U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 005-55641
UNITED FINANCIAL HOLDINGS, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
FLORIDA 59-2156002
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
333 THIRD AVENUE NORTH,
SUITE 200 33701-3346
ST. PETERSBURG, FLORIDA (Zip Code)
(Address of Principal Executive Offices)
(727) 898-2265
(Issuer's Telephone Number, Including Area Code)
----------------------
Securities registered pursuant to Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of each Class on Which Registered
------------------- ---------------------
None None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Shares, par value $.01 per share
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes X
No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendments to this Form 10-KSB. [ ]
The issuer's gross revenues for its most recent fiscal year was $19,831,356.
The aggregate market value of the Common Stock of the issuer held by
non-affiliates as of March 1, 2000, was approximately $16,146,417, as computed
by reference to the closing price of the Common Stock as quoted on the Nasdaq
National Market System on such date. As of March 1, 2000, there were 4,244,598
issued and outstanding Common Stock of the issuer.
Transitional Small Business Disclosure Format (check one): Yes ___ No _X_
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement of the issuer for the 2000 Annual
Meeting of Shareholders to be filed with the Securities and Exchange Commission
no later than 120 days after the end of the issuer's 1999 fiscal year are
incorporated by reference into Part III of this Form 10-KSB.
<PAGE>
UNITED FINANCIAL HOLDINGS, INC.
FORM 10-KSB
Fiscal Year Ended December 31, 1999
Item Number in
FORM 10-KSB Page
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PART I
1. Description of Business 3
2. Description of Property 21
3. Legal Proceedings 22
4. Submission of Matters to a Vote of Security-Holders 22
PART II
5. Market for Common Equity and Related Stockholder Matters 22
6. Management's Discussion and Analysis of Financial Condition and
Results of Operations 24
7. Consolidated Financial Statements 49
8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 50
PART III
9. Directors, Executive Officers, Promoters and Control Persons
Compliance with Section 16(a) of the Exchange Act 50
10. Executive Compensation 50
11. Security Ownership of Certain Beneficial
Owners and Management 50
12. Certain Relationships and Related Transactions 50
13. Exhibits and Reports on Form 8-K 50
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
United Financial Holdings, Inc. (the "Company") is a registered bank
holding company formed in 1982, the principal subsidiary of which is United Bank
and Trust Company (the "Bank"), a Florida-chartered commercial bank
headquartered in St. Petersburg, Florida. The Bank was founded in 1979 and is a
community-oriented, full service commercial bank with five branch offices
serving the southern Pinellas County area of the State of Florida. The Bank
provides a broad range of traditional banking services with emphasis on
commercial loans and loans under the lending program of the U.S. Small Business
Administration (the "SBA"). The Company's operations include three business
segments: commercial banking, trust services, and investment advisory services,
which constituted 84.6%, 15.3% and 0.1%, respectively, of the Company's 1999
pre-tax income before corporate overhead. At December 31, 1999, the Company had
consolidated total assets of $209.5 million, net loans of $153.5 million,
deposits of $175.1 million and stockholders' equity of $16.8 million.
The Bank is a community-oriented full service, commercial bank and
currently operating from five branch offices serving the southern Pinellas
County area of the State of Florida. It offers consumer and commercial loans,
ATM cards, credit cards, and a full range of deposit account types including
demand deposits, NOW accounts, money market accounts, savings accounts, and
certificates of deposit. Additionally, the Bank offers internet banking and a
bill payment service. The primary focus of the Bank's commercial lending
activities is on loans to small and medium sized businesses and professional
firms. The Bank's commercial loans include loans secured by real estate or other
assets, loans made under the SBA's lending program and secured and unsecured
loans to small businesses. The Company believes the Bank is one of the largest
originators, among similarly sized financial institutions, of SBA loans in the
State of Florida (measured by dollar volume of loans originated).
The Company's other operating subsidiaries are Eickhoff, Pieper, &
Willoughby, Inc., an investment advisory firm registered under the Investment
Advisers Act of 1940 ("EPW") headquartered in Tampa, Florida, with an office in
Jacksonville, Florida, and United Trust Company, a Florida-chartered trust
company ("United Trust") registered with the Florida Department of Banking and
Finance and located in St. Petersburg, Florida. EPW offers investment management
services to corporate, municipal and high net worth individual clients
throughout the State of Florida. As of December 31, 1999, EPW had $334.9 million
in assets under management. United Trust is a wholesale provider of data
processing, administrative and accounting support and asset custody services to
professionals holding assets in trust (primarily legal and accounting firms).
United Trust also provides retail trust and investment management services to
individual and corporate clients. As of December 31, 1999, United Trust had
$317.7 million in assets under trust.
Background
In 1986 a group of investors, headed by Neil W. Savage, the Company's
President and Chief Executive Officer and the Bank's Chairman and Chief
Executive Officer, acquired control of the Company, then known as Pinellas
Bancshares Corporation. The Company's name was changed to its present name in
1995 and the Bank's name was changed from United Bank of Pinellas to its present
name that same year.
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In September 1995 the Company purchased FSC, a trust data processing and
accounting service for professionals, and merged this entity into the Company.
In January 1996, the Company acquired EPW. The Company formed United Trust
during the fourth quarter of 1997 and effective December 31, 1997 transferred
all of the Bank's trust assets to United Trust.
Business Strategy
The principal elements of the Company's business strategy are to increase
its market share in its existing business segments and to seek out niche
business segments in which the Company can compete effectively in order to
create new sources of non-interest income and increase traditional interest
income from new lending opportunities. The Company has sought to implement its
strategy of increasing its market share in its existing business segments by
expanding the Bank's market coverage through de novo branching, increasing the
Bank's emphasis on originating loans secured by real estate and other assets for
its own portfolio, pursuing small business secured and unsecured lending for its
own portfolio, and continuing to originate a high volume of SBA loans, both for
its own portfolio and for sale in the secondary market. A primary element of the
Company's business strategy as a community banking organization is to seek to
provide customers with a level of personalized service exceeding that provided
by its competitors, including the local banking operations of large regional and
national banking companies.
The Company has sought to add new sources of non-interest income through
the creation of United Trust, which receives fees for the wholesale trust
services it offers to legal and accounting firms and the retail trust and
investment management services it offers to other clients, and the acquisition
of EPW, which generates fee income from the investment management services it
offers to corporate, municipal and high net worth individual clients. By
expanding the range of trust and investment management services it offers, the
Company seeks to differentiate itself from other similarly sized community
banking organizations operating in the Company's market. While pursuing these
strategies, management remains committed to improving asset quality, managing
interest rate risk, enhancing profitability and maintaining its status as a
well-capitalized institution for regulatory capital purposes.
As a result of this business strategy, the Company's total assets have
increased from approximately $122.7 million at December 31, 1996 to $209.5
million at December 31, 1999. The Company's consolidated net revenues increased
from $10.7 million for the year ended December 31, 1996 to $13.2 million for the
year ended December 31, 1999. During this period of asset and revenue growth,
the Company's net income increased from $1.5 million for the year ended December
31, 1996 to $2.3 million for the year ended December 31, 1999.
The Company intends to continue selectively adding branches in its market
area., and completed its purchase and opening of a new branch in April 1999. The
Company has no current plans to add Bank branches outside of the Pinellas County
market. The Company's current goal is to open one new branch each year.
Accordingly, in the future, the Company may consider strategic expansion though
the acquisition of other banks or bank branches or by de novo branching. Similar
to the Company's previous efforts that resulted in it establishing United Trust
and acquiring EPW, the Company may consider from time to time expansion
opportunities into other business lines that might add to the Company's
non-interest income and the acquisition or development of other businesses that
the Company considers complementary to its existing business. For example, the
Company recently completed the creation of a new property and casualty insurance
company and made a minority investment in the company. From time to time, the
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Company may commence similar exploratory efforts to evaluate the possibility of
acquiring or establishing similar or additional lines of business.
Market Area
Currently, the Bank has five offices located in southern Pinellas County,
Florida, which is the Bank's primary market area. The population of Pinellas
County was estimated to be 899,000 on April 1, 1999 by the University of
Florida's Bureau of Economic and Business Research. This compares with a
population of 852,000 at the 1990 census and 729,000 at the 1980 census.
Pinellas County has been a retirement and tourism destination for many years,
and over 25% of its population is over 65 years of age, compared with a
state-wide average of 18%.
According to information published by the Florida Bankers Association, as
of December 31, 1998, Pinellas County was the fourth largest county in Florida
in terms of bank and thrift deposits, with total deposits of $13.3 billion, or
6.58% of the state's total deposits. There is a significant seasonal population
increase during the months of November to April of each year; seasonal residents
are not included in the cited population statistics. The Company believes that
while the population of Pinellas County will continue to grow, the rate of
growth is likely to be lower than the population growth rate of the State of
Florida as a whole, and is likely to slow due to the nature of the market area.
As a peninsula surrounded on the south, east and west by water, Pinellas County
has limited room for future development. The local economy is dependent upon
service industries, manufacturing, tourism, and medical facilities as its major
sources of employment and commerce.
United Trust's primary market for retail business is also Pinellas County.
Its wholesale services are marketed more widely to the Tampa Bay Area,
consisting of Pinellas, Hillsborough, Pasco and Manatee Counties. EPW markets
its services to high net worth individuals and to commercial and governmental
clients throughout the State of Florida and secondarily in the Southeastern
United States.
Pinellas County is a highly competitive market for financial, trust and
investment services. The Bank faces competition for deposits from other
commercial banks, thrift institutions, money market funds and credit unions.
Competition for loans of the types originated by the Bank is also strong.
Management believes that Pinellas County is considered an attractive market by
financial institutions seeking to obtain deposits, as evidenced by the 282
offices of commercial banks and thrift institutions existing in Pinellas County
at December 31, 1999.
Operating Strategy
Management believes that the consolidation of the banking industry and the
emergence of large regional and national bank holding companies has created
opportunities for locally-owned and operated financial institutions to
effectively compete for customers who desire a level of personalized banking
services that the large banking organizations may not be able to offer. The Bank
was organized as a community financial institution owned and managed by people
who are actively involved in the Bank's local market area and committed to the
area's economic growth and development. With local ownership and management, the
Company believes that the Bank can be more responsive to the banking needs of
the community it serves and can tailor its services to meet its customers' needs
rather than providing the standardized services that larger bank holding
companies tend to offer.
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Local ownership and operation allows the Bank faster, more responsive and
flexible decision-making which may not be available at the branch offices of the
large bank holding companies that constitute the majority of the financial
institution offices located in the Bank's market area.
The principal business of the Bank is to attract deposits from the general
public and to invest those funds in various types of loans and other
interest-earning assets. The Bank's earnings depend primarily upon the
difference between (i) the interest and fees received by the Bank from loans,
the securities held in its investment portfolio and other investments; and (ii)
expenses incurred by the Bank in connection with obtaining funds for lending
(including interest paid on deposits and other borrowings) and expenses relating
to day-to-day operations.
The Bank's customers are primarily individuals (including seasonal
residents), professionals and small and medium size businesses, located
predominantly in Pinellas County, Florida. The Bank seeks to develop new
business through an ongoing program of personal calls on both present and
potential customers. As a local independent bank, the Bank utilizes traditional
local advertising media as well as direct mailings, telephone contacts, and
brochures to promote the Bank and develop loans and deposits. In addition, the
Bank's directors all have worked or lived in or near the Bank's market area for
a number of years, contributing to the Bank's image as a locally-oriented
independent institution, which management believes is an important factor to its
targeted customer base.
Sources of Funds
The primary source of funds for lending, investment and other general
business purposes is deposit accounts. Other sources of funds are loan
repayments, proceeds from the sale of loans and investment securities, and
borrowings. The Bank expects that loan repayments will be a relatively stable
source of funds, while levels of deposits maintained at the Bank will be
significantly influenced by general interest rate and money market conditions.
Generally, the Company may use short-term borrowings to compensate for
reductions in sources of funds normally available, while longer term borrowings
may be used to support expanded lending activities. Management believes that the
Company's funding requirements can be met through retail deposits in the
Company's local market area without reliance on brokered deposits. For
additional discussion of asset and liability management policies and strategies,
see "Liquidity and Asset/Liability Management."
As of December 31, 1999, the scheduled maturities of deposits of $100,000
or more were as follows (dollars in thousands):
Three months or less................................... $ 4,214
Over three through six months....................... 3,793
Six through twelve months.............................. 4,413
Over twelve months..................................... 4,259
---------
$ 16,679
The Bank offers a full range of deposit services, including checking and
other transaction accounts, savings accounts and time deposits. The following
table sets forth the principal types of deposit accounts offered and the
aggregate amounts of such accounts at December 31, 1999 (dollars in thousands):
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Weighted Percent
Average of Total
Interest Rate Amount Deposits
------------- -------- ----------
Non-interest bearing.............. 0.00% $ 32,936 18.8%
NOW and Money Market accounts..... 2.85 67,914 38.8
Savings........................... 2.05 4,873 2.8
Time deposits with original
maturities of:
One year or less............... 4.93 51,016 29.1
Over 1 year through 5 years.... 5.71 18,359 10.5
-------- ---------
Total time deposits.......... 5.20 69,375 39.6
-------- ---------
Total deposits............... 3.13% $175,098 100.0%
======== =========
At December 31, 1999, scheduled maturities of time deposits were as
follows (dollars in thousands):
Period Ended December 31, Percent of
Time Time
Deposits Deposits
---------- -----------
2000.............................. $ 51,016 73.5%
2001.............................. 13,552 19.5
2002.............................. 3,447 5.0
2003.............................. 704 1.0
2004.............................. 656 1.0
---------- ------------
Total time deposits............. $ 69,375 100.0%
========== ============
Lending Activities
The primary source of income generated by the Bank is interest earned on
loans held in the Bank's loan portfolio. The Bank's lending activities include
commercial, real estate and consumer loans. During 1999, the Bank's net loans
increased $37.0 million.
Commercial Loans. The Bank offers commercial loans for working capital
purposes, business expansion, seasonal needs, acquisition of equipment, and
other business needs. Collateral pledged to secure these loans may include
equipment, accounts receivable, or other assets. The Bank often requires
personal guarantees of these loans.
SBA Loans. The SBA lending program was established by Congress in 1953 to
assist new and established small businesses in obtaining necessary capital.
Under this program, the SBA guarantees up to 90% of the principal balance of the
loan, subject to a maximum guarantee per loan of $750,000, thereby removing a
portion of the credit risk to the lending financial institution and generally
enabling lenders to offer loans under this program at more attractive interest
rates for borrowers than other available financing. The SBA loans originated by
the Company typically have SBA guarantees for 60% to 90% of the principal
balance of the loan. The existence of a secondary market for the guaranteed
portion of the SBA loans provides the Bank an opportunity to sell the guaranteed
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portion of the loans and obtain additional liquidity and income. The Bank
typically services such loans and receives servicing fees with respect to such
loans.
The only loans sold by the Bank during 1999, 1998 and 1997 were SBA loans.
When the Bank sells an SBA loan and retains the servicing of the loan, a
servicing asset is recorded. The book value of such assets, which the Company
believes approximates the fair value of such assets, at December 31, 1999,
December 31, 1998, and December 31, 1997 was $408 thousand, $141 thousand, and
$78 thousand, respectively. Amortization expense relating to such servicing
assets of $25 thousand, $13 thousand and $2 thousand was recorded for 1999, 1998
and 1997, respectively. The Company periodically reviews these assets for
impairment. No valuation for impairment of these assets was deemed necessary for
the periods presented.
At December 31, 1997, the Bank had $5.7 million of SBA loans, of which
approximately 19.0% was guaranteed by the SBA. During 1997, the Bank sold
guaranteed portions of its SBA loans totaling $3.7 million. At December 31,
1998, the Bank had $6.6 million of SBA loans, of which approximately 22.0% was
guaranteed by the SBA. During 1998, the Bank sold guaranteed portions of its SBA
loans totaling $2.9 million. At December 31, 1999, the Bank had $10.6 million of
SBA loans, of which approximately 27.4% was guaranteed by the SBA. During 1999,
the Bank sold guaranteed portions of its SBA loans totaling $8.1 million. The
Bank recognized gains on the sale of SBA loans during 1997, 1998 and 1999 of
$290 thousand, $239 thousand and $442 thousand, respectively, and had loan
servicing fees on SBA loans during 1997, 1998 and 1999 of $164 thousand, $148
thousand and $166 thousand, respectively.
Real Estate Loans. The Bank offers commercial and, on a limited basis,
residential real estate loans. Commercial real estate loans are made for general
corporate purposes, construction and expansion of facilities. Residential loans
are made in the form of fixed and variable rate mortgages and home equity loans.
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The following tables set forth information concerning the loan portfolio,
based on total dollars and percent of portfolio, by collateral type as of the
dates indicated (dollars in thousands):
At December 31,
1999 1998 1997
--------- --------- ---------
Real estate mortgage loans:
Commercial real estate..............$ 82,622 $ 60,693 $ 44,547
One-to-four family residential...... 7,933 7,075 7,482
Multifamily residential............. 13,603 6,673 5,485
Construction and land development... 4,585 3,572 3,071
--------- --------- ---------
Total real estate mortgage loans.. 108,743 78,013 60,585
Commercial loans...................... 41,358 34,904 30,536
Consumer loans........................ 5,930 4,438 3,998
Other loans........................... 839 1,803 1,871
--------- --------- ---------
Gross loans......................... 156,870 119,158 96,990
Allowances for loan losses............ (2,341) (1,984) (1,648)
Unearned fees (1,032) (628) (521)
--------- --------- ---------
Total loans net of allowance and
unearned fees......................$153,497 $116,546 $ 94,821
========= ========= =========
At December 31,
1999 1998 1997
--------- --------- ---------
Real estate mortgage loans:
Commercial real estate.............. 52.7% 50.9% 45.9%
One-to-four family residential...... 5.1 5.9 7.7
Multifamily residential............. 8.7 5.6 5.7
Construction and land development... 2.9 3.1 3.2
--------- --------- ---------
Total real estate mortgage loans.. 69.4 65.5 62.5
Commercial loans...................... 26.4 29.3 31.5
Consumer loans........................ 3.7 3.7 4.1
Other Loans........................... 0.5 1.5 1.9
--------- --------- ---------
Gross loans......................... 100.0% 100.0% 100.0 %
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The following table sets forth the contractual amortization of real estate
and commercial loans at December 31, 1999 and December 31, 1998. Loans having no
stated schedule of repayments and no stated maturity are reported as due in one
year or less. The table also sets forth the dollar amount of loans scheduled to
mature after one year, according to their interest rate characteristics (dollars
in thousands):
December 31, 1999 December 31, 1998
------------------- -------------------
Real Real
Estate Commercial Estate Commercial
Amounts due:
One year or less............ $ 38,999 $ 29,181 $ 27,448 $ 24,751
After one through 5 yrs..... 54,665 8,578 40,433 9,722
More than five years........ 15,079 3,599 10,132 431
--------- --------- ---------- ---------
Total................... $ 108,743 $ 41,358 $ 78,013 $ 34,904
========= ========= ========= ========
Interest rate terms on amounts
due after one year:
Adjustable.................. $ 40,533 $ 701 $ 29,195 $ 3,042
Fixed....................... 29,208 11,476 21,370 7,111
--------- --------- --------- --------
Total................... $ 69,741 $ 12,177 $ 50,565 $ 10,153
========= ========= ========= ========
Investment Management Services
EPW offers investment management services to high net worth individuals,
corporate pension and profit sharing plans, charitable entities, and state and
local government pension plans. EPW receives fees for its services which vary
according to the amount of assets in the account under management. EPW markets
its services throughout the State of Florida.
Trust Services
United Trust offers wholesale trust services that include on-line trust
account information processing, asset custody and investment support services.
These services are offered to legal and accounting firms and to other
custodians. United Trust also offers retail trust services including investment
management, probate and custodian services which are marketed principally to
customers of the Bank and EPW and clients of local attorneys and accountants.
Credit Administration
The loan approval process consists of a combination of individual and
committee loan authority. Individual lending authority is based upon experience
and is broken down into secured and unsecured requests. The Officers' Loan
Committee (the "Officers' Loan Committee") is made up of commercial lenders and
credit administration personnel. The Officers' Loan Committee currently has
final approval on all unsecured credit for $50,000 to $1,000,000 and secured
credits for $250,000 to $1,000,000. The General Loan Committee (the "General
Loan Committee") is made up of four non-employee directors, the Chairman of the
Board of Directors of the Company ("Board of Directors") and the President of
the Bank. The General Loan Committee has final approval authority for all loans
over $1,000,000 to the legal lending limit of the Bank, except for loans
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involving directors of the Company which must be approved by a vote of the full
Board of Directors with the interested director not present during the loan
discussion and vote.
The Company has a policies and procedures manual that addresses the
specific underwriting guidelines for specific types of credits. Any deviation
from these guidelines is considered to be a policy exception that must be
outlined during the approval process and voted upon by the appropriate committee
or approved by a loan officer with sufficient lending authority. The guidelines
are reviewed and approved by the Board of Directors on an annual basis.
The Company's lending philosophy is to extend credit to businesses or
individuals in the Bank's market area who demonstrate sufficient cash flow to
repay the debt and whose track record indicate they are borrowers with whom the
Bank desires to establish an ongoing lending relationship.
The loan portfolio is under continued review in order to monitor potential
credit deterioration. Loans are graded at their inception by the loan officers.
Credit administration reviews existing credits on an on-going basis. The Company
also employs an independent third-party loan review company that reviews
specific larger size credits on a quarterly basis. This quarterly review is
presented to the General Loan Committee for its further review.
Asset Quality
Allowance/Provision for Loan Losses. The allowance for loan losses
represents management's estimate of an amount adequate to provide for potential
losses within the existing loan portfolio. The allowance is based upon an
ongoing quarterly assessment of the probable estimated losses inherent in the
loan portfolio, and to a lesser extent, unused commitments to provide financing.
The methodologies for assessing the appropriateness of the allowance
consists of several key elements, which include: 1) the formula allowance; 2)
review of the underlying collateral on specific loans; and 3) historical loan
losses. The formula allowance is calculated by applying loss factors to
outstanding loans and unused commitments, in each case based on the internal
risk grade of those loans. Changes in risk grades of both performing and
non-performing loans affect the amount of the formula allowance. On the larger
criticized or classified credits, a review is conducted of the underlying
collateral that secures each credit. A worse case scenario review is conducted
on those loans to calculate the amount, if any, of potential loss. The
historical loan loss method is a review of the last six years of actual losses.
The loss percentage is calculated and applied to the current outstanding loans
in total.
Various conditions that would affect the loan portfolio are also evaluated.
General economic and business conditions that affect the portfolio are reviewed,
including: 1) credit quality trends, including trends in past due and
non-performing loans; 2) collateral values in general; 3) loan volumes and
concentration; 4) recent loss experience in particular segments of the
portfolio; 5) duration and strength of the current business cycle; 6) bank
regulatory examination results; and 7) findings of the external loan review
process. Senior management and the Directors' General Loan Committee review
these conditions quarterly. If any of these conditions presents a problem to the
loan portfolio, an additional allocation may be recommended.
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The following table sets forth information concerning the activity in the
allowance for loan losses during the periods indicated (dollars in thousands):
At December 31,
1999 1998 1997
--------- --------- ---------
Allowance at beginning of period............. $ 1,984 $ 1,647 $ 1,610
Charge-offs:
Real estate loans.......................... 144 195 -
Commercial loans........................... 274 212 52
Consumer loans............................. 42 19 39
---------- ---------- ---------
Total charge-offs...................... 460 426 91
Recoveries:
Real estate loans.......................... - - -
Commercial loans........................... 31 9 38
Consumer loans............................. 1 2 -
---------- ---------- ---------
Total recoveries....................... 32 11 38
Net charge-offs.............................. 428 415 53
Provision for loan losses.................... 785 752 90
---------- ---------- ---------
Allowance at end of period................... $ 2,341 $ 1,984 $ 1,647
========== ========== =========
The following table presents information regarding the Company's total
allowance for loan losses as well as its general allocation of such amount to
the various loan categories based upon management's estimates (dollars in
thousands):
Dec. 31, 1999 Dec. 31, 1998 Dec. 31, 1997
---------------- ----------------- -----------------
Allowance Allocation Percentage Percentage Percentage
of Loan of Loan of Loan
Amount Portfolio Amount Portfolio Amount Portfolio
------ --------- ------ --------- ------ ---------
Performing/not classified:
Commercial Loans.......... $ 448 24% $ 485 27% $ 368 31%
Real Estate Loans......... 1,063 64 607 59 459 53
Consumer Loans............ 78 7 121 7 92 9
------ ------ ------ ------ ------ ------
Subtotal.................. 1,589 95 1,213 93 919 93
Non-performing/ classified:
Marginal.................. 112 3 29 3 2 5
Substandard............... 362 2 677 4 483 2
Doubtful.................. - 0 51 0 - 0
Loss...................... - 0 - 0 - 0
------ ------ ------ ------ ------ ------
Subtotal.................. 474 5 757 8 485 7
Unallocated............... 278 0 14 0 243 0
------ ------ ------ ------ ------ ------
Total..................... $2,341 100% $1,984 100% $1,647 100%
====== ====== ====== ====== ====== ======
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Nonperforming Assets. Nonperforming assets include (i) loans which are 90
days or more past due and have been placed into non-accrual status, (ii)
accruing loans that are 90 days or more delinquent that are deemed by management
to be adequately secured and in the process of collection, and (iii) ORE (i.e.,
real estate acquired through foreclosure or deed in lieu of foreclosure). All
delinquent loans are reviewed on a regular basis and are placed on non-accrual
status when, in the opinion of management, the possibility of collecting
additional interest is deemed insufficient to warrant further accrual. As a
matter of policy, interest is not accrued on loans past due 90 days or more
unless the loan is both well secured and in process of collection. When a loan
is placed in non-accrual status, interest accruals cease and uncollected accrued
interest is reversed and charged against current income. Additional interest
income on such loans is recognized only when received.
The following table sets forth information regarding the components of
nonperforming assets at the dates indicated (dollars in thousands):
At December 31,
1999 1998 1997
------------ ------------ ------------
Real estate loans.................. $ 1,462 $ 2,820 $ 374
Commercial loans................... 453 1,181 26
Consumer loans..................... - - -
------------ ------------ ------------
Total non-accrual loans......... 1,915 4,001 400
Other Real Estate.................. 1,528 1,015 -
Accruing Loans 90 days past due 441 449 251
------------ ------------ ------------
Total nonperforming assets...... $ 3,884 $ 5,465 $ 651
============ ============ ============
The amount of gross interest income that would have been earned on
nonperforming loans was $43 thousand at December 31, 1999.
Competition
The banking industry in general, and the Bank's market area in particular,
are characterized by significant competition for both deposits and lending
opportunities. In its market area, the Bank competes with other commercial
banks, thrift institutions, credit unions, finance companies, mutual funds,
insurance companies, brokerage and investment banking firms, and various other
non-bank providers of financial services. Competition for deposits may have the
effect of increasing the rates of interest the Bank will pay on deposits, which
would increase the Bank's cost of funds and possibly reduce its net earnings.
Competition for loans may have the effect of lowering the rate of interest the
Bank will receive on its loans, which would lower the Bank's return on invested
assets and possibly reduce its net earnings. Many of the Bank's competitors have
been in existence for a significantly longer period of time than the Bank, are
larger and have greater financial and other resources and lending limits than
the Bank, and may offer certain services that the Bank does not provide.
There are approximately 282 branch offices of commercial banks and thrift
institutions operating in Pinellas County. In order to compete effectively, the
Bank seeks to differentiate its services from those offered by larger
institutions, including the branch offices of large regional and national bank
holding companies. The Bank seeks to provide banking products and services that
are customized to its market area and target customers on a personalized basis,
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which management believes cannot be matched by many of the larger institutions
that tend to offer many banking products and services on an impersonal basis.
Management believes that, as the banking industry has undergone further
consolidation, the opportunity to attract customers seeking personalized service
has been enhanced. The Bank seeks to tailor its products and services to its
specific geographic market and targeted customers, and to thereby attract the
business of professionals, entrepreneurs, and small to medium sized commercial
businesses while continuing to provide exceptional banking services to all of
its customers. The profitability of the Bank depends upon its ability to compete
effectively in its market area. While management believes that the Bank's local
ownership, community oriented operating philosophy and personalized service
enhances the Bank's ability to compete in its market area, there can be no
assurance that the Bank will be able to continue to compete effectively or that
competitive factors will not have an adverse effect on the Bank's operating
results or financial condition.
Employees
At December 31, 1999, the Company had 87 full-time and 7 part-time
employees, none of whom were represented by a union or subject to a collective
bargaining agreement. The Company believes its relations with its employees to
be good.
Supervision and Regulation
The Company and the Bank are extensively regulated under both federal and
state law. The following is a brief summary of certain statutes, rules and
regulations affecting the Company and the Bank. This summary is qualified in its
entirety by reference to the particular statutory and regulatory provisions
referenced below and is not intended to be an exhaustive description of the
statutes or regulations applicable to the Company's business. Supervision,
regulation and examination of the Company and the Bank by the bank regulatory
agencies are intended primarily for the protection of depositors and other
customers rather than shareholders.
Regulation of the Company. The Company is a bank holding company
registered with the Federal Reserve under the Bank Holding Company Act of 1956,
as amended ("BHC Act"). As such, the Company is subject to the supervision,
examination and reporting requirements of the BHC Act and the regulations of the
Federal Reserve.
The BHC Act requires every bank holding company to obtain the prior
approval of the Federal Reserve before: (i) it may acquire direct or indirect
ownership or control of any voting shares of any bank if, after such
acquisition, the bank holding company will directly or indirectly own or control
more than 5% of the voting shares of the bank; (ii) it or any of its
subsidiaries, other than a bank, may acquire all or substantially all of the
assets of the bank; or (iii) it may merge or consolidate with any other bank
holding company. Similar federal statutes require bank holding companies and
other companies to obtain the prior approval of the Office of Thrift Supervision
("OTS") before acquiring ownership or control of a federal savings association.
The BHC Act further provides that the Federal Reserve may not approve any
transaction that would result in a monopoly or would be in furtherance of any
combination or conspiracy to monopolize or attempt to monopolize the business of
banking in any section of the United States, or the effect of which may be
substantially to lessen competition or to tend to create a monopoly in any
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section of the country, or that in any other manner would be in restraint of
trade, unless the anti-competitive effects of the proposed transaction are
clearly outweighed by the public interest in meeting the convenience and needs
of the community served. The Federal Reserve is also required to consider the
financial and managerial resources and future prospects of the bank holding
companies and banks concerned and the convenience and needs of the communities
to be served. Consideration of financial resources generally focuses on capital
adequacy, and consideration of convenience and needs issues includes the
parties' performance under the Community Reinvestment Act of 1977, as amended
(the "CRA").
The BHC Act, as amended by the interstate banking provisions of the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Banking Act"), authorizes (i) the Company, and any other bank
holding company located in Florida to acquire a bank located in any other state,
and (ii) any bank holding company located outside Florida to acquire any
Florida-based bank, regardless of state law to the contrary, in either case
subject to certain deposit-percentage, aging requirements, and other
restrictions. The Interstate Banking Act also generally provides that national
and state-chartered banks may branch interstate through acquisitions of banks in
other states, unless a state has "opted out" of the interstate branching
provisions of the Interstate Banking Act prior to June 1, 1997. Neither Florida
nor any other state in the southeastern United States has "opted out".
Accordingly, the Company would have the ability to acquire a bank in a state in
the Southeast and thereafter consolidate all of its bank subsidiaries into a
single bank with interstate branches.
The BHC Act generally prohibits the Company from engaging in activities
other than banking or managing or controlling banks or other permissible
subsidiaries and from acquiring or retaining direct or indirect control of any
company engaged in any activities other than those activities determined by the
Federal Reserve to be so closely related to banking or managing or controlling
banks as to be a proper incident thereto.
In determining whether a particular activity is permissible, the Federal
Reserve must consider whether the performance of such an activity reasonably can
be expected to produce benefits to the public, such as greater convenience,
increased competition, or gains in efficiency, that outweigh possible adverse
effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interest, or unsound banking practices. The investment
management, data processing, administrative and accounting support and asset
custody services offered by EPW and United Trust have been determined by the
Federal Reserve to be permissible activities of bank holding companies. The BHC
Act does not place territorial limitations on permissible nonbanking activities
of bank holding companies. Despite prior approval, the Federal Reserve has the
power to order a bank holding company or its non-bank subsidiaries to terminate
any activity or to terminate its ownership or control of any subsidiary when it
has reasonable cause to believe that continuation of such activity or such
ownership or control constitutes a serious risk to the financial safety,
soundness, or stability of any bank subsidiary of the holding company.
Under Federal Reserve policy, bank holding companies are expected to act
as a source of financial strength and support to their subsidiary banks. This
support may be required at times when, absent such Federal Reserve policy, the
holding company may not be inclined to provide it. In addition, any capital
loans by a bank holding company to any bank subsidiary are subordinate in right
of payment to deposits and to certain other indebtedness of such subsidiary
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bank. In the event of a bank holding company's bankruptcy, any commitment by the
bank holding company to a federal bank regulatory agency to maintain the capital
of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a
priority payment.
Financial Services Modernization Legislation. On November 12, 1999 the
President signed into law the Gramm-Leach-Bliley Act ("Act"), a sweeping piece
of financial services reform legislation that for the first time will permit
commercial banks to affiliate with investment banks and insurance companies
through a holding company structure and will greatly expand the range of
activities in which bank affiliates and subsidiaries may engage. The Act repeals
key provisions of the Glass-Steagall Act of 1933 that have heretofore prohibited
banks from affiliating with entities engaged principally in securities
underwriting activities and overrides those state laws that prohibit
affiliations of banks and insurance companies or either discriminate against or
have a substantially adverse effect on banks selling insurance.
The Act amends the BHC Act to authorize new "financial holding companies"
("FHCs"). Under the FHC provisions of the Act, a BHC can qualify to become an
FHC if all of its bank and thrift subsidiaries are well capitalized and well
managed and have a Community Reinvestment Act ("CRA") rating of "satisfactory"
or better. Once a BHC become an FHC, it is permitted to conduct any securities,
insurance and merchant banking activities, as well as any other activities that
are "financial in nature" or incidental or complementary to a financial
activity, such as developing financial software, hosting internet web sites
relating to financial matters and operating a travel agency. Under the
regulatory structure prescribed by the Act, the Federal Reserve will act as the
"umbrella regulator" for the FHC, with each FHC subsidiary subject to
supervision and regulation by its own functional regulator or agency.
The Act also gives banks the option of conducting certain newly-permitted
financial activities in a subsidiary rather than using an FHC. Banks that
satisfy the well capitalized, well managed and CRA requirements applicable to
FHCs will be able to establish "financial subsidiaries" that are permitted to
conduct all financial activities as agency and some financial activities as
principal such as securities underwriting. The main activities in which
financial subsidiaries are prohibited from engaging are insurance underwriting,
real estate development and, at least for the next five years, merchant banking.
In addition to enabling banks and their holding companies to conduct a
wide range of financial activities, the Act also contains a number of privacy
requirements with which banks and other financial institutions must comply.
Under the Act, all financial institutions must adopt a privacy policy and make
its policy known to those who become new customers and provide annual disclosure
of its policy to all of its customers. They must also give their customers the
right to "opt out" whenever they want to disclose nonpublic customer information
to non-affiliates. An exception to this opt out requirement is made where the
third party is performing services on behalf of the financial institution or
pursuant to a joint agreement. Financial institutions are also required to take
such steps as are necessary to insure the security and confidentiality of
customer records and information and to protect against unauthorized access to
or use of such records or information.
Regulation of the Bank. The Bank is organized as a Florida-chartered
commercial bank and is regulated and supervised by the Florida Department of
Banking and Finance (the "Department"). In addition, the Bank is regulated and
supervised by the Federal Reserve, which serves as its primary federal regulator
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and, to a lesser extent, by the Federal Deposit Insurance Corporation ("FDIC")
as the administrator of the fund that insures the Bank's deposits. Accordingly,
the Department and the Federal Reserve conduct regular examinations of the Bank,
reviewing the adequacy of the loan loss reserves, quality of loans and
investments, propriety of management practices, compliance with laws and
regulations, and other aspects of the Bank's operations. In addition to these
regular examinations, the Bank must furnish to the Federal Reserve quarterly
reports containing detailed financial statements and schedules. The capital
ratios of the Bank at December 31, 1999 all exceed the current regulatory
minimum guidelines for a "well capitalized" bank.
Federal and Florida banking laws and regulations govern all areas of the
operations of the Bank, including reserves, loans, mortgages, capital, issuances
of securities, payment of dividends, and establishment of branches. As its
primary federal regulator, the Federal Reserve has authority to impose
penalties, initiate civil and administrative actions and take other steps
intended to prevent the Bank from engaging in unsafe or unsound practices. The
Bank is a member of the Bank Insurance Fund ("BIF") and, as such, deposits in
the Bank are insured by the FDIC to the maximum extent permissible by law.
The Bank is subject to the provisions of the CRA. Under the CRA, the Bank
has a continuing and affirmative obligation consistent with its safe and sound
operation to help meet the credit needs of its entire communities, including
low- and moderate-income neighborhoods. The CRA does not establish specific
lending requirements or programs for financial institutions nor does it limit
the Bank's discretion to develop the types of products and services that it
believes are best suited to their particular communities, consistent with the
CRA. The CRA requires the appropriate federal bank regulatory agency (in the
case of the Bank, the Federal Reserve), in connection with their regular
examinations, to assess a financial institution's record in meeting the credit
needs of the community serviced by it, including low- and moderate-income
neighborhoods. A federal banking agency's assessment of a financial
institution's CRA record is made available to the public. Further, such
assessment is required whenever the institution applies to, among other things,
establish a new branch that will accept deposits, relocate an existing office or
merge or consolidate with, or acquire the assets of or assume the liabilities
of, a federally-regulated financial institution. In the case where the Company
applies for approval to acquire a bank or other bank holding company, the
federal regulator approving the transaction will also assess the CRA records of
the Bank. The Bank received a "Satisfactory" CRA rating in its most recent
examination.
In April 1995, the federal banking agencies adopted amendments revising
their CRA regulations, with a phase-in schedule applicable to various
provisions. Among other things, the amended CRA regulations, which became fully
effective on July 1, 1997, substitute for the prior process-based assessment
factors a new evaluation system that will rate an institution based on its
actual performance in meeting community needs. In particular, the system now
focuses on three tests: (i) a lending test, to evaluate the institution's record
of making loans in its service areas; (ii) an investment test, to evaluate the
institution's record of investing in community development projects; and (iii) a
service test, to evaluate the institution's delivery of services through its
branches and other offices. The amended CRA regulations also clarify how an
institution's CRA performance will be considered in the application process. The
Company does not anticipate that the revised CRA regulations will have any
material impact on the Bank's operations or its CRA rating.
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Deposit Insurance. The Bank is subject to FDIC deposit insurance
assessments. The Bank is also subject to a risk-based assessment system for
insured depository institutions that takes into account the risks attributable
to different categories and concentrations of assets and liabilities. The system
assigns an institution to one of three capital categories: (i) well capitalized,
(ii) adequately capitalized, and (iii) undercapitalized. An institution is also
assigned, by the FDIC, to one of three supervisory subgroups within each capital
group. The supervisory subgroup to which an institution is assigned is based on
a supervisory evaluation provided to the FDIC by the institution's primary
federal regulator and information the FDIC determines to be relevant to the
institution's financial condition and the risk posed to the deposit insurance
funds (which may include, if applicable, information provided by the
institution's state supervisor). An institution's insurance assessment rate is
then determined based on the capital category and supervisory category to which
it is assigned. Under the risk-based assessment system, there are nine
assessment risk classifications (i.e., combinations of capital groups and
supervisory subgroups) to which different assessment rates are applied.
Assessment rates on deposits for an institution in the highest category (i.e.,
"well capitalized" and "healthy") are less than assessment rates on deposits for
an institution in the lowest category (i.e., "undercapitalized" and "substantial
supervisory concern").
In addition to FDIC insurance assessments, the Bank is also subject to
assessments used to pay interest on bonds issued by the Financing Corporation
(the "FICO") under the Deposit Insurance Funds Act (the "Funds Act"). Prior to
enactment of the Funds Act, only insurance payments by SAIF-member institutions
were available to satisfy FICO's interest payment obligations. Through the end
of 1999, the FICO assessment rate on BIF-assessable deposits is required by the
statute to be one-fifth of the SAIF rate. Thereafter, FICO assessment rates for
members of both insurance funds will presumably be equalized.
Currently, the FICO assessment rate for BIF-assessable deposits is 0.013
percent (or 1.3 basis points) and the FICO assessment rate for SAIF assessable
deposits is 0.0648 percent (or 6.48 basis points). In 1999, the Bank's total
FICO payment obligation was $16,935, all of which was attributable to the
BIF-assessable deposits. The Bank has no SAIF assessable deposits.
Capital Requirements. The Company and the Bank are required to comply with
the capital adequacy standards established by the Federal Reserve. There are
three basic measures of capital adequacy for banks that have been promulgated by
the Federal Reserve; two risk-based measures and a leverage measure. All
applicable capital standards must be satisfied for a bank holding company and a
bank to be considered in compliance.
The risk-based capital standards 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. 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 guidelines for the ratio of total capital ("Total Capital") to
risk-weighted assets (including certain off-balance-sheet items, such as standby
letters of credit) is 8.0%. At least half of Total Capital (i.e., 4% of
risk-weighted assets) must comprise common stock, minority interests in the
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equity accounts of consolidated subsidiaries, noncumulative perpetual preferred
stock, and a limited amount of cumulative perpetual preferred stock, less
goodwill and certain other intangible assets ("Tier 1 Capital"). The remainder
may consist of subordinated debt, other preferred stock, and a limited amount of
loan loss reserves ("Tier 2 Capital"). In addition, the Federal Reserve has
established minimum leverage ratio guidelines for bank holding companies. These
guidelines provide for a minimum ratio of Tier 1 Capital to average assets, less
goodwill and certain other intangible assets, of 3% for banks that meet certain
specified criteria, including having the highest regulatory rating. All other
bank holding companies generally are required to maintain a leverage ratio of at
least 3%, plus an additional cushion of 100 to 200 basis points. The guidelines
also provide that bank holding companies experiencing internal growth or making
acquisitions will be expected to maintain strong capital positions substantially
above the minimum supervisory levels, without significant reliance on intangible
assets. Furthermore, the Federal Reserve has indicated that it will consider a
"tangible Tier 1 Capital leverage ratio" (deducting all intangibles) and other
indicators of capital strength in evaluating proposals for expansion or new
activities. As of December 31, 1999 the Company's leverage ratio was 10.65%.
The FDIC Improvement Act of 1991 ("FDICIA") contains "prompt corrective
action" provisions pursuant to which banks are to be classified into one of the
five categories based upon capital adequacy, ranging from "well capitalized" to
"critically undercapitalized", and which require (subject to certain exceptions)
the appropriate federal banking agency to take prompt corrective action with
respect to an institution that becomes "significantly undercapitalized" or
"critically undercapitalized".
The Federal Reserve has issued final regulations to implement the "prompt
corrective action" provisions of the FDICIA. In general, the regulations define
the five capital categories as follows: (i) an institution is "well capitalized"
if it has a total risk-based capital ratio of 10% or greater, has a Tier 1
risk-based capital ratio of 6% or greater, has a leverage ratio of 5% or greater
and is not subject to any written capital order or directive to meet and
maintain a specific capital level for any capital measures; (ii) an institution
is "adequately capitalized" if it has a total risk-based capital ratio of 8% or
greater, has a Tier 1 risk-based capital ratio of 4% or greater, and has a
leverage ratio of 4% or greater; (iii) an institution is "undercapitalized" if
it has a total risk-based capital ratio of less than 8%, has a Tier 1 risk-based
capital ratio that is less than 4% or has a leverage ratio that is less than 4%;
(iv) an institution is "significantly undercapitalized" if it has a total
risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital ratio
that is less than 3% or a leverage ratio that is less than 3%; and (v) an
institution is "critically undercapitalized" if its "tangible equity" is equal
to or less than 2% of its total assets. The Federal Reserve also, after an
opportunity for a hearing, has authority to downgrade an institution from "well
capitalized" to "adequately capitalized" or to subject an "adequately
capitalized" or "undercapitalized" institution to the supervisory actions
applicable to the next lower category, for supervisory concerns. The degree of
regulatory scrutiny of a financial institution will increase, and the
permissible activities of the institution will decrease, as it moves downward
through the capital categories. Institutions that fall into one of the three
undercapitalized categories may be required to (i) submit a capital restoration
plan; (ii) raise additional capital; (iii) restrict their growth, deposit
interest rates, and other activities; (iv) improve their management; (iv)
eliminate management fees; or (vi) divest themselves of all or part of their
operations. Bank holding companies controlling financial institutions can be
called upon to boost the institutions' capital and to partially guarantee the
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institutions' performance under their capital restoration plans. As of December
31, 1999, the Company met the criteria to be considered well capitalized, with
Tier 1 and total capital equal to 12.9% and 14.15% of its respective total
risk-weighted assets. While the Company's capital levels have been in excess of
those required to be maintained by a "well capitalized" financial institution,
rapid growth, poor loan portfolio performance, or poor earnings performance, or
a combination of these factors, could change the Company's capital position in a
relative short period of time, making an additional capital infusion necessary.
Dividends. As a Florida-chartered commercial bank, the Bank is subject to
the laws of Florida as to the payment of dividends. Under the Florida Financial
Institutions Code, the prior approval of the Department is required if the
dividend declared by a bank in any quarter or semiannual or annual period will
exceed the sum of the bank's net profits for that period and its retained net
profits for the preceding two years.
Under Federal law, if, in the opinion of the federal banking regulator, a
bank or thrift under its jurisdiction is engaged in or is about to engage in an
unsafe or unsound practice (which, depending on the financial condition of the
depository institution, could include the payment of dividends), such regulator
may require, after notice and hearing, that such institution cease and desist
from such practice. The federal banking agencies have indicated that paying
dividends that deplete a depository institution's capital base to an inadequate
level would be an unsafe and unsound banking practice. Under the Prompt
Corrective Action regulations adopted by the federal banking agencies, a
depository institution may not pay any dividend to its holding company if
payment would cause it to become undercapitalized or if it already is
undercapitalized.
Federal Reserve System. The Federal Reserve regulations require banks to
maintain non-interest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The Federal Reserve regulations,
effective November 30, 1999, generally require that reserves be maintained
against aggregate transaction accounts as follows: (i) for accounts aggregating
$44.3 million or less the reserve requirement is 3%; and (ii) for accounts
greater than $44.3 million, the reserve requirement is $1.329 million plus 10.0%
against that portion of total transaction accounts in excess of $44.3 million.
The first $5.0 million of otherwise reservable balances are exempted from the
reserve requirements. As of December 31, 1999, the Bank was in compliance with
the foregoing requirements. The balances maintained to meet the reserve
requirements imposed by the Federal Reserve may be used to satisfy liquidity
requirements imposed by the Department. These reserve requirements are subject
to annual adjustments by the Federal Reserve and higher reserve requirements may
be imposed in the future. Because required reserves must be maintained in the
form of either vault cash, a noninterest-bearing account at a Federal Reserve
Bank or a pass-through account as defined by the Federal Reserve, the effect of
this reserve requirement is to reduce the Bank's interest-earning assets.
Liquidity. Under Florida banking regulations, the Bank is required to
maintain a daily liquidity position equal to at least 15% of its total
transaction accounts and 8% of its total nontransaction accounts, less those
deposits of public funds for which security has been pledged as provided by law.
The Bank may satisfy its liquidity requirements with cash on hand (including
cash items in process of collection), deposits held with the Federal Reserve,
demand deposits due from correspondent banks, Federal funds sold,
interest-bearing deposits maturing in 31 days or less and the market value of
certain unencumbered, rated, investment-grade securities and securities issued
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by Florida or any county, municipality or other political subdivision within the
State. The Federal Reserve also reviews the Bank's liquidity position as part of
its examination and imposes similar requirements on the Bank. Any
Florida-chartered commercial bank that fails to comply with its liquidity
requirements generally may not further diminish liquidity either by making any
new loans (other than by discounting or purchasing bills of exchange payable at
sight) or by paying dividends. At December 31, 1999, the Bank's net liquid
assets exceeded the minimum amount required under the applicable Florida
regulations.
Monetary Policy and Economic Controls. The banking business is affected
not only by general economic conditions, but also by the monetary policies of
the Federal Reserve. Changes in the discount rate on member bank borrowing,
availability of borrowing at the "discount window", open market operations, the
imposition of changes in reserve requirements against bank deposits and the
imposition of and changes in reserve requirements against certain borrowings by
banks and their affiliates are some of the instruments of monetary policy
available to the Federal Reserve. The monetary policies have had a significant
effect on the operating results of commercial banks and are expected to continue
to do so in the future. The monetary policies of the Federal Reserve are
influenced by various factors, including inflation, unemployment and short- and
long-term changes in the international trade balance and in the fiscal policies
of the United States Government. Future monetary policies and the effect of such
policies on the future business and earnings of the Bank cannot be predicted.
Future Legislation. Various legislation is from time to time introduced in
Congress. Such legislation may change banking statutes and the operating
environment of the Company and its bank and non-bank subsidiaries in substantial
and unpredictable ways. There is no assurance that any legislation will be
enacted and, if enacted, the ultimate effect that any such potential legislation
or implementing regulations would have upon the financial condition or results
of operations of the Company.
Changes in Accounting Standards
The Financial Accounting Standards Board ("FASB") recently adopted or
issued proposals and guidelines that may have a significant impact on the
accounting practices of commercial enterprises in general and financial
institutions in particular.
In June, 1998 the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 requires entities to recognize
all derivatives in their financial statements as either assets or liabilities
measured at fair value. SFAS No. 133 also specified new methods of accounting
for hedging transactions, prescribes the items and transactions that may be
hedged, and specifies detailed criteria to be met to qualify for hedge
accounting. On adoption, entities are permitted to transfer held-to-maturity
debt securities to the available-for-sale or trading category. SFAS No. 133 is
effective for fiscal years beginning after June 15, 1999. The adoption of SFAS
No. 133 for the year ended December 31, 2000 is not expected to have a material
impact on the results of operations for the Company.
ITEM 2. DESCRIPTION OF PROPERTY
The principal executive offices of the Company, the Bank and United Trust
are located in an office building at 333 Third Avenue North, St. Petersburg,
Florida 33701. This facility was renovated in 1997, is owned by the Company and
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has a total of five floors and approximately 47,400 square feet of usable space.
The Company and its subsidiaries occupy a total of approximately 25,000 square
feet on the first two floors and a portion of the third floor of the building.
As of December 31, 1999, the balance of the building was leased to tenants.
Adequate parking, lobby, safe deposit boxes, and drive-thru facilities are
provided to customers of the Bank at this location.
The Bank has additional branch locations at 5801 North 49th Street (North
Office), 5601 North Park Street (Five Towns Office), 6500 Gulf Boulevard (St.
Pete Beach Office), and 7490 Bryan Dairy Road (Bryan Dairy), all in Pinellas
county Florida. Except for the Five Towns Office, these facilities are owned by
the Company and offer both lobby and drive-thru banking facilities to the Bank's
customers. The Five Towns Office is leased for a term expiring October 31, 2001,
with four renewal options.
EPW's main office is located in an office building in Tampa, Florida in
which EPW leases approximately 3,190 square feet of space pursuant to a lease
expiring February 28, 2003, with no renewal option. EPW's Jacksonville, Florida
office operates out of a private home owned by an officer of EPW.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to various legal proceedings in the ordinary course
of its business. Based on information presently available, management does not
believe that the ultimate outcome of such proceedings, in the aggregate, would
have a material adverse effect on the Company's financial position, results of
operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
There were no matters submitted to a vote of the Company's
security-holders during the fourth quarter of its fiscal year ended December 31,
1999.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Shares are quoted on the Nasdaq SmallCap Market under
the symbol UFHI. At the close of business on March 1, 2000, there were
outstanding 4,244,598 Common Shares which were held by approximately 325 record
and beneficial shareholders.
The following table sets forth the high and low closing sales prices for
the Common Shares as quoted by Nasdaq for the period indicated:
High Low
Year Ended December 31, 1998:
Fourth Quarter (from December 11, 1998) $7.63 $7.25
Year Ended December 31, 1999:
First Quarter $7.75 $6.50
Second Quarter $7.50 $6.38
Third Quarter $7.25 $6.63
Fourth Quarter $7.19 $6.69
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Since 1995, the Company has declared and paid quarterly cash dividends on
the Common Stock to record holders of the Common Stock at each calendar quarter
end, payable on the last day of the following month. Starting in the first
quarter of 1997, such dividends were paid at the rate of $0.03 1/3 per share of
Common Stock until the third quarter of 1998, when a dividend of $0.04 per share
was declared. These regular quarterly cash dividends were declared throughout
1999. The Company currently has no plans to modify the amount or timing of such
dividends.
The Company is primarily a holding company with no material business
operations, sources of income or assets of its own other than the shares of its
subsidiaries. Because substantially all of the Company's operations are
conducted through subsidiaries, the Company's cash flow and, consequently, its
ability to pay dividends or make other distributions is dependent upon either
third-party borrowings made by the Company or the cash flow of its subsidiaries
and the payment of funds by those subsidiaries, including the Bank, to the
Company in the form of loans, dividends, fees or otherwise. The Company's
subsidiaries are separate and distinct legal entities and will have no
obligation, contingent or otherwise, to make any funds available, whether in the
form of loans, dividends or otherwise. Regulatory limitations on the Bank
restrict its ability to make loans or distributions to the Company.
Use of Proceeds
On December 10, 1998, UFH Capital Trust I ("UFH Capital"), a Delaware
statutory business trust, all of the common equity interests of which are owned
by the Company, and the Company's joint Registration Statement on Form SB-2
(Nos. 333-60431 and 333-60431-01) (the "Registration Statement") became
effective, registering the initial public offering by the Company of 450,000
shares of the Company's common stock, par value $.01 per share, and up to
1,200,000 shares of 9.4% Cumulative Trust Preferred Securities with a
liquidation amount of $5 per share (the "Preferred Securities"), representing
preferred undivided beneficial interests in the assets of UFH Capital.
Furthermore, pursuant to such Registration Statement, the Company registered up
to an additional 67,500 shares of its common stock and UFH Capital registered up
to an additional 180,000 shares of Preferred Securities in the event that the
managing underwriter for the offering, William R. Hough & Co. (the
"Underwriter"), exercised its option to purchase such shares to cover
over-allotments.
All of the gross proceeds received by UFH Capital from the offering of the
Preferred Securities and certain other funds of UFH Capital were invested in an
equivalent amount of the Company's 9.4% Junior Subordinated Debentures (the
"Junior Subordinated Debentures") totaling $6,959,200, which were issued by the
Company to UFH Capital. All of the Junior Subordinated Debentures were
registered as part of the Registration Statement. In addition, a guarantee of
the Company relating to the Preferred Securities was also registered as part of
the Registration Statement. The Company's and UFH Capital's initial public
offerings terminated on January 8, 1999, upon the exercise of the Underwriter's
over-allotment option with respect to the Common Stock and the Preferred
Securities.
From December 10, 1998, through December 31, 1998, approximately $2.7
million of the estimated net offering proceeds of $9,528,446 were used by the
Company to repay debt to the lender under the Company's senior credit facility
and $1.5 million was contributed to the capital of the Bank.
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<PAGE>
In March 1999, the Company purchased a $250,000 equity position, or
approximately 5 percent, in United Insurance Holdings, LC ("Insurance
Holdings"). Insurance Holdings is the parent company of United Property
Insurance and Casualty Company, Inc. The Company has the option to acquire, at
its election, up to an aggregate of 20 percent of the common equity of Insurance
Holdings, if and when bank holding company regulations permit such an
investment. Additionally, the Company originally made a $1 million loan advance
to Insurance Holdings with a maturity date of June 8, 1999. The loan was
subsequently renewed for another 60 day term and a $0.5 million principal
repayment was made in July. One director of the Company also serves as a
director of Insurance Holdings.
In April 1999, the Company purchased a $500,000 equity position, or
approximately 2.2% of the outstanding capital stock, in Nexity Financial
Corporation ("Nexity"). Nexity acquired an Alabama state chartered bank and
intends to pursue an internet banking business strategy and ultimately raise
additional capital in an initial public offering.
The remaining net offering proceeds are on deposit in a non-interest
bearing demand deposit account of the Company established with the Bank. The
Bank in turn is using those funds to fund its assets, such as loans and
overnight investments.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
Comparison of Balance Sheets at December 31, 1999 and December 31, 1998
Overview
Total assets of the Company were $209.5 million at December 31, 1999,
compared to $171.9 million at December 31, 1998, an increase of $37.6 million or
21.9%. This increase was primarily the result of the Company's internal growth
of earning assets (primarily loans) funded by an increase in deposits.
Investment Securities
Investment securities, consisting of U.S. Treasury and federal agency
securities, obligations of state and political subdivisions and mortgage-backed
and corporate debt securities, were $24.4 million at December 31, 1999, compared
to $25.7 million at December 31, 1998, a decrease of $1.3 million or 5.1%. At
December 31, 1999, the Company held certain securities totaling $9.9 million as
available for sale. These securities have been recorded at market value.
Loans
Total loans were $156.9 million at December 31, 1999, compared to $119.2
million at December 31, 1998, an increase of $37.7 million or 31.6%. For the
same period, real estate mortgage loans increased by $30.7 million or 39.4%,
commercial loans increased by $6.5 million or 18.6%, and all other loans
including consumer loans increased by $0.5 million or 8.4%. Net loans were
$153.5 million at December 31, 1999, compared to $116.5 million at December 31,
1998.
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<PAGE>
Asset Quality and Allowance for Loan Losses
The allowance for loan losses amounted to $2.3 million at December 31,
1999, compared to $2.0 million at December 31, 1998, an increase of $0.3 million
or 15.0%. During 1999, $460 thousand in loans were charged off, $785 thousand
was added to the allowance for loan losses through a provision, which was
accounted for as an expense, reducing net income, and $33 thousand was recovered
from loans previously charged off.
Nonperforming Assets
Nonperforming assets were $3.9 million at December 31, 1999, compared to
$5.5 million at December 31, 1998. Nonperforming assets at December 31, 1999
consisted of nonperforming loans of $2.4 million and other real estate owned
(ORE) of $1.5 million. ORE owned consists of three properties, all of which have
been listed for sale. Management believes that these properties are carried at
values that are equal to their current market value.
Bank Premises and Equipment
Bank premises and equipment were $9.6 million at December 31, 1999,
compared to $9.3 million at December 31, 1998, an increase of $.3 million or
3.2%. This increase was primarily due to the acquisition of a new branch site
and related equipment, less the depreciation of buildings and equipment and
amortization of leasehold improvements
Deposits
Total deposits were $175.1 million at December 31, 1999, compared to
$139.1 million at December 31, 1998, an increase of $36.0 million or 25.9%. From
December 31, 1998 to December 31, 1999, demand deposits increased $5.2 million,
NOW and money market deposits increased $19.3 million, savings deposits
increased $0.2 million, time deposits of $100 thousand or greater increased $5.2
million, and other time deposits increased $6.0 million.
Long-term Debt and Convertible Subordinated Debentures
Long-term debt outstanding (excluding convertible subordinated debentures)
was $0 at December 31, 1999, compared to $34 thousand at December 31, 1998, a
decrease of $34 thousand. The decrease was due to the repayment of the debt of a
subsidiary of the Company. In addition, $630 thousand in convertible
subordinated debentures were outstanding during both periods.
Mandatory Redeemable Capital Securities of Subsidiary Trust
In December 1998, the Company, through a statutory business trust created
and owned by the Company, issued $6,749,600 (including an overallotment of
$749,600 that closed on January 14, 1999) of 9.40% Cumulative Trust Preferred
Securities that will mature on December 10, 2028. The principal assets of the
statutory buiness trust are debentures issued to the Company in an aggregate
amount of $6.96 million, with an interest rate of 9.40% and a maturity date of
December 10, 2028. See Note D of the Consolidated Financial Statements for
additional information.
Stockholders' Equity
Stockholders' equity was $16.8 million at December 31, 1999, or 8.02% of
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<PAGE>
total assets, compared to $14.8 million, or 8.61% of total assets at December
31, 1998. At December 31, 1999, the Bank's Tier I (core) Capital ratio was
7.16%, its Tier I Risk-based Capital ratio was 9.16%, and its Total Risk-based
Capital ratio was 10.41%. The capital ratios of the Bank at that date all
exceeded the minimum regulatory guidelines for an institution to be considered
"well capitalized". The increase in stockholders' equity was due to the
Company's 1999 net income, less dividends declared.
Comparison of Results of Operations for the Years Ended December 31, 1999 and
1998
Overview
Net income for the year ended December 31, 1999 was $2.3 million or $0.54
per share diluted, compared to $1.8 million or $0.46 per share diluted for the
same period in 1998. On a pre-tax basis, United Trust earned $679 thousand in
1999 versus $176 thousand in 1998, EPW's pre-tax operating profits (before
deducting $297 thousand of costs associated with the issuance of certain
performance shares issued pursuant to the acquisition of EPW) increased to $302
thousand from $210 thousand during this period and the Bank's pre-tax profits
increased to $3.8 million from $2.7 million during this same period.
Business Segment Information
The Company's operations include three business segments: commercial
banking, trust services (operated through United Trust) and investment
management services (operated through EPW). The following are the results of
operations for these three segments for the years ended December 31, 1999 and
1998 (dollars in thousands):
Year Ended December 31, 1999
Commercial United Company
Banking Trust EPW Total
--------- ------- ------ ---------
Interest income................. $ 14,580 $ 196 $ 0 $ 14,776
Interest expense................ 5,264 0 0 5,264
--------- ------- ------ ---------
Net interest income............. 9,316 196 0 9,512
Loan loss provision............. 785 0 0 785
--------- ------- ------ ---------
Net interest income after
loan loss provision........... 8,531 196 0 8,727
Noninterest income.............. 2,001 1,630 1,593 5,224
General and Administrative
("G&A") expenses.............. 6,760 1,108 1,588 9,456
Amortization of goodwill........ 15 39 0 54
--------- ------- ------ ---------
Total noninterest expense....... 6,775 1,147 1,588 9,510
--------- ------- ------ ---------
Net income before taxes......... $ 3,757 $ 679 $ 5 4,441
========= ======== ======
Net corporate overhead expense.. 786
Income tax expense.............. 1,322
---------
Net income...................... $ 2,333
=========
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<PAGE>
Year Ended December 31, 1998
Commercial United Company
Banking Trust EPW Total
--------- ------- ------ ---------
Interest income................. $ 12,561 $ 171 $ 0 $ 12,732
Interest expense................ 5,066 0 4 5,070
--------- ------ ------- ---------
Net interest income............. 7,495 171 (4) 7,662
Loan loss provision............. 752 0 0 752
--------- ------ ------- ---------
Net interest income after
loan loss provision........... 6,743 171 (4) 6,910
Noninterest income.............. 1,646 956 1,447 4,049
General and Administrative
("G&A") expenses.............. 5,637 926 1,356 7,919
Amortization of goodwill........ 15 25 1 41
--------- ------ -------- ---------
Total noninterest expense....... 5,652 951 1,357 7,960
--------- ------ -------- ---------
Net income before taxes......... $ 2,737 $ 176 $ 86 2,999
========= ====== ========
Net corporate overhead expense.. 232
Income tax expense.............. 1,010
---------
Net income...................... $ 1,757
=========
Commercial Banking Activities. The Company's commercial banking activities
are conducted through the Bank. Net interest income of the Bank for the year
ended December 31, 1999 was $9.3 million, compared to $7.5 million for the same
period in 1998, a $1.8 million or 24.0% increase. Based on the Company's
analysis of its loan portfolio and loan loss reserve, the loan loss provision
was increased to $785 thousand for 1999, compared to $752 thousand for 1998.
Non-interest income for 1999 was $2.0 million, compared to $1.6 million for
1998, an increase of $0.4 million or 25.0%. Total non-interest expense was $6.8
million for 1999, compared to $5.7 million for 1998, a 19.3% increase. Net
income before taxes was $3.8 million for 1999, compared to $2.7 million for
1998, a 40.7% increase.
Trust Activities. United Trust reported net income before taxes of $679
thousand for the year ended December 31, 1999, compared to $176 thousand for
1998, an improvement of $503 thousand. This improvement includes an
extraordinary fee of $350 thousand from a trust account for services provided in
conjunction with the sale of a closely held company as well as an increase in
the volume of trust accounts.
Investment Advisory Activities. Net income before taxes for EPW was $5
thousand for the year ended December 31, 1999, compared to $86 thousand for the
same period of 1998, an $81 thousand decrease. In 1999, expenses of $297
thousand were incurred due to the issuance of "performance shares" pursuant to
the acquisition of EPW as compared to expenses of $124 thousand in 1998. Income
before taxes without this expense would have been $302 thousand, an increase of
$92 thousand over 1998. This increase would have been primarily due to an
increase in the volume of assets under management by EPW, resulting in part from
higher market values of the assets under management.
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<PAGE>
Analysis of Net Interest Income
Net interest income for the year ended December 31, 1999 was $8.9 million,
compared to $7.4 million for the same period in 1998, a $1.5 million or 20.3%
increase. Interest income was $14.7 million for the year ended December 31,
1999, compared to $12.7 million for the same period in 1998, a $2.0 million or
15.7% increase. Interest expense was $5.8 million for the year ended December
31, 1999, compared to $5.3 million for the same period in 1998, a $0.5 million
or 9.4% increase.
The following tables summarize the average yields earned on
interest-earning assets and the average rates paid on interest-bearing
liabilities for the years ended December 31, 1999 and 1998 (dollars in
thousands):
Year Ended December 31, 1999
----------------------------------
Average Average
Balance Interest Rate
--------- --------- -------
Summary of average rates/
interest earning assets:
Interest earning assets:
Loans, net(1)...................... $ 133,243 $ 12,784 9.59%
Securities:
Investment securities - taxable.... 25,344 1,613 6.36
Investment securities - non-taxable 854 43 7.99
Federal funds sold................. 5,454 270 4.95
--------- ---------
Total earning assets............... 164,895 14,710 8.94%
Non-earning assets................. 26,534
---------
Total average assets................. $ 191,429
=========
Interest bearing liabilities:
NOW & money market................. $ 57,058 $ 1,628 2.85%
Savings............................ 5,230 107 2.05
Time, $100,000 & over.............. 13,437 7,004 5.21
Time other......................... 50,911 2,527 4.96
Convertible subordinated
Debentures....................... 630 50 8.00
Long-term debt..................... 11 1 9.09
Trust preferred securities......... 6,750 633 9.40
Other borrowings................... 7,296 193 2.65
--------- ---------
Total interest bearing liabilities... 141,323 5,839 4.13
Non-Interest bearing liabilities:
Deposits........................... 31,779
Other.............................. 2,354
Stockholders' equity............... 15,973
---------
Total liabilities and stockholders' $ 191,429
Equity............................ =========
Net interest & net interest spread. $ 8,871 4.80%
========= ====
Net interest margin................ 5.40%
(1) Includes non-accrual loans. ====
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<PAGE>
Year Ended December 31, 1998
----------------------------------
Average Average
Balance Interest Rate
--------- --------- -------
Summary of average rates/
interest earning assets:
Interest earning assets:
Loans, net(1)...................... $ 102,197 $ 10,382 10.16%
Securities:
Investment securities - taxable.... 26,325 1,714 6.51
Investment securities - non-taxable 570 31 8.63
Federal funds sold................. 9,821 532 5.42
--------- ---------
Total earning assets............... 138,913 12,659 9.13%
Non-earning assets................. 22,711
---------
Total average assets................. $ 161,624
=========
Interest bearing liabilities:
NOW & money market................. $ 50,328 $ 1,564 3.11%
Savings............................ 4,742 97 2.05
Time, $100,000 & over.............. 9,850 534 5.42
Time other......................... 49,455 2,669 5.40
Convertible subordinated
Debentures....................... 630 50 8.00
Long-term debt..................... 2,329 200 8.59
Trust preferred securities......... 300 28 9.40
Other borrowings................... 4,736 126 2.66
--------- ---------
Total interest bearing liabilities... 122,370 5,268 4.30
Non-Interest bearing liabilities:
Deposits........................... 25,276
Other.............................. 2,152
Stockholders' equity............... 11,826
---------
Total liabilities and stockholders' $ 161,624
Equity............................ =========
Net interest & net interest spread. $ 7,391 4.82%
========= ====
Net interest margin................ 5.33%
(1) Includes non-accrual loans. ====
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<PAGE>
The following table reflects the change in net interest income due to
changes in the volume and rate of the Company's assets and liabilities for the
twelve month period ended December 31, 1999:
Increase (Decrease)
--------------------------------------
Changes in net interest income Combination
(dollars in thousands) Rate/
Volume Rate Volume Total
------- ------ ------- --------
Interest earning assets:
Loans, net........................... $ 3,154 $(577) $(175) $ 2,402
Securities:
Investment securities - taxable...... (64) (38) 1 (101)
Investment securities - non-taxable.. 25 (4) (9) 12
Federal funds sold................... (237) (45) 20 (262)
------- ----- ------ --------
Total change in interest income........ 2,878 (664) (163) 2,051
Interest bearing liabilities:
NOW & money market................... 209 (128) (17) 64
Savings.............................. 10 - - 10
Time, $100,000 & over................ 194 (21) (7) 166
Time other........................... 79 (214) (7) (142)
Convertible subordinated debentures.. - - - -
Long-term debt....................... (199) 12 (12) (199)
Trust preferred securities........... 606 - (1) 605
Other borrowings..................... 68 (1) - 67
------- ----- ------ --------
Total change in interest expense....... 967 (352) (44) 571
------- ----- ------ --------
Increase (decrease) in net interest
income............................... $ 1,911 $(312) $(119) $ 1,480
======= ===== ====== ========
Noninterest Income
Noninterest income for the year ended December 31, 1999 was $5.1 million
compared to $4.1 million for the same period in 1998, an increase of $1.0
million or 24.4%. This increase was primarily due to increased revenues from EPW
and United Trust whose combined revenues increased $821 thousand during this
period and include an extraordinary fee of $350 thousand from a trust account
for services provided in conjunction with the sale of a closely held company.
Gain on sale of loans increased $203 thousand from the prior year.
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<PAGE>
The following table indicates the components of noninterest income for the
years ended December 31, 1999 and 1998 (dollars in thousands):
For the Years Ended December 31,
---------------------------------
Increase/
1999 1998 (Decrease)
-------- -------- --------
Service charges on deposit accounts......... $ 797 $ 707 $ 90
Trust and investment management income...... 3,176 2,355 821
Other service charges, fees, and income..... 363 415 (52)
Loan servicing fees......................... 166 148 18
Net trading account profit.................. 42 87 (45)
Income on cash value life insurance......... 135 137 (2)
Gain on sale of SBA loans................... 442 239 203
-------- -------- ---------
Total noninterest income.................... $ 5,121 $ 4,088 $ 1,033
======== ======== =========
Noninterest Expense
Total noninterest expense for the year ended December 31, 1999 was $9.6
million, compared to $8.0 million for the same period in 1998, an increase of
$1.6 million or 20.0%.
The following table reflects the components of noninterest expense for the
years ended December 31, 1999 and 1998 (dollars in thousands):
For the Years Ended
December 31,
Increase/
1999 1998 (Decrease)
-------- -------- ----------
Salaries and employee benefits........ $ 5,361 $ 4,631 $ 730
Occupancy expense..................... 520 522 (2)
Furniture and equipment expense....... 607 512 95
Data processing expense............... 487 437 50
Legal and professional fees........... 175 121 54
Amortization of intangible assets..... 85 79 6
Advertising........................... 352 302 50
Telephone expense..................... 185 171 14
Stationery and supplies............... 177 137 40
Directors fees........................ 191 191 -
Postage expense....................... 112 90 22
Consulting fees....................... 275 41 234
Other operating expenses.............. 1,025 725 300
-------- -------- -----------
Total noninterest expense............. $ 9,552 $ 7,959 $ 1,593
======== ======== ===========
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<PAGE>
YEARS ENDED DECEMBER 31, 1998 AND 1997
Comparison of Balance Sheets at December 31, 1998 and December 31, 1997
Overview
Total assets of the Company were $171.9 million at December 31, 1998,
compared to $147.3 million at December 31, 1997, an increase of $24.6 million or
16.7%. This increase was primarily the result of the Company's internal growth
of earning assets (primarily loans) funded by an increase in deposits.
Investment Securities
Investment securities, consisting of U.S. Treasury and federal agency
securities, obligations of state and political subdivisions and mortgage-backed
and corporate debt securities, were $25.7 million at December 31, 1998, compared
to $21.6 million at December 31, 1997, an increase of $4.1 million or 19.0%. At
December 31, 1998, the Company held certain securities totaling $14.5 million as
available for sale. These securities have been recorded at market value.
Loans
Total loans were $119.2 million at December 31, 1998, compared to $97.0
million at December 31, 1997, an increase of $22.2 million or 22.9%. For the
same period, real estate mortgage loans increased by $17.4 million or 28.7%,
commercial loans increased by $4.4 million or 14.3%, and all other loans
including consumer loans increased by $0.3 million or 5.1%. Net loans were
$116.5 million at December 31, 1998, compared to $94.8 million at December 31,
1997.
Allowance for Loan Losses
The allowance for loan losses amounted to $2.0 million at December 31,
1998, compared to $1.6 million at December 31, 1997, an increase of $0.4 million
or 25.0%. During 1998, $426 thousand in loans were charged off, $752 thousand
was added to the allowance for loan losses through a provision, which was
accounted for as an expense, reducing net income, and $10 thousand was recovered
from loans previously charged off.
Nonperforming Assets
Nonperforming assets were $5.5 million at December 31, 1998, compared to
$.7 million at December 31, 1997. Nonperforming assets at December 31, 1998
consisted of nonperforming loans of $4.0 million and ORE owned of $1.0 million.
A nonperforming loan in the amount of $1.3 million is being paid on a monthly
basis on a pre-judgment stipulation and interest and principal are being
recorded on a cash basis as received. ORE owned consisted of one property which
has been listed for sale. Management believes that this property is carried at a
value that is equal to its current market value.
Bank Premises and Equipment
Bank premises and equipment was $9.3 million at December 31, 1998,
compared to $9.5 million at December 31, 1997, a decrease of $.2 million or
2.1%. This decrease was primarily due to depreciation of buildings and equipment
and amortization of leasehold improvements
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<PAGE>
Deposits
Total deposits were $139.1 million at December 31, 1998, compared to
$130.2 million at December 31, 1997, an increase of $8.9 million or 6.8%. From
December 31, 1997 to December 31, 1998, demand deposits decreased $0.7 million,
NOW and money market deposits increased $12.6 million, savings deposits
decreased $0.5 million, time deposits of $100 thousand or greater increased $1.8
million, and other time deposits decreased $4.3 million.
Long-term Debt and Convertible Subordinated Debentures
Long-term debt outstanding (excluding convertible subordinated debentures)
was $34 thousand at December 31, 1998, compared to $2.7 million at December 31,
1997, a decrease of $2.6 million. The majority of the decrease was due to
repayment of debt with a portion of the proceeds from the Company's public
offering. The remaining debt is payable to an unrelated bank. In addition, $630
thousand in convertible subordinated debentures were outstanding during both
periods.
Mandatory Redeemable Capital Securities of Subsidiary Trust
In December 1998, the Company, through a statutory business trust created
and owned by the Company, issued $6,749,600 (including an overallotment of
$749,600 that closed on January 14, 1999) of 9.40% Cumulative Trust Preferred
Securities which will mature on December 10, 2028. See Note D of the
Consolidated Financial Statements for additional information.
Stockholders' Equity
Stockholders' equity was $14.8 million at December 31, 1998, or 8.61% of
total assets, compared to $10.5 million, or 7.13% of total assets at December
31, 1997. At December 31, 1998, the Bank's Tier I (core) Capital ratio was
7.44%, its Tier I Risk-based Capital ratio was 9.52%, and its Total Risk-based
Capital ratio was 10.78%. The capital ratios of the Bank at that date all
exceeded the minimum regulatory guidelines for an institution to be considered
"well capitalized". The increase in stockholders' equity was due to proceeds
from the Company's initial public offering and 1998 net income.
Comparison of Results of Operations for the Years Ended December 31, 1998 and
1997
Overview
Net income for the year ended December 31, 1998 was $1.8 million or $0.46
per share diluted, compared to $1.4 million or $0.38 per share diluted for the
same period in 1997. On a pre-tax basis, United Trust earned $176 thousand in
1998 versus a loss of $114 thousand in 1997, EPW's pre-tax operating profits
(before deducting $124 thousand of costs associated with the issuance of
performance shares) increased to $210 thousand from $149 thousand during this
period and the Bank's pre-tax profits increased to $2.7 million from $2.5
million during this same period.
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<PAGE>
Business Segment Information
The Company's operations include three business segments: commercial
banking, trust services (operated through United Trust) and investment
management services (operated through EPW). The following are the results of
operations for these three segments for the years ended December 31, 1998 and
1997 (dollars in thousands).
Year Ended December 31,
1998
Commercial United Company
Banking Trust EPW Total
-------- ------ ------- --------
Interest Income..................... $ 12,561 $ 171 $ 0 $ 12,732
Interest Expense.................... 5,066 0 4 5,070
-------- ------ ------- --------
Net Interest Income................. 7,495 171 (4) 7,662
Loan Loss Provision................. 752 0 0 752
-------- ------ ------- --------
Net Interest Income after loan loss 6,743 171 (4) 6,910
Provision.........................
Noninterest Income.................. 1,646 956 1,447 4,049
General and Administrative ("G&A") 5,637 926 1,356 7,919
Expenses..........................
Other noninterest expense........... 0 0 0 0
Amortization of goodwill............ 15 25 1 41
-------- ------ ------ ---------
Total noninterest expense........... 5,652 951 1,357 7,960
-------- ------ ------ ---------
Net Income before taxes............. $ 2,737 $ 176 $ 86 2,999
======== ======= ======
Net Corporate Overhead expense...... 232
Income tax expense.................. 1,010
---------
Net income.......................... $ 1,757
=========
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<PAGE>
Year Ended December 31, 1997
Commercial United Company
Banking Trust EPW Total
-------- ------ ------ --------
Interest Income..................... $ 10,785 $ 0 $ 0 $ 10,785
Interest Expense.................... 3,970 0 5 3,975
-------- ------ ------ --------
Net Interest Income................. 6,815 0 (5) 6,810
Loan Loss Provision................. 90 0 0 90
-------- ------ ------ --------
Net Interest Income after loan loss 6,725 0 (5) 6,720
Provision.........................
Noninterest Income.................. 1,286 765 1,238 3,289
General and Administrative ("G&A") 5,124 852 1,084 7,060
Expenses..........................
Other noninterest expense........... 384 9 0 393
Amortization of goodwill............ 15 18 0 33
-------- ------ ------ --------
Total noninterest expense........... 5,523 879 1,084 7,486
-------- ------ ------ --------
Net Income before taxes............. $ 2,488 $ (114) $ 149 2,523
======== ======= ======= ========
Net Corporate Overhead expense...... 253
Income tax expense.................. 860
--------
Net income.......................... $ 1,410
========
Commercial Banking Activities. The Company's commercial banking activities
are conducted through the Bank. Net interest income of the Bank for the year
ended December 31, 1998 was $7.5 million, compared to $6.8 million for the same
period in 1997, a $0.7 million or 10.3% increase. Based on the Company's
analysis of its loan portfolio and loan loss reserve, the loan loss provision
was increased substantially to $752 thousand for 1998, compared to $90 thousand
for 1997. Non-interest income for 1998 was $1.6 million, compared to $1.3
million for 1997, an increase of $0.3 million or 23.1%. Total non-interest
expense was $5.7 million for 1998, compared to $5.5 million for 1997, a 3.6%
increase. Net income before taxes was $2.7 million for 1998, compared to $2.5
million for 1997, an 8.0% increase.
The Bank's net income before taxes in 1997 included several non-recurring
noninterest expenses. In 1997, the Bank took a one-time write-down of $255
thousand in the value of a security held in portfolio and $129 thousand from the
write-off of leasehold improvements in a facility that was abandoned. Other
increases in general and administrative expenses were substantially due to the
full year impact from a new branch which was opened in September 1996, expenses
associated with moving into the new headquarters building, and additional
employees hired for accounting and credit administration functions and other
support operations.
Trust Activities. United Trust reported net income before taxes of $176
thousand for the year ended December 31, 1998, compared to a loss of $114
thousand for 1997, an improvement of $290 thousand. This improvement was the
result of the increased volume of trust accounts.
Investment Advisory Activities. Net income before taxes for EPW was $86
thousand for the year ended December 31, 1998, compared to $149 thousand for the
same period of 1997, a $63 thousand decrease. In 1998, expenses of $124 thousand
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<PAGE>
were incurred due to the issuance of "performance shares" pursuant to the
acquisition agreement of EPW. Income before taxes without this expense would
have been $210 thousand, an increase of $61 thousand over 1997. This increase
would have been primarily due to an increase in the volume of assets under
management by EPW resulting from higher market values of the assets under
management.
Analysis of Net Interest Income
Net interest income for the year ended December 31, 1998 was $7.4 million,
compared to $6.7 million for the same period in 1997, a $0.7 million or 10.4%
increase. Interest income was $12.7 million for the year ended December 31,
1998, compared to $10.8 million for the same period in 1997, a $1.9 million or
17.4% increase. Interest expense was $5.3 million for the year ended December
31, 1998, compared to $4.1 million for the same period in 1997, a $1.2 million
or 29.3% increase.
The following table summarizes the average yields earned on
interest-earning assets and the average rates paid on interest-bearing
liabilities for the years ended December 31, 1998 and 1997 (dollars in
thousands):
Year Ended December 31, 1998
Average Average
Summary of average rates/ Balance Interest Rate
interest earning assets: --------- --------- -------
Interest earning assets:
Loans, net(1)...................... $ 102,197 $ 10,382 10.16%
Securities:
Investment securities - taxable.... 26,325 1,714 6.51
Investment securities - non-taxable 570 31 8.63
Federal funds sold................. 9,821 532 5.42
--------- ---------
Total earning assets............... 138,913 12,659 9.13%
Non-earning assets................. 22,711
---------
Total average assets................. $ 161,624
=========
Interest bearing liabilities:
NOW & money market................. $ 50,328 $ 1,564 3.11%
Savings............................ 4,742 97 2.05%
Time, $100,000 & over.............. 9,850 534 5.42
Time other......................... 49,455 2,669 5.40
Convertible subordinated
Debentures......................... 630 50 8.00
Long-term debt..................... 2,329 200 8.59
Other borrowings................... 5,036 154 3.06
--------- ---------
Total interest bearing liabilities... 122,370 5,268 4.30
Non-Interest bearing liabilities:
Deposits........................... 25,276
Other.............................. 2,152
Stockholders' equity............... 11,826
---------
Total liabilities and stockholders' $ 161,624
equity............................ =========
Net interest & net interest spread. $ 7,391 4.82%
========== ====
Net interest margin................ 5.33%
(1) Includes non-accrual loans. ====
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Year Ended December 31, 1997
Average Average
Balance Interest Rate
--------- --------- -------
Summary of average rates/
interest earning assets:
Interest earning assets:
Loans, net(1)...................... $ 83,614 $ 8,961 10.72%
Securities:
Investment securities - taxable.... 22,995 1,508 6.56
Investment securities - non-taxable 494 29 9.09
Federal funds sold................. 5,447 295 5.42
--------- --------
Total earning assets............... 112,550 10,793 9.60%
Non-earning assets................. 18,230
---------
Total average assets................. $ 130,780
=========
Interest bearing liabilities:
NOW & money market................. $ 30,692 $ 795 2.59%
Savings............................ 4,774 97 2.02
Time, $100,000 & over.............. 7,518 419 5.57
Time other......................... 47,445 2,604 5.49
Convertible subordinated
Debentures......................... 630 50 8.00
Long-term debt..................... 1,037 80 7.73
Other borrowings................... 2,638 56 2.13
--------- --------
Total interest bearing liabilities... 94,734 4,101 4.33
Non-Interest bearing liabilities:
Deposits........................... 24,774
Other.............................. 1,380
Stockholders' equity............... 9,892
---------
Total liabilities and stockholders' $ 130,780
equity............................. =========
Net interest & net interest spread. $ 6,692 5.27%
======== ====
Net interest margin................ 5.96%
====
(1) Includes non-accrual loans.
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The following table reflects the change in net interest income due to
changes in the volume and rate of the Company's assets and liabilities for the
twelve month period ended December 31, 1998:
Increase (Decrease)
--------------------------------------
Changes in net interest income Combination
(dollars in thousands) Rate/
Volume Rate Volume Total
------- ------ ------- --------
Interest earning assets:
Loans, net........................... $ 1,992 $ (467) $ (104) $ 1,421
Securities:
Investment securities - taxable...... 218 (11) (2) 206
Investment securities - non-taxable.. 7 (2) (3) 2
Federal funds sold................... 237 - - 237
------- ------ ------- --------
Total change in interest income........ 2,454 (480) (108) 1,866
Interest bearing liabilities:
NOW & money market................... 509 159 102 769
Savings.............................. (1) 1 (1) -
Time, $100,000 & over................ 130 (11) (4) 115
Time other........................... 110 (43) (2) 65
Convertible subordinated debentures.. - - - -
Long-term debt....................... 100 (9) 11 120
Other borrowings..................... 51 24 22 98
------- ------ ------- --------
Total change in interest expense....... 899 139 129 1,167
------- ------ ------- --------
Increase (decrease) in net
interest income...................... $ 1,555 $ (619) $ (237) $ 699
======= ====== ======= =======
Noninterest Income
Noninterest income for the year ended December 31, 1998 was $4.1 million
compared to $3.2 million for the same period in 1997, an increase of $0.9
million or 28.1%. This increase was primarily due to increased revenues from EPW
and United Trust whose combined revenues increased $469 thousand during this
period. Income on cash value life insurance was $137 thousand in 1998 while all
other fees and commissions increased by $190 thousand.
The following table indicates the components of noninterest income for
the years ended December 31, 1998 and 1997 (dollars in thousands):
For the Years Ended December 31,
Increase/
1998 1997 (Decrease)
-------- -------- ---------
Service charges on deposit accounts...... $ 707 $ 675 $ 32
Trust and investment management income... 2,355 1,886 469
Other service charges, fees, and income.. 415 225 190
Loan servicing fees...................... 148 164 (16)
Net trading account profit............... 87 - 87
Income on cash value life insurance...... 137 - 137
Gain on sale of SBA loans................ 239 290 (51)
-------- -------- ----------
Total noninterest income................. $ 4,088 $ 3,240 $ 848
======== ======== =========
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<PAGE>
Noninterest Expense
Total noninterest expense for the year ended December 31, 1998 was $8.0
million, compared to $7.6 million for the same period in 1997, an increase of
$0.4 million or 5.3%.
The following table reflects the components of noninterest expense for the
years ended December 31, 1998 and 1997 (dollars in thousands):
For the Years Ended December 31,
Increase/
1998 1997 (Decrease)
--------- -------- ----------
Salaries and employee benefits........... $ 4,631 $ 4,048 $ 583
Occupancy expense........................ 522 514 8
Furniture and equipment expense.......... 512 494 18
Data processing expense.................. 437 418 19
Legal and professional fees.............. 121 177 (56)
Amortization of intangible assets........ 79 67 12
Advertising.............................. 302 265 37
Relocation expense....................... - 138 (138)
Stationery and supplies.................. 137 151 (14)
Directors fees........................... 191 199 (8)
Securities write-down.................... - 255 (255)
Other operating expenses................. 1,027 846 181
-------- -------- ---------
Total noninterest expense................ $ 7,959 $ 7,572 $ 387
======== ======== =========
Liquidity and Asset/Liability Management
The Investment and Asset/Liability Committee of the Board of Directors
reviews the Company's liquidity, which is its ability to generate sufficient
cash to meet the funding needs of current loan demand, deposit withdrawals, and
other cash demands. The primary sources of funds consist of deposits,
amortization and prepayments of loans, sales of investments, other funds from
operations and the Company's capital. The Bank is a member of the Federal Home
Loan Bank of Atlanta ("FHLB") and has the ability to borrow to supplement its
liquidity needs.
When the Company's primary sources of funds are not sufficient to meet
deposit outflows, loan originations and purchases and other cash requirements,
the Company may supplementally borrow funds from the FHLB and from other
sources. The FHLB acts as an additional source of funding for banks and thrift
institutions that make residential mortgage loans.
FHLB borrowings, known as "advances", are secured by the Bank's mortgage
loan portfolio, and the terms and rates charged for FHLB advances vary in
response to general economic conditions. As a shareholder of the FHLB, the Bank
is authorized to apply for advances from this bank. A wide variety of borrowing
plans are offered by the FHLB, each with its own maturity and interest rate. The
FHLB will consider various factors, including an institution's regulatory
capital position, net income, quality and composition of assets, lending
policies and practices, and level of current borrowings from all sources, in
determining the amount of credit to extend to an institution. As of December 31,
1999, the Company had no FHLB advances outstanding.
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A Florida chartered commercial bank is required to maintain a liquidity
reserve of at least 15% of its total transaction accounts and 8% of its total
nontransaction accounts less deposits of certain public funds. The liquidity
reserve may consist of cash on hand, cash on demand with other correspondent
banks and other investments and short-term marketable securities as determined
by the rules of the Department, such as federal funds sold and United States
securities or securities guaranteed by the United States or agencies thereof.
The Company complies with applicable liquidity reserve requirements. As of
December 31, 1999, the Bank had liquidity of approximately $22.8 million or
approximately 12.2% of total deposits combined with borrowings. The Company's
primary sources of funds consist of principal payments on loans and investment
securities, proceeds from sales and maturities of securities available for sale
and net increases in deposits. The Company uses its funds principally to
purchase investment securities and fund existing and continuing loan
commitments. At December 31, 1999, the Company had commitments to originate
loans totaling $26.0 million. Scheduled maturities of certificates of deposit
during the 12 months following December 31, 1999 total $51.0 million as of
December 31, 1999. Management believes the Company has adequate resources to
fund all its commitments, and, if so desired, that it can adjust the rates on
certificates of deposit to retain deposits in a changing interest-rate
environment.
Asset/Liability Management
One of the primary objectives of the Company is to reduce fluctuations in
net interest income caused by changes in interest rates. To manage interest rate
risk, the Board of Directors has established interest-rate risk policies and
procedures which delegate to the Investment and Asset/Liability Committee the
responsibility to monitor and report on interest-rate risk, devise strategies to
manage interest-rate risk, monitor loan originations and deposit activity, and
approve all pricing strategies.
The management of interest-rate risk is one of the most significant
factors affecting the ability to achieve future earnings. The measure of the
mismatch of assets maturing or repricing within certain periods, and liabilities
maturing or repricing within the same period, is commonly referred to as the
"gap" for such period. Controlling the maturity or repricing of an institution's
assets and liabilities in order to minimize interest rate risk is commonly
referred to as gap management. "Negative gap" occurs when, during a specific
time period, an institution's liabilities are scheduled to reprice more rapidly
than its assets, so that, barring other factors affecting interest income and
expense, in periods of rising interest rates the institution's interest expense
would increase more rapidly than its interest income, and in periods of falling
interest rates the institution's interest expense would decrease more rapidly
than its interest income. "Positive gap" occurs when an institution's assets are
scheduled to reprice more rapidly than its liabilities, so that, barring other
factors affecting interest income and expense, in periods of falling interest
rates, the institution's interest income would decrease more rapidly than its
interest expense, and in periods of rising interest rates, the institution's
interest income would increase more rapidly than its interest expense. It is
common to focus on the one-year gap, which is the difference between the dollar
amount of assets and the dollar amount of liabilities maturing or repricing
within the next 12 months.
To the extent market conditions permit, the Bank follows a strategy
intended to protect its net interest income from adverse changes in interest
rates by maintaining spreads through the adjustability of its interest earning
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assets and its interest bearing liabilities. The Bank employs a number of
strategies designed to protect its net interest income. The Bank calculates its
net interest margin on a monthly basis and compares it to a quarterly national
peer group ratio. Historically, the Bank has enjoyed a higher than peer group
average net interest margin as well as a higher margin than most of the
community banks operating in Pinellas County.
Additionally, the Investment and Asset/Liability Committee meets on a
quarterly basis to review the most recent margin analysis, the Bank's overall
pricing strategies, and a monthly gap report measuring its interest rate
sensitivity position.
The Bank is also a member of the FHLB. Member banks have access to a
variety of fixed and variable rate borrowings, ranging from overnight to up to
20 years or longer. Access to these instruments can permit the Bank to match
maturities of either specific groups of loans or larger, single loans.
Currently, the Bank has no FHLB advances outstanding.
The cumulative one-year gap at December 31, 1999 was a negative $33.9
million or a negative 16.2% (expressed as a percentage of total assets). The
exclusion of approximately $1.9 million of non-accrual loans increased the
negative gap by approximately 1%. The Company performs an income simulation
analysis to measure net interest income volatility when the portfolio is
subjected to a 200 basis point interest rate shock. Based on the results of this
simulation and the current interest rate environment (taking into account
competitive pricing and generally increasing interest rates), the Company
believes that its gap position as of December 31, 1999 was appropriate, and
currently anticipates that a similar negative gap position will continue in the
subsequent one year time period.
The following table presents the maturities or repricing of
interest-earning assets and interest-bearing liabilities at December 31, 1999.
The balances shown have been derived based on the financial characteristics of
the various assets and liabilities. Adjustable and floating-rate assets are
included in the period in which interest rates are next scheduled to adjust
rather than their scheduled maturity dates. Fixed-rate loans are shown in the
periods in which they are scheduled to be repaid according to contractual
amortization and, where appropriate, prepayment assumptions based on the coupon
rates in the portfolio have been used to adjust the repayment amounts. Repricing
of time deposits is based on their scheduled maturities.
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<PAGE>
Interest Sensitivity Analysis
(dollars in thousands)
0 to 3 4 to 6 7 to 12
Months Months Months
--------- ---------- ----------
Assets:
Federal funds sold.............. $ 2,971 $ 0 $ 0
Securities...................... 1,957 720 556
Loans:(1)
Fixed......................... 9,751 2,675 7,337
Variable...................... 33,514 16,146 4,153
--------- ---------- ---------
Total rate sensitive assets....... $ 48,139 $ 19,541 $ 12,046
========= ========== =========
Liabilities:
Interest demand................. $ 49,992 $ 0 $ 0
Savings......................... 4,873 0 0
Time deposits................... 17,368 15,592 18,056
Other borrowings................ 7,713 0 0
Long term debt.................. 0 0 0
--------- ---------- ---------
Total rate sensitive liabilities.. $ 79,946 $ 15,592 $ 18,056
========= =========== =========
Dollar gap........................ $ (31,807) $ 3,949 $ (6,010)
Cumulative dollar gap............. $ (31,807) $ (27,858) $ (33,868)
Cumulative gap/total assets(2).... (15.18)% (13.30)% (16.17)%
- --------------------------------------------------------------------------------
Interest Sensitivity Analysis Table Continued... Non-Rate
Sensitive
13 to 60 60+ Assets/
Months Months Liabilities Total
--------- --------- ----------- ---------
Assets:
Federal funds sold.............. $ 0 $ 0 N/A $ 2,917
Securities...................... 19,495 1,819 N/A 24,547
Loans:(1)
Fixed......................... 26,991 11,207 N/A 57,961
Variable...................... 41,347 1,878 N/A 97,038
--------- --------- --------- ---------
Total rate sensitive assets....... $ 87,833 $ 14,904 N/A $ 182,463
========= ========= ========= =========
Liabilities:
Interest demand................. $ 0 $ 0 $ 17,922 $ 67,914
Savings......................... 0 0 0 4,873
Time deposits................... 18,359 0 0 69,375
Other borrowings................ 0 0 0 7,713
Long term debt.................. 630 0 0 630
--------- --------- --------- ---------
Total rate sensitive liabilities.. $ 18,989 $ 0 $ 17,922 $ 150,505
========= ========= ========= =========
Dollar gap........................ $ 68,844 $ 14,904 $ (17,922) $ 31,958
Cumulative dollar gap............. $ 34,976 $ 49,880 $ 31,958 $ 31,958
Cumulative gap/total assets(2).... 16.70% 23.81% 15.26% 15.26%
- -------------------
(1) Excludes nonaccrual loans of approximately $1.9 million.
(2) Calculated based on total assets of $209,481.
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The following tables presents various operating ratios at the period ended or
for the period ended:
December 31,
1999 1998 1997
----- ----- ------
Return on average assets............ 1.22% 1.09% 1.08%
Return on average equity............ 14.61% 14.86% 14.25%
Equity to total assets.............. 8.03% 8.59% 7.56%
Dividend Payout..................... 28.46% 30.51% 33.65%
Net interest margin................. 5.40% 5.33% 5.95%
The following table summarizes the Company's securities by maturity and
weighted average yields at December 31, 1999. Yields on tax exempt securities
are stated at their nominal rates and have not been adjusted for tax rate
differences. Refer to Note G - Securities in the Company's Consolidated
Financial Statements for additional information regarding the Securities
portfolio.
After One Year But After 5 Years But
------------------ -----------------
Within One Year Within 5 Years Within 10 Years
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
------- ------ ------- ------ ------- -------
At December 31, 1999:
Securities held to maturity:
U.S. Treasury securities and
obligations of U.S. government
corporations and
agencies $ 132 7.10% $ 7,406 6.13% $ 2,000 6.73%
Obligations of State
and political
Subdivisions 135 5.75% 375 6.95% 794 6.21%
Corporate obligations 500 7.61% 0 0.00% 0 0.00%
Other 100 5.75% 0 0.00% 0 0.00%
------- ------ ------- ------ ------- -------
$ 867 7.03% $ 7,781 6.17% $ 2,794 6.58%
Mortgage Backed Securities
======= ====== ======= ====== ======= =======
Total $ 867 7.03% $ 7,781 6.17% $ 2,794 6.58%
======= ====== ======= ====== ======= =======
At December 31, 1999:
Securities available for sale:
U.S. Treasury securities and
obligations of U.S. government
corporations and
agencies $ 1,502 6.06% $ 1,597 6.58% $ 1,421 6.63%
Obligations of State
and political
Subdivisions 0 0.00% 347 7.20% 1,362 6.26%
------- ------ ------- ------ ------- -------
$ 1,502 6.06% $ 1,944 6.69% $ 2,783 6.45%
Mortgage Backed Securities:
Equity Securities
------- ------ ------- ------ ------- -------
Total $ 1,502 6.06% $ 1,944 6.69% $ 2,783 6.45%
======= ====== ======= ====== ======= =======
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Continued..........
After 10 Years Total
Carrying Average Carrying Average
Value Yield Value Yield
------- ------ ------- ------
At December 31, 1999:
Securities held to
maturity:
U.S. Treasury
securities and
obligations of U.S.
government
corporations and
agencies $ 573 6.53% $ 10,111 6.29%
Obligations of State
and political
Subdivisions 522 4.62% 1,826 5.87%
Corporate obligations 0 0.00% 500 7.61%
Other 0 0.00% 100 5.75%
------- ------ ------- ------
$ 1,095 4.62% $12,537 6.27%
Mortgage Backed 2,004 7.49%
Securities
======= ====== ======= ======
Total $ 1,095 4.62% $14,541 6.45%
======= ====== ======= ======
At December 31, 1999:
Securities available for
sale:
U.S. Treasury
securities and
obligations of U.S.
government
corporations and
agencies $ 776 6.64% $ 5,296 6.46%
Obligations of State
and political
Subdivisions 0 0.00% 1,709 6.45%
------- ------ ------- ------
$ 776 6.64% $ 7,005 6.46%
Mortgage Backed 1,136 6.71%
Securities
Equity Securities 1,783 2.48%
------- ------ ------- ------
Total $ 776 6.64% $ 9,924 5.77%
======= ====== ======= ======
YEAR 2000 CONSIDERATIONS
During the past year, many businesses, including financial institutions
such as the Company, faced potentially serious issues associated with the
inability of certain existing data processing hardware and software to
appropriately recognize calendar dates beginning in the year 2000. The "Year
2000" problem arose because many existing computer programs use only the last
two digits to refer to a year. Therefore, these computer programs may not
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<PAGE>
properly recognize a year that begins with "20" instead of "19." Additionally,
many computer programs that can only distinguish the final two digits of the
year may read entries for the year 2000 as the year 1900. For example, computer
systems may compute payment, interest, delinquency or other figures important to
the operations of financial institutions based on the wrong date. If not
corrected, many computer applications, including those owned by the Company and
third parties with which the Company does business, could fail or create
erroneous results, thereby potentially impacting the operations and financial
performance of the Company.
In 1997, the Company began the process of evaluating its information
technology for Year 2000 readiness. In April 1998, the Company adopted a formal,
comprehensive Year 2000 Policy Statement designed to identify and address Year
2000 issues that might impact the Company (the "Year 2000 Plan"). In 1998 and
1999 the Company completed the "Awareness," "Inventory," "Assessment," and
"Testing/Validation" phases of its Year 2000 Plan, which are designed to appoint
and train a group of employees to oversee and implement the Year 2000 Plan, to
provide for the inventory of the software and hardware of the Company, and to
provide further assessment of the nature and size of the Year 2000 issues that
might affect the Company. The Company continues to oversee its internal efforts
and the efforts of third parties to timely and properly address the Year 2000
issues that have been identified. Testing and validation of the actions that
have been taken thus far were completed by June 30, 1999. This validation
process has also been audited by outside consultants.
The Company outsources its principal data processing activities to a third
party and purchases most of its software applications from third party vendors.
Additionally, the Company outsources its trust business data processing and
custodial management activities to a third party. Each of the two foregoing data
processing servicers has represented to the Company that it has completed its
Year 2000 testing. The Company has received and reviewed the third party proxy
test results which support their claims. Also the Company has completed all
testing and validating of its own systems. Based on these efforts to date, the
Company believes that its vendors and significant customers are actively
addressing the problems associated with the Year 2000 issue and that the Company
will be prepared to respond to Year 2000 problems as they arise. The Company
will continue to refine the contingency plans to address the most reasonably
likely worst case scenarios relating to the Year 2000 problem throughout 2000.
Although the Company's Year 2000 efforts are ongoing and will continue
throughout the Year 2000, there can be no assurance that the Company will be
prepared to timely respond to all year 2000 issues that may arise.
The Company has attempted to identify potential Year 2000 problems
stemming from non-information technology systems, such as microcontrollers used
to operate security systems and elevators and embedded systems in its buildings
and equipment and other infrastructure, and establishing a program for testing
these systems for Year 2000 compliance. To date, the Company has not encountered
any substantial Year 2000 problems with respect to such non-information
technology systems, and believes the cost to remedy any such problems will not
be material.
To date, the Company has not incurred material testing, compliance or
replacement costs relating to its Year 2000 investigation to date. The Company
incurred costs of approximately $255,000 in 1998 and $289,000 in 1999 towards
technology related costs, including the updating of software and hardware
systems to ensure Year 2000 compliance. The Company does not expect to incur
additional material related testing, compliance or replacement costs in the
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<PAGE>
future and does not believe that the potential non-compliance of its information
and non-information technology systems and programs present a material risk to
the Company's financial condition or results of operations.
Although to date, the Company has not experienced significant Year 2000
issues, there can be no assurance that Year 2000 related issues will not arise
in the future and that the Company not be adversely affected by the failure of
third party vendors or significant customers to become Year 2000 compliant.
Although the Company is taking steps to identify and address Year 2000 problems,
if unexpected or unresolved Year 2000 problems develop, given the Company's
reliance on data processing services to maintain customer balances, service
customer accounts and to perform other record keeping and service oriented
functions associated with the Company's three primary business segments, the
occurrence of any such events could have a material impact on the Company's
results of operations, liquidity and financial condition.
FORWARD LOOKING STATEMENTS
This Form 10-KSB contains statements that constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The
words "believe," "estimate," "expect," "intend," "anticipate" and similar
expressions and variations thereof identify certain of such forward-looking
statements, which speak only as of the dates on which they were made. The
company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events, or otherwise. Readers are cautioned that any such forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties, and that actual results may differ materially from those
indicated in the forward-looking statements as a result of various factors. Such
factors include competition, general economic conditions, potential changes in
interest rates, and changes in the value of real estate securing loans made by
the issuer.
FACTORS AFFECTING FUTURE RESULTS
Impact of Changes in Real Estate Values
A significant portion of the Company's loan portfolio consists of loans
secured by real estate. At December 31, 1999, 5.1% of the Company's loans were
secured by one-to-four family residential real estate, 61.4% were secured by
commercial real estate and multifamily residential, 2.9% were construction loans
and the Company had ORE acquired through foreclosure with a book value of $1.5
million. The properties securing these loans are concentrated in Florida. Real
estate values and real estate markets generally are affected by, among other
things, changes in national, regional or local economic conditions, fluctuations
in interest rates and the availability of loans to potential purchasers, changes
in the tax laws and other governmental statutes, regulations and policies and
acts of nature. Any decline in real estate prices, particularly in Florida,
could significantly reduce the value of the real estate collateral securing the
Company's real estate loans, increase the level of the Company's nonperforming
loans, require write-downs in the book value of its ORE, and have a material
negative impact on the Company's financial performance.
Nonperforming Assets
The Company's ratio of nonperforming assets to total assets was 1.85% at
December 31, 1999, which is somewhat above the average level of other
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<PAGE>
similarly-sized financial institutions. While the Company carefully manages its
loan portfolio with a view to minimizing its nonperforming assets, there can be
no assurance that the Company's ratio of nonperforming assets to total assets
will improve or not increase, particularly if general economic conditions
deteriorate.
Adequacy of Allowance for Loan Losses
Industry experience indicates that a portion of the Company's loans will
become delinquent and a portion of the loans will require partial or entire
charge-off. Regardless of the underwriting criteria utilized by the Company,
losses may be experienced as a result of various factors beyond the Company's
control, including, among other things, changes in market conditions affecting
the value of properties and problems affecting the credit of the borrower. The
Company's determination of the adequacy of its allowance for loan losses is
based on various considerations, including an analysis of the risk
characteristics of various classifications of loans, previous loan loss
experience, specific loans which would have loan loss potential, delinquency
trends, estimated fair value of the underlying collateral, current economic
conditions, the view of the Company's regulators, and geographic and industry
loan concentration. If, however, delinquency levels were to increase as a result
of adverse general economic conditions, especially in Florida, the loan loss
reserve so determined by the Company may not be adequate. To the extent that the
Company's loan losses exceed its allowance for loan losses, the Company's
results of operations would be adversely affected. There can be no assurance
that the Company's allowance for loan losses will be adequate to cover its loan
losses or that the Company will not experience losses in its loan portfolio
which may require significant increases to the allowance for loan losses in the
future.
Potential Impact of Changes in Interest Rates
The Company's profitability is dependent to a large extent on its net
interest income, which is the difference between its interest income on
interest-earning assets and its interest expense on interest-bearing
liabilities. The Company, like most financial institutions, is affected by
changes in general interest rate levels, which are currently at relatively low
levels, and by other economic factors beyond its control. Interest rate risk
arises from mismatches (i.e., the interest sensitivity gap) between the dollar
amount of repricing or maturing assets and liabilities, and is measured in terms
of the ratio of the interest rate sensitivity gap to total assets. More assets
repricing or maturing than liabilities over a given time frame is considered
asset-sensitive and is reflected as a positive gap, and more liabilities
repricing or maturing than assets over a given time frame is considered
liability-sensitive and is reflected as a negative gap. An asset-sensitive
position (i.e., a positive gap) will generally enhance earnings in a rising
interest rate environment and will negatively impact earnings in a falling
interest rate environment, while a liability-sensitive position (i.e., a
negative gap) will generally enhance earnings in a falling interest rate
environment and negatively impact earnings in a rising interest rate
environment. Fluctuations in interest rates are not predictable or controllable.
The Company has attempted to structure its asset and liability management
strategies to mitigate the impact on net interest income of changes in market
interest rates. At December 31, 1999, the Company had a one year cumulative
negative gap of 16.2%. This negative one year gap position may, as noted above,
have a negative impact on earnings in a rising interest rate environment.
-47-
<PAGE>
Regulatory Oversight
The Bank is subject to extensive regulation, supervision and examination
by the Department as its chartering authority and primary regulator, by the
Federal Reserve as its federal regulator and by the FDIC as administrator of the
insurance fund that insures the Bank's deposits up to applicable limits. As the
holding company of the Bank, the Company is subject to regulation and oversight
by the Federal Reserve. Such regulation and supervision governs the activities
in which an institution may engage and is intended primarily for the protection
of the FDIC insurance funds and depositors. Regulatory authorities have been
granted extensive discretion in connection with their supervisory and
enforcement activities and regulations have been implemented which have
increased capital requirements, increased insurance premiums and have resulted
in increased administrative, professional and compensation expenses. Any change
in the regulatory structure or the applicable statutes or regulations could have
a material impact on the Company, the Bank and their operations. Additional
legislation and regulations may be enacted or adopted in the future which could
significantly affect the powers, authority and operations of the Bank and the
Bank's competitors which in turn could have a material adverse affect on the
Bank and its operations.
Dependence on Existing Management
The Company's business depends in large part upon the availability of the
services of its senior management, including Neil W. Savage, Ward J. Curtis,
Jr., Harold J. Winner and William A. Eickhoff. If the services of any of such
senior management personnel were to become unavailable to the Company, the
Company's business and operating results could be adversely affected. While the
Company maintains key-man life insurance policies on certain of its senior
management personnel, naming the Company as beneficiary, there can be no
assurance that the proceeds of any such policies would adequately compensate the
Company for the loss of the services of any of such persons. Neither Mr. Savage
nor Mr. Winner have entered into a non-competition agreement with the Company or
the Bank. Although both Mr. Eickhoff's and Mr. Curtis's employment contracts
contain non-competition clauses, the provisions terminate under certain
conditions.
Control by Existing Shareholders
The Company's directors and executive officers (and their respective
affiliates and immediate family members) own approximately 50.6% of the
outstanding Common Stock. As a result of such ownership, these persons will
likely be able to effectively control the election of the Company's directors
and the outcome of matters requiring shareholder approval, and thereby control
the management and policies of the Company.
Competition
The Company competes with various types of financial institutions,
including other commercial banks and savings institutions, and with finance
companies, mortgage banking companies, money market mutual funds, investment
advisory firms and companies and credit unions, many of which have substantially
greater financial resources than the Company and, in some cases, operate under
fewer regulatory constraints.
-48-
<PAGE>
Anti-Takeover Considerations
The Company's articles of incorporation and bylaws and Florida law contain
certain provisions that may discourage or make more difficult any attempt by a
person or group to obtain control of the Company. In addition, the board of
directors of the Company is empowered to issue from time to time one or more
series of Undesignated Preferred Stock without shareholder approval, the terms
of which could have the effect of delaying or preventing a change in control of
the Company.
Possible Volatility of Share Price
The market price of the Common Stock may experience fluctuations that are
unrelated to the operating performance of the Company. The market price of the
Common Stock may be affected by conditions in the securities markets generally
as well as developments in the banking industry or the United States or world
economy. Any securities exchange on which the Common Stock may be traded may
from time to time experience significant price and volume fluctuations that may
be unrelated to the operating performance of particular companies. The market
price of the Common Stock, like the stock prices of many publicly traded bank
holding companies, may prove to be highly volatile.
Restrictions on Ability to Pay Dividends
The Company is primarily a holding company with no material business
operations, sources of income or assets of its own other than the shares of its
subsidiaries. Because substantially all of the Company's operations are
conducted through subsidiaries, the Company's cash flow and, consequently, its
ability to pay dividends or make other distributions is dependent upon either
third-party borrowings made by the Company or the cash flow of its subsidiaries
and the payment of funds by those subsidiaries, including the Bank, to the
Company in the form of loans, dividends, fees or otherwise. The Company's
subsidiaries are separate and distinct legal entities and will have no
obligation, contingent or otherwise, to make any funds available, whether in the
form of loans, dividends or otherwise. Regulatory limitations on the Bank
restrict its ability to make loans or distributions to the Company.
ITEM 7. FINANCIAL STATEMENTS
The following financial statements are contained on pages F-1 through F-41 of
this Report:
Report of Independent Certified Public Accountants;
Consolidated Balance Sheets - December 31, 1999 and 1998
Consolidated Statements of Earnings - Years ended December 31, 1999, 1998
and 1997;
Consolidated Statements of Comprehensive Income - Years ended December 31,
1999, 1998 and 1997;
Consolidated Statement of Stockholders' Equity - Years ended December 31,
1999, 1998 and 1997;
Consolidated Statements of Cash Flows - Years ended December 31, 1999, 1998
and 1997;
-49-
<PAGE>
Notes to Consolidated Financial Statements
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Information required by Item 9 of Form 10-KSB is incorporated herein by
reference to the Registrant's definitive Proxy Statement for the 2000 Annual
Meeting of Shareholders which will be filed with the Securities and Exchange
Commission no later than 120 days after the close of the Registrant's fiscal
year.
ITEM 10. EXECUTIVE COMPENSATION
Information required by Item 10 of Form 10-KSB is incorporated herein by
reference to the Registrant's definitive Proxy Statement for the 2000 Annual
Meeting of Shareholders which will be filed with the Securities and Exchange
Commission no later than 120 days after the close of the Registrant's fiscal
year.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by Item 11 of Form 10-KSB is incorporated herein by
reference to the Registrant's definitive Proxy Statement for the 2000 Annual
Meeting of Shareholders which will be filed with the Securities and Exchange
Commission no later than 120 days after the close of the Registrant's fiscal
year.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by Item 12 of Form 10-KSB is incorporated herein by
reference to the Registrant's definitive Proxy Statement for the 2000 Annual
Meeting of Shareholders which will be filed with the Securities and Exchange
Commission no later than 120 days after the close of the Registrant's fiscal
year.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Amended and Restated Articles of Incorporation of the Company*
3.2 Bylaws of the Company*
10.1 UFH Stock Option and Incentive Compensation Plan*
10.2 Trust Department Stock Option Plan*
10.3 Eickhoff, Pieper & Willoughby Stock Option Plan*
10.4 Modification Agreement*
10.5 Property Management Agreement between Imaginative Investments,
Inc. and the Southeast Companies of Tampa Bay, Inc.*
10.6 Employment Agreement of Charles O. Lowe*
10.7 Employment Agreement of Ward J. Curtis, Jr.*
10.8 Employment Agreement of Harold J. Winner*
-50-
<PAGE>
10.9 Employment Agreement of John H. Pieper**
10.10 Employment Agreement of Neil W. Savage*
10.11 Employment Agreement of William A. Eickhoff*
10.12 Salary Continuation Agreement of Harold J. Winner*
10.13 Salary Continuation Agreement of Neil W. Savage*
10.14 Agreement between Willow Green Partnership, LTD and Irwin
Contracting relating to foreclosed property acquired by United
Bank**
10.15 Pinellas Bancshares Corporation 8% Convertible Debentures held
by Eickhoff & Pieper, a Florida General Partnership*
10.16 Loan Agreement between AmSouth f/k/a AmSouth Bank of Florida and
UFH f/k/a Pinellas Bancshares Corporation*
21 List of Subsidiaries*
27 Financial Data Schedule
*This information is incorporated herein by reference to the Company's
Amendment No. 2 to Registration Statement on Form SB-2 (File No. 333-60431)
previously filed with the Commission on October 7, 1998. **This information
is incorporated herein by reference to the Company's Form 10KSB filed on
March 31, 1999.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the fiscal year ending
December 31, 1999.
-51-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
9134, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
UNITED FINANCIAL HOLDINGS, INC.
Date: March 14, 2000 By: /s/ Neil W. Savage
------------------------------
Neil W. Savage
President and Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
Signature Title Date
- ------------------------- --------------------------- ----------------
/s/ John B. Norrie Chairman of the Board March 14, 2000
- -------------------------
John B. Norrie
/s/ Neil W. Savage President, Chief Executive March 14, 2000
- ------------------------- Officer and Director
Neil W. Savage (Principal Executive Officer)
/s/ Ronald E. Clampitt Director March 14, 2000
- -------------------------
Ronald E. Clampitt
/s/ Ward J. Curtis Director March 14, 2000
- -------------------------
Ward J. Curtis
/s/ David K. Davis Director March 14, 2000
- -------------------------
David K. Davis
/s/ William A. Eickhoff Director March 14, 2000
- -------------------------
William A. Eickhoff
/s/ Edward D. Foreman Director March 14, 2000
- -------------------------
Edward D. Foreman
/s/ Ian F. Irwin Director March 14, 2000
- -------------------------
Ian F. Irwin
/s/ Charles O. Lowe Director March 14, 2000
- -------------------------
Charles O. Lowe
-52-
<PAGE>
/s/ Jack A. MaCris, M.D. Director March 14, 2000
- -------------------------
Jack A. MaCris, M.D.
/s/ Ronald R. Petrini Director March 14, 2000
- -------------------------
Ronald R. Petrini
/s/ John B. Wier, Jr. Director March 14, 2000
- -------------------------
John B. Wier, Jr.
/s/ Harold J. Winner Director March 14, 2000
- -------------------------
Harold J. Winner
/s/ C. Peter Bardin Chief Financial Officer March 14, 2000
- ------------------------- (Principal Financial Officer)
C. Peter Bardin
-53-
UNITED FINANCIAL HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
December 31, 1999, 1998 and 1997
-F1-
<PAGE>
UNITED FINANCIAL HOLDINGS, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
--------
Report of Independent Certified Public Accountants F-3
Consolidated Balance Sheets at December 31, 1999 and 1998 F-4
Consolidated Statements of Earnings for the years ended
December 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Comprehensive Income for the years
ended December 31, 1999, 1998 and 1997 F-7
Consolidated Statement of Stockholders' Equity for the years
ended December 31, 1999, 1998 and 1997 F-8
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 F-9
Notes to Consolidated Financial Statements F-11
-F2-
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
Board of Directors
United Financial Holdings, Inc.
St. Petersburg, Florida
We have audited the consolidated balance sheets of United Financial Holdings,
Inc. and Subsidiaries (the "Company") as of December 31, 1999 and 1998, and the
related consolidated statements of earnings, comprehensive income, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1999. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits of the consolidated financial statements in accordance
with generally accepted auditing standards. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
Our audits of the consolidated financial statements referred to above, were
conducted for the purpose of forming an opinion on the consolidated financial
statements taken as a whole. The consolidating balance sheet as of December 31,
1999 and the consolidating statement of earnings for the year ended December 31,
1999, are presented for purposes of additional analysis of the consolidated
financial statements rather than to present the financial position and results
of operations of the individual companies. The consolidating information has
been subjected to the audit procedures applied in the audit of the consolidated
financial statements and, in our opinion, is fairly stated in all material
respects in relation to the consolidated financial statements taken as a whole.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of United
Financial Holdings, Inc. and Subsidiaries as of December 31, 1999 and 1998, and
the consolidated results of their operations and their consolidated cash flows
for each of the three years in the period ended December 31, 1999 in conformity
with generally accepted accounting principles.
Grant Thornton, LLP
Tampa, Florida
January 24, 2000
-F3-
<PAGE>
United Financial Holdings, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
1999 1998
------------ ------------
ASSETS
Cash and due from banks $ 8,866,336 $ 7,966,757
Federal funds sold 2,917,000 4,011,000
Trading securities 81,600 157,354
Securities held to maturity, market value of
$14,072,208 and $11,435,699, respectively 14,540,677 11,205,629
Securities available for sale, at market 9,923,820 14,527,487
Loans, net 153,497,408 116,545,851
Premises and equipment, net 9,618,536 9,274,501
Federal Home Loan Bank stock 506,600 433,500
Federal Reserve Bank stock 203,800 158,800
Accrued interest receivable 1,190,200 995,458
Intangible assets, less accumulated
amortization of $1,725,395 and
$1,642,935, respectively 1,748,527 1,451,031
Other real estate owned 1,528,311 1,015,255
Other assets 4,858,493 4,159,556
------------ ------------
Total assets $209,481,308 $171,902,179
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Demand $ 32,936,185 $ 27,741,896
NOW and money market 67,913,763 48,550,267
Savings 4,872,802 4,686,318
Time, $100,000 and over 16,679,300 11,462,762
Other time 52,695,991 46,654,262
------------ ------------
Total deposits 175,098,041 139,095,505
Securities sold under agreements to repurchase 7,307,044 8,795,715
Accrued interest payable 448,378 391,769
Convertible subordinated debentures 630,000 630,000
Long-term debt - 33,750
Other liabilities 2,425,862 2,184,334
------------ ------------
Total liabilities 185,909,325 151,131,073
(Continued on F4b)
The accompanying notes are an integral part of these statements.
-F4a-
<PAGE>
United Financial Holdings, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Continued from F4a)
December 31,
1999 1998
------------ ------------
Company-obligated Mandatory Redeemable Capital
Securities of Subsidiary Trust Holding Solely
Subordinated Debentures Of The Company 6,749,600 6,000,000
STOCKHOLDERS' EQUITY
7%convertible preferred stock, $10 par
value; 150,000 shares authorized;
10,000 and 20,850 shares issued and
outstanding at December 31, 1999 and
1998, respectively 100,000 208,500
Common stock, $.01 par value; 20,000,000
shares authorized; 4,192,771 and
4,045,563 shares issued and outstanding
at December 31, 1999 and 1998,
respectively 41,928 40,455
Paid-in capital 9,672,634 9,192,103
Common stock subscription receivable - (393,260)
Accumulated other comprehensive income (232,362) 141,313
Retained earnings 7,240,183 5,581,995
------------ ------------
Total stockholders' equity 16,822,383 14,771,106
------------ ------------
Total liabilities and
stockholders' equity $209,481,308 $171,902,179
============ ============
The accompanying notes are an integral part of these statements.
-F4b-
<PAGE>
United Financial Holdings, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
For the Years Ended December 31,
1999 1998 1997
----------- ----------- ------------
Interest income
Loans and loan fees $12,783,696 $10,381,551 $ 8,960,703
Securities
U.S. Treasury 391,772 552,623 598,549
Obligations of other U.S.
Government agencies and
corporations 782,669 880,517 746,786
Obligations of states and
political subdivisions 203,298 104,137 39,570
Other 279,342 207,938 151,612
Federal funds sold and secur-
ities purchased under reverse
repurchase agreements 269,736 532,014 295,297
----------- ----------- ------------
Total interest income 14,710,513 12,658,780 10,792,517
Interest expense
NOW and money market 1,627,761 1,563,767 794,997
Savings 107,028 96,920 96,656
Time deposits, $100,000 and over 699,673 534,471 419,007
Other time 2,528,119 2,668,754 2,603,631
Long-term debt 50,400 250,057 130,547
Subordinated debentures issued
to subsidiary trust 632,700 28,198 -
Federal funds purchased and
securities sold under
agreements to repurchase 193,548 126,152 56,248
----------- ----------- ------------
Total interest expense 5,839,229 5,268,319 4,101,086
----------- ----------- ------------
Net interest income 8,871,284 7,390,461 6,691,431
Provision for loan losses 785,000 752,000 90,000
----------- ----------- ------------
Net interest income
after provision for
loan losses 8,086,284 6,638,461 6,601,431
Other income
Service charges on deposit
accounts 797,181 706,839 674,637
Trust and investment
management income 3,175,514 2,355,156 1,886,534
Net trading account profit 41,808 87,354 -
Gain on sales of loans 442,227 239,498 289,720
Gain on sale of held to
maturity security - 78,498 -
Loan servicing fees 165,897 147,881 164,368
Income on cash value
life insurance 135,354 136,728 -
All other fees and income 362,862 336,549 224,993
----------- ----------- ------------
Total other income 5,120,843 4,088,503 3,240,252
(Continued on F6)
-F5-
<PAGE>
United Financial Holdings, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
(Continued from F5)
For the Years Ended December 31,
1999 1998 1997
------------ ------------ ------------
Other expense
Salaries and employee benefits $ 5,361,048 $ 4,630,580 $ 4,047,859
Occupancy expense 520,406 522,472 514,374
Furniture and equipment expense 606,453 512,000 494,360
Data processing expense 487,317 436,767 417,522
Consulting fees 274,733 41,149 28,615
Legal and professional fees 174,811 120,702 176,778
Amortization of intangible assets 85,115 79,443 66,802
Marketing and business development 352,055 301,611 265,472
Directors fees 191,350 190,662 198,750
Telephone expense 184,999 171,535 149,367
Stationery, printing and supplies 176,706 137,092 151,327
Postage expense 111,965 90,373 79,834
Headquarter relocation expense - - 138,314
Securities write down - - 255,000
Other operating expenses 1,025,091 724,700 587,621
------------ ------------ ------------
9,552,049 7,959,086 7,571,995
------------ ------------ ------------
Earnings before income taxes 3,655,078 2,767,878 2,269,688
Income tax expense (benefit)
Current 1,559,391 1,192,177 957,932
Deferred (237,206) (181,607) (97,986)
------------ ------------ ------------
1,322,185 1,010,570 859,946
------------ ------------ ------------
NET EARNINGS $ 2,332,893 $ 1,757,308 $ 1,409,742
============ ============ ============
Earnings Per Share:
Basic $ .56 $ .49 $ .41
Diluted $ .54 $ .46 $ .38
The accompanying notes are an integral part of these statements.
-F6-
<PAGE>
United Financial Holdings, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year Ended December 31,
1999 1998 1997
------------ ------------ ------------
Net earnings $2,332,893 $1,757,308 $1,409,742
Other comprehensive income
Unrealized holding gains
(losses) (566,174) 126,991 18,642
Income tax (expense) benefit
related to items of other
comprehensive income 192,499 (43,177) (7,015)
------------ ------------ ------------
Comprehensive income $1,959,218 $1,841,122 $1,421,369
============ ============ ============
The accompanying notes are an integral part of these statements.
-F7-
<PAGE>
United Financial Holdings, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
7% 6%
Convertible Convertible
Common Preferred Preferred Paid-In
Stock Stock Stock Capital
-------- ----------- ----------- ----------
Balance at December 31, 1996 $ 34,308 $ 233,500 $ - $5,737,567
Net Earnings - - - -
Dividends on Common Stock - - - -
Dividends on Preferred Stock - - - -
Accumulated other comprehensive
income - - - -
Issuance of Common Stock for
cash 135 - - 52,365
-------- ----------- ----------- ----------
Balance at December 31, 1997 34,443 233,500 - 5,789,932
Net Earnings - - - -
Conversion of 7% Preferred
to Common Stock 210 (25,000) - 24,770
Dividends on Common Stock - - - -
Dividends on Preferred Stock - - - -
Accumulated other comprehensive
income - - - -
Issuance of Common Stock in IPO 5,077 - - 2,799,334
Performance shares issued 320 - - 263,787
Issuance of Common Stock for cash 405 - - 314,280
-------- ----------- ----------- ----------
Balance at December 31, 1998 40,455 208,500 - 9,192,103
Net Earnings - - - -
Dividends on Common Stock - - - -
Dividends on Preferred Stock - - - -
Accumulated other comprehensive
income - - - -
Issuance of Common Stock in IPO - - - (25,565)
-------- ----------- ----------- ----------
Balance at December 31, 1999 $ 41,928 $ 100,000 $ - $9,672,634
======== ========= =========== ==========
(Continued on F8b)
The accompanying notes are an integral part of these statements.
-F8a-
<PAGE>
United Financial Holdings, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Continued from F8a)
Accumulated
Other Stock
Comprehensive Subscription Retained
Income Receivable Earnings Total
------------- ------------ ----------- ------------
Balance at December 31, 1996 $ 45,872 $ - $3,440,408 $ 9,491,655
Net Earnings - - 1,409,742 1,409,742
Dividends on Common Stock - - (458,017) (458,017)
Dividends on Preferred Stock - - (16,345) (16,345)
Accumulated other
comprehensive income 11,627 - - 11,627
Issuance of Common Stock
for cash - - - 52,500
------------- ------------ ----------- ------------
Balance at December 31, 1997 57,499 - 4,375,788 10,491,162
Net Earnings - - 1,757,308 1,757,308
Conversion of 7% Preferred
to Common Stock - - - (20)
Dividends on Common Stock - - (535,631) (535,631)
Dividends on Preferred Stock - - (15,470) (15,470)
Accumulated other
comprehensive income 83,814 - - 83,814
Issuance of Common Stock
in IPO - (393,260) - 2,411,151
Performance shares issued - - - 264,107
Issuance of Common Stock
for cash - - - 314,685
------------- ------------ ----------- ------------
Balance at December 31, 1998 141,313 (393,260) 5,581,995 14,771,106
Net Earnings - - 2,332,893 2,332,893
Conversion of 7% Preferred
to Common Stock - - - (4)
Dividends on Common Stock - - (663,907) (663,907)
Dividends on Preferred Stock - - (10,798) (10,798)
Accumulated other
comprehensive income (373,675) - - (373,675)
Issuance of Common Stock
in IPO - 393,260 - 367,695
Performance shares issued - - - 399,073
------------- ------------ ----------- ------------
Balance at December 31, 1999 $(232,362) $ - $7,240,183 $16,822,383
============= ============ =========== ============
The accompanying notes are an integral part of these statements.
-F8b-
<PAGE>
United Financial Holdings, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
1999 1998 1997
------------ ------------ ------------
Cash flows from operating
activities:
Net earnings $ 2,332,893 $ 1,757,308 $ 1,409,742
Adjustments to reconcile net
earnings to net cash provided by
(used in) operating activities
Provision for loan losses 785,000 752,000 90,000
Provision for depreciation
and amortization 787,996 650,669 566,344
Unrealized gain on
trading securities (41,808) (87,354) -
Gain on sale of held to
maturity security - (78,498) -
Write down of investment
security - - 255,000
Write-off of leasehold
improvements - - 130,065
Accretion of securities
discount (22,123) (58,715) (44,317)
Amortization of unearned
loan fees (121,730) (149,954) (64,941)
Amortization of securities
premiums 18,251 26,125 38,874
Gain on sales of loans (774,100) (372,500) (422,831)
Increase in interest
receivable (194,742) (45,416) (171,487)
(Decrease) increase in
interest payable 56,610 (4,415) 59,399
Increase in other assets (1,592,850) (1,558,741) (2,641,922)
Decrease in other liabilities 241,527 360,997 276,211
------------ ------------ ------------
Net cash provided by
(used in) operating
activities 1,474,924 1,191,506 (519,863)
(Continued on F9b)
-F9a-
<PAGE>
United Financial Holdings, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued from F9a
Year Ended December 31,
1999 1998 1997
------------ ------------ ------------
Cash flows from investing activities:
Purchase of Federal Reserve Bank
stock and FHLB stock (118,100) (73,650) (46,100)
Net decrease (increase)
in Federal funds sold 1,094,000 3,430,000 (380,000)
Principal repayments of held
to maturity securities 2,422,366 580,646 388,715
Proceeds from sale of held
to maturity security - 110,906 -
Principal repayments of
available for sale securities 403,391 900,182 494,729
Proceeds from maturities of
available for sale securities 1,500,778 3,260,000 4,491,876
Proceeds from maturities of held
to maturity securities 2,732,843 4,567,408 4,987,969
Purchases of available for
sale securities (4,895,000 (7,153,908) (6,937,869)
Purchases of held to
maturity securities (1,148,000) (6,304,138) (6,526,492)
Proceeds from sales of loans 8,890,919 3,243,766 3,969,174
Net increase in loans (45,731,646) (25,197,839) (19,130,218)
Capital expenditures (1,048,670) (310,722) (4,185,913)
------------ ------------ ------------
Net cash used in
investing activities (35,897,119) (22,947,349) (22,874,129)
(Continued)
-F9b-
<PAGE>
United Financial Holdings, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
Year Ended December 31,
1999 1998 1997
------------ ------------ ------------
Cash flows from financing
activities:
Net increase in demand deposits,
NOW accounts, money market
accounts and savings accounts $ 24,744,269 $ 11,317,459 $ 10,754,834
Net (decrease) increase in
certificates of deposit 11,258,267 (2,441,058) 11,319,353
Net increase (decrease) in
securities sold under
agreements to repurchase (1,488,671) 7,714,970 (688,114)
Increase in borrowings - - 2,004,202
Repayment of long-term debt (33,750) (2,644,402) (140,000)
Issuance of Company-obligated
mandatory redeemable capital
securities of subsidiary trust
holding solely subordinated
debentures of the Company 749,600 6,000,000 -
Issuance of common stock 766,764 2,989,923 52,500
Dividend paid on preferred stock (10,798) (15,470) (16,345)
Dividend paid on common stock (663,907) (535,631) (458,017)
------------ ------------ ------------
Net cash provided
by financing activities 35,321,774 22,385,791 22,828,413
------------ ------------ ------------
Net increase (decrease) in cash
and cash equivalents 899,579 629,948 (565,579)
Cash and cash equivalents at
beginning of year 7,966,757 7,336,809 7,902,388
------------ ------------ ------------
Cash and cash equivalents at
end of year $ 8,866,336 $ 7,966,757 $ 7,336,809
============ ============ ============
Cash paid during the year for:
Interest $ 5,782,619 $ 5,263,904 $ 4,041,687
Income taxes $ 1,288,470 $ 1,108,451 $ 927,817
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY
Reclassification of loans to
foreclosed real estate $ 1,038,266 $ 1,253,160 $ 408,113
============ ============ =============
Reclassification of foreclosed
real estate to loans $ - $ 262,500 $ 124,000
============ ============ =============
Performance shares issued $ 399,073 $ 264,107 $ -
============ ============ =============
The accompanying notes are an integral part of these statements.
-F10-
<PAGE>
United Financial Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
United Financial Holdings, Inc. (the "Company") is a registered bank holding
company formed in 1982, the principal subsidiary of which is United Bank
("Bank"), a Florida-chartered commercial bank headquartered in St. Petersburg,
Florida. The Bank was founded in 1979 and is a community-oriented, full service
commercial bank with four branch offices serving the southern Pinellas County
area of the State of Florida.
Following is a summary of the significant accounting policies that have been
consistently applied in the preparation of the consolidated financial statements
of United Financial Holdings, Inc. and Subsidiaries.
1. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of United Financial
Holdings, Inc. (the "Company") and its Subsidiaries, the Bank, Eickhoff, Pieper
& Willoughby ("EPW"), United Trust Company ("Trust") and UFH Capital Trust I
("UFHCT"), after all significant intercompany accounts and transactions have
been eliminated. United Trust was formed on November 30, 1997. On December 31,
1997, the Bank transferred all assets of the trust division to the newly formed
United Trust Company.
2. CASH AND CASH EQUIVALENTS
For the purpose of presentation in the Consolidated Statements of Cash Flows,
cash and cash equivalents includes cash on hand and non-interest bearing amounts
due from correspondent banks.
3. USE OF ESTIMATES IN FINANCIAL STATEMENTS
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
4. SECURITIES
The Company's investment securities are classified in the following categories
and accounted for as follows:
* Trading Securities. Government and corporate bonds and corporate securities
held principally for resale in the near term are classified as trading
securities and recorded at their fair values. The Company had one trading
security, which was transferred from securities available for sale during
the year ended December 31, 1998, at which time book value approximated
market value. The security has an unrealized gain of $24,737 and $87,354 at
December 31, 1999 and 1998. The Company had no trading securities for the
year ended December 31, 1997.
-F11-
<PAGE>
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
* Securities Held to Maturity. Bonds, notes and debentures for which the
Company has the positive intent and ability to hold to maturity are reported
at cost, adjusted for amortization of premiums and accretion of discounts
which are recognized in interest income using the interest method over the
period to maturity. Such securities may be sold or transferred to the
available for sale or trading securities classification only as a result of
isolated, non-recurring, or unusual changes in circumstances which the
Company could not have reasonably anticipated, such as a change in statutory
or regulatory requirements regarding investment limitations or a significant
deterioration in a security issuer's credit-worthiness.
* Securities Available for Sale. Securities available for sale consist of
bonds, notes, debentures, and certain equity securities not classified as
trading securities nor as securities held to maturity, which may be sold
prior to maturity as part of asset/liability management or in response to
other factors, and are carried at fair value with any valuation adjustment
reported in a separate component of stockholders' equity, net of the tax
effect.
Declines in the fair value of individual held-to-maturity and available-for-sale
securities below their cost that are other than temporary are recognized as
write downs of the individual securities to their fair value. Such write-downs
are included in earnings as realized losses. The Company had a write down of one
investment security totaling $255,000 for the year ended December 31, 1997.
There were no such write-downs during 1999 and 1998.
Gains and losses on the sale of securities available for sale are determined
using the specific-identification method.
5. LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are reported at their
outstanding principal balance. These receivables are adjusted for any
charge-offs, the allowance for loan losses, and any deferred fees or costs on
originated loans and un-amortized premiums or discounts on purchased loans.
Loan origination fees and certain direct origination costs are capitalized and
recognized as an adjustment to the related loan's yield, generally over the
contractual life of the loan.
The accrual of interest on impaired loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due. When
interest accrual is discontinued, all unpaid accrued interest is reversed.
Interest income is subsequently recognized only to the extent cash payments are
received.
The allowance for loan losses is increased by charges to income and decreased by
charge-offs (net of recoveries). Management's periodic evaluation of the
adequacy of the allowance is based on the Bank's past loan loss experience,
known and inherent risks in the portfolio, adverse situations that may affect
the borrower's ability to repay, the estimated value of any underlying
collateral, and current economic conditions.
-F12-
<PAGE>
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
6. ACCOUNTING FOR IMPAIRMENT OF LOANS
The Company's measurement of impaired loans includes those loans, which are
non-performing and have been placed on non-accrual status and those loans, which
are performing according to all contractual terms of the loan agreement but may
have substantive indication of potential credit weakness.
Residential mortgages and consumer loans and leases outside the scope of SFAS
No. 114 are collectively evaluated for impairment.
7. PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are provided for in amounts
sufficient to relate the cost of depreciable assets to operations over their
estimated service lives. Leasehold improvements are amortized over the lives of
the respective leases or the service lives of the improvements, whichever is
shorter. The straight-line method of depreciation is followed for substantially
all assets for financial reporting purposes, but accelerated methods are used
for tax purposes.
8. OTHER REAL ESTATE OWNED (ORE)
Other real estate owned is initially recorded at fair value at the date of
foreclosure, less estimated selling costs. Costs relating to development and
improvement of property are capitalized, whereas costs relating to the holding
of property are expensed.
Valuations are periodically performed by management, or obtained from
independent appraisers, and an allowance for loss is established by a charge to
operations if the value of the property declines below its original estimated
fair value.
If a sale of real estate owned results in a gain, the gain is accounted for in
accordance with FASB Statement No. 66, Accounting for Sales of Real Estate.
Accordingly, gains may be deferred or recognized currently depending on the
terms of the sale. Losses are charged to operations as incurred.
9. INTANGIBLE ASSETS
Intangible assets include core deposit premiums paid to acquire certain customer
deposit bases and the remaining excess of cost over net tangible assets
acquired. These assets are being amortized on a straight-line basis over their
estimated lives of 10-40 years.
-F13-
<PAGE>
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
10. INCOME TAXES
Deferred income tax assets and liabilities are computed annually for differences
between the consolidated financial statements and tax basis of assets and
liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in net deferred assets and
liabilities.
11. STOCK BASED COMPENSATION
The Company accounts for its stock-based compensation plans under Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.
Effective in 1996, the Company adopted the disclosure option of SFAS No. 123,
Accounting for Stock-Based Compensation, which requires that companies not
electing to account for stock-based compensation as prescribed by the statement,
disclose the pro forma effects on earnings and earnings per share as if SFAS No.
123 had been adopted. Additionally, certain other disclosures are required with
respect to stock compensation and the assumptions used are to determine the pro
forma effects of SFAS No. 123.
12. LOAN FEES
Net loan fees and processing costs are deferred and amortized over the lives of
the loans using the interest method of amortization.
13. ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically reviews its long-lived assets for impairment.
Impairment losses on long-lived assets are recognized when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amounts. The Company did not
record any impairment losses during the years ended December 31, 1999 and 1998.
14. ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENT OF LIABILITIES
The FASB has issued SFAS No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities, which was effective for the
Company's fiscal year beginning January 1, 1997. SFAS No. 125 provides standards
for distinguishing transfers of financial assets that are sales from transfers
that are secured borrowings. A transfer of financial assets in which the
transferor surrenders control over those assets is accounted for as a sale to
the extent that consideration other than beneficial interests in the transferred
assets is received in exchange. After a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, de-recognizes financial assets when control has been surrendered,
and de-recognizes liabilities when extinguished.
-F14-
<PAGE>
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
15. REPORTING COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income. SFAS
No. 130 establishes standards for reporting and display of comprehensive income.
A specific reporting format is not required, provided the financial statements
show the amount of total comprehensive income for the period. Those items, which
are not included in net income are required to be shown in the financial
statements with appropriate footnote disclosure and the aggregate balance of
such items must be shown separately from retained earnings and additional
paid-in capital in the equity section of the balance sheet. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997. Reclassification
of financial statements for earlier periods is required. The Company adopted
SFAS No. 130 effective January 1, 1998.
16. DISCLOSURES ABOUT BUSINESS SEGMENTS
In June 1997, the FASB adopted SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information. SFAS No. 131 establishes standards for the
way the Company reports information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial reports. SFAS No. 131 is effective for periods
beginning after December 15, 1997. Management has implemented SFAS No. 131 in
the year ended December 31, 1997.
17. EARNINGS PER SHARE
In February 1997, the FASB issued SFAS No. 128, Earnings Per Share. SFAS No. 128
simplified the method for computing and presenting earnings per share ("EPS")
previously required by APB Opinion No. 15, Earnings Per Share, and makes them
comparable to international EPS standards. SFAS No. 128 is effective for periods
ending after December 15, 1997, and requires restatement of all prior period EPS
data and has been implemented by the Company. It replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual presentation
of basic and diluted EPS on the face of the income statement for all entities
with complex capital structures and requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation.
18. RECLASSIFICATIONS
Certain reclassifications have been made to the December 31, 1998, and 1997
balances to conform to the December 31, 1999 presentation.
-F15-
<PAGE>
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
19. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The FASB recently issued SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS No. 133 requires entities to recognize all derivatives
in their financial statements as either assets or liabilities measured at fair
value. SFAS No. 133 also specified new methods of accounting for hedging
transactions, prescribes the items and transactions that may be hedged, and
specifies detailed criteria to be met to qualify for hedge accounting. On
adoption, entities are permitted to transfer held-to-maturity debt securities to
the available-for-sale or trading category. SFAS No. 133 is effective for fiscal
years beginning after June 15, 1999. The adoption of SFAS No. 133 for the year
ended December 31, 2000 is not expected to have a material impact on the results
of operations for the Company.
NOTE B - ACQUISITIONS
On September 30, 1995, the Company purchased 100% of the stock of Fiduciary
Services Corp. ("FSC") for $450,000, issuing 150,000 shares at $3.00 per share
of common stock of the Company plus a contingent payment of performance shares
based upon net earnings of the trust department through 2001. The acquisition of
FSC was accounted for as a purchase. The purchase price was allocated to net
tangible assets acquired based upon their estimated fair market values. The
performance shares will be recorded as additional purchase price. Included in
intangible assets is $395,706 of excess of cost over net tangible assets
acquired. Pro forma information is not presented, as the effect of the
acquisition is immaterial to the financial statements.
On January 31, 1996, the Company completed the acquisition of EPW, an
independent investment management firm. The acquisition was facilitated by the
issuance of $630,000, of 8% convertible subordinated debentures, plus a
contingent payment of performance shares based upon net earnings of EPW through
2001. The performance shares will be recorded as compensation.
For the above acquisitions, the Company has reserved from its authorized but
un-issued Common Stock, 225,000 shares as performance shares and 120,215 shares
have been paid out as of December 31, 1999, of which 78,140 shares were
accounted for as additional consideration and 42,075 shares were accounted for
as compensation.
NOTE C - INITIAL PUBLIC OFFERING
On December 16, 1998, the Company completed an Initial Public Offering (IPO) in
which it issued 507,705 shares of common stock at a price of $7.25 per share.
The common stock trades on the NASDAQ Small Cap Market under the symbol "UFHI".
Concurrent with the common stock offering, the Company issued through UFH
Capital Trust I, 1,349,920 shares of $5.00 par value Trust Preferred securities
with a coupon rate of 9.40%. The Trust Preferred securities trade on the NASDAQ
Small Cap Market under the symbol "UFHIP". Proceeds from the offering totaled
$9,554,011 net of underwriting fees and Trust Preferred costs of $876,450.
-F16-
<PAGE>
NOTE D - UFH CAPITAL TRUST I
On December 16, 1998, UFH Capital Trust I ("UFHCT"), a Delaware statutory
business trust created by the Company, issued $6,749,600 (including an over
allotment of $749,600 that closed on January 14, 1999) of 9.40% Cumulative Trust
Preferred Securities ("Securities") which will mature on December 10, 2028,
subject to earlier redemption in certain circumstances. The principal asset of
UFHCT is a $6,959,200 subordinated debenture of the Company. The subordinated
debenture bears interest at the rate of 9.40% and matures December 16, 2028,
subject to earlier redemption in certain circumstances. The Company owns all of
the common securities of UFHCT.
The Securities, the assets of UFHCT, and the common securities issued by UFHCT,
are redeemable in whole or in part on or after December 10, 2003 or at any time,
in whole (but not in part) within 180 days following the occurrence of certain
events. The Securities are included in Tier I Capital for regulatory purposes,
subject to certain limitations.
The obligations of the Company with respect to the issuance of the Securities
constitute a full and unconditional guarantee by the Company of UFHCT's
obligation with respect to the Securities.
Subject to certain exceptions and limitations, the Company may, from time to
time, defer subordinated debenture interest payments, which would result in a
deferral of distribution payments on the related securities and, with certain
exceptions, prevent the Company from declaring and paying cash distributions on
the Company's common stock or debt securities that rank pari passu or junior to
the subordinated debentures.
NOTE E - BUSINESS SEGMENT INFORMATION
United Financial has three reportable segments: Commercial Banking, Trust
Services, and Investment Management Services. Commercial Banking delivers a full
range of financial services to individuals and small to medium sized businesses.
Services include loan products such as commercial mortgages, business equipment
loans and lines of credit, equity lending, credit cards, and loans for
automobile and other personal financing needs, and various products designed to
meet the credit needs of small businesses. In addition, Commercial Banking
offers various deposit products that meet customers' savings and transaction
needs. Trust Services is comprised of client fiduciary services and provides
primarily fee-based income. This area includes not only traditional trust
services, but also is a wholesale provider of trust services such as data
processing, administrative and accounting support and asset custody services to
professionals holding assets in trust, such as legal and accounting firms.
Investment Services offers investment management services through an investment
advisory firm registered under the Investment Advisers Act of 1940. Such
investment management services are offered to corporate, municipal, and high net
worth individual clients throughout the State of Florida and the southeastern
United States. Corporate and Other includes corporate expenses such as corporate
overhead, intercompany transactions, and certain goodwill amortization. The
accounting policies of the reportable segments are the same as those described
in Note A.
-F17-
<PAGE>
United Financial Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E - BUSINESS SEGMENT INFORMATION - Continued
The following table presents the Company's Business Segment Information for the
years ended December 31, 1999, 1998 and 1997, respectively:
Commercial Investment Trust Corporate
Banking Management Services & Overhead Total
1999 ------------ ---------- ----------- ---------- ------------
Interest income $ 14,579,861 $ - $ 196,196 $ (65,544)$ 14,710,513
Interest expense 5,263,836 - - 575,393 5,839,229
------------ ---------- ----------- ---------- ------------
Net interest
income 9,316,025 - 196,196 (640,937) 8,871,284
Other revenue 2,000,774 1,593,054 1,630,459 (103,444) 5,120,843
------------ ---------- ----------- ---------- ------------
Total revenue 11,316,799 1,593,054 1,826,655 (744,381) 13,992,127
Loan loss
provision 785,000 - - - 785,000
Non interest
expense 6,774,763 1,588,305 1,147,680 41,301 9,552,049
------------ ---------- ----------- ---------- ------------
Pre-tax income 3,757,036 4,749 678,975 (785,682) 3,655,078
Income taxes
(benefit) 1,328,800 (13,235) 274,944 (268,324) 1,322,185
------------ ---------- ----------- ---------- ------------
Segment net
income $ 2,428,236 $ 17,984 $ 404,031 $ (517,358)$ 2,332,893
============ ========== =========== ========== ============
Total assets $205,178,434 $ 462,832 $ 3,422,100 $ 417,942 $209,481,308
============ ========== =========== ========== ============
Capital
expenditures $ 973,121 $ 35,457 $ 45,927 $ - $ 1,054,505
============ ========== =========== ========== ============
(Continued on F18b & F18c)
-F18a-
<PAGE>
United Financial Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E - BUSINESS SEGMENT INFORMATION - Continued from F18a
Commercial Investment Trust Corporate
Banking Management Services & Overhead Total
1998 ------------ ---------- ----------- ---------- ------------
Interest income $ 12,561,480 $ - $ 170,611 $ (73,311)$ 12,658,780
Interest expense 5,066,193 4,015 - 198,111 5,268,319
------------ ---------- ----------- ---------- ------------
Net interest
income 7,495,287 (4,015) 170,611 (271,422) 7,390,461
Other revenue 1,645,718 1,447,113 956,042 39,630 4,088,503
------------ ---------- ----------- ---------- ------------
Total revenue 9,141,005 1,443,098 1,126,653 (231,792) 11,478,964
Loan loss
provision 752,000 - - - 752,000
Non interest
expense 5,652,029 1,356,633 950,676 (252) 7,959,086
------------ ---------- ----------- ---------- ------------
Pre-tax income 2,736,976 86,465 175,977 (231,540) 2,767,878
Income taxes
(benefit) 969,555 37,914 71,073 (67,972) 1,010,570
------------ ---------- ----------- ---------- ------------
Segment net
income $ 1,767,421 $ 48,551 $ 104,904 $ (163,568)$ 1,757,308
============ ========== =========== ========== ============
Total assets $168,837,452 $ 396,682 $ 2,666,328 $ 1,717 $171,902,179
============ ========== =========== ========== ============
Capital
expenditures $ 389,634 $ 24,151 $ 2,165 $ - $ 315,950
============ ========== =========== ========== ============
(Continued on F18c)
-F18b-
<PAGE>
United Financial Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E - BUSINESS SEGMENT INFORMATION - Continued from F18b
Commercial Investment Trust Corporate
Banking Management Services & Overhead Total
1997 ------------ ---------- ----------- ---------- ------------
Interest income $ 10,785,371 $ - $ - $ 7,146 $ 10,792,517
Interest expense 3,970,539 4,848 - 125,699 4,101,086
------------ ---------- ----------- ---------- ------------
Net interest
income 6,814,832 (4,848) - (118,553) 6,691,431
Other revenue 1,286,174 1,237,571 764,507 (48,000) 3,240,252
------------ ---------- ----------- ---------- ------------
Total revenue 8,101,006 1,232,723 764,507 (166,553) 9,931,683
Loan loss
provision 90,000 - - - 90,000
Non interest
expense 5,522,949 1,084,197 878,884 85,965 7,571,995
------------ ---------- ----------- ---------- ------------
Pre-tax income 2,488,057 148,526 (114,377) (252,518) 2,269,688
Income taxes
(benefit) 925,149 41,163 (43,005) (63,361) 859,946
------------ ---------- ----------- ---------- ------------
Segment net
income $ 1,562,908 $ 107,363 $ (71,372)$ (189,157)$ 1,409,742
============ ========== =========== ========== ============
Total assets $144,482,343 $ 231,565 $ 2,363,338 $ 241,438 $147,318,684
============ ========== =========== ========== ============
Capital
expenditures $ 3,949,336 $ 32,173 $ 201,254 $ - $ 4,182,763
============ ========== =========== ========== ============
-F18c-
<PAGE>
NOTE F - UNITED FINANCIAL HOLDINGS, INC. (Parent Only) CONDENSED FINANCIAL
INFORMATION
The Bank, EPW, Trust and UFHCT are wholly-owned subsidiaries of United Financial
Holdings, Inc. The majority of the Company's assets are represented by its
investment in the Bank and its primary source of income is dividends from the
Bank.
During 1989, the Company authorized the issuance of 150,000 shares of $10 par
value cumulative, convertible, 7% preferred stock. The shares are convertible
into common shares at $1.19 per share.
Following is condensed financial information of the Company.
December 31,
1999 1998 1997
------------ ------------ -------------
BALANCE SHEETS
Cash and cash equivalents $ 2,975,207 $ 4,451,859 $ 203,278
Trading securities 81,600 157,354 -
Equity securities 773,000 - -
Note receivable 500,000 - -
Due from subsidiaries 499,183 192,432 197,014
Investment in Bank 15,872,307 13,617,578 10,428,370
Investment in EPW 154,259 136,275 102,723
Investment in United Trust 3,399,823 2,646,885 2,360,985
Investment in UFH Cap Trust I 209,600 209,600 -
Intangible assets 499,011 546,230 561,063
Receivable from UFH Cap Trust I - 774,476 -
Other assets 38,431 120,530 125,291
------------ ------------ ------------
$ 25,002,421 $ 22,853,219 $ 13,978,724
============ ============ ============
Note payable $ - $ - $ 2,629,402
Convertible subordinated
debentures 630,000 630,000 630,000
Junior subordinated
debentures issued
to UFH Cap Trust I 6,959,200 6,959,200 -
Other liabilities 590,838 492,913 228,160
Stockholders' equity 16,822,383 14,771,106 10,491,162
------------ ------------ ------------
$ 25,002,421 $ 22,853,219 $ 13,978,724
============ ============ ============
-F19-
<PAGE>
NOTE F - UNITED FINANCIAL HOLDINGS, INC. (Parent Only) CONDENSED FINANCIAL
INFORMATION - Continued
December 31,
1999 1998 1997
------------ ------------ -------------
STATEMENTS OF EARNINGS
Equity in earnings of Bank $ 2,428,237 $ 1,767,421 $ 1,492,207
Equity in earnings of EPW 17,985 48,551 107,363
Equity in earnings of
United Trust 404,031 95,599 -
Gains on trading account 41,808 87,354 -
Other income 64,308 100,345 26,611
Interest expense (702,748) (275,116) (125,699)
Other expense (189,052) (144,123) (156,235)
------------ ------------ -------------
Earnings before income taxes 2,064,569 1,680,031 1,344,247
Income tax benefit 268,324 77,277 65,495
------------ ------------ -------------
Net earnings $ 2,332,893 $ 1,757,308 $ 1,409,742
============ ============ =============
NOTE G - SECURITIES
At December 31, 1999 and 1998, the carrying value and estimated market value of
investments in debt and equity securities were as follows:
Carrying
Value Gross Gross Estimated
(Amortized Unrealized Unrealized Market
Cost) Gains Losses Value
----------- ----------- ---------- ------------
DECEMBER 31, 1999
Securities held to maturity:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $10,111,441 $ 1,655 $ 276,011 $ 9,837,085
Obligations of State and
political subdivisions 1,825,423 11,692 77,183 1,759,932
Mortgage-backed securities 2,003,792 1,763 121,614 1,883,941
Corporate obligations 500,021 - 8,771 491,250
Other 100,000 - - 100,000
------------ ----------- --------- -----------
Total $14,540,677 $15,110 $ 483,579 $14,072,208
=========== =========== ========= ===========
-F20-
<PAGE>
NOTE G - SECURITIES - Continued
Historical Gross Gross Carrying
Amortized Unrealized Unrealized Value
Cost Gains Losses (Market Value)
----------- ---------- ---------- --------------
Securities available for sale:
U.S. Treasury securities and
obligations of U.S.
government corporations
and agencies $ 5,403,131 $ 10,373 $ 117,425 $ 5,296,079
Obligations of State and
political subdivisions 1,803,336 - 94,164 1,709,172
Mortgage-backed securities 1,146,820 3,368 14,209 1,135,979
Equity securities 1,922,590 - 140,000 1,782,590
----------- ---------- ---------- ------------
Total $10,275,877 $ 13,741 $ 365,798 $ 9,923,820
=========== ========== ========== ============
Carrying
Value Gross Gross
(Amortized Unrealized Unrealized Estimated
Cost) Gains Losses Market Value
----------- ---------- ---------- --------------
DECEMBER 31, 1998
Securities held to maturity:
U.S. Treasury securities and
obligations of U.S.
governmentcorporations
and agencies $ 5,975,832 $ 227,918 $ 31,563 $ 6,172,187
Obligations of State and
political subdivisions 1,179,373 13,869 10,174 1,183,068
Mortgage-backed securities 3,448,531 22,630 92 3,471,069
Corporate obligations 501,893 7,482 - 509,375
Other 100,000 - - 100,000
----------- ---------- ---------- ------------
Total $11,205,629 $ 271,899 $ 41,829 $ 11,435,699
=========== ========== ========== ============
-F21-
<PAGE>
NOTE G - SECURITIES - Continued
Historical Gross Gross Carrying
Amortized Unrealized Unrealized Value
Cost Gains Losses (Market Value)
----------- ---------- ---------- --------------
Securities available for sale:
U.S. Treasury securities and
obligations of U.S.
government corporations
and agencies $ 8,747,092 $ 139,132 $ - $ 8,886,224
Obligations of State and
political subdivisions 1,444,917 55,011 - 1,499,928
Mortgage-backed securities 3,035,227 31,795 577 3,066,445
Equity securities 1,086,140 - 11,250 1,074,890
----------- ---------- ---------- ------------
Total $14,313,376 $ 225,938 $ 11,827 $ 14,527,487
=========== ========== ========== =============
Proceeds from the sale of investments in debt securities totaled $110,906 for
the year ended December 31, 1998 with a resulting gain of $78,498, which is
included in other service charges, fees and income. The sale of these held to
maturity debt securities during the year ended December 31, 1998 was due to a
significant deterioration in the issuer's credit-worthiness. There were no
proceeds from sales of investments in debt securities for the years ended
December 31, 1999 and 1997.
The amortized cost and estimated market value of debt securities at December 31,
1999, by contractual maturity, are shown below. Actual maturities may differ
from contractual maturities due to borrowers having the right to call or prepay
obligations with or without call or prepayment penalties.
Securities held to Securities available
maturity for sale
----------------------------- -----------------------------
Carrying Carrying
Value Estimated Historical Value
(Amortized Market Average Amortized Market Average
Cost) Value Yield Cost Value) Yield
---------- ---------- ------- ---------- ---------- -------
Due in one year
or less $ 867,095 $ 859,234 7.03% $1,499,659 $1,502,032 6.06%
Due after one
year through
five years 7,781,001 7,626,822 6.17% 1,967,461 1,944,357 6.46%
Due after five
years through
ten years 2,793,965 2,676,041 6.58% 2,927,395 2,783,273 5.44%
Due after ten
years 1,094,824 1,026,170 5.62% 811,952 775,590 6.64%
-F22-
<PAGE>
NOTE G - SECURITIES - Continued
Securities held to Securities available
maturity for sale
----------------------------- -----------------------------
Carrying Carrying
Value Estimated Historical Value
(Amortized Market Average Amortized Market Average
Cost) Value Yield Cost Value) Yield
----------- ----------- ------- ----------- ---------- -------
Mortgage-
backed
securities 2,003,792 1,883,941 7.49% 1,146,820 1,135,978 6.71%
Equity securities - 1,922,590 - - 1,782,590 3.67%
----------- ----------- ------- ----------- ----------- -------
Total $14,540,677 $14,072,208 $10,275,877 $9,923,820
=========== =========== =========== ==========
Investment securities with a carrying value (which approximates market value) of
approximately $8,406,000 and $13,447,000 at December 31, 1999 and 1998,
respectively, were pledged to secure public funds and securities sold under
agreements to repurchase.
NOTE H - LOANS
Major classifications of loans were as follows:
December 31,
1999 1998
----------------- ------------------
Real estate mortgage $ 108,742,717 $ 78,013,492
Commercial 41,358,490 34,903,429
Installment and other 6,768,611 6,240,676
----------------- ------------------
156,869,818 119,157,597
Less: Allowance for loan losses 2,340,857 1,983,753
Unearned fees 1,031,553 627,993
----------------- ------------------
Loans, net $153,497,408 $116,545,851
================= ==================
Changes in the allowance for loan losses were as follows:
For the Years Ended December 31,
1999 1998 1997
---------- ---------- ----------
Balance at beginning of year $1,983,753 $1,647,355 $1,609,785
Provision charged to operating
expenses 785,000 752,000 90,000
Recoveries on loans previously
charged off 32,596 10,536 38,510
Loans charged off (460,492) (426,138) (90,940)
---------- ---------- ----------
Balance at end of year $2,340,857 $1,983,753 $1,647,355
========== ========== ==========
-F23-
<PAGE>
NOTE H - LOANS - Continued
Changes in unearned fees were as follows:
For the Years Ended December 31,
1999 1998 1997
----------- ----------- -----------
Balance at beginning of year $ 627,993 $ 520,862 $ 341,439
Points deferred on loans 525,290 257,085 244,364
Points recognized in income (121,730) (149,954) (64,941)
----------- ----------- -----------
Balance at end of year $ 1,031,553 $ 627,993 $ 520,862
=========== =========== ===========
Impaired loans were as follows:
For the Years Ended December 31,
1999 1998 1997
----------- ----------- -----------
Balance at end of period $ 1,914,536 $ 4,001,964 $ 400,049
Average balance during period 3,016,132 2,808,974 440,927
Total related allowance for losses 231,000 602,000 13,000
Interest income recognized on
impaired loans 103,600 86,700 -
The only loans sold by the Bank during 1999, 1998 and 1997 were SBA loans. In
accordance with SFAS No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities, a servicing asset is
recorded when the Bank sells the SBA loans. The book value of such assets, which
the Bank believes approximates the fair value of such assets at December 31,
1999, 1998 and 1997 was $408,000 $141,000 and $78,000, respectively.
Amortization expense relating to such servicing assets of $25,000, $13,000, and
$2,000 was recorded for 1999, 1998 and 1997, respectively. The Company
periodically reviews prepayment and default assumptions to determine impairment.
No valuation for impairment of these assets was deemed necessary for the periods
presented.
NOTE I - PREMISES AND EQUIPMENT
Major classifications of premises and equipment are as follows:
December 31,
1999 1998
------------ ------------
Land $ 1,688,779 $ 1,396,779
Land improvements 64,746 64,746
Leasehold improvements 115,811 115,812
Building and building improvements 7,623,685 7,404,878
Furniture, fixtures and equipment 3,017,053 2,666,993
------------ ------------
12,510,074 11,649,208
Less accumulated depreciation
and amortization 2,891,538 2,374,707
------------ ------------
$ 9,618,536 $ 9,274,501
============ ============
-F24-
<PAGE>
NOTE I - PREMISES AND EQUIPMENT - Continued
Depreciation of premises and equipment and amortization of leaseholds was
$704,823, $576,515, and $501,475 for the years ended December 31, 1999, 1998 and
1997, respectively.
NOTE J - INCOME TAXES
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities, consist of the
following:
December 31,
1999 1998
----------- -----------
Deferred tax assets
Allowance for loan losses $ 815,000 $ 680,000
Deferred loan fees 325,000 158,000
Deferred compensation 143,000 118,000
Securities available for sale 133,000 -
Net operating loss carryforward (1) 15,000 34,000
---------- ---------
1,431,000 990,000
Deferred tax liabilities
Fixed assets 225,000 133,000
Securities available for sale - 81,000
---------- ---------
225,000 214,000
Net deferred tax asset,
included with other assets $1,206,000 $ 776,000
========== =========
(1) Relates to net operating losses of two acquired subsidiaries. The
acquisitions resulted in ownership changes for purposes of Section 382
of the Internal Revenue Code of 1986, as amended. Consequently, the net
operating loss carryforwards are subject to a yearly limitation on their
utilization and can only be applied against future income of the
acquired subsidiaries. Such operating loss carryforwards at December 31,
1999 are approximately $38,000 and begin to expire in 2010. The Company
believes that it will obtain the future income to fully utilize the net
operating loss carryforwards, thus no valuation allowance has been
recorded.
Management believes that it is more likely than not that the net deferred tax
asset will be realized and, therefore, a valuation allowance has not been
recorded against the deferred asset at December 31, 1999, 1998 and 1997.
-F25-
<PAGE>
NOTE J - INCOME TAXES - Continued
The Company's effective tax rate varies from the statutory rate of 34%. The
reasons for this difference are as follows:
For the Years Ended December 31,
1999 1998 1997
---------- ---------- ----------
Computed "expected" tax provision $1,242,700 $ 941,000 $ 771,700
Tax exempt interest income - securities (22,800) (14,800) (7,500)
Tax exempt income - life insurance (46,000) (46,500) -
Goodwill amortization 29,000 24,000 22,100
State taxes net of federal benefit 104,300 70,600 58,600
Other, net 14,985 36,270 15,046
---------- ---------- ----------
Total $1,322,185 $1,010,570 $ 859,946
========== ========== ==========
NOTE K - DEPOSITS
At December 31, 1999, the scheduled maturities of time deposits are as follows:
2000 $51,016,253
2001 13,552,025
2002 3,446,577
2003 704,141
2004 656,295
-----------
$69,375,291
===========
NOTE L - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Company enters into retail repurchase agreements with certain of its
customers. These agreements mature daily. All securities collateralizing these
agreements were under the Company's control for each respective time period.
Information concerning securities sold under agreements to repurchase is
summarized as follows:
Year Ended December 31,
1999 1998 1997
---------- ---------- ----------
Average balance $6,391,928 $3,983,959 $2,029,453
Average interest rate 3.52% 3.55% 2.49%
Maximum month-end balance $7,307,044 $8,795,715 $2,860,141
The average rate was determined by dividing the total interest paid by the
average outstanding borrowings.
-F26-
<PAGE>
NOTE L - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE - Continued
Securities underlying the agreements are as follows:
At December 31,
1999 1998
---------- ----------
Carrying value $7,445,000 $8,644,000
Estimated fair value $7,340,000 8,804,000
NOTE M - LONG-TERM DEBT
Long-term debt of the Company consists of the following:
At December 31,
1999 1998
---------- ----------
Note payable to an unrelated bank
providing for quarterly principal
payments of $3,750 and quarterly
interest payments at 8.5% fixed, due
in 2001. The note is collateralized
by certain pieces of data processing
equipment. $ - $ 33,750
8% Convertible Subordinated Debentures
issued in conjunction with the
acquisition of EPW. The holder can
convert to common stock at $4.12
per share at any time. Upon conversion,
the common stock issued cannot be
traded for a period of two years.
Interest is payable semi-annually
and the debentures mature January 31,
2006. The debentures are callable by
the Company, in whole or part, as follows:
Year Price
-------- -------
2001 103%
2002 102%
2003 101%
2004 and thereafter 100% 630,000 630,000
---------- ----------
$ 630,000 $ 663,750
========== ==========
-F27-
<PAGE>
NOTE M - LONG-TERM DEBT - Continued
The annual principal reductions of the long-term debt during each of the next
five years ended December 31 are as follows:
2000 $ -
2001 -
2002 -
2003 -
2004 -
Thereafter 630,000
--------------
$ 630,000
==============
NOTE N - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and a 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 weighting, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) to total and Tier I capital (as defined in the regulations) to risk
weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1999, that the Bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 1999 and 1998, the most recent notification from the Federal
Reserve categorized the Bank as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized, the Bank
must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage
ratios as set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's category.
-F28-
<PAGE>
NOTE N - REGULATORY MATTERS - Continued
The Bank's actual capital amounts and ratios as of December 31, 1999 are as
follows (dollars in thousands):
To Be Well
Minimum Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
--------------- ----------------- -----------------
Stockholders' equity
and ratio to total
assets $ 15,872 7.74%
Intangible assets (389)
--------
Tangible capital and
ratio to adjusted
total assets $ 15,483 7.14% $ 3,254 1.5%
======== =========
Tier I (core) capital and
ratio to adjusted
total assets $ 15,537 7.16% $ 6,508 3.0% $ 10,846 5.0%
======== ======== ========
Tier I capital and ratio
to risk-weighted
assets $ 15,537 9.16% $ 5,088 3.0% $ 10,176 6.0%
======== ======== ========
Tier II capital -
allowance for loan
and lease losses 2,123
Total risk-based capital
and ratio to risk-
weighted assets $ 17,660 10.41% $ 13,568 8.0% $ 16,906 10.0%
======== ======== ========
Total assets $205,178
========
Adjusted total assets 216,918
========
Risk-weighted assets $169,599
========
-F29-
<PAGE>
NOTE N - REGULATORY MATTERS - Continued
The Bank's actual capital amounts and ratios as of December 31, 1998 are as
follows (dollars in thousands):
To Be Well
Minimum Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
--------------- ----------------- -----------------
Stockholders' equity
and ratio to total
assets $ 13,617 8.06%
Intangible assets (404)
--------
Tangible capital and
ratio to adjusted
total assets $ 13,213 7.52% $ 2,636 1.5%
======== =========
Tier I (core) capital and
ratio to adjusted
total assets $ 13,073 7.44% $ 5,272 3.0% $ 8,787 5.0%
======== ======== ========
Tier I capital and ratio
to risk-weighted
assets $ 13,073 9.52% $ 4,118 3.0% $ 8,236 6.0%
======== ======== ========
Tier II capital -
allowance for loan
and lease losses 1,719
Total risk-based capital
and ratio to risk-
weighted assets $ 14,792 10.78% $ 10,981 8.0% $ 13,727 10.0%
======== ======== ========
Total assets $168,837
========
Adjusted total assets 175,739
========
Risk-weighted assets $137,267
========
-F30-
<PAGE>
NOTE O - CONCENTRATIONS OF RISK
All of the Company's loans, commitments, and commercial and standby letters of
credit have been granted to customers who are substantially all located in the
Company's market area. The majority of customers are depositors of the Company.
The concentrations of credit by type of loan are set forth in Note D. The
distribution of commitments to extend credit approximates the distribution of
loans outstanding. Commercial and standby letters of credit were granted
primarily to commercial borrowers. The Company, as a matter of policy, does not
extend credit to any single borrower or group of related borrowers in excess of
its legal lending limit. At December 31, 1999 and 1998, less than 3% of the
Company's loans are unsecured.
At December 31, 1999, no single customer represented more than 10% of total
deposits. At December 31, 1998, the Company held deposits for a customer equal
to approximately 10% of total deposits. Such deposits were invested in
short-term investments.
NOTE P - COMMITMENTS AND CONTINGENT LIABILITIES
OFF BALANCE-SHEET RISK
The Company 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. Such financial instruments are recorded in the financial
statements when they become payable. Those instruments involve, to varying
degrees, elements of credit and interest rate risks in excess of the amount
recognized in the balance sheet. The contract or notional amounts of those
instruments reflect the extent of involvement the Company has in particular
classes of financial instruments.
The Company's exposure to credit loss in the event of non-performance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual or notional amount
of those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
Unless noted otherwise, the Company does not require collateral or other
security to support financial instruments with off-balance-sheet credit risk.
The contract or notional amounts are as follows:
December 31,
1999 1998
------------ ------------
Commitments to extend credit $23,967,359 $20,182,057
Standby letters of credit and
financial guarantees written $ 2,032,288 $ 1,595,882
-F31-
<PAGE>
NOTE P - COMMITMENTS AND CONTINGENT LIABILITIES - Continued
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 Company evaluates each customer's
credit-worthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements, including
commercial paper, bond financing, and similar transactions. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. The Company generally holds
residential or commercial real estate, accounts receivable, inventory, and
equipment as collateral supporting those commitments for which collateral is
deemed necessary.
LITIGATION
The Company is party to certain litigation encountered in the course of its
normal operations, a portion of which involves actions brought against
borrowers, generally involving foreclosure proceedings. In some instances,
borrowers or interested parties have filed or threatened suit in retaliation.
Management, after consulting with legal counsel, believes that it has valid
defenses and intends to vigorously defend these matters. Management is of the
opinion that an unfavorable outcome, if any, would not have a material effect
upon the consolidated financial statements.
OPERATING LEASES
The Company also has operating leases covering certain office equipment and
office facilities expiring at various times through 2004.
The minimum annual rentals under these leases as of December 31, 1999, are as
follows:
Year Amount
------ ----------
2000 $ 82,996
2001 83,730
2002 74,189
2003 27,690
2004 28,806
Thereafter 24,828
----------
Total minimum lease payments $ 322,239
==========
-F32-
<PAGE>
NOTE P - COMMITMENTS AND CONTINGENT LIABILITIES - Continued
The Company's rent expense was $96,788, $102,342, and $189,096 for the years
ended December 31, 1999, 1998 and 1997, respectively.
NOTE Q - FAIR VALUE OF FINANCIAL INSTRUMENTS
The assumptions used in the estimation of the fair value of the Company's
financial instruments are detailed below. Where quoted prices are not available,
fair values are based on estimates using discounted cash flows and other
valuation techniques. The use of discounted cash flows can be significantly
affected by the assumptions used, including the discount rate and estimates of
future cash flows. The following disclosures should not be considered a
surrogate of the liquidation value of the Company, but rather represent a
good-faith estimate of the increase or decrease in value of financial
instruments held by the Company since purchase, origination or issuance.
The Company, in estimating the fair value of its financial instruments, used the
following methods and assumptions:
Cash and due from banks and interest bearing deposits with other banks: Fair
value equals the carrying value of such assets.
Investment securities and investment securities available for sale: Fair
values for investment securities are based on quoted market prices.
Federal funds sold: Due to the short-term nature of these assets, the
carrying values of these assets approximate their fair value.
Loans: For variable rate loans, those repricing within six months or less,
fair values are based on carrying values. Fixed rate commercial loans, other
installment loans, and certain real estate mortgage loans were valued using
discounted cash flows. The discount rate used to determine the present value
of these loans was based on interest rates currently being charged by the
Company on comparable loans as to credit risk and term.
Off-balance-sheet instruments: The Company's loan commitments, which
approximate $26,000,000 and $21,800,000 at December 31, 1999 and 1998,
respectively, are negotiated at current market rates and are relatively
short-term in nature and, as a matter of policy, the Company generally makes
commitments for fixed rate loans for relatively short periods of time.
Therefore, the estimated value of the Company's loan commitments
approximates the fees charged for entering into the commitments.
-F33-
<PAGE>
NOTE Q - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued
Deposit liabilities: The fair values of demand deposits are, as required by
SFAS 107, equal to the carrying value of such deposits. Demand deposits
include non-interest-bearing demand deposits, savings accounts, NOW accounts
and money market demand accounts. Discounted cash flows have been used to
value fixed rate term deposits. The discount rate used is based on interest
rates currently being offered by the Company on comparable deposits as to
amount and term.
Short-term borrowings: The carrying value of Federal funds purchased,
securities sold under agreements to repurchase and other short-term
borrowings approximate their carrying values.
Long-term debt: The carrying value of the Company's long-term debt
approximates its fair value since the interest rates on these instruments
approximate market interest rates.
Cumulative trust preferred securities: Fair value for cumulative trust
preferred securities are based on quoted market prices.
For the Years Ended
Financial Instruments December 31, 1999 December 31, 1998
--------------------- ---------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
Assets: (In Thousands) (In Thousands)
--------------------- ----------------------
Cash and due from banks $ 8,866 $ 8,866 $ 7,967 $ 7,967
Federal funds sold 2,917 2,917 4,011 4,011
Trading securities 82 82 157 157
Securities held to
maturity 14,541 14,072 11,206 11,436
Securities available
for sale 9,924 9,924 14,527 14,527
Loans 156,870 156,690 119,158 119,694
Federal Home Loan
Bank stock 507 507 434 434
Federal Reserve
Bank stock 204 204 159 159
Liabilities:
Demand deposits 32,936 32,936 27,742 27,742
NOW and money market 67,914 67,914 48,550 48,550
Savings 4,873 4,873 4,686 4,686
Time, $100,000 and over 16,679 16,720 11,463 11,492
Other time 52,696 52,832 46,654 46,789
Securities sold under
agreements to
repurchase 7,307 7,307 8,796 8,796
Long-term debt 630 630 664 664
Cumulative trust
preferred securities 6,750 6,412 6,000 6,000
Off balance sheet items - 260 - 218
-F34-
<PAGE>
NOTE R - RELATED PARTIES
The Bank has entered into transactions with its directors, significant
stockholders, and their affiliates ("related parties"). Such transactions were
made in the ordinary course of business on substantially the same terms and
conditions, including interest rates and collateral, as those prevailing at the
same time for comparable transactions with other customers and did not, in the
opinion of management, involve more than normal credit risk or present other
unfavorable features. The aggregate amount of loans to such related parties
approximated $6,194,000, $5,277,500 and $4,462,400 at December 31, 1999, 1998
and 1997, respectively.
During November 1997, an affiliate of one of the Company's directors entered
into an exclusive right to a lease agreement (the "Lease Agreement") with
Imaginative Investments, Inc., a subsidiary of the Company and the owner of the
real property covering the Company's principal executive office (the "Owner").
Pursuant to the Lease Agreement, the Owner granted to such entity the exclusive
right to lease 17,918 square feet of the Company's principal executive office
for a total of $246,373 or $13.75 per rental square foot with annual escalations
of 3%, and three to five year lease terms in return for a commission of 3% if no
outside broker is used and 6% in the event an outside broker is used. The Lease
Agreement commenced July 14, 1997 and terminated at midnight on July 14, 1998.
As of December 31, 1999, the space was 100% leased.
During March 1997, an affiliate of one of the Company's directors (the
"Manager") entered into a property Management Agreement with Imaginative
Investments, Inc., a subsidiary of the Company, pursuant to which the Manager is
employed to act as the sole and exclusive manager in the leasing, operation and
management of the Company's principal executive offices for total consideration
of approximately $19,000. The Owner is required to maintain comprehensive
general public liability insurance in the amount of $2,000,000 naming as insured
parties the Owner, Manager and such other parties as the Owner may direct. The
Manager must maintain its own insurance to protect itself from any and all
claims under any workers' compensation laws or other employer's liability laws.
NOTE S - PROFIT-SHARING PLAN
The Company has a defined contribution profit-sharing plan covering
substantially all employees. The Board of Directors determines contributions
annually. The Company contributed $112,500, $110,000, and $99,996 for the years
ended December 31, 1999, 1998 and 1997, respectively. The plan was amended in
1993 to include an Employee Stock Ownership Plan (ESOP) provision. As of
December 31, 1999, the ESOP owned 152,297 shares of the Company's common stock.
During 1999, the ESOP purchased an additional 17,500 shares on the open market.
-F35-
<PAGE>
NOTE S - PROFIT-SHARING PLAN - Continued
The Company sponsors a deferred compensation 401(k) Plan for the benefit of
eligible full-time employees. The 401(k) Plan, which is voluntary, allows
employees to contribute up to 10 percent of their total compensation (or a
maximum of $10,000 as limited by federal regulations) on a pre-tax basis. The
Company makes a matching contribution of 100 percent of the first $500 and 40
percent thereafter, up to the maximum amount allowed by the 401(k) Plan.
Employee contributions to the 401(k) Plan were $182,040, $184,204, and $173,262
for the years ended December 31, 1999, 1998 and 1997, respectively. The
Company's matching contribution was $90,732, $92,857, and $86,927 for the years
ended December 31, 1999, 1998 and 1997, respectively.
NOTE T - STOCKHOLDERS' EQUITY
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share (EPS) computations. Options to purchase
454,749 shares of common stock at $7.92 a share, 481,380 shares of common stock
at $7.96 a share and 495,000 shares at $7.96 a share at December 31, 1999, 1998
and 1997, respectively, were not included in the computation of diluted EPS
because the options exercise price was not less than the value of the common
shares based on quoted market price or an independent appraisal. All these
options have various lives and expire in 2000 and beyond.
For the Year Ended December 31, 1999
-----------------------------
Weighted Per
Average Share
Earnings Shares Amount
---------- --------- -------
Basic EPS Net earnings available to common
stockholders $2,322,095 4,118,228 $.56
====
Effect of dilutive securities Incremental
shares from assumed exercise or conversion of:
Convertible debt 31,434 152,790
Preferred stock 10,798 129,476
Stock options - -
----------- ---------
Diluted EPS Net earnings available to common
stockholders and assumed conversions $2,364,327 4,400,494 $.54
========== ========= ====
(Continued on F36b)
-F36a-
<PAGE>
(Continued from F36a)
For the Year Ended December 31, 1998
-----------------------------
Weighted Per
Average Share
Earnings Shares Amount
---------- --------- -------
Basic EPS Net earnings available to common
stockholders $1,741,838 3,523,364 $.49
====
Effect of dilutive securities Incremental
shares from assumed exercise or conversion of:
Convertible debt 31,434 152,790
Preferred stock 15,470 185,508
Stock options - -
----------- ---------
Diluted EPS Net earnings available to common
stockholders and assumed conversions $1,788,742 3,861,662 $.46
=========== ========= ====
For the Year Ended December 31, 1997
-----------------------------
Weighted Per
Average Share
Earnings Shares Amount
---------- --------- -------
Basic EPS Net earnings available to common
stockholders $1,393,397 3,432,768 $.41
====
Effect of dilutive securities Incremental
shares from assumed exercise or conversion of:
Convertible debt 31,434 152,790
Preferred stock 16,345 196,947
Stock options - 3,207
---------- ---------
Diluted EPS Net earnings available to common
stockholders and assumed conversions $1,441,176 3,785,712 $.38
========== ========= ====
-F36b-
<PAGE>
NOTE T - STOCKHOLDERS' EQUITY - Continued
During the year ended December 31, 1997, the Company adopted the United
Financial Holdings, Inc. Stock Option and Incentive Compensation Plan ("Plan")
under which 468,000 shares of common stock were reserved. Under the Plan, the
Company may grant its Board of Directors and certain officers incentive stock
options or non-qualified stock options to purchase a specified number of shares
of common stock at a price not less than fair market value on the date of grant
and for a term not to exceed 10 years. The options granted to the Board of
Directors are 100% vested and the remaining options vest and become exercisable
at 20% increments after each anniversary date beginning after the second
anniversary date. During 1997, 156,000 and 312,000 options were granted to the
Company's Board of Directors and eligible executive officers, respectively, at
$7.94 per share, the estimated fair value of the Company's common stock at the
grant date. As such, no compensation expense was recorded in connection with the
grant of such options.
Range Weighted Average
Number of per Per Aggregate
of Option Share Option
Shares Share Price Price
--------- ------------ -------- -------------
Outstanding at
December 31, 1996 54,000 $ 3.89-8.25 $6.21 $ 335,340
Options granted 468,000 7.94 7.94 3,715,920
Options exercised (13,500) - (3.89) (52,515)
Options forfeited - - - -
--------- ------------ -------- -------------
Outstanding at
December 31, 1997 508,500 3.89-8.25 7.88 3,998,745
Options granted - - - -
Options exercised (6,000) - (5.08) (30,480)
Options forfeited (21,120) 5.08-7.94 (6.92) (146,150)
--------- ------------ -------- -------------
Outstanding at
December 31, 1998 481,380 7.63-8.25 7.94 3,822,115
Options granted 3,000 6.688 6.688 20,063
Options exercised - - - -
Options forfeited (29,631) 7.94-8.25 (8.08) (239,418)
--------- ------------ -------- -------------
Outstanding at
December 31, 1999 454,749 6.688-7.625 7.92 $ 3,602,760
========= ============ ======= =============
-F37-
<PAGE>
NOTE T - STOCKHOLDERS' EQUITY - Continued
The weighted-average remaining contractual life of the outstanding stock options
at December 31, 1999, 1998 and 1997 was 94 months, 103 months and 114 months,
respectively.
These options are exercisable as follows:
Weighted
Average
Year Ending Number of Exercise
December 31, Shares Price
----------------- ---------- ----------
2000 448,749 7.93
2001 3,300 7.71
2002 1,200 7.31
2003 1,500 6.94
---------- ----------
454,749 7.92
========== ==========
In order to calculate the fair value of the options, it was assumed that the
risk-free interest rate was 6.0%, the dividend yield would be 1.68% over the
exercise period, the expected life of the options would be the entire exercise
period, and stock volatility would approximate zero due to a thinly traded
market for the stock. The following information pertains to the fair value of
the options at December 31, 1999, 1998 and 1997.
For the Years Ended December 31,
1999 1998 1997
------------ ------------ ------------
Weighted average-grant-date
Fair value of options issued
during the year $ NIL $ NIL $ 705,120
============ ============ ============
Pro forma net earnings $ 2,244,347 $ 1,668,356 $ 1,402,329
============ ============ ============
Pro forma basic earnings
per share $ .54 $ .47 $ .41
============ ============ ============
-F38-
<PAGE>
NOTE U - EXECUTIVE COMPENSATION
The Company has employment contracts with certain executive officers of the
Company, providing for a total annual payment equal to their annual base salary
plus bonuses. These contracts are in effect until termination (as defined) of
the related employee. If the Company, for other than just cause (as defined)
terminates the employee, the affected employee shall receive, for a period of
twelve months, continuing compensation equal to his compensation for the twelve
month period immediately prior to termination.
The Company has established a non-qualified defined benefit plan covering
certain executive employees. The Plan specifies that upon reaching age 65, the
employee will receive an annual benefit (paid monthly) ranging from 40 percent
to 60 percent of their annual salary, for 240 months. The Company will accrue
the present value of the estimated future retirement payments over the period
from the date of each agreement to the retirement date of the respective
executive officer. To fund these benefit plans, the Company purchased single
premium cash value life insurance policies with current cash surrender values of
$2.55 million, which have been capitalized and included in other assets.
NOTE V - STOCK SPLIT
The Board of Directors declared a three-for-one common stock split effective
July 1, 1998 issued on July 31, 1998. All amounts have been restated to reflect
this stock split.
-F39-
<PAGE>
SUPPLEMENTAL SCHEDULES
-F40-
<PAGE>
United Financial Holdings, Inc. and Subsidiaries
SUPPLEMENTAL CONSOLIDATING STATEMENT OF EARNINGS
For the Year Ended December 31, 1999
United
Financial
Holdings, United
Inc. Bank EPW Trust
------------ ------------ -------- ----------
ASSETS
Cash and due from banks $ 2,975,207 $ 8,866,336 $331,571 $ 392,528
Federal funds sold - 2,917,000 - -
Trading Securities 81,600 - - -
Securities held to
maturity, market value
of $14,072,208 - 14,540,677 - -
Securities available for
sale, at market 773,000 7,895,856 - 2,004,964
Loans, net 500,000 152,997,408 - -
Premises and equipment, net - 9,468,347 51,245 98,944
Federal Home Loan Bank stock - 506,600 - -
Federal Reserve Bank stock - 203,800 - -
Accrued interest receivable 2,285 1,166,906 - 21,009
Intangible assets, less
accumulated amortization
of $1,725,395 499,011 388,959 - 860,557
Other real estate owned - 1,528,311 - -
Other assets 20,171,318 4,698,234 80,017 44,098
------------ ------------ -------- ----------
Total assets $ 25,002,421 $205,178,434 $462,833 $3,422,100
============ ============ ======== ==========
(Continued on F41b)
-F41a-
<PAGE>
United Financial Holdings, Inc. and Subsidiaries
SUPPLEMENTAL CONSOLIDATING STATEMENT OF EARNING
(Continued from F41a)
For the Year Ended December 31, 1999
Eliminating Consolidated
UFHCT Total Entries Total
---------- ------------ ------------- ------------
ASSETS
Cash and due from banks $ - $ 12,565,642 $ (3,699,306) $ 8,866,336
Federal funds sold - 2,917,000 - 2,917,000
Trading Securities - 81,600 - 81,600
Securities held to
maturity, market value
of $14,072,208 - 14,540,677 - 14,540,677
Securities available for
sale, at market - 10,673,820 (750,000) 9,923,820
Loans, net - 153,497,408 - 153,497,408
Premises and equipment, net - 9,618,536 - 9,618,536
Federal Home Loan Bank stock - 506,600 - 506,600
Federal Reserve Bank stock - 203,800 - 203,800
Accrued interest receivable - 1,190,200 - 1,190,200
Intangible assets, less
accumulated amortization
of $1,725,395 - 1,748,527 - 1,748,527
Other real estate owned - 1,528,311 - 1,528,311
Other assets 6,959,200 31,952,867 (27,094,374) 4,858,493
---------- ------------ ------------ ------------
Total assets $6,959,200 $241,024,988 $ (31,543,680) $209,481,308
========== ============ ============= ============
-F41b-
<PAGE>
United Financial Holdings, Inc. and Subsidiaries
SUPPLEMENTAL CONSOLIDATING STATEMENT OF EARNINGS
For the Year Ended December 31, 1999
United Financial United
Holdings, Inc. Bank EPW Trust
---------------- ------------ -------- ----------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits
Demand $ - $ 36,635,491 $ - $ -
NOW and money market - 67,913,763 - -
Savings - 4,872,802 - -
Time, $100,000 and over - 17,429,300 - -
Other time - 52,695,991 - -
------------ ------------ -------- ----------
Total deposits - 179,547,347 - -
Securities sold under
agreements to repurchase - 7,307,044 - -
Accrued interest payable 25,200 423,178 - -
Convertible subordinated
debentures 630,000 - - -
Long-term debt 6,959,200 - - -
Other liabilities 565,638 2,028,558 308,573 22,276
------------ ------------ -------- ----------
Total liabilities 8,180,038 189,306,127 308,573 22,276
Company-obligated Mandatory
Redeemable Capital
Securities of Subsidiary
Trust Holding Solely
Subordinated Debentures
Of The Company - - - -
STOCKHOLDERS' EQUITY
7% convertible preferred
stock, $10 par value;
150,000 shares authorized;
10,000 shares issued
and outstanding at
December 31, 1999 100,000 - - -
Common stock, $.01 par value;
20,000,000 shares authorized,
4,192,771 shares issued and
outstanding at
December 31, 1999 41,928 750,000 38,539 1,000,000
Paid-in capital 9,672,634 6,792,746 775,814 1,825,065
Common stock subscription
receivable - - - -
Accumulated other compre-
hensive income (232,362) (194,647) - (37,714)
Retained earnings 7,240,183 8,524,208 (660,093) 612,473
------------ ------------ -------- ----------
Total stockholders'
equity 16,822,383 15,872,307 154,260 3,399,824
------------ ------------ -------- ----------
Total liabilities and
stockholders' equity $ 25,002,421 $205,178,434 $462,833 $3,422,100
============ ============ ======== ==========
(Continued on F42b)
-F42a-
<PAGE>
United Financial Holdings, Inc. and Subsidiaries
SUPPLEMENTAL CONSOLIDATING STATEMENT OF EARNINGS - Continued from F42a
For the Year Ended December 31, 1999
Eliminating Consolidated
UFHCT Total Entries Total
--------- ------------ ------------- ------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits
Demand $ - $ 36,635,491 $ (3,699,306) $ 32,936,185
NOW and money market - 67,913,763 - 67,913,763
Savings - 4,872,802 - 4,872,802
Time, $100,000 and over - 17,429,300 (750,000) 16,679,300
Other time - 52,695,991 - 52,695,991
---------- ------------ ------------- ------------
Total deposits - 179,547,347 (4,449,306) 175,098,041
Securities sold under
agreements to repurchase - 7,307,044 - 7,307,044
Accrued interest payable - 448,378 - 448,378
Convertible subordinated
debentures - 630,000 - 630,000
Long-term debt - 6,959,200 (6,959,200) -
Other liabilities - 2,925,045 (499,183) 2,425,862
---------- ------------ ------------- ------------
Total liabilities - 197,817,014 (11,907,689) 185,909,325
Company-obligated Mandatory
Redeemable Capital
Securities of Subsidiary
Trust Holding Solely
Subordinated Debentures
Of The Company 6,749,600 6,749,600 - 6,749,600
STOCKHOLDERS' EQUITY
7% convertible preferred
stock, $10 par value;
150,000 shares authorized;
10,000 shares issued
and outstanding at
December 31, 1999 - 100,000 - 100,000
Common stock, $.01 par value;
20,000,000 shares
authorized, 4,192,771
shares issued and
outstanding at
December 31, 1999 209,600 2,040,067 (1,998,139) 41,928
Paid-in capital - 19,066,259 (9,393,625) 9,672,634
Common stock
subscription receivable - - - -
Accumulated other
comprehensive income - (464,723) 232,361 (232,362)
Retained earnings - 15,716,771 (8,476,588) 7,240,183
----------- ------------ ------------ -------------
Total stockholders'
equity $ 209,600 36,458,374 (19,635,991) 16,822,383
----------- ------------ ------------ -------------
Total liabilities
and stockholders'
equity $ 6,959,200 $241,024,988 $(31,543,680) $ 209,481,308
=========== ============ ============ =============
-F42b-
<PAGE>
United Financial Holdings, Inc. and Subsidiaries
SUPPLEMENTAL CONSOLIDATING STATEMENT OF EARNINGS
For the Year Ended December 31, 1999
United Financial United
Holdings, Inc. Bank EPW Trust
---------------- ----------- -------- ----------
Interest income
Loans and loan fees $ 61,811 $12,741,533 $ - $ -
Securities
U.S. Treasury - 391,772 - -
Obligations of other
U.S. Government
agencies and
corporations - 694,180 - 88,489
Obligations of
states and political
subdivisions - 203,298 - -
Other - 279,342 - -
Federal funds sold and
securities purchased
under reverse
repurchase agreements - 269,736 - 107,707
---------------- ----------- -------- ----------
Total interest
income 61,811 14,579,861 - 196,196
Interest expense
NOW and money market - 1,627,761 - -
Savings - 107,028 - -
Time deposits, $100,000
and over - 699,673 - -
Other time - 2,555,958 - -
Long-term debt 50,400 - - -
Subordinated debentures
issued to subsidiary
trust 652,348 - - -
Federal funds purchased
and securities sold under
agreements to repurchase - 273,416 - -
---------------- ----------- -------- ----------
Total interest expense 702,748 5,263,836 - -
---------------- ----------- -------- ----------
Net interest income (640,937) 9,316,025 - 196,196
Provision for loan losses - 785,000 - -
---------------- ----------- -------- ----------
Net interest income
after provision for
loan losses (640,937) 8,531,025 - 196,196
(Continued on F43b)
-F43a-
<PAGE>
United Financial Holdings, Inc. and Subsidiaries
SUPPLEMENTAL CONSOLIDATING STATEMENT OF EARNINGS - Continued from F43a
For the Year Ended December 31, 1999
Eliminating Consolidated
UFHCT Total Entries Total
--------- ------------ ------------- ------------
Interest income
Loans and loan fees $ 652,348 $ 13,455,692 $ (671,996) $ 12,783,696
Securities
U.S. Treasury - 391,772 - 391,772
Obligations of other
U.S. Government
agencies and
corporations - 782,669 - 782,669
Obligations of
states and political
subdivisions - 203,298 - 203,298
Other - 279,342 - 279,342
Federal funds sold and
securities purchased
under reverse
repurchase agreements - 377,443 (107,707) 269,736
--------- ------------ ------------- ------------
Total interest
income 652,348 15,490,216 (779,703) 14,710,513
Interest expense
NOW and money market - 1,627,761 - 1,627,761
Savings - 107,028 - 107,028
Time deposits, $100,000
and over - 699,673 - 699,673
Other time - 2,555,958 (27,839) 2,528,119
Long-term debt - 50,400 - 50,400
Subordinated debentures
issued to subsidiary
trust 652,348 1,304,696 (671,996) 632,700
Federal funds purchased
and securities sold under
agreements to repurchase - 273,416 (79,868) 193,548
--------- ------------ ------------- ------------
Total interest expense 652,348 6,618,932 (779,703) 5,839,229
--------- ------------ ------------- ------------
Net interest income - 8,871,284 - 8,871,284
Provision for loan losses - 785,000 - 785,000
--------- ------------ ------------- ------------
Net interest income
after provision for
loan losses - 8,086,284 - 8,086,284
-F43b-
<PAGE>
United Financial Holdings, Inc. and Subsidiaries
SUPPLEMENTAL CONSOLIDATING STATEMENT OF EARNINGS
For the Year Ended December 31, 1999
United
Financial United
Holdings, Inc. Bank EPW Trust
-------------- ----------- ---------- ------------
Other income
Service charges on
deposit accounts $ - $ 797,181 $ - $
Trust and investment
management income - - 1,593,054 1,630,460
Net trading account
profit 41,808 - - -
Equity in Earnings of
Subsidiaries 2,850,253 - - -
Other service charges,
fees and income 2,497 1,203,593 - -
-------------- ----------- ---------- ------------
Total other income 2,894,558 2,000,774 1,593,054 1,630,460
Other expense
Salaries and employee
benefits - 3,544,432 1,231,927 584,689
Occupancy expense - 450,967 67,433 59,516
Furniture and equipment
expense - 495,120 56,793 54,540
Data processing expense - 332,768 28,471 126,078
Legal and professional
fees 59,237 115,573 - -
Amortization of
intangible assets 31,027 14,724 - 39,365
Other operating
expenses 98,788 1,821,178 203,681 283,492
-------------- ----------- ---------- ------------
189,052 6,774,762 1,588,305 1,147,680
-------------- ----------- ---------- ------------
Earnings before
income taxes 2,064,569 3,757,037 4,749 678,976
Income tax expense
(benefit) (268,324) 1,328,800 (13,235) 274,944
-------------- ----------- ---------- ------------
NET EARNINGS $ 2,332,893 $2,428,237 $ 17,984 $ 404,032
============== ========== ========== ============
(Continued on F-44b)
-F44a-
<PAGE>
United Financial Holdings, Inc. and Subsidiaries
SUPPLEMENTAL CONSOLIDATING STATEMENT OF EARNINGS - Continued from Page F44a
For the Year Ended December 31, 1999
Eliminating Consolidated
UFHCT Total Entries Total
--------- ------------ ------------- ------------
Other income
Service charges on
deposit accounts $ - $ 797,181 $ - $ 797,181
Trust and investment
management income - 3,223,514 (48,000) 3,175,514
Net trading account
profit - 41,808 - 41,808
Equity in Earnings of
Subsidiaries - 2,850,253 (2,850,253) -
Other service charges,
fees and income - 1,206,090 (99,750) 1,106,340
--------- ------------ ------------- ------------
Total other income - 8,118,846 (2,998,003) 5,120,843
Other expense
Salaries and employee
benefits - 5,361,048 - 5,361,048
Occupancy expense - 577,916 (57,510) 520,406
Furniture and equipment
expense - 606,453 - 606,453
Data processing expense - 487,317 - 487,317
Legal and professional
fees - 174,810 - 174,810
Amortization of
intangible assets - 85,116 - 85,116
Other operating
expenses - 2,407,139 (90,240) 2,316,899
--------- ------------ ------------- ------------
- 9,699,799 (147,750) 9,552,049
--------- ------------ ------------- ------------
Earnings before
income taxes - 6,505,331 (2,850,253) 3,655,078
Income tax expense
(benefit) - 1,322,185 - 1,322,185
--------- ------------ ------------- ------------
NET EARNINGS $ - $ 5,183,146 $ (2,850,253) $ 2,332,893
========= ============ ============= ============
-F44b-
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 8,724
<INT-BEARING-DEPOSITS> 142
<FED-FUNDS-SOLD> 2,917
<TRADING-ASSETS> 82
<INVESTMENTS-HELD-FOR-SALE> 9,924
<INVESTMENTS-CARRYING> 14,541
<INVESTMENTS-MARKET> 14,072
<LOANS> 155,838
<ALLOWANCE> 2,341
<TOTAL-ASSETS> 209,481
<DEPOSITS> 175,098
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,426
<LONG-TERM> 630
0
100
<COMMON> 42
<OTHER-SE> 16,680
<TOTAL-LIABILITIES-AND-EQUITY> 209,481
<INTEREST-LOAN> 12,784
<INTEREST-INVEST> 1,378
<INTEREST-OTHER> 549
<INTEREST-TOTAL> 14,711
<INTEREST-DEPOSIT> 4,963
<INTEREST-EXPENSE> 5,839
<INTEREST-INCOME-NET> 8,871
<LOAN-LOSSES> 785
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 9,552
<INCOME-PRETAX> 3,655
<INCOME-PRE-EXTRAORDINARY> 3,655
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,333
<EPS-BASIC> 0.56
<EPS-DILUTED> 0.54
<YIELD-ACTUAL> 5.40
<LOANS-NON> 2,325
<LOANS-PAST> 411
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,984
<CHARGE-OFFS> 460
<RECOVERIES> 32
<ALLOWANCE-CLOSE> 2,341
<ALLOWANCE-DOMESTIC> 2,341
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 278
</TABLE>
