not have a material impact on the Company's financial
statements.
In 1998, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related
Information". SFAS No. 131 defines how operating segments are determined and
requires disclosure of certain financial and descriptive information about the
Company's operating segments. Under current conditions, the Company is
reporting one segment.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activity." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments imbedded in other contracts, and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as a hedge. The accounting for changes in the fair
value of a derivative (gains and losses) depends on the intended use of the
derivative and resulting designation. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. Earlier application is
permitted only as of the beginning of any fiscal quarter. The Company is
currently reviewing the provisions of SFAS No. 133.
YEAR 2000 COMPLIANCE
Rapid and accurate data processing is essential to the Company's
operations. Many computer programs that can only distinguish the final two
digits of the year entered (a common programming practice in prior years) are
expected to read entries for the Year 2000 as the year 1900 or as zero and
incorrectly attempt to compute payment, interest, delinquency and other data.
The Company has been evaluating both information technology (computer systems)
and non-information technology systems (e.g., vault timer, electronic door lock
and heating, ventilation and air conditioning control). The Company has
examined all of its non-information technology systems and has either received
certification of Year 2000 compliance for systems controlled by third-party
providers or determined that the systems should not be impacted by the Year
2000. The Company has completed its first round of testing and is currently
reviewing the results with regard to the systems it controls. In addition,
third-parties controlling systems used by the Company for its data processing
have also completed their first round of testing, and the parties operating the
systems are reviewing the results of this testing. The Company does not expect
any material costs to address its non-information technology systems and has
not had any material costs to date. The Company has determined that the
22
<PAGE>
information technology systems it currently uses have substantially more Year
2000 risk than the non-information technology systems the Company uses. The
Company has evaluated its information technology systems risk in three areas:
(1) its own computers, (2) computers of others used by its borrowers, and (3)
computers of others who provide the Company with data processing.
THE COMPANY'S COMPUTERS. During 1998, the Company has spent approximately
$300,000 to upgrade its computer systems, primarily through the purchase of new
hardware. This upgrade was necessary to accommodate the planned expansion of
the Bank, and was not necessitated as part of the Company's Year 2000
remediation efforts. However, these new systems are Year 2000 compliant. The
Company does not expect to have additional material costs to address this risk
area after 1998.
COMPUTERS OF OTHERS USED BY BORROWERS. The Company has evaluated most of
its borrowers and does not believe that the Year 2000 problem should, on an
aggregate basis, impact their ability to make payments to the Bank. The Company
believes that most of its individual borrowers are not dependent on their home
computers for income and none of the Company's commercial borrowers are so
large that a Year 2000 problem would render them unable to collect revenue or
rent and, in turn, continue to make loan payments to the Bank. The Company does
not expect any material costs to address this risk area.
COMPUTERS OF OTHERS WHO PROVIDE THE COMPANY WITH DATA PROCESSING. This
risk is primarily focused on one third-party service bureau that provides
virtually all of the Company's data processing. This service bureau is not Year
2000 compliant but has advised the Company that it expects to be compliant
before the Year 2000. This service bureau has conducted its first round of
testing of its systems and software, and is currently in the process of
reviewing the results of these tests. If this problem is not solved before the
Year 2000, the Company would likely experience significant delays, mistakes or
failures. These delays, mistakes or failures could have a significant impact on
the Company's financial condition and results of operations.
CONTINGENCY PLAN. The Company is monitoring its service bureau to evaluate
whether the Company's data processing system will fail. The Company is being
provided with periodic updates on the status of testing and upgrades being made
by the service bureau. If the Company's service bureau fails, the Company will
attempt to locate an alternative service bureau that is Year 2000 compliant or
the Company will contract with the same vendor of its software system (which is
Year 2000 compliant) to utilize this software on the Company's own in-house
hardware system. If the Company is unsuccessful, the Company will enter deposit
and loan transactions by hand in its general ledger and compute loan payments
and deposit balances and interests with its existing computer system. The
Company can do this because of its relatively small number of loan and deposit
accounts and would expand its internal bookkeeping system. The Company's
computer systems are independently able to generate labels and mailings for all
of the Company's customers. If this labor intensive approach becomes necessary,
management and the Company's employees will become much less efficient.
However, the Company believes that it would be able to operate in this manner
indefinitely, until the Company's existing service bureau, or their
replacement, is able to again provide data processing services. If very few
financial institution service bureaus were operating in the Year 2000, the
Company's replacement costs, assuming it could negotiate an agreement, could be
material.
ITEM 7.--FINANCIAL STATEMENTS
The financial statements required by this item are filed herewith.
ITEM 8.--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
23
<PAGE>
ITEM 9.--DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT;
COMPLIANCE WITH SECTION 16(A)
Information concerning directors and executive officers is included in the
definitive Proxy Statement for the Company's 1999 Annual Meeting under the
captions "ELECTION OF DIRECTORS" and information concerning compliance with
Section 16(a) of the Exchange Act is included under the caption "COMPLIANCE
WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934," each of which is
incorporated herein by reference. It is expected that such Proxy Statement will
be filed with the Securities and Exchange Commission no later than April 30,
1999.
The following table sets forth certain information about each executive
officer of the company who is not also a director.
<TABLE>
<CAPTION>
NAME, AGE AND POSITION OFFICER SINCE PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- ------------------------------------- --------------- -----------------------------------------------
<S> <C> <C>
William Burke, 39, 1998 Senior Vice President and Regional Senior
Chief Operating Officer of the Bank Lending Officer of 1st United Bank of Boca
Raton, Florida; previously, Vice President for
Commercial Lending of SouthEast Bank
Dennis Gavin, 34, 1998 Vice President of Commercial Lending for
Senior Vice President and 1st United Bank of Boca Raton, Florida;
Senior Lending Officer of the Bank previously, Credit Administration Officer for
Barnett Bank of Palm Beach County.
Anne Paddock, 37, 1998 Vice President of Commercial Lending,
Senior Vice President--Loan 1st United Bank of Boca Raton, Florida;
Administration of the Bank previously, Commercial Loan Officer for
various financial institutions.
</TABLE>
ITEM 10.--EXECUTIVE COMPENSATION
Information concerning executive compensation is included in the
definitive Proxy Statement for the Company's 1999 Annual Meeting under the
captions "EXECUTIVE COMPENSATION AND ALL OTHER COMPENSATION" and "COMPENSATION
OF DIRECTORS", which is incorporated by reference herein. It is expected that
such Proxy Statement will be filed with the Securities and Exchange Commission
no later than April 30, 1999.
ITEM 11.--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and
management is included in the definitive Proxy statement for the Company's 1999
Annual Meeting under the caption "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT", which is incorporated herein by reference. It is
expected that such Proxy statement will be filed with the Securities and
Exchange Commission no later than April 30, 1999.
ITEM 12.--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is
included in the definitive Proxy Statement for the Company's 1999 Annual
Meeting under the caption "INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN
TRANSACTIONS", which is incorporated herein by reference. It is expected that
such Proxy Statement will be filed with the Securities and Exchange Commission
no later than April 30, 1999.
24
<PAGE>
ITEM 13.--EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- -------- -------------------------------
21 Subsidiaries of the Registrant
27 Financial Data Schedule
(b) Reports on form 8-K
DATE ITEM
- ------------- -----------------------------------------
December 22 5--announcing anticipated year end loss
November 4 5--announcing third quarter 1998 results
25
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGES
------
REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ............... F-2
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS--ADMIRALTY BANCORP, INC. AND
SUBSIDIARY AND PREDECESSOR COMPANY ............................ F-4
CONSOLIDATED STATEMENTS OF OPERATIONS--ADMIRALTY BANCORP,
INC. AND SUBSIDIARY AND PREDECESSOR COMPANY ................... F-5
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME--ADMIRALTY BANCORP, INC. AND
SUBSIDIARY .................................................... F-6
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME--PREDECESSOR COMPANY ................. F-7
CONSOLIDATED STATEMENTS OF CASH FLOWS--ADMIRALTY BANCORP,
INC. AND SUBSIDIARY AND PREDECESSOR COMPANY ................... F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--ADMIRALTY
BANCORP, INC. AND SUBSIDIARY AND PREDECESSOR COMPANY .......... F-9
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Admiralty Bancorp, Inc. and subsidiary
We have audited the accompanying consolidated balance sheets of Admiralty
Bancorp, Inc. and subsidiary as of December 31, 1998 and 1997, and the related
consolidated statements of operations, changes in stockholders' equity and
comprehensive income and cash flows for the year ended December 31, 1998 and
the period August 11, 1997 (date of inception), through December 31, 1997.
These financial statements are the responsibility of management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above, present
fairly, in all material respects, the consolidated financial position of
Admiralty Bancorp, Inc. and subsidiary as of December 31, 1998 and 1997, and
the consolidated results of their operations and their consolidated cash flows
for year ended December 31, 1998 and the period August 11, 1997 (date of
inception), through December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ GRANT THORNTON LLP
Philadelphia, Pennsylvania
February 19, 1999
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
White Eagle Financial Group, Inc.
We have audited the accompanying consolidated balance sheet of White Eagle
Financial Group, Inc. and subsidiary (Predecessor Company) as of December 31,
1997, and the related consolidated statements of income, changes in
stockholders' equity and comprehensive income and cash flows for the year then
ended. These financial statements are the responsibility of management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above, present
fairly, in all material respects, the consolidated financial position of White
Eagle Financial Group, Inc. and subsidiary as of December 31, 1997, and the
consolidated results of their operations and their consolidated cash flows for
year then ended, in conformity with generally accepted accounting principles.
/s/ GRANT THORNTON LLP
West Palm Beach, Florida
March 13, 1998
F-3
<PAGE>
ADMIRALTY BANCORP, INC. AND SUBSIDIARY
AND PREDECESSOR COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ADMIRALTY BANCORP, INC.
AND SUBSIDIARY
-------------------------------
DECEMBER 31, PREDECESSOR COMPANY
------------------------------- --------------------
1998 1997 DECEMBER 31, 1997
-------------- -------------- --------------------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents
Cash and due from banks .......................................... $ 4,002,304 $ 7,845,550 $ 1,974,169
Federal funds sold ............................................... 13,294,000 -- 100,000
----------- ----------- -----------
Total cash and cash equivalents ............................... 17,296,304 7,845,550 2,074,169
Investment securities available for sale, at fair market value..... 9,391,362 -- 3,633,300
Investment securities held to maturity, at cost
(fair value of $16,606,373 at December 31, 1997).................. -- -- 16,560,956
Loans held for sale ............................................... -- -- 994,182
Loans, net ........................................................ 46,811,697 -- 22,853,777
Accrued interest receivable ....................................... 266,022 36,781 308,210
Federal Reserve Bank and FHLB stock ............................... 682,550 -- 113,550
Premises and equipment, net ....................................... 1,113,388 -- 631,208
Deferred tax asset ................................................ 438,600 -- 438,600
Goodwill .......................................................... 3,834,188 -- --
Other assets ...................................................... 914,385 162,526 597,829
----------- ----------- -----------
Total assets .................................................. $80,748,496 $ 8,044,857 $48,205,781
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits ......................................................... $60,718,380 $ -- $42,776,197
Accrued interest payable ......................................... 57,758 -- 57,405
Due under purchase contract ...................................... 201,633 -- --
Other liabilities ................................................ 268,052 40,356 750,646
----------- ----------- -----------
Total liabilities ............................................. 61,245,823 40,356 43,584,248
----------- ----------- -----------
Minority interest ................................................. -- -- 376,049
----------- ----------- -----------
Stockholders' equity
Preferred stock, no par value, 2,000,000 shares authorized,
no shares issued or outstanding ................................. -- -- --
Common stock, $0.01 par value, 325,000 shares authorized,
323,533 shares issued and outstanding in 1997 ................... -- -- 3,235
Common stock, Class A, no par value, 1,000,000 shares
authorized, 888,881 shares issued and outstanding at
December 31, 1998 and 1997 ...................................... 7,490,283 8,060,440 --
Common stock, Class B, no par value, 4,000,000 shares
authorized, 1,492,759 and 177,759 shares issued and
outstanding at December 31, 1998 and 1997,
respectively .................................................... 12,883,869 89,560 --
Subscriptions receivable ......................................... -- (205,000)
Additional paid-in capital ....................................... -- -- 3,138,345
Retained earnings (accumulated deficit) .......................... (875,855) 59,501 1,096,280
Accumulated other comprehensive income ........................... 4,376 -- 7,624
----------- ----------- -----------
Total stockholders' equity .................................... 19,502,673 8,004,501 4,245,484
----------- ----------- -----------
Total liabilities and stockholders' equity .................... $80,748,496 $ 8,044,857 $48,205,781
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
ADMIRALTY BANCORP, INC. AND SUBSIDIARY
AND PREDECESSOR COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
ADMIRALTY BANCORP, INC.
AND SUBSIDIARY
------------------------------------
FOR THE PERIOD
AUGUST 11, 1997
(DATE OF INCEPTION)
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1998 1997
-------------- ---------------------
<S> <C> <C>
Interest income
Loans ...................................................... $ 2,936,798 $ --
Securities ................................................. 797,978 84,445
Federal funds sold ......................................... 298,297 --
Other ...................................................... 102 --
----------- --------
Total interest income ................................... 4,033,175 84,445
----------- --------
Interest expense
Deposits ................................................... 1,079,076 --
Borrowings ................................................. 10,268 7,938
----------- --------
Total interest expense .................................. 1,089,344 7,938
----------- --------
Net interest income ..................................... 2,943,831 76,507
Provision for loan losses ................................... 385,000 --
----------- --------
Net interest income after provision
for loan losses ....................................... 2,558,831 76,507
----------- --------
Non-interest income
Service charges and fees ................................... 607,988 --
Net gain (loss) on sale of securities ...................... (39,349) --
Gain on sale of loans ...................................... 164,044 --
Other income ............................................... -- --
----------- --------
Total non-interest income ............................... 732,683 --
----------- --------
Non-interest expense
Salaries and employee benefits ............................. 1,440,840 --
Occupancy .................................................. 524,510 --
Furniture and equipment .................................... 272,558 --
Amortization of goodwill ................................... 147,308 --
Other expense .............................................. 1,393,572 1,650
----------- --------
Total non-interest expense .............................. 3,778,788 1,650
----------- --------
(Loss) income before income tax (benefit) expense and
minority interest ..................................... (487,274) 74,857
Income tax (benefit) expense ................................ -- 15,356
----------- --------
(Loss) income before minority interest .................. (487,274) 59,501
Minority interest ........................................... (3,692) --
----------- --------
Net (loss) income ....................................... $ (490,966) $ 59,501
=========== ========
Per share data
Net income (loss) per share--basic and diluted
Class A Common Stock ...................................... $ 0.50
===========
Class B Common Stock ...................................... $ (1.77)
===========
<CAPTION>
PREDECESSOR COMPANY
--------------------------------
FOR THE PERIOD
JANUARY 1, 1998
THROUGH YEAR ENDED
JANUARY 21, DECEMBER 31,
1998 1997
---------------- ---------------
(UNAUDITED)
<S> <C> <C>
Interest income
Loans ...................................................... $ 147,401 $ 2,328,764
Securities ................................................. 68,133 1,179,503
Federal funds sold ......................................... 388 121,800
Other ...................................................... -- --
--------- -----------
Total interest income ................................... 215,922 3,630,067
--------- -----------
Interest expense
Deposits ................................................... 71,006 1,191,951
Borrowings ................................................. 5,034 4,783
--------- -----------
Total interest expense .................................. 76,040 1,196,734
--------- -----------
Net interest income ..................................... 139,882 2,433,333
Provision for loan losses ................................... -- 435,000
--------- -----------
Net interest income after provision
for loan losses ....................................... 139,882 1,998,333
--------- -----------
Non-interest income
Service charges and fees ................................... 13,169 621,579
Net gain (loss) on sale of securities ...................... -- 86,712
Gain on sale of loans ...................................... -- 974,571
Other income ............................................... 27,238 45,247
--------- -----------
Total non-interest income ............................... 40,407 1,728,109
--------- -----------
Non-interest expense
Salaries and employee benefits ............................. 38,792 903,625
Occupancy .................................................. 29,699 403,260
Furniture and equipment .................................... 10,828 215,228
Amortization of goodwill ................................... -- --
Other expense .............................................. 51,784 1,175,736
--------- -----------
Total non-interest expense .............................. 131,103 2,697,849
--------- -----------
(Loss) income before income tax (benefit) expense and
minority interest ..................................... 49,186 1,028,593
Income tax (benefit) expense ................................ -- (288,000)
--------- -----------
(Loss) income before minority interest .................. 49,186 1,316,593
Minority interest ........................................... (2,020) (52,664)
--------- -----------
Net (loss) income ....................................... $ 47,166 $ 1,263,929
========= ===========
Per share data
Net income (loss) per share--basic and diluted
Class A Common Stock ......................................
Class B Common Stock ......................................
</TABLE>
The accompanying notes are an integral part of these
statements.
F-5
<PAGE>
ADMIRALTY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
COMMON STOCK
-----------------------------------------------------
CLASS A CLASS B
STOCK -------------------------- --------------------------
SUBSCRIPTION
RECEIVABLE SHARES AMOUNT SHARES AMOUNT
-------------- ---------- --------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance, August 11, 1997 ........... $ -- -- $ -- -- $ --
Issuance of common stock ........... (205,000) 888,881 8,060,440 133,320 89,560
Net income for the period .......... -- -- -- -- --
----------- ------- ----------- ------- -----------
Comprehensive income ...............
Balance, December 31, 1997 ......... (205,000) 888,881 8,060,440 133,320 89,560
Issuance of Class B
common stock ...................... -- -- -- 1,315,000 12,349,919
Cost of issuance of Class A
common stock ...................... -- -- (570,157) -- --
Collection of subscription
receivable ........................ 205,000 -- -- -- --
Net loss for the year ended
December 31, 1998 ................. -- -- -- -- --
Other comprehensive income,
net of reclassifications
and tax ........................... -- -- -- -- --
Class A Common Stock
dividend .......................... -- -- -- 44,439 444,390
----------- ------- ----------- --------- -----------
Comprehensive income ...............
Balance, December 31, 1998 ......... $ -- 888,881 $ 7,490,283 1,492,759 $12,883,869
=========== ======= =========== ========= ===========
<CAPTION>
ACCUMULATED
OTHER TOTAL
RETAINED COMPREHENSIVE STOCKHOLDERS' COMPREHENSIVE
EARNINGS INCOME EQUITY INCOME
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Balance, August 11, 1997 ........... $ -- $ -- $ --
Issuance of common stock ........... -- -- 7,945,000
Net income for the period .......... 59,501 -- 59,501 $ 59,501
----------- ------- ----------- -----------
Comprehensive income ............... $ 59,501
===========
Balance, December 31, 1997 ......... 59,501 -- 8,004,501
Issuance of Class B
common stock ...................... -- -- 12,349,919
Cost of issuance of Class A
common stock ...................... -- -- (570,157)
Collection of subscription
receivable ........................ -- -- 205,000
Net loss for the year ended
December 31, 1998 ................. (490,966) -- (490,966) $ (490,966)
Other comprehensive income,
net of reclassifications
and tax ........................... -- 4,376 4,376 4,376
-----------
Class A Common Stock
dividend .......................... (444,390) -- --
----------- ------- -----------
Comprehensive income ............... $ (486,590)
===========
Balance, December 31, 1998 ......... $ (875,855) $ 4,376 $19,502,673
=========== ======= ===========
</TABLE>
The accompanying notes are an integral part of these
statements.
F-6
<PAGE>
PREDECESSOR COMPANY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
--------------------- ADDITIONAL
PAID-IN
SHARES PAR VALUE CAPITAL
--------- ----------- --------------
<S> <C> <C> <C>
Balance, December 31, 1996 ..... 323,533 $ 3,235 $ 3,138,345
Net income ..................... -- -- --
Change in net unrealized
gain on securities available
for sale ...................... -- -- --
------- ------- -----------
Comprehensive income ...........
Balance, December 31, 1997 ..... 323,533 $ 3,235 $ 3,138,345
======= ======= ===========
<CAPTION>
ACCUMULATED
EARNINGS OTHER TOTAL
(ACCUMULATED COMPREHENSIVE STOCKHOLDERS' COMPREHENSIVE
DEFICIT) INCOME EQUITY INCOME
-------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 ..... $ (167,649) $ 2,574 $ 2,976,505
Net income ..................... 1,263,929 -- 1,263,929 $ 1,263,929
Change in net unrealized
gain on securities available
for sale ...................... -- 5,050 5,050 5,050
----------- ------- ----------- -----------
Comprehensive income ........... $ 1,268,979
===========
Balance, December 31, 1997 ..... $ 1,096,280 $ 7,624 $ 4,245,484
=========== ======= ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
ADMIRALTY BANCORP, INC. AND SUBSIDIARY
AND PREDECESSOR COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
ADMIRALTY BANCORP, INC. AND SUBSIDIARY
----------------------------------------
FOR THE PERIOD
AUGUST 11, 1997
(DATE OF INCEPTION)
THROUGH
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------- --------------------
<S> <C> <C>
Operating activities
Net (loss) .............................................................. $ (490,966) $ 59,501
Adjustments to reconcile net income to net cash provided by
(used in) operating activities
Minority interest in net income ........................................ 3,692 --
Provision for loan losses .............................................. 385,000 --
Depreciation and amortization .......................................... 429,308 --
Amortization, net of accretion, of investment securities ............... 140,441 --
(Gain) loss on sale of securities ...................................... 39,349 --
Gains on sales of mortgage loans ....................................... (164,044) --
Increase in other assets ............................................... (99,327) (199,307)
Increase (decrease) in other liabilities ............................... (516,248) 40,356
-------------- -----------
Net cash provided by (used in) operating activities .................. (272,795) (99,450)
-------------- -----------
Investing activities
Proceeds from maturities of investment securities
available for sale .................................................... 16,125,149 --
Purchases of investment securities available for sale ................... (9,171,497) --
Proceeds from sales of investment securities available for sale ......... 2,955,197 --
Purchase of Federal Reserve Bank FHLB stock ............................. (569,000) --
Net loan originations and principal collections on loans ................ (22,151,447) --
Proceeds from sale of mortgage loan sales ............................... --
Purchase of premises and equipment ...................................... (775,887) --
Payment for purchase of Company, net of cash acquired ................... (4,439,882) --
Redemption/buyout of minority interest .................................. (358,165) --
-------------- -----------
Net cash used in investing activities ................................ (18,385,532) --
-------------- -----------
Financing activities
Net increase in deposits ................................................ 21,206,319 --
Net decrease in securities sold under agreements to
repurchase and other borrowings ....................................... (4,582,000) --
Collection of subscription receivable ................................... 205,000 --
Proceeds from issuance of common stock, net of costs .................... 11,279,762 7,945,000
-------------- -----------
Net cash provided by financing activities ............................ 28,109,081 7,945,000
-------------- -----------
Net (decrease) increase in cash and cash equivalents ..................... 9,450,754 7,845,550
Cash and cash equivalents, beginning of period ........................... 7,845,550 --
-------------- -----------
Cash and cash equivalents, end of period ................................. $ 17,296,304 $ 7,845,550
============== ===========
<CAPTION>
PREDECESSOR COMPANY
--------------------
YEAR ENDED
DECEMBER 31, 1997
--------------------
<S> <C>
Operating activities
Net (loss) .............................................................. $ 1,285,329
Adjustments to reconcile net income to net cash provided by
(used in) operating activities
Minority interest in net income ........................................ 54,488
Provision for loan losses .............................................. 435,000
Depreciation and amortization .......................................... 243,806
Amortization, net of accretion, of investment securities ............... --
(Gain) loss on sale of securities ...................................... (86,712)
Gains on sales of mortgage loans ....................................... (1,011,795)
Increase in other assets ............................................... (70,553)
Increase (decrease) in other liabilities ............................... 506,825
--------------
Net cash provided by (used in) operating activities .................. 1,356,388
--------------
Investing activities
Proceeds from maturities of investment securities
available for sale .................................................... --
Purchases of investment securities available for sale ................... (12,159,399)
Proceeds from sales of investment securities available for sale ......... 9,531,835
Purchase of Federal Reserve Bank FHLB stock ............................. (26,450)
Net loan originations and principal collections on loans ................ (10,945,330)
Proceeds from sale of mortgage loan sales ............................... 6,728,662
Purchase of premises and equipment ...................................... (44,632)
Payment for purchase of Company, net of cash acquired ................... --
Redemption/buyout of minority interest .................................. --
--------------
Net cash used in investing activities ................................ (6,915,314)
--------------
Financing activities
Net increase in deposits ................................................ 2,956,039
Net decrease in securities sold under agreements to
repurchase and other borrowings ....................................... --
Collection of subscription receivable ................................... --
Proceeds from issuance of common stock, net of costs .................... --
--------------
Net cash provided by financing activities ............................ 2,956,039
--------------
Net (decrease) increase in cash and cash equivalents ..................... (2,602,887)
Cash and cash equivalents, beginning of period ........................... 4,677,056
--------------
Cash and cash equivalents, end of period ................................. $ 2,074,169
==============
</TABLE>
The accompanying notes are an integral part of these
statements.
F-8
<PAGE>
ADMIRALTY BANCORP, INC. AND SUBSIDIARY
AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE A--ORGANIZATION
Admiralty Bancorp, Inc. (successor company to White Eagle Financial Group,
Inc.), is a bank holding company incorporated in the state of Delaware. The
consolidated financial statements include the accounts of Admiralty Bancorp,
Inc. "Admiralty", and its wholly owned subsidiary, Admiralty Bank "the Bank",
collectively referred to as "the Company". The Bank is a state-chartered
independent community bank with its main office in Palm Beach Gardens, Florida,
and branches in Juno Beach, Boca Raton and Jupiter.
The Bank operates as a commercial bank offering a wide variety of
commercial loans and, to a lesser degree, consumer credits. The Bank originates
small business loans which are partially guaranteed by the Small Business
Administration. The Bank sells the guaranteed portion to unrelated third
parties. The Bank continues to service these loans. Its primary future
strategic aim is to establish a reputation and market presence as the "small
and middle market business bank" in its principal market. The Bank funds its
loans primarily by offering time, savings and money market, and demand deposit
accounts to both commercial enterprises and individuals. Additionally, the Bank
originates residential mortgage loans. Principal markets include South Florida.
The Bank competes with other banking and financial institutions in its
primary markets. Commercial banks, savings banks, savings and loan
associations, mortgage bankers and brokers, credit unions and money market
funds actively compete for deposits and loans. Such institutions, as well as
consumer finance, mutual funds, insurance companies, and brokerage and
investment banking firms, may be considered competitors of the Bank with
respect to one or more of the services it renders.
The Bank is subject to regulations of certain state and federal agencies
and, accordingly, it is periodically examined by those regulatory authorities.
As a consequence of the extensive regulation of commercial banking activities,
the Bank's business is particularly susceptible to being affected by state and
federal legislation and regulations.
NOTE B--SUMMARY OF ACCOUNTING POLICIES
BASIS OF FINANCIAL STATEMENT PRESENTATION
The accounting policies of the Company conform with generally accepted
accounting principles and predominant practices within the banking industry.
All significant intercompany balances and transactions have been eliminated in
consolidation.
The preparation of financial statements 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. These estimates and assumptions also affect reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
The principal estimate that is particularly susceptible to significant
change in the near term relates to the allowance for loan losses. The
evaluation of the adequacy of the allowance for loan losses includes, among
other factors, an analysis of historical loss rates, by category, applied to
current loan
F-9
<PAGE>
ADMIRALTY BANCORP, INC. AND SUBSIDIARY
AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998 AND 1997
NOTE B--SUMMARY OF ACCOUNTING POLICIES--(CONTINUED)
totals. However, actual losses may be higher or lower than historical trends,
which vary. Actual losses on specified problem loans, which also are provided
for in the evaluation, may vary from estimated loss percentages, which are
established based upon a limited number of potential loss classifications.
In 1998, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No 131 defines how operating segments are determined and
requires disclosure of certain financial and descriptive information about the
Company's operating segments. Under current conditions, the Company is
reporting one segment.
INVESTMENT SECURITIES
The Bank accounts for its investment securities in accordance with SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
This standard requires investments in securities to be classified in one of
three categories: held to maturity, trading, or available for sale. Investments
in debt securities, for which management has both the ability and intent to
hold to maturity, are carried at cost, adjusted for the amortization of
premiums and accretion of discounts computed by the interest method.
Investments in debt securities, which management believes may be sold prior to
maturity due to changes in interest rates, prepayment risk and equity,
liquidity requirements or other factors, are classified as available for sale.
Net unrealized gains and losses for such securities, net of tax effect, are
required to be recognized as a separate component of shareholders' equity and
excluded from the determination of net income. The Bank does not engage in
security trading. Security transactions are accounted for on a trade date
basis. Gains or losses on disposition of investment securities are based on the
net proceeds and the adjusted carrying amount of the securities sold using the
specific identification method.
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activity." SFAS No.
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments imbedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. If certain conditions are met, a derivative
may be specifically designated as a hedge. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. Earlier
application is permitted only as of the beginning of any fiscal quarter.
Management is in the process of reviewing the provisions of SFAS No. 133.
LOANS AND ALLOWANCE OR LOAN LOSSES
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are stated at the amount of
unpaid principal and are net of unearned discount, unearned loan fees and an
allowance for loan losses. The allowance for loan losses is established through
a provision for loan losses charged to expense. Loan principal considered to be
uncollectible by management is charged against the allowance for loan losses.
The allowance is an amount that management believes will be adequate to absorb
possible losses on existing loans that may become
F-10
<PAGE>
ADMIRALTY BANCORP, INC. AND SUBSIDIARY
AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998 AND 1997
NOTE B--SUMMARY OF ACCOUNTING POLICIES--(CONTINUED)
uncollectible based upon an evaluation of known and inherent risks in the loan
portfolio. The evaluation takes into consideration such factors as changes in
the nature and size of the loan portfolio, overall portfolio quality, specific
problem loans, and current and future economic conditions which may affect the
borrowers' ability to pay. The evaluation details historical losses by loan
category, the resulting loss rates for which are projected at current loan
total amounts. Loss estimates for specified problem loans are also detailed.
Interest income is accrued as earned on a simple interest basis. Accrual
of interest is discontinued on a loan when management believes, after
considering economic and business conditions and collection efforts, that the
borrower's financial condition is such that collection of interest is doubtful.
When a loan is placed on such non-accrual status, all accumulated accrued
interest receivable, applicable to periods prior to the current year, is
charged off to the allowance for loan losses. Interest which had accrued in the
current year is reversed out of current period income. Loans 90 days or more
past due and still accruing interest must have both principal and accruing
interest adequately secured and must be in the process of collection.
The Bank accounts for its impaired loans in accordance with SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan--Income Recognition and
Disclosures." This standard requires that a creditor measure impairment based
on the present value of expected future cash flows discounted at the loan's
effective interest rate, except that as a practical expedient, a creditor may
measure impairment based on a loan's observable market price, or the fair value
of the collateral if the loan is collateral-dependent. Regardless of the
measurement method, a creditor must measure impairment based on the fair value
of the collateral when the creditor determines that foreclosure is probable.
BANK PREMISES AND EQUIPMENT
Bank premises and equipment, including leasehold improvements, are stated
at cost less accumulated depreciation. Depreciation expense is computed on the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are depreciated over the shorter of the estimated useful lives of
the improvements or the terms of the related leases. Depreciation expense was
$282,000 and $199,000 for the years ended December 31, 1998 and 1997,
respectively.
OTHER REAL ESTATE OWNED
Other real estate owned, included in other assets, representing property
acquired through foreclosure, is carried at the lower of the principal balance
of the secured loan or fair value less estimated disposal costs of the acquired
property. Costs relating to holding the assets are charged to expense.
MORTGAGE SERVICING
The Bank performs various servicing functions on loans owned by others. A
fee, usually based on a percentage of the outstanding principal balance of the
loan, is received for these services. At December 31, 1998 and 1997, the Bank
was servicing approximately $14,840,000 and $17,416,000, respectively, of loans
for others.
F-11
<PAGE>
ADMIRALTY BANCORP, INC. AND SUBSIDIARY
AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998 AND 1997
NOTE B--SUMMARY OF ACCOUNTING POLICIES--(CONTINUED)
The Company accounts for its transfers and servicing assets in accordance
with SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities," as amended by SFAS No. 127, "Deferral of
the Effective Date of Certain Provisions of SFAS No. 125," which provides
accounting guidance on transfers of financial assets, servicing of financial
assets and extinguishments of liabilities.
LONG-LIVED AND INTANGIBLE ASSETS
The Bank accounts for long-lived and intangible assets in accordance with
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," which provides guidance on when to
recognize and how to measure impairment losses of long-lived assets and certain
identifiable intangibles and how to value long-lived assets to be disposed of.
The adoption of this new statement did not have a material impact on the Bank's
financial position or results of operations.
MORTGAGES HELD FOR SALE
Mortgages held for sale are recorded at cost, which approximates market.
These mortgages are typically sold within three months of origination without
recourse to the Bank. Gain on the sales of residential mortgages is recognized
at the time of sale, and substantially all such gains result from the
recognition of previously deferred fees collected upon the origination of such
loans.
RESTRICTIONS ON CASH AND DUE FROM BANKS
The Bank is required to maintain reserves against customer demand deposits
by keeping cash on hand or balances with the Federal Reserve Bank in a
non-interest bearing account. The amounts of those reserves and cash balances
at December 31, 1998 and 1997, were approximately $426,000 and $291,000,
respectively.
MANAGEMENT STOCK OPTION PLAN
The Company accounts for the Management Stock Option Plan in accordance
with SFAS No. 123, "Accounting for Stock-Based Compensation," which contains a
fair value-based method for valuing stock-based compensation that entities may
use, which measures compensation cost at the grant date based on the fair value
of the award. Compensation is then recognized over the service period, which is
usually the vesting period. Alternatively, the standard permits entities to
continue accounting for employee stock options and similar instruments under
Accountings Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees." Entities that continue to account for stock options using APB
Opinion No. 25 are required to make pro forma disclosures of net income and
earnings per share, as if the fair value-based method of accounting defined in
SFAS No. 123 had been applied. The Corporation's employee stock option plan is
accounted for under APB Opinion No. 25.
RETIREMENT PLAN
The Company has a savings plan pursuant to the provisions of section
401(k) of the Internal Revenue Code for all eligible employees. Employees can
contribute up to limitation as defined within
F-12
<PAGE>
ADMIRALTY BANCORP, INC. AND SUBSIDIARY
AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998 AND 1997
NOTE B--SUMMARY OF ACCOUNTING POLICIES--(CONTINUED)
the plan. The Company accrues costs as incurred. Contributions to this plan
amounted to $-0- and $9,000 for the years ended December 31, 1998 and 1997,
respectively.
STOCKHOLDERS' EQUITY
The total authorized capital stock of Admiralty consists of 5,000,000
shares of common stock and 2,000,000 shares of preferred stock.
Admiralty established Class A Common Stock which possess all such rights
and privileges as are afforded to capital stock by law and shall also possess
the following rights, privileges and limitations:
DIVIDENDS
The holder of each share of Class A Common Stock shall be entitled to
receive out of any funds legally available; therefore, when and as
declared by the Board of Directors, preferential dividends thereon at the
annual rate of ten percent (10%) per annum based upon a $10.00 per share
stated value, and no more, payable semiannually on June 30 and December 31
or on such other date or dates as may be determined by the Board of
Directors. Those dividends shall be non-cumulative and may be paid either
in cash or in shares of the Company's Class B Common Stock, at the
discretion of the Company's Board of Directors. No dividends shall be
declared or paid or set apart for payment on the Company's Class B Common
Stock (described below) for any period unless the most recently required
dividend is paid on the Class A Common Stock. Holders of shares of the
Class A Common Stock shall not be entitled to any dividends, whether
payable in cash, property or stock, in excess of the non-cumulative
dividends, as herein provided, on the Class A Common Stock, unless
specially declared by the Board of Directors.
VOTING RIGHTS
Holders of Class A Common Stock shall have the right to vote at any
meeting of stockholders or otherwise and shall be entitled to notice of
any such meeting. Each share of Class A Common Stock is entitled to one
vote per share, and unless otherwise required by law, the Class A Common
Stock will vote with the Class B Common Stock together as a single class.
CONVERSION RIGHTS
VOLUNTARY CONVERSION. Each share of Class A Common Stock is convertible,
at the option of the holder, into one share of Class B Common Stock, at
anytime or from time to time.
INVOLUNTARY CONVERSION. In addition to the foregoing voluntary conversion
rights, the Company has the right to require a holder of Class A Common
Stock to convert the Class A Common Stock into Class B Common Stock, at
the rate of one share of Class B Common Stock for each share of Class A
Common Stock held, in the event that the Class B Common Stock trades at
$15.00 or higher and does not trade below $15.00 for the next 20
consecutive trading days. Upon the end of such 20 consecutive trading day
period, Company may issue a notice of mandatory conversion requiring the
conversion of shares of the Class A Common Stock to Class B Common Stock
within 20 days.
F-13
<PAGE>
ADMIRALTY BANCORP, INC. AND SUBSIDIARY
AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998 AND 1997
NOTE B--SUMMARY OF ACCOUNTING POLICIES--(CONTINUED)
The conversion rate set forth above is subject to adjustment in the event
of payment of certain stock dividends, stock split-ups or combinations or
other similar recapitalizations, to ensure that a holder of the Class A
Common Stock does not have his interests in the Company diluted through
such transaction.
Admiralty also established Class B Common Stock which possess all such
rights and privileges as are afforded to capital stock by law. Voting rights,
with regard to any items upon which the Class B Common Stock shall be required
or entitled to vote, the Class B Common Stock shall vote together with the
Class A Common Stock as a single class, except as otherwise required by law.
EARNINGS (LOSS) PER COMMON SHARE
The Company adopted the provisions of SFAS No. 128, "Earnings Per Share,"
which eliminates primary and fully diluted earnings per share (EPS) and
requires presentation of basic and diluted EPS in conjunction with the
disclosure of the methodology used in computing such EPS. Basic EPS excludes
dilution and is computed by dividing income available to common shareholders by
the weighted average common shares outstanding during the period. The Company's
capital structure requires the use of the "two class" method of computing basic
earnings per share. Diluted EPS takes into account the potential dilution that
could occur if securities or other contracts to issue Class B Common Stock,
including Class A Common Stock, were exercised and converted into Class B
Common Stock. EPS calculations for the period August 11, 1997 (date of
inception), through December 31, 1997, and for the predecessor company have not
been presented because the presentation is not considered meaningful.
COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted the FASB issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards to provide
prominent disclosure of comprehensive income items. Other comprehensive income
consists of net unrealized gains on investment securities available for sale.
The components of other comprehensive income are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------------------------------
NET OF
BEFORE TAX TAX TAX
AMOUNT EXPENSE AMOUNT
-------------- ------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Unrealized gains on securities
Unrealized holding loss arising during period ......... $ (32,402) $ 11,988 $ (20,414)
Less reclassification adjustment
for losses realized in net income ................... 39,349 (14,559) 24,790
---------- --------- ----------
Other comprehensive income, net ........................ $ 6,947 $ (2,571) $ 4,376
========== ========= ==========
</TABLE>
F-14
<PAGE>
ADMIRALTY BANCORP, INC. AND SUBSIDIARY
AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998 AND 1997
NOTE B--SUMMARY OF ACCOUNTING POLICIES--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------------------
NET OF
BEFORE TAX TAX TAX
AMOUNT EXPENSE AMOUNT
------------ -------------- -----------
<S> <C> <C> <C>
Unrealized gains on securities
Unrealized holding gains arising during period ......... $ 94,791 $ (35,546) $ 59,245
Less reclassification adjustment
for gains realized in net income ..................... (86,712) 32,517 (54,195)
--------- ---------- ---------
Other comprehensive income, net ......................... $ 8,079 $ (3,029) $ 5,050
========= ========== =========
</TABLE>
ADVERTISING COSTS
The Bank expenses advertising costs as incurred.
INCOME TAXES
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
STATEMENT OF CASH FLOWS
Cash and cash equivalents are defined as cash on hand, cash items in the
process of collection, amounts due from banks and federal funds sold with an
original maturity of three months or less. Cash paid for income taxes for the
year ended December 31, 1998 and 1997, was approximately $181,000 and $-0-,
respectively. Cash paid for interest was approximately $1,089,000 and
$1,195,000 for the years ended December 31, 1998 and 1997, respectively.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 financial statements
to conform to the 1998 presentation.
F-15
<PAGE>
ADMIRALTY BANCORP, INC. AND SUBSIDIARY
AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998 AND 1997
NOTE C--INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses, and fair value of
the Bank's available for sale and held to maturity securities are summarized as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Available for sale
U.S. Government and agency securities..... $ 4,500,000 $ 1,533 $ (4,132) $ 4,497,401
Mortgage-backed securities ............... 4,870,665 10,800 (1,254) 4,880,211
Other securities ......................... 13,750 -- -- 13,750
----------- ------- --------- -----------
Total available for sale securities ..... $ 9,384,415 $12,333 $ (5,386) $ 9,391,362
=========== ======= ========= ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------------- ------------ -------------- --------------
<S> <C> <C> <C> <C>
Available for sale
Mortgage-backed securities ............... $ 3,607,351 $ 16,394 $ (4,195) $ 3,619,550
Other securities ......................... 13,750 -- -- 13,750
----------- -------- ---------- -----------
$ 3,621,101 $ 16,394 $ (4,195) $ 3,633,300
=========== ======== ========== ===========
Held to maturity
Mortgage-backed securities ............... $16,059,516 $ 73,285 $ (27,834) $16,104,967
U.S. Government and agency securities..... 501,440 -- (34) 501,406
----------- -------- ---------- -----------
Total held to maturity securities ....... $16,560,956 $ 73,285 $ (27,868) $16,606,373
=========== ======== ========== ===========
</TABLE>
The amortized cost and estimated fair value of the Company's investment
and mortgage-backed securities, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
AVAILABLE FOR SALE
-------------------------------
AMORTIZED FAIR
COST VALUE
-------------- --------------
Due from one year to five years ......... $ 4,500,000 $ 4,497,401
Mortgage-backed securities .............. 4,870,665 4,880,211
Other securities ........................ 13,750 13,750
----------- -----------
$ 9,384,415 $ 9,391,362
=========== ===========
Proceeds on sales of securities classified as available for sale were
approximately $2,916,000 and $9,500,000 for the years ended December 31, 1998
and 1997, respectively. The Bank had gross realized gains of approximately
$3,000 and $87,000 for the years ended December 31, 1998 and 1997,
respectively. The Bank had gross realized losses of approximately $42,000 and
$-0- for the year ended December 31, 1998 and 1997, respectively.
F-16
<PAGE>
ADMIRALTY BANCORP, INC. AND SUBSIDIARY
AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998 AND 1997
NOTE C--INVESTMENT SECURITIES--(CONTINUED)
The carrying value of securities pledged to secure deposits and for other
purposes required or permitted by law amounted to approximately $-0- and
$5,395,000 at December 31, 1998 and 1997, respectively.
NOTE D--LOANS
Major classification of loans is as follows:
DECEMBER 31,
-------------------------------
1998 1997
-------------- --------------
Commercial .............................. $10,630,344 $ 6,074,099
Real estate ............................. 35,723,238 16,288,446
Installment ............................. 862,674 688,652
Home equity ............................. 215,607 195,759
Overdrafts .............................. 95,946 25,912
----------- -----------
47,527,809 23,272,868
Less
Allowance for loan losses .............. (602,474) (377,807)
Deferred loan origination fees ......... (113,638) (41,284)
----------- -----------
Loans, net ............................ $46,811,697 $22,853,777
=========== ===========
Changes in the allowance for loan losses are as follows:
YEARS ENDED DECEMBER 31,
---------------------------
1998 1997
------------ ------------
Balance at beginning of year ......... $ 377,807 $ 364,745
Loans charged off .................... (199,238) (447,356)
Recoveries ........................... 38,905 25,418
Provision for loan losses ............ 385,000 435,000
---------- ----------
Balance at end of year ............... $ 602,474 $ 377,807
========== ==========
The balance of impaired loans was approximately $-0- and $96,000 at
December 31, 1998 and 1997, respectively. The Bank has identified a loan as
impaired when it is probable that interest and principal will not be collected
according to the contractual terms of the loan agreement. The allowance for
loan loss associated with impaired loans was approximately $-0- and $11,000 at
December 31, 1998 and 1997, respectively. The average recorded investment on
impaired loans was approximately $446,000 and $12,000 for the years ended
December 31, 1998 and 1997, respectively. The income recognized on impaired
loans for the years ended December 31, 1998 and 1997, was approximately $40,000
and $14,000, respectively. Total cash collected on impaired loans for the year
ended December 31, 1998 was approximately $42,000, of which $40,000 was applied
to interest and $2,000 was applied to principal balance outstanding. Total cash
collected on impaired loans for the year ended December 31, 1997 was
approximately $30,000, all of which was credited to the principal balance
outstanding. Interest which would have been accrued on impaired loans for the
years ended December 31, 1998 and 1997, was approximately $1,000 and $11,000,
respectively. The Bank
F-17
<PAGE>
ADMIRALTY BANCORP, INC. AND SUBSIDIARY
AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998 AND 1997
NOTE D--LOANS--(CONTINUED)
recognizes income on non-accrual loans under the cash basis when the loans are
both current and the collateral on the loan is sufficient to cover the
outstanding obligation to the Bank; if these factors do not exist, the Bank
will not recognize income.
As of December 31, 1998 and 1997, the Bank had no loans past due 90 days
or more as to interest or principal payments that were still accruing interest.
At December 31, 1998 and 1997, there were no commitments to lend additional
funds to borrowers whose loans are classified as non-accrual.
NOTE E--PREMISES AND EQUIPMENT
Premises and equipment are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
ESTIMATED -------------------------------
USEFUL LIVES 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Furniture and equipment ........................... 3 - 7 years $ 1,842,096 $ 1,195,471
Leasehold improvements ............................ 5 - 15 years 621,197 580,819
------------ ------------
2,463,293 1,776,290
Accumulated depreciation and amortization ......... (1,349,905) (1,145,082)
------------ ------------
$ 1,113,388 $ 631,208
============ ============
</TABLE>
NOTE F--DEPOSITS
Deposits are as follows:
DECEMBER 31,
-------------------------------
1998 1997
-------------- --------------
Non-interest bearing demand ............. $20,129,028 $11,686,556
Savings, NOW and money market ........... 21,239,186 14,933,464
Time deposits, under $100,000............ 11,570,275 11,888,066
Time deposits, $100,000 and over......... 7,779,891 4,268,111
----------- -----------
$60,718,380 $42,776,197
=========== ===========
At December 31, 1998, the scheduled maturities of time deposits are as
follows:
1999 ............. $17,793,763
2000 ............. 1,059,557
2001 ............. 142,408
2002 ............. 199,117
2003 ............. 155,321
-----------
$19,350,166
===========
F-18
<PAGE>
ADMIRALTY BANCORP, INC. AND SUBSIDIARY
AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998 AND 1997
NOTE G--INCOME TAXES
Income tax (benefit) expense is comprised of the following:
YEARS ENDED DECEMBER 31,
-----------------------------
1998 1997
----------- ---------------
Federal
Current .......... $ -- $ 139,028
Deferred ......... -- (400,482)
-------- -----------
-- (261,454)
-------- -----------
State
Current .......... -- 16,211
Deferred ......... -- (42,757)
-------- -----------
-- (26,546)
-------- -----------
$ -- $ (288,000)
======== ===========
The income tax provision reconciled to the tax computed at the statutory
federal rate was as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Tax at statutory rate .............................. $ (167,000) $ 366,000
Non-deductible goodwill ............................ 51,000 --
Tax exempt income .................................. (24,000) --
Other non-deductible items ......................... 3,000 --
Increase (decrease) in valuation allowance ......... 116,000 (677,000)
Other .............................................. 21,000 23,000
----------- -----------
$ -- $ (288,000)
=========== ===========
</TABLE>
The net deferred tax asset consisted of the following:
DECEMBER 31,
---------------------------
1998 1997
------------ ------------
Deferred tax assets (liabilities)
Net operating loss .............. $ 490,800 484,800
Fixed assets .................... 17,300 (17,300)
SBA loans ....................... (81,800) (20,500)
Allowance for loan loss ......... 116,800 (5,600)
Other ........................... 11,500 (2,800)
---------- -------
554,600 438,600
Valuation allowance .............. (116,000) --
---------- -------
Net deferred tax asset ......... $ 438,600 $ 438,600
========== =========
At December 31, 1998, the Bank had unused net operating loss carryforwards
of approximately $1,300,000 for Federal and Florida income tax purposes
expiring in various amounts from the years
F-19
<PAGE>
ADMIRALTY BANCORP, INC. AND SUBSIDIARY
AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998 AND 1997
NOTE G--INCOME TAXES--(CONTINUED)
2006 through 2018. The loss carryforward reflects the maximum benefit that
could be obtained from the net operating losses due to limitations under
Internal Revenue code Section 382.
A valuation allowance has been recorded to reflect a net deferred tax
asset that management believes is realizable in future tax years.
NOTE H--EARNINGS (LOSS) PER SHARE
After the end of 1998, it was determined that, based on our complex
capital structure involving our Class A and Class B Common Stock, the more
appropriate presentation of earnings per share is described below.
Basic earnings per share is calculated using the "two class" method of
computing earnings per share. Diluted earnings per share is calculated using
the "if converted" method of computing earnings per share, if dilutive. The "if
converted" method assumes the conversion of Class A Common Stock into shares of
Class B Common Stock. The following instruments were outstanding and not
included in the computation of diluted earnings per share because to do so
would have been antidilutive for the periods presented: Class A Common Stock
convertible into 888,881 shares of Class B Common Stock; options outstanding to
purchase 226,000 shares of Class B Common Stock at $10.50 per share; and
warrants outstanding to purchase 800,000 shares of Class B Common Stock at
$11.00 per share.
The following table illustrates the reconciliation of the numerators and
denominators of the basic and diluted earnings per share computations:
Net (loss) ............................ $ (490,966)
Less dividends paid
Class A Common Stock ................. (444,390)
-----------
Undistributed earnings (loss) ......... $ (935,356)
===========
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------------
CLASS A CLASS B
-------------- ---------------
<S> <C> <C>
Basic and diluted (earnings) loss per share data
Distributed earnings ..................................... $ 444,390 $ --
Weighted average shares .................................. 888,881 529,115
---------- -----------
Distributed earnings per share ............................ $ 0.50 $ --
========== ===========
Undistributed earnings (loss) ............................. $ -- $ (935,356)
Weighted average shares ................................... 888,881 529,115
---------- -----------
Undistributed earnings (loss) per share ................... $ -- $ (1.77)
========== ===========
Total basic and diluted earnings (loss) per share ......... $ 0.50 $ (1.77)
========== ===========
</TABLE>
F-20
<PAGE>
ADMIRALTY BANCORP, INC. AND SUBSIDIARY
AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998 AND 1997
NOTE I--COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Bank utilizes certain office space and equipment under operating
leases expiring through 2008. Total rent expense under such operating leases,
included in occupancy expense, was approximately $352,000 and $282,000 for the
years ended December 31, 1998 and 1997, respectively.
Approximate minimum payments under non-cancellable operating leases for
the period ending December 31, are as follows:
1999 ................... $ 522,000
2000 ................... 520,000
2001 ................... 471,000
2002 ................... 469,000
2003 ................... 446,000
Thereafter ............. 1,420,000
-----------
$ 3,848,000
===========
OTHER
The Bank is involved in certain litigation arising in the ordinary course
of business. In the opinion of management, the outcome of this litigation will
not have a significant effect on the accompanying financial statements.
NOTE J--MANAGEMENT STOCK OPTION PLAN
In May 1998, the Board of Directors of the Company approved the 1998
Management Stock Option Plan (the Management Plan), which provides for options
to purchase up to 330,000 shares of Class B stock to be issued to members of
the Board of Directors of the Company, the Bank and any other subsidiaries
which the Company acquires or incorporates in the future.
The Management Plan provides for the granting of both incentive options
and nonstatutory options. Incentive stock options may be granted at an exercise
price of not less than 100% of the fair market value of the Class B stock on
the date of the grant. The option price for nonstatutory options may not be
less than 100% of the fair market value of the Class B stock on the date of
grant. The Board of Directors has discretion to set the actual exercise price
of any option within the foregoing parameters. The options, which have a term
of 10 years when issued, vest either immediately or over a three to five year
period.
F-21
<PAGE>
ADMIRALTY BANCORP, INC. AND SUBSIDIARY
AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998 AND 1997
NOTE J--MANAGEMENT STOCK OPTION PLAN--(CONTINUED)
The Management Plan is a fixed stock option plan accounted for under APB
Opinion No. 25 and related interpretations. Had compensation cost for the plans
been determined based on the fair value of options at the grant dates
consistent with the method of SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net loss and earnings per share for the Class B
Common Stock would have been reduced to the pro forma amounts indicated below
for the year ended December 31, 1998. Class A stock is not legally entitled to
share in any dividends paid upon the Class B stock.
Net (loss)
As reported .................................. $ (490,966)
Pro forma .................................... $ (1,744,940)
Basic and diluted loss per share--Class B stock
As reported .................................. $ (1.77)
Pro forma .................................... $ (4.14)
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted
average assumptions used for grants in 1998: no dividend yield; expected
volatility of 60%, risk-free interest rate of 5.48%; and expected lives of five
years for all options.
A summary of the status of the Corporation's fixed stock option plans as
of December 31, 1998, and changes for the year then ended was as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
----------- -----------------
<S> <C> <C>
Outstanding at beginning of year ................................... -- $ --
Options granted .................................................... 226,000 10.50
Options exercised .................................................. -- --
Options forfeited .................................................. -- --
------- ------
Outstanding at end of year ......................................... 226,000 10.50
======= ======
Options exercisable at end of year ................................. 216,000 10.50
======= ======
Weighted average fair value of options granted during year ......... $ 5.92
======
</TABLE>
NOTE K--RELATED PARTY TRANSACTIONS
The Bank has made in the past and, assuming continued satisfaction of
generally applicable credit standards, expects to continue to make loans to
directors, executive officers and their associates, (i.e., corporations or
organizations for which they serve as officers or directors or in which they
have beneficial ownership interests of ten percent or more). These loans have
all been made in the ordinary course of the Bank's business on substantially
the same items, including interest rates and collateral, as those prevailing at
the time for comparable transactions with other persons and do not involve more
than the normal risk of collectibility or present other unfavorable features.
In addition, Bank Directors and Officers keep depository balances with the
Bank. The aggregate dollar amount of these
F-22
<PAGE>
ADMIRALTY BANCORP, INC. AND SUBSIDIARY
AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998 AND 1997
NOTE K--RELATED PARTY TRANSACTIONS--(CONTINUED)
loans was $982,000 and $-0- at December 31, 1998 and 1997, respectively. For
the year ended December 31, 1998, $995,000 in funds were disbursed and $13,000
of principal repayments were received.
The Bank's branches in Boca Raton and Jupiter are leased from entities
owned by certain members of the Company's Board of Directors. The aggregate
rental payment due under these two leases will be approximately $239,000 per
year. The Company believes that these leases represent fair market value, and
are comparable to terms which the Bank could have obtained from unaffiliated
parties.
NOTE L--FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATION OF
CREDIT RISKS
The Bank is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit and financial guarantees. Those instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the balance sheets. The contract or notional amounts of
those instruments reflect the extent of the Bank's involvement in particular
classes of financial instruments.
The Bank's exposure to credit loss in the event of non-performance by the
other party to the financial instrument for commitments to extend credit,
standby letters of credit and financial guarantees written is represented by
the contractual notional amount of those instruments. The Bank uses the same
credit policies in making commitments and conditional obligations as it does
for on-balance-sheet instruments.
The Bank does not require collateral or other security to support
financial instruments with credit risk. The approximate contract amounts are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1997
-------------- ------------
<S> <C> <C>
Unfunded line of credit ........................ $ 1,216,000 $ 196,000
Standby letters of credit ...................... 149,000 161,000
Unfunded construction loan commitments ......... 4,145,000 1,819,000
Unfunded commercial loan commitments ........... 9,966,000 986,000
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if it is deemed necessary by the Bank upon extension of credit, is
based on management's credit evaluation of the counterparty. Collateral held
varies but may include accounts receivable; inventory, property, plant, and
equipment; and income-producing commercial properties.
F-23
<PAGE>
ADMIRALTY BANCORP, INC. AND SUBSIDIARY
AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998 AND 1997
NOTE L--FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATION OF
CREDIT RISKS--(CONTINUED)
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Bank to guarantee the performance of a customer to a
third party. Those guarantees are primarily issued to support public and
private borrowing arrangements.
The Bank has not been required to perform on any financial guarantees
during the past year. The Bank has not incurred any losses on its commitments
in 1998 or 1997.
The Bank is an independent community commercial bank, with its main office
in Palm Beach Gardens, Florida, and branches in Juno Beach, Boca Raton and
Jupiter. The Bank principally extends credit for commercial business and
commercial real estate loans, substantially all of which are located in South
Florida. Although the Bank maintains a diversified loan portfolio, a
substantial portion of its borrowers' abilities to repay loans is dependent
upon the economic condition of the South Florida region.
NOTE M--BORROWINGS
The Company has an available unsecured overnight borrowing line of credit
totalling $4,000,000 with a corresponding bank. At December 31, 1998 the entire
line of credit was available to the Company.
NOTE N--FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires entities to disclose the estimated fair value of their assets and
liabilities considered to be financial instruments. For the Bank, as for most
financial institutions, the majority of its assets and liabilities are
considered financial instruments as defined in SFAS No. 107. However, many such
instruments lack an available trading market, as characterized by a willing
buyer and seller engaging in an exchange transaction. Also, it is the Company's
general practice and intent to hold its financial instruments to maturity and
to not engage in trading or significant sales activities. Therefore, the
Company had to use significant estimations and present value calculations to
prepare this disclosure.
Changes in the assumptions or methodologies used to estimate fair values
may materially affect the estimated amounts. Also, management is concerned that
there may not be reasonable comparability between institutions due to the wide
range of permitted assumptions and methodologies in the absence of active
markets. This lack of uniformity gives rise to a high degree of subjectivity in
estimating financial instrument fair values.
Fair values have been estimated using data which management considered the
best available, as generally provided by estimation methodologies deemed
suitable for the pertinent category of financial instrument. The estimation
methodologies, resulting fair values and recorded carrying amounts are as
follows:
Fair value of loans and deposits with floating interest rates is generally
presumed to approximate the recorded carrying amounts.
F-24
<PAGE>
ADMIRALTY BANCORP, INC. AND SUBSIDIARY
AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998 AND 1997
NOTE N--FAIR VALUE OF FINANCIAL INSTRUMENTS--(CONTINUED)
Fair value of financial instruments actively traded in a secondary market
has been estimated using quoted market prices.
<TABLE>
<CAPTION>
1998 1997
------------------------- ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ------------ ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents ...................... $ 17,296 $ 17,296 $ 2,074 $ 2,074
======== ======== ======= =======
Investment securities, including Federal Reserve
Bank and FHLB stock ........................... $ 10,074 $ 10,074 $20,308 $20,353
======== ======== ======= =======
</TABLE>
Fair value of financial instruments with stated maturities has been
estimated using present value cash flow, discounted at a rate approximating
current market for similar assets and liabilities. Fair value of financial
instrument liabilities with no stated maturities has been estimated to equal
the carrying amount (the amount payable on demand).
<TABLE>
<CAPTION>
1998 1997
------------------------- ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ------------ ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Deposits with stated maturities ............ $ 19,350 $ 19,396 $ 16,156 $ 16,284
======== ======== ======== ========
Deposits with no stated maturities ......... $ 41,368 $ 41,368 $ 26,620 $ 26,620
======== ======== ======== ========
</TABLE>
The fair value of the net loan portfolio has been estimated using present
value cash flows, discounted at the approximate current market rates adjusted
for non-interest operating costs, and giving consideration to estimated
prepayment risk and credit loss factors.
1998 1997
------------------------- ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ------------ ---------- -----------
(IN THOUSANDS)
Total loans ......... $47,414 $47,392 $23,232 $23,194
======= ======= ======= =======
There is no material difference between the carrying amount and the
estimated fair value of off-balance-sheet items totalling approximately $15.5
million and $3.2 million at December 31, 1998 and 1997, respectively, which are
primarily comprised of floating rate loan commitments priced to market at
funding.
The Bank's remaining assets and liabilities are not considered financial
instruments. No disclosure of the relationship value of the Bank's deposits is
required by SFAS No. 107.
NOTE O--REGULATORY MATTERS
Based upon the results of the joint examination conducted by the State of
Florida Department of Banking and Finance (the Department) and the Federal
Reserve Bank of Atlanta (FRB) that
F-25
<PAGE>
ADMIRALTY BANCORP, INC. AND SUBSIDIARY
AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998 AND 1997
NOTE O--REGULATORY MATTERS--(CONTINUED)
concluded in September 1991, the Bank entered into a Cease and Desist Order
(C&D) in January 1992. Provisions of this C&D required the Bank to, among other
things, cease and desist from the following: (1) operating the Bank with
inadequate capital; (2) maintaining unsatisfactory asset quality and excess
past-due loans; (3) funding operations with unstable deposits or other
liabilities; and (4) maintaining inadequate loss reserves.
Based upon the improvements in the Bank's condition as reflected in the
Report of Examination as of October 1997 by the FRB, and based on the Bank's
overall compliance with the C&D, the FRB terminated its C&D on January 30,
1998, and the Department terminated its C&D on February 6, 1998.
The Bank, as a state-chartered Federal Reserve member bank, is subject to
regulatory dividend restrictions. Under such restrictions, the Bank may not,
without prior regulatory approval, declare dividends.
The Bank is subject to various regulatory and capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory--and possibly additional
discretionary--actions by the 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
following table) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). Management believes, as of December 31, 1998, that
the Bank meets all capital adequacy requirements to which it is subject.
F-26
<PAGE>
ADMIRALTY BANCORP, INC. AND SUBSIDIARY
AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998 AND 1997
NOTE O--REGULATORY MATTERS--(CONTINUED)
As of December 31, 1998, the most recent notification from the Department
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain minimum total risk-based, Tier I risk-based and Tier I leverage as set
forth in the table. There are no conditions or events since that notification
that management believes have changed the institution's category.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------------- ------------------------ -------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
----------- ----------- ---------- ----------- ---------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998
Total capital
(to risk-weighted assets) ................ $ 14,073 25.41% $>4,430 >8.00% $>5,538 >10.00%
= = = =
Tier I capital
(to risk-weighted assets) ................ 13,471 24.33 >2,215 >4.00 >3,323 >6.00
= = = =
Tier I capital (to average assets) ......... 13,471 19.21 >2,805 >4.00 >3,507 >5.00
= = = =
As of December 31, 1997
Total capital
(to risk-weighted assets) ................ $ 4,414 13.98% $>3,526 >8.00% $>3,157 >10.00%
= = = =
Tier I capital
(to risk-weighted assets) ................ 4,037 12.79 >1,262 >4.00 >1,894 >6.00
= = = =
Tier I capital (to average assets) ......... 4,037 8.59 >1,880 >4.00 >2,819 >5.00
= = = =
</TABLE>
NOTE P--PLAN OF MERGER AND RECAPITALIZATION
During September 1997, Admiralty Bancorp, Inc. (Admiralty), entered into
an Agreement and Plan of Merger (the Agreement) with White Eagle Financial
Group, Inc. (WEFG). Pursuant to the terms of the Agreement, all then existing
shareholders of WEFG had their interests in WEFG cancelled in exchange for a
cash payment equal to 1.85 times the shareholders' equity of WEFG. The
consideration paid to WEFG shareholders upon consummation of the acquisition
was $7,500,000. Additionally, Admiralty paid a finder fee of $500,000, payable
in 50,000 shares of Class B Common Stock, to the former Chairman of the Board
of WEFG in conjunction with the sale of WEFG to Admiralty. This fee was
considered additional consideration in the purchase WEFG. In connection with
this transaction, Admiralty was merged into WEFG and WEFG then changed its name
to Admiralty Bancorp, Inc. This transaction was accounted for under the
purchase method of accounting and accordingly, the results of operation for the
year ended December 31, 1998, include only the results of operations of WEFG
from the date of acquisition, January 22, 1998. The acquisition resulted in the
Company recording $3,981,000 of goodwill which is being amortized on a
straight-line basis over 25 years. Amortization expense for the year ended
December 31, 1998 was $147,000.
F-27
<PAGE>
ADMIRALTY BANCORP, INC. AND SUBSIDIARY
AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998 AND 1997
NOTE P--PLAN OF MERGER AND RECAPITALIZATION--(CONTINUED)
The following represents the unaudited pro forma financial information of
Admiralty as if the acquisition occurred on the first date of the periods
indicated. The pro forma information should be read in conjunction with the
related historical information and is not necessarily indicative of the results
that would have been attained had the transaction actually taken place. EPS
calculations for the Predecessor Company have not been presented because the
presentation is not considered meaningful.
UNAUDITED PRO FORMA
-----------------------
1998 1997
---------- ----------
Interest income ....................... $ 4,249 $ 3,630
Interest expense ...................... 1,165 1,197
------- -------
Net interest income ................... $ 3,084 $ 2,433
======= =======
Net (loss) income ..................... $ (444) $ 1,117
======= =======
Net (loss) per share--basic and diluted
Class A Common Stock ................. $ 0.50 --
Class B Common Stock ................. $ (1.68) --
The organizers of Admiralty recapitalized the Company through $8,000,000
in new capital raised through a private placement of the Company's Class A
Units, consisting of one share of Class A Common Stock, no par value (the Class
A Stock) and one Class B Common Stock Purchase Warrant (the Class B Stock).
Holders of the warrants are entitled to purchase 800,000 shares of the Class B
Stock. Each of these warrants entitles the holder to purchase one share of the
Class B Stock, at a purchase price of $11.00 per share, for a period commencing
January 22, 1999, and ending January 21, 2002. Each Class A Unit had a purchase
price of $10.00. The Class A Common Stock can also be converted into shares of
Class B Common Stock at the option of the holders of the Class A Common Stock.
Additionally, in connection with the formation of Admiralty, the organizers
received 88,881 shares of Class A Common Stock and 133,320 shares of Class B
Common Stock for $150,000 of consideration.
The Company completed a public offering in 1998 in which it sold 1.3
million shares of Class B Common Stock at $10.50 per share. After giving effect
to offering expenses of $1.4 million, the sale resulted in net cash proceeds of
$11.8 million.
NOTE Q--SUBSEQUENT EVENTS
On January 27, 1999, the Board of Directors declared a 4.4% Class A Common
Stock dividend payable in shares of Class B Common Stock. In connection with
the dividend, the Company issued 39,107 shares of Class B Common Stock with a
fair market value of $10.00 per share.
F-28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
ADMIRALTY BANCORP, INC.
By: /s/ WARD KELLOGG
---------------------------------
Ward Kellogg
President and Chief Executive
Officer
Dated:
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- -------------------------------- --------------------------------------------- ---------------
<S> <C> <C>
/s/ WARD KELLOGG President and Chief Executive Officer March 30, 1999
----------------------------
Ward Kellogg
/s/ JOHN KAPSIS Senior Vice President--Finance March 30, 1999
---------------------------- (Principal Accounting and Financial Officer
John Kapsis
/s/ BRUCE A. MAHON Chairman of the Board March 30, 1999
----------------------------
Bruce A. Mahon
/s/ DAVID B. DICKENSEN Director March 30, 1999
----------------------------
David B. Dickensen
/s/ LESLIE E. GOODMAN Director March 30, 1999
----------------------------
Leslie E. Goodman
/s/ THOMAS L. GRAY, JR. Director March 30, 1999
----------------------------
Thomas L. Gray, Jr.
/s/ THOMAS J. HANFORD Director March 30, 1999
----------------------------
Thomas J. Hanford
/s/ SIDNEY L. HOFING Director March 30, 1999
- -------------------------------
Sidney L. Hofing
/s/ PETER L.A. PANTAGES Director March 30, 1999
- -------------------------------
Peter L.A. Pantages
</TABLE>
<PAGE>
NAME TITLE DATE
- --------------------------------- ---------- ---------------
/s/ RICHARD P. ROSA Director March 30, 1999
----------------------------
Richard P. Rosa
/s/ CRAIG A. SPENCER Director March 30, 1999
----------------------------
Craig A. Spencer
/s/ JOSEPH W. VECCIA, JR. Director March 30, 1999
----------------------------
Joseph W. Veccia, Jr.
/s/ MARK A. WOLTERS Director March 30, 1999
----------------------------
Mark A. Wolters
/s/ GEORGE R. ZOFFINGER Director March 30, 1999
----------------------------
George R. Zoffinger
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
21 Subsidiaries of the Registrant
27 Financial Data Schedule
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Admiralty Bancorp, Inc. has a single subsidiary, Admiralty Bank.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,996
<INT-BEARING-DEPOSITS> 6
<FED-FUNDS-SOLD> 13,294
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 9,391
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 47,414
<ALLOWANCE> 602
<TOTAL-ASSETS> 80,748
<DEPOSITS> 60,718
<SHORT-TERM> 0
<LIABILITIES-OTHER> 527
<LONG-TERM> 0
0
0
<COMMON> 20,374
<OTHER-SE> (871)
<TOTAL-LIABILITIES-AND-EQUITY> 80,748
<INTEREST-LOAN> 2,937
<INTEREST-INVEST> 798
<INTEREST-OTHER> 298
<INTEREST-TOTAL> 4,033
<INTEREST-DEPOSIT> 1,079
<INTEREST-EXPENSE> 1,089
<INTEREST-INCOME-NET> 2,944
<LOAN-LOSSES> 385
<SECURITIES-GAINS> (39)
<EXPENSE-OTHER> 3,779
<INCOME-PRETAX> (487)
<INCOME-PRE-EXTRAORDINARY> (491)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (491)
<EPS-PRIMARY> (1.77)
<EPS-DILUTED> (1.77)
<YIELD-ACTUAL> 6.21
<LOANS-NON> 109
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 378
<CHARGE-OFFS> 199
<RECOVERIES> 38
<ALLOWANCE-CLOSE> 602
<ALLOWANCE-DOMESTIC> 515
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 87
</TABLE>
