SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
-------------------
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
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
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(State of 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)
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(Former Name, Former Address and Former Fiscal 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 _____
As of May 14, 1999 there were 2,420,747 shares of common stock, including both
Class A and Class B shares of Common Stock, outstanding.
<PAGE>
ADMIRALTY BANCORP, INC. AND SUBSIDIARY
TABLE OF CONTENTS
Part I. Financial Information
Item 1. Financial Statements
PAGE
----
Condensed Consolidated Balance Sheets -
At March 31, 1999 (unaudited) and at December 31, 1998.......... 3
Condensed Consolidated Statements of Operations (unaudited) -
Three months ended March 31, 1999 and 1998 ..................... 4
Condensed Consolidated Statements of Cash Flows (unaudited) -
Three months ended March 31, 1999 and 1998 ..................... 5
Notes to Consolidated Financial Statements (unaudited) ........... 6
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations ...................................... 12
Part II. Other Information
Item 1. Legal Proceedings ....................................... 20
Item 2. Changes in Securities and Use of Proceeds ............... 20
Item 3. Defaults Upon Senior Securities ......................... 20
Item 4. Submission of Matters to a Vote of Security Holders ...... 20
Item 5. Other Information ....................................... 20
Item 6. Exhibits and Reports on Form 8-K ........................ 20
Signature Page
2
<PAGE>
ADMIRALTY BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31, 1998
-------------- -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents
Cash and due from banks ............................... $ 3,875,334 $ 3,996,594
Interest bearing due from banks ....................... 8,347 5,710
Federal funds sold .................................... 14,466,000 13,294,000
------------ ------------
Total cash and cash equivalents ................. 18,349,681 17,296,304
Investment securities available for sale,
at fair market value .................................. 9,968,702 9,391,362
Investment securities held to maturity, at cost
(fair market value of $1,000,000 at March 31, 1999).... 1,000,000
Loans, net .................................................... 54,860,664 46,811,697
Accrued interest receivable ................................... 382,852 266,022
Federal Reserve Bank and FHLB stock ........................... 771,850 682,550
Premises and equipment, net ................................... 1,606,726 1,113,388
Deferred tax asset ............................................ 438,643 438,600
Goodwill ...................................................... 3,794,356 3,834,188
Other assets .................................................. 915,282 914,385
------------ ------------
Total assets .................................... $ 92,088,756 $ 80,748,496
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits ...................................................... $ 72,072,619 $ 60,718,380
Accrued interest payable ...................................... 52,714 57,758
Due under purchase contract ................................... 158,495 201,633
Other liabilities ............................................. 299,192 268,052
------------ ------------
Total liabilities ..................................... 72,583,020 61,245,823
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, no par value, 2,000,000 shares
authorized, no shares issued or outstanding ........... -- --
Common stock, Class A, no par value, 1,000,000 shares
authorized, 888,881 shares issued and outstanding at
March 31, 1999 and December 31, 1998 .................. 7,490,283 7,490,283
Common stock, Class B, no par value, 4,000,000 shares
authorized, 1,531,866 shares issued and outstanding
at March 31, 1999 and December 31, 1998 ............... 13,274,939 13,274,939
Accumulated deficit ........................................... (1,237,419) (1,266,925)
Accumulated other comprehensive income (loss), net ............ (22,067) 4,376
------------ ------------
Total stockholders' equity .................................... 19,505,736 19,502,673
------------ ------------
Total liabilities and stockholders' equity .................... $ 92,088,756 $ 80,748,496
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
ADMIRALTY BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
ADMIRALTY BANCORP, INC. PREDECESSOR
AND SUBSIDIARY COMPANY
---------------------------------- -----------------
FOR THE PERIOD FOR THE PERIOD
THREE MONTHS JANUARY 22,1998 JANUARY 1,1998
ENDED THROUGH THROUGH
MARCH 31, 1999 MARCH 31, 1998 JANUARY 21, 1998
-------------- --------------- ----------------
<S> <C> <C> <C>
Interest income
Loans ............................... $ 1,120,682 $ 521,725 $ 147,401
Securities .......................... 144,003 264,399 68,133
Federal funds sold .................. 141,641 1,459 388
Other ............................... 91 -- --
----------- ----------- -----------
Total interest income ......... 1,406,417 787,583 215,922
----------- ----------- -----------
Interest expense
Deposits ............................ 336,727 210,790 71,006
Borrowings .......................... -- 10,268 5,034
----------- ----------- -----------
Total interest expense ........ 336,727 221,058 76,040
----------- ----------- -----------
Net interest income ........... 1,069,690 566,525 139,882
Provision for loan losses ................... 15,000 55,000 --
----------- ----------- -----------
Net interest income after
provision for loan losses ..... 1,054,690 511,525 139,882
----------- ----------- -----------
Non-interest income
Service charges and fees ............ 205,470 64,366 13,169
Gain on sale of loans ............... 59,480 204,294 --
Other income ........................ 13,028 3,465 27,238
----------- ----------- -----------
Total non-interest income ..... 277,978 272,125 40,407
----------- ----------- -----------
Non-interest expense
Salaries and employee benefits ...... 528,053 190,330 38,792
Occupancy ........................... 209,611 71,495 29,699
Furniture and equipment ............. 99,474 43,319 10,828
Amortization of goodwill ............ 39,832 29,862 --
Other expense ....................... 390,492 267,423 51,784
----------- ----------- -----------
Total non-interest expense .... 1,267,462 602,429 131,103
----------- ----------- -----------
Income before income tax
expense and
minority interest ........... 65,206 181,221 49,186
Income tax expense .......................... 35,700 88,000 --
----------- ----------- -----------
Income before minority interest ..... 29,506 93,221 49,186
Minority interest ........................... -- (4,028) (2,020)
----------- ----------- -----------
Net income .......................... $ 29,506 $ 89,193 $ 47,166
=========== =========== ===========
Per share data
Net income per share - basic and diluted... $ 0.01 $ 0.08
=========== ===========
Weighted average shares outstanding ....... 2,420,747 1,155,747
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
ADMIRALTY BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 22, 1998
THREE MONTHS ENDED THROUGH
MARCH 31, 1999 MARCH 31, 1998
-------------- --------------
<S> <C> <C>
Operating activities
Net income .................................................... $ 29,506 $ 89,193
Adjustments to reconcile net income to net cash provided by
(used in) operating activities
Minority interest in net income ............................. -- 4,028
Provision for loan losses ................................... 15,000 55,000
Depreciation and amortization of fixed assets ............... 90,369 70,360
Amortization, net of accretion, of investment securities..... 9,916 --
Gain on sales of loans ...................................... (59,480) (204,294)
Increase in other assets .................................... (62,127) (92,745)
(Decrease) increase in other liabilities .................... (52,841) 602,235
Increase in income taxes payable ............................ 35,800 88,000
------------ ------------
Net cash provided by operating activities ............... 6,143 611,777
Investing activities
Proceeds from maturities of investment securities
available for sale .......................................... 1,370,491 3,809,343
Purchases of investment securities available for sale ......... (2,000,000) --
Purchases of investment securities held to maturity ........... (1,000,000) --
Purchase of Federal Reserve Bank & FHLB stock ................. (89,300) --
Net loan originations and principal collections on loans ...... (8,883,010) (9,763,391)
Proceeds from loan sales ...................................... 878,521 7,960,230
Purchase of premises and equipment, net ....................... (583,707) 37,227
Payment for purchase of Company, net of cash acquired ......... -- (2,881,831)
------------ ------------
Net cash used in investing activities ....................... (10,307,005) (838,422)
Financing activities
Net increase in deposits ...................................... 11,354,239 1,724,084
Net decrease in securities sold under agreements to
repurchase and other borrowings ............................. -- (4,582,000)
Collection of subscription receivable ......................... -- 205,000
Cost of issuance of common stock .............................. -- (493,781)
------------ ------------
Net cash provided by financing activities ................... 11,354,239 (3,146,697)
------------ ------------
Net increase (decrease) in cash and cash equivalents .................. 1,053,377 (3,373,342)
Cash and cash equivalents, beginning of period ........................ 17,296,304 7,845,550
------------ ------------
Cash and cash equivalents, end of period .............................. $ 18,349,681 $ 4,472,208
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The unaudited condensed consolidated interim financial statements of Admiralty
Bancorp, Inc. (the "Company") and its wholly owned subsidiary, Admiralty Bank
(the "Bank") reflect all adjustments (including normal recurring accruals)
which, in the opinion of management, are necessary to present fairly the
Company's consolidated financial condition and the consolidated results of
operations and the consolidated cash flows for interim periods. The results for
interim periods are not necessarily indicative of trends or results to be
expected for the full year. These condensed consolidated interim financial
statements and notes should be read in conjunction with the Company Annual
Report on Form 10-KSB for the year ended December 31, 1998.
The Company is a bank holding company incorporated in the state of Delaware. The
Bank is a state chartered commercial bank, with its main office in Palm Beach
Gardens, Florida, and branches in Juno Beach, Jupiter, and Boca Raton, Florida.
On January 22, 1998 Admiralty Bancorp, Inc. acquired White Eagle Financial
Group, Inc. ("WEFG" or "the Predecessor Company"). In connection with the
transaction, Admiralty Bancorp, Inc. (N.J. corporation) was merged into WEFG and
WEFG then changed its name to Admiralty Bancorp, Inc. In connection with the
transaction, a new board of directors was elected and new management was
subsequently appointed. The transaction was accounted for under the purchase
method of accounting and accordingly, the results of operation for the quarter
ended March 31, 1998 include only the results of operations of the Predecessor
Company from the date of acquisition, January 22, 1998. Prior to the Change In
Control and the Company's Public Offering, the Predecessor Company was a
privately held institution. Accordingly, the Predecessor Company's operations
for the first 21 days of 1998 are presented separately.
On January 22, 1999, the Board of Directors declared a 4.4% dividend paid to
Class A shareholders in shares of the Company's Class B stock. Accordingly, the
consolidated financial statements for prior periods have been restated to
reflect the issuance of the Class B shares.
On March 22, 1999, the Board of Directors resolved to treat both classes of the
Company's stock equally, in terms of the amount of dividends declared and the
form of payment of dividends. This resolution and new dividend policy is
effective January 1, 1999. However, the resolution specifically excepts the
January, 1999 dividend paid to Class A shareholders which represented the
dividend on Class A shares for the second half of 1998.
NOTE B - RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("Statement 133"). Statement 133 is
effective for fiscal years beginning after June 15, 1999, with earlier adoption
permitted. Statement 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded 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. It is currently
anticipated that the Company will adopt Statement 133 on January 1, 2000, and
that Statement 133 will not have a significant financial statement impact upon
adoption.
6
<PAGE>
During January 1999, the Company adopted SFAS No. 134, "Accounting for
Mortgage-backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise" ("Statement 134"). Statement 134
is effective for the first fiscal quarter beginning after December 15, 1998.
This statement conforms the subsequent accounting for securities retained after
the securitization of mortgage loans by a mortgage banking enterprise with the
subsequent accounting for securities retained after the securitization of other
types of assets by a non-mortgage entity. Adoption of Statement 134 did not have
a material impact on the consolidated 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.
Effective January 1, 1998 the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (Statement 130). This
statement is effective for financial statements issued for periods beginning
after December 15, 1997. Under Statement 130, a company is required to show
changes in assets and liabilities as comprehensive income in the consolidated
statements of changes in stockholders' equity or in an alternative comprehensive
income statement presentation. The following table illustrates the Company's
comprehensive income for the periods reported.
<TABLE>
<CAPTION>
FOR THE PERIOD
THREE MONTHS JANUARY 22, 1998
ENDED THROUGH
(Unaudited) MARCH 31, 1999 MARCH 31, 1998
-------------- --------------
<S> <C> <C>
Net earnings $ 29,506 $ 89,193
Other comprehensive income, net of tax -
Unrealized gains on securities
Unrealized holding losses arising during period (26,443) (4,458)
Less: reclassification adjustment for
realized gains included in net income -- --
-------- --------
Comprehensive income $ 3,063 $ 84,735
======== ========
</TABLE>
7
<PAGE>
NOTE C - NET INCOME PER SHARE
The Company calculates net income per share in accordance with SFAS No. 128,
"Earnings Per Share." Net income per share was computed by dividing net income
by the weighted average number of shares of common stock outstanding during the
three months ended March 31, 1999 and 1998. Adjustments would have been made,
where material, to give effect to the shares that would be outstanding, assuming
the exercise of dilutive stock options and warrants, all of which are considered
common stock equivalents. No adjustments were necessary in this period as the
adjustment would have been anti-dilutive.
The following table illustrates the reconciliation of the numerator and
denominator of the basic and diluted earnings per share computations for the
periods ended March 31, 1999 and 1998:
FOR THE PERIOD
THREE MONTHS JANUARY 22, 1998
ENDED THROUGH
MARCH 31, 1999 MARCH 31, 1998
-------------- --------------
Net income $ 29,506 $ 89,193
---------- ----------
Weighted average shares 2,420,747 1,155,747
---------- ----------
Basic and Diluted earnings per Share $ 0.01 $ 0.08
========== ==========
As noted above, on January 22, 1999, the board of directors declared a 4.4%
dividend to be paid on Class A shares in shares of the Company's Class B stock.
Accordingly, basic and diluted EPS has been adjusted retroactively for all
periods presented to reflect this stock dividend.
At December 31, 1998, the Company considered its capital structure involving its
Class A and Class B Common Stock to be complex due to different dividend rights
of Class A (10% dividend in cash or stock per year) and Class B common
shareholders. Accordingly, the Company calculated basic earnings per share using
the "two-class" method of computing earnings per share. Diluted earnings per
share was calculated using the "if converted" method of computing earnings per
share, if dilutive.
As noted above, the Company adopted a new dividend policy effective January 1,
1999 whereby the Company's Class A and Class B Common Stock will be treated
equally in the amount and terms of dividends declared and the form of payment of
dividends. Accordingly, effective January 1, 1999, the earnings per share is no
longer being computed under the two class method.
The earnings per share ("EPS") calculation for the period January 1, 1998
through January 21, 1998 for the predecessor company has not been presented
because the presentation is not considered meaningful.
8
<PAGE>
NOTE D - INVESTMENT AND MORTGAGE BACKED SECURITIES
The amortized cost and fair value of investment securities and mortgage-backed
securities as of March 31, 1999 are as follows:
<TABLE>
<CAPTION>
GROSS UNREALIZED GROSS UNREALIZED
AMORTIZED COST GAINS LOSSES FAIR VALUE
-------------- ---------------- ---------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
MARCH 31, 1999
AVAILABLE FOR SALE:
U.S. Government and Agency $ 6,500 $ 0 $ (48) $ 6,452
securities
Mortgaged-backed securities 3,490 13 -- 3,503
Other securities 14 -- -- 14
SUB-TOTAL $10,004 $ 13 $ (48) $ 9,969
------- ------- ------- -------
HELD TO MATURITY:
U.S. Government and Agency $ 1,000 $ -- $ -- $ 1,000
securities
TOTAL $11,004 $ 13 $ (48) $10,969
======= ======= ======= =======
</TABLE>
9
<PAGE>
The amortized cost and fair value of investment and mortgage-backed securities
as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
GROSS UNREALIZED GROSS UNREALIZED
AMORTIZED COST GAINS LOSSES FAIR VALUE
-------------- ---------------- ---------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
AVAILABLE FOR SALE:
U.S. Government and Agency $4,500 $ 1 $ (4) $4,497
securities
Mortgaged-backed securities 4,870 11 (1) 4,880
Other securities 14 -- -- 14
------ ------ ------ ------
TOTAL $9,384 $ 12 $ (5) $9,391
====== ====== ====== ======
</TABLE>
The carrying value of securities pledged to secure deposits and for other
purposes required or permitted by law amounted to approximately $500 thousand
and $-0- at March 31, 1999 and December 31, 1998, respectively.
NOTE E - LOANS
The following schedule presents the components of loans, net of unearned income,
by type, as of March 31, 1999 and December 31, 1998.
<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31, 1998
---------------------- ----------------------
(Dollars in thousands)
AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Commercial and Industrial $12,329 22% $10,557 22%
Real Estate
Non-Residential Properties 33,020 60% 30,292 64%
Residential Properties 4,642 8% 3,694 8%
Construction 4,417 8% 1,912 4%
Consumer 1,083 2% 959 2%
------- ------- ------- -------
Total Loans 55,491 100% 47,414 100%
less: allowance 630 602
------- -------
Total loans, net $54,861 $46,812
======= =======
</TABLE>
10
<PAGE>
Changes in the allowance for loan losses are as follows:
FOR THE PERIOD
JANUARY 22, 1998
THREE MONTHS ENDED THROUGH
MARCH 31, 1999 MARCH 31, 1998
-------------- --------------
(DOLLARS IN THOUSANDS)
Balance at beginning of year $ 602 $ 378
Provision for loan losses 15 55
Charge-offs -- 5
Recoveries 13 1
------- -------
Ending Balance $ 630 $ 429
======= =======
Ratio of net charge-offs to
average loans outstanding 0.00% 0.02%
Balance of allowance as a % of
loans at period end 1.13% 1.71%
At March 31, 1999 and December 31, 1998, loans with unpaid principal balances of
approximately $109 thousand and $109 thousand, respectively, were 90 days or
more contractually delinquent or on nonaccrual status.
11
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain "forward-looking statements as defined under
Section 21E of the Securities Exchange Act of 1934." The Company desires to take
advantage of the "safe harbor" provisions of Section 21E and is including this
statement for the express purpose of availing itself of the protection of the
safe harbor with respect to all such forward-looking statements. These
forward-looking statements, which are included in Management's Discussion and
Analysis, describe future plans or strategies and may include the Company's
expectations of future financial results. The words "believe", "expect",
"anticipate", "estimate", "project", and similar expressions identify
forward-looking statements. The Company's ability to predict results or the
effect of future plans or strategies or qualitative or quantitative changes
based on market risk exposure is inherently uncertain. Factors which could
effect actual results include but are not limited to i) change in general market
interest rates, ii) general economic conditions, iii) legislative/regulatory
changes, iv) monetary and fiscal policies of the U.S. Treasury and the Federal
Reserve, v) changes in the quality or composition of the Company's loan and
investment policies, vi) demand for loan products, vii) deposit flows, viii)
competition, and ix) demand for financial services in the Company's markets.
These factors should be considered in evaluating the forward-looking statements,
and undue reliance should not be placed on such statements.
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, the Company was a privately held
institution (the "Predecessor Company"). The Company's historic financial
statements included in this filing for the three (3) months ended March 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 current year periods,
the income statement data discussed for the three months ended March 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.
For the quarter ended March 31, 1999, the Company generated a net profit of $30
thousand, or $0.01 per share, a decrease from earnings of $136 thousand for the
first quarter of 1998.
At March 31, 1999, the Company's total assets reached $92.1 million, an increase
of 14.0% over total assets at December 31, 1998. The Company's net loans totaled
$54.9 million, an increase of 17.2% over net loans at December 31, 1998 and the
Company's deposits totaled $72.1 million, an increase of 18.7% over total
deposits at December 31, 1998.
12
<PAGE>
RESULTS OF OPERATIONS
Three Months Ended March 31, 1999 and March 31, 1998.
INTEREST INCOME. Total interest income increased $403 thousand, or 40.2%, to
$1.4 million for the quarter ended March 31, 1999 from $1.0 million for the same
period of 1998. This increase in interest income primarily relates to increases
in the Company's average balance of earning assets, partially offset by a
decrease in average rates. Average balances increased by $24.8 million for loans
and $11.9 for federal funds sold and a decrease of $7.8 million for investment
securities. The average yield on the loan portfolio decreased to 9.2% from
11.1%, the average yield on federal funds sold decreased to 4.8% from 6.0% and
the average yield on investment securities decreased to 5.7% from 7.4% in 1999
as compared to 1998. During the three months ended March 31, 1999, as the
Company's asset mix began to shift toward a greater percentage of loans newly
originated in a lower rate environment, the net yield on the Company's interest
earning assets decreased to 8.0% from the 9.5% earned during the three months
ended March 31, 1998.
INTEREST EXPENSE. The Company's interest expense for the first quarter of 1999
increased $40 thousand, or 13.3% to $337 thousand from $297 thousand for the
same period last year. The increase in interest expense reflects an 40.3%
increase in average interest bearing deposits at March 31, 1999 as compared to
the same period in 1998 offset by a decrease in rates and a shift in the
Company's deposit gathering philosophy, away from time deposits and toward lower
rate transactional accounts. The average balance of time deposits, money market
deposits and NOW deposits increased by $4.1 million, $2.5 million and $5.6
million respectively in the first quarter of 1999 as compared to the same period
in 1998. In addition, the average balance of the Company's non-interest bearing
demand deposits increased by $10.0 million, to $20.9 million for the three
months ended March 31, 1999 from $10.9 million for the three months ended March
31, 1998. The changes to the Company's deposit portfolio reduced the Company's
average cost of funds for the three months ended March 31, 1999 to 2.1%,
compared to a 2.8% average cost of funds for the comparable period in 1998.
NET-INTEREST INCOME. Net interest income for the three months ended March 31,
1999, increased by $363 thousand, or 51.4%, over the same period last year. The
Company's net interest spread decreased 90 basis points to 4.77% for the three
months ended March 31, 1999 from 5.67% for the comparable period of 1998.
PROVISION FOR LOAN LOSSES. Prior to the change in control, the Bank's operations
were subject to a cease and desist order with the Federal Reserve Bank of
Atlanta and the Florida Department of Banking and Finance. Among other things,
the cease and desist order required the Bank to maintain a designated level of
allowance for loan losses, and to expense provisions necessary to maintain the
allowance at the required level. The cease and desist order was lifted in early
1998. The reduction in the provision for loan losses for the three months ended
March 31, 1999 compared to the comparable period of 1998 reflects the ability of
management to set the Company's expense for provision for loan losses at a level
management believes appropriate in light of the Company's lending activities,
the quality of the loan portfolio, historical experience,
13
<PAGE>
volume and type of lending conducted by the Company, industry standards, the
status of past due and nonperforming loans, the general economic conditions of
the Company's lending area and other factors affecting collectibility of the
Company's loan portfolio. The provision for loan losses was $15 thousand for the
quarter ended March 31, 1999, compared to $55 thousand for the comparable period
in 1998. While the Company's management uses available information to recognize
losses on loans, future additions to the allowance may be necessary based on
changes in economic conditions.
NON-INTEREST INCOME. For the first quarter of 1999, total non-interest income
decreased by $35 thousand, or 11.1%, over the same period of last year. The
decrease includes a reduction of $145 thousand from gains from the sale of loans
due to a lower volume of SBA loan sales and a $15 thousand reduction in loan
funding fees due to the cessation of a residential loan origination and sale
program. Service charges and fee income on deposit accounts, a component of
non-interest income, increased by $128 thousand over the same period last year
resulting from the growth in the deposit portfolio.
NON-INTEREST EXPENSE. For the three month period ended March 31, 1999, the
Company experienced increases in its non-interest expenses over non-interest
expense for the comparable period of 1998. For the period ended March 31, 1999,
the Company's total non-interest expense was $1.3 million, compared to total
non-interest expense of $734 thousand for the 1998 period. The increase in
non-interest expense in the three month period of 1999 reflects increased
compensation and employee benefit expense as the Company hired a new senior
management team, including Ward Kellogg, the Company's new president and his
team of community bankers. Full time equivalent employees increase from 27 at
March 31, 1998 to 45 at March 31, 1999. 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.
Goodwill amortization totaled $40 thousand and $30 thousand for the three month
periods ended March 31, 1999 and 1998 respectively. The Company also experienced
the following increases in other non-interest expenses related primarily to its
growth: insurance expense increased $17.5 thousand, or 271.5%, data processing
fees increased $32.5 thousand, or 62.8%, telephone expense increased $19.4
thousand, or 134.7%, and stationery and supplies increased $12.6 thousand, or
89.9%.
INCOME TAXES. Income tax expense decreased to $36 thousand for the quarter ended
March 31, 1999, from $88 thousand for the same period last year, primarily due
to a decrease in pretax accounting income. The effective tax rates were 55% and
49% for the three months ended March 31, 1999 and 1998, respectively.
Non-deductible expenses for goodwill amortization and provisions to the loan
loss reserve relative to overall income have resulted in the unusually high
effective tax rates for the periods presented.
14
<PAGE>
FINANCIAL CONDITION
March 31, 1999 compared to December 31, 1998
Total assets increased to $92.1 million, an increase of $11.3 million, or 14.0%,
from total assets of $80.7 million at December 31, 1998. Increases in total
assets included increases of $8.0 million in net loans, $1.6 million in
investment securities, $1.2 million in Federal Funds sold and $493 thousand in
premises and equipment, net of the reserve for depreciation.
The $8.0 million increase in net loans is comprised primarily of $1.8 million
commercial loans, $2.7 million in real estate loans and $2.5 million in
construction loans. The increase is the result of the new management team's
efforts to attract new business and expand relationships with existing
customers.
At March 31, 1999, federal funds sold increased by $1.2 million over December
31, 1998. The increase is attributable primarily to the Company's deposit growth
outpacing loan growth during the period. Accrued interest receivable increased
$117 thousand as a result of growth in the loan and investment portfolios.
Federal Reserve Bank (FRB) stock and Federal Home Loan Bank (FHLB) stock
increased as the result purchases of additional FHLB stock in compliance with
the FHLB's membership requirements. The Company's net investment in premises and
equipment increased $493 thousand as a result of the build out and opening of
its new Boca Raton branch. The Company opened a temporary branch in Boca Raton,
Florida in the fall of 1998 and moved into its newly renovated, permanent branch
in January 1999.
Total deposits increased 18.7%, from $60.7 million at December 31, 1998 to $72.1
million at March 31, 1998. Growth in the recently opened Boca Raton branch
accounted for $10.5 million dollars of the overall deposit growth. Although the
Company entered the Boca Raton market only recently, several members of the new
management team have long standing business relationships in that market.
Average total deposits increased $18.4 million for the three months ended March
31, 1999 over the twelve months ended December 31, 1998. Within the deposit
portfolio, the Company has sought to de-emphasize higher rate time deposits and
emphasize business related deposit accounts. As a result of this strategy, time
deposits as a percentage of total average deposits decreased from 33.7% to 29.2%
while NOW accounts increased from 15.7% to 17.5% of average total deposits and
non-interest bearing demand increased from 28.8% to 32.8% of average total
deposits.
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.
15
<PAGE>
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 attributable 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
principle until such time as management determines 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 the borrower and the Company begin to discuss the origination
of the loan. Documentation, including the 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.
Non-performing loans were unchanged from December 31, 1998 at $109 thousand. The
balance represents a single loan placed on non-accrual status during December
1998. The Bank initiated foreclosure proceedings and the borrower subsequently
filed Chapter 13 bankruptcy. Management believes the loan is adequately secured
and management does not anticipate that the Company will incur a material loss
on this credit.
<TABLE>
<CAPTION>
MARCH 31
----------------------- DECEMBER 31
(Dollars in thousands) 1999 1998 1998
-------- -------- --------
<S> <C> <C> <C>
Non-accrual loans $ 109 $ 718 $ 109
Other real estate owned 8 24 8
------- -------- -------
Total non-performing assets (1) $ 117 $ 742 $ 117
======= ======== =======
Non-accrual loans to total loans 0.20% 2.86% 0.23%
Non-performing assets to total assets 0.13% 1.46% 0.14%
Allowance for possible loan losses as a
percentage of non-performing assets 538.26% 57.82% 514.94%
</TABLE>
(1) Excludes loans past due 90 days or more and still accruing interest of
approximately $0, $94,000, and $0 at March 31, 1999 and 1998 and December 31,
1998 respectively.
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 portfolio are analyzed on an on going basis
by the Bank'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 the risk and
appropriate reserves. Along with
16
<PAGE>
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 judgements about information available to them at the time of their
examination.
At March 31, 1999, the allowance for loan losses was $630, an increase of $28
thousand, or 4.6%, from the $602 thousand at year-end 1998. During the three
months ended March 31, 1999 the Company had charge-offs of $0.1 thousand,
recoveries of $13 thousand and provided a loan loss provision of $15 thousand.
INVESTMENT SECURITIES
At March 31, 1999, the Company's investment securities portfolio, both held to
maturity and available for sale, totaled $11.0 million, an increase of $1.6
million, from total investment securities of $9.4 million at December 31, 1998.
At March 31, 1999, all but $1 million of the Company's investment securities
were classified as available for sale. As the mortgage backed securities have
paid down the funds have been reinvested in U.S. Government and agency
securities with the goal of maintaining the portfolio near its current level.
LIQUIDITY
Net cash provided by the Company's operating activities (i.e. , cash items
affecting net income) was $6 thousand and $612 thousand for the three months
ended March 31, 1999 and 1998, respectively.
Net cash used in investing activities (i.e. cash receipts and disbursements
primarily from its investment securities, mortgage-backed securities and loan
portfolios) was $10.3 million and $838 thousand for the three months ended March
31, 1999 and 1998, respectively. The Company used $1.7 million for net
investment securities in 1999 while in 1998 it received cash of $3.8 million
from its securities portfolio. Additionally, the Company used $8.0 million and
$1.8 million for net loans and loan sales in the first quarter of 1999 and 1998
respectively. Also during 1998, the Company used $2.9 million for the purchase
of the Predecessor Company.
Net cash provided by the Company in financing activities (i.e. cash receipts
primarily from net
17
<PAGE>
increase in deposits and issuance of common stock) was $11.4 million in 1999
while it used $3.1 million in 1998. The increase in 1999 was principally due to
an increase in deposits. Deposits increased $11.4 million in 1999 compared to
growth of $1.7 million in the first three months of 1998. Additionally, in 1998
the Company used $4.6 million to repay borrowings.
As a state chartered commercial bank, the Bank is required to maintain a daily
liquidity position equal to at least 15 percent of its total transaction
accounts and eight percent of its total nontransaction accounts, less those
deposits of public funds for which security has been pledged. As of March 31,
1999 the Bank had a liquidity ratio of 44 percent which was adequate to meet the
statutory requirement. The primary source of the Bank's liquidity is federal
funds sold - overnight loans to major commercial banks. At March 31, 1999
federal funds sold totaled $14.5 million. Funds not required to meet loan and
deposit demand were invested primarily in U.S. Government and Agency securities.
The Bank considers these investments to be secondary sources of liquidity. The
Bank's investment securities classified as available for sale had a carrying
value of $10.0 million at March 31, 1999.
An additional external source of liquidity is an unsecured $4 million federal
funds line of credit the Bank has established through one of its correspondent
banks. The Company did not draw on this line during 1999.
CAPITAL RESOURCES
Total stockholders' equity increased $3.1 thousand to $19.5 million at March 31,
1999. The increase was due to earnings retention, which was partially offset by
an decrease in the unrealized, holding loss on securities held available for
sale.
At March 31, 1999, the Bank exceeded all regulatory capital requirements as
follows:
CAPITAL ADEQUACY
(Dollars in thousands)
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
March 31, 1999 FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
----------------- ----------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to risk weighted assets)........... 14,188 20.42% > 5,557 > 8.00% > 6,947 > 10.00%
- - - -
I Capital
(to risk weighted assets)........... 13,558 19.52% > 2,779 > 4.00% > 4,168 > 6.00%
- - - -
Tier I Capital
(to average assets).................. 13,558 17.49% > 3,100 > 4.00% > 3,875 > 5.00%
- - - -
</TABLE>
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
18
<PAGE>
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, reviewed the results internally and had the results reviewed
by a third party. The Company is continuing with follow up reviews and
additional testing of 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 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 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.
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.
19
<PAGE>
PART II OTHER INFORMATION
Item 1 LEGAL PROCEEDINGS
The Company and the Bank are periodically involved in various legal
proceedings as a normal incident to their businesses. In the opinion of
management, no material loss is expected from any such pending lawsuit.
Item 2 CHANGES IN SECURITIES
During the first quarter of 1999, the Company approved a new Dividend Policy
which effectively eliminates the requirement of two-class earnings per share
accounting methodology. The new policy provides that holders of Class A and
Class B shares will be treated equally in the payment of dividends, so that
holders of Class B shares will receive the same dividends as holders of Class A
shares, and will not receive a dividend if the Class A shares do not receive a
dividend. Both "A" and "B" shareholders already have the same voting rights.
Item 3 DEFAULTS UPON SERVED SECURITIES
Not applicable
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted for a vote of the shareholders during the period
covered by this report.
Item 5 OTHER INFORMATION
Not applicable
Item 6 EXHIBITS AND REPORT ON FORM 8-K
(a) Exhibits
NUMBER DESCRIPTION
------ -----------
27 Financial Data Schedule
(b) Reports on Form 8-K
On January 8, 1999 the Company filed a Form 8-K to report its preliminary
estimated performance for 1998.
20
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ADMIRALTY BANCORP, INC.
Date: May 14, 1999 By: /s/ WARD KELLOGG
-----------------------------------------
WARD KELLOGG, President
Date: May 14, 1999 By: /s/ KEVIN M. SACKET
-----------------------------------------
KEVIN M. SACKET, Treasurer
(Principal Financial Officer)
21
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 3,876
<INT-BEARING-DEPOSITS> 8
<FED-FUNDS-SOLD> 14,466
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 9,969
<INVESTMENTS-CARRYING> 1,000
<INVESTMENTS-MARKET> 1,000
<LOANS> 55,491
<ALLOWANCE> 630
<TOTAL-ASSETS> 92,089
<DEPOSITS> 72,073
<SHORT-TERM> 0
<LIABILITIES-OTHER> 510
<LONG-TERM> 0
0
0
<COMMON> 20,765
<OTHER-SE> (1,259)
<TOTAL-LIABILITIES-AND-EQUITY> 92,089
<INTEREST-LOAN> 1,121
<INTEREST-INVEST> 144
<INTEREST-OTHER> 141
<INTEREST-TOTAL> 1,406
<INTEREST-DEPOSIT> 336
<INTEREST-EXPENSE> 336
<INTEREST-INCOME-NET> 1,070
<LOAN-LOSSES> 15
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,267
<INCOME-PRETAX> 65
<INCOME-PRE-EXTRAORDINARY> 65
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
<YIELD-ACTUAL> 7.96
<LOANS-NON> 109
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 602
<CHARGE-OFFS> 0
<RECOVERIES> 13
<ALLOWANCE-CLOSE> 630
<ALLOWANCE-DOMESTIC> 630
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
