<PAGE> 1
Exhibit 99.1
CENTERSTATE BANKS OF FLORIDA, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS COVERS IMPORTANT FACTORS
AFFECTING THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION OF CENTERSTATE BANKS
OF FLORIDA, INC. AND SUBSIDIARIES FOR THE PERIODS SHOWN. CENTERSTATE BANKS OF
FLORIDA, INC. AND SUBSIDIARIES' CONSOLIDATED FINANCIAL STATEMENTS SHOULD BE READ
IN CONJUNCTION WITH THIS ANALYSIS.
OVERVIEW
Centerstate Banks of Florida, Inc. (the "Company") is a multi bank
holding company that was formed as of the close of business June 30, 2000 as
part of a merger of three independent commercial banks in central Florida (First
National Bank of Osceola County, Community National Bank of Pasco County and
First National Bank of Polk County). The business combination was accounted for
using the pooling-of-interest accounting method. All historical financial
presentations have been restated to reflect the merger. The outstanding shares
of the three banks were converted into Company common stock at agreed upon
exchange ratios described in the merger agreements. All of the shareholders of
the three banks are now the shareholders of the Company, which owns all of the
outstanding shares of the three banks. The three banks will maintain their
separate identities as wholly owned subsidiaries of the Company.
First National Bank of Osceola County is a national bank chartered in
September 1989. It operates from three full service locations and one remote
location within Osceola County and two full service locations in Orange County,
which is contiguous with Osceola County.
Community National Bank of Pasco County is a national bank chartered in
November 1989. It operates from seven full service locations within Pasco and
contiguous counties.
First National Bank of Polk County is a national bank chartered in
February 1992. It operates from three full service locations within Polk County.
The Company, through its subsidiary banks, provides traditional deposit
and lending products and services to its commercial and retail customers.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999 AND
DECEMBER 31, 1998.
NET INCOME
The Company's net income for the year ended December 31, 1999 was
$1,946,000 compared to net income of $2,287,000 for the year ended December 31,
1998. The per share net income for the years ended December 31, 1999 and 1998
was $0.73 ($0.70 diluted) and $0.90 ($0.85 diluted). Net income overall was
negatively impacted from 1998 to 1999 due to increased operating expenses
resulting primarily from the opening of two new branches in the fourth quarter
of 1998 and one in the first quarter of 1999. The per share income was also
negatively impacted due to the issuance of additional shares from the exercise
of stock options in 1998 and 1999.
The Company's return on average assets ("ROA") and return on average
equity ("ROE") for the year ended December 31, 1999 was 0.70% and 8.83%, as
compared to the ROA and ROE of 0.90% and 11.79% for the year ended December 31,
1998. The efficiency ratios for the year ended December 31,
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<PAGE> 2
1999 and 1998 were 74% and 67%, respectively.
Net income decreased approximately $341,000 or 15% to $1,946,000 for
the year ended December 31, 1999, compared to $2,287,000 for the same period
during 1998. Both net interest income and non-interest income increased by a
combined amount of approximately $1,391,000, which was offset by an increase of
approximately $1,783,000 in non interest expenses, primarily due to the opening
of two new branches in the fourth quarter of 1998 and another new branch in the
first quarter of 1999, as well as investing in future growth by adding
additional employees and equipment in other areas of the Company. The provision
for loan losses increased by $31,000 and income tax expense decreased by
approximately $82,000.
The improvement in net interest income was primarily due to an increase
in average interest earning assets resulting from a growth in lending
activities. The increase in non-interest income was a result of an increase in
deposit related and other miscellaneous fees, both due to the overall growth of
the loan and deposit portfolios.
NET INTEREST INCOME/MARGIN
Net interest income consists of interest and fee income generated by
earning assets, less interest expense.
Net interest income increased $1,030,000 or 11% to $10,784,000 during
the year ended December 31, 1999 compared to $9,754,000 for the year ended
December 31, 1998. The $1,030,000 increase was a combination of a $564,000
increase in interest income and a $466,000 decrease in interest expense.
Average interest earning assets increased $18,911,000 to $251,475,000
during the year ended December 31, 1999, compared to $232,564,000 for the year
ended December 31, 1998. Comparing these same two periods, yield on average
interest earning assets decreased from 7.97% to 7.60%. The increase in volume
had a positive effect on the change in interest income ($1,798,000 volume
variance), which was partially offset by the negative impact resulting from the
0.37% decrease in average yields ($1,234,000 rate variance). The result was a
$564,000 increase in interest income.
Average interest bearing liabilities increased $15,427,000 to
$213,505,000 during the year ended December 31, 1999, compared to $198,078,000
for the year ended December 31, 1998. Comparing these same two periods, the cost
of average interest bearing liabilities decreased from 4.43% to 3.90%. The
increase in volume resulted in an increase in interest expense ($294,000 volume
variance), which was offset by the 0.53% decrease in average yields ($760,000
rate variance). The result was a $466,000 decrease in interest expense. Refer to
the tables Average Balances - Yields & Rates, and Analysis Of Changes In
Interest Income And Expenses below.
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<PAGE> 3
AVERAGE BALANCES - YIELDS & RATES
(Dollars are in Thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------------------------
1999 1998
---------------------------------- --------------------------------------
Average Interest Average Average Interest Average
Balance Inc/Exp Rate Balance Inc/Exp Rate
------------ --------- --------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Federal Funds Sold $ 11,186 $ 556 4.97% $ 23,770 $ 1,225 5.15%
Securities Available for Sale 75,284 4,069 5.40% 63,452 3,707 5.84%
Securities Held to Maturity 4,746 203 4.28% 2,274 125 5.50%
Loans (2) (1) 160,259 14,274 8.91% 143,068 13,481 9.42%
------------ --------- --------- ------------ --------- ----------
TOTAL EARNING ASSETS $ 251,475 $ 19,102 7.60% $ 232,564 $ 18,538 7.97%
All Other 26,590 22,463
Assets
============ ============
TOTAL ASSETS $ 278,065 $ 255,027
============ ============
LIABILITIES & SHAREHOLDERS' EQUITY:
Deposits:
NOW & Money Markets $ 58,369 $ 1,228 2.10% $ 47,360 $ 1,032 2.18%
Savings 21,591 448 2.07% 16,020 364 2.27%
Time 128,216 6,415 5.00% 130,430 7,191 5.51%
Deposits
Short Term Borrowings 5,329 227 4.26% 4,268 197 4.62%
------------ --------- --------- ------------ --------- ----------
TOTAL INTEREST BEARING
LIABILITIES $ 213,505 $ 8,318 3.90% $ 198,078 $ 8,784 4.43%
Demand Deposits 41,824 35,630
Other 689 1,922
Liabilities
Shareholders' Equity 22,047 19,397
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 278,065 $ 255,027
============ ============
NET INTEREST SPREAD (3) 3.70% 3.54%
========= ==========
NET INTEREST INCOME $ 10,784 $ 9,754
========= =========
NET INTEREST MARGIN (4) 4.29% 4.19%
========= ==========
</TABLE>
(1) Loan balances are net of deferred fees/cost of origination and reserve
for loan loss allowances.
(2) Interest income on average loans includes loan fee recognition of
$572,000 and $515,000 for the years ended December 31, 1999 and 1998.
(3) Represents the average rate earned on interest earning assets minus the
average rate paid on interest bearing liabilities.
(4) Represents net interest income divided by total earning assets.
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ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSES
(Dollars are in Thousands)
Net Change Dec 31, 1998 - 1999
--------------------------------------
Net
Volume (1) Rate (2) Change
--------------------------------------
INTEREST INCOME
Federal Funds sold ($649) ($20) ($669)
Securities Available for Sale 691 (329) 362
Securities Held to Maturity 136 (58) 78
Loans 1,620 (827) 793
--------------------------------------
TOTAL INTEREST INCOME $1,798 ($1,234) $564
--------------------------------------
INTEREST EXPENSE
Deposits
NOW & Money Market Accounts $240 ($44) $196
Savings 127 (43) 84
Time Deposits (122) (654) (776)
Short-Term Borrowings 49 (19) 30
--------------------------------------
TOTAL INTEREST EXPENSE $294 ($760) ($466)
--------------------------------------
NET INTEREST INCOME $1,504 ($474) $1,030
======================================
(1) The volume variance reflects the change in the average balance
outstanding multiplied by the actual average rate during the prior
period.
(2) The rate variance reflects the change in the actual average rate
multiplied by the average balance outstanding during the current
period.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
Management's policy is to maintain the allowance for loan losses at a
level sufficient to absorb inherent losses in the loan portfolio. The allowance
is increased by the provision for loan losses, which is a charge to current
period earnings and decreased by charge-offs net of recoveries on prior period
loan charge-offs. In determining the adequacy of the reserve for loan losses,
management considers those levels maintained by conditions of individual
borrowers, the historical loan loss experience, the general economic environment
and the overall portfolio composition. As these factors change, the level of
loan loss provision changes.
The provision for loan loss expense increased $31,000 or 14% to
$258,000 during the year ended December 31, 1999, as compared to $227,000 for
the year ended December 31, 1998, due to an increase in general lending
activity. At December 31, 1999, the allowance for loan losses totaled
$2,302,000, or 1.30%, of total loans outstanding, compared to $2,335,000 or
1.52% of total loans outstanding at December 31, 1998.
Management believes that the Company's allowance for loan losses was
adequate at December 31, 1999. The following sets forth certain information on
the Company's allowance for loan losses for the periods presented.
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ACTIVITY IN ALLOWANCE FOR LOAN LOSSES
(In Thousands of Dollars)
December 31,
----------------------
1999 1998
----------------------
Balance at Beginning of Year $2,335 $2,190
Loans Charged-Off:
Commercial, Financial & Agricultural (236) (31)
Real Estate, Mortgage (79) (37)
Consumer (58) (54)
----------------------
Total Loans Charged-Off ($373) ($122)
----------------------
Recoveries on Loans Previously Charged-Off
Commercial, Financial & Agricultural $56 $5
Real Estate, Mortgage 9 26
Consumer 17 9
----------------------
Total Loan Recoveries $82 $40
----------------------
Net Loans Charged-Off ($291) ($82)
----------------------
Provision for Loan Losses Charged
to Expense $258 $227
----------------------
Ending Balance $2,302 $2,335
======================
Total Loans Outstanding (net of deferred fees/costs) $177,462 $154,125
Average Loans Outstanding $161,905 $146,740
Allowance for Loan Losses to Loans Outstanding 1.30% 1.52%
Net Charge-offs to Average Loans
Outstanding 0.18% 0.06%
NON-INTEREST INCOME
Non-interest income for 1999 increased by $361,000, or 23% to
$1,907,000 as compared to $1,546,000 for 1998. The net increase was comprised of
a $328,000 increase in service fees on various deposit accounts, a $55,000
increase in ATM related fees, a $6,000 net gain on the sale of securities, a net
decrease resulting from a net loss of $103,000 on sale of repossessed real
estate, increase in rental income of $10,000 and an increase of approximately
$65,000 in all other miscellaneous fees.
NON-INTEREST EXPENSE
Non-interest expense increased $1,783,000 (23%) to $9,367,000 during
the year ended December 31, 1999, compared to $7,584,000 for the year ended
December 31, 1998. The increase was a result of a $724,000 increase in
compensation and related employee benefits, a $435,000 increase in occupancy and
related equipment expenses, a $126,000 increase in data processing expenses, and
all remaining increases in non-interest expense (approximately $499,000)
summarized in the table below - Non-Interest Expenses. The primary reasons for
the increase in non interest expense was the two new branches that opened during
the last quarter of 1998 and the new branch that opened during the first quarter
of 1999, as well as an
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increase in employees and equipment required to sustain the overall growth of
the Company.
NON INTEREST EXPENSE
(Dollars are in Thousands)
Years Ended Dec 31
--------------------------------------
1999 1998 Increase
--------------------------------------
Salary, wages and employee benefits $4,117 $3,393 $724
Occupancy expense 1,213 911 302
Depreciation of premises and equipment 778 645 133
Stationary and printing supplies 328 260 68
Advertising and public relations 212 180 32
Data processing expense 752 626 126
Legal & professional fees 275 265 10
Other operating expenses 1,692 1,304 388
--------------------------------------
Total other operating expenses $9,367 $7,584 $1,783
======================================
INCOME TAXES PROVISION
The income tax provision for the year ended December 31, 1999, was
$1,120,000, an effective tax rate of 36.5%, as compared to $1,202,000 for the
year ended December 31, 1998, an effective tax rate of 34.5%.
NET INCOME
Net income for the years ended December 31, 1999 and 1998 was
$1,946,000 ($0.73 per share basic and $0.70 per share diluted) and $2,287,000
($0.90 per share basic and $0.85 per share diluted).
COMPARISON OF BALANCE SHEETS AT DECEMBER 31, 1999 AND DECEMBER 31, 1998
OVERVIEW
As of December 31, 1999, the Company had total assets of $278.9
million, compared to $276.1 million as of December 31, 1998. As of December 31,
1999 total net loans were $175.2 million and total deposits were $248.0 million,
compared to $151.8 million and $249.6 million as of December 31, 1998.
LOANS
Lending-related income is the most important component of the Company's
net interest income and is a major contributor to profitability. The loan
portfolio is the largest component of earning assets, and it therefore generates
the largest portion of revenues. The absolute volume of loans and the volume of
loans as a percentage of earning assets is an important determinant of net
interest margin as loans are expected to produce higher yields than securities
and other earning assets. Average net loans during the year ended December 31,
1999, were $160,259,000, or 64% of earning assets, as compared to $143,068,000,
or 62% of earning assets, for December 31, 1998. Total loans at December 31,
1999 and 1998 were $177,463,000 and $154,125,000 respectively. This represents a
loan to total asset ratio of 64% and 56% and a loan to deposit ratio of 72% and
62%, at December 31, 1999 and 1998 respectively.
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As of December 31, 1999, the Company had total loans of $177,463,000,
net of unearned discount, as compared to $154,125,000 at December 31, 1998, an
increase of $23,338,000, or 15%. The growth in loans during this period was
mainly due to the general growth in the market and the calling efforts of the
loan officers. Commercial, financial and agricultural loans totaled $28,680,000,
or 16% of the loan portfolio. Real estate construction loans totaled
$11,913,000, or 7% of the loan portfolio. Real estate mortgage loans totaled
$119,994,000, or 68% of the loan portfolio. Installment and consumer loans
totaled $16,876,000, or 9% of the loan portfolio.
Loan concentrations are considered to exist where there are amounts
loaned to multiple borrowers engaged in similar activities, which collectively
could be similarly impacted by economic or other conditions and when the total
of such amounts would exceed 25% of total capital. Due to the lack of
diversified industry and the relative proximity of markets served, the Company
has concentrations in geographic as well as in types of loans funded. The tables
below provide a summary of the loan portfolio composition and maturities for the
periods provided below.
LOAN PORTFOLIO COMPOSITION
(In thousands of dollars)
TYPES OF LOANS December 31,
--------------------------------------------------- -------------------------
1999 1998
------------- -----------
Commercial, financial & agricultural $28,680 $23,951
Real Estate - construction 11,913 9,300
Real Estate - mortgage 119,994 106,108
Installment & consumer loans 16,876 14,766
------------- -----------
Total Loans, net of unearned fees $177,463 $154,125
Less: Allowance for loan losses (2,302) (2,335)
------------- -----------
Net Loans $175,161 $151,790
============= ===========
LOAN MATURITY SCHEDULE
(In thousands of dollars)
<TABLE>
<CAPTION>
December 31, 1999
-----------------------------------------------
0 - 12 1 - 5 Over 5
Months Years Years Total
---------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
All loans other than construction $75,803 $55,920 $33,827 $165,550
Real Estate - construction 11,913 0 0 11,913
---------- ----------- ------------ -----------
Total $87,716 $55,920 $33,827 $177,463
========== =========== ============ ===========
Fixed interest rate $14,506 $51,094 $21,310 $86,910
Variable interest rate 73,210 4,826 12,517 90,553
---------- ----------- ------------ -----------
Total $87,716 $55,920 $33,827 $177,463
========== =========== ============ ===========
December 31, 1998
-----------------------------------------------
0 - 12 1 - 5 Over 5
Months Years Years Total
---------- ----------- ------------ -----------
All loans other than construction $94,536 $42,844 $7,445 $144,825
Real Estate - construction 9,300 0 0 9,300
---------- ----------- ------------ -----------
Total $103,836 $42,844 $7,445 $154,125
========== =========== ============ ===========
Fixed interest rate $12,467 $38,113 $7,098 $57,678
Variable interest rate 91,369 4,731 347 96,447
---------- ----------- ------------ -----------
Total $103,836 $42,844 $7,445 $154,125
========== =========== ============ ===========
</TABLE>
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CREDIT QUALITY
The Company maintains an allowance for loan losses to absorb inherent
losses in the loan portfolio. The loans are charged against the allowance when
management believes collection of the principal is unlikely. The reserve
consists of amounts established for specific loans and is also based on
historical loan loss experience. The specific reserve element is the result of a
regular analysis of all loans and commitments based on credit rating
classifications. The historical loan loss element represents a projection of
future credit problems and is determined using loan loss experience of each loan
type. Management also weighs general economic conditions based on knowledge of
specific factors that may affect the collectibility of loans. The Company is
committed to the early recognition of problems and to maintaining a sufficient
allowance. At December 31, 1999, the allowance for loan losses was $2,302,000 or
1.3% of total loans outstanding, net of unearned fees, compared to $2,335,000 or
1.5%, at December 31, 1998.
Non-performing assets consist of non-accrual loans, loans past due 90
days or more and still accruing interest, and other real estate owned. Loans are
placed on a non-accrual status when they are past due 90 days and management
believes the borrower's financial condition, after giving consideration to
economic conditions and collection efforts, is such that collection of interest
is doubtful. When a loan is placed on non-accrual status, interest accruals
cease and uncollected interest is reversed and charged against current income.
Subsequent collections reduce the principal balance of the loan until the loan
is returned to accrual status.
Total non-performing assets as of December 31, 1999, decreased $320,000
or 31% to $723,000, compared to $1,043,000 as of December 31, 1998.
Non-performing loans, as a percentage of total assets at December 31, 1999 and
December 31,1998, was .26% and .38%, respectively. Management believes that the
allowance for loan losses on December 31, 1999, was adequate.
Management is continually analyzing its loan portfolio in an effort to
recognize and resolve its problem assets as quickly and efficiently as possible.
As of December 31, 1999, management believes that it has identified and
adequately reserved for such problem assets. However, management recognizes that
many factors can adversely impact various segments of its market. As such
management continuously focuses its attention on promptly identifying and
providing for potential problem loans, as they arise. The tables below summarize
the Company's non performing assets and allocation of allowance for loan losses
for the periods provided.
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NON-PERFORMING ASSETS
(In thousands of dollars)
December 31,
------------------------
1999 1998
------------ -----------
Non-Accrual Loans $474 $632
Past Due Loans 90 Days or More
and Still Accruing Interest 58 173
Other Real Estate Owned 191 238
------------ -----------
Total Non-Performing Assets $723 $1,043
============ ===========
Percent of Total Assets 0.26% 0.38%
============ ===========
Allowance for Loan Losses $2,302 $2,335
============ ===========
Allowance for Loan Losses to
Nonperforming Loans 318% 224%
============ ===========
Dec 31, 1999 Dec 31, 1998
------------ ------------
Restructured loans $ 0 $ 0
--------- ---------
Recorded investment in impaired loans $ 1,467 $ 1,579
--------- ---------
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
(In thousands of dollars)
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
--------------------------------- ---------------------------------
Percent of Percent of
Loans in Each Loans in Each
Category to Category to
Amount Total Loans Amount Total Loans
------------- ------------------- ------------- -------------------
<S> <C> <C> <C> <C>
Commercial, Financial & Agricultural $614 16% $721 16%
Real Estate Construction 84 7% 128 6%
Real Estate - Mortgage 804 68% 945 69%
Consumer 258 9% 249 10%
Unallocated 542 0% 292 0%
------------- ------------------- ------------- -------------------
Total $2,302 100% $2,335 100%
============= =================== ============= ===================
</TABLE>
DEPOSITS AND FUNDS PURCHASED
Total deposits decreased $1,654,000 (0.7%) to $247,977,000 as of
December 31, 1999, compared to $249,631,000 on December 31, 1998. The Company
made an effort during 1999 to change the deposit mix through pricing strategies.
The result was that total time deposits, which tend to be higher cost deposits,
decreased by $13,387,000 and non time deposits, which tend to be lower cost
deposits, increased by $11,733,000. The Company does not rely on purchased or
brokered deposits as a source of funds. Instead, the generation of deposits
within its market area serves as the Company's fundamental tool in providing a
source of funds to be invested primarily in loans. The table below summarizes
selected deposit
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information for the periods indicated.
SELECTED STATISTICAL INFORMATION FOR DEPOSITS
(In thousands of dollars)
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
-------------------------------- -------------------------------
Average Average
Balance Rate Balance Rate
----------------- -------------- ----------------- -------------
<S> <C> <C> <C> <C>
Noninterest-bearing
demand deposits $41,824 0.00% $35,630 0.00%
Interest-bearing demand
Deposits 66,557 2.36% 54,300 1.90%
Savings deposits 21,591 2.08% 16,020 2.27%
Time deposits 120,027 5.05% 123,490 5.82%
----------------- -------------- ----------------- -------------
Total Average Deposits $249,999 3.23% $229,440 3.74%
================= ============== ================= =============
</TABLE>
MATURITY OF TIME DEPOSITS OF $100,000 OR MORE
(In thousands of dollars)
December 31,
1999 1998
-------------- ------------
Three Months or Less $8,906 $8,805
Three Through Six Months 5,539 5,856
Six Through Twelve Months 6,376 6,127
Over Twelve Months 3,801 2,752
-------------- ------------
Total $24,622 $23,540
============== ============
REPURCHASE AGREEMENTS AND FEDERAL RESERVE BANK ADVANCES
The Company's subsidiary Banks enter into agreements to borrow short
term funds via Federal Reserve Bank advances and also enter into agreements to
repurchase ("repurchase agreements") under which the Company pledges investment
securities owned and under its control as collateral against the one-day
agreements. The daily average balance of these short-term borrowing agreements
for the years ended December 31, 1999, and 1998, was approximately $5,301,000
and $4,267,000, respectively. Interest expense for the same periods was
approximately $229,000 and $196,000, respectively, resulting in an average rate
paid of 4.32% and 4.59% for the years ended December 31, 1999, and 1998,
respectively.
SCHEDULE OF SHORT-TERM BORROWINGS (1)
(In thousands of dollars)
<TABLE>
<CAPTION>
Maximum Average Weighted
Outstanding Interest Rate Average
at any Average during the Ending Interest Rate
Month End Balance Year Balance at Year End
--------------- ------------ -------------- ------------- ----------------
<C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31,
1999 $8,130 $5,301 4.32% $7,078 4.37%
1998 7,417 4,267 4.59% 4,886 4.38%
</TABLE>
-------------------------
(1) Consists of securities sold under agreements to repurchase and Federal
Reserve Bank advances
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SECURITIES
The Company accounts for investments at fair value except for those
securities which the Company has the positive intent and ability to hold to
maturity. Investments to be held for indefinite periods of time and not intended
to be held to maturity are classified as available for sale and are carried at
fair value. Unrealized holding gains and losses are included as a separate
component of stockholders' equity net of the effect of income taxes. Realized
gains and losses on investment securities available for sale are computed using
the specific identification method.
Securities that management has the intent and the Company has the
ability at the time of purchase or origination to hold until maturity are
classified as investment securities held to maturity. Securities in this
category are carried at amortized cost adjusted for accretion of discounts and
amortization of premiums using the level yield method over the estimated life of
the securities. If a security has a decline in fair value below its amortized
cost that is other than temporary, then the security will be written down to its
new cost basis by recording a loss in the statement of operations.
The Company does not engage in trading activities as defined in
Statement of Financial Accounting Standard Number 115.
The Company's available for sale portfolio totaled $59,827,000 at
December 31, 1999 and $81,584,000 at December 31, 1998, or 21% and 30%,
respectively, of total assets. The held to maturity portfolio totaled $3,532,000
at December 31, 1999, and $2,555,000 at December 31, 1998, or 1% and 1%,
respectively, of total assets. See the tables below for a summary of security
type, maturity and average yield distributions.
The Company uses its securities portfolio primarily as a source of
liquidity and a base from which to pledge assets for repurchase agreements and
public deposits. When the Company's liquidity position exceeds expected loan
demand, other investments are considered by management as a secondary earnings
alternative. Typically, management remains short-term (under 5 years) in its
decision to invest in certain securities. As these investments mature, they will
be used to meet cash needs or will be reinvested to maintain a desired liquidity
position. The Company has designated substantially all of its securities as
available for sale to provide flexibility, in case an immediate need for
liquidity arises. The composition of the portfolio offers management full
flexibility in managing its liquidity position and interest rate sensitivity,
without adversely impacting its regulatory capital levels. The available for
sale portfolio is carried at fair market value and had a net unrealized loss of
approximately $424,000 on December 31, 1999, and a net unrealized gain of
approximately $498,000 on December 31, 1998.
The Company invests primarily in direct obligations of the United
States, obligations guaranteed as to the principal and interest by the United
States and obligations of agencies of the United States. In addition, the
Company enters into federal funds transactions with its principal correspondent
banks, and acts as a net seller of such funds. The Federal Reserve Bank also
requires equity investments to be maintained by the Company. The tables below
summarize the maturity distribution of securities, weighted average yield by
range of maturities, and distribution of securities for the periods provided.
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MATURITY DISTRIBUTION OF INVESTMENT SECURITIES
(In thousands of dollars)
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
------------------------- --------------------------
Amortized Estimated Amortized Estimated
Cost Market Value Cost Market Value
---------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
U.S. Treasury and U.S. Government
Agencies and Corporations and
Obligations of State and Political
Subdivisions:
One Year or Less $40,444 $40,242 $26,551 $26,706
Over One Through Five Years 18,366 18,144 51,126 51,469
Over Five Through Ten Years 1,000 1,000 0 0
Over Ten Years 0 0 3,000 3,000
Federal Reserve Bank Stock 441 441 409 409
---------- -------------- ----------- --------------
Total $60,251 $59,827 $81,086 $81,584
========== ============== =========== ==============
HELD-TO-MATURITY
U.S. Government Agencies and Treasuries
One Year or Less $0 $0 $500 $504
Over One Through Five Years 3,532 3,457 2,055 2,042
---------- -------------- ----------- --------------
Total $3,532 $3,457 $2,555 $2,546
========== ============== =========== ==============
</TABLE>
WEIGHTED AVERAGE YIELD BY RANGE OF MATURITIES
(Average yields on securities available for sale
are calculated based on amortized cost)
Dec 31, 1999 Dec 31, 1998
------------ ------------
One Year or Less 5.21% 5.87%
Over One Through Five Years 5.59% 5.37%
Over Five Through Ten Years 6.60% 0.00%
Over Ten Years 0.00% 5.72%
DISTRIBUTION OF INVESTMENT SECURITIES
(In thousands of dollars)
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
------------------------- --------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
-------------- ---------- -------------- -----------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
US Treasury Securities $34,410 $34,216 $43,232 $43,597
US Government Agencies 23,150 22,930 31,085 31,219
State, County, & Municipal 1,000 1,000 4,000 4,000
Mortgage-Backed Securities 1,250 1,240 2,360 2,359
Federal Reserve Bank Stock 441 441 409 409
-------------- ---------- -------------- -----------
Total $60,251 $59,827 $81,086 $81,584
============== ========== ============== ===========
HELD-TO-MATURITY
US Treasury Securities $0 $0 $2,055 $2,042
US Government Agencies 3,532 3,457 500 504
-------------- ---------- -------------- -----------
Total $3,532 $3,457 $2,555 $2,546
============== ========== ============== ===========
</TABLE>
LIQUIDITY AND INTEREST RATE SENSITIVITY
Market and public confidence in the financial strength of the Company
and financial institutions in general will largely determine the Company's
access to appropriate levels of liquidity. This confidence is significantly
dependent on the Company's ability to maintain sound asset quality and
appropriate levels of
12
<PAGE> 13
capital reserves.
Liquidity is defined as the ability to meet anticipated customer
demands for funds under credit commitments and deposit withdrawals at a
reasonable cost and on a timely basis. Management measures the liquidity
position by giving consideration to both on- and off-balance sheet sources of
and demands for funds on a daily and weekly basis.
Sources of liquidity include cash and cash equivalents, net of federal
requirements to maintain reserves against deposit liabilities; investment
securities eligible for pledging to secure borrowings from dealers and customers
pursuant to securities sold under repurchase agreements; loan repayments; loan
sales; deposits and certain interest rate-sensitive deposits; and borrowings
under overnight federal fund lines available from correspondent banks. In
addition to interest rate-sensitive deposits, the primary demand for liquidity
is anticipated fundings under credit commitments to customers.
Interest rate sensitivity refers to the responsiveness of
interest-earning assets and interest-bearing liabilities to changes in market
interest rates. The rate sensitive position, or gap, is the difference in the
volume of rate-sensitive assets and liabilities, at a given time interval,
including both floating rate instruments and instruments which are approaching
maturity. The measurement of the Company's interest rate sensitivity, or gap, is
one of the principal techniques used in asset and liability management.
Management generally attempts to maintain a balance between rate-sensitive
assets and liabilities as the exposure period is lengthened to minimize overall
interest rate risks.
The asset mix of the balance sheet is evaluated continually in terms of
several variables: yield, credit quality, appropriate funding sources and
liquidity. Management of the liability mix of the balance sheet focuses on
expanding the various funding sources.
The Company's gap and liquidity positions are reviewed periodically by
management to determine whether or not changes in policies and procedures are
necessary to achieve financial goals. At December 31, 1999, approximately 51% of
total gross loans were adjustable rate and 66% of total securities either
reprice or mature in less than one year. Liabilities consisted of approximately
$33,141,000 (14%) in NOW accounts, $50,192,000 (20%) in Money Market Accounts
and Savings, $122,063,000 (49%) in time deposits and $42,581,000 (17%) in
non-interest bearing demand accounts. At December 31, 1998, approximately 62% of
total gross loans were adjustable rate and 29% of total securities either
reprice or mature in less than one year. Liabilities consisted of approximately
$31,234,000 (13%) in NOW, $42,884,000 (17%) in Money Market Accounts and
Savings, $135,451,000 (54%) in time deposits, and $40,062,000 (16%) in
non-interest bearing demand accounts. A rate sensitivity analysis is presented
below as of December 31, 1999 and December 31, 1998.
The Company has prepared a table which presents the market risk
associated with financial instruments held by the company. In the "Rate
Sensitivity Analysis" table, rate sensitive assets and liabilities are shown by
maturity or repricing periods, separating fixed and variable interest rates. The
estimated fair value of each instrument category is also shown in the table.
While these estimates of fair value are based on management's judgment of the
most appropriate factors, there is no assurance that, if the Company had to
disposed of such instruments at December 31, 1998, and December 31, 1999, the
estimated fair values would necessarily have been achieved at that date, since
market values may differ depending on various circumstances. The estimated fair
values at December 31, 1998, and December 31, 1999, should not necessarily be
considered to apply at subsequent dates.
13
<PAGE> 14
RATE SENSITIVITY ANALYSIS
December 31, 1999
(In thousands of dollars)
<TABLE>
<CAPTION>
Est. Fair
(Dollars in thousands) 0-1 Yr 1-2 Yrs 2-3 Yrs 3-4 Yrs 4-5 Yrs 5 Ys + TOTAL Value
---------------------- ------ ------- ------- ------- ------- ------ ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Loans
Fixed Rate Loans (3) $ 19,312 $7,186 $12,101 $16,684 $12,694 $18,933 $ 86,910 $87,117
Average Interest Rate 8.77% 9.27% 9.00% 8.70% 8.48% 8.29% 8.68%
Variable Rate Loans (3) 84,225 390 1,165 2,289 2,149 335 90,553 90,553
Average Interest Rate 8.46% 8.13% 8.12% 8.25% 8.35% 7.30% 8.44%
Investment Securities (1)
Fixed Rate Investments 40,494 13,348 3,848 2,326 2,326 0 62,342 61,998
Average Interest Rate 5.21% 5.58% 5.61% 5.41% 5.41% 5.33%
Variable Rate Investments 1,000 0 0 0 0 0 1,000 1,000
Average Interest Rate 6.69% 6.69%
Federal Funds Sold 4,069 0 0 0 0 0 4,069 4,069
Average Interest Rate 5.04% 5.04%
Other Earning Assets (2) 441 0 0 0 0 0 441 441
Average Interest Rate 6.00% 6.00%
----------- ---------- ---------- --------- ---------- ---------- ----------- ------------
Total Interest-Earning Assets $149,541 $20,924 $17,114 $21,299 $17,169 $19,268 $245,315 $245,178
Average Interest Rate 7.51% 6.90% 8.18% 8.29% 8.05% 8.27% 7.67%
=========== ========== ========== ========= ========== ========== ===========
INTEREST BEARING LIABILITIES
NOW $33,141 $ - $ - $ - $ - $ - $33,141 $ 33,141
Average Interest Rate 1.03% 1.03%
Money Market 26,759 0 0 0 0 0 26,759 26,759
Average Interest Rate 3.74% 3.74%
Savings 23,433 0 0 0 0 23,433 23,433
Average Interest Rate 2.01% 2.01%
CDs $100,000 & Over 20,820 2,731 502 469 100 0 24,622 24,692
Average Interest Rate 5.03% 5.56% 6.21% 5.61% 6.00% 5.13%
CDs Under $100,000 72,945 17,548 4,103 1,929 916 0 97,441 97,350
Average Interest Rate 4.82% 5.15% 5.68% 5.49% 5.11% 4.93%
Securities Sold Under
Repurchase Agreement 7,078 0 0 0 0 0 7,078 7,078
Average Interest Rate 4.20% 4.20%
----------- ---------- ---------- --------- ---------- ---------- ----------- ------------
Total Interest-Bearing Liabilities $184,176 $20,279 $4,605 $2,398 $1,016 $ - $212,474 $212,453
Average Interest Rate 3.62% 5.20% 5.74% 5.51% 5.20% 3.85%
=========== ========== ========== ========= ========== ========== ===========
</TABLE>
----------------------------
1. Securities are shown at amortized cost.
2. Represents interest earning Federal Reserve stock.
3. Loans are shown net of deferred fees and cost.
14
<PAGE> 15
RATE SENSITIVITY ANALYSIS
December 31, 1998
(Dollars are in Thousands)
<TABLE>
<CAPTION>
Est. Fair
0-1 Yr 1-2 Yrs 2-3 Yrs 3-4 Yrs 4-5 Yrs 5 Ys + TOTAL Value
------ ------- ------- ------- ------- ------ ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS
Loans
Fixed Rate Loans (3) $12,979 $8,934 $9,110 $12,382 $8,884 $5,389 $57,678 $58,337
Average Interest Rate 8.77% 9.65% 9.32% 8.94% 8.73% 9.24% 9.07%
Variable Rate Loans (3) 90,814 1,194 951 3,116 25 347 96,447 96,447
Average Interest Rate 8.23% 8.48% 9.13% 8.55% 8.80% 7.40% 8.24%
Investment Securities (1)
Fixed Rate Securities 23,274 45,044 8,055 2,859 1,000 2,000 82,232 82,732
Average Interest Rate 5.95% 5.54% 5.78% 5.76% 5.62% 5.70% 5.69%
Variable Rate Securities 1,000 0 0 0 0 0 1,000 1,000
Average Interest Rate 5.77% 5.77%
Federal Funds Sold 13,944 0 0 0 0 0 13,944 13,944
Average Interest Rate 5.31% 5.31%
Other Earning Assets (2) 409 0 0 0 0 0 409 409
Average Interest Rate 6.00% 6.00%
---------- --------- --------- --------- --------- --------- ---------- -----------
Total Interest-Earning Assets $142,420 $55,172 $18,116 $18,357 $9,909 $7,736 $251,710 $252,869
7.59% 6.27% 7.74% 8.38% 8.42% 8.24% 7.42%
========== ========= ========= ========= ========= ========= ==========
INTEREST BEARING LIABILITIES
NOW Accounts $31,234 $0 $0 $0 $0 $0 $31,234 $31,234
Average Interest Rate 1.20% 1.20%
Money Market Accounts 24,151 0 0 0 0 0 24,151 24,151
Average Interest Rate 3.05% 3.05%
Savings Accounts 18,733 0 0 0 0 0 18,733 18,733
Average Interest Rate 1.74% 1.74%
CDs $100,000 & Over 21,056 1,352 403 502 227 0 23,540 23,869
Average Interest Rate 5.39% 5.73% 6.01% 6.11% 5.79% 5.44%
CDs Under $100,000 75,623 21,740 6,808 3,843 3,890 7 111,911 113,638
Average Interest Rate 5.21% 5.66% 5.64% 5.77% 5.79% 4.00% 5.36%
Securities Sold Under
Repurchase Agreement 4,886 0 0 0 0 0 4,886 4,886
Average Interest Rate 4.27% 4.27%
---------- --------- --------- --------- --------- --------- ---------- -----------
Total Interest-Bearing Liabilities $175,683 $23,092 $7,211 $4,345 $4,117 $7 $214,455 $216,511
3.82% 5.67% 5.66% 5.81% 5.79% 4.00% 4.16%
========== ========= ========= ========= ========= ========= ==========
</TABLE>
-------------------
1. Securities are shown at amortized cost.
2. Represents interest earning Federal Reserve stock.
3. Loans are shown net of deferred fees and cost.
15
<PAGE> 16
PRIMARY SOURCES AND USES OF FUNDS
The primary source of funds during the period included maturity/sale of
investments net of purchases ($20,780,000), decrease in federal funds sold and
other cash items ($1,481,000), exercise of stock options net of tax benefit,
($1,539,000) increase in borrowings from repurchase agreements and Federal
Reserve Bank advances ($2,192,000) and net income ($1,946,000). The primary uses
of funds during the period included a decrease in deposits ($1,654,000), an
increase in net loans outstanding ($23,371,000), increase in premises and
equipment ($1,364,000), dividends paid ($390,000), and other miscellaneous net
uses ($1,159,000).
CAPITAL RESOURCES
Shareholders' equity at December 31, 1999, was $23,312,000 compared to
$20,793,000 at December 31, 1998.
The Comptroller has established risk-based capital requirements for
national banks. These guidelines are intended to provide an additional measure
of a bank's capital adequacy by assigning weighted levels of risk to asset
categories. Banks are also required to systematically maintain capital against
such "off- balance sheet" activities as loans sold with recourse, loan
commitments, guarantees and standby letters of credit. These guidelines are
intended to strengthen the quality of capital by increasing the emphasis on
common equity and restricting the amount of loan loss reserves and other forms
of equity such as preferred stock that may be included in capital. Each of the
Company's subsidiary bank's goal is to maintain its current status as a
"well-capitalized institution" as that term is defined by its regulators.
Under the terms of the guidelines, banks must meet minimum capital
adequacy based upon both total assets and risk adjusted assets. All banks are
required to maintain a minimum ratio of total capital to risk-weighted assets of
8% and a minimum ratio of Tier 1 capital to risk-weighted assets of 4%.
Adherence to these guidelines has not had an adverse impact on the Company.
Selected consolidated capital ratios at December 31, 1999, and 1998 were as
follows:
CAPITAL RATIOS
(Dollars are in Thousands)
<TABLE>
<CAPTION>
Actual Well Capitalized Excess
------------------------ -------------------------
Amount Ratio Amount Ratio Amount
------------------------ ------------------------- ------------
<S> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1999:
Total Capital: (to Risk Weighted Assets): $25,489 14.8% $17,253 10.0% $9,488
Tier 1 Capital: (to Risk Weighted Assets): $23,397 13.6% $10,352 6.0% $14,297
Tier 1 Capital: (to Average Assets): $23,397 8.4% $13,935 5.0% $10,419
AS OF DECEMBER 31, 1998:
Total Capital: (to Risk Weighted Assets): $22,300 14.7% $15,129 10.0% $7,171
Tier 1 Capital: (to Risk Weighted Assets): $20,377 13.5% $9,077 6.0% $11,300
Tier 1 Capital: (to Average Assets): $20,377 7.6% $13,406 5.0% $6,971
</TABLE>
16
<PAGE> 17
EFFECTS OF INFLATION AND CHANGING PRICES
The accompanying consolidated financial statements have been prepared
in accordance with generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical
dollars without considering the change in the relative purchasing power of money
over time due to inflation. Unlike most industrial companies, virtually all of
the assets and liabilities of a financial institution are monetary in nature. As
a result, interest rates generally have a more significant impact on the
performance of a financial institution than the effects of general levels of
inflation. Although interest rates do not necessarily move in the same direction
or to the same extent as the prices of goods and services, increases in
inflation generally have resulted in increased interest rates. In addition,
inflation affects financial institutions' increased cost of goods and services
purchased, the cost of salaries and benefits, occupancy expense, and similar
items. Inflation and related increases in interest rates generally decrease the
market value of investments and loans held and may adversely affect liquidity,
earnings, and shareholders' equity. Commercial and other loan originations and
refinancings tend to slow as interest rates increase, and can reduce the
Company's earnings from such activities.
ACCOUNTING PRONOUNCEMENTS
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 provides new accounting and reporting
standards for reporting and displaying comprehensive income and its components
in a full set of general-purpose financial statements. The adoption of this
standard did not have a material impact on reported results of operations of the
Company.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The statement establishes accounting and
reporting standards for derivative instruments (including certain derivative
instruments imbedded in other contracts). The statement is effective for fiscal
years beginning after June 15, 1999. The financial impact of the adoption of
this statement has not been determined. However, the effect of the adoption of
the statement is not expected to be material. In June of 1999, the FASB issued
SFAS No. 137, which delays implementation of SFAS No. 133 for one year.
QUARTERLY FINANCIAL INFORMATION
The following table sets forth, for the periods indicated, certain
consolidated quarterly financial information. This information is derived from
the Company's unaudited financial statements which include, in the opinion of
management, all normal recurring adjustments which management considers
necessary for a fair presentation of the results for such periods. This
information should be read in conjunction with the Company's Financial
Statements included elsewhere in this document. The results for any quarter are
not necessarily indicative of results for future periods.
17
<PAGE> 18
SELECTED QUARTERLY DATA
(In thousands of dollars)
<TABLE>
<CAPTION>
1999 1998
(Dollars in Thousands except -------------------------------- -------------------------------
for per share data) 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q
--------------------------------- -------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Interest Income $2,836 $2,691 $2,681 $2,576 $2,479 $2,450 $2,421 $2,404
Provision for Loan Losses 87 36 48 87 (58) 57 106 122
-------------------------------- -------------------------------
Net Interest Income after
provision for loan losses $2,749 $2,655 $2,633 $2,489 $2,537 $2,393 $2,315 $2,282
Non-Interest Income 515 481 471 442 514 372 337 322
Securities gains (losses) (2) 0 0 0 0 0 0 0
Non-Interest Expenses 2,433 2,375 2,333 2,225 2,043 1,895 1,850 1,796
-------------------------------- -------------------------------
Income before income
tax expense $829 $761 $771 $706 $1,008 $870 $802 $808
Income tax expense 296 272 289 264 319 317 255 310
-------------------------------- -------------------------------
Net Income $533 $489 $482 $442 $689 $553 $547 $498
================================ ===============================
Basic earnings per common share $0.19 $0.18 $0.18 $0.17 $0.27 $0.22 $0.22 $0.20
Diluted earnings per common share $0.19 $0.18 $0.17 $0.16 $0.26 $0.21 $0.20 $0.19
</TABLE>
18
