As filed with the Securities and Exchange Commission on
September 18, 2000
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM SB-2
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
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ADMIRALTY BANCORP, INC.
(Exact name of Registrant as Specified in Its Charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
65-0405207
(I.R.S. Employer Identification Number)
4400 PGA BOULEVARD, SUITE 100
PALM BEACH GARDENS, FLORIDA 33410
(561) 624-4701
(Address, including zip code, and telephone number, including
area code, of agent for service)
WARD KELLOGG, PRESIDENT
ADMIRALTY BANCORP, INC.
4400 PGA BOULEVARD, SUITE 100
PALM BEACH GARDENS, FLORIDA 33410
(561) 624-4701
(Name, address, including zip code and telephone number,
including area codes, of agent for service)
WITH A COPY TO
ROBERT A. SCHWARTZ, ESQ.
JAMIESON, MOORE, PESKIN & SPICER
177 MADISON AVENUE
MORRISTOWN, NEW JERSEY 07960
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Approximate date of commencement of proposed sale to the public: As
soon as practicable after this Registration Statement becomes effective.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering.
[ ] ___________________
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering.
[ ] ___________________
If this form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering.
[ ] ___________________
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box.
[ ] ___________________
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
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Proposed Proposed
Maximum Maximum
Title of Shares Amount to be Price Per Aggregate Amount of
to be Registered Registered Share (1) Offering Price (1) Registration Fee
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<S> <C> <C> <C> <C>
Class B Common Stock,
no par value 1,100,000 $11.00 $12,100,000 $3,194.00
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</TABLE>
(1) Estimated solely for the purpose of determining the
registration fee in accordance with Rule 457 under the
Securities Act of 1933.
<PAGE>
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
<TABLE>
<CAPTION>
ADMIRALTY BANCORP, INC.
Cross Reference Sheet Form SB-2
<S> <C>
Items of Form SB-2 Prospectus Caption or Location
1. Front of Registration Statement and Outside
Front Cover Page of Prospectus . . . . . . . . . . . Facing Page of Registration Statement;
Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus . . . . . . . . . . . . . . . . . . . . . Inside Front
Cover Page;
Outside Back Cover Page;
TABLE OF CONTENTS
3. Summary Information and Risk Factors . . . . . . . . OFFERING SUMMARY;
RISK FACTORS
4. Use of Proceeds . . . . . . . . . . . . . . . . . . USE OF PROCEEDS
5. Determination of Offering Price . . . . . . . . . . THE OFFERING - Determination of Offering Price
6. Dilution . . . . . . . . . . . . . . . . . . . . . . Not Applicable
7. Selling Security Holders . . . . . . . . . . . . . . Not Applicable
8. Plan of Distribution . . . . . . . . . . . . . . . . THE OFFERING - Sale of Class B Common Stock
9. Legal Proceedings . . . . . . . . . . . . . . . . . THE COMPANY - Legal Proceedings
10. Directors, Executive Officers, Promoters and
Control Persons . . . . . . . . . . . . . . . . . . MANAGEMENT - Board of Directors & Executive
Officers
11. Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . . . . MANAGEMENT - Stock Ownership of Management and
Certain Shareholders
12. Description of Securities . . . . . . . . . . . . . DESCRIPTION OF THE COMPANY'S SECURITIES
13. Interest of Named Experts and Counsel . . . . . Not Applicable
14. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities . Not Applicable
15. Organization Within Last Five Years . . . . . . . MANAGEMENT - Certain Transactions with
Management
16. Description of Business . . . . . . . . . . . . . THE COMPANY
17. Management's Discussion and Analysis or
Plan of Operation . . . . . . . . . . . . . . . . MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
18. Description of Property . . . . . . . . . . . . . THE COMPANY - Physical Facilities
19. Certain Relationships and Related Transactions MANAGEMENT - Certain Transactions
with Management
20. Market for Common Equity and
Related Stockholder Matters . . . . . . . . . . . OFFERING SUMMARY; DESCRIPTION
OF THE COMPANY'S SECURITIES
21. Executive Compensation . . . . . . . . . . . . . MANAGEMENT - Compensation of
Board of Directors; Compensation of Executive
Officers; Management Stock Option Plan
22. Financial Statements . . . . . . . . . . . . . . INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS
23. Changes in and Disagreements with
Accountants on Accounting and Financial
</TABLE>
<PAGE>
Disclosure . . . . . . . . . . . . . . . . . . Not Applicable
<PAGE>
PROSPECTUS
ADMIRALTY BANCORP, INC.
700,000 to 1,100,000 SHARES
of
Class B Common Stock
(Intended Offering Price $8.00 - $11.00 Per Share)
We are a financial holding company under the Bank Holding
Company Act of 1956, as amended, incorporated under the laws of Delaware. Our
Class B Common Stock is traded on the NASDAQ National Market under the symbol
"AAABB".
Our subsidiary is Admiralty Bank, a Florida state chartered commercial
bank. The bank is a full service commercial bank which operates through its main
office located in Palm Beach Gardens, Florida and five branch offices located in
Boca Raton, Juno Beach, Jupiter, Melbourne and Orlando, Florida. We also own an
interest in Admiralty Insurance Services, LLC, which provides a full range of
insurance services to the bank's customers and the public.
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THE PURCHASE OF THE COMMON STOCK INVOLVES VARIOUS INVESTMENT RISKS
WHICH SHOULD BE CONSIDERED CAREFULLY BY PROSPECTIVE INVESTORS. SEE "RISK
FACTORS" BEGINNING ON PAGE 5 OF THIS PROSPECTUS.
Neither the Securities and Exchange Commission nor any state securities
commission has approved the common stock or determined that this prospectus is
accurate or complete. Any representation to the contrary is a criminal offense.
The shares of common stock are not bank deposits and are not secured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
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Price to Public Proceeds to Company (1)
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Per Share. . . . . . . . .
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Total (Minimum/Maximum) .
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(1) Before deduction of expenses of the offering payable by the company
estimated at $100,000.
The shares of common stock are offered on a best efforts basis.
The date of this Prospectus is ___________, 2000
<PAGE>
TABLE OF CONTENTS
Page
----
Offering Summary ...................................... 1
Consolidated Selected Financial and Other Data......... 2
Risk Factors .......................................... 5
Use of Proceeds ....................................... 10
The Offering .......................................... 10
Capitalization......................................... 11
Market Price of and Dividends on the Common Stock...... 12
Management's Discussion and Analysis of Financial
Condition and Results of Operations .......... 13
The Company............................................ 44
Supervision and Regulation ............................ 45
Management ............................................ 49
Description of the Company's Securities ............... 56
Transfer Agent ........................................ 60
Legal Matters.......................................... 60
Experts ............................................... 60
Where You Can Find Additional Information ............. 60
Table of Contents to Financial Statements ............. F-1
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OFFERING SUMMARY
The items in the following summary are described in more detail later
in this prospectus. This summary provides an overview of selected information
and does not contain all of the information you should consider. Therefore, you
should also read the more detailed information set out in this prospectus,
including the consolidated financial statements and notes. References to "we",
"our", "us", the "company" and "Admiralty" refer to Admiralty Bancorp, Inc. and
its subsidiaries on a consolidated basis, unless stated otherwise. References to
the "bank" refer to Admiralty Bank, unless stated otherwise.
Admiralty Bancorp, Inc.
Admiralty Bancorp, Inc is a financial holding company under the Bank
Holding Company Act of 1956, as amended, incorporated under the laws of
Delaware. We are the holding company for Admiralty Bank, a Florida state
chartered commercial bank and member of the Federal Reserve System. The bank is
a full service commercial bank, providing a wide range of business and consumer
financial services in our target marketplace, which is comprised primarily of
south and central Florida. The bank operates through its main office located in
Palm Beach Gardens, Florida and five branch offices located in Boca Raton, Juno
Beach, Jupiter, Melbourne and Orlando, Florida. The bank's deposits are insured
by the Federal Deposit Insurance Corporation up to applicable limits.
We intend to use the proceeds of this offering to fund our expansion
and provide capital for the associated loan growth. Our products include
traditional commercial loans, Small Business Administration loans, lines of
credit, mortgage products and insurance services.
As of June 30, 2000, we had total assets of $192.2 million, net loans
of $137.1 million, total deposits of $153.4 million and total shareholders'
equity of $20.0 million. See page F-2.
The following is a summary of our financial highlights and strategy:
o Rapid Asset Growth -- From December 31, 1997, twenty one days
before the current management team acquired control of the
bank, through June 30, 2000, our assets have increased $144.0
million to $192.2 million, an increase of 299%. During that
same period, our loan portfolio has increased from $22.9
million to $137.1 million, and the percentage of our assets
characterized as non-performing has decreased from 0.25% to
0.10% of total assets.
o Significant Earnings Increase -- We produced a net profit of
$252 thousand in 1999, an increase of $696 thousand from a pro
forma (which assumes that the change in control by which
current management gained control of the company occurred on
January 1, 1998 rather than January 22, 1998) net loss of $444
thousand for the year ended December 31, 1998. In the first
six months of 2000, we produced a net profit of $438 thousand.
o Community-Based Institution-- Through the recent wave of bank
consolidations in south Florida, many locally based community
banks serving the Palm Beach, Broward and Brevard Counties,
Florida area have been acquired by larger, regional and
multi-state institutions. A number of these institutions are
headquartered outside of the State of Florida. We are
committed to serving our local communities by providing
customers access to bank officers and decision-makers. We
believe the recent wave of bank consolidations created
opportunities for us to enhance the value of our franchise. We
have elected to focus on building our franchise through branch
expansion. Our branch expansion plans are designed to foster
rapid growth and we believe build our franchise value. We
believe these activities enhance our long-term prospects.
o Product Line Expansion -- In April 2000, we entered into a
joint venture agreement with USI
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Florida to form Admiralty Insurance Services, LLC, which
provides customers of Admiralty Bank and the public with a
full range of insurance products.
Risk Factors
There are many risks associated with an investment in the company.
Before you decide to purchase our Class B common stock, you should read the Risk
Factors section beginning on page 5 of this prospectus.
The Offering
Securities Offered . . . . . . . 700,000 to 1,100,000 shares of Class B
Common Stock.
Class B Common Stock Outstanding
Prior to the Offering . . . . . . 2,346,499 shares(1).
Class B Common Stock Outstanding
After the Offering . . . 3,046,499 shares(1) if minimum number of
shares are sold.
3,446,499 shares(1) if maximum number of
shares are sold.
Use of Proceeds. . . . . . . . . The net proceeds of this offering will be
used to provide capital to grow our
franchise, particularly through our
expansion into the Orlando area, and to
ensure acceptable capital levels are
maintained during our growth.
Market For Securities . . . . . . Our Class B common stock trades on the
NASDAQ National Market under the symbol
"AAABB."
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(1) Does not include 1,958,165 shares of Class B stock reserved for issuance
pursuant to the conversion rights of the Class A common stock, unexercised
warrants and unexercised options under the company's stock option plans.
Consolidated Selected Financial and Other Data
You should read the following selected information in conjunction with
our consolidated financial statements and the notes to the consolidated
financial statements, appearing in this prospectus on page F-1. The selected
financial data at or for the periods ended June 30, 2000, and June 30, 1999 were
derived from our unaudited financial statements. The selected financial data at
or for the periods ended December 31, 1999 and 1998 were derived from our
audited consolidated financial statements for the respective periods.
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<TABLE>
<CAPTION>
As of or for the six As of or for
month period ended As of or for the year ended
June 30, the year ended December 31, 1998
2000 1999 December 31, 1999 (Pro Forma)(1)
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(In Thousands, Except Per Share Data and Percentages)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA
Interest and dividend income............ $ 6,679 $ 3,166 $ 7,930 $ 4,249
Interest expense 2,744 853 2,448 1,165
------- ------- ------- -------
Net interest and dividend income... 3,935 2,313 5,482 3,084
Provision for loan losses............... 443 72 525 385
------- ------- ------- -------
Net interest and dividend income 3,492 2,241 4,957 2,699
after provision for loan losses.........
Non-interest income..................... 501 515 1,075 853
Non-interest expense.................... 3,233 2,588 5,396 3,990
------- ------- ------- -------
Income (loss) before income taxes....... 760 168 636 (438)
Income tax expense...................... 322 111 384 0
------- ------- ------- -------
Income (loss) before minority interest.. 438 57 252 (438)
Minority interest in loss
of subsidiaries....................... 0 0 0 (6)
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Net income (loss)....................... $ 438 $ 57 $ 252 $ (444)
------- ------- ------- -------
PER SHARE DATA
Net income - basic and diluted -
Class A(2)............................ n/a n/a n/a $0.44
Net income - basic and diluted -
Class B(2)............................ n/a n/a n/a $(1.06)
Net Income - basic and diluted.......... $0.15 $0.02 $0.09 n/a
Book value (3).......................... $7.05 $6.83 $6.89 $6.85
BALANCE SHEET DATA
Total Assets............................ $192,231 $107,424 $139,962 $80,748
Total Loans............................. 138,519 70,868 100,857 47,414
Allowance for loan losses............... (1,463) (698) (1,017) (602)
Investment securities (4)............... 36,551 14,963 27,682 10,074
Goodwill, net........................... 3,463 3,755 3,540 3,834
Deposits................................ 153,435 87,474 110,273 60,718
Shareholders' equity.................... 20,033 19,456 19,574 19,502
SELECTED OPERATING RATIOS
Return on average assets................ 0.53% 0.13% 0.23% (0.77%)
Return on average shareholders' equity.. 4.45% 0.59% 1.29% (3.96%)
Net interest margin (5)................. 5.13% 5.80% 5.64% 6.21%
SELECTED ASSET QUALITY DATA,
CAPITAL AND ASSET QUALITY RATIOS
Equity/assets........................... 10.42% 18.11% 13.99% 19.51%
Non-accrual loans/total loans........... 0.14% 0.15% 0.15% 0.23%
Non-performing assets/total loans and
other real estate owned............... 0.14% 0.17% 0.26% 0.25%
Allowance for loans losses/
total loans........................... 1.06% 0.98% 1.01% 1.27%
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C>
Allowance for loan losses/non-
performing assets..................... 750.26% 596.58% 388.17% 514.94%
Net charge-offs (recoveries)/
average total loans.............. 0.00% (0.04%) 0.15% 0.56%
</TABLE>
(1) Financial information for the year ended December 31, 1998 is
based upon the Pro Forma Consolidated Income Statement for that time
period which assumes the change in control of the company occurred on
January 1, 1998.
(2) For the year ended December 31, 1998, the company reported
earnings per share using the two class method of reporting due to
differences in the dividend rights for the Class A and Class B common
stock. In January 1999, the Board of Directors adopted a new dividend
policy pursuant to which the Class A and Class B shares are treated
equally, and the company now reports earnings per share as if it had
one class of stock outstanding. Refer to Note 2 to the consolidated
financial statements on page F-22.
(3) Book value per common share is calculated by dividing the
aggregate outstanding Class A common shares multiplied by the
conversion ratio, and Class B common shares into total shareholders'
equity at the respective dates.
(4) Investment securities include Federal Reserve Bank stock and
Federal Home Loan Bank stock.
(5) The net interest margin is calculated by dividing net interest
income by average interest earning assets.
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RISK FACTORS
You should consider the following risk factors in addition to the other
information in this prospectus before investing in our common stock.
Certain statements in this prospectus are forward-looking and are
identified by the use of forward-looking words or phrases such as "intended,"
"will be positioned," "believes," "expects," is or are "expected" and
"anticipated." These forward-looking statements are based on our current
expectations. The risk factors set forth below are cautionary statements
identifying important factors that could cause actual results to differ
materially from those in the forward-looking statements.
Shares of Class B stock may trade on the NASDAQ National Market at a price below
the offering price.
The offering price of the shares of Class B stock in this offering has
not been determined by the market price, but rather, by the company's own
valuation of the shares. The purchase price of the shares in this offering may
be higher than the amount that the shares trade for on the NASDAQ National
Market. Therefore, an investor in this offering who later wishes to sell his or
her shares may realize a loss on the sale if the market price has not risen
above the offering price.
If our planned expansion into Orlando, Florida is not profitable, the losses
could have a substantial adverse impact upon the company.
In order to expand the bank into Orlando, Florida, we will be required
to commit a substantial amount of the company's resources, including financial
resources and the time, energy and expertise of our management. In addition, the
expansion into Orlando will require that we hire additional management and
staff. If we are not able to attract sufficient deposits, originate sufficient
loans, or cause the Orlando branch(es) to become profitable for any reason, such
failure may have a significant adverse effect on the company.
In addition, the success of the Orlando branch is heavily dependent
upon the performance of a few executive officers, including primarily Randy
Burden. Although Mr. Burden has commenced his employment with the bank, we do
not have an employment agreement with Mr. Burden and the loss of Mr. Burden's
services could substantially impact the success of our Orlando expansion.
The issuance of additional shares in the future may result in dilution.
In connection with our public offering of the shares in 1998, we issued
warrants to purchase shares of the Class B stock at an exercise price of $9.74
per share. Presently 1,089,595 of these warrants are outstanding. In addition,
options to purchase 372,613 shares of Class B stock are outstanding. The
exercise of these warrants or options, although in excess of book value, could
substantially dilute your voting interest as a stockholder.
Our continued rapid growth may negatively affect profitability.
Since December, 1997, our asset size has grown 299%. Our business plan
calls for our continued rapid expansion. This expansion may detrimentally impact
our future profitability in several ways, including through potential loan
losses and the need for future provisions to the loan loss reserve, and an
increase in operating and other non-interest expenses associated with growth.
Our continued rapid growth and success also depends on the ability of
our officers and key employees to manage our growth effectively, to attract and
retain skilled employees and to expand the capabilities of our management
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information systems. Accordingly, there can be no assurance that we will be
successful in managing our expansion and the failure to do so would adversely
affect our financial position.
Defensive measures contained in the Certificate of Incorporation limit the
ability of shareholders to exert control over the board of directors.
Our Certificate of Incorporation contains certain provisions which have
been adopted as defensive measures to protect the company against an unsolicited
hostile takeover bid. These provisions may also have significant effects in
limiting the ability of our shareholders to effect an immediate change in the
composition of the board of directors and to otherwise exercise their voting
power to affect the composition of the board. In general, these provisions
provide for (i) a classified board of directors; (ii) that directors may not be
removed by shareholders without cause; (iii) that the affirmative vote of 80% of
the outstanding shares of common stock are required to approve a merger,
consolidation or sale of substantially all of the company's assets, unless the
proposed transaction is approved by a majority of the board of directors; and
(iv) prior notice of any shareholder nominations and proposals.
Changes in local economic conditions could adversely affect our loan portfolio.
Our success depends to a certain extent upon the general economic
conditions of the local markets that we serve. Unlike larger banks that are more
geographically diversified, we provide banking and financial services primarily
to customers in Palm Beach, Broward, and Brevard Counties, Florida, in which we
have branches. Therefore, any decline in the economy of Florida or these
particular areas could have an adverse impact on us.
Our loans, the ability of borrowers to repay these loans and the value
of collateral securing these loans are impacted by economic conditions. Our
financial results, the credit quality of our existing loan portfolio, and the
ability to generate new loans with acceptable yield and credit characteristics
may be adversely affected by changes in prevailing economic conditions,
including declines in real estate values, changes in interest rates, adverse
employment conditions and the monetary and fiscal policies of the federal
government. Although economic conditions in our primary market areas are strong
and have aided our recent growth, we cannot assure you that these conditions
will continue to prevail. We cannot assure you that positive trends or
developments discussed in this prospectus will continue or that negative trends
or developments will not have a significant adverse effect on us.
Our allowance for loan losses may not be adequate to cover actual losses.
Like all financial institutions, we maintain an allowance for loan
losses to provide for loan defaults and nonperformance. We believe that our
allowance for loan losses is adequate to cover losses inherent in the loan
portfolios. However, a significant portion of the loans that we have made are
not yet "seasoned". In other words, these loans have not been in repayment for a
period of time long enough for us to know with a high level of probability what
percentage of the borrowers will default or not fully perform on their
obligations. Therefore, our allowance for loan losses may not be adequate to
cover actual losses, and future provisions for loan losses could materially and
adversely affect results of our operations.
Risks within the loan portfolio are analyzed on a continuous basis by
management, by independent internal and external loan review functions and by
the audit committee. A risk system, consisting of multiple grading categories,
is utilized as an analytical tool to assess risk and the appropriate level of
loss 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
borrowers, past and expected loan loss experience, and other factors management
feels deserve recognition in establishing an adequate reserve. This risk
assessment process is performed at least quarterly, and, as adjustments become
necessary, they are realized in the periods in which they become known. The
amount of future losses is susceptible to changes in economic, operating and
other conditions, including changes in interest rates, that may be beyond our
control, and these losses may
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exceed current estimates. State and federal regulatory agencies, as an integral
part of their examination process, review our loans and allowance for loan
losses. Although we believe that our allowance for loan losses is adequate to
cover anticipated losses, we cannot assure you that we will not further increase
the allowance for loan losses or that regulators will not require us to increase
this allowance. The need to take additional provisions could adversely affect
our earnings.
We are in competition with many other banks, including larger commercial banks
which have greater resources than us.
The banking industry within the State of Florida is highly competitive.
The bank's principal market area is served by branch offices of large commercial
banks and thrift institutions. A number of these institutions have substantially
greater resources to expend upon advertising and marketing than we do, and their
substantially greater capitalization enables them to make much larger loans. Our
success depends a great deal upon our judgment that large and mid-size financial
institutions do not adequately serve small businesses in our principal market
area and our ability to compete favorably for such customers. In addition to
competition from larger institutions, we also face competition for individuals
and small businesses from recently formed banks seeking to compete as "home
town" institutions. Most of these new institutions have focused their marketing
efforts on the smaller end of the small business market we serve.
The company is dependent on the bank as a source for dividends on the common
stock.
Admiralty Bancorp, Inc. is a legal entity separate and distinct from
the bank. The company has no material assets other than its ownership of the
bank and its interest in Admiralty Insurance Services. Earnings of the company
are wholly dependent on the earnings of the bank, as the company has engaged in
no significant operations of its own. Accordingly, the earnings of the company,
and its ability to pay dividends on the common stock, are largely dependent on
the receipt by the company of earnings of the bank in the form of dividends. Any
restriction on the ability of the bank to pay dividends could significantly and
adversely affect the ability of the company to pay dividends with respect to the
common stock. The bank's ability to pay dividends or make other capital
distributions to the company is governed by regulations imposed by the Florida
Department of Banking and the Federal Reserve, the Bank's primary regulators.
We may be subject to higher operating costs as a result of government
regulation.
We are subject to extensive federal and state legislation, regulation
and supervision which is intended primarily to protect depositors and the
Federal Deposit Insurance Corporation's Bank Insurance Fund, rather than
investors. Legislative and regulatory changes may increase our costs of doing
business or otherwise adversely affect us and create competitive advantages for
non-bank competitors.
We cannot predict how changes in technology will impact our business.
The financial services market, including banking services, is
increasingly affected by advances in technology, including developments in:
o telecommunications;
o data processing;
o automation;
o Internet-based banking;
o telebanking; and
o debit cards and so-called "smart cards."
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Our ability to compete successfully in the future will depend, to a
certain extent, on whether we can anticipate and respond to technological
changes. To develop these and other new technologies we will likely have to make
additional capital investments in the future. We cannot assure you that we will
have sufficient resources or access to the necessary proprietary technology to
remain competitive in the future.
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There is a risk that we may not be repaid in a timely manner, or at all, for
loans we make.
The risk of nonpayment (or deferred or delayed payment) of loans is
inherent in commercial banking. Such non payment, or delayed or deferred payment
of loans to the bank, if they occur, may have a material adverse effect on our
earnings and overall financial condition. Additionally, in compliance with
applicable banking laws and regulations, the bank maintains an allowance for
loan losses created through charges against earnings. As of June 30, 2000, the
bank's allowance for loan losses was $1.5 million. The bank's marketing focus on
small to medium-size businesses may result in the assumption by the bank of
certain lending risks that are different from or greater than those which would
apply to loans made to larger companies. We seek to minimize our credit risk
exposure through credit controls which include evaluation of potential
borrowers, available collateral, liquidity and cash flow. However, there can be
no assurance that such procedures will actually reduce loan losses.
The laws that regulate our operations are designed for the protection of
depositors and the public, but not our shareholders.
The federal and state laws and regulations applicable to our operations
give regulatory authorities extensive discretion in connection with their
supervisory and enforcement responsibilities, and generally have been
promulgated to protect depositors and the deposit insurance funds and not for
the purpose of protecting shareholders. These laws and regulations can
materially affect our future business. Laws and regulations now affecting us may
be changed at any time, and the interpretation of such laws and regulations by
bank regulatory authorities is also subject to change. We can give no assurance
that future changes in laws and regulations or changes in their interpretation
will not adversely affect our business.
The potential impact of changes in monetary policy and interest rates may
negatively affect our operations.
Our operating results may be significantly affected (favorably or
unfavorably) by market rates of interest which, in turn, are affected by
prevailing economic conditions, by the fiscal and monetary policies of the
United States government and by the policies of various regulatory agencies. Our
earnings will depend primarily upon our interest rate spread (i.e., the
difference between income earned on our loans and investments and the interest
paid on our deposits). Like many financial institutions, we may be subject to
the risk of fluctuations in interest rates, which, if significant, may have a
material adverse effect on our operations.
9
<PAGE>
USE OF PROCEEDS
The net proceeds of this offering are estimated to be $6.9 million,
assuming a price to the public of $10.00 per share after deducting offering
expenses of $100,000 if the minimum number of shares are sold, and $10.9 million
after deducting offering expenses if the maximum number of shares are sold.
These proceeds will be used to support the expansion of our Admiralty Bank
franchise through, among other things, our entry into the Orlando, Florida
market, and to assist the bank in maintaining acceptable capital levels while it
continues to grow. In addition, a larger capital base will permit the bank to
make larger loans, and to better penetrate its market areas.
THE OFFERING
General
We are offering a minimum of 700,000 and a maximum of 1,100,000 shares
of our Class B common stock at a price of between $8.00 and $11.00 per share,
for a total price of between $5.6 million to $7.7 million if the minimum number
of shares are sold and $8.8 million to $12.1 million if the maximum number of
shares are sold, before deducting offering expenses estimated to be $100
thousand. There is no minimum number of shares required for a purchaser to
participate in this offering. The maximum purchase for any individual investor
is 100,000 shares of Class B stock, unless we, in our sole discretion, accept a
subscription for a greater number of shares.
Determination of Offering Price
We have determined the offering price of the Class B stock in this
offering through our own valuation of the shares and based upon the amount of
additional capital needed for the planned bank expansion, rather than on the
trading value of the Class B stock on the NASDAQ National Market. Our valuation
of the Class B stock takes into account the earnings and growth of the company,
and management's belief that the company's stock is undervalued at the present
time, as are the securities of many financial institutions. The offering price
may be substantially higher than the market price for the shares on the NASDAQ
National Market.
Offering Period
The offering period for the shares will end when a minimum of 700,000
shares are sold or at 5:00 p.m. Florida time, on ______________, 2000, whichever
occurs first. We may extend this date at our discretion for additional periods
not exceeding a total of 180 days from the expiration of the initial offering
period (i.e., until _________, 2001).
Sale of Class B Common Stock
The Class B stock will be offered by certain officers, directors or
representatives of the company, who will not receive any commissions on those
sales. We will, however, reimburse these individuals for reasonable expenses
they incur in connection with the offering.
How to Subscribe
We will offer shares of our Class B stock to the public who may
subscribe for whole shares. If you wish to subscribe for shares of our Class B
stock, you must complete the following steps before the offer ends:
1) Complete and sign the subscription agreement which accompanies
this prospectus;
2) Make full payment of the entire purchase price for the shares
subscribed in United States currency by check, bank draft, or money
order payable to Admiralty Bancorp, Inc.; and
3) Deliver the subscription agreement, together with the payment
described above, to Admiralty Bancorp,
10
<PAGE>
Inc., 4400 PGA Boulevard, Palm Beach Gardens, Florida, 33410.
Subscription funds will be held by us pending receipt of subscriptions
for a minimum of 700,000 shares. In the event we do not receive subscriptions
for 700,000 shares, we will terminate the offering and return all subscription
funds, without interest.
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2000
and as adjusted to give effect, after deducting offering expenses, to the sale
of the common stock by this prospectus, at an assumed offering price of $10.00
per share.
<TABLE>
<CAPTION>
June 30, 2000
-------------
As Adjusted for this offering
Actual Minimum Maximum
-----------------------------------------
(unaudited) (Dollars in thousands)
<S> <C> <C> <C>
Shareholders' equity
Preferred stock, no par value, 2,000,000 shares
authorized, no shares issued or outstanding.........$ -- $ -- $ --
Common Stock Class A, no par value, 1,000,000 shares
authorized, 454,250 shares issued and outstanding.... 3,828 3,828 3,828
Common Stock Class B, no par value, 4,000,000 shares
authorized, 2,329,561 shares issued and outstanding(1) 19,359 26,259 30,259
Accumulated deficit...................................... (2,999) (2,999) (2,999)
Accumulated other comprehensive loss, net................ (155) (155) (155)
--------------------------------------
Total shareholders' equity.....................$20,033 $26,933 $30,933
======= ======= =======
</TABLE>
(1) Class B shares outstanding would be 3,029,561 if the minimum number of
shares in this offering are issued and 3,429,561 if the maximum number of
shares in this offering are issued.
The following tables set forth our capital ratios for both the bank and the
company as of June 30, 2000, and as adjusted to give effect, after deducting
offering expenses, to the sale of the common stock offered by this prospectus at
an assumed offering price of $10.00 per share, as well as the minimum required
regulatory capital.
Admiralty Bank
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
June 30, 2000 As Adjusted Required
Actual Minimum/Maximum Regulatory Well Capitalized(2)
(unaudited) (unaudited) Minimum
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Risk-based Capital: (1)
--------------------------------------------------------------------------------------------------------------
Tier I capital 9.61% 14.02%/16.54% 4.00% 6.00%
--------------------------------------------------------------------------------------------------------------
Total capital 10.57% 14.97%/17.49% 8.00% 10.00%
--------------------------------------------------------------------------------------------------------------
Leverage ratio 8.35% 12.29%/14.58% 3.00 - 5.00% 5.00%
--------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The bank's capital ratios, as adjusted, are computed in a manner consistent
with regulatory guidelines and assume that net proceeds from the offering
are invested in assets that carry a 20% risk-weighting.
(2) For the company to remain qualified as a financial holding company,
Admiralty Bank must remain "well capitalized" under FRB regulations.
11
<PAGE>
On July 31, 2000 the company made a capital contribution of $1,250
thousand to the bank to support the bank's continued growth.
Admiralty Bancorp, Inc.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
June 30, 2000 As Adjusted Required
Actual Minimum/Maximum Regulatory
(unaudited) (unaudited) Minimum
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Risk-based Capital: (1)
---------------------------------------------------------------------------------------
Tier I capital 10.72% 15.12%/17.63% 4.00%
---------------------------------------------------------------------------------------
Total capital 11.68% 16.07%/18.58% 8.00%
---------------------------------------------------------------------------------------
Leverage ratio 9.31% 13.26%/15.54% 3.00 - 5.00%
---------------------------------------------------------------------------------------
</TABLE>
(1) The company's capital ratios, as adjusted, are computed in a manner
consistent with regulatory guidelines and assume that net proceeds from the
offering are invested in assets that carry a 20% risk-weighting.
Market Price and Dividends on the Class B Common Stock
Since September 30, 1998 our Class B stock has been traded on the
Nasdaq National Market under the symbol "AAABB." The following table shows the
high and low bid price for the common stock on the Nasdaq National Market since
our inception. High and low bid prices reported on the NASDAQ National Market
reflect inter-dealer quotations, without retail markup, mark-down or
commissions, and may not necessarily represent actual transactions.
2000
----
High Low
---- ---
1st Quarter................ $9.00 $6.00
2nd Quarter................ 6.88 5.25
1999
----
High Low
---- ---
1st Quarter................ $8.64 $7.09
2nd Quarter................ 9.18 7.09
3rd Quarter................ 7.86 6.64
4th Quarter................ 8.09 6.20
1998
----
High Low
---- ---
4th Quarter................ $9.52 $8.41
As of June 30, 2000, the company had 177 shareholders of record. The
company paid a 12.91% stock dividend on its Class B common stock on January 23,
2000. The company has not paid cash dividends and does not anticipate paying
cash dividends in the foreseeable future.
12
<PAGE>
Subscriptions by Directors and Executive Officers
The following table sets forth the number of shares which certain directors and
executive officers, and proposed future directors of the company, have expressed
an interest in purchasing upon the consummation of this offering.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
As a Percentage of
Shares Offered
Name Amount(1) Number of Shares Minimum Maximum
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
----------------------------------------------------------------------------------------------------
Randy O. Burden $1,000,000 100,000 14.3% 9.1%
----------------------------------------------------------------------------------------------------
Douglas P. Hooker $1,000,000 100,000 14.3% 9.1%
----------------------------------------------------------------------------------------------------
Patrick C. Mathes $ 500,000 50,000 7.1% 4.5%
----------------------------------------------------------------------------------------------------
Edward Gerrits $ 500,000 50,000 7.1% 4.5%
----------------------------------------------------------------------------------------------------
</TABLE>
(1) Assuming an offering price of $10.00 per share.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The current management team and board of directors acquired the company
on January 22, 1998. Prior to this change in control of the company and the
company's public offering, the company was a privately held institution. The
company's historical financial statements included in this prospectus for the
year 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 period ended December 31, 1999, the income statement data
discussed for the year ended December 31, 1998, are based upon pro forma data
for the company assuming the change in control had occurred on January 1, 1998.
On March 22, 1999, the board of directors resolved to treat both
classes of the company's common stock equally, in terms of the amount of
dividends declared and the form of payment of dividends. This resolution and new
dividend policy was effective January 1, 1999. Accordingly, effective January 1,
1999, earnings per share is no longer being computed under the two class method.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2000 and June 30 1999
For the quarter ended June 30, 2000, we generated net income of $225 thousand,
an increase from net income of $27 thousand for the second quarter of 1999.
At June 30, 2000, our total assets reached $192.2 million, an increase of 37.3%
over total assets at December 31, 1999. Our net loans totaled $137.1 million, an
increase of 37.3% over net loans at December 31, 1999, and our deposits totaled
$153.4 million, an increase of 39.1% over total deposits at December 31, 1999.
During the six months ended June 30, 2000, we also instituted a leveraged growth
strategy designed to provide a measure of protection against falling interest
rates and to enhance income. The strategy involved the purchase of a $10 million
GNMA II mortgage-backed security with an 8% coupon funded initially by $9
million in 90 day FHLB advances at an initial rate of 6.10%.
13
<PAGE>
Interest and Dividend Income. Total interest and dividend income increased $1.9
million, or 108.5%, to $3.7 million for the quarter ended June 30, 2000 from
$1.8 million for the same period of 1999. This increase in interest income
primarily relates to an increase in our average balance of earning assets and to
a lesser extent to higher yield
on the portfolio of interest earning assets. Average balances increased by $62.2
million for loans and $25.0 million for investment securities and the average
balance of federal funds sold decreased $9.6 million. The average yield on the
loan portfolio increased slightly to 9.4% in the second quarter of 2000,
compared to 9.0% in the second quarter of 1999. The average yield on federal
funds sold increased to 6.4% in 2000 from 4.7% in 1999 reflecting higher current
market rates of interest. The average yield on investment securities, including
Federal Reserve Bank and FHLB stocks increased to 7.1% in 2000 from 5.8% in
1999, primarily as a result of the purchase of longer term, mortgage-backed
securities. During the three months ended June 30, 2000 the yield on our
interest earning assets increased to 8.8% from the 7.9% earned during the three
months ended June 30, 1999. This increase is due to a shift in the mix of the
average earning assets out of federal funds sold and into higher yielding loans
and investment securities and to higher market interest rates.
Interest Expense. Our interest expense for the second quarter of 2000 increased
$1,058 thousand, or 205.0%, to $1,574 thousand from $516 thousand for the same
period last year. The increase in interest expense reflects a 120.3% increase in
average interest bearing liabilities at June 30, 2000, as compared to the same
period in 1999. The average balance of time deposits, money market deposits and
NOW deposits increased by $21.7 million, $26.7 million and $1.4 million,
respectively, in the second quarter of 2000 as compared to the same period in
1999. The increase in money market deposit accounts reflects the success of our
tiered-rate money market account which offers competitive rates based upon the
size of the customer's account balance. In addition, the average balance of the
our non-interest bearing demand deposits increased by $9.3 million, to $32.5
million for the three months ended June 30, 2000 from $23.2 million for the
three months ended June 30, 1999. The Company's average cost of deposits for the
three months ended June 30, 2000, increased to 3.7% from 2.6% for the comparable
period of 1999. Additionally, we borrowed funds during the second quarter of
2000 while in the same period of 1999 we had no borrowed funds. The average
balance of federal funds purchased was $609 thousand, the average balance of
securities sold under agreement to repurchase was $9.1 million, and the average
balance of advances from the FHLB was $9.2 million at average rates of 6.6%,
6.2% and 6.5%, respectively, during the three months ended June 30, 2000.
Federal funds purchased were used primarily to fund loan growth in periods when
loan growth out paced deposit growth. The funds obtained through the repurchase
agreement and FHLB advances were used to purchase securities under a leveraged
growth and interest rate risk reduction strategy. Our average cost of funds,
deposits and borrowings, for the three months ended June 30, 2000, increased to
4.0% from 2.6% compared to the comparable period of 1999.
Net-Interest and Dividend Income. Net interest income for the three months ended
June 30, 2000, increased by $850 thousand, or 68.4%, over the same period last
year. Our net interest spread decreased 48 basis points to 3.78% for the three
months ended June 30, 2000, from 4.26% for the comparable period of 1999,
reflecting our higher cost of funds for the current period.
Provision for Loan Losses. The increase to $244 thousand from $57 thousand in
the provision for loan losses for the three months ended June 30, 2000, compared
to the comparable period of 1999, reflects the growth in the loan portfolio in
the second quarter 2000 compared to the same period the prior year. Our expense
for provision for loan losses maintained the reserve at a level management
believes appropriate in light of our lending activities, the quality of the loan
portfolio, historical experience, volume and type of lending conducted by us,
the status of past due and non-performing loans, the general economic conditions
of our lending area and other factors affecting collectibility of our loan
portfolio. The provision for the three months ended June 30, 2000 was due to
growth primarily in the non-residential real estate loan portfolio. We had net
recoveries of $3 thousand and did not experience any material change in our
level of classified loans during the three month period. While our management
uses available information to recognize losses on loans, future additions to the
allowance may be necessary based on changes in economic conditions, the
financial status of borrowers and regulatory requirements.
14
<PAGE>
Non-Interest Income. For the second quarter of 2000, total non-interest income
increased $11 thousand, or 4.6%, over the same period of last year. The increase
includes additional service charges and fees primarily resulting from growth in
the deposit portfolio and an increase of $9 thousand on gain on sale of loans
due to two small loans being sold in the three months ended June 30, 2000 versus
no loan sales during the same period in 1999.
Non-Interest Expense. For the three month period ended June 30, 2000, we
experienced increases in non-interest expense over non-interest expense for the
comparable period of 1999. For the three month period ended June 30, 2000, our
total non-interest expense was $1.7 million, compared to total non-interest
expense of $1.3 million for the 1999 period. The increase in non-interest
expense in the three month period of 2000 reflects increased compensation and
employee benefit expense as we hired additional staff to administer growth in
our loan and deposit portfolios, to
staff our new in-house data processing and items processing departments and to
staff our new full service Melbourne, Florida facility, which opened in March
2000. The increase in salary and benefit expenses also reflects salary
adjustments for our employees. Full time equivalent employees increased from 47
at June 30 1999, to 66 at June 30, 2000. Occupancy expense increased $63
thousand, or 30.9%, in the three months ended June 30, 2000 as compared to the
same period in 1999. Rents at the Melbourne office and new operations center
were $27 thousand and $19 thousand, respectively, in the second quarter of 2000
while we did not have these locations in 1999. Increased amortization expense
for the leasehold improvements at the Boca Raton office, which was completed
late in 1999, also accounted for $7 thousand of the increase in occupancy
expense. Goodwill amortization totaled $39 thousand and $40 thousand for the
three month periods ended June 30, 2000, and 1999, respectively. We also
experienced the following increases in other non-interest expenses related
primarily to its growth: postage expense increased $9 thousand, or 71.3%,
stationery and supplies expense increased $15 thousand, or 56.6%, business
development expense increased $26 thousand, and telephone expense increased $10
thousand, or 38.3%. Legal expenses decreased $43 thousand or 84.1% and we paid
$50 thousand to settle a lawsuit during the quarter.
We also expect an increase in non-interest expense as a result of our expansion
into the Orlando, Florida area. Our first branch in the area opened for business
on September 7, 2000. Expenses resulting from the Orlando expansion will include
those associated with rent, staffing, equipping and operating the new branch.
Income Taxes. Income tax expense increased to $166 thousand for the quarter
ended June 30, 2000, compared to $75 thousand for the same period last year,
primarily due to an increase in pretax income. The effective tax rate for the
second quarter of 2000 was 42.5%. Non-deductible goodwill amortization expense
contributed to the effective tax rate.
Six Months Ended June 30, 2000 and June 30 1999.
For the six months ended June 30, 2000, we generated net income of $438
thousand, an increase from net income $57 thousand for the same period in 1999.
Interest and Dividend Income. Total interest and dividend income increased $3.5
million, or 111.0%, to $6.7 million for the six months ended June 30, 2000 from
$3.2 million for the same period of 1999. This increase in interest income
primarily relates to an increase in our average balance of earning assets and to
a lesser extent to higher yield on the portfolio of interest earning assets.
Average balances increased by $60.7 million for loans and $23.2 million for
investment securities and the average balance of federal funds sold decreased
$10.5 million. The average yield on the loan portfolio increased slightly to
9.3% in the first six months of 2000, compared to 9.1% in the second quarter of
1999. The average yield on federal funds sold increased to 6.3% in 2000 from
4.7% in 1999, reflecting higher current market rates of interest. The average
yield on investment securities, including Federal Reserve Bank and FHLB stocks,
increased to 7.0% in 2000 from 5.8% in 1999, primarily as a result of the
purchase of longer term, mortgage-backed securities. During the six months ended
June 30, 2000 the yield on our interest earning assets increased to 8.7% from
the 7.9% earned during the six months ended June 30, 1999. This increase is due
to a shift in the mix of the average earning assets out of federal funds sold
and into higher
15
<PAGE>
yielding loans and investment securities and to higher market interest rates.
Interest Expense. Our interest expense for the first six months of 2000
increased $1.9 million, or 221.7%, to $2.7 million from $853 thousand for the
same period last year. The increase in interest expense reflects a 127.7%
increase in average interest bearing liabilities at June 30, 2000, as compared
to the same period in 1999. The average balance of time deposits, money market
deposits and NOW deposits increased by $19.7 million, $26.8 million and $1.2
million, respectively, for the first six months of 2000 as compared to the same
period in 1999. The increase in time deposits includes $15.2 million raised
using an Internet based deposit rate listing service. At June 30, 2000, we had
$25.2 million in deposits gathered through this program at an average rate of
7.11%. The increase in money market deposit accounts reflects the success of our
tiered-rate money market account which offers competitive rates based upon the
size of the customer's account balance. In addition, the average balance of our
non-interest bearing demand deposits increased by $9.9 million, to $31.0 million
for the six months ended June 30, 2000 from $21.1 million for the six months
ended June 30, 1999. Our average cost of deposits for the six months ended June
30, 2000, increased to 3.5% from 2.4% for the comparable period of 1999.
Additionally, we borrowed funds during the first six months of 2000 while in the
same period of 1999 we had no borrowed funds. The average balance of federal
funds purchased was $737 thousand, the average balance of securities sold under
agreement to repurchase was $9.1 million, and the average balance of advances
from the FHLB was $6.6 million at average rates of 6.3%, 6.2% and 6.4%,
respectively, during the six months ended June 30, 2000. Federal funds purchased
were used primarily to fund loan growth in periods when loan growth out paced
deposit growth. The funds obtained through the repurchase agreement and FHLB
advances were used to purchase securities under a leveraged growth and interest
rate risk reduction strategy. Our average cost of funds, deposits and
borrowings, for the six months ended June 30, 2000, increased to 3.8% from 2.4%
compared to the comparable period of 1999.
Net-Interest and Dividend Income. Net interest income for the six months ended
June 30, 2000, increased by $1.6 million, or 70.1%, over the same period last
year. Our net interest spread decreased 62 basis points to 3.87% for the six
months ended June 30, 2000, from 4.49% for the comparable period of 1999,
reflecting our higher cost of funds.
COMPARATIVE AVERAGE BALANCE SHEETS
The following table reflects the components of our net interest income, setting
forth for the periods presented herein, (1) average assets, liabilities and
shareholders' equity, (2) interest income earned on interest-earning assets and
interest expense paid on interest-bearing liabilities, (3) average yields earned
on interest-earning assets and average rates paid on interest-bearing
liabilities, (4) our net interest spread (i.e., the average yield on
interest-earning assets less the average rate on interest-bearing liabilities)
and (5) our net yield on interest-earning assets. Rates are computed on a tax
equivalent basis.
16
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 2000 June 30, 1999
------------------------------- -------------------------------
Average Average
Interest Rates Interest Rates
Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid Balance Expense Paid
------- -------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Due from banks..........................$ 63 $ 2 6.0% $ 10 $ 0 4.6%
Loans (1)............................... 116,532 5,391 9.3% 55,875 2,533 9.1%
Taxable investment securities (2)....... 34,331 1,193 7.0% 11,114 317 5.8%
Federal funds sold...................... 2,950 93 6.3% 13,430 316 4.7%
-------- ------ ------- ------
Total interest-earning assets........... 153,876 $6,679 8.7% 80,429 $3,166 7.9%
------ ------
Non-interest-earning assets............. 12,564 11,245
Allowance for possible loan losses...... (1,173) (627)
-------- -------
Total assets.......................$165,267 $91,047
======== =======
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
NOW deposits............................$ 12,591 $ 44 0.7% $11,376 $ 46 0.8%
Savings deposits........................ 2,258 25 2.2% 2,597 23 1.8%
Money market deposits................... 42,548 993 4.7% 15,791 288 3.7%
Time deposits........................... 39,878 1,165 5.9% 20,180 496 5.0%
Federal funds purchased................. 737 23 6.3% -- -- 0.0%
Repurchase agreements................... 9,066 282 6.2% -- -- 0.0%
Advances from FHLB...................... 6,626 212 6.4% -- -- 0.0%
-------- ------ ------- ------
Total interest-bearing liabilities...... 113,704 $2,744 4.8% 49,944 $ 853 3.4%
------ ------
Non-interest bearing liabilities:
Demand deposits......................... 31,038 21,126
Other liabilities....................... 710 484
-------- -------
Total non-interest bearing liabilities.. 31,748 21,610
-------- -------
Shareholders' equity.................... 19,815 19,493
-------- -------
Total liabilities and
shareholders' equity............$165,267 $91,047
======== =======
Net interest differential............... 3.9% 4.5%
=== ===
Net yield on interest-earning assets.... $3,935 5.1% $2,313 5.8%
====== === ====== ===
SELECTED OPERATING RATIOS
Return on average assets........... 0.53% 0.13%
Return on average equity........... 4.45% 0.59%
Equity to assets ratio............. 10.42% 18.11%
</TABLE>
(1) Average loans include non-accrual loans, which were $195 thousand and $109
thousand at June 30, 2000 and June 30, 1999, respectively.
(2) Includes Federal Reserve Bank of Atlanta stock and Federal Home Loan Bank
stock.
17
<PAGE>
The following table presents by category the major factors that contributed to
the changes in net interest income for the periods presented. Amounts have been
computed on a fully tax-equivalent basis.
Six months ended June 30,
2000 versus 1999
Increase (Decrease) Due to Change in:
-------------------------------------
Average Average
Volume Rate Net
------ ---- ------
(in thousands)
Interest Income:
Due from banks..........................$ 1 $ 1 $ 2
Loans................................... 2,779 79 2,858
Taxable investment securities........... 668 208 876
Federal funds sold...................... (246) 23 (223)
------ ---- ------
Total interest income...................$3,202 $311 $3,513
------ ---- ------
Interest expense:
NOW deposits............................$ 5 $ (7) (2)
Money market deposits................... 491 214 705
Savings deposits........................ (2) 4 2
Time deposits........................... 489 180 669
Federal funds purchased................. 23 -- 23
Repurchase agreements................... 282 -- 282
FHLB advances........................... 212 -- 212
------ ---- ------
Total interest expense..................$1,500 $391 $1,891
------ ---- ------
Net interest income.....................$1,702 $(80) $1,622
====== ==== ======
Provision for Loan Losses. The increase to $443 thousand from $72 thousand in
the provision for loan losses for the six months ended June 30, 2000, compared
to the comparable period of 1999 is reflective of the growth in the loan
portfolio in the first half of 2000 compared to the same period in the prior
year. Our provision for loan losses maintained the reserve at a level management
believes appropriate in light of our lending activities, the quality of the loan
portfolio, historical experience, volume and type of lending conducted by us,
the status of past due and non-performing loans, the general economic conditions
of our lending area and other factors affecting collectibility of our loan
portfolio. The provision for the six months ended June 30, 2000 was due to
growth primarily in the non-residential real estate, residential real estate and
commercial and industrial loan portfolios. We had net recoveries of $3 thousand
and did not experience any material change in the level of classified loans
during the three month period. While our management uses available information
to recognize losses on loans, future additions to the allowance may be necessary
based on changes in economic conditions, the financial status of borrowers and
regulatory requirements.
Non-Interest Income. For the first six months of 2000, total non-interest income
decreased by $14 thousand, or 2.7%, over the same period of last year. The
decrease includes a $39 thousand increase from additional service charges and
fees primarily resulting from growth in the deposit portfolio and a reduction of
$50 thousand on gain on sale of loans due to a lower volume of loans sold in the
six months ended June 30, 2000 versus the same period in 1999. We also gained
$16 thousand by selling stock we received in the de-mutualization of two of our
insurance vendors. Other factors affecting non-interest income include $22
thousand less in gain on sale of assets in 2000 and $13 thousand more in gain on
sale of other real estate during the first six months of 2000 as compared to the
same period in 1999.
18
<PAGE>
Non-Interest Expense. For the six month period ended June 30, 2000, the Company
experienced increases in its non-interest expense over non-interest expense for
the comparable period of 1999. For the six month period ended June 30, 2000, our
total non-interest expense was $3.2 million, compared to total non-interest
expense of $2.6 million for the 1999 period. The increase in non-interest
expense in the six month period of 2000 reflects increased compensation and
employee benefit expense as we hired additional staff to administer growth in
our loan and deposit portfolios, and to staff its new full service Melbourne,
Florida facility which opened in March 2000. The increase in salary and benefit
expenses also reflect salary adjustments for our employees. Full time equivalent
employees increased from 47 at June 30 1999, to 66 at June 30, 2000. Occupancy
expense increased $69 thousand, or 16.7%, in the six months ended June 30, 2000
as compared to the same period in 1999. Rents at the Melbourne office and new
operations center were $34 thousand and $19 thousand, respectively, in the first
six months of 2000, while we did not have these locations in 1999. Increased
amortization expense for the leasehold improvements at the Boca Raton office,
which was completed late in 1999, also accounted for $17 thousand of the
increase in occupancy expense. Goodwill amortization totaled $77 thousand and
$80 thousand for the six month periods ended June 30, 2000, and 1999,
respectively. We experienced a net increase of $168 thousand, or 20.0%, in other
non-interest expenses in the first six months of 2000 compared to the same
period in 1999. This increase is related primarily to our growth. The net change
in other non-interest expense includes the following: postage expense increased
$18 thousand, or 67.3%, stationery and supplies expense increased $26 thousand,
or 49.5%, business development expense increased $31 thousand, or 125.4%, and
State and FDIC assessments increased $15 thousand, or 116.5%. We paid $50
thousand to settle a lawsuit during 2000. Legal expenses decreased $41 thousand,
or 61.7%, insurance expense decreased $21.5 thousand, or 40.4%, and consulting
costs decreased $34 thousand or 100%.
Income Taxes. Income tax expense increased to $322 thousand for the six months
ended June 30, 2000, compared to $111 thousand for the same period last year,
primarily due to an increase in pretax income. The effective tax rate for the
six months ended June 30, 2000 was 42.4%. Non-deductible goodwill amortization
expense contributed to the effective tax rate.
FINANCIAL CONDITION
June 30, 2000 compared to December 31, 1999
Total assets increased to $192.2 million, an increase of $52.2 million, or
37.3%, from total assets of $140.0 million at December 31, 1999. Increases in
total assets included increases of $4.2 million in federal funds sold, $37.2
million in net loans, $4.4 million in investment securities held to maturity,
$4.0 million in investment securities available for sale, $505 thousand in
Federal Reserve Bank and Federal Home Loan Bank stock, $641 thousand in net
premises and equipment and $516 thousand in other assets.
The $37.2 million increase in net loans is comprised primarily of $4.1 million
in commercial loans, $30.2 million in non-residential real estate loans, $4.0
million in residential real estate loans, and a reduction of $1.0 million in
construction loans. The net increase is the result of the management team's
efforts to attract new business and expand relationships with existing
customers.
The following schedule presents the components of loans, net of unearned income,
by type, as of June 30, 2000 and December 31, 1999:
19
<PAGE>
June 30, 2000 December 31, 1999
------------------ ------------------
(Dollars in thousands)
Amount Percent Amount Percent
-------- ------- -------- -------
Commercial and Industrial...............$ 24,430 18% $ 20,380 20%
Real Estate Non-Residential Properties.. 91,659 66% 61,416 60%
Residential Properties.................. 14,866 11% 10,824 11%
Construction............................ 6,117 4% 7,148 7%
Consumer................................ 1,935 1% 1,534 2%
-------- --- -------- ---
Gross Loans............................. 139,007 100% 101,302 100%
less: net deferred fees................ 488 445
-------- --------
Total loans............................. 138,519 100,857
less: allowance for loan losses........ 1,463 1,017
-------- --------
Net loans...............................$137,056 $ 99,840
======== ========
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 June 30, 2000.
<TABLE>
<CAPTION>
Within 1 Year 1 to 5 Years After 5 Years Total
------------- ------------ ------------- -----
(in thousands)
<S> <C> <C> <C> <C>
Commercial and Industrial............... $17,105 $6,550 $775 $24,430
Construction Loans...................... 6,117 0 0 6,117
------- ------ ---- -------
Total (1).......................... $23,222 $6,550 $775 $30,547
======= ====== ==== =======
Fixed Rate Loans........................ $ 7,569
Variable Rate Loans..................... 22,978
-------
Total (1).......................... $30,547
=======
</TABLE>
(1) Includes Commercial and Industrial and Construction loans only.
At June 30, 2000, cash and due from banks increased $522 thousand reflecting our
growth. Federal funds sold increased by $4.2 million from December 31, 1999. The
increase is attributable primarily to growth in deposits and borrowings
outpacing loan and investment portfolio growth during the period. Accrued
interest receivable increased $237 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 $505 thousand, primarily as the result of
purchases of additional FHLB stock in compliance with the FHLB's membership
requirements. Our net investment in premises and equipment increased $641
thousand, including $292 thousand for our Melbourne office, $130 thousand to
build out the new operations center, $150 thousand for data processing equipment
and $30 thousand in leasehold improvements at the Boca Raton office. Other
assets increased $458 thousand, including $407 thousand for software for the
in-house operating system, $75 thousand in prepaid insurance, $19 thousand in
security deposits, $17 thousand in deferred expenses, and a decrease of $108
thousand in other real estate owned.
Total deposits increased 39.1%, from $110.3 million at December 31, 1999, to
$153.4 million at June 30, 2000.
20
<PAGE>
Deposits are summarized as follows:
June 30, 2000 December 31, 1999
------------- -----------------
(in thousands)
Non-interest bearing demand.............$ 30,917 $ 29,235
Savings, NOW and money market........... 69,769 46,884
Time deposits, under $100,000........... 34,884 20,187
Time deposits, $100,000 and over........ 17,865 13,967
-------- --------
$153,435 $110,273
======== ========
Money market accounts increased $23.2 million in the first six months of 2000.
This increase reflects the market's acceptance of two, tiered money market
account products, which pay increased rates as the balance in the account
increases. These accounts contributed to an increase in the average rate paid on
money market accounts from 4.34% in December 1999 to 5.12% in June 2000. Of the
total increase in money market accounts, $16.5 million was raised in our Boca
Raton office.
Time deposits increased $18.6 million in the first six months of 2000. We
subscribe to a deposit listing service on the internet which allows us to post
time deposit rates on a web site which is available to other subscribers who use
the site as an information source for investing in time deposits. The deposits
raised through this program are primarily deposits of credit unions, savings
banks and commercial banks at terms from ninety days to three years. We raised
$15.2 million with this program in the first six months of 2000. At June 30,
2000, we had $25.2 million in deposits raised through this program compared to
$10.0 million at December 31, 1999. The weighted average rate of the internet
portfolio at June 30, 2000 was 7.11% and the weighted average life was eight
months.
The following table sets forth the average amounts of various types of deposits
for each of the periods indicated:
June 30, 2000 December 31, 1999
----------------- -----------------
Average Average
Amount Yield Amount Yield
-------- ------- ------- -------
(dollars in thousands)
Non-Interest Bearing Demand.............$ 31,038 0.0% $23,823 0.0%
Interest-Bearing Demand................. 12,591 0.7% 11,535 0.8%
Money Market Deposits................... 42,548 4.7% 26,107 4.1%
Savings Deposits........................ 2,258 2.2% 2,300 1.8%
Time Deposits........................... 39,878 5.9% 22,308 5.0%
-------- -------
Total...................................$128,313 $86,073
======== =======
The increased average yield on money market accounts is attributable to
increased volume of higher yielding tiered money market accounts. The increased
average yield on time deposits is primarily attributable to the growth in the
internet deposit portfolio which tends to require higher interest rates than the
local time deposit portfolio. We offered these two higher yielding products to
attract deposits to fund the growth in the loan portfolio.
The following table summarizes the maturity distribution of time deposits of
denominations of $100,000 or more as of June 30, 2000, (in thousands):
21
<PAGE>
Time deposits ($100,000 and over)
Three months or less....................$ 5,122
Over three months through nine months... 7,056
Over nine months through twelve months.. 3,611
Over twelve months...................... 2,076
-------
Total..............................$17,865
=======
FHLB advances totaled $9.0 million at June 30, 2000. There were no FHLB advances
at December 31, 1999. The funds obtained in this borrowing were used toward the
purchase of a $10 million GNMA II mortgage-backed security, of which $5 million
par value is carried available for sale and $5 million par value is carried in
the held to maturity portfolio. The security is pledged to secure the borrowing
line and we are required to maintain a specified margin between the market value
of the security and the amount advanced under the line.
The following table sets forth information regarding our short-term borrowing at
and for the periods indicated:
6/30/00 12/31/99
------- --------
FHLB advances
Balance outstanding.............................. 9,000 0
Weighted average interest rate at period end..... 6.8% 0.0%
Maximum balance at any month-end................. 9,400 0
Average amount outstanding during period......... 6,626 0
Weighted average interest rate during period..... 6.4% 0.0%
Accrued interest payable increased $117 thousand, or 54.7%, due to an increased
volume of interest paying liabilities, including other borrowings, and a higher
average cost of the interest bearing liabilities. Other liabilities increased
$102 thousand, or 30.9%, due primarily to an $86 thousand dollar increase in
accrued expenses payable related to the Company's growth.
Asset Quality. Our principal earning assets are 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 accumulated accrued interest receivable applicable to
periods prior to the current year is charged off to the allowance for loan
losses and all interest accrued applicable to the current year is backed out of
current period income. Until the loan becomes current, any payments received
from the borrower are applied to outstanding principal until such time as
management determines the financial condition of the borrower and other factors
merit recognition of such payments as interest.
We attempt to minimize overall credit risk through loan diversification and loan
approval procedures. Our due diligence begins at the time the borrower begins to
discuss with us 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-accrual loans increased to $195 thousand at June 30, 2000 from $154 thousand
at December 31, 1999. The balance represents two loans, one with a balance of
$154 thousand which was placed on non-accrual status during October 1999. The
balance of this loan represents the unguaranteed portion of a Small Business
Administration loan. The bank has initiated foreclosure. Management believes
proper reserves have been established for this loan. The second loan, with a
balance of $41 thousand, was placed on non-accrual status during February 2000.
The loan
22
<PAGE>
is secured by business equipment and a second mortgage on the residence of the
principal of the company. Management believes that this loan is adequately
reserved.
The Company has no other real estate owned at June 30, 2000. The one property
the Company acquired through foreclosure in December 1999 that was carried on
the books at $108 thousand was sold during June 2000 at a gain of $17 thousand.
The following table sets forth information concerning risk elements in our
portfolio:
(unaudited)
June 30, December 31,
-------------------- ------------
(Dollars in thousands) 2000 1999 1999
---- ---- ----
Non-accrual loans....................... $195 $109 $154
Other real estate owned................. 0 8 108
---- ---- ----
Total non-performing assets (1)......... $195 $117 $262
==== ==== ====
Non-accrual loans to total loans........ 0.14% 0.15% 0.15%
Non-performing assets to total assets... 0.10% 0.11% 0.19%
Allowance for possible loan losses as
a percentage of non-performing assets... 750.26% 596.58% 388.17%
(1) Excludes loans past due more than 90 days and still accruing interest of $41
thousand at December 31, 1999. No loans were past due more than 90 days and
still accruing interest at the other periods presented.
If the above described non-accruing loans had been current, our interest income
would have increased by $11 thousand and $5 thousand for the six month periods
ended June 30, 2000 and 1999, respectively, and $8 thousand for the year ended
December 31, 1999.
Allowance For Loan Losses. We attempt 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 ongoing basis by our officers, by outside independent loan review auditors
and by our Directors' Loan Committee. A risk system, consisting of multiple
grading categories, is utilized as an analytical tool to assess the risk and
appropriate reserves. We segregate the loan portfolio for loan loss purposes
into segments based upon the underlying collateral. We provide for a general
allowance for losses inherent in the portfolio by the collateral categories.
General loss percentages are calculated based upon historical analyses as well
as estimates of the inherent losses which probably exist as of the evaluation
date even though they might not have been identified by the more objective
processes used. This is due to the risk of error and/or inherent imprecision in
the process. This portion of the allowance is particularly subjective and
requires judgments based on qualitative factors which do not lend themselves to
exact mathematical calculations such as: trends in delinquencies and
nonaccruals; migration trends in the portfolio; trends in volume, terms, and
portfolio mix; new credit products and/or changes in the geographic distribution
of those products; changes in lending policies and procedures; loan review
reports on the efficacy of the risk identification process; changes in the
outlook for local, regional and national economic conditions; concentrations of
credit; and peer group comparisons. Specific allowances are provided in the
event that the specific analysis on each classified loan indicates that the
probable loss would be in excess of the general percentage allocation. The
provision for loan loss is debited or credited in order to state the allowance
for loan losses to the required level as determined above. Along with the risk
system, our 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
23
<PAGE>
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 our
allowance for loan losses. These agencies may require that we take additional
provisions based on their judgments about information available to them at the
time of their examination.
At June 30, 2000, the allowance for loan losses was $1.5 million, an increase of
$446 thousand from December 31, 1999. During the six months ended June 30, 2000,
we had no charge-offs and recoveries of $3 thousand and provided a loan loss
provision of $443 thousand.
The following is a summary of the reconciliation of the allowance for loan
losses for the periods presented:
Six months ended June 30,
--------------------------
2000 1999
------ ----
(dollars in thousands)
Balance at beginning of period.......... $1,017 $602
CHARGE-OFFS
Real estate............................. 0 0
Instalment.............................. 0 0
Commercial.............................. 0 1
------ ----
Total Charge-offs.................. 0 1
RECOVERIES
Real estate............................. 0 4
Instalment.............................. 0 0
Commercial.............................. 3 21
------ ----
Total Recoveries................... 3 25
Net recoveries.......................... 3 24
Provision charged to expense............ 443 72
------ ----
Balance of allowance at end of period... $1,463 $698
====== ====
Ratio of net charge-offs to
average loans outstanding............. 0.00% -0.04%
Balance of allowance at period end
as a percent of total loans
at period end......................... 1.06% 0.98%
24
<PAGE>
The following table sets forth, for each of our major lending areas, the amount
and percentage of our allowance for loan losses attributable to that category,
and the percentage of total loans represented by that category, as of the
periods indicated.
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
-------------------- --------------------
% of % of
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Balance applicable to:
Commercial and industrial...............$ 242 18% $ 175 20%
Real estate:
Non-residential properties............. 810 66% 596 60%
Residential properties................. 124 11% 66 11%
Construction........................... 181 4% 134 7%
Consumer................................ 30 1% 14 2%
------ --- ------ ---
Subtotal................................ 1,387 100% 985 100%
Unallocated reserves.................... 76 -- 32 --
------ --- ------ ---
Total..............................$1,463 100% $1,017 100%
====== === ====== ===
</TABLE>
Investment Securities. At June 30, 2000, our investment securities portfolio,
including both held to maturity and available for sale, totaled $35.3 million,
an increase of $8.4 million, from total investment securities of $26.9 million
at December 31, 1999. At June 30, 2000, $12.9 million of our investment
securities were classified as available for sale and $22.4 million were
classified as held to maturity. At December 31, 1999, $8.9 million and $18.0
million of securities were classified as available for sale and held to
maturity, respectively. As the mortgage-backed securities have paid down, the
funds have been reinvested primarily in the loan portfolio.
The following table sets forth, as of June 30, 2000, the maturity distribution
of our investment portfolio.
MATURITY SCHEDULE OF INVESTMENT SECURITIES
<TABLE>
<CAPTION>
After One But After Five But
Within One Year Within Five Years Within Ten Years After Ten Years Total
(Dollars in thousands) ------------------ ------------------ ------------------ ------------------ ------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Held to Maturity Value Yield Value Yield Value Yield Value Yield Value Yield
---------------- -------- ------- -------- ------- -------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and
Agency Obligations.........$ 0 0.00% $1,000 5.94% $ 0 0.00% $ 0 0.00% $ 1,000 5.94%
Mortgage-Backed Securities... 1,347 7.22% 5,387 7.22% 6,026 7.30% 8,638 7.48% 21,398 7.35%
------ ---- ------ ---- ------ ---- ------ ---- ------- ----
$1,347 7.22% $6,387 7.02% $6,026 7.30% $8,638 7.48% $22,398 7.29%
====== ====== ====== ====== =======
</TABLE>
Mortgage-backed securities maturities are based on current prepayment speeds.
25
<PAGE>
MATURITY SCHEDULE OF INVESTMENT SECURITIES
<TABLE>
<CAPTION>
After One But After Five But
Within One Year Within Five Years Within Ten Years After Ten Years Total
(Dollars in thousands) ------------------ ------------------ ------------------ ------------------ ------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Available for Sale Value Yield Value Yield Value Yield Value Yield Value Yield
------------------ -------- ------- -------- ------- -------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and
Agency Obligations.........$ 495 6.90% $5,798 7.09% $ 0 0.00% $ 0 0.00% $ 6,293 7.07%
Mortgage-Backed Securities... 653 7.55% 2,058 7.88% 2,034 7.93% 1,824 8.00% 6,569 7.90%
Other Securities 0 0.00% 0 0.00% 0 0.00% 1,291 6.94% 1,291 6.94%
------ ---- ------ ---- ------ ---- ------ ---- ------- ----
$1,148 7.27% $7,856 7.29% $2,034 7.93% $3,115 7.56% $14,153 7.44%
====== ====== ====== ====== =======
</TABLE>
Mortgage-backed securities maturities are based on current prepayment speeds.
Other securities include Federal Reserve Bank Stock of $535 thousand and Federal
Home Loan Bank Stock of $742 thousand that the Bank must own as a condition of
membership. The Bank does not anticipate that it will discontinue its
memberships and, therefore, these stocks are classified as more than ten years.
Other securities also includes $14 thousand in Bankers' Bancorporation of
Florida stock.
Liquidity. Net cash provided by our operating activities was $451 thousand in
the first six months of 2000 compared to $130 thousand for the six months ended
June 30, 1999, resulting primarily from the increase in net income.
Net cash used in investing activities was $47.2 million in the period ended June
30, 2000 compared to $29.0 million in the comparable period of 1999. We used
$8.3 million for net investment securities in 2000, while in 1999 we used $5.0
million for our securities portfolio. Additionally, we used $37.7 million and
$23.3 million for net loans and loan sales in the first six months of 2000 and
1999, respectively.
Net cash provided by our financing activities was $51.6 million in the first six
months of 2000, and $26.7 million in the comparable period of 1999. The increase
in 2000 was due to a $43.2 million increase in deposits and net increase of $8.4
million in federal funds purchased and other borrowed money. Net deposits
provided an increase $43.2 million in 2000 compared to $26.7 million in the six
months ended June 30, 1999.
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 8 percent of its total nontransaction accounts, less those deposits
of public funds for which security has been pledged. As of June 30, 2000, the
bank had a liquidity ratio of 17.2 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 June 30, 2000,
federal funds sold totaled $4.2 million. Funds not required to meet loan and
deposit demand were invested primarily in mortgage-backed, 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 $12.9 million at June 30, 2000.
An additional external source of liquidity is an unsecured $4 million federal
funds overnight borrowing line of credit and a secured line of credit with a
correspondent bank. Our unencumbered investment securities are the collateral
for the secured line of credit and serve to determine the total amount available
under the line. At June 30, 2000, no funds were drawn under either the secured
or unsecured line. During the six months ended June 30, 2000 we drew on the
unsecured line to $4 million several times and drew on the secured line up to
$2.8 million when loan growth outpaced deposit growth. We also maintain a line
of credit at the Federal Home Loan Bank of Atlanta secured by first lien
residential mortgages. The total credit available under this line is based on
the market value of the collateral. At June 30, 2000, $3.1 million was
available. No draws have been made under this line.
Capital Resources. Total shareholders equity increased to $20.0 million at June
30, 2000 from $19.6 million at December 31, 1999. June 30, 2000 equity was
affected by net income of $438 thousand and a decrease of $21 thousand in net
unrealized losses on available for sale securities.
26
<PAGE>
At June 30, 2000, we exceeded all regulatory capital requirements as follows:
CAPITAL ADEQUACY
(dollars in thousands)
ADMIRALTY BANCORP, INC.
<TABLE>
<CAPTION>
To be well capitalized
For capital under prompt corrective
Actual adequacy purposes action provisions
------------------ ------------------ -----------------------
Amount ($) Ratio Amount ($) Ratio Amount ($) Ratio
---------- ----- ---------- ----- ---------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to risk weighted assets)............. 17,759 11.68% >12,163 >8.00% >15,204 >10.00%
- - - -
Tier I Capital
(to risk weighted assets)............. 16,296 10.72% > 6,082 >4.00% > 9,123 > 6.00%
- - - -
Tier I Capital
(to average assets)................... 16,296 9.31% > 7,000 >4.00% > 8,750 > 5.00%
- - - -
</TABLE>
As of December 31, 1998, the most recent notification from the Florida
Department of Banking characterized the bank as well capitalized under the
regulatory framework for prompt corrective action.
The following table sets forth capital levels for the bank at June 30, 2000:
CAPITAL ADEQUACY
(dollars in thousands)
ADMIRALTY BANK
<TABLE>
<CAPTION>
To be well capitalized
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)............. 16,070 10.57% >12,162 >8.00% >15,202 >10.00%
Tier I Capital
(to risk weighted assets)............. 14,607 9.61% > 6,081 >4.00% > 9,121 > 6.00%
Tier I Capital
(to average assets)................... 14,607 8.35% > 7,000 >4.00% > 8,750 > 5.00%
</TABLE>
27
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
RESULTS OF OPERATIONS
For the Year Ended December 31, 1999
For the year ended December 31, 1999 we generated net income of $252 thousand or
$0.09 per share compared to a net loss of $444 thousand in 1998 which equates to
earnings per share of $0.44 per Class A share and a loss of $1.06 per Class B
share.
At December 31, 1999, our total assets reached $140.0 million, an increase of
73.3% over total assets at December 31, 1998, our net loans totaled $99.8
million, an increase of 113.3% over net loans at December 31, 1998 and our
deposits totaled $110.3 million, an increase of 81.6% over total deposits at
December 31, 1998. The increases are generally due to the aggressive return to
and penetration of our service area, both through our management team (which
came to us in the second half of 1998) and through our new office locations.
During 1999, management undertook an analysis of our arrangement with an outside
service provider to continue to provide data processing services and items
processing services to the bank. Management determined we would benefit by
bringing these processes in house in order to gain economies of scale as the
bank grows which would not have been available as a serviced institution. In
order to accommodate this transition, we will lease a larger operations center,
purchase computer equipment, communications equipment and items processing
equipment, and buy licensing to the banking software package on which it
currently operates. The costs of designing, acquiring and operating in the
in-house environment are not expected to significantly impact net income in 2000
and we should begin to benefit from the economies of scale in the following
years as the total footings and the volume of transactions increase. As part of
the migration to the in-house system additional features will be added to the
current system to provide enhanced services to our customers. The most
significant addition will be the addition of internet banking capabilities which
will allow customers to review their accounts and transfer between loan and
deposit accounts through the internet. The internet banking module will be
complemented by a bill paying module which will allow customers to pay bills
through the internet. Many members of our management team have experience with
in house data and items processing and do not expect this migration to disrupt
business.
Years ended December 31, 1999 and December 31, 1998
Our results of operations depend primarily on net interest income, which is the
difference between the interest earned on interest-earning assets and fees
earned servicing loans which we have sold and the interest paid on funds
borrowed to support those assets, such as deposits. In addition, we realize
gains in connection with sales of the guaranteed portion of loans originated
under the Small Business Administration guaranteed 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, 1999, we produced a net profit of
$252 thousand, an increase of $696 thousand from a pro forma net loss of $444
thousand for the year ended December 31, 1998. The period to period increase in
reported net income is attributable to an increase in our net interest income
partially offset by an increase in non-interest expense as we incurred costs to
enhance the value of our franchise and a reduction in the gain on sales of loans
from those recognized in 1998.
28
<PAGE>
Interest and Dividend Income. Total interest and dividend income increased $3.7
million, or 86.6%, to $7.9 million for the year ended December 31, 1999 from
$4.2 million in 1998. This increase in interest income primarily relates to an
increase in our average balance of earning assets, partially offset by a
decrease in average rates. Average balances increased by $42.5 million for
loans, $1.4 million for investment securities and $3.5 million for federal funds
sold. The average yield on the loan portfolio decreased to 9.1% from 10.7%, the
average yield on investment securities, including Federal Reserve Bank and FHLB
stock, increased to 6.1% from 5.8% and the average yield on federal funds sold
decreased to 4.8% from 5.1% in 1999 as compared to 1998 reflecting lower market
rates of interest on loans. During 1999, as our asset mix continued to shift
toward a greater percentage of loans newly originated in the current rate
environment, our yield on interest earning assets decreased to 8.2% from the
8.6% earned during 1998.
Interest Expense. Our interest expense for the year ended December 31, 1999
increased $1.3 million, or 110.1%, to $2.4 million from $1.1 million for 1998.
The increase in interest expense reflects a 98.4% increase in average interest
bearing liabilities during 1999 coupled with an increase in the average rate
paid on interest bearing liabilities to 3.8% from 3.6%, partially offset by a
shift in our 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 $7.1 million, $18.6 million and
$4.4 million, respectively, in 1999, as compared to 1998. During 1999, the
average rate paid by us on our money market accounts increased to 4.1% from 2.8%
in 1998. In addition, the average balance of our non-interest bearing demand
deposits increased by $10.8 million, to $23.8, from $13.0 million at December
31, 1998. We also entered into a repurchase agreement in 1999. The average
balance of the repurchase agreement was $1.8 million at an average cost of 6.2%.
The changes to our deposit portfolio and entry into the repurchase agreement
increased our average cost of interest bearing liabilities to 3.8% for 1999
compared to 3.6% in 1998.
Net-Interest Income. Net interest income increased by $2.4 million, or 77.8%,
over 1998. Our net interest spread decreased 61 basis points to 4.4% for 1999
from 5.0% in 1998. Our net yield on interest earning assets decreased to 5.6% in
1999 from 6.2% in 1998.
COMPARATIVE AVERAGE BALANCE SHEETS
The following table reflects the components of our net interest income, setting
forth for the periods presented herein, (1) average assets, liabilities and
shareholders' equity, (2) interest income earned on interest-earning assets and
interest expense 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.
29
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------
1999 1998 (1)
--------------------------------- --------------------------------
Average Average
Interest Rates Interest Rates
Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid Balance Expense Paid
--------- --------- -------- --------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest earning assets:
Due from banks ....................... $ 14 $ 1 5.1% $ 0 $ 0 0.0%
Loans (2) ............................ 71,470 6,479 9.1% 28,925 3,084 10.7%
Taxable investment securities (3) .... 16,213 994 6.1% 14,842 866 5.8%
Federal funds sold ................... 9,425 456 4.8% 5,882 299 5.1%
--------- --------- --------- ---------
Total interest earning assets ........ 97,122 $ 7,930 8.2% 49,649 $ 4,249 8.6%
--------- ---------
Non-interest earning assets .......... 11,838 8,190
Allowance for possible loan losses ... (743) (434)
--------- ---------
Total Assets .................. $ 108,217 $ 57,405
========= =========
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
NOW deposits ......................... $ 11,535 $ 87 0.8% $ 7,102 $ 84 1.2%
Savings deposits ..................... 2,299 42 1.8% 2,315 42 1.8%
Money market deposits ................ 26,108 1,074 4.1% 7,541 212 2.8%
Time deposits ........................ 22,308 1,115 5.0% 15,247 813 5.3%
Federal funds purchased .............. 291 17 5.8% 241 14 5.8%
Repurchase agreements ................ 1,819 113 6.2% 0 0 0.0%
--------- --------- --------- ---------
Total interest-bearing liabilities ... 64,360 $ 2,448 3.8% 32,446 $ 1,165 3.6%
--------- ---------
Non-interest bearing liabilities:
Demand deposits ...................... 23,823 13,028
Other liabilities .................... 528 732
--------- ---------
Total non-interest bearing liabilities 24,351 13,760
--------- ---------
Shareholders' equity ................. 19,506 11,199
--------- ---------
Total liabilities and shareholders'
equity ............................ $ 108,217 $ 57,405
========= =========
Net interest differential ............ 4.4% 5.0%
======= =======
Net yield on interest earning assets . $ 5,482 5.6% $ 3,084 6.2%
========= ======= ========= =======
</TABLE>
SELECTED OPERATING RATIOS
Return on average assets ......... 0.23% (0.77%)
Return on average equity ......... 1.29% (3.96%)
Equity to assets ratio ........... 18.02% 19.51%
(1) Financial information for the year ended December 31, 1998 is based
upon the pro forma consolidated income statement for that time period
which assumes the change in control occurred on January 1, 1998.
(2) Average loans include non-accrual loans, which were $154 thousand and
$109 thousand at December 31, 1999 and December 31, 1998, respectively.
(3) Includes Federal Reserve Bank of Atlanta stock and Federal Home Loan
Bank Stock.
30
<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.
Volume Rate Net
------- ------- -------
(in thousands)
Interest Income:
Due from banks ...................... $ 0 $ 1 $ 1
Loans ............................... 4,536 (1,141) 3,395
Taxable investment securities........ 80 48 128
Federal funds sold .................. 180 (23) 157
------- ------- -------
Total interest income ............... $ 4,796 $(1,115) $ 3,681
------- ------- -------
Interest expense:
Federal funds purchased ............. $ 2 $ 0 2
NOW deposits ........................ 52 (49) 3
Money market deposits ............... 523 340 863
Time deposits ....................... 377 (75) 302
Repurchase agreements ............... 113 0 113
------- ------- -------
Total interest expense .............. $ 1,067 $ 216 $ 1,283
------- ------- -------
Net interest income ................. $ 3,729 $(1,331) $ 2,398
======= ======= =======
(1) Financial Information for the year ended December 31, 2000 is based upon the
pro form consolidated income statement for that time period which assumes the
change in control of the company occurred on January 1, 1998
Provision for Loan Losses. The increase in the provision for loan losses for
1999 compared to 1998 is reflective of the significant growth in the loan
portfolio during 1999 as compared to the prior year. Our provision for loan
losses maintained the reserve at a level management believes appropriate in
light of our lending activities, the quality of the loan portfolio, historical
experience, volume and type of lending conducted by us, the status of past due
and nonperforming loans, the general economic conditions of our lending area and
other factors affecting collectibility of our loan portfolio. We had net
charge-offs of $110 thousand and did not experience any material change in its
level of classified loans during 1999. While our management uses available
information to recognize losses on loans, future additions to the allowance may
be necessary based on changes in economic conditions, the financial status of
borrowers and regulatory requirements.
Non-Interest Income. Total non-interest income increased by $222 thousand, or
26.0%, over last year. The increase includes a $304 thousand increase in service
charges and fees. The significant changes in the service charges and fees is
primarily composed of the following: a $319 thousand, or 126%, increase in
service charges on deposits of which $240 thousand represents increased
non-sufficient funds and overdraft charges, a $30 thousand, or 187%, increase in
wire transfer fees, a reduction of $29 thousand, or 11%, in serviced loan fees
and a reduction of $26 thousand, or 100%, in loan funding fees due to the
cessation of a residential loan origination and sale program. The company also
experienced a $39 thousand loss on sale of securities in 1998 compared to no
losses on sales of securities in 1999, a reduction of $144 thousand in gains
from the sales of loans due to a lower volume of SBA loan sales in 1999 and a
$23 thousand gain on sale of other assets in 1999 compared with no gains in
1998.
31
<PAGE>
Non-Interest Expense. Our non-interest expense for 1999 increased over
non-interest expense for 1998. For 1999, our total non-interest expense was $5.4
million, compared to total non-interest expense of $4.0 million for 1998. The
increase in non-interest expense reflects increased compensation and employee
benefit expense as we hired a new senior management team, including Ward
Kellogg, our new president and his team of community bankers. Full time
equivalent employees increased from 45 at December 31, 1998 to 51 at December
31, 1999, reflecting increases necessary both to administer our growing loan and
deposit portfolios and to staff the Boca Raton office. We experienced an
increase in occupancy and furniture and equipment expenses as we opened our
fourth office in Boca Raton, Florida, and relocated our Jupiter office to
larger, more modern quarters. Goodwill amortization totaled $154 thousand and
$147 thousand for 1999 and 1998, respectively. We also experienced the following
changes in other non-interest expenses related primarily to growth: insurance
expense increased $51 thousand, or 96%, data processing fees increased $73
thousand, or 28%, legal fees increased $18 thousand, or 16%, telephone expense
increased $23 thousand, or 28%, stationery and supplies increased $45 thousand,
or 56%, audit expense increased $91 thousand, or 147%, dues, subscriptions and
publications expense decreased $12 thousand or 38%, Y2K expenses were $19
thousand compared to no such expenses in 1998 and amortization of SBA loan
servicing assets was $20 thousand or 44% lower in 1999 due to fewer loans paying
off early during 1999 compared to 1998.
Income Taxes. Income tax expense increased to $384 thousand for 1999, from no
income tax expense for 1998, primarily due to an increase in pretax accounting
income. Non-deductible expenses for goodwill amortization and the establishment
of a deferred tax valuation allowance have resulted in the unusually high
effective tax rate for the year of 60%.
At December 31, 1999, we had unused net operating loss carry-forwards of
approximately $1.1 million for federal and Florida Income Tax purposes expiring
through 2008. 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
December 31, 1999 compared to December 31, 1998
At December 31, 1999, our total assets were $140.0 million, compared to $80.7
million at December 31, 1998. Increases in total assets included increases of
$53.0 million in net loans, $18.0 million in investment securities held to
maturity, and $728 thousand in premises and equipment, net of accumulated
depreciation. Federal funds sold decreased $13.3 million. Total deposits were
$110.3 million at December 31, 1999 compared to $60.7 million at December 31,
1998.
Cash and Due From Banks. At December 31 1999, cash and due from banks increased
$1.1 million to accommodate our growth and as a result of the accumulation of
cash in preparation for the year 2000 calendar date change. Federal funds sold
decreased by $13.3 million from December 31, 1998. The decrease is attributable
primarily to our loan and investment portfolio growth outpacing deposit growth
during the period.
Loan Portfolio. The $53.0 million increase in net loans is comprised primarily
of $9.8 million in commercial loans, $30.7 million in non-residential real
estate loans, $7.1 million in residential real estate loans, and $5.2 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.
Our loan portfolio consists primarily of loans secured by real estate, and, to a
lesser extent, commercial and
32
<PAGE>
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 property being purchased. Our loans are primarily to
businesses and individuals located in Palm Beach, Broward and Brevard Counties,
Florida. We have not made loans to borrowers outside of the United States.
Commercial lending activities are focused primarily on lending to small business
borrowers. We believe that our 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.The following
schedule presents the components of loans, by type, as of December 31, 1999 and
December 31, 1998.
<TABLE>
<CAPTION>
December 31,
1999 1998
------------------- -------------------
Amount Percent Amount Percent
-------- -------- -------- --------
(in thousands, except percentages)
<S> <C> <C> <C> <C>
Commercial and Industrial ...................... $ 20,380 20% $ 10,701 22%
Real Estate Non-Residential Properties ......... 61,416 60% 30,465 64%
Residential Properties ......................... 10,824 11% 3,694 8%
Construction ................................... 7,148 7% 1,912 4%
Consumer ....................................... 1,534 2% 963 2%
-------- -------- -------- --------
Gross loans .................................... 101,302 100% 47,735 100%
======== ========
less: net deferred fees ....................... 445 321
-------- --------
Total loans .................................... 100,857 47,414
less: allowance for loan losses ............... 1,017 602
-------- --------
Net loans ...................................... $ 99,840 $ 46,812
======== ========
</TABLE>
The following table sets forth, in terms of interest rate sensitivity, certain
components of our loan portfolio as well as our fixed and adjustable rate loans
within that portfolio at December 31, 1999.
<TABLE>
<CAPTION>
Within 1 to 5 After
1 Year Years 5 Years Total
------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C>
Commercial and Industrial ........... $ 4,182 $12,288 $ 3,910 $20,380
Construction Loans .................. 3,387 1,356 2,405 7,148
------- ------- ------- -------
Total (1) ...................... $ 7,569 $13,644 $ 6,315 $27,528
======= ======= ======= =======
Fixed Rate Loans .................... $ 8,483
Variable Rate Loans ................. 19,045
-------
Total (1) ...................... $27,528
=======
</TABLE>
(1) Includes Commercial and Industrial and Construction loans only.
ASSET QUALITY
33
<PAGE>
Our principal earning assets are 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 owned.
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 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 and all interest accrued applicable
to the current year is backed out of current period 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.
We attempt to minimize overall credit risk through loan diversification and its
loan approval procedures. Our due diligence begins at the time we begin to
discuss with a borrower 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 1999, our non-accrual loans increased by $45 thousand to $154 thousand at
December 31, 1999 from $109 thousand at December 31, 1998. This balance
represents one loan placed in non-accrual status during October 1999. This loan
is subject to a workout agreement, and management believes that the loan is
adequately secured and does not anticipate that we will incur a material loss on
this credit. Other real estate owned increased to $108 thousand at December 31,
1999 from $8 thousand at December 31, 1998. The balance represents one single
family residence acquired through foreclosure in December 1999. The foreclosed
loan was covered by mortgage insurance. Management does not anticipate the
company will incur a material loss upon liquidation of the property.
The following table sets forth information concerning our non-performing assets
as of the dates indicated:
Non-Performing Loans
December 31,
------------------
1999 1998
------- -------
(dollars in thousands)
Non-accrual loans .............................. $ 154 $ 109
Other real estate owned ........................ 108 8
------- -------
Total non-performing assets (1) ................ $ 262 $ 117
======= =======
Non-accrual loans to total loans ............... 0.15% 0.23%
Non-performing assets to total assets .......... 0.19% 0.14%
Allowance for possible loan losses as a
percentage of non-performing assets ......... 388.17% 514.94%
(1) Excludes loans past due 90 days or more and still accruing interest of
approximately $41 thousand and $0 at December 31, 1999 and 1998,
respectively.
If the above described non-accruing loans had been current, our interest income
would have increased by $8
34
<PAGE>
thousand and $7 thousand for the years ended December 31, 1999 and 1998,
respectively. At the dates indicated in the above table, there were no
concentration of loans exceeding 10% of our total loans and we had no foreign
loans.
Allowance for Loan Losses. We attempt 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 our
Directors' Loan Committee. A risk system, consisting of multiple grading
categories, is utilized as an analytical tool to assess risk and appropriate
reserves. We segregate the loan portfolio for loan loss purposes into segments
based upon the underlying collateral. We provide for a general allowance for
losses inherent in the portfolio by the collateral categories. General loss
percentages are calculated based upon historical analyses as well as estimates
of the inherent losses which probably exist as of the evaluation date even
though they might not have been identified by the more objective processes used.
This is due to the risk of error and/or inherent imprecision in the process.
This portion of the allowance is particularly subjective and requires judgments
based on qualitative factors which do not lend themselves to exact mathematical
calculations such as: trends in delinquencies and nonaccruals; migration trends
in the portfolio; trends in volume, terms, and portfolio mix; new credit
products and/or changes in the geographic distribution of those products;
changes in lending policies and procedures; loan review reports on the efficacy
of the risk identification process; changes in the outlook for local, regional
and national economic conditions; concentrations of credit; and peer group
comparisons. Specific allowances are provided in the event that the specific
analysis on each classified loan indicates that the probable loss would be in
excess of the general percentage allocation. The provision for loan loss is
debited or credited in order to state the allowance for loan losses to the
required level as determined above. 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 us to take
additional provisions based on their judgments about information available to
them at the time of their examination.
Our allowance for possible loan losses totaled $1.0 million and $602 thousand at
December 31, 1999 and 1998, respectively.
The following is a summary of the reconciliation of the allowance for loan
losses for the periods presented.
35
<PAGE>
Year Ended December 31,
----------------
1999 1998
------ ------
(dollars in thousands)
Balance at beginning of period .......................... $ 602 $ 378
CHARGE-OFFS
Real estate ............................................. 0 58
Instalment .............................................. 1 0
Commercial .............................................. 177 141
------ ------
Total Charge-offs .................................. 178 199
RECOVERIES
Real estate ............................................. 4 0
Instalment .............................................. 0 13
Commercial .............................................. 64 25
------ ------
Total Recoveries ................................... 68 38
Net Charge-offs ......................................... 110 161
Provision charged to expense ............................ 525 385
------ ------
Balance of allowance at end of period ................... $1,017 $ 602
====== ======
Ratio of net charge-offs to average loans outstanding ... 0.15% 0.56%
Balance of allowance at period end as
a percent of total loans at period end .............. 1.01% 1.27%
The following table sets forth, for each of our major lending areas, the amount
and percentage of our 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
36
<PAGE>
December 31,
----------------------------------
1999 1998
----------------------------------
% of % of
Total Total
Amount Loans Amount Loans
------ ------ ------ ------
(dollars in thousands)
Balance applicable to:
Commercial and industrial ....... $ 175 20% $ 123 22%
Real estate:
Non-residential properties ..... 596 60% 306 64%
Residential properties ......... 66 11% 59 8%
Construction ................... 134 7% 19 4%
Consumer ........................ 14 2% 8 2%
------ ------ ------ ------
Subtotal ........................ 985 100% 515 100%
Unallocated reserves ............ 32 -- 87 --
------ ------ ------ ------
Total ...................... $1,017 100% $ 602 100%
====== ====== ====== ======
Allocation of the Allowance for Loan Losses By Category
Investment Portfolio. We maintain 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, 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.
We classify our investment securities as either held to maturity or available
for sale. Investment 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 shareholders'
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, 1999 we had $8.9 million and $18.0 million of our
investment portfolio classified as available for sale and held to maturity,
respectively. At December 31, 1998, our entire investment securities portfolio
of $9.4 million was classified as available for sale.
The $18.0 million increase in the investment held to maturity portfolio is
comprised of purchases of mortgage-backed securities to augment the overall
portfolio as the bank grows and other mortgage-backed securities pay down, and
the purchase of a $10 million, 20 year FHLMC mortgage-backed security purchased
in a transaction leveraged by borrowing $9.0 million under a repurchase
agreement. As part of the Change in Control of the
37
<PAGE>
company, we restructured our securities portfolio including the sale of $2.9
million of investment securities in early 1998 which resulted in a net loss of
$39 thousand.
The following table sets forth the carrying value of our 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):
Gross Gross
Available for sale Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------ ----- ------ -------
December 31, 1999
U.S. Government and Agency Securities $6,997 $ 0 $ (218) $6,779
Mortgage-Backed Securities 2,155 0 (63) 2,092
Other Securities 14 0 0 14
------ ----- ------ ------
Total $9,166 $ 0 $ (281) $8,885
====== ===== ====== ======
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------ ----- ------ -------
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
====== ===== ====== ======
A comparative summary of investment securities held to maturity for the periods
presented is as follows (in thousands):
Gross Gross
Held to maturity Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------ ----- ------ -------
December 31, 1999
U.S. Government and Agency Securities $ 1,000 $ 0 $ (28) $ 972
Mortgage-Backed Securities 17,025 0 (276) 16,749
------ ----- ------ -------
Total $18,025 $ 0 $ (304) $17,721
======= ===== ====== =======
At December 31, 1998, we had no investment securities classified as held to
maturity.
38
<PAGE>
The following tables sets forth as of December 31, 1999, the maturity
distribution of our investment portfolio.
MATURITY SCHEDULE OF INVESTMENT SECURITIES
<TABLE>
<CAPTION>
Within One After One But After Five But After Ten
(Dollars in thousands) Year Within Five Years Within Ten Years Years Total
--------------- --------------- ---------------- --------------- ---------------
Available for Sale Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield Value Yield
------ ---- ------ ---- ------- ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and
Agency Obligations $ 497 7.35% $6,282 6.89% $ 0 0.00% $ 0 0.00% $6,779 6.92%
Mortgage-Backed
Securities 666 6.34% 437 7.48% 546 7.48% 443 7.48% 2,092 6.16%
Other Securities 0 0.00% 0 0.00% 0 0.00% 786 6.38% 786 6.38%
------ ---- ------ ---- ------- ---- ------ ---- ------ ----
$1,163 6.77% $6,719 6.92% $ 546 7.48% $1,229 6.78% $9,657 6.92%
====== ====== ======= ====== ======
</TABLE>
Mortgage-backed securities are based on current prepayment speeds.
Other securities include Federal Reserve Bank Stock of $530 thousand and Federal
Home Loan Bank Stock of $242 thousand that the bank must own as a condition of
membership. The bank does not anticipate that it will discontinue its
memberships and, therefore, these stocks are classified as more than ten years.
Other securities also includes $14 thousand in Bankers' Bancorporation of
Florida stock.
MATURITY SCHEDULE OF INVESTMENT SECURITIES
<TABLE>
<CAPTION>
Within One After One But After Five But After Ten
(Dollars in thousands) Year Within Five Years Within Ten Years Years Total
--------------- --------------- ---------------- --------------- ---------------
Held to Maturity Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield Value Yield
------ ---- ------ ---- ------- ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and
Agency Obligations $ 0 0.00% $1,000 5.94% $ 0 0.00% $ 0 0.00% $ 1,000 5.94%
Mortgage-Backed
Securities 1,116 6.89% 4,466 6.89% 3,526 7.03% 7,917 7.38% 17,025 7.15%
------ ---- ------ ---- ------- ---- ------ ---- ------- ----
$1,116 6.89% $5,466 6.72% $ 3,526 7.03% $7,917 7.38% $18,025 7.08%
====== ====== ======= ====== =======
</TABLE>
Mortgage-backed securities are based on current prepayment speeds.
Proceeds from the sales of securities available for sale during the years ended
December 31, 1999 and 1998 were $0 and $2.9 million, respectively. Gross gains
of $3 thousand and gross losses of $42 thousand were realized on those sales in
1998. Securities pledged to secure public funds on deposit or for other purposes
required or permitted by law amounted to $21.9 million at December 31, 1999 and
no securities were pledged at December 31, 1998.
Other Assets. Accrued interest receivable increased $376 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 of purchases of
additional FHLB stock in compliance with the FHLB's membership requirements. Our
net investment in premises and equipment increased $728 thousand primarily as a
result of the build out and opening of our Boca Raton branch.
Deposits. Deposits are our primary source of funds. During 1999, our deposits
increased by $49.6 million, or 81.6%, to $110.3 million at December 31, 1999
from $60.7 million at December 31, 1998. During 1999, our deposit portfolio
shifted away from time deposits and toward transaction and money market
accounts. This shift reflected our increased emphasis on business accounts. At
December 31, 1999 and 1998, average demand deposits were $23.8 million and $13.0
million representing 27.7% and 28.8%, respectively, of average total deposits.
Average money market deposits were $26.1 million and $7.5 million representing
30.3% and 16.7% of average total
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deposits in 1999 and 1998, respectively. Average time deposits were $22.3
million and $15.2 million, representing 25.9% and 33.7%, of average total
deposits in 1999 and 1998, respectively. Our cost of deposits for 1999 was
2.69%, compared to 2.54% for the year ended December 31, 1998.
The following table sets forth the average amounts of various types of deposits
for each of the periods indicated:
December 31,
----------------------------------------
1999 1998
Average Average
Amount Yield Amount Yield
-------- ------- -------- -------
(dollars in thousands)
Non-Interest Bearing Demand $23,823 0.0% $13,028 0.0%
Interest-Bearing Demand 11,535 0.8% 7,102 1.2%
Money Market Deposits 26,107 4.1% 7,541 2.8%
Savings Deposits 2,300 1.8% 2,315 1.8%
Time Deposits 22,308 5.0% 15,247 5.3%
------- -------
Total $86,073 $45,233
======= =======
We do 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, 1999 (in thousands):
Time deposits ($100,000 and over)
Three months or less ............................ $ 3,814
Over three months through nine months ........... 7,201
Over nine months through twelve months .......... 2,577
Over twelve months .............................. 375
-------
Total ...................................... $13,967
=======
Federal Funds Purchased and Securities Sold Under Agreement to Repurchase. We
had federal funds purchased of $571 thousand at December 31, 1999 and no federal
funds purchased at December 31, 1998. Growth in the loan and investment
portfolios in excess of growth in the deposit portfolio resulted in our
purchasing these overnight funds. We entered into a $9.0 million repurchase
agreement during the fourth quarter of 1999. The funds received in the
repurchase transaction were used toward the purchase of a $10.1 million, 20
year, FHLMC mortgage-backed security. The borrowings under the repurchase
agreement mature as follows: $3.1 million in one year, $3.0 million in two years
and $2.9 million in three years. The cost of the one year borrowing is 6.04%,
the two year borrowing is at 6.25% and the three year borrowing is at 6.45%. At
each maturity date management will evaluate whether to replace the borrowings or
pay them off using company funds.
Other Liabilities. Accrued interest payable increased $156 thousand, or 269.0%,
to $214 thousand as a result of an increased volume and rates paid on interest
bearing liabilities including the repurchase agreement. Payables due to
shareholders of White Eagle Financial Group, Inc., the predecessor company from
which Admiralty Bancorp was acquired on January 22, 1998, were extinguished
during 1999.
Shareholders' Equity. Class B common stock increased $3.2 million. The change is
the result of two stock dividends, totaling $2.8 million, and the conversion of
45 thousand shares of Class A stock to Class B stock totaling $376 thousand. In
January 1999, the Board of Directors declared a stock dividend paid to the Class
A shareholders
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in Class B stock. In December 1999, the Board of Directors declared a stock
dividend payable to all Class A and Class B shareholders of record on December
31, 1999 payable in Class B common stock.
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. Our 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 of our major objectives when managing the rate sensitivity of our assets and
liabilities is to stabilize net interest income. The management of and authority
to assume interest rate risk is the responsibility of our Asset/Liability
Committee ("ALCO"), which is comprised of four Board members. The process to
review interest rate risk management is a regular part of our management. 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 our 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. We employ 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 31, 1999, we maintained a one year negative cumulative gap of $16.6
million or -11.83% of total assets.
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<TABLE>
<CAPTION>
Interest Sensitivity Gap at December 31, 1999
------------------------------------------------------------
3 Month 3 Through 1 Through Over
or Less 12 Months 3 Years 3 Years Total
-------- -------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Investment securities, at amortized cost (1) ..... $ 1,034 $ 1,556 $ 9,951 $ 15,424 $ 27,965
Loans ............................................ 57,900 5,488 5,909 31,560 100,857
-------- -------- -------- -------- --------
Total earning assets ............................. $ 58,934 $ 7,044 $ 15,860 $ 46,984 $128,822
Interest bearing transaction deposits ............ $ 12,791 $ 0 $ 0 $ 0 $ 12,791
Interest bearing non-transaction accounts ........ 34,093 0 0 0 34,093
Time deposits .................................... 7,818 24,167 1,925 244 34,154
Federal funds purchased .......................... 571 0 0 0 571
Securities sold under agreement
to repurchase ................................. 0 3,100 5,900 0 9,000
-------- -------- -------- -------- --------
Total interest bearing liabilities ............... $ 55,273 $ 27,267 $ 7,825 $ 244 $ 90,609
-------- -------- -------- -------- --------
Interest sensitivity gap ......................... $ 3,661 $(20,223) $ 8,035 $ 46,740 $ 38,213
======== ======== ======== ======== ========
Cumulative gap ................................... $ 3,661 $(16,562) $ (8,527) $ 38,213
======== ======== ======== ========
Cumulative gap to total assets ................... 2.62% -11.83% -6.09% 27.30%
</TABLE>
(1) Investment securities include Federal Reserve Bank stock and Federal Home
Loan Bank stock, totalling $772 thousand, which have been included in the
over three year column.
Liquidity. Our liquidity is a measure of our ability to fund loans, withdrawals
or maturities of deposits, and other cash outflows in a cost effective manner.
Our 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 our investment portfolio we generally have sought to obtain a safe yet
slightly higher yield than would have been available to us as a net seller of
overnight Federal funds while still maintaining liquidity. Through our
investment portfolio, we also attempt to manage our maturity gap by seeking
maturities of investments which coincide as closely as possible with maturities
of deposits.
As an additional source of liquidity we have a $4 million unsecured Federal
funds overnight borrowing line of credit and a secured line of credit with a
corresponding bank. At December 31, 1999 we had a balance of $571 thousand drawn
on the unsecured line of credit. Our unencumbered investment securities are the
collateral for the secured line of credit and serve to determine the total
amount available under the line. During 1999 we drew the unsecured Federal funds
line to $4 million several times and drew on the secured line up to $2.5 million
when loan growth outpaced deposit growth.
We entered into a $9.0 million repurchase agreement during October 1999. The
funds received in the repurchase transaction were used toward the purchase of a
$10.1 million, 20 year, FHLMC mortgage-backed security which is the security
sold under the agreement. The borrowings under the repurchase agreement mature
as follows: $3.1 million in one year, $3.0 million in two years and $2.9 million
in three years. The cost of the one year borrowing is 6.04%, the two year
borrowing is at 6.25% and the three year borrowing is at 6.45%. At each maturity
date management will evaluate whether to replace the borrowings or pay them off
using company funds.
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<PAGE>
Net cash provided by our operating activities was $1.3 million in 1999 compared
to a use of cash of $353 thousand in 1998 resulting primarily from the increase
in net income during the year.
Net cash used in investing activities was $72.6 million in 1999 compared to
$17.9 million in 1998. We used $17.9 million for net investment securities and
Federal Reserve Bank and Federal Home Loan Bank stock in 1999, while in 1998 it
received cash of $9.3 million from our securities portfolio. Additionally, we
used $53.6 million and $22.1 million for net loans and loan sales in 1999 and
1998, respectively. Also during 1998, we used $4.4 million for the purchase of
the Predecessor Company.
Net cash provided by our financing activities was $59.1 million in 1999 and
$27.8 million in 1998. The increase in 1999 was primarily due to a net increase
in deposits and $9 million received in a repurchase agreement. Net deposits
provided an increase $49.6 million in 1999 compared to $21.2 million in 1998.
Additionally, in 1998 we used $4.6 million to repay borrowings and received
$11.3 million in net proceeds on the sale of common stock.
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 December 31,
1999, the bank had a liquidity ratio of 20 percent which was adequate to meet
the statutory requirement. The primary source of the bank's liquidity is cash
and cash equivalents including federal funds sold - overnight loans to major
commercial banks. At December 31, 1999, cash and cash equivalents totaled $5.1
million. Funds not required to meet loan and deposit demand were invested
primarily in mortgage-backed, 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
$8.9 million at December 31, 1999. The unrealized loss on the securities held
available for sale at December 31, 1999 was $283 thousand.
Capital. A significant measure of the strength of a financial institution is its
capital base. Our 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 by at least 100 to 200 basis
points. Minimum leverage ratios for each bank are evaluated through the ongoing
regulatory examination process.
Our federal regulators impose capital standards on bank holding companies which
are substantially similar to those imposed upon the bank.
As of December 31, 1998, the most recent notification from our regulators
categorized the bank as well capitalized under the regulatory framework for
prompt corrective action. There are no conditions or events since that
notification that management believes have changed the bank's category.
Impact Of Inflation And Changing Prices. Our financial statements and the notes
to those financial statements, included in this prospectus, were prepared in
accordance with generally accepted accounting principles, which
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<PAGE>
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 our operations. Unlike most industrial
companies, nearly all of our assets and liabilities are monetary. As a result,
interest rates have a greater impact on our 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.
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"). The effective date of
Statement 133 was delayed by Statement 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB No.
133." In June 2000, FASB issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an Amendment of FASB Statement No.
133" (Statement 138). Statement 138 addresses a limited number of issues causing
implementation difficulties for numerous entities that apply Statement 133.
Statement 133 is now effective for all quarters of all fiscal years beginning
after June 15, 2000, with an early 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, 2001, and that Statement 133 will not have a significant
financial statement impact upon adoption.
THE COMPANY
General
Admiralty Bancorp, Inc. is a financial holding company under the Bank
Holding Company Act of 1956, as amended. We are the holding company for
Admiralty Bank, a Florida state chartered commercial bank and member of the
Federal Reserve System. The bank is a full service commercial bank, providing a
wide range of business and consumer financial services in our target
marketplace, which is comprised primarily of south and central Florida. The bank
operates through its main office located in Palm Beach Gardens, Florida and five
branch offices located in Boca Raton, Juno Beach, Jupiter, Melbourne and
Orlando, Florida.
We also own a fifty percent interest in Admiralty Insurance Services,
LLC. Admiralty Insurance Services, LLC. is a joint venture among the company and
USI Florida, a provider of insurance services in Florida, created to market a
full range of insurance products to customers of the bank and to the public.
The bank's deposits are insured by the Bank Insurance Fund of the
Federal Deposit Insurance Corporation 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 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.
It is our strategic plan to grow our franchise into the Orlando,
Florida area. We have recently opened a new full service branch of the bank in
Orlando, and have retained a team of veteran bankers from the Orlando area to
lead our expansion. The Orlando team includes Eddie Gerrits, Charlie Lowe, Don
Grace, Joanne Sweeney, Matt Ravenscroft, Doug Russell and Wally Stoney, and will
be headed by Mr. Randy Burden, who will become Managing Director of the bank for
the Orlando area. We also intend to appoint Messers Burden, Patrick Mathes and
Douglas Hooker to the boards of directors of the bank and the company. Messrs.
Burden, Mathes and Hooker are local businessmen in the Orlando area who have
extensive contacts, and have experience in the operation of financial
institutions in the Orlando area. These new directors and officers of the bank
previously worked together at Citrus Bank in Orlando, an independent community
bank, which grew by over $300 million in four years before it was acquired by a
larger bank. We expect Messrs. Burden, Mathes and Hooker to play an active role
in the development and management of our Orlando branch expansion.
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<PAGE>
Business of the Company
We conduct a traditional commercial banking business and offer services
including personal and business checking accounts and time deposits, money
market accounts and regular savings accounts. We structure our 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, Broward and
Brevard Counties, Florida trade area that we serve. We engage in a wide range of
lending activities and offer commercial, consumer, residential and
non-residential mortgage and construction loans.
On March 11, 2000, the company became a financial holding company under
the Gramm-Leach-Bliley Financial Modernization Act of 1999 (the "Modernization
Act"). See "Recent Regulatory Enactments and Proposals." This status permits us
to undertake financial activities which need not be closely related to banking,
such as insurance brokerage activities. Under the Modernization Act, our bank
subsidiary must remain "well capitalized" (i.e., have a leveraged capital ratio
of 5% or greater and a risk based capital ratio of 10% or greater) and well
managed, or we could be required to divest ourself of our non-banking
activities. In addition, we must maintain a rating of "satisfactory" or better
under the Community Reinvestment Act. In April, 2000, we entered into a joint
venture with USI Florida and created Admiralty Insurance Services, LLC.
Service Area
Our service area primarily consists of Palm Beach, Broward and Brevard
Counties, Florida, although we make loans throughout Florida. We operate through
our main office in Palm Beach Gardens, Florida and branch offices in Boca Raton,
Juno Beach, Jupiter, Melbourne and Orlando, Florida.
Our first branch office in Orlando, Florida, opened for business on
September 7, 2000. We have leased premises located at 2 South Orange Avenue,
Orlando. We intend to open 3 branches in the Orlando area over the next year,
and have begun investigating the location for our second Orlando branch.
Competition
We operate 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 our service area. Certain of these
institutions have significantly higher lending limits than we do and provide
services to their customers which we do not offer.
Management believes we are able to compete favorably with our
competitors because we provide responsive personalized services through
management's knowledge and awareness of our service area, customers and
business.
Employees
At June 30, 2000, we employed 66 full-time equivalent employees. None
of these employees is covered by a collective bargaining agreement and we
believe that our employee relations are good.
SUPERVISION AND REGULATION
45
<PAGE>
Financial holding companies, bank holding companies and banks are
extensively regulated under both federal and state law. These laws and
regulations are intended to protect depositors, not shareholders. 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.
Financial Holding Company Regulation
As a financial holding company registered under the Bank Holding
Company Act, the company is subject to the regulation and supervision applicable
to bank holding companies by the Board of Governors of the Federal Reserve
System. The company is required to file with the Federal Reserve Bank annual
reports and other information regarding its business operations and those of its
subsidiaries.
The Bank Holding Company Act requires, among other things, the prior
approval of the Federal Reserve Bank 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 Federal Reserve Bank 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 Federal Reserve Bank 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.
The Bank Holding Company Act has been substantially amended by the
Gramm-Leach-Bliley Financial Modernization Act of 1999. See "Recent Regulatory
Enactments and Proposals." The portion of the Gramm-Leach-Bliley Financial
Modernization Act effecting the powers of the company become effective March 11,
2000. Prior to the Gramm-Leach-Bliley Financial Modernization Act, the Bank
Holding Company Act prohibited 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 Federal Reserve to be so closely related to banking or
managing or controlling banks as to be properly incident thereto.
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
Federal Reserve Bank 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
Federal Reserve also has the authority under the Bank Holding Company Act to
require a bank holding company to terminate any activity or to relinquish
control of a non-bank subsidiary upon the Federal Reserve'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.
Recent Regulatory Enactments and Proposals.
On November 12, 1999, the President signed the Gramm-Leach-Bliley
Financial Modernization Act of 1999 into law. The Modernization Act among other
things:
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<PAGE>
o allows bank holding companies meeting management, capital and
Community Reinvestment Act standards to engage in a substantially
broader range of nonbanking activities than previously permissible,
including insurance underwriting and making merchant banking
investments in commercial and financial companies;
o allows insurers and other financial services companies to
acquire banks or bank holding companies;
o removes various restrictions that applied to bank holding
company ownership of securities firms and mutual fund advisory
companies; and
o established the overall regulatory structure applicable to
bank holding companies that also engage in insurance and securities
operations.
This part of the Modernization Act became effective on March 11, 2000. The
Modernization Act also modifies other current financial laws, including laws
related to financial privacy and community reinvestment. The new financial
privacy provisions will generally prohibit financial institutions, including us,
from disclosing nonpublic personal financial information to third parties unless
customers have the opportunity to "opt out" of the disclosure.
Capital Adequacy Guidelines for Financial Holding Companies and Bank Holding
Companies.
In January 1989, the Federal Reserve adopted risk-based capital
guidelines for bank holding companies, which are also applicable to financial
holding companies. The risk-based capital guidelines are designed to make
regulatory capital requirements more sensitive to differences in risk profile
among banks and bank holding companies, to account for off-balance sheet
exposure, and to minimize disincentives for holding liquid assets. Under these
guidelines, 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 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 shareholders' 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% risk 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.
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<PAGE>
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 Florida Department of Banking. As a
member of the Federal Reserve System, the bank is subject to regulation,
supervision and control of the Federal Reserve. 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, 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 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 2.12 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.
Description of Property
48
<PAGE>
The bank leases its main office in Palm Beach Gardens and its branch
offices in Boca Raton, Juno Beach, Jupiter, Melbourne and Orlando, Florida. In
addition, the bank maintains an operations center in Lake Worth, Florida. The
bank presently sub-lets office property in North Palm Beach, Florida, where it
formerly maintained its operations center. The bank's lease on this property
expires July 31, 2001. The following table sets forth certain information
regarding these leases:
Location Square Feet Monthly Rental Term
--------------------------------------------------------------------------------
Boca Raton 5,000 $ 12,643 November 30, 2008
Juno Beach 2,508 4,348 December 31, 2002
Jupiter 4,067 8,487 August 31, 2008
Lake Worth 5,600 4,900 March 31, 2005
Melbourne 4,845 5,822 March 12, 2001
North Palm Beach 1,800 1,837 July 31, 2001
Orlando(1) 6,500 14,165 January 31, 2011
Palm Beach Gardens 7,930 16,851 October31, 2003
(1) The square footage and monthly rental are estimated. We are awaiting a final
measurement of the premises. We have the right to terminate the lease at our
option if we do not raise a minimum of $7 million in this offering.
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
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.
MANAGEMENT
The direction and control of the company is vested in the board of directors.
The term of each director is three years. Directors are divided into three
classes and elections are staggered so that the term for one class of directors
expires each year. The following table sets forth information with respect to
the directors and certain executive officers, including their ages, a brief
description of their recent business experience, certain directorships held by
each, the year in which each became a director of the company and the year in
which their terms as director of the company expire.
Current Board of Directors and Executive Officers
<TABLE>
<CAPTION>
Five Years Professional Term of Office
Name, Age, Position Experience Since - Expires
------------------------------------- ----------------------------------------------------- ------------------
<S> <C> <C> <C>
Sidney Hofing, 66, Director President of the Eagle Group, Inc. 1998 2001
(Real Estate Development)
Peter L. A. Pantages, 45, Director President of McCay Real Estate 1998 2001
Group (Real Estate Development)
</TABLE>
49
<PAGE>
<TABLE>
<S> <C> <C> <C>
Ward Kellogg, 41, President, Chief President and Chief Executive Officer of the 1999 2001
Executive Officer and Director Bank and the Company; formerly, Executive
Vice President and Chief Credit Officer of 1st
United Bank, Boca Raton, Florida
Joseph Veccia, 43, Director Partner, VPC Development (Real Estate 1999 2001
Development) and past Chairman of the Greater
Boca Raton Chamber of Commerce
William Berger, 56, Director Senior Partner, Greenspoon, Marder, Hirschfeld 2000 2002
Rafkin, Ross & Berger, PA.
David B. Dickenson, 58, Director Senior Partner, Dickenson, Murdoch, 1998 2002
Rex and Sloan (Attorneys)
Thomas L. Gray, 55, Director Chairman of the Board of Grand Bancorp, Inc. 1998 2002
and Grand Bank, N.A.; Formerly President and
CEO of Carnegie Bancorp
Leslie E. Goodman, 57, Director Executive Officer of the Eagle Group, Inc. 1998 2002
(Real Estate Development)
George Zoffinger, 52, Director President and CEO of Constellation Capital Corp.; 1998 2002
Director of MFN Financial Corp.; Director of Atlas
Steel Corp.; Director of Commercial Federal Corp.;
Director of N.J. Resourcing
Bruce A. Mahon, 70, Chairman Chairman of the Board of the Company and the 1998 2003
of the Board Bank; Formerly Chairman of the Board of
Carnegie Bancorp, Inc. and Carnegie Bank
Craig Spencer, 39, Director President and CEO of The Arden Group, Inc. 1998 2003
(Real Estate Development)
Richard Rosa, 49, Director Chief Financial Officer and Director of Grand 1998 2003
Bancorp, Inc. and Grand Bank, N.A.; Formerly
Chief Financial Officer of Carnegie
Bancorp and Carnegie Bank, N.A.
Mark Wolters, 40, Director President of Grand Bancorp, Inc. and Grand 1998 2003
Bank, N.A.; Director of Grand Bank, N.A.;
Formerly Executive Vice President of
Carnegie Bancorp
Thomas J. Hanford, 61, Director, Private Investor 1998 2003
William Burke, 41, Chief Operating Officer of the bank; 1998 N/A
Chief Operating Officer Formerly Senior Vice President and Senior
Lending Officer of 1st United Bank
Edward Gerrits, 42, Executive Vice President of the bank; 2000 N/A
</TABLE>
50
<PAGE>
<TABLE>
<S> <C> <C> <C>
Executive Vice President formerly Director and Executive Vice
President Citrus Bank, formerly President,
Gerrits-Citrus, Inc., Real Estate Development &
Sales
</TABLE>
51
<PAGE>
Stock Ownership of Management and Controlling Shareholders
The following tables set forth, as of July 28, 2000, certain
information concerning the ownership of the company's common stock by (i) each
person who is known by the company to own beneficially more than five percent
(5%) of the issued and outstanding common stock, (ii) each director of the
company and each director of the bank, (iii) each named executive officer and
(iv) all directors and officers of the company as a group. Since the Class A
Stock and the Class B Stock vote together as a single class, the following table
presents the classes together.
Number of Shares
of Class A
Name and Position and Class B Percent
With Company Beneficially Owned (1) of Class
------------ ---------------------- --------
Bruce A. Mahon, 70(2) 161,941 5.81
Chairman of the Board
Craig Spencer, 39 157,888 5.67
Director(3)(4)
Richard Rosa, 49, Director(5) 66,515 2.39
Mark Wolters, 40, Director (6) 43,841 1.57
Sidney Hofing, 66, Director (7) 179,648 6.45
Peter L. A. Pantages, 45, Director (8) 99,077 3.56
Thomas L. Gray, 55, Director (9) 113,219 4.06
Leslie E. Goodman, 57, Director (10) 110,237 3.96
George Zoffinger, 52, Director (11) 60,371 2.17
Ward Kellogg, 41, President (12) 69,618 2.50
David Dickenson, 58, Director (13) 18,372 *
Thomas Hanford, 61, Director (14) 68,041 2.44
Joseph Veccia, 43, Director (15) 39,519 1.42
William Berger, 56, Director 1,129 *
Directors and Executive Officers of
the Company as a Group (18 persons) 1,258,102 45.16
* Less than 1%
------------------------
(1) The address of all persons is c/o Admiralty Bancorp, Inc., 4400 PGA
Boulevard, Palm Beach Gardens, Florida 33410.
(2) Includes 45,165 shares of Class B stock purchasable upon the exercise
of stock options and 30,345 shares of Class B stock purchasable upon
the exercise of warrants. Also includes 4,000 shares of Class A stock,
8,162 shares of Class B stock all held by members of Mr. Mahon's
family.
(3) Includes 21,312 shares of Class B stock purchasable upon the exercise
of stock options.
52
<PAGE>
(4) Includes 80,120 shares of Class B stock held jointly with Mr. Spencer's
wife, and 56,456 shares of Class B stock purchasable upon the exercise
of warrants held jointly with Mr. Spencer's wife.
(5) Includes 21,312 shares of Class B stock purchasable upon the exercise
of stock options and 16,937 shares of Class B stock purchasable upon
the exercise of warrants. Also includes 5,000 shares of Class A stock
and 2,258 shares of Class B stock and 5,646 shares of Class B stock
purchasable upon the exercise of warrants held by Mr. Rosa's
self-directed IRA.
(6) Includes 21,312 shares of Class B stock purchasable upon the exercise
of stock options and 16,937 shares of Class B stock purchasable upon
the exercise of warrants. Also includes 5,592 shares of Class B stock
held by Mr. Wolters as custodian for his children.
(7) Includes 50,810 shares of Class B stock purchasable upon the exercise
of warrants, and 21,312 shares of Class B stock purchasable upon the
exercise of stock options. Of the reported shares, 28,980 shares and
22,582 Warrants are held by a limited partnership of which Mr. Hofing
is a member. Also includes 3,000 shares of Class B stock held by
members of Mr. Hofing's family.
(8) Includes 21,312 shares of Class B stock purchasable upon the exercise
of stock options and 30,910 shares of Class B stock purchasable upon
the exercise of warrants. Also includes 2,728 shares of Class B stock
and 2,258 shares of Class B stock purchasable upon the exercise of
warrants held in trust. Also includes 15,201 shares of Class B stock
held by members of Mr. Pantages' family.
(9) Includes 21,312 shares of Class B stock purchasable upon the exercise
of stock options, 19,195 shares purchasable upon the exercise of
warrants and 1,915 shares of Class B stock held in Mr. Gray's self
directed IRA.
(10) Includes 21,312 shares of Class B stock purchasable upon the exercise
of stock options and 45,164 shares of Class B stock purchasable upon
the exercise of warrants.
(11) Includes 21,312 shares of Class B stock purchasable upon the exercise
of stock options and 16,937 shares of Class B stock purchasable upon
the exercise of warrants. Also includes 6,823 shares and warrants to
purchase 5,646 shares of Class B stock held by a limited partnership of
which Mr. Zoffinger is a member.
(12) Includes 51,939 shares of Class B stock purchasable upon the exercise
of stock options.
(13) Includes 5,646 shares of Class B stock purchasable upon the exercise of
stock options and 3,726 shares of Class B stock held by Mr. Dickenson's
wife.
(14) Includes shares of Class B stock held as follows: 4,618 shares by an
investment partnership of which Mr. Hanford is a member and 5,646
shares by an investment corporation in which Mr. Hanford has a
controlling interest and 6,516 held by Mr. Hanford's family.
(15) Includes 5,646 shares of Class B stock purchasable upon the exercise of
stock options. Also includes 11,291 shares of Class B stock held by Mr.
Veccia's IRA. Also includes 22,582 shares of Class B stock held by a
limited partnership in which members of Mr. Veccia's immediate family
has a membership interest.
Executive Compensation
The following table sets forth a summary for the last three fiscal
years of the cash and non-cash compensation awarded to, earned by, or paid to,
the Chief Executive Officer of the company and each of the four most highly
compensated executive officers of the company or the bank whose individual
remuneration exceeded $100,000 for the last fiscal year.
53
<PAGE>
SUMMARY COMPENSATION TABLE
Cash and Cash Equivalent Forms of Remuneration
<TABLE>
<CAPTION>
Long-Term
Compensation
----------------
Awards
----------------
Annual Compensation Securities
-------------------- Other Annual Underlying
Name and Principal Position Year Salary($) Bonus($) Compansation($) Options/SARs(#)
--------------------------- ---- --------- -------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Ward Kellogg 1999 $125,000 $17,659 (3) 18,066
1998 $ 62,500(1) -0- (3) 33,873
William Burke 1999 $100,000 $11,796 (3) 7,904
Chief Operating Officer 1998 $ 50,000(2) $25,000 (3) 11,291
</TABLE>
------------
(1) Mr. Kellogg was hired as President on July 1, 1998 at an annual salary of
$125,000.
(2) Mr. Burke was hired on July 2, 1998 at an annual salary of $100,000.
(3) The company believes the value of these perquisites and other benefits to be
less than 10% of the salary and bonus reported in the table above.
Employment Agreements
Mr. Kellogg serves as President and Chief Executive Officer of the
company and the bank pursuant to an employment agreement dated July 1, 1998.
Pursuant to this agreement, Mr. Kellogg initially received an annual salary of
$125,000, subject to annual increases. In addition, Mr. Kellogg may receive a
cash bonus based upon the company's return on average assets. Mr. Kellogg's
employment agreement has a term of 3 1/2 years. If Mr. Kellogg is terminated
other than for cause (as defined in the agreement), he is to receive his then
current base compensation for the remaining term of the agreement, or 24-months,
whichever is longer. If Mr. Kellogg's employment is terminated following a
change in control (as defined in the agreement) or if he voluntarily terminates
his employment following a change in control under certain circumstances, Mr.
Kellogg will be entitled to receive his then current based compensation for a
period of 24-months.
54
<PAGE>
Management Option Plan
As disclosed above under the caption "Executive Compensation", the
company maintains the Management Option Plan. Members of management of the
company are permitted to participate in the Management Option Plan. The
following table lists grants of options under the Management Option Plan to the
executive officers named in the "Summary Compensation Table" above for 1999 and
contains certain information about the potential value of those options based
upon certain assumptions as to the appreciation of the company's Class B Stock
over the life of the option.
EXECUTIVE COMPENSATION
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
----------------------------------------------------------------------------------------
Number of % of Total
Securities Options/SARs Present
Underlying Granted to Exercise or Value of
Options/SARs Employees in Base Price Expiration Grant on
Name Granted Fiscal Year ($/Share) Date Grant Date ($)(1)
------------ ------------ ------------ ----------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
Ward Kellogg 5,646 7.3% 9.30 1/31/09 $25,576
12,420 16.1% 7.59 10/21/09 $53,033
William Burke 7,904 10.2% 7.59 10/21/09 $33,750
</TABLE>
(1) The present value has been estimated using the Black-Scholes option pricing
model using the following assumptions: divided yield of -0-%; expected
volatility of 60% and a risk free interest rate of 6.04%.
The following table sets forth information concerning the fiscal
year-end value of unexercised options held by the executive officers of the
company named in the table above. No stock options were exercised by such
executive officers during 1999 or during the first two quarters of 2000.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL
YEAR AND FY-END OPTION
55
<PAGE>
<TABLE>
<CAPTION>
Number of Securities
Shares Underlying Unexercised Value of Unexercised
Acquired on Value Options/SARs at FY-End(#) In-the-Money Options/
Name Exercise (#) Realized Exercisable/Unexercisable SARs at FT-End
------------ ------------ -------- ------------------------- ---------------------
<S> <C> <C> <C> <C>
Ward Kellogg 0 $0 39,519/12,420 $ (1)
William Burke 0 $0 19,195/0 $ (1)
</TABLE>
(1) These options were not in the money at year end.
DESCRIPTION OF THE COMPANY'S SECURITIES
Capital Stock
General. Admiralty Bancorp, Inc. is incorporated under the laws of the
State of Delaware. Therefore, the rights of holders of our stock will be
governed by the Delaware General Corporation Law and our Certificate of
Incorporation. Our Certificate of Incorporation provides for an authorized
capitalization of 7,000,000 shares of capital stock, consisting of 5,000,000
shares of common stock, in two classes, and 2,000,000 shares of preferred stock,
to be issued in series as determined by the Board of Directors.
Class B Stock
As of June 30, 2000, there were 2,329,561 shares of Class B stock
outstanding.
Dividend Rights. The holders of our Class B common stock will be
entitled to dividends, when, as, and if declared by our Board of Directors,
subject to the restrictions imposed by Delaware law. The only statutory
limitation applicable to the company is that dividends must be paid out of
surplus or, if there is no surplus, out of net profits for the fiscal year in
which the dividend is declared or out of the preceding year's net profit.
However, as a practical matter, unless we expand our activities, our primary
source of income will be the bank.
Voting Rights. Except as discussed under "Anti-Takeover Provisions",
each share of our Class B stock is entitled to one vote per share. Cumulative
voting is not permitted. The Class B stock will vote with the Class A stock as a
single class on all matters on which a vote is required or permitted. Under our
Certificate of Incorporation, certain matters require an 80% stockholder vote.
See "Anti-Takeover Provisions".
Preemptive Rights. Under Delaware law, shareholders may have preemptive
rights if these rights are provided in the certificate of incorporation. Our
Certificate of Incorporation does not provide for preemptive rights.
Appraisal Rights. Under Delaware law, dissenting shareholders of the
company have appraisal rights (subject to the broad exception set forth in the
next sentence) upon certain mergers or consolidations. Appraisal rights are not
available in any such transaction if shares of the company are listed for
trading on a national securities exchange or designated as a national market
system security on the NASDAQ system or held of record by more than 2,000
holders.
56
<PAGE>
Directors. Under Delaware law and our Certificate of Incorporation, the
company is to have a minimum of 3 directors and a maximum of 25, with the number
of directors at any given time to be fixed by the Board of Directors. We
currently have fourteen (14) members of our Board of Directors.
Class A Stock
Our Class A stock has the same basic rights as the Class B stock, with
the exceptions listed below. Therefore, the voting rights, preemptive rights,
and appraisal rights of the Class A stock are the same as for the Class B stock.
As of June 30, 2000, there were 454,250 shares of the Class A stock outstanding.
The following is a discussion of the additional rights of the Class A stock:
Dividends. The holders of the Class A stock are entitled to receive
annual Class A stock dividends equal to 10% of the stated value of a share of
Class A stock, $10.00 per share. The dividend may be paid either in cash or in
market value of Class B stock, at the discretion of the Board of Directors.
Dividends may be paid semi-annually or otherwise as the Board may determine, and
the form of the dividend will be determined before each payment period. No
dividends may be paid on the Class B stock if the company has failed to pay the
most recently required dividend payment on the Class A stock, in cash or in
shares of Class B stock. After receipt of the required 10% dividend, the Class A
stock is not legally entitled to share in any dividends paid upon the Class B
stock, although the Board of Directors may permit such participation.
Conversion Rights. Each share of Class A stock is convertible, at the
option of the holder, into 1.1291 shares of the company's Class B stock. The
conversion rate is subject to adjustment in the manner provided in the company's
Certificate of Incorporation in the event of payment of certain stock dividends,
stock split-ups or combinations or other similar recapitalizations. No
adjustment in the conversion rate is required unless it would result in at least
a 1% increase or decrease in that rate; however, any adjustment not made is
carried forward.
In addition to the voluntary conversion rights described above, the
company will have the right to require a holder of Class A stock to convert the
Class A stock into Class B stock, at the rate of 1.1291 shares of Class B stock
for each share of Class A stock held, in the event that the Class B stock trades
at $13.28 or higher and does not trade below $13.28 for the next 20 consecutive
trading days. Upon the end of such 20 consecutive trading day period, the
company may issue a notice of mandatory conversion requiring the conversion of
shares of the Class A stock to Class B stock within 20 days.
Voting Rights. The holders of Class A stock have the same voting rights
as the Class B stock. Both the Class A stock and the Class B stock will vote
together as a single class on all matters.
Liquidation Rights. The holders of Class A stock are entitled to share
ratably with the holders of the Class B stock in the available proceeds of any
liquidation or dissolution of the company. The Class A stock has no preference
upon a liquidation of the company.
Preferred Stock
Our certificate of incorporation authorizes the company to issue up to
2,000,000 shares of preferred stock, in one or more series, with such
designations and such relative voting, dividend, liquidation, conversion and
other rights, preferences and limitations as shall be set forth in resolutions
providing for the issuance thereof adopted by the Board of Directors. No shares
of preferred stock have been issued.
Warrants
The company currently has issued and outstanding stock purchase
warrants which, in the aggregate, entitle the holders of those warrants to
purchase 1,089,594 shares of Class B stock. Each warrant entitles the holder to
purchase one share of Class B stock at a purchase price of $9.74, as adjusted
for Class B stock dividends during a period commencing on January 22, 1999 and
expiring on January 21, 2002 although the expiration date of the
57
<PAGE>
warrants is subject to acceleration as provided below. Any warrant not exercised
on or before the expiration date shall expire and will not thereafter be
exercisable. Warrant holders do not have the rights and privileges of holders of
common stock.
The company has the right to accelerate the expiration date of the
warrants in the event that (i) the Class B stock is traded on a nationally
recognized securities exchange or the NASDAQ National or SmallCap Market, and
(ii) the Class B stock has traded at $13.28 per share or above and has not
traded below $13.28 per share for 20 consecutive trading days. In the event
these conditions are met, the company may, but is not obligated to, issue a
notice of acceleration to each warrant holder. Upon issuance of the notice, the
warrants will expire 30 days after the date of the notice. To the extent the
company issues the notice of acceleration, it will be required to redeem each
outstanding but unexercised warrant for a price of $0.09 per warrant, as
adjusted upon the expiration of the warrants.
ANTI-TAKEOVER PROVISIONS
Bank Regulatory Requirements. Under the Federal Change in Bank Control Act (the
"Control Act"), a 60 day prior written notice must be submitted to the FRB if
any person, or any group acting in concert, seeks to acquire 10% or more of any
class of outstanding voting securities of a bank holding company, unless the
Federal Reserve Bank ("FRB") determines that the acquisition will not result in
a change of control. Under the Control Act, the FRB has 60 days within which to
act on such notice taking into consideration certain factors, including the
financial and managerial resources of the acquirer, the convenience and needs of
the community served by the bank holding company and its subsidiary banks and
the antitrust effects of the acquisition. Under the Bank Holding Company Act of
1956, as amended ("BHCA"), a company is generally required to obtain prior
approval of the FRB before it may obtain control of a bank holding company.
Under the BHCA, control is generally described to mean the beneficial ownership
of 25% or more of the outstanding voting securities of a company, although a
presumption of control may exist if a party beneficially owns 10% or more of the
outstanding voting securities of a company and certain other circumstances are
present.
Delaware Law. Certain provisions of Delaware law are designed to provide
Delaware corporations with additional protection against hostile takeovers. The
takeover statute, which is codified in Section 203 of the Delaware General
Corporate Law ("Section 203"), is intended to discourage certain takeover
practices by impeding the ability of a hostile acquirer to engage in certain
transactions with the target company.
In general, Section 203 provides that a "Person" (as defined in Section
203) who owns 15% or more of the outstanding voting stock of a Delaware
corporation (an "Interested Stockholder") may not consummate a merger or other
business combination transaction with the corporation at any time during the
three-year period following the date such "Person" came to own 15% or more of
the outstanding voting stock. The term "business combination" is defined broadly
to cover a wide range of corporate transactions including mergers, sales of
assets, issuances of stock, transactions with subsidiaries and the receipt of
disproportionate financial benefits.
The statute exempts the following transactions from the requirements of
Section 203: (i) any business combination if, prior to the date a person became
an Interested Stockholder, the Board of Directors approved either the business
combination or the transaction which resulted in the stockholder becoming an
Interested Stockholder; (ii) any business combination involving a person who
acquired at least 85% of the outstanding voting stock in the transaction in
which he became an Interested Stockholder, with the number of shares outstanding
for this purpose calculated without regard to those shares owned by the
corporation's directors who are also officers and by certain employee stock
plans; (iii) any business combination with an Interested Stockholder that is
approved by the Board of Directors and by a two-thirds vote of the outstanding
voting stock not owned by the Interested Stockholder; and (iv) certain business
combinations that are proposed after the corporation had received other
acquisition proposals and which are approved or not opposed by a majority of
certain continuing members of the Board of Directors. A corporation may exempt
itself from the requirements of the statute by adopting an amendment to its
Certificate of
58
<PAGE>
Incorporation or Bylaws electing not to be governed by Section 203. At the
present time, the Board of Directors does not intend to propose any such
amendment.
Classified Board of Directors. Pursuant to the company's Certificate of
Incorporation, the Board of Directors is divided into three classes, each of
which contains approximately one-third of the whole number of the members of the
board. Each class serves a staggered term, with approximately one-third of the
total number of directors being elected each year. The Certificate of
Incorporation and Bylaws provide that the size of the board shall be determined
by a majority of the directors. The Certificate of Incorporation and the Bylaws
provide that any vacancy occurring in the Board, including a vacancy created by
an increase in the number of directors or resulting from death, resignation,
retirement, disqualification, removal from office or other cause, shall be
filled for the remainder of the unexpired term exclusively by a majority vote of
the directors then in office. The classified Board is intended to provide for
continuity of the Board of Directors and to make it more difficult and time
consuming for a stockholder group to use its voting power to gain control of the
Board of Directors without the consent of the incumbent Board of Directors of
the company.
Stockholder Vote Required to Approve Business Combinations. The Certificate of
Incorporation requires the approval of the holders of at least 80% of the
company's outstanding shares of voting stock to approve certain "Business
Combinations," and related transactions. Under Delaware law, absent this
provision, Business Combinations, including mergers, consolidations and sales of
all or substantially all of the assets of a corporation must, subject to certain
exceptions, be approved by the vote of the holders of only a majority of the
outstanding shares of Common Stock of the company and any other affected class
of stock. Under the Certificate of Incorporation, at least 80% approval of
shareholders is required in connection with any Business Combination except in
cases where the proposed transaction has been approved in advance by a majority
of the company's Board of Directors. This provisions of the Certificate of
Incorporation applies to any "Business Combination," which is defined to include
(i) any merger or consolidation of the company or any of its subsidiaries with
or into any other person; (ii) any sale, lease, exchange, mortgage, pledge,
transfer, or other disposition to or with any other person of substantially all
of the assets of the company or combined assets of the company and its
subsidiary, or (iii) any offer for the exchange of securities of another entry
for the securities of the company.
Evaluation of Offers. The Certificate of Incorporation further provides that the
Board of Directors, when evaluating any offer of another "Person", to (i) make a
tender or exchange offer for any equity security of the company, (ii) merge or
consolidate the company with another corporation or entity, or (iii) purchase or
otherwise acquire all or substantially all of the properties and assets of the
company, may, in connection with the exercise of its judgment in determining
what is in the best interest of the company, the bank and the shareholders of
the company, give due consideration (to the extent permitted by law) to all
relevant factors, including, without limitation, the social and economic effects
of acceptance of such offer on the company's customers and the bank's present
and future account holders, borrowers and employees; on the communities in which
the company and the bank operate or are located; and on the ability of the
company to fulfill its corporate objectives as a bank holding company and on the
ability of the bank to fulfill the objectives of a state chartered stock bank
under applicable statutes and regulations. By having these standards in the
Certificate of Incorporation of the company, the Board of Directors may be in a
stronger position to oppose such a transaction if the board concludes that the
transaction would not be in the best interest of the company, even if the price
offered is significantly greater than the then market price of any equity
security of the company.
Amendment of Certificate of Incorporation and Bylaws. Amendments to the
Certificate of Incorporation must be approved by a majority vote of the
company's Board of Directors and also by a majority of the outstanding shares of
its voting stock, provided, however, that an affirmative vote of at least 80% of
the outstanding voting stock entitled to vote (after giving effect to the
provision limiting voting rights) is required to amend or repeal certain
provisions of the Certificate of Incorporation, including the provision limiting
voting rights and the provisions
59
<PAGE>
relating to approval of certain business combinations.
Certain Bylaw Provisions The Bylaws also require a stockholder who intends to
nominate a candidate for election to the Board of Directors to give at least 90
days advance notice in writing to the Secretary of the company. The notice
provision requires a stockholder wishing to nominate any person or election as a
director provide the company with certain information concerning the nominee and
the proposing stockholder.
TRANSFER AGENT
We have recently switched from one transfer agent to another. Our
transfer agent until September 10, 2000 was Stocktrans, Inc., 7 East Lancaster
Avenue, Ardmore, Pennsylvania. As of September 11, 2000 our transfer agent is
National City Bank, Shareholder Services, P. O. Box 92301, Cleveland, Ohio
44193-0900.
LEGAL MATTERS
The validity of the shares of the Class B common stock offered by this
prospectus will be passed upon for us by Jamieson, Moore, Peskin & Spicer, P.C.,
Morristown, New Jersey.
EXPERTS
Our financial statements as of December 31, 1998 and for year then
ended included in this prospectus or in the registration statement, of which
this prospectus forms a part, have been audited by Grant Thornton LLP,
independent certified public accountants. Grant Thornton LLP's report appears in
this prospectus and elsewhere in this registration statement. The financial
statements as of December 31, 1998 and for year then ended are included in
reliance upon the report of Grant Thornton LLP, given upon the authority of that
firm as experts in accounting and auditing.
Our financial statements as of December 31, 1999 and for year then
ended included in this prospectus or in the registration statement, of which
this prospectus forms a part, have been audited by KPMG LLP, independent
certified public accountants. KPMG LLP's report appears in this prospectus and
elsewhere in this registration statement. The financial statements as of
December 31, 1999 and for year then ended are included in reliance upon the
report of KPMG LLP, given upon the authority of that firm as experts in
accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
The company has filed with the Securities and Exchange Commission a
Registration Statement on Form SB-2 under the Securities Exchange Act of 1934,
as amended, with respect to the shares of common stock offered hereby. This
prospectus, which constitutes a part of the Registration Statement, omits
certain of the information contained in the Registration Statement and the
exhibits and schedules thereto on file with the Securities and Exchange
Commission pursuant to the Securities Exchange Act of 1934, as amended, and the
rules and regulations of the Securities and Exchange Commission promulgated
thereunder. For further information with respect to the company and the shares
of common stock, reference is made to the Registration Statement and the
exhibits and schedules attached hereto. The Registration Statement, including
exhibits thereto, may be inspected and copied at the public reference facilities
maintained by the Securities and Exchange Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and the Securities and
Exchange Commission's Regional Offices at 7 World Trade Center, Suite 1300, New
York, New York 10048, and Citicorp Center, 500 West Madison
60
<PAGE>
Street, Suite 1400, Chicago, Illinois 60661, and copies may be obtained at
prescribed rates from the Public Reference Section of the Commission at its
principal office in Washington, D.C. The Securities and Exchange Commission also
maintains a Website that contains copies of such material. The address of the
Securities and Exchange Commission's Website is (http://www.sec.gov). Statements
contained in this prospectus as to the contents of any contract or other
document referred to are not necessarily complete and in each instance reference
is made to the copy of such contract or other document filed as an exhibit to
the Registration Statement, each such statement being qualified in its entirety
by such reference.
The company is subject to the informational requirements of Section
12(g) of the Securities Exchange Act of 1934, as amended, and in accordance
therewith, will file reports and other information with the Securities and
Exchange Commission. Such reports and other information can be inspected without
charge and copied at prescribed rates at the public reference facilities
maintained by the Securities and Exchange Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its regional
offices located at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York
10048. Copies of such material can also be obtained at prescribed rates from the
Securities and Exchange Commission's Public Reference Section, 450 Fifth Street,
N.W., Washington, D.C. 20549 and its public reference facilities in Chicago,
Illinois and New York, New York.
61
<PAGE>
TABLE OF CONTENTS
Page
----
Condensed Consolidated Balance Sheets -
At June 30, 2000 (unaudited) and at December 31, 1999........... F-2
Condensed Consolidated Statements of Operations (unaudited) -
Three months ended June 30, 2000 and 1999....................... F-3
Condensed Consolidated Statements of Operations (unaudited) -
Six months ended June 30, 2000 and 1999......................... F-4
Condensed Consolidated Statements of Cash Flows (unaudited) -
Six months ended June 30, 2000 and 1999......................... F-5
Notes to Consolidated Financial Statement......................... F-6
Independent Auditors' Reports..................................... F-11
Consolidated Balance Sheets
At December 31, 1999 and 1998................................... F-13
Consolidated Statements of Operations
Years ended December 31, 1999 and 1998 and
the Period January 1, 1998 to January 22, 1998.................. F-14
Consolidated Statement of Changes in Stockholders' Equity
At December 31, 1999, 1998 and 1997............................. F-15
Consolidated Statements of Cash Flows
Years ended December 31, 1999 and 1998.......................... F-16
Notes to Consolidated Financial Statements........................ F-17
F-1
<PAGE>
Admiralty Bancorp, Inc. and subsidiary
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents
Cash and due from banks ..................................... $ 5,637 $ 5,115
Interest bearing due from banks ............................. 205 21
Federal funds sold .......................................... 4,161 --
--------- ---------
Total cash and cash equivalents ....................... 10,003 5,136
Investment securities available for sale,
at fair market value ........................................ 12,876 8,885
Investment securities held to maturity, at cost
(fair market value of $21,998 and $17,721 at
June 30, 2000 and December 31, 1999, respectively) .......... 22,398 18,025
Loans, net .......................................................... 137,056 99,840
Accrued interest receivable ......................................... 879 642
Federal Reserve Bank and FHLB stock ................................. 1,277 772
Premises and equipment, net ......................................... 2,482 1,841
Goodwill, net ....................................................... 3,463 3,540
Other assets ........................................................ 1,797 1,281
--------- ---------
Total assets .......................................... $ 192,231 $ 139,962
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits ............................................................ $ 153,435 $ 110,273
Federal funds purchased ............................................. -- 571
Securities sold under agreement to repurchase ....................... 9,000 9,000
Advances from FHLB .................................................. 9,000 --
Accrued interest payable ............................................ 331 214
Other liabilities ................................................... 432 330
--------- ---------
Total liabilities ........................................... 172,198 120,388
--------- ---------
SHAREHOLDERS' 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, 454,250 and 844,254 shares issued and outstanding
at June 30, 1999 and December 31, 1999, respectively ........ 3,828 7,114
Common stock, Class B, no par value, 4,000,000 shares authorized,
2,329,561 and 1,889,205 shares issued and outstanding
at June 30, 2000 and December 31, 1999, respectively ........ 19,359 16,073
Accumulated deficit ................................................. (2,999) (3,437)
Accumulated other comprehensive loss, net ........................... (155) (176)
--------- ---------
Total shareholders' equity .................................. 20,033 19,574
--------- ---------
Total liabilities and shareholders' equity .................. $ 192,231 $ 139,962
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
Admiralty Bancorp, Inc. and subsidiary
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per-share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
June 30, June 30,
2000 1999
---------- ----------
<S> <C> <C>
Interest and dividend income
Loans ...................................... $ 2,936 $ 1,412
Mortgage-backed securities ................. 519 54
Other debt securities ...................... 107 107
Federal funds sold ......................... 82 174
Dividends from FRB and FHLB stock .......... 22 12
Other ...................................... 1 --
---------- ----------
Total interest and dividend income ... 3,667 1,759
---------- ----------
Interest expense
Deposits ................................... 1,272 516
Federal funds purchased .................... 10 --
Securities sold under repurchase agreement . 142 --
Advances from FHLB ......................... 150 --
---------- ----------
Total interest expense ............... 1,574 516
---------- ----------
Net interest and dividend income ..... 2,093 1,243
Provision for loan losses .......................... 244 57
---------- ----------
Net interest and dividend income after
provision for loan losses ............ 1,849 1,186
---------- ----------
Non-interest income
Service charges and fees ................... 221 210
Gain on sale of loans ...................... 9 --
Gain on sale of other real estate .......... 17 4
Other income ............................... 1 23
---------- ----------
Total non-interest income ............ 248 237
---------- ----------
Non-interest expense
Salaries and employee benefits ............. 742 544
Occupancy .................................. 267 204
Furniture and equipment .................... 97 86
Amortization of goodwill ................... 39 40
Other expense .............................. 561 447
---------- ----------
Total non-interest expense ........... 1,706 1,321
---------- ----------
Income before income tax expense ..... 391 102
Income tax expense ................................. 166 75
---------- ----------
Net income ................................. $ 225 $ 27
========== ==========
Per share data
Net income per share - basic and diluted ......... $ 0.08 $ 0.01
========== ==========
Weighted average shares outstanding .............. 2,842,452 2,848,214
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
Admiralty Bancorp, Inc. and subsidiary
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per-share data)
(unaudited)
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, June 30,
2000 1999
---------- ----------
<S> <C> <C>
Interest and dividend income
Loans ...................................... $ 5,391 $ 2,533
Mortgage-backed securities ................. 936 110
Other debt securities ...................... 218 184
Federal funds sold ......................... 93 316
Dividends from FRB and FHLB stock .......... 39 23
Other ...................................... 2 --
---------- ----------
Total interest and dividend income ... 6,679 3,166
---------- ----------
Interest expense
Deposits ................................... 2,227 853
Federal funds purchased .................... 23 --
Securities sold under repurchase agreement . 282 --
Advances from FHLB ......................... 212 --
---------- ----------
Total interest expense ............... 2,744 853
---------- ----------
Net interest and dividend income ..... 3,935 2,313
Provision for loan losses .......................... 443 72
---------- ----------
Net interest and dividend income after
provision for loan losses ............ 3,492 2,241
---------- ----------
Non-interest income
Service charges and fees ................... 455 416
Gain on sale of securities ................. 16 --
Gain on sale of loans ...................... 9 59
Gain on sale of other real estate .......... 17 4
Other income ............................... 4 36
---------- ----------
Total non-interest income ............ 501 515
---------- ----------
Non-interest expense
Salaries and employee benefits ............. 1,487 1,071
Occupancy .................................. 482 413
Furniture and equipment .................... 181 186
Amortization of goodwill ................... 77 80
Other expense .............................. 1,006 838
---------- ----------
Total non-interest expense ........... 3,233 2,588
---------- ----------
Income before income tax expense ..... 760 168
Income tax expense ................................. 322 111
---------- ----------
Net income ................................. $ 438 $ 57
========== ==========
Per share data
Net income per share - basic and diluted ......... $ 0.15 $ 0.02
========== ==========
Weighted average shares outstanding .............. 2,842,452 2,848,214
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
Admiralty Bancorp, Inc. and subsidiary
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, June 30,
2000 1999
--------- ----------
<S> <C> <C>
Operating activities
Net income .................................................... $ 438 $ 57
Adjustments to reconcile net income to net cash provided by
(used in) operating activities
Provision for loan losses ................................... 443 72
Depreciation and amortization ............................... 264 277
Gain on sales of securities ................................. (16) --
Gain on sales of loans ...................................... (9) (59)
Gain on sales of premises and equipment ..................... -- (22)
Gain on sales of other real estate owned .................... (17) (4)
Increase in accrued interest receivable ..................... (237) (214)
(Increase) decrease in other assets ......................... (634) 46
Increase in accrued interest payable ........................ 117 20
Increase (decrease) in other liabilities .................... 102 (43)
-------- --------
Net cash provided by operating activities ............... 451 130
-------- --------
Investing activities
Proceeds from maturities of investment securities
available for sale .......................................... 1,040 2,022
Proceeds from maturities of investment securities
held to maturity ............................................ 620 --
Proceeds from sales of investment securities available for sale 17 --
Purchases of investment securities available for sale ......... (4,998) (2,000)
Purchases of investment securities held to maturity ........... (4,998) (5,002)
Purchase of Federal Reserve Bank & FHLB stock ................. (505) (89)
Net loan originations and principal collections on loans ...... (37,939) (24,149)
Proceeds from loan sales ...................................... 289 878
Proceeds from sale of premises and equipment .................. -- 24
Proceeds from sales of other real estate owned ................ 123 4
Purchase of premises and equipment, net ....................... (824) (651)
-------- --------
Net cash used in investing activities ....................... (47,175) (28,963)
-------- --------
Financing activities
Net increase in deposits ...................................... 43,162 26,656
Net increase in federal funds purchased, securities sold under
agreements to repurchase and advances from FHLB ............. 8,429 --
-------- --------
Net cash provided by financing activities ................... 51,591 26,656
-------- --------
Net increase (decrease) in cash and cash equivalents .................. 4,867 (2,177)
Cash and cash equivalents, beginning of period ........................ 5,136 17,296
-------- --------
Cash and cash equivalents, end of period .............................. $ 10,003 $ 15,119
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
Admiralty Bancorp, Inc. and subsidiary
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - 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. Certain prior
year amounts have been reclassified to conform to the 2000 presentation. 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's Annual
Report on Form 10-KSB for the year ended December 31, 1999.
The Company is incorporated in the state of Delaware and is registered with the
Board of Governors of the Federal Reserve Bank as a financial holding company.
The Bank is a Florida state chartered commercial bank, with its main office in
Palm Beach Gardens, Florida, and branches in Boca Raton, Juno Beach, Jupiter,
and Melbourne, Florida. On March 11, 2000, the Company converted from a one bank
holding company to a financial holding company under the Gramm-Leach-Bliley
Financial Modernization Act of 1999 (the "Modernization Act"). This status
permits the Company to undertake financial activities which need not be closely
related to banking, such as insurance brokerage activities. Under the
Modernization Act, the Company's bank subsidiary must remain "well capitalized"
(i.e., have a leveraged capital ratio of 5% or greater and a risk based capital
ratio of 10% or greater) and well managed, or the Company could be required to
divest itself of its non-banking activities. In addition, the Company must
maintain a rating of "satisfactory" or better under the Community Reinvestment
Act. The Company has entered into a joint venture to sell insurance, and may
seek alliances with other financial service providers, as a way to enhance
non-interest income.
The Company has formed Admiralty Insurance Services, LLC ("AIS") as a joint
venture with USI Florida ("USI") to offer a wide range of insurance products,
primarily to customers of the Bank. USI and the Company are each 50 percent
owners of AIS. USI and AIS will share equally in commissions on policies sold,
and the Company is entitled to 50 percent of the net income of AIS. Under the
agreement, USI Florida will absorb all costs incurred by AIS for operating
expenses. AIS did minimal business during the six months ended June 30, 2000 and
no revenue was recognized during the period.
NOTE 2 - 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"). The effective date of
Statement 133 was delayed by Statement 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB No.
133." In June 2000, FASB issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an Amendment of FASB Statement No.
133" (Statement 138). Statement 138 addresses a limited number of issues causing
implementation difficulties for numerous entities that apply Statement 133.
Statement 133 is now effective for all quarters of all fiscal years beginning
after June 15, 2000, with an early 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, 2001, and that Statement 133 will not have a significant
financial statement impact upon adoption.
F-6
<PAGE>
NOTE 3 - COMPREHENSIVE INCOME
The following table sets forth the components of the Company's comprehensive
income:
Six months ended
--------------------
June 30, June 30,
(Unaudited) 2000 1999
(in thousands) --------- ---------
Net Income $ 438 $ 57
Other comprehensive income (loss), net of tax -
Change in net unrealized gain on securities
held available for sale, net of taxes of $(12)
and $62 in 2000 and 1999, respectively ............ 21 (103)
----- -----
Comprehensive income $ 459 $ (46)
===== =====
NOTE 4 - NET INCOME PER SHARE
The Company calculates net income per share in accordance with SFAS No. 128,
"Earnings Per Share." Net income per share is computed by dividing net income by
the weighted average number of shares of common stock outstanding during the
periods presented. Using this method, adjustments are to be 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.
The following table illustrates the reconciliation of the numerator and
denominator of the basic and diluted earnings per share computations for the six
months ended June 30, 2000, and 1999:
Six Months Ended
--------------------------
June 30, 2000 June 30, 1999
---------- ----------
(dollars in thousands,
except per share data)
Net income .................................. $ 438 $ 57
---------- ----------
Weighted average shares ..................... 2,842,452 2,848,214
---------- ----------
Basic and diluted earnings per share ......... $ 0.15 $ 0.02
---------- ----------
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 common stock. Due the
different dividend rights of the two classes of stock and the preferential
nature of this dividend, the issuance of the Class B share dividend has been
reflected in earnings per share from the date of issuance.
On December 17, 1999 the Board of Directors declared a dividend of $1.00 per
Class A share, payable in Class B common stock to all shareholders of record of
Class A common stock as of December 31, 1999. In order to treat the holders of
Class B common stock similarly as the holders of the Class A common stock, the
Board of Directors
F-7
<PAGE>
declared a 12.91% stock dividend on the Company's Class B common stock to be
paid to the holders of the Class B common stock as of December 31, 1999. For
purposes of the earnings per share, the issuance of this Class B stock dividend
has been effected as of January 1, 1999. The basic and diluted weighted average
number of shares outstanding and net earnings per share information for 1999 has
been restated to reflect the effects of this stock dividend.
The basic and diluted weighted average number of shares outstanding and net
earnings per share information for 1998 and 1999 have been restated to reflect a
1:1.1291 conversion ratio for discretionary conversions of Class A shares to
Class B shares, reflecting the change in the Class A conversion ratio caused by
the 1999 stock dividend on the Class B shares. During the three and six month
periods ended June 30, 2000, 241,944 and 390,004 Class A shares were converted
to 273,181 and 440,357 shares of Class B common stock, respectively. As of June
30, 2000, 454,250 shares of Class A Common stock remain outstanding.
NOTE 5 - INVESTMENT AND MORTGAGE BACKED SECURITIES
The amortized cost and fair value of investment securities and mortgage-backed
securities are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
June 30, 2000
AVAILABLE FOR SALE:
U.S. Government and Agency
securities ..................................... $ 6,500 $ 0 $ (207) $ 6,293
Mortgage-backed securities ..................... 6,610 22 (63) 6,569
Other securities .............................. 14 0 0 14
-------- -------- -------- --------
Sub-total ...................................... $ 13,124 $ 22 $ (270) $ 12,876
-------- -------- -------- --------
HELD TO MATURITY:
U.S. Government and Agency
securities ..................................... $ 1,000 $ 0 $ (29) $ 971
Mortgage-backed securities ..................... 21,398 22 (393) 21,027
-------- -------- -------- --------
Sub-total ...................................... $ 22,398 $ 22 $ (422) $ 21,998
-------- -------- -------- --------
TOTAL .......................................... $ 35,522 $ 44 $ (692) $ 34,874
======== ======== ======== ========
</TABLE>
F-8
<PAGE>
The amortized cost and fair value of investment and mortgage-backed securities
are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C>
December 31, 1999
AVAILABLE FOR SALE:
U.S. Government and Agency ...................... $ 6,997 $ 0 $ (218) $ 6,779
securities
Mortgage-backed securities ...................... 2,155 0 (63) 2,092
Other securities ................................ 14 0 0 14
------- ------- ------- -------
Sub-total ....................................... $ 9,166 $ 0 $ (281) $ 8,885
------- ------- ------- -------
HELD TO MATURITY:
U.S. Government and Agency ...................... $ 1,000 $ 0 $ (28) $ 972
securities
Mortgage-backed securities ...................... 17,025 0 (276) 16,749
------- ------- ------- -------
Sub-total ....................................... $18,025 $ 0 $ (304) $17,721
------- ------- ------- -------
TOTAL ........................................... $27,191 $ 0 $ (585) $26,606
======= ======= ======= =======
</TABLE>
The carrying value of securities pledged to secure deposits and for other
purposes required or permitted by law amounted to approximately $21.9 million
and $10.6 million at June 30, 2000 and December 31, 1999, respectively.
NOTE 6 - LOANS
The following schedule presents the components of loans, net of unearned income,
by type, as of June 30, 2000 and December 31, 1999:
F-9
<PAGE>
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
-------------------- --------------------
(Dollars in thousands)
Amount Percent Amount Percent
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Commercial and Industrial ............ $ 24,430 18% $ 20,380 20%
Real Estate Non-Residential Properties 91,659 66% 61,416 60%
Residential Properties ............... 14,866 11% 10,824 11%
Construction ......................... 6,117 4% 7,148 7%
Consumer ............................. 1,935 1% 1,534 2%
-------- -------- -------- --------
Gross Loans .......................... 139,007 100% 101,302 100%
less: net deferred fees ............. 488 445
-------- --------
Total loans .......................... 138,519 100,857
less: allowance for loan losses ...... 1,463 1,017
-------- --------
Net loans ............................ $137,056 $ 99,840
======== ========
</TABLE>
Changes in the allowance for loan losses are as follows:
Six months ended
---------------------
June 30, June 30,
2000 1999
------ ------
(Dollars in thousands)
Balance at beginning of year $1,017 $ 602
Provision for loan losses 443 72
Charge-offs -- (1)
Recoveries 3 25
------ ------
Ending Balance $1,463 $ 698
====== ======
Ratio of net charge-offs to
average loans outstanding 0.00% -0.04%
Balance of allowance as a % of
total loans at period end 1.06% 0.98%
Loans with unpaid principal balances of $195 thousand were 90 days or more
contractually delinquent or on nonaccrual status at June 30, 2000 and December
31, 1999.
F-10
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders
Admiralty Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets of Admiralty
Bancorp, Inc. and subsidiary as of December 31, 1999, and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our 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 consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated 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 provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Admiralty Bancorp,
Inc. and subsidiary as of December 31, 1999, and the results of their operations
and their cash flows for the year then ended, in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
West Palm Beach, Florida
January 14, 2000
F-11
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
Admiralty Bancorp, Inc. and subsidiary
We have audited the accompanying consolidated balance sheet of Admiralty
Bancorp, Inc. and subsidiary as of December 31, 1998, and the related
consolidated statements of operations, changes in shareholders' equity 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 audits.
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 consolidated 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 the
consolidated results of their operations and their consolidated cash flows for
the year ended, in conformity with generally accepted accounting principles.
/s/ Grant Thornton LLP
Philadelphia, Pennsylvania
February 19, 1999
F-12
<PAGE>
Admiralty Bancorp, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
December 31,
-----------------------
1999 1998
--------- ---------
<S> <C> <C>
ASSETS Cash and cash equivalents:
Cash and due from banks ................................................ $ 5,115 $ 3,996
Interest bearing due from banks ........................................ 21 6
Federal funds sold ..................................................... -- 13,294
--------- ---------
Total cash and cash equivalents .................................. 5,136 17,296
Investment securities available for sale,
at fair market value ................................................... 8,885 9,391
Investment securities held to maturity, at cost
(fair market value of $17,721 at December 31, 1999) .................... 18,025 --
Loans, net ..................................................................... 99,840 46,812
Accrued interest receivable .................................................... 642 266
Federal Reserve Bank and FHLB stock ............................................ 772 683
Premises and equipment, net .................................................... 1,841 1,113
Deferred tax asset, net ........................................................ 464 436
Goodwill (net of accumulated depreciation of $301 thousand
and $147 thousand at December 31, 1999 and 1998, respectively) ......... 3,540 3,834
Other assets ................................................................... 817 917
--------- ---------
Total assets ..................................................... $ 139,962 $ 80,748
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits ....................................................................... $ 110,273 $ 60,718
Federal funds purchased ........................................................ 571 --
Securities sold under agreement to repurchase .................................. 9,000 --
Accrued interest payable ....................................................... 214 58
Due under purchase contract .................................................... -- 202
Other liabilities .............................................................. 330 268
--------- ---------
Total liabilities ...................................................... 120,388 61,246
--------- ---------
SHAREHOLDERS' 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, 844,254 and 888,881 shares issued and outstanding
at December 31, 1999 and 1998, respectively. Class A
shares are convertible to Class B common stock ......................... 7,114 7,490
Common stock, Class B, no par value, 4,000,000 shares
authorized, 1,889,205 and 1,492,759 shares issued and
outstanding at December 31, 1999 and 1998 respectively ................. 16,073 12,884
Accumulated deficit ............................................................ (3,437) (876)
Accumulated other comprehensive income (loss), net ............................. (176) 4
--------- ---------
Total shareholders' equity ..................................................... 19,574 19,502
--------- ---------
Total liabilities and shareholders' equity ..................................... $ 139,962 $ 80,748
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-13
<PAGE>
Admiralty Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per-share data)
<TABLE>
<CAPTION>
Admiralty Bancorp, Inc. Predecessor
and Subsidiary Company
--------------------------- -----------
For the Period
January 1, 1998
Year Ended Year Ended Through
December 31, December 31, January 21,
1999 1998 1998
----------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
Interest and dividend income
Loans ....................................... $ 6,479 $ 2,937 $ 147
Mortgage-backed securities .................. 538 646 62
Other debt securities ....................... 408 135 5
Federal funds sold .......................... 456 298 1
Dividends from Federal Reserve Bank
and FHLB stock ............................ 48 17 1
Other ....................................... 1 -- --
----------- ----------- -----------
Total interest and dividend income .... 7,930 4,033 216
----------- ----------- -----------
Interest expense
Deposits .................................... 2,318 1,079 71
Federal funds purchased ..................... 17 10 5
Securities sold under repurchase
agreement ................................. 113 -- --
----------- ----------- -----------
Total interest expense ................ 2,448 1,089 76
----------- ----------- -----------
Net interest and dividend income ...... 5,482 2,944 140
Provision for loan losses ........................... 525 385 --
----------- ----------- -----------
Net interest and dividend income
after provision for loan losses ....... 4,957 2,559 140
----------- ----------- -----------
Non-interest income
Service charges and fees .................... 925 608 13
Net loss on sale of securities .............. -- (39) --
Gain on sale of loans ....................... 100 244 --
Other income ................................ 50 -- 27
----------- ----------- -----------
Total non-interest income ............. 1,075 813 40
----------- ----------- -----------
Non-interest expense
Salaries and employee benefits .............. 2,271 1,441 39
Occupancy ................................... 820 525 29
Furniture and equipment ..................... 355 273 11
Amortization of goodwill .................... 154 147 --
Other expense ............................... 1,796 1,473 52
----------- ----------- -----------
Total non-interest expense ............ 5,396 3,859 131
----------- ----------- -----------
Income (loss) before income tax
expense and minority interest ........ 636 (487) 49
Income tax expense .................................. 384 -- --
----------- ----------- -----------
Income (loss) before minority interest ...... 252 (487) 49
Minority interest ................................... -- (4) (2)
----------- ----------- -----------
Net income (loss) ........................... $ 252 $ (491) $ 47
=========== =========== ===========
Per share data
Net income (loss) per share - basic and diluted ... $ 0.09
===========
Class A Common Stock ........................ $ 0.44
===========
Class B Common Stock ........................ $ (1.12)
===========
Weighted average shares outstanding ............... 2,847,915 1,840,414
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-14
<PAGE>
Admiralty Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Common Stock Other
-------------------------------------------- Retained Compre- Total
Stock Class A Class B Earnings/ hensive Share- Compre-
(Dollars in thousands) Subscription --------------------- -------------------- Accum. Income/ holders' hensive
Receivable Number $ Number $ (Deficit) (Loss) Equity Income
--------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1997 $ (205) 888,881 $ 8,060 133,320 $ 90 $ 59 $ -- $ 8,004 $ --
Issuance of Class B
Common Stock -- -- -- 1,315,000 12,350 -- -- 12,350
Cost of Issuance of
Class A Common Stock -- -- (570) -- -- -- -- (570)
Collection of Subscription
Receivable 205 -- -- -- -- -- -- 205
Class A Common
Stock Dividend -- -- -- 44,439 444 (444) -- --
Net loss for year ended
December 31, 1998 -- -- -- -- -- (491) -- (491) (491)
Other comprehensive income:
Change in net unrealized
gain on securities held
available for sale, net
of taxes of $(3) -- -- -- -- -- -- 4 4 4
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Comprehensive income $ (487)
=========
Balance at
December 31, 1998 -- 888,881 7,490 1,492,759 12,884 (876) 4 19,502
Class A shares converted
to Class B shares -- (44,627) (376) 44,627 376 -- -- --
Stock Dividends -- -- -- 351,819 2,813 (2,813) -- --
Net income for year ended
December 31, 1999 -- -- -- -- -- 252 -- 252 252
Other comprehensive income:
Change in net unrealized
loss on securities
held available for sale,
net of taxes of $108 -- -- -- -- -- -- (180) (180) (180)
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Comprehensive income $ 72
=========
Balance at
December 31, 1999 $ -- 844,254 $ 7,114 1,889,205 $ 16,073 $ (3,437) $ (176) $ 19,574
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-15
<PAGE>
Admiralty Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1999 December 31, 1998
----------------- -----------------
<S> <C> <C>
Operating activities
Net income (loss) ................................................. $ 252 $ (491)
Adjustments to reconcile net income to net cash provided by
(used in) operating activities
Minority interest ............................................... -- 4
Provision for loan losses ....................................... 525 385
Depreciation and amortization ................................... 512 429
Amortization, net of accretion, of investment securities ........ 21 140
Deferred income tax provision ................................... 80 --
Loss on sales of securities ..................................... -- 39
Gain on sales of loans .......................................... (100) (244)
Gain on sales of premises and equipment ......................... (21) --
Gain on sales of other real estate owned ........................ (4) --
Change in accrued interest receivable ........................... (376) (229)
Change in accrued interest payable .............................. 156 58
Change in other assets .......................................... 200 72
Change in other liabilities ..................................... 62 (516)
-------- --------
Net cash provided by (used in) operating activities ......... 1,307 (353)
-------- --------
Investing activities
Proceeds from maturities of investment securities
available for sale .............................................. 2,698 16,125
Proceeds from maturities of investment securities
held to maturity ................................................ 309 --
Proceeds from sales of investment securities available for sale ... -- 2,955
Purchases of investment securities available for sale ............. (2,499) (9,171)
Purchases of investment securities held to maturity ............... (18,336) --
Purchase of Federal Reserve Bank & FHLB stock ..................... (89) (569)
Net loan originations and principal collections on loans .......... (55,277) (24,724)
Proceeds from loan sales .......................................... 1,716 2,653
Proceeds from sale of premises and equipment ...................... 24 --
Proceeds from sales of other real estate owned .................... 12 --
Purchase of premises and equipment, net ........................... (1,091) (776)
Payment for purchase of Company, net of cash acquired ............. (60) (4,440)
-------- --------
Net cash used in investing activities ........................... (72,593) (17,947)
-------- --------
Financing activities
Net chnage in deposits ............................................ 49,555 21,206
Net change in securities sold under agreements to
repurchase and other borrowings ................................. 9,571 (4,582)
Collection of subscription receivable ............................. -- 205
Payment to purchase minority interest ............................. -- (358)
Proceeds from issuance of common stock - net of costs ............. -- 11,280
-------- --------
Net cash provided by financing activities ....................... 59,126 27,751
-------- --------
Net (decrease) increase in cash and cash equivalents ...................... (12,160) 9,451
Cash and cash equivalents, beginning of period ............................ 17,296 7,845
-------- --------
Cash and cash equivalents, end of period .................................. $ 5,136 $ 17,296
======== ========
Supplemental disclosures:
Cash paid for:
Interest ........................................................ $ 2,292 $ 1,164
Taxes ........................................................... 115 321
Noncash investing and financing activities:
Change in unrealized gain (loss) on available for sale securities $ (288) $ 7
Change in deferred taxes related to available for sale securities 108 (3)
Transfer of loans to other real estate .......................... 108 --
</TABLE>
See accompanying notes to consolidated financial statements.
F-16
<PAGE>
Admiralty Bancorp, Inc. and Subsidiary
December 31, 1999 and 1998
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION
Nature of Business
Admiralty Bancorp, Inc., successor company to White Eagle Financial Group, Inc.,
is a one 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 Boca Raton, Juno Beach, Jupiter and Melbourne, Florida.
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 southern and
central 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.
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
(the Change In Control) 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 hired. The transaction was accounted for
under the purchase method of accounting and accordingly the results of
operations for the period ended December 31, 1998, include only the results of
operations of the 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.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Admiralty Bancorp,
Inc. and its wholly owned subsidiary, Admiralty Bank.
The accounting policies of the Company conform with generally accepted
accounting principles and predominant
F-17
<PAGE>
practices within the banking industry. All significant intercompany balances and
transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated 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 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.
As of December 31, 1999, substantially all of the Company's real estate loans
are secured by real estate in Palm Beach and Broward counties. Accordingly, the
ultimate collectibility of a substantial portion of the Company's real estate
loan portfolio is susceptible to changes in market conditions in the above
counties. Management believes that the allowances for losses on loans is
adequate. While management uses available information to recognize losses on
loans, future additions to the allowances may be necessary based on changes in
economic conditions, particularly in the above counties. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowances for losses on loans. Such agencies
may require the Company to recognize additions to the allowance based on their
judgments about information available to them at the time of their examination.
Investment Securities
The Bank accounts for its investment securities in accordance with Statement of
Financial Accounting Standards ("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 recognized as a component of comprehensive
income included in shareholders' equity and excluded from the determination of
net income. Declines in the fair value of individual held-to-maturity and
available-for-sale securities below their cost that are other than temporary
results in write-downs of the individual securities to their fair value with the
related write-downs included in earnings as realized losses. 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.
The Company does not purchase, sell or utilize off-balance sheet derivative
financial instruments or derivative commodity instruments.
Loans and Allowance for 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 deferred fees or costs on originated loans and an allowance for
loan losses. The allowance for loan losses is established through a provision
for loan losses charged to expense.
F-18
<PAGE>
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 inherent losses which probably exist as of
the evaluation date due to the inherent risks in the loan portfolio even though
they might not have been identified by the objective loan review process. 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.
The Company follows a consistent procedural discipline and accounts for loan
loss contingencies in accordance with SFAS No. 5, "Accounting for
Contingencies", and SFAS No. 114 "Accounting for Impairment of a Loan," as
amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan -
Income Recognition and Disclosures." The following is a description of how each
portion of the allowance for loan losses is determined.
The Company segregates the loan portfolio for loan loss purposes into segments
based upon the underlying collateral. The Company provides for a general
allowance for losses inherent in the portfolio by the collateral categories.
General loss percentages are calculated based upon historical analyses as well
as estimates of the inherent losses which probably exist as of the evaluation
date even though they might not have been identified by the more objective
processes used. This is due to the risk of error and/or inherent imprecision in
the process. This portion of the allowance is particularly subjective and
requires judgments based on qualitative factors which do not lend themselves to
exact mathematical calculations such as: trends in delinquencies and
nonaccruals; migration trends in the portfolio; trends in volume, terms, and
portfolio mix; new credit products and/or changes in the geographic distribution
of those products; changes in lending policies and procedures; loan review
reports on the efficacy of the risk identification process; changes in the
outlook for local, regional and national economic conditions; concentrations of
credit; and peer group comparisons.
Specific allowances are provided in the event that the specific analysis on each
classified loan indicates that it is probable that the Bank will be unable to
collect all amounts due, both principal and interest, according to the
contractual terms of the loan agreement. When a loan is impaired, the Bank
measures impairment based on either (a) the present value of the expected future
cash flows of the impaired loan discounted at the loan's original effective
rate, (b) the observable market price of the impaired loans, or (c) the fair
value of the collateral of a collateral-dependent loan. The Bank selects the
measurement method on a loan-by-loan basis, except for collateral-dependent
loans for which foreclosure is probable must be measured at the fair value of
the collateral. In a troubled debt restructuring involving a restructured loan,
the Bank measures impairment by discounting the total expected future cash flows
at the loan's original effective rate of interest. The provision for loan loss
is debited or credited in order to state the allowance for loan losses to the
required level as determined above.
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. 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 at which time
the loan is returned to accruing status. 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.
Bank Premises And Equipment
Bank premises and equipment, including leasehold improvements, are stated at
cost less accumulated depreciation.
F-19
<PAGE>
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.
Maintenance and repairs are charged to expense as incurred and improvements are
capitalized. The cost and accumulated depreciation relating to premises and
equipment retired or otherwise disposed of are eliminated from the accounts and
any resulting gains or losses are credited or charged to income.
Other Real Estate Owned
Assets acquired through, or in lieu of, loan foreclosures are held for sale and
are initially recorded at fair value at the date of foreclosure, establishing a
new cost basis.
Subsequent to foreclosure, valuations are periodically performed by management
and the assets are carried at the lower carrying amount of fair value less cost
to sell. Revenue and expenses from operations and changes in the valuation
allowance are included in net expenses from foreclosed assets.
Mortgage Servicing
Servicing assets are recognized as separate assets when rights are acquired
through purchase or through sale of financial assets. Capitalized servicing
rights are reported in other assets and are amortized into non-interest income
in proportion to, and over the period of, the estimated future net servicing
income of the underlying financial assets. Servicing assets are evaluated for
impairment based upon the fair value of the rights as compared to amortized
cost. Impairment is determined by stratifying rights by predominant
characteristics, such as interest rates and terms. Fair value is determined
using prices for similar assets with similar characteristics, when available, or
based upon discounted cash flows using market-based assumptions. Impairment is
recognized through a valuation allowance for an individual stratum, to the
extent that fair value is less than the capitalized amount for the stratum.
Goodwill
Goodwill, representing the excess of the purchase price over the fair value of
the net assets acquired from WEFG, is being amortized on a straight-line basis
over its estimated useful life of 25 years. The Company, at each balance sheet
date, evaluates the recovery of the carrying amount of goodwill by determining
if any impairment indicators are present. These indicators include duplication
of resources resulting from acquisitions, income derived from businesses
acquired and other factors. If this review indicates that goodwill will not be
recoverable, as principally determined based on the estimated undiscounted cash
flows of the acquired entity over the remaining amortization period, the
Company's carrying value of the goodwill is reduced by the estimated shortfall
of discounted future cash flows.
Transfers Of Financial Assets
Transfers of financial assets are accounted for as sales, when control over the
assets has been surrendered. Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from the Company, (2) the
transferee obtains the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred assets, and (3)
the Company does not maintain effective control over the transferred assets
through an agreement to repurchase them before their maturity.
Long-Lived and Intangible Assets
F-20
<PAGE>
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 Statement
requires that long-lived and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to the future cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the asset exceeds the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or the fair value less costs to sell.
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 reserve balances required to be maintained in cash on hand
and/or in balances at the Federal Reserve Bank were $918 thousand and $426
thousand at December 31, 1999 and 1998, respectively.
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.
Management Stock Option Plan
SFAS No. 123, "Accounting for Stock- Based Compensation," encourages all
entities to adopt a fair value based method of accounting for employee stock
compensation plans, whereby compensation cost is measured at the grant date
based on the value of the award and is recognized over the service period, which
is usually the vesting period. However, it also allows an entity to continue to
measure compensation cost for those plans using the intrinsic value based method
of accounting prescribed by Accounting Principles Board Opinion (APB Opinion)
No. 25, "Accounting for Stock Issued to Employees", whereby compensation cost is
the excess, if any, of the quoted market price of the stock at the grant date
(or other measurement date) over the amount an employee must pay to acquire the
stock. Stock options issued under the Company's management stock option plan
have no intrinsic value at the grant date, and under APB Opinion No. 25 no
compensation is recognized for them. The Company has elected to continue with
the accounting methodology in APB Opinion No. 25 and, as a result, has provided
pro forma disclosures of net income and earnings per share and other
disclosures, as if the fair value based method of accounting had been applied.
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. An eligible employee may
elect to contribute to the 401(k) plan in the form of deferrals of between 1%
and 15% of the total base compensation that would otherwise be payable to the
employee. Employee contributions are fully vested and non-forfeitable at all
times. The 401(k) plan permits contributions by the Company. In 1999 the Company
matched 50% of the employees' contributions up to 6% of the participant's base
salary. The Company did not make a matching contribution in 1998. The Company
accrues costs as incurred. Expenses accrued toward contributions to this plan
amounted to $34,000 and $-0- for the years ended December 31, 1999 and 1998,
respectively.
F-21
<PAGE>
Earnings (Loss) Per Common Share
The Company computes basic and diluted earnings per share in accordance with
SFAS No. 128, "Earnings per Share." Basic earnings per share is computed by
dividing the net income (loss) to common shareholders for the year by the
weighted-average number of shares of common stock outstanding during the year.
Diluted earnings per share is computed by dividing the net income (loss)
available to common shareholders for the year by the weighted-average number of
common stock and potential common stock outstanding during the year, to the
extent that such potential common stock is dilutive. Potential common stock
consists of the shares issuable pursuant to the exercise of stock options. Since
the potential common stock for the year ended December 31, 1999 and for the
period from January 22, 1998 through December 31, 1998 is antidilutive, basic
earnings (loss) per share is equal to the diluted net earnings (loss) per share
for each year.
Prior to January 1, 1999, the capital structure of the Company provided for the
dividend rights of Class A common shareholders to be different than the dividend
rights of the Class B common shareholders. Accordingly, the "two class" method
of computing earnings per share was used. Under the "two class" method, net
earnings is allocated based on a formula that determines earnings per share for
each class of common stock according to dividends declared. Effective January 1,
1999, the Company adopted a new dividend policy whereby the Class A and Class B
common shareholders will be treated equally in the amount and terms of dividends
declared and the form of payment of dividends. Earnings per share for the year
ended December 31, 1999 are not presented under the "two class" method.
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 common stock. Due the
different dividend rights of the two classes of stock and the preferential
nature of this dividend, the issuance of the Class B share dividend has been
reflected in earnings (loss) per share from the date of issuance.
On December 17, 1999 the Board of Directors declared and annual dividend of
$1.00 per Class A share, payable in Class B common stock to all shareholders of
record of Class A common stock as of December 31, 1999. In order to treat the
holders of Class B common stock similarly as the holders of the Class A common
stock, the Board of Directors declared a 12.91% stock dividend on the Company's
Class B common stock to be paid to the holders of the Class B common stock as of
December 31, 1999. For purposes of the earnings (loss) per share, the issuance
of this Class B stock dividend has been effected as of January 1, 1998. The
basic and diluted weighted average number of shares outstanding and net earnings
(loss) per share information for 1998 has been restated to reflect the effects
of this stock dividend.
The basic and diluted weighted average number of shares outstanding and net
earnings per share information for 1998 and 1999 have been restated to reflect a
1:1.1291 conversion ratio for discretionary conversions of Class A shares to
Class B shares, reflecting the change in the Class A conversion ratio caused by
the 1999 stock dividend on the Class B shares.
The following table presents the computation of basic and diluted earnings per
share:
F-22
<PAGE>
<TABLE>
<CAPTION>
Year Ended
(In thousands, except shares and December 31, Year Ended
per share information) 1999 December 31, 1998
---------- ------------------------------
Class A Class B Total
---------- -------- -----
<S> <C> <C> <C> <C>
Net Income (loss).............................. $ 252 $(491)
==========
Less: Class A dividend........................ $ 444 (444)
========== ------
Loss attributable to Class B shareholders...... $ (935) $(935)
======== =====
Weighted average number of shares
of common stock........................... 2,847,915 1,003,636 836,778
Additional dilutive shares related
to stock options -- -- --
---------- ---------- ---------
Total weighted average common shares
and equivalents outstanding for dilutive
earnings per share computation............. 2,847,915 1,003,636 836,778
========== ========== ========
Basic earnings (loss) per share................ $ 0.09 $ 0.44 $ (1.12)
Diluted earnings (loss) per share.............. $ 0.09 $ 0.44 $ (1.12)
</TABLE>
Earnings per share for the period from January 1, 1998 through January 21, 1998
for the Predecessor Company has not been presented because it is not considered
meaningful.
Comprehensive Income
On January 1, 1998, the Company adopted SFAS No. 130 which 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:
December 31, 1999
-------------------------------------
Before Tax Tax Net of Tax
(In thousands) Amount Effect Amount
----------- ------ -----------
Unrealized loss on securities:
Unrealized holding loss arising
during period....................... $(288) $108 $(180)
Less reclassification adjustment
for losses realized in net income... -- -- --
----- ---- -----
Other comprehensive loss, net........... $(288) $108 $(180)
===== ==== =====
December 31, 1998
-------------------------------------
Before Tax Tax Net of Tax
(In thousands) Amount Effect Amount
----------- ------ -----------
Unrealized gains on securities:
Unrealized holding loss arising
during period....................... $ (32) $ 12 $ (20)
Less reclassification adjustment
for losses realized in net income... 39 (15) 24
----- ---- -----
Other comprehensive income, net......... $ 7 $ (3) $ 4
===== ==== =====
F-23
<PAGE>
Advertising Costs
The Bank expenses advertising costs as incurred. Advertising costs were $34
thousand and $26 thousand in 1999 and 1998 respectively.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carry forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Reclassifications
Certain reclassifications have been made to the 1998 financial statements to
conform to the 1999 presentation.
Recently Issued Accounting Standards
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"). The effective date of
Statement 133 was delayed by Statement 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB No.
133." In June 2000, FASB issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an Amendment of FASB Statement No.
133" (Statement 138). Statement 138 addresses a limited number of issues causing
implementation difficulties for numerous entities that apply Statement 133.
Statement 133 is now effective for all quarters of all fiscal years beginning
after June 15, 2000, with an early 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, 2001, and that Statement 133 will not have a significant
financial statement impact upon adoption.
NOTE 3 - INVESTMENT SECURITIES
The amortized cost and fair value of investment securities as of December 31,
1999 are as follows:
Gross Gross
December 31, 1999 Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------- ----------------------------- ----------
(In thousands)
AVAILABLE FOR SALE:
U.S. Government and
Agency securities..... $ 6,997 $ 0 $(218) $ 6,779
F-24
<PAGE>
Mortgage-backed
securities............ 2,155 0 (63) 2,092
Other securities..... 14 0 0 14
------- --- ----- -------
SUB-TOTAL............. $ 9,166 $ 0 $(281) $ 8,885
------- --- ----- -------
Gross Gross
December 31, 1999 Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------- ----------------------------- ----------
(In thousands)
HELD TO MATURITY:
U.S. Government and
Agency securities..... $ 1,000 $ 0 $ (28) $ 972
Mortgage-backed
securities............ 17,025 0 (276) 16,749
------- --- ----- -------
SUB-TOTAL............. 18,025 0 (304) 17,721
------- --- ----- -------
TOTAL SECURITIES...... $27,191 $ 0 $(585) $26,606
------- --- ----- -------
The amortized cost and fair value of investment securities as of December 31,
1998 are as follows:
Gross Gross
December 31, 1998 Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------- ----------------------------- ----------
(In thousands)
AVAILABLE FOR SALE:
U.S. Government and $ 4,500 $ 1 $ (4) $ 4,497
Agency securities.....
Mortgage-backed
securities............ 4,870 11 (1) 4,880
Other securities...... 14 0 0 14
------- --- ----- -------
TOTAL................. $ 9,384 $12 $ (5) $ 9,391
======= === ===== =======
At December 31, 1998, the Company had no investment securities classified as
held to maturity.
The carrying value of securities pledged to secure deposits and for other
purposes required or permitted by law amounted to approximately $10,554 thousand
and $-0- at December 31, 1999 and December 31, 1998, respectively.
The amortized cost and estimated fair value of the Company's investment and
mortgaged 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.
F-25
<PAGE>
December 31, 1999
-------------------------
Available for Sale
-------------------------
(In thousands) Amortized Fair
Cost Value
--------- ------
Due in one year or less................. 500 497
Due from one year to five years......... 6,497 6,282
Mortgage-backed securities.............. 2,155 2,092
Other securities........................ 14 14
9,166 8,885
====== ======
Held to Maturity
-------------------------
(In thousands) Amortized Fair
Cost Value
--------- ------
Due from one year to five years......... 1,000 972
Mortgage- backed securities............. 17,025 16,749
------ ------
18,025 17,721
====== ======
Proceeds from the sales of securities classified as available for sale were
$2,916 thousand in 1998 while no securities were sold during 1999. The Company
realized no securities gains in 1999 and $3 thousand in the year ended December
31, 1998. The Company realized no securities losses in 1999 and $42 thousand in
the year ended December 31, 1998.
NOTE 4 - LOANS
The following schedule presents the components of loans by type, as of December
31, 1999 and December 31, 1998.
December 31,
1999 1998
------------------ -----------------
Amount Percent Amount Percent
-------- ------- ------- -------
(in thousands, except percentages)
Commercial and Industrial...............$ 20,380 20% $10,701 22%
Real Estate Non-Residential Properties.. 61,416 60% 30,465 64%
Residential Properties.................. 10,824 11% 3,694 8%
Construction............................ 7,148 7% 1,912 4%
Consumer................................ 1,534 2% 963 2%
-------- --- ------- ---
Gross loans.............................$101,302 100% $47,735 100%
=== ===
less: net deferred fees................ 445 321
-------- -------
Total loans............................. 100,857 $47,414
less: allowance for loan losses........ 1,017 602
-------- -------
Net loans...............................$ 99,840 $46,812
======== =======
Changes in the allowance for loan losses are as follows:
F-26
<PAGE>
Year Ended Year Ended
(Dollars in thousands) December 31, 1999 December 31, 1998
----------------- -----------------
Balance at beginning of year............ $ 602 $378
Provision for loan losses............... 525 385
Charge-offs............................. (178) (199)
Recoveries.............................. 68 38
------ ----
Ending Balance.......................... $1,017 $602
====== ====
Loans with unpaid principal balances of $195 thousand and $109 thousand were 90
days or more contractually delinquent or on nonaccrual status at December 31,
1999 and December 31, 1998, respectively.
The balance of impaired loans was $154 and $0 at December 31, 1999 and 1998
respectively. The Bank has identified a loan as impaired when it is probable
that principal and interest will not be collected according to the contractual
terms of the loan agreement. The allowance for loan loss associated with
impaired loans was $37 thousand and $0 at December 31, 1999 and 1998,
respectively. The average recorded investment in impaired loans was
approximately $37 thousand and $446 thousand for the years ended December 31,
1999 and 1998 respectively. No income was recognized on impaired loans in 1999
and approximately $40 thousand in income was recognized during the year ended
December 31, 1998. No cash was collected on impaired loans during 1999. Total
cash collected for the year ended December 31, 1998 was approximately $42
thousand, of which approximately $40 thousand was applied to interest and $2
thousand was applied to the principal balance outstanding. Interest which would
have been accrued on impaired loans for the years ended December 31, 1999 and
1998, was approximately $1 thousand in each year.
A loan having a carrying value of $108 thousand was transferred to foreclosed
real estate in 1999, and no loans were transferred to foreclosed real estate in
1998.
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
(In thousands) December 31,
------------------
Estimated Useful Lives 1999 1998
---------------------- ------- -------
Furniture and equipment... 3 - 7 Years $ 2,143 $ 1,842
Leasehold improvements.... 5 - 15 Years 1,238 621
------- -------
3,381 $ 2,463
Accumulated depreciation
and amortization........ (1,540) (1,350)
------- -------
$ 1,841 $ 1,113
======= =======
NOTE 6 - DEPOSITS
Deposits are summarized as follows:
(In thousands) December 31,
----------------------
1999 1998
-------- -------
Non-interest bearing demand............. $ 29,235 $20,129
Savings, NOW and money market........... 46,884 21,239
F-27
<PAGE>
Time deposits, under $100,000........... 20,187 11,570
Time deposits, $100,000 and over........ 13,967 7,780
-------- -------
$110,273 $60,718
======== =======
At December 31, 1999, the scheduled maturities of time deposits are as follows:
(in thousands)
2000 ............. $31,985
2001 ............. 1,422
2002 ............. 503
2003 ............. 56
2004 ............. 188
-------
$34,154
=======
NOTE 7 - OTHER BORROWED FUNDS
The Company has a $ 4 million unsecured Federal funds overnight borrowing line
of credit and a secured line of credit with a correspondent bank. At December
31, 1999 the Company had a balance of $571 thousand drawn on the unsecured line
of credit. The Company's unencumbered investment securities are the collateral
for the secured line of credit and serve to determine the total amount available
under the line.
The Company entered into a $9.0 million repurchase agreement during the October
1999. The funds received in the repurchase transaction were used toward the
purchase of a $10.1 million, 20 year, FHLMC mortgage-backed security which is
the security sold under the agreement. The borrowings under the repurchase
agreement mature $3.1 million in one year, $3.0 million in two years and $2.9
million in three years. The cost of the one year borrowing is 6.04%, the two
year borrowing is at 6.25% and the three year borrowing is at 6.45%. At each
maturity date management will evaluate whether to replace the borrowings or pay
them off using Company funds.
Information concerning securities sold under agreements to repurchase during the
year ended December 31, 1999 is summarized as follows:
F-28
<PAGE>
(Dollars in thousands)
Average balance during the year.........$ 1,819
Average interest rate during the year... 6.24%
Maximum month end balance
during the year.......................$ 9,000
Mortgage-backed securities underlying
the agreements at year end:
Carrying value..........................$10,056
Estimated fair value....................$ 9,890
Securities underlying the agreement were held by the counterparty.
NOTE 8 - INCOME TAXES
Income tax expense is comprised of the following:
(In thousands) Years Ended December 31,
-----------------------------
1999 1998
---- -----
Federal................................. $273 $ -0-
State................................... 31 -0-
---- -----
$304 $ -0-
---- -----
Federal................................. $ 72 $ -0-
State................................... 8 -0-
---- -----
$ 80 $ -0-
---- -----
Total income tax expense............... $384 $ -0-
==== =====
The income tax provision reconciled to the tax computed at the statutory federal
rate was as follows:
(In thousands) Years Ended December 31,
-----------------------------
1999 1998
---- -----
Tax at statutory rate of 34%............ $216 $(167)
State taxes, net of federal tax benefit. 19 (9)
Non-deductible goodwill................. 52 51
Tax exempt income....................... 0 (24)
Other non-deductible items.............. 13 3
Increase in valuation allowance......... 90 116
Other................................... (6) 30
---- -----
Total provision......................... $384 $ -0-
==== =====
F-29
<PAGE>
The net deferred tax asset consisted of the following:
Years Ended
(In thousands) December 31,
---------------
1999 1998
----- ----
Deferred tax assets (liabilities)
Net operating loss carryforward.......$ 398 $ 491
Premises and equipment................ 68 17
Sale of SBA loans..................... (86) (81)
Allowance for loan losses............. 185 117
Unrealized loss (gain) on securities
Available for sale.................. 105 (3)
Other................................. 0 11
----- -----
Total deferred tax asset.............. 670 552
Valuation allowance..................... (206) (116)
----- -----
Net deferred tax asset................ 464 436
Less: asset at beginning of year....... (436) (439)
Change in unrealized (loss) gain on
securities available for sale......... (108) 3
----- -----
Provision for deferred income taxes.....$ (80) $ 0
===== =====
The valuation allowance for deferred tax assets as of December 31, 1999 and 1998
was $206 thousand and $116 thousand, respectively. The net change in the total
valuation allowance for the years ended December 31, 1999 and 1998 was an
increase of $90 thousand and $116 thousand, respectively. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
differences become deductible.
At December 31, 1999, the Company had unused net operating loss carryforwards of
approximately $1.1 million for Federal and Florida income tax purposes expiring
in various amounts from the 2006 through 2008. 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.
NOTE 9 - 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, payable semiannually on June 30 and December 31, or
on such other date or dates as may be determined by the
F-30
<PAGE>
Board of Directors. The Directors have elected to pay the Class A
dividend on an annual basis. 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 any time 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 $13.28 or higher and does not trade below $13.28
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.
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. Due to a 12.91% stock
dividend paid in January 2000 to all shareholders of record on December
31, 1999, each share of class A common stock is now convertible into
1.1291 shares of Class B common stock.
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.
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 was
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.
The Company also has outstanding 1,089,594 warrants to purchase Class B common
stock at $9.74 per share for a period commencing January 22, 1998 and ending
January 21, 2002. The expiration date of the warrants is subject to acceleration
as described in Note 16 - Plan of Merger and Recapitalization.
F-31
<PAGE>
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Operating Leases
The Bank utilizes certain office space and equipment under operating leases
expiring through 2010. Total rent expense under such operating leases, included
in occupancy expense, was approximately $616 thousand and $352 thousand for the
years ended December 31, 1999 and 1998, respectively.
Approximate minimum payments under non-cancelable operating leases for the
period ending December 31, are as follows:
2000 .............. $ 623,000
2001 .............. 598,000
2002 .............. 599,000
2003 .............. 579,000
2004............... 416,000
Thereafter ........ 1,575,000
----------
$4,390,000
==========
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 11 - 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 372,613 shares (adjusted for the recent stock dividend) of Class B stock
to be issued to members of the Board of Directors and management 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 period specified by the
Board.
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 periods
presented.
(In thousands, except per share data) Year ended December 31,
------------------------
1999 1998
------ -------
Net income (loss)
As reported............................... $ 252 $ (491)
Pro forma................................. $ (338) $(1,745)
Basic and diluted loss per share - Class B
F-32
<PAGE>
As reported............................... n/a $ (1.12)
Pro forma................................. n/a $ (2.62)
Basic and diluted earnings (loss) per share
As reported............................... $ 0.09 n/a
Pro forma................................. $(0.12) n/a
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 1999 and 1998: no dividend yield; expected
volatility of 60%; expected lives of five years for all options; and a risk free
interest rate of 6.04% and 5.48% for 1999 and 1998, respectively.
A summary of the status of the Company's fixed stock option plans as of December
31, 1999 and 1998, and changes for the years then ended is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1999 1998
---- ----
Weighted Weighted
average average
Number exercise price Number exercise price
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Option outstanding at
beginning of year.............. 260,825 $ 9.30 -0- $ -0-
Options granted.................. 139,454 8.59 260,825 9.30
Options exercised................ (27,666) 9.30 -0- -0-
Options forfeited................ -0- -0- -0- -0-
------- ------ ------- ------
Options outstanding at
end of year.................... 372,613 $ 9.05 260,825 $ 9.30
======= ====== ======= ======
Options exercisable at
end of year.................... 357,370 $ 9.11 249,534 $ 9.30
======= ====== ======= ======
Weighted average fair value of
options granted during year.... $ 4.39 $ 5.24
====== ======
</TABLE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------- ----------------------------------
Number Weighted Avg. Number
Exercise at Outstanding Remaining Weighted Avg. Exercisable at Weighted Avg.
Prices December 31, 1999 Contractual Life Exercise Price December 31, 1999 Exercise Price
-------- ----------------- ---------------- -------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
$ 9.30 316,154 8.6 years $ 9.30 316,154 $ 9.30
$ 9.29 1,130 8.8 years $ 9.29 1,130 $ 9.29
$ 7.59 49,118 9.8 years $ 7.59 36,698 $ 7.59
$ 7.58 565 9.8 years $ 7.58 565 $ 7.58
$ 7.53 5,646 10.0 years $ 7.53 2,823 $ 7.53
------- -------
372,613 357,370
======= =======
</TABLE>
NOTE 12 - 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
F-33
<PAGE>
amount of these loans was $5.5 million and $982 thousand at December 31, 1999
and 1998, respectively. For the year ended December 31, 1999, $5.5 million in
funds were disbursed and $791 thousand 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 $246 thousand 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 13 - 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 always require collateral or other security to support
financial instruments with credit risk. The approximate contract amounts are as
follows:
(In thousands) December 31,
------------------------
1999 1998
------ ------
Unfunded lines of credit................ $2,230 $1,216
Standby letters of credit............... 399 149
Unfunded construction loan commitments.. 2,983 4,145
Unfunded commercial loan commitments.... 8,964 9,966
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.
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 1999 or
1998.
NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
entities to disclose the estimated
F-34
<PAGE>
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.
Fair value of financial instruments actively traded in a secondary market has
been estimated using quoted market prices.
<TABLE>
<CAPTION>
(In thousands) 1999 1998
------------------------------- -------------------------------
Amount Value Amount Value
-------- -------------- -------- --------------
<S> <C> <C> <C> <C>
Cash and cash equivalents.......................... $ 5,136 $ 5,136 $17,296 $17,296
======= ======= ======= =======
Investment securities, including Federal Reserve
Bank and FHLB stock ............................... $27,682 $27,378 $10,074 $10,074
======= ======= ======= =======
</TABLE>
The fair value of the total 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.
<TABLE>
<CAPTION>
(In thousands) 1999 1998
------------------------------- -------------------------------
Amount Value Amount Value
-------- -------------- -------- --------------
<S> <C> <C> <C> <C>
Loans............................................... $99,840 $99,014 $46,812 $46,790
======= ======= ======= =======
</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>
(In thousands) 1999 1998
------------------------------- -------------------------------
Amount Value Amount Value
-------- -------------- -------- --------------
<S> <C> <C> <C> <C>
Deposits with stated maturities......... $34,154 $34,296 $19,350 $19,396
======= ======= ======= =======
</TABLE>
F-35
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Deposits with no stated maturities...... $76,119 $76,119 $41,368 $41,368
======= ======= ======= =======
Borrowing with stated maturities........ $ 9,000 $ 9,054 $ -0- $ -0-
======= ======= ======= =======
Borrowings with no stated maturities.... $ 571 $ 571 $ -0- $ -0-
======= ======= ======= =======
</TABLE>
The fair value of commitments to originate loans and other off-balance sheet
instruments is estimated using fees currently charged to enter into similar
agreements taking into account the remaining terms of the agreements and the
present creditworthiness of the counterparties. For fixed rate loan commitments,
the fair value also considers the difference between current levels of interest
and the committed rates. As of December 31, 1999 and December 31, 1998 the fair
value of these commitments, which are primarily comprised of floating rate loan
commitments priced to market at funding, with notional amounts of $14.6 million
and $15.5 million respectively, was immaterial.
The fair value of other financial instruments, including interest receivable and
interest payable, approximates the carrying value due to the short term nature
of these instruments.
NOTE 15 - REGULATORY MATTERS
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 cash 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, 1999, that
the Bank meets all capital adequacy requirements to which it is subject.
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>
December 31, 1999 To Be Well Capitalized
For Capital Under Prompt Corrective
(dollars in thousands) Actual Adequacy Purposes Action Provisions
------------------ -------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to risk weighted assets)............. $15,131 13.28% >$9,114 >8.00% >$11,392 >10.00%
- - - -
Tier I Capital
(to risk weighted assets)............. $14,114 12.39% >$4,557 >4.00% >$ 6,835 > 6.00%
- - - -
Tier I Capital
(to average assets)................... $14,114 10.74% >$5,258 >4.00% >$ 6,573 > 5.00%
- - - -
</TABLE>
F-36
<PAGE>
<TABLE>
<CAPTION>
December 31, 1998 To Be Well Capitalized
For Capital Under Prompt Corrective
(dollars in thousands) Actual Adequacy Purposes Action Provisions
------------------ -------------------- -----------------------
<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>
NOTE 16 - PLAN OF MERGER AND RECAPITALIZATION
During September 1997, Admiralty entered into an Agreement and Plan of Merger
(the Agreement) with 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
$7.5 million. Additionally, Admiralty paid a finder fee of $500 thousand,
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 $3.9 million of goodwill which is being amortized on a straight-line
basis over 25 years. Amortization expense for the years ended December 31, 1999
and 1998 was $154 thousand and $147 thousand respectively.
The following represents the unaudited pro forma financial information of
Admiralty as if the acquisition occurred on January 1, 1998. 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.
UNAUDITED PRO FORMA
-------------------
Year ended
(In thousands, except per share data) December 31, 1998
-----------------
Interest income......................... $4,249
Interest expense........................ 1,165
------
Net interest income..................... $3,084
------
Net income (loss)....................... $ (444)
======
Net income (loss) per share
Class A Common Stock.................. $ 0.50
Class B Common Stock.................. $(1.06)
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 903,286 shares of the Class B
Stock. Each Class A Unit had a purchase price of $10.00. In addition, to
compensate directors of the Company for their time and efforts in organizing the
Company and consummating the Change in Control, the Board of Directors of the
Company awarded warrants to purchase 169,371 shares of Class B common stock in
the aggregate to members of the Board of Directors of the Company and, as part
of the consideration in the Change in Control, the Company issued warrants to
purchase 16,937 shares of common stock to the former majority shareholder of
WEFG. Each of these warrants entitles the holder to purchase one share of the
Class B Stock, at a purchase price of $9.74 per share, for a period commencing
January 22,
F-37
<PAGE>
1999, and ending January 21, 2002. The expiration date of the warrants is
subject to acceleration as provided below and any warrant not exercised on or
before the expiration date shall expire and shall not thereafter be exercisable.
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 has the right to accelerate the expiration date of the warrants in
the event that (i) the Class B stock is traded on a nationally recognized
securities exchange or on the NASDAQ National or SmallCap Market, and (ii) the
Class B stock has traded at $13.28 or above and has not traded below $13.28 per
share for 20 consecutive trading days. In the event these conditions are met,
the Company may, but is not obligated, to issue a notice of acceleration to each
warrant holder. Upon issuance of the notice, the warrants will expire 30 days
after the date of notice. To the extent the Company issues the notice of
acceleration, it will be required to redeem each outstanding but unexercised
warrant for a price of $0.09 per warrant upon the expiration of the warrants.
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.
F-38
<PAGE>
No dealer, salesperson or any other
person has been authorized to give
information or make any 700,000 to
representation not contained in 1,100,000 Shares
this prospectus in connection with Class B Common Stock
the offer made hereby. If given or
made, such information or
representation must not be relied
upon as having been authorized by ADMIRALTY BANCORP, INC.
company or underwriter. This
prospectus does not constitute an
offer to sell or a solicitation of
an offer to buy any of the P R O S P E C T U S
securities offered hereby in any
jurisdiction to any person to whom
it is unlawful to make such offer
in such jurisdiction. Neither the
delivery of this prospectus nor any
sale made hereunder shall, under
any circumstances, create any
implication that there has been no
change in the affairs of the
company since the date hereof or
that information contained herein
is current as of any time
subsequent to such date.
Until _____________, 2000 (25 days
after the date of the prospectus),
all dealers effecting transactions
in the common stock, whether or not
participating in this distribution,
may be required to deliver a _______________, 2000
prospectus. This is in addition to
the obligation of dealers to
deliver a prospectus when acting as
underwriters and with respect to
their unsold allotments or
subscriptions.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Article EIGHT of the Restated Certificate of Incorporation of the
Company provides that the Company shall indemnify its present and former
officers and directors and may, by action of its Board of Directors, indemnify
its present and former employees and agents and persons serving at its request
against expenses, including attorneys' fees, judgments, fines or amounts paid in
settlement incurred in connection with any pending, threatened or completed
action (civil or criminal) if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Company.
Under Section 145 of the Delaware General Corporation Law ("DGCL"), the
Company may indemnify a corporate agent in a specific case if a determination is
made by any of the following that the applicable standard of conduct was met:
(i) the Board of Directors, or a committee thereof, acting by a majority vote of
a quorum consisting of disinterested directors; (ii) by independent legal
counsel, if there is not a quorum of disinterested directors or if the
disinterested quorum empowers counsel to make the determination; or (iii) by the
shareholders.
Section 145 of the DGCL further provides that a corporate agent is
entitled to mandatory indemnification to the extent that the agent is successful
on the merits or otherwise in any proceeding, or in defense of any claim, issue
or matter in the proceeding. In advance of the final disposition of a
proceeding, the Company may pay an agent's expenses if the agent agrees to repay
the expenses unless it is ultimately determined he is entitled to
indemnification.
Article EIGHT also provides that such indemnification shall not exclude
any other rights to indemnification to which a person may otherwise be entitled,
and authorizes the Company to purchase insurance on behalf of any of the persons
enumerated against any liability whether or not the Company would have the power
to indemnify him under the provisions of Article EIGHT.
Article EIGHT of the Company's Certification of Incorporation provides
that a director of the Company shall not be personally liable to the Company or
its shareholders for monetary damages for a breach of any fiduciary duty as
director owned to the Company or its shareholders except to the extent such
exemption from liability or limitation thereof is not permitted under the DGCL.
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth the expenses (other than underwriting
compensation expected to be incurred) in connection with the offering described
in this Registration Statement.
<PAGE>
All of such amounts (except the SEC Registration Fee and the NASD
Filing Fee) are estimated.
SEC Registration Fee $ 3,194
Printing and Engraving Costs 15,000
Legal Fees and Expenses 35,000
Accounting Fees and Expenses 25,000
Transfer Agent and Registrar Fees and Expenses 2,500
Miscellaneous 19,306
--------
TOTAL $100,000
Item 26. Recent Sales of Unregistered Securities
The following information relates to securities of the Company issued
or sold within the past three years which were not registered under the
Securities Act of 1933, as amended (the "Securities Act"):
In September, 1997, the Company issued 88,881 shares of Class A stock
and 133,320 shares of Class B stock to its founders pursuant to one exemption
from registration contained in Section 4(3) of the Securities Act. In January,
1998, the Company consummated a private placement of units (the "Units"). Each
Unit consists of one (1) share of Class A Common Stock (the "Class A Stock") and
one (1) Class B Common Stock purchase warrant (the "Warrant"). Each Warrant
permits the holder thereof to purchase one (1) share of the Company's Class B
Common Stock for a purchase price of $9.74 per share. Each Warrant has a term of
four (4) years. The sale of the Units was undertaken in accordance with Rule 506
of Regulation D. Approximately 800,000 units were sold to 71 purchasers, all of
whom the Company believes are "accredited investors" as defined in Rule 501 of
Regulation D, for gross proceeds of $8,000,000.
Item 27. Exhibits
Exhibits List
Exhibit
Number Description of Exhibits
------- -----------------------
3.1 Restated Certificate of Incorporation of Admiralty Bancorp, Inc.,
a Delaware corporation (1)
3.2 Certificate of Incorporation of Admiralty Bank (1)
3.3 Bylaws of Admiralty Bancorp, Inc., a Delaware corporation (1)
3.4 Bylaws of Admiralty Bank (1)
4 Form of Class B Common Stock Certificate (1)
5 Opinion of Jamieson, Moore, Peskin & Spicer, P.C.
10.1 Lease Agreement between Two South Orange Street, L.L.C. and
Admiralty Bank (without exhibits)
10.2 Employment Agreement with Ward Kellogg (1)
21 Subsidiaries of the Registrant
23.1 Consent of Jamieson, Moore, Peskin & Spicer (see Exhibit 5)
<PAGE>
23.2 Consent of KPMG LLP, West Palm Beach, FL as auditor to Admiralty
Bancorp, Inc.
23.3 Consent of Grant Thornton, LLP, Philadelphia, PA as auditor to
Admiralty Bancorp, Inc.
23.4 Consent of Randy O. Burden
23.5 Consent of Patrick Mathes
23.6 Consent of Douglas Hooker
24 Power of Attorney
27 Financial Data Schedule
99 Form of Subscription Agreement
(1) Incorporated by reference from the registration statement on Form SB-2,
registration number 333-60307.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Palm Beach Gardens, State
of Florida, on the 15 day of September, 2000.
ADMIRALTY BANCORP, INC.
/s/ Bruce A. Mahon
---------------------------------
BRUCE A. MAHON
Chairman of the Board
/s/ William Berger
---------------------------------
WILLIAM BERGER
Director
/s/ David B. Dickenson
---------------------------------
DAVID B. DICKENSON
Director
/s/ Leslie E. Goodman
---------------------------------
LESLIE E. GOODMAN
Director
/s/ Thomas L. Gray, Jr.
---------------------------------
THOMAS L. GRAY, JR.
Director
/s/ Thomas J. Hanford
---------------------------------
THOMAS J. HANFORD
Director
/s/ Sidney L. Hofing
---------------------------------
SIDNEY L. HOFING
Director
/s/ Ward Kellogg
---------------------------------
WARD KELLOGG
CEO and Director
(Principle Executive Officer)
/s/ Peter L. A. Pantages
---------------------------------
PETER L. A. PANTAGES
Director
/s/ Richard P. Rosa
---------------------------------
RICHARD P. ROSA
<PAGE>
Director
/s/ Craig A. Spencer
---------------------------------
CRAIG A. SPENCER
Director
/s/ Joseph W. Veccia, Jr.
---------------------------------
JOSEPH W. VECCIA, JR.
Director
/s/ Mark A. Wolters
---------------------------------
MARK A. WOLTERS
Director
/s George R. Zoffinger
---------------------------------
GEORGE R. ZOFFINGER
Director
/s/ Kevin M. Sacket
---------------------------------
KEVIN M. SACKET
Treasurer
(Principle Financial Officer)
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
------- -----------
5 Opinion of Jamieson, Moore, Peskin & Spicer, P.C.
10.1 Lease Agreement between Two South Orange Street, L.L.C. and
Admiralty Bank (without exhibits).
21 Subsidiaries of the Registrant
23.1 Consent of Jamieson, Moore, Peskin & Spicer (see Exhibit 5)
23.2 Consent of KPMG LLP, West Palm Beach, FL as auditor to Admiralty
Bancorp, Inc.
23.3 Consent of Grant Thornton, LLP, Philadelphia, PA as auditor
to Admiralty Bancorp, Inc.
23.4 Consent of Randy O. Burden
23.5 Consent of Patrick Mathes
23.6 Consent of Douglas Hooker
24 Power of Attorney
27 Financial Data Schedule
99 Form of Subscription Agreement
