SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ________________________.
Commission file number: 000-23713
GULF WEST BANKS, INC.
(Exact Name of Registrant as Specified in Its Charter)
FLORIDA 59-3276590
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
425 22ND AVENUE NORTH
ST. PETERSBURG, FLORIDA 33704
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (727) 894-5696
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $1.00 PER SHARE
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not 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-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of
the registrant as of January 31, 1999, was $32,636,818. The number of shares of
the registrant's common stock outstanding as of January 31, 1999, was 6,660,843.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's definitive Proxy Statement relating to the registrant's 1999
annual meeting of shareholders, as filed with the Commission on March 16, 1999,
is incorporated by reference into Part III of this Annual Report on Form 10-K.
<PAGE>
PART I
ITEM 1. BUSINESS.
INTRODUCTION
Gulf West Banks, Inc. ("Gulf West" or the "Company") is a one-bank
holding company registered under the Bank Holding Company Act of 1956, as
amended, and was incorporated under the laws of the State of Florida effective
October 24, 1994. Gulf West's principal assets are all of the issued and
outstanding shares of capital stock of Mercantile Bank, a Florida state banking
corporation which is located in St. Petersburg, Florida ("Mercantile"), and all
of the issued and outstanding shares of Liberty Leasing Corporation ("Liberty"),
a Florida corporation located in Tampa, Florida, which is engaged in equipment
leasing.
The principal executive offices of Gulf West and Mercantile are located
at 425 22nd Avenue North, St. Petersburg, Florida 33704, and their telephone
number is (727) 894-5696. Liberty is located at 5440 Mariner Street, Suite 204,
Tampa, Florida 33609 and its telephone number is (813) 287-2982.
ACTIVITIES OF GULF WEST
Currently, the only business activity of Gulf West is to own and
operate Mercantile and Liberty. Mercantile provides a wide range of personal and
commercial banking services to customers located in the Florida counties of
Pinellas, Hillsborough, and Pasco. The activities of Mercantile are described in
more detail below under the caption "Activities of Mercantile." Liberty is an
equipment leasing company that arranges financing for a variety of equipment for
all types of businesses. Liberty currently comprises a de minimis portion of
Gulf West's total assets and earnings. Although other activities are permitted
under the Bank Holding Company Act of 1956, management of Gulf West has no
current plans to engage in any other activities, although it may choose to do so
at a later date.
ACQUISITION OF CITIZENS NATIONAL BANK AND TRUST COMPANY
On January 16, 1998, the Company acquired Citizens National Bank and
Trust Company of Port Richey, Florida ("Citizens National") in exchange for
approximately 2,359,500 shares (adjusted to reflect subsequent stock dividends)
of the common stock of the Company. The acquisition was effected through the
merger of Citizens National with and into Mercantile pursuant to an Amended and
Restated Agreement and Plan of Merger, dated October 16, 1997, by and among Gulf
West, Mercantile, and Citizens National. Citizens National was a national
banking association which was originally chartered by the Office of the
Controller of the Currency on February 29, 1988. Prior to the acquisition,
Citizens National engaged in general commercial banking and trust services from
its one full service banking location in Port Richey, Florida. At the time of
the acquisition, Mercantile amended its charter to include trust powers so that
it could continue the trust business of Citizens National. Subsequent to the
acquisition, Mercantile sold the trust accounts to SunTrust Bank, Nature Coast
and the trust department is no longer active. As a result of the acquisition,
Citizens National's single banking office is currently being operated as the
Port Richey office of Mercantile.
ACTIVITIES OF MERCANTILE
The principal services offered by Mercantile include commercial and
individual checking and savings accounts, money market accounts, certificates of
deposit, most types of loans, and letters of credit. Mercantile also provides
credit card services through a national credit card issuer and acts as issuing
agent for U.S. Savings Bonds. Mercantile offers collection teller services, wire
transfer facilities, safe deposit facilities, and night depository facilities.
Mercantile's transaction accounts and time certificates are tailored to
Mercantile's principal market area at rates competitive with those offered in
Mercantile's primary service area. In addition, Mercantile offers certain
retirement account services, including individual retirement accounts. All of
Mercantile's deposit accounts are insured by the FDIC up to the maximum amount
allowed by law.
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Mercantile offers a wide range of short to medium-term commercial and
personal loans. Commercial loans include both secured and unsecured loans for
working capital (including inventory and receivables), business expansion
(including acquisition of real estate and improvements), purchase of equipment
and machinery, and Small Business Administration ("SBA") loans. Consumer loans
include secured and unsecured loans for financing automobiles, home
improvements, and personal investments. Mercantile also originates and holds
construction and acquisition loans on residential real estate. At December 31,
1998, commercial and consumer loans accounted for approximately 73.6% and 5.8%,
respectively, of Mercantile's loan portfolio. Loans on residential real estate
accounted for the remaining 20.6% of the loan portfolio. All loans are made in
compliance with applicable federal and state regulations.
Mercantile's lobby business hours are generally from 9:00 a.m. to 4:00
p.m., Monday through Thursday, 9:00 a.m. to 6:00 p.m. on Fridays, and 9:00 a.m.
to 12:00 p.m. on Saturdays. The drive-up teller hours are generally 8:00 a.m. to
5:00 p.m. on Monday through Thursday, 8:00 a.m. to 6:00 p.m. on Fridays, and
8:00 a.m. to 12:00 p.m. on Saturdays. However, drive-in hours do vary slightly
from office to office depending on customer requirements. Mercantile also has
24-hour automatic teller machines (ATM's) at each of its offices. Mercantile
issues cards to its customers that can be used in any bank ATM as well as any
ATM's which are members of the HONOR and CIRRUS networks.
Mercantile's data processing is handled by an outside service bureau --
FiServ, Inc. of Atlanta, Georgia. Item processing is currently handled by the
FiServ, Inc. item processing center in Jacksonville, Florida however Mercantile
will start performing this function internally in the second or third quarter of
1999. The amount paid for these services is dependent on the volume of
transactions and the number of accounts being processed. In the year ended
December 31, 1998, Mercantile paid $608,000 for data processing services.
Mercantile makes extensive use of personal computers in all areas of its
operations that permit efficient handling of deposit and loan accounts and other
paper intensive applications such as word processing.
MARKET AREA
Seven of Mercantile's banking offices are located in Pinellas County,
Florida, four are located in Hillsborough County, Florida, and one is located in
Pasco County, Florida. All three counties are in the west central Gulf Coast of
Florida. The residential population of Pinellas County as of the 1990 census was
852,000 and the estimated population in 1998 was 894,000. Hillsborough County
had a residential population of 834,000 as of the 1990 census and the estimated
1998 population was 945,000. Pasco County had a residential population of
281,000 as of the 1990 census and the estimated 1998 population was 321,000. The
area has many more seasonal residents. The majority of Mercantile's business is
generated from customers whose businesses or residences are located in an area
within a radius of three miles of one of its banking offices. Four of the
Pinellas County offices are located within the city limits of St. Petersburg,
one is located in the unincorporated community of Tierra Verde, one is located
in the city limits of Dunedin, and another one in the city limits of Pinellas
Park. Two of the Hillsborough County offices are located within the city limits
of Tampa, one within the city limits of Temple Terrace and one is in the county.
The Pasco County office is located in the city limits of Port Richey.
OPERATING STRATEGY
The management of the Company believes that the emerging dominance of
large regional holding companies in the banking industry has created a need for
more locally-owned institutions with personalized banking services. Mercantile
was organized as a locally-owned, locally-managed community financial
institution, owned and managed by people who are actively involved in
Mercantile's market area and committed to its economic growth and development.
With local ownership, management, and directors, the Company's management
believes that Mercantile can be more responsive to the communities it serves and
tailor services to its customers' needs rather than provide the standardized
services that large holding companies tend to offer. Local ownership and
operation will allow faster, more responsive, and flexible decision-making which
is not available at the majority of financial institutions in or near
Mercantile's market area which are branch offices of large regional holding
company banks with headquarters located elsewhere in Florida or in the United
States.
The principal business of Mercantile is to attract deposits from the
general public and to invest those funds in various types of loans and other
interest-earning assets. Funds are provided for the operations of Mercantile
through proceeds from the sale of investments and loans, from amortization and
repayment of outstanding loans, investments, net deposit inflow, and from
borrowings. Earnings of Mercantile depend primarily upon the difference between
(1) the interest and fees received by Mercantile from loans, the securities held
in its investment portfolio, and other investments and (2)
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expenses incurred by Mercantile in connection with obtaining funds for lending
(including interest paid on deposits and other borrowings) and expenses relating
to day-to-day operations.
To the extent market conditions permit, Mercantile follows a strategy
intended to insulate Mercantile's interest rate gap from adverse changes in
interest rates by maintaining spreads through the adjustability of its
interest-earning assets and interest-bearing liabilities. Mercantile's ability
to reduce interest-rate risk in its loan and investment portfolios will depend
upon a number of factors, many of which are beyond Mercantile's control,
including among others, competition for loans and deposits in its market area
and conditions prevailing in the secondary market.
The primary sources of Mercantile's funds for lending and for other
general business purposes are Mercantile's capital, deposits, loan repayments,
and borrowings. Mercantile expects that loan repayments will be relatively
stable sources of funds, while deposit inflows and outflows will be
significantly influenced by prevailing interest rates, money market rates, and
general economic conditions. Generally, short-term borrowings may be used to
compensate for reductions in normal sources of funds while longer-term
borrowings may be used to support expanded lending activities.
Mercantile's customers are primarily individuals, professionals, small
and medium size businesses, and seasonal retirees located predominantly in
Pinellas, Hillsborough, and Pasco Counties, Florida. Mercantile's locations are
situated in areas that are convenient to these types of customers.
Mercantile continually seeks to develop new business though an ongoing
program of personal calls on both present and potential customers. As a local
independent bank, Mercantile 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, Mercantile's directors all have
worked and/or lived in or near Mercantile's market area for a number of years.
Management believes that this factor, coupled with the past and continued
involvement of the directors and officers in various local community activities,
will further promote Mercantile's image as a locally-oriented independent
institution, which management believes is an important factor to its targeted
customer base.
COMPETITION
The banking industry in general, and Mercantile's market in particular,
is characterized by significant competition for both deposits and lending
opportunities. In its market area, Mercantile competes with other commercial
banks, savings and loan associations, credit unions, finance companies, mutual
funds, insurance companies, brokerage and investment banking firms, and various
other nonbank competitors. Competition for deposits may have the effect of
increasing the rates of interest Mercantile will pay on deposits, which would
increase Mercantile's cost of money and possibly reduce its net earnings.
Competition for loans may have the effect of lowering the rate of interest
Mercantile will receive on its loans, which would lower Mercantile's return on
invested assets and possibly reduce its net earnings. Many of Mercantile's
competitors have been in existence for a significantly longer period of time
than Mercantile, are larger and have greater financial and other resources and
lending limits than Mercantile, and may offer certain services that Mercantile
does not provide at this time. However, management feels that the market is rich
with opportunity to provide tailor-made custom banking products and services
which cannot be provided by the large institutions which offer many banking
products and services on an impersonal basis. With the recent acquisitions by
larger institutions, the opportunity has been enhanced as customers are looking
for more personalized service. This concept known as "niche" or "boutique"
banking will enable Mercantile to capture its share of the professional market,
entrepreneurs, and small to medium size commercial businesses while continuing
to provide exceptional banking services to all customers. The profitability of
Mercantile depends upon its ability to compete in this market area. At the
present time, Mercantile is unable to predict the extent to which competition
may adversely affect its financial condition and operating results.
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There are approximately 32 commercial banks and savings and loan
associations in Pinellas County. In Hillsborough County there are approximately
37 such institutions, and in Pasco County, there are approximately 22 such
institutions. Mercantile expects to receive competition from all of these
financial institutions, a significant number of which have offices located in
the St. Petersburg and Tampa areas. In order to compete with major financial
institutions and others in Mercantile's market area, Mercantile emphasizes
specialized and personal service by its directors, officers, and employees.
Mercantile believes that its local ownership and community oriented operating
philosophy and personalized banking service are competitive factors which
strengthen Mercantile.
EMPLOYEES
As of December 31, 1998, Gulf West employed 143 employees of which 131
were full-time and 12 were part-time, including five executive officers. Gulf
West's employees are not represented by a collective bargaining group, and Gulf
West considers its relations with its employees to be excellent. Gulf West
provides employees with benefits customary in the banking industry, which
include major medical insurance, group term life insurance, dental insurance,
long term disability insurance, a 401(k) savings plan, and vacation and sick
leave.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Report contains certain forward-looking statements which represent
the issuer's expectations or beliefs, including, but not limited to, statements
concerning the banking industry and the issuer's operations, performance,
financial condition, and growth. For this purpose, any statements contained in
this Report that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the generality of the foregoing,
words such as "may," "will," "expect," "believe," "anticipate," "intend,"
"could," "should," "can," "estimate," or "continue" or the negative of other
variations thereof or comparable terminology are intended to identify
forward-looking statements. These statements by their nature involve substantial
risks and uncertainties, certain of which are beyond the issuer's control, and
actual results may differ materially depending on a variety of important
factors, including competition, general economic conditions, potential changes
in interest rates, and changes in the value of real estate securing loans made
by Mercantile, among other things.
ITEM 2. PROPERTIES.
Gulf West corporate offices are located within the main office of
Mercantile. Liberty Leasing occupies leased space in an office park located at
5440 Mariner Street, Tampa, Florida.
Mercantile's corporate offices are located at 425 22nd Avenue North,
St. Petersburg, Florida 33704. This office also serves as Mercantile's main
office banking facility. It has approximately 9,000 square feet and houses a
branch office on the first floor, the commercial lending department and
Mercantile's and Gulf West's executive offices. The building was constructed in
1987 and is a two-story structure located on a 71,000 square foot parcel of land
which Mercantile owns. Two other buildings are also located on this site, both
one story structures containing 3,100 and 6,500 square feet of space which
Mercantile currently leases to small retailers and professional offices. The
property is located less than two miles north of the downtown business district
of St. Petersburg.
In addition to its main office in St. Petersburg, Mercantile also has
six additional locations throughout Pinellas County, four locations in
Hillsborough County and one location in Pasco County. Five of these offices are
owned facilities while the other six are leased.
Mercantile also rents approximately 10,940 square feet in a
professional office complex located at 2860 Scherer Drive, St. Petersburg,
Florida 33716. This facility houses Mercantile's consumer and residential
lending departments, the data processing operations department, the deposit and
loan operations department and the accounting department. The item processing
department will be located in this facility when the function is brought
in-house in mid 1999.
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ITEM 3. LEGAL PROCEEDINGS.
Gulf West and Mercantile are parties to various legal proceedings in
the ordinary course of business. Management does not believe that there is any
pending or threatened proceeding against Gulf West or Mercantile which, if
determined adversely, would have a material adverse effect on the business,
results of operations, or financial position of Gulf West or Mercantile.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Since March 25,1998 the Company's common stock has been quoted on the
Nasdaq National Market System under the symbol "GWBK". Prior to March 25, 1998
there was no established public trading market for the Company's common stock.
However, the brokerage firm of Raymond James & Associates, Inc. facilitated
trades of the Company's common stock in the over-the-counter market. Prices
reported to the Company ranged from $4.25 to $4.55 during 1997. The high and low
bids for the Company's common stock on the Nasdaq National Market System from
March 25, 1998 through December 31,1998 were as follows :
QUARTER ENDED HIGH LOW
------------- ---- ---
March 31, 1998 $11.818 $10.227
June 30, 1998 $12.955 $ 9.773
September 30, 1998 $11.818 $ 7.955
December 31, 1998 $10.250 $ 6.818
The Company paid cash dividends of $0.03 per share in 1995, paid a 5%
stock dividend in 1996, a 10% stock dividend in February 1998 and another 10%
stock dividend in December 1998. (The above market information has been restated
for the effect of these stock dividends.) Further dividends, if any, will be
determined by the Board of Directors based on several factors including the
Company's growth rate, profitability, financial condition and capital
requirements.
As of January 31, 1999, the Company had approximately 1,047 holders of
record of common stock. Certain of the Company's shares are held in "nominee" or
"street" name and, accordingly, the number of owners of such shares is not known
nor included in the foregoing number of holders.
The following sales of shares of Gulf West common stock, par value
$1.00 per share ("Gulf West Common Stock"), were not registered pursuant to the
Securities Act of 1933, as amended (the "Securities Act"), but were issued
pursuant to the exemptions indicated below:
During the quarter ended December 31, 1998, 114 shares of Gulf West's
Common Stock were issued to officers and employees of Gulf West pursuant to Gulf
West's employee stock purchase plan at an average per share purchase price of
$4.55. Such shares were issued pursuant to the intrastate offering exemption
contained in Section 3(11) of the Securities Act. Such exemption was available
because all shares were offered and sold only to employees of Gulf West or its
subsidiaries, all of whom are residents of Florida, and Gulf West is
incorporated in the State of Florida.
Proceeds from the sales of the above securities were used for general corporate
purposes.
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<TABLE>
<CAPTION>
ITEM 6. SELECTED FINANCIAL DATA.
AT DECEMBER 31,
-----------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE FIGURES)
<S> <C> <C> <C> <C> <C>
Cash and due from banks.......................... $ 16,045 9,046 8,631 5,555 5,882
Federal funds sold and securities purchased
under agreements to resell................... 11,654 8,903 3,356 5,600 5,300
Investment securities............................ 69,087 53,183 40,231 33,489 23,963
Loans............................................ 208,608 122,555 112,979 73,948 63,472
All other assets................................. 26,780 11,161 9,617 7,344 5,832
------- ------- ------- ------- -------
Total assets................................. $ 332,174 204,848 174,814 125,936 104,449
======= ======= ======= ======= =======
Deposits......................................... 286,372 169,101 149,335 109,192 96,372
Other borrowings................................. 15,438 20,237 12,047 3,799 -
All other liabilities............................ 1,400 969 332 431 149
Stockholders' equity............................. 28,964 14,541 13,100 12,514 7,928
------- ------- ------- ------- -------
Total liabilities and stockholders' equity... $ 332,174 204,848 174,814 125,936 104,449
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total interest income.............................. $ 21,018 14,039 10,844 8,447 6,146
Total interest expense............................. 9,602 6,026 4,659 3,736 2,521
------ ------ ------ ----- -----
Net interest income................................ 11,416 8,013 6,185 4,711 3,625
Provision for loan losses.......................... 440 437 401 240 176
------- ------- ------ ------ ------
Net interest income after provision
for loan losses................................ 10,976 7,576 5,784 4,471 3,449
Noninterest income................................. 2,856 1,987 1,031 849 603
Noninterest expenses............................... 10,132 7,654 6,324 4,181 3,228
------ ------ ------ ----- -----
Earnings before income taxes....................... 3,700 1,909 491 1,139 824
Income taxes....................................... 1,179 654 177 431 142
------ ------ ------- ------ ------
Net earnings....................................... $ 2,521 1,255 314 708 682
====== ====== ======= ====== ======
Earnings per share (1):
Basic ......................................... $ .38 0.31 0.08 0.21 0.23
======= ====== ======= ====== ======
Diluted........................................ $ .37 0.30 0.08 0.20 0.23
======= ====== ======= ====== ======
Without SAIF Assessment**
Net earnings....................................... $ 2,521 1,255 608 708 682
====== ====== ======= ====== ======
Earnings per common share - basic (1).............. $ 0.38 0.31 0.16 0.21 0.23
======= ====== ======= ====== ======
Earnings per common share - diluted (1)............ $ 0.37 0.30 0.15 0.20 0.23
======= ====== ======= ====== ======
</TABLE>
** SAIF assessment was paid in 1996
(continued)
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<TABLE>
<CAPTION>
AT OR FOR THE
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE FIGURES)
<S> <C> <C> <C> <C> <C>
FOR THE PERIOD:
Return on average assets........................ 0.84% 0.69% 0.22% 0.63% 0.74%
Return on average equity........................ 9.22% 9.18% 2.45% 6.93% 8.69%
Average equity to average assets................ 9.15% 7.50% 8.87% 9.11% 8.47%
Interest rate spread during the period (2)...... 3.57% 4.02% 4.01% 3.99% 3.82%
Net interest margin............................. 4.25% 4.84% 4.78% 4.71% 4.37%
Noninterest expense to average assets........... 3.39% 4.20% 4.39% 3.73% 3.49%
Dividends pay-out ratio......................... - - - - 0.13%
AT THE END OF THE PERIOD:
Ratio of average interest-earning assets to
average interest-bearing liabilities........ 1.20 1.22 1.21 1.19 1.18
Nonperforming loans, and foreclosed real
estate as a percentage of total assets...... 0.43% 0.31% 0.46% 1.01% 0.07%
Allowance for loan losses as a percentage
of total loans.............................. 1.15% 1.26% 1.04% 1.11% 1.03%
Allowance for loan losses as a percentage
of nonperforming loans...................... 219.97% 245.53% 148.19% 107.37% 933.80%
Total number of offices......................... 11 9 8 5 4
Full-service banking offices.................... 11 9 8 5 4
Total shares outstanding at
end of period (1)........................... 6,643,717 4,044,638 4,024,496 3,968,510 2,978,779
Book value per share (1)........................ 4.36 3.60 3.26 3.16 2.66
</TABLE>
- -----------
(1) All per share information is presented to reflect the two stock
dividends of 10% declared January 15, 1998 and November 16, 1998 and
the 5% stock dividend declared November 19, 1996.
(2) Difference between weighted-average yield on all interest-earning
assets and weighted-average rate on all interest-bearing liabilities.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
Gulf West Banks, Inc. (the "Holding Company") is a one-bank holding company and
owns 100% of the outstanding stock of Mercantile Bank ("Mercantile"). Mercantile
is a State (Florida) chartered commercial bank. Mercantile, through twelve
banking offices, provides a wide range of banking services to individuals and
businesses located primarily in Pinellas, Hillsborough and Pasco Counties,
Florida. During 1996, the Holding Company acquired all the outstanding common
shares of Liberty Leasing Corporation ("Liberty") in exchange for 38,115 shares
of the Holding Company's common stock. Liberty is an equipment leasing company
that arranges financing for a variety of equipment for all types of businesses
and is headquartered in Tampa. The acquisition has been accounted for using the
purchase method of accounting. The Holding Company's only business activities
are the operations of Mercantile and Liberty. Collectively the entities are
referred to as "Gulf West".
The principal services offered by Mercantile include commercial and individual
checking and savings accounts, money-market accounts, certificates of deposit,
most types of loans, including commercial and working capital loans and real
estate, home equity and installment loans, as well as financing through letters
of credit. Mercantile also provides credit card services through a national
credit card issuer and acts as issuing agent for U.S. Savings Bonds, travelers
checks and cashiers checks. It offers collection teller services, wire transfer
facilities, safe deposit and night depository facilities. The transaction
accounts and time certificates are tailored to Mercantile's principal market
area at rates competitive with those offered in Mercantile's primary service
area. In addition, Mercantile offers certain retirement account services,
including individual retirement accounts. All deposit accounts are insured by
the FDIC up to the maximum amount allowed by law. Mercantile offers a wide range
of short to medium-term commercial and personal loans. Commercial loans include
both secured and unsecured loans for working capital (including inventory and
receivables), business expansion (including acquisition of real estate and
improvements), purchase of equipment and machinery, and Small Business
Administration ("SBA") loans. Consumer loans include secured and unsecured loans
for financing automobiles, home improvements, and personal investments.
Mercantile also originates and holds construction and acquisition loans on
residential real estate.
At December 31, 1998, Gulf West had total consolidated assets of $332.2 million,
an increase of 62.2% over total assets of $204.8 million at December 31, 1997.
During the year ended December 31, 1998, net loans receivable increased $86.1
million or 70.2%. Gulf West's portfolio of investment securities increased to
$69.1 million as of December 31, 1998 from $53.2 million as of December 31,
1997. Mercantile's deposits increased to $286.4 million as of December 31, 1998
from $169.1 million as of December 31, 1997, a 69.3% increase. Gulf West had
consolidated net earnings of $2,521,000 or $.38 basic earnings per share ($.37
diluted earnings per share) for the year ended December 31, 1998 compared to
consolidated net earnings of $1,255,000 or $.31 basic earnings per share (.30
diluted earnings per share) for 1997.
REGULATION AND LEGISLATION
As a state-chartered commercial bank, Mercantile is subject to extensive
regulation by the Florida Department of Banking and Finance ("Florida DBF") and
the Federal Deposit Insurance Corporation ("FDIC"). Mercantile files reports
with the Florida DBF and the FDIC concerning its activities and financial
condition, in addition to obtaining regulatory approvals prior to entering into
certain transactions such as mergers with or acquisitions of other financial
institutions. Periodic examinations are performed by the Florida DBF and the
FDIC to monitor Mercantile's compliance with the various regulatory
requirements. The Holding Company and Mercantile are also subject to regulation
and examination by the Federal Reserve Board of Governors. As a Florida
corporation, Mercantile is also subject to the Florida Act and the regulation of
the Florida Department of State under the authority to administer and implement
the Florida Act.
8
<PAGE>
ACQUISITION
On January 16, 1998, Gulf West acquired Citizens National Bank and Trust
Company, Port Richey, Florida ("Citizens"). The acquisition was accomplished
through the merger of Citizens with and into Mercantile. In consideration of the
merger, Gulf West issued 2.4 million shares of its common stock (adjusted for
subsequent stock dividends) to the shareholders of Citizens. At December 31,
1997, Citizens had total assets of $75.5 million, total loans of $30.7 million
and total deposits of $66.4 million. Citizens operated one banking office in
Pasco County, Florida. Gulf West has accounted for this transaction using the
purchase method of accounting.
YEAR 2000 COMPLIANCE
Gulf West is acutely aware of the many areas affected by the Year 2000 computer
issue, as addressed by the Federal Financial Institutions Examination Council
("FFIEC") in its interagency statement which provided an outline for
institutions to effectively manage the Year 2000 challenges. A Year 2000 plan
has been approved by the Board of Directors which includes multiple phases,
tasks to be completed, and target dates for completion. Issues addressed therein
include awareness, assessment, renovation, validation, implementation, testing,
and contingency planning.
Under the plan, Gulf West has formed a Year 2000 committee that is charged with
the oversight of completing the Year 2000 project on a timely basis. Gulf West
has completed its awareness, assessment and renovation phases and is actively
involved in validating and implementing the other aspects of its plan. At the
present time, Gulf West has substantially completed its testing phase, the
results of which indicate that Gulf West's internal systems appear to be Year
2000 ready. Since it routinely upgrades and purchases technologically advanced
software and hardware on a continual basis, Gulf West has determined that the
cost of making modifications to correct any Year 2000 issues will not materially
affect reported operating results.
Gulf West's vendors and suppliers have been contacted for written confirmation
of their product readiness for Year 2000 compliance. Negative or deficient
responses are analyzed and periodically reviewed to prescribe timely actions
within Gulf West's contingency planning. Gulf West's main service provider has
completed testing of its mission critical application software and item
processing software; the test results, which have been documented and validated,
are deemed to be Year 2000 compliant. FFIEC guidance on testing Year 2000
compliance of service providers states that proxy tests are acceptable
compliance tests. In proxy testing, the service provider tests with a
representative sample of financial institutions that use a particular service,
with the results of such testing shared with all similarly situated clients of
the service provider. Gulf West has authorized the acceptance of proxy testing
since the proxy tests have been conducted with financial institutions that are
similar in type and complexity to its own, using the same version of the Year
2000 ready software and the same hardware and operating systems.
Gulf West also recognizes the importance of determining that its borrowers are
facing the Year 2000 problem in a timely manner to avoid deterioration of the
loan portfolio solely due to this issue. All material relationships have been
identified and questionnaires have been completed to assess the inherent risks.
Deposit customers have received statement stuffers and informational material in
this regard. Gulf West plans to work on a one-on-one basis with any borrower who
has been identified as having high Year 2000 risk exposure.
Accordingly, management does not believe that Gulf West has incurred or will
incur material costs associated with the Year 2000 issue. Yet, there can be no
assurances that all hardware and software that Gulf West will use will be Year
2000 compliant. Management cannot predict the amount of financial difficulties
it may incur due to customers and vendors inability to perform according to
their agreements with Gulf West or the effects that other third parties may
cause as a result of this issue. Therefore, there can be no assurance that the
failure or delay of others to address the issue or that the costs involved in
such process will not have a material adverse effect on Gulf West's business,
financial condition, and results of operations.
Based on testing results to date (as noted above), Gulf West's mission critical
systems have been deemed to be Year 2000 compliant and, therefore a contingency
plan has not been developed with respect to those systems. With regards to non-
mission critical internal systems, Gulf West's contingency plans are to replace
those systems that test as being noncompliant. Alternatively, some systems could
be handled manually on an interim basis. Should outside service providers not be
able to provide compliant systems, Gulf West will terminate those relationships
and transfer to other vendors. It is anticipated that Gulf West's deposit
customers will have increased demands for cash in the latter part of 1999 and
correspondingly Gulf
9
<PAGE>
West will maintain higher liquidity levels.
CREDIT RISK
Gulf West's primary business is making commercial, business, consumer and real
estate loans. That activity entails potential loan losses, the magnitude of
which depend on a variety of economic factors affecting borrowers which are
beyond the control of Gulf West. While management has instituted underwriting
guidelines and credit review procedures to protect Gulf West from avoidable
credit losses, some losses will inevitably occur.
The following table sets forth certain information regarding nonaccrual loans
and foreclosed real estate, including the ratio of such loans and foreclosed
real estate to total assets as of the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonperforming (nonaccrual) loans:
Residential real estate loans.................................. $ 84 51 91 - 53
Commercial real estate......................................... 653 488 628 747 -
Commercial loans............................................... 343 83 41 - -
Consumer loans and other....................................... 28 15 39 26 18
------ ---- ---- ----- ---
Total nonperforming (nonaccrual) loans..................... 1,108 637 799 773 71
----- --- --- ----- ---
Total nonperforming loans to total assets.................. .33% .31% .46% .61% .07%
=== === === === ===
Foreclosed real estate:
Real estate acquired by foreclosure or deed
in lieu of foreclosure....................................... 309 - - 497 -
------ ------ ----- ----- ----
Total nonperforming loans and foreclosed real estate....... $ 1,417 637 799 1,270 71
===== === === ===== ===
Total nonperforming and foreclosed real estate
to total assets......................................... .43% .31% .46% 1.01% .07%
=== === === ==== ===
</TABLE>
10
<PAGE>
Interest income that would have been recorded under the original terms of
nonaccrual loans and the interest income actually recognized are summarized
below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest income that would have been recognized................ $ 108 71 82 23 6
Interest income recognized..................................... 63 51 66 15 4
--- -- -- -- -
$ 45 20 16 8 2
=== == == == =
</TABLE>
The following table sets forth information with respect to activity in Gulf
West's allowance for loan losses for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Average loans outstanding, net................................... $ 174,476 116,148 87,000 65,747 57,185
======== ======= ======= ====== ======
Allowance at beginning of year................................... 1,564 1,184 830 663 613
-------- ------- ------- ------ ------
Charge-offs:
Commercial loans.............................................. (92) (36) - (41) (61)
Consumer loans................................................ (91) (60) (54) (57) (77)
-------- ------- ------- ------ ------
Total loans charged-off..................................... (183) (96) (54) (98) (138)
-------- ------- ------- ------ ------
Recoveries....................................................... 87 39 7 25 12
-------- ------- ------- ------ ------
Net charge-offs............................................. (96) (57) (47) (73) (126)
-------- ------- ------- ------ ------
Provision from acquisition of Citizens National Bank
and Trust................................................... 528 - - - -
-------- ------- ------- ------ ------
Provision for loan losses charged to operating expenses....... 440 437 401 240 176
-------- ------- ------- ------ ------
Allowance at end of year...................................... $ 2,436 1,564 1,184 830 663
======== ======= ======= ====== ======
Ratio of net charge-offs to average loans outstanding......... .0010 .0005 .0005 .0011 .0022
======== ======= ======= ====== ======
Allowance as a percent of total loans......................... 1.15% 1.26% 1.04% 1.11% 1.03%
======== ======= ======= ====== ======
Total loans at end of year.................................... $ 211,114 124,291 114,065 74,654 64,059
======= ======= ======= ====== ======
</TABLE>
11
<PAGE>
The following table presents information regarding Gulf West's total allowance
for loan losses as well as the allocation of such amounts to the various
categories of loans:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------ ------------------- ------------------- ------------------- -------------------
% OF % OF % OF % OF % OF
LOANS IN LOANS IN LOANS IN LOANS IN LOANS IN
EACH EACH EACH EACH EACH
AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY
OF TO TOTAL OF TO TOTAL OF TO TOTAL OF TO TOTAL OF TO TOTAL
ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial loans..... $ 541 14.3% $ 328 15.9% $ 179 15.9% $ 136 19.5% $ 137 20.7%
Commercial real
estate loans....... 1,616 59.3 985 58.2 782 55.4 447 37.2 327 49.3
Residential real
estate loans....... 140 20.6 63 15.3 67 19.4 120 33.4 119 17.9
Consumer loans....... 139 5.8 188 10.6 156 9.3 127 9.9 80 12.1
------- ----- ------- ----- ----- ----- --- ----- --- ----
Total allowance
for loan
losses....... $ 2,436 100.0% $ 1,564 100.0% $ 1,184 100.0% $ 830 100.0% $ 663 100.0%
===== ===== ===== ===== ===== ===== === ===== === =====
</TABLE>
12
<PAGE>
RESULTS OF OPERATIONS
The operating results of Gulf West depend primarily on its net interest income,
which is the difference between interest income on interest-earning assets and
interest expense on interest-bearing liabilities, consisting primarily of
deposits. Net interest income is determined by the difference between yields
earned on interest-earning assets and rates paid on interest-bearing liabilities
("interest-rate spread") and the relative amounts of interest-earning assets and
interest-bearing liabilities. Gulf West's interest-rate spread is affected by
regulatory, economic and competitive factors that influence interest rates, loan
demand and deposit flows. In addition, Gulf West's net earnings are also
affected by the level of nonperforming loans and foreclosed real estate, as well
as the level of its noninterest income, and its noninterest expenses, such as
salaries and employee benefits, occupancy and equipment costs and provisions for
losses on foreclosed real estate and income taxes.
The following table sets forth for the periods indicated, information regarding
(i) the total dollar amount of interest and dividend income of Gulf West from
interest-earning assets and the resultant average yields; (ii) the total dollar
amount of interest expense on interest-bearing liabilities and the resultant
average cost; (iii) net interest/dividend income; (iv) interest-rate spread; (v)
interest margin; and (vi) ratio of average interest-earning assets to average
interest-bearing liabilities.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------
1998 1997 1996
--------------------------- -------------------------- ---------------------------
INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE
AVERAGE AND YIELD/ AVERAGE AND YIELD/ AVERAGE AND YIELD/
BALANCE DIVIDENDS RATE BALANCE DIVIDENDS RATE BALANCE DIVIDENDS RATE
------- --------- ---- ------- --------- ---- ------- --------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (1)............................ $ 174,476 15,395 8.82% $ 116,148 10,934 9.41% $ 87,000 8,272 9.51%
Securities........................... 79,462 4,818 6.06% 41,335 2,661 6.44% 33,387 2,086 6.25%
Other interest-earning
assets (2)....................... 14,964 805 5.38% 8,187 444 5.42% 9,084 486 5.35%
------- ------- -------- ------- -------- -------
Total interest-earning
assets......................... 268,902 21,018 7.82% 165,670 14,039 8.47% 129,471 10,844 8.38%
------ ------ ------
Noninterest-earning assets (3).......... 29,967 16,754 14,966
------- ------- -------
Total assets..................... $ 298,869 $ 182,424 $ 144,437
======= ======= =======
Interest-bearing liabilities:
Savings and NOW deposits............. 75,140 2,042 2.72% 40,267 1,245 3.09% 28,219 812 2.88%
Money-market deposits................ 19,938 596 2.99% 13,747 371 2.70% 11,716 317 2.71%
Time deposits........................ 116,567 6,212 5.33% 72,841 3,953 5.43% 61,226 3,260 5.32%
Other borrowings..................... 14,113 752 5.33% 8,705 457 5.25% 5,447 270 4.96%
------- ------- -------- ------- -------- ------
Total interest-bearing ........
liabilities.................. 225,758 9,602 4.25% 135,560 6,026 4.45% 106,608 4,659 4.37%
------ ------ ------
Demand deposits......................... 44,135 33,153 25,005
Noninterest-bearing liabilities......... 1,632 36 17
Stockholders' equity.................... 27,344 13,675 12,807
------- ------- -------
Total liabilities and
stockholders' equity......... $ 298,869 $ 182,424 $ 144,437
======= ======= =======
Net interest income..................... $ 11,416 $ 8,013 $ 6,185
====== ====== ======
Interest-rate spread (4)................ 3.57% 4.02% 4.01%
==== ==== ====
Net interest margin (5)................. 4.25% 4.84% 4.78%
==== ==== ====
Ratio of average interest-earning assets
to average interest-bearing
liabilities.......................... 1.20 1.22 1.21
==== ==== ====
</TABLE>
- ----------------------------------------
(1) Includes nonaccrual loans.
(2) Includes interest-bearing deposits, federal funds sold and securities
purchased under agreements to resell.
(3) Includes bank owned life insurance which is not considered an
interest-earning asset.
(4) Interest-rate spread represents the difference between the average yield
on interest-earning assets and the average cost of interest-bearing
liabilities.
(5) Net interest margin is net interest income dividend by average
interest-earning assets.
13
<PAGE>
RATE/VOLUME ANALYSIS
The following table sets forth certain information regarding changes in interest
income and interest expense of Gulf West for the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (1) changes in rate (change
in rate multiplied by prior volume), (2) changes in volume (change in volume
multiplied by prior rate) and (3) changes in rate-volume (change in rate
multiplied by change in volume).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 VS. 1997
------------------------------------
INCREASE (DECREASE) DUE TO
------------------------------------
RATE/
RATE VOLUME VOLUME TOTAL
---- ------ ------ -----
(In thousands)
<S> <C> <C> <C> <C>
Interest earning assets:
Loans.................................................................... $(685) 5,489 (343) 4,461
Securities............................................................... (157) 2,455 (141) 2,157
Other interest-earning assets............................................ (33) 367 27 361
--- ------ --- ------
Total.................................................................. (875) 8,311 (457) 6,979
--- ----- --- -----
Interest-bearing liabilities:
Deposits:
Savings and NOW deposits............................................... (149) 1,078 (132) 797
Money market deposits.................................................. 40 167 18 225
Time deposits.......................................................... (73) 2,374 (42) 2,259
Other borrowings....................................................... 69 284 (58) 295
---- ------ --- ------
Total.................................................................. (113) 3,903 (214) 3,576
--- ----- --- -----
Net change in net interest income............................................ $(762) 4,408 (243) 3,403
=== ===== === =====
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 VS. 1996
------------------------------------
INCREASE (DECREASE) DUE TO
------------------------------------
RATE/
RATE VOLUME VOLUME TOTAL
---- ------ ------ -----
(In thousands)
<S> <C> <C> <C> <C>
Interest earning assets:
Loans.................................................................... $ (82) 2,771 (27) 2,662
Securities............................................................... 63 497 15 575
Other interest-earning assets............................................ 7 (48) (1) (42)
--- ------ --- ------
Total.................................................................. (12) 3,220 (13) 3,195
--- ----- -- -----
Interest-bearing liabilities:
Deposits:
Savings and NOW deposits............................................... 60 347 26 433
Money market deposits.................................................. (1) 55 - 54
Time deposits.......................................................... 63 618 12 693
Other borrowings....................................................... 16 161 10 187
--- ------ -- ------
Total.................................................................. 138 1,181 48 1,367
--- ----- -- -----
Net change in net interest income............................................ $(150) 2,039 (61) 1,828
=== ===== == =====
</TABLE>
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
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 Florida DBF, such as federal funds sold and United States
securities or securities guaranteed by the United States or agencies thereof. As
of December 31, 1998 and December 31, 1997, Mercantile has liquidity of
approximately $74.9 million and $45.7 million, or approximately 27.6% and 28.7%
of total deposits combined with borrowings, respectively.
During the year ended December 31, 1998, Gulf West's primary sources of funds
consisted of principal payments on loans and investment securities, proceeds
from sales and maturities of securities available for sale and net increases in
deposits. Gulf West used its capital resources principally to purchase
investment securities and fund existing and continuing loan commitments. At
December 31, 1998, Gulf West had commitments to originate loans totaling $7.1
million. Scheduled maturities of certificates of deposit during the 12 months
following December 31, 1998 totaled $92.1 million. Management believes Gulf West
has adequate resources to fund all its commitments, that substantially all of
its existing commitments will be funded within the next twelve months and, if so
desired, that it can adjust the rates on certificates of deposit to retain
deposits in a changing interest-rate environment.
The following table sets forth, by maturity distribution, certain information
pertaining to the investment securities portfolio (dollars in thousands):
<TABLE>
<CAPTION>
AFTER ONE YEAR AFTER FIVE YEARS
ONE YEAR OR LESS TO FIVE YEARS TO TEN YEARS AFTER TEN YEARS TOTAL
---------------- ---------------- ----------------- ---------------- ----------------
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AT DECEMBER 31, 1998:
U.S. Treasury
securities........ $ 1,234 5.56% $ 7,067 6.20% $ - - % $ - - % $ 8,301 6.10%
U.S. agency
obligations....... 5,034 5.31 3,094 6.43 - - - - 8,128 5.74
Corporate and other
obligations....... 1,045 5.08 454 6.17 2,452 8.19 2,307 8.51 6,258 7.64
----- ------- ----- ----- ------
$ 7,313 5.32% $ 10,615 6.27% $ 2,452 8.19% $ 2,307 8.51% $ 22,687 6.40%
===== ==== ====== ==== ===== ==== ===== ====
Mortgage-backed
securities................................................................................. 46,400 6.47
------
Total...................................................................................... $ 69,087 6.45%
====== ====
AT DECEMBER 31, 1997:
U.S. Treasury
securities.........$ 3,478 4.86% $ 8,097 6.44% $ - - % $ - - % $ 11,575 5.96%
U.S. agency
obligations........ - - 1,004 7.00 - - - - 1,004 7.00
----- ----- ===== ----- ------
$ 3,478 4.86% $ 9,101 6.50% $ - - % $ - - % $ 12,579 6.04%
===== ==== ===== ==== ===== === ===== ====
Mortgage-backed
securities.................................................................................. 40,604 6.85
------
Total....................................................................................... $ 53,183 6.66%
====== ====
</TABLE>
15
<PAGE>
REGULATORY CAPITAL REQUIREMENTS
Under FDIC regulations, Mercantile is required to meet certain minimum
regulatory capital requirements. This is not a valuation allowance and has not
been created by charges against earnings. It represents a restriction on
stockholders' equity.
Quantitative measures established by regulation to ensure capital adequacy
require Mercantile to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1998, that
Mercantile meets all capital adequacy requirements to which it is subject.
As of December 31, 1998, the most recent notification from the State and Federal
regulators categorized Mercantile as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
Mercantile must maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the table below. There are no conditions or
events since that notification that management believes have changed
Mercantile's category.
The following table summarizes the capital requirements for Mercantile (dollars
in thousands):
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES: ACTION PROVISIONS:
------------------ ------------------ -------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
AT DECEMBER 31, 1998:
Total Capital
(to Risk-Weighted Assets)....... $ 28,340 12.6% $ 17,965 8.0% $ 22,456 10.0%
Tier I Capital
(to Risk-Weighted Assets)....... 25,904 11.5 8,979 4.0 13,468 6.0
Tier I Capital
(to Average Assets)............. 25,904 8.1 12,856 4.0 16,069 5.0
AT DECEMBER 31, 1997:
Total Capital
(to Risk-Weighted Assets)....... $ 15,458 11.3% $ 10,922 8.0% $ 13,652 10.0%
Tier I Capital
(to Risk-Weighted Assets)....... 13,894 10.2 5,461 4.0 8,191 6.0
Tier I Capital
(to Average Assets)............. 13,894 7.5 7,397 4.0 9,246 5.0
</TABLE>
MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and rates.
Gulf West's market risk arises primarily from interest rate risk inherent in its
lending and deposit taking activities. To that end, management actively monitors
and manages its interest rate risk exposure. The measurement of market risk
associated with financial instruments is meaningful only when all related and
offsetting on- and off-balance-sheet transactions are aggregated, and the
resulting net positions are identified. Disclosures about the fair value of
financial instruments, which reflect changes in market prices and rates, can be
found in Note 11 of Notes to Consolidated Financial Statements.
Gulf West's primary objective in managing interest-rate risk is to minimize the
adverse impact of changes in interest rates on Gulf West's net interest income
and capital, while adjusting Gulf West's asset-liability structure to obtain the
maximum yield- cost spread on that structure. Gulf West relies primarily on its
asset-liability structure to control interest rate risk. However, a sudden and
substantial increase in interest rates may adversely impact Gulf West's
earnings, to the extent that the interest rates borne by assets and liabilities
do not change at the same speed, to the same extent, or on the same basis. Gulf
West does not engage in trading activities.
16
<PAGE>
ASSET - LIABILITY STRUCTURE
As part of its asset and liability management, Gulf West has emphasized
establishing and implementing internal asset-liability decision processes, as
well as communications and control procedures to aid in managing Gulf West's
earnings. Management believes that these processes and procedures provide Gulf
West with better capital planning, asset mix and volume controls, loan-pricing
guidelines, and deposit interest-rate guidelines which should result in tighter
controls and less exposure to interest-rate risk.
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest-rate sensitive" and by
monitoring an institution's interest-rate sensitivity "gap." An asset or
liability is said to be interest-rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest-rate sensitivity
gap is defined as the difference between interest-earning assets and
interest-bearing liabilities maturing or repricing within a given time period.
The gap ratio is computed as dividing rate-sensitive assets by rate-sensitive
liabilities. A gap ratio of 1.0% represents perfect matching. A gap is
considered positive when the amount of interest-rate sensitive assets exceeds
interest-rate sensitive liabilities. A gap is considered negative when the
amount of interest-rate sensitive liabilities exceeds interest-rate sensitive
assets. During a period of rising interest rates, a negative gap would adversely
affect net interest income, while a positive gap would result in an increase in
net interest income. During a period of falling interest rates, a negative gap
would result in an increase in net interest income, while a positive gap would
adversely affect net interest income.
Since gap analysis does not take into account the probability that potential
maturities or repricings of interest rate sensitive assets and liabilities will
occur, or the relative magnitude of the repricings, Gulf West also uses an
industry standard computer modeling system to perform "Income Simulation
Analysis." Income simulation analysis captures not only the potential of assets
and liabilities to mature or reprice but the probability that they will do so.
In addition, income simulation analysis attends to the relative sensitivities of
balance sheet items and projects their behavior over an extended period of time
and permits management to assess the probable effects on balance sheet items of
not only changes in market interest rates but also of proposed strategies for
responding to such changes.
On a quarterly basis, management of Gulf West performs an income simulation
analysis to determine the projected effect on net interest income of both a 200
basis point increase and a 200 basis point decrease in the level of interest
rates. These scenarios assume that the 200 basis point rate changes occur in
even monthly increments over twelve months and then hold constant for an
additional twelve months. The volatility of net interest income over this
twenty-four month period in both an up and down rate scenario is measured by
reference to the levels of such income in a flat rate scenario. Gulf West has
established guidelines for the acceptable volatility of net interest income for
the twenty-four month period and management institutes appropriate strategies
designed to keep the volatility levels within those guidelines.
In order to minimize the potential for adverse effects of material and prolonged
increases in interest rates on the results of operations, Gulf West's management
continues to monitor asset and liability management policies to better match the
maturities and repricing terms of its interest-earning assets and
interest-bearing liabilities. Such policies have consisted primarily of: (i)
emphasizing the origination of adjustable-rate loans; (ii) maintaining a stable
core deposit base; and (iii) maintaining a significant portion of liquid assets
(cash and short-term investments).
Gulf West has also maintained a relatively large portfolio of liquid assets
(cash and assets maturing or repricing in one year or less) in order to reduce
its vulnerability to shifts in market rates of interest. At December 31, 1998,
10.2% of Gulf West's total assets consisted of cash and short-term U.S.
Government and agency securities maturing in one year or less. Furthermore, as
of such date, Gulf West's liquidity ratio was 27.6%.
Gulf West also seeks to maintain a large stable core deposit base by providing
quality service to its customers without significantly increasing its cost of
funds or operating expenses. The success of Gulf West's core deposit strategy is
demonstrated by the stability and growth of its demand accounts, money-market
deposit accounts, savings accounts and NOW accounts, which totaled $158.5
million, representing 55.3% of total deposits at December 31, 1998. Management
anticipates that these accounts will increase and in the future comprise a
significant portion of its deposit base.
As of December 31, 1998, Gulf West's one-year negative interest-rate sensitivity
gap in dollars was $76.3 million. Although management believes that the
implementation of the foregoing strategies has reduced the potential adverse
effects of changes in interest rates on Gulf West's results of operations, any
substantial and prolonged increase in market rates of interest could have an
adverse impact on Gulf West's results of operations. As discussed above, on a
quarterly basis management performs an income simulation analysis to measure the
volatility of Gulf West's projected net interest income when subjected to 200
basis point interest rate shocks. As a result of this simulation analysis,
management believes that its present gap position
17
<PAGE>
is appropriate for the current interest rate environment and that a negative gap
will continue in the one year time period.
The following table sets forth certain information relating to Gulf West's
interest-earning assets and interest-bearing liabilities at December 31, 1998
that are estimated to mature or are scheduled to reprice within the period
shown. Since assets and liabilities within each interest-sensitive period may
not reprice by the same amount or at the same time, the following table may not
be reflective of changes in net interest income which would result from changes
in the general level of interest rates.
<TABLE>
<CAPTION>
MORE
THAN MORE
THREE THAN SIX MORE MORE
MONTHS MONTHS THAN ONE THAN FIVE
THREE TO SIX TO ONE YEAR TO YEARS AND
MONTHS MONTHS YEAR FIVE YEARS INSENSITIVE TOTAL
------ ------ ------ ---------- ----------- -----
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans (1),(2):
Adjustable rate............... $ 23,007 8,807 9,656 59,460 7,470 108,400
Fixed rate.................... 2,980 1,568 3,601 9,257 43,049 60,455
Consumer and other loans...... 19,581 821 1,803 15,153 4,901 42,259
------- -------- ------- ------- ------ -------
Total loans................ 45,568 11,196 15,060 83,870 55,420 211,114
Investments (3),(4)............. 12,011 5,149 21,312 21,926 20,343 80,741
------- ------- ------ ------- ------ -------
Total rate-sensitive assets 57,579 16,345 36,372 105,796 75,763 291,855
------- ------ ------ ------- ------ -------
Deposit accounts (5):
Savings and NOW............... 53,255 - - - 33,440 86,695
Money market.................. 25,819 - - - - 25,819
Time deposits................. 31,505 28,775 31,791 35,840 3 127,914
------- ------ ------ ------- ------ -------
Total deposit accounts.......... 110,579 28,775 31,791 35,840 33,443 240,428
Other borrowings................ 15,438 - - - - 15,438
------- ------ ------ ------- ------ -------
Total rate-sensitive
liabilities............ 126,017 28,775 31,791 35,840 33,443 255,866
------- ------ ------ ------- ------ -------
Gap (repricing differences)..... $ (68,438) (12,430) 4,581 69,956 42,320 35,989
======= ====== ======= ======= ====== =======
Cumulative GAP.................. $ (68,438) (80,868) (76,287) (6,331) 35,989
======= ====== ====== ======= ======
Cumulative GAP/total assets..... (20.60)% (24.35)% (22.97)% (1.91)% 10.83%
===== ===== ===== ==== =====
</TABLE>
- -------------------------
(1) In preparing the table above, adjustable-rate loans are included in the
period in which the interest rates are next scheduled to adjust rather
than in the period in which the loans mature. Fixed-rate loans are
scheduled, including repayment, according to their contractual
maturities.
(2) Includes nonaccrual loans.
(3) Investments are scheduled according to their respective repricing and
maturity dates adjusted for management assumptions regarding
prepayments on mortgage-backed securities and callable securities.
(4) Includes federal funds sold and securities purchased under agreement to
resell.
(5) The savings and NOW accounts repricing volumes are based on
management's assumptions of the sensitivity of these accounts to
changes in market interest rates. Time accounts are scheduled according
to their respective maturity dates.
18
<PAGE>
The following table reflects the contractual principal repayments by period of
Gulf West's loan portfolio at December 31, 1998.
<TABLE>
<CAPTION>
RESIDENTIAL
YEARS ENDING COMMERCIAL MORTGAGE CONSUMER
DECEMBER 31, LOANS LOANS LOANS TOTAL
------------ ---------- ----------- -------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1999........................................ $ 31,857 1,431 3,624 36,912
2000........................................ 10,299 1,292 3,045 14,636
2001-2002................................... 20,799 1,375 2,562 24,736
2003-2004................................... 11,404 2,925 2,546 16,875
2005-2012................................... 44,464 11,871 416 56,751
Thereafter.................................. 36,368 24,533 303 61,204
------- ------ ------ -------
Total.................................. $ 155,191 43,427 12,496 211,114
======= ====== ====== =======
</TABLE>
Of the $174,202,000 of loans due after 1999, 33% of such loans have fixed rates
of interest and 67% have adjustable rates.
The following table displays loan originations by type of loan and principal
reductions during the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Originations:
Commercial loans..................................$ 23,066 12,102 12,543 8,030 6,271
Commercial real estate loans...................... 71,624 31,329 49,234 18,342 9,950
Residential real estate........................... 16,085 4,197 3,125 2,314 3,497
Consumer loans.................................... 11,046 11,692 9,689 8,979 8,948
------- ------ ------ ------ ------
Total loans originated......................... 121,821 59,320 74,591 37,665 28,666
Loans acquired with purchase of Citizens................ 30,744 - - - -
Principal reductions.................................... (65,742) (49,094) (35,180) (27,070) (18,281)
------- ------ ------ ------ ------
Increase in gross loans....................... $ 86,823 10,226 39,411 10,595 10,385
======= ====== ====== ====== ======
</TABLE>
The following table sets forth information concerning Gulf West's loan portfolio
by type of loan at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------- ---------------- ------------- -------------- ---------------
% OF % OF % OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial........... $ 30,102 14.3% $ 19,752 15.9% $ 18,169 15.9% $ 14,531 19.5% $ 9,597 15.0%
Commercial
real estate........ 125,089 59.3 72,396 58.2 63,207 55.4 27,772 37.2 19,721 30.8
Residential
real estate........ 43,427 20.6 18,966 15.3 22,095 19.4 24,949 33.4 27,307 42.6
Consumer............. 12,496 5.8 13,177 10.6 10,594 9.3 7,402 9.9 7,434 11.6
------- ------ ------- ----- ------- ----- ------ ---- ------ ----
Total loans...... 211,114 100.0% 124,291 100.0% 114,065 100.0% 74,654 100.0% 64,059 100.0%
===== ===== ===== ===== =====
Less:
Deferred loan
fees............. (70) (172) (221) (134) (90)
Allowance for
loan losses...... (2,436) (1,564) (1,184) (830) (663)
------- -------- ------- ------- -------
Loans, net....... $ 208,608 $ 122,555 $ 112,660 $ 73,690 $ 63,306
======= ======= ======= ====== ======
</TABLE>
19
<PAGE>
The following table shows the distribution of, and certain other information
relating to, deposit accounts by type:
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------
1998 1997
--------------------------------------------
% OF % OF
AMOUNT DEPOSIT AMOUNT DEPOSIT
------ ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Demand deposits..................................... $ 45,943 16.0% $ 36,992 21.9%
Savings and NOW deposits............................ 86,696 30.3 45,888 27.1
Money-market deposits............................... 25,819 9.0 16,324 9.7
Time deposits....................................... 127,914 44.7 69,897 41.3
------- ------ ------- -----
Total deposits...................................... $ 286,372 100.0% $ 169,101 100.0%
======= ===== ======= =====
</TABLE>
Jumbo certificates ($100,000 and over) mature as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------
1998
----
(IN THOUSANDS)
<S> <C>
Due three months or less............................................................ $ 7,686
Due over three months to six months................................................. 7,809
Due over six months to one year..................................................... 8,248
Due over one year................................................................... 11,650
------
$ 35,393
======
</TABLE>
The scheduled maturities of time deposits are as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------
1998
----
(IN THOUSANDS)
<S> <C>
Due in one year or less......................................................... $ 92,070
Due in more than one but less than three years.................................. 28,480
Due in more than three but less than five years................................. 7,361
Due in over five years.......................................................... 3
-------
$ 127,914
=======
</TABLE>
The following table sets forth the net deposit flows of Gulf West during the
periods indicated (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net increase before interest credited................................... $ 42,120 13,848 35,508
Deposits assumed with Citizens acquisition.............................. 66,388 - -
Net credited............................................................ 8,763 5,918 4,635
-------- ------- ------
Net deposit increase............................................... $ 117,271 19,766 40,143
======= ====== ======
</TABLE>
The following table shows the average amount of and the average rate paid on
each of the following interest-bearing deposit account categories during the
periods indicated:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE YIELD BALANCE YIELD BALANCE YIELD
------- ----- ------- ----- ------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Savings and NOW deposits................... $ 75,140 2.72% $ 40,267 3.09% $ 28,219 2.88%
Money market deposits...................... 19,938 2.99 13,747 2.70 11,716 2.71
Time deposits ........................... 116,567 5.33 72,841 5.43 61,226 5.32
------- ---- ------- ---- ------- ----
Total interest-bearing deposits....... $ 211,645 4.18% $ 126,855 4.39% $ 101,161 4.34%
======= ==== ======= ==== ======= ====
</TABLE>
20
<PAGE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997
GENERAL
Net earnings for the year ended December 31, 1998 were $2,521,000 or $.38 per
basic share ($.37 per diluted share) compared to net earnings of $1,255,000 or
$.31 per basic share ($.30 per diluted share) for the year ended December 31,
1997. This increase in Gulf West's net earnings was primarily due to an increase
in net interest income and noninterest income partially offset by increases in
noninterest expenses and income taxes.
INTEREST INCOME AND EXPENSE
Interest income increased from $14.0 million for the year ended December 31,
1997 to $21.0 million for the year ended December 31, 1998. Interest income on
loans increased $4.5 million due to an increase in the average loan portfolio
balance from $116.1 million for the year ended December 31, 1997 to $174.5
million for the year ended December 31, 1998, partially offset by a decrease in
the weighted-average yield earned on the portfolio. Interest on investment
securities increased $2.2 million due to an increase in the average investment
securities portfolio to $79.5 million in 1998 from $41.3 million in 1997
partially offset by a decrease in the average yield in 1998. Interest on other
interest-earning assets increased $.4 million due to an increase in average
other interest-earning assets from $8.2 million in 1997 to $15.0 million in
1998.
Interest expense increased to $9.6 million for the year ended December 31, 1998
from $6.0 million for the year ended December 31, 1997. Interest expense on
deposit accounts increased primarily due to an increase in average
interest-bearing deposit balances from $126.9 million during the year ended
December 31, 1997 to $211.6 million for 1998. Interest expense on other
borrowings increased $.3 million primarily due to an increase in average
borrowings from $8.7 million in 1997 to $14.1 million in 1998 partially offset
by a decrease in average rates. The average cost of all interest-bearing
liabilities decreased from 4.45% for the year ended December 31, 1997 to 4.25%
for the year ended December 31, 1998.
PROVISION FOR LOAN LOSSES
The provision for loan losses is charged to earnings to bring the total
allowance to a level deemed appropriate by management and is based upon
historical experience, the volume and type of lending conducted by Gulf West,
industry standards, the amounts of nonperforming loans, general economic
conditions, particularly as they relate to Gulf West's market areas, and other
factors related to the collectability of Gulf West's loan portfolio. The
provision increased from $437,000 for the year ended December 31, 1997 to
$440,000 for the year ended December 31, 1998. Management believes that the
allowance for loan losses of $2,436,000 is adequate at December 31, 1998.
NONINTEREST INCOME
Total noninterest income increased $.9 million to $2.9 million for the year
ended December 31, 1998 from $2.0 million reported in 1997, principally from an
increase in leasing fees from Liberty Leasing, an increase in service fees on
deposits, and increased cash surrender value of life insurance.
NONINTEREST EXPENSES
Total noninterest expenses increased $2.4 million to $10.1 million for the year
ended December 31, 1998 from $7.7 million for the year ended December 31, 1997,
primarily due to an increase in salaries and employee benefits and occupancy
expense relating to additional banking offices opened in 1997 and 1998 including
the acquisition of Citizens.
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996
GENERAL
Net earnings for the year ended December 31, 1997 were $1,255,000 or $.31 per
basic share ($.30 per diluted share) compared to net earnings of $314,000 or
$.08 per basic and diluted share for the year ended December 31, 1996. This
increase in Gulf West's net earnings was primarily due to an increase in net
interest income and noninterest income, partially offset by increases in
noninterest expenses and income taxes.
INTEREST INCOME AND EXPENSE
Interest income increased from $10.8 million for the year ended December 31,
1996 to $14.0 million for the year ended December 31, 1997. Interest income on
loans increased $2.7 million due an increase in the average loan portfolio
balance from $87.0 million for the year ended December 31, 1996 to $116.1
million for the year ended December 31, 1997, partially offset by a decrease in
the weighted-average yield earned on the portfolio. Interest on investment
securities increased $575,000 due to an increase in the average yield earned
from 6.25% in 1996 to 6.44% in 1997, as well as an increase in the
21
<PAGE>
average investment securities portfolio to $41.3 million in 1997 from $33.4
million in 1996. Interest on other interest-earning assets decreased $42,000 due
to a decrease in average other interest-earning assets from $9.1 million in 1996
to $8.2 million in 1997.
Interest expense increased to $6.0 million for the year ended December 31, 1997
from $4.7 million for the year ended December 31, 1996. Interest expense on
deposit accounts increased primarily due to an increase in average
interest-bearing deposit balances from $101.2 million during the year ended
December 31, 1996 to $126.9 million for the comparable period in 1997. Interest
expense on other borrowings increased $187,000 from $270,000 to $457,000
primarily due to an increase in average borrowings from $5.5 million in 1996 to
$8.7 million in 1997 as well as an increase in average rates. The average cost
of all interest-bearing liabilities increased from 4.37% for the year ended
December 31, 1996 to 4.45% for the year ended December 31, 1997.
PROVISION FOR LOAN LOSSES
The provision for loan losses is charged to earnings to bring the total
allowance to a level deemed appropriate by management and is based upon
historical experience, the volume and type of lending conducted by Gulf West,
industry standards, the amounts of nonperforming loans, general economic
conditions, particularly as they relate to Gulf West's market areas, and other
factors related to the collectability of Gulf West's loan portfolio. The
provision increased from $401,000 for the year ended December 31, 1996 to
$437,000 for the year ended December 31, 1997. Management believed that the
allowance for loan losses of $1,564,000 was adequate at December 31, 1997.
NONINTEREST INCOME
Total noninterest income increased $1.0 million to $2.0 million for the year
ended December 31, 1997 from $1.0 million reported in 1996, principally from an
increase in leasing fees from Liberty Leasing, an increase in service fees on
deposits, and an increase on gains on sales of securities.
NONINTEREST EXPENSE
Total noninterest expense increased $1.4 million to $7.7 million for the year
ended December 31, 1997 from $6.3 million for the year ended December 31, 1996,
primarily due to an increase in salaries and employee benefits and occupancy
expense relating to additional banking offices opened in 1996 and 1997, as well
as additional data processing expenses partially offset by the SAIF special
assessment that was recorded in 1996, but not in 1997.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been prepared in
accordance with GAAP, which requires the measurement of financial position and
operating results in terms of historical dollars, without considering changes in
the relative purchasing power of money over time due to inflation. Unlike most
industrial companies, substantially all of the assets and liabilities of Gulf
West are monetary in nature. As a result, interest rates have a more significant
impact on Gulf West's performance than the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or in
the same magnitude as the prices of goods and services, since such prices are
affected by inflation to a larger extent than interest rates.
FUTURE ACCOUNTING REQUIREMENTS
Financial Accounting Standards 133 - ACCOUNTING FOR DERIVATIVE INVESTMENTS AND
HEDGING ACTIVITIES requires companies to record derivatives on the balance sheet
as assets or liabilities, measured at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the use of the derivatives and whether they qualify for hedge accounting. The
key criterion for hedge accounting is that the hedging relationship must be
highly effective in achieving offsetting changes in fair value or cash flows.
Gulf West will be required to adopt this Statement effective January 1, 2000.
Management does not anticipate that this Statement will have a material impact
on Gulf West.
22
<PAGE>
SELECTED QUARTERLY RESULTS
Selected quarterly results of operations for the four quarters ended December 31
are as follows (in thousands, except share amounts):
<TABLE>
<CAPTION>
1998 1997
--------------------------------------------------------------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income............ $ 5,494 5,121 5,208 5,195 3,632 3,558 3,469 3,380
Interest expense........... 2,566 2,489 2,273 2,274 1,492 1,513 1,534 1,487
Net interest income........ 2,928 2,632 2,935 2,921 2,140 2,045 1,935 1,893
Provision for loan
losses.................. 90 90 110 150 32 165 135 105
Earnings before
income taxes............ 1,047 797 897 959 808 411 313 377
Net earnings............... 766 554 586 615 543 256 221 235
Basic earnings per
common share (1)........ .12 .08 .09 .09 .14 .06 .05 .06
Diluted earnings per
common share (1)........ .11 .08 .09 .09 .13 .06 .05 .06
Cash dividends declared
per common share........ - - - - - - - -
Market price range (1):
High.................... 10.25 11.82 12.96 11.82 N/A N/A N/A N/A
Low..................... 6.82 7.96 9.77 10.23 N/A N/A N/A N/A
</TABLE>
- ------------------
(1) All per share information is presented to reflect all stock dividends and
stock splits including the 10% stock dividends declared January 15, 1998
and November 16, 1998.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required by this Item is incorporated herein by reference to
the information set forth under the following captions contained in this Form
10-K:
(i) "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- Market Risk;"
(ii) "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- Asset-Liability Structure;" and
(iii) Note 11 to "CONSOLIDATED FINANCIAL STATEMENTS OF GULF WEST BANKS, INC.
AND SUBSIDIARIES."
23
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
GULF WEST BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks............................................................... $ 16,045 9,046
Federal funds sold and securities purchased under agreements to resell................ 11,654 8,903
-------- --------
Total cash and cash equivalents.............................................. 27,699 17,949
Securities available for sale......................................................... 69,087 53,183
Loans receivable, net of allowance for losses of $2,436 and $1,564.................... 208,608 122,555
Loans held for sale, at cost which approximates market................................ - 715
Premises and equipment, net........................................................... 9,978 7,043
Cash surrender value of bank owned life insurance..................................... 12,020 1,450
Accrued interest receivable........................................................... 1,646 1,119
Deferred tax asset.................................................................... 118 328
Goodwill, net......................................................................... 1,643 136
Foreclosed real estate, net........................................................... 309 -
Other assets.......................................................................... 1,066 370
-------- ---------
Total........................................................................ $ 332,174 204,848
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Demand deposits.................................................................... 45,943 36,992
Savings, NOW deposits and money-market deposits.................................... 112,515 62,212
Time deposits...................................................................... 127,914 69,897
------- -------
Total deposits............................................................... 286,372 169,101
Other borrowings................................................................... 15,438 20,237
Other liabilities.................................................................. 1,400 969
-------- ---------
Total liabilities............................................................ 303,210 190,307
------- -------
Commitments and contingencies (Notes 6, 11 and 19)
Stockholders' equity:
Class A preferred stock, $5 par value, authorized
1,000,000 shares, none issued or outstanding.................................... - -
Common stock, $1 par value; 10,000,000 shares
authorized, 6,643,717 and 3,342,676 issued and outstanding...................... 6,644 3,343
Additional paid-in capital......................................................... 21,397 9,308
Retained earnings.................................................................. 537 1,705
Accumulated other comprehensive income............................................. 386 185
-------- ----------
Total stockholders' equity................................................... 28,964 14,541
------- --------
Total........................................................................ $ 332,174 204,848
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
24
<PAGE>
GULF WEST BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest income:
Loans receivable........................................................ $ 15,395 10,934 8,272
Securities available for sale........................................... 4,818 2,661 2,086
Other interest-earning assets........................................... 805 444 486
------- ------- --------
Total interest income.............................................. 21,018 14,039 10,844
------ ------ ------
Interest expense:
Deposits................................................................ 8,850 5,569 4,389
Other borrowings........................................................ 752 457 270
------- ------- -------
Total interest expense............................................. 9,602 6,026 4,659
------ ------ ------
Net interest income.......................................................... 11,416 8,013 6,185
Provision for loan losses.......................................... 440 437 401
------- ------- -------
Net interest income after provision for loan losses.......................... 10,976 7,576 5,784
------ ------ ------
Noninterest income:
Service fees on deposit accounts........................................ 1,152 816 566
Gain (loss) from sale of securities available for sale.................. 101 237 (10)
Income from mortgage banking activity................................... 57 56 39
Leasing fees and commissions............................................ 647 508 131
Income from bank owned life insurance................................... 354 71 52
Other income............................................................ 545 299 253
------- -------- -------
Total noninterest income........................................... 2,856 1,987 1,031
------ ------- ------
Noninterest expenses:
Salaries and employee benefits.......................................... 5,605 4,273 3,230
Occupancy expense....................................................... 1,958 1,502 968
Data processing......................................................... 608 409 224
Federal deposit insurance premium....................................... 107 93 181
Advertising............................................................. 249 205 186
Stationary, printing and supplies....................................... 300 216 195
Telephone and postage .................................................. 263 215 174
SAIF special assessment................................................. - - 470
Other expense........................................................... 1,042 741 696
------ ------- -------
Total noninterest expenses......................................... 10,132 7,654 6,324
------ ------ ------
Earnings before income taxes ................................................ 3,700 1,909 491
Income taxes....................................................... 1,179 654 177
------ ------- -------
Net earnings................................................................. $ 2,521 1,255 314
====== ====== =======
Earnings per share:
Basic................................................................... $ .38 .31 .08
======== ======= =======
Diluted................................................................. $ .37 .30 .08
======== ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
25
<PAGE>
GULF WEST BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
($ IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK OTHER
------------------ ADDITIONAL COMPRE- TOTAL
NUMBER OF PAID-IN RETAINED HENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS INCOME EQUITY
--------- ------ ---------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995........................... 3,121,671 $ 3,122 8,462 926 4 12,514
------ ---- ------
Comprehensive income:
Net earnings for 1996.............................. - - - 314 - 314
Net change in unrealized gains on available-
for-sale securities, net of taxes............... - - - - 66 66
-------- ---- ---------
Comprehensive income................................... - - - 314 66 380
------ ---- --------
Shares issued under employee stock purchase plan....... 7,270 7 19 - - 26
Shares issued in exchange for Liberty Leasing
Corporation........................................ 30,000 30 120 - - 150
Shares issued under stock option plan.................. 9,000 9 21 - - 30
Stock dividend......................................... 158,089 158 632 (790) - -
---------- ------ ------- ------ ------ ---------
Balance at December 31, 1996........................... 3,326,030 3,326 9,254 450 70 13,100
------ ----- ------
Comprehensive income:
Net earnings for 1997.............................. - - - 1,255 - 1,255
Net change in unrealized gains on available-
for-sale securities, net of taxes............... - - - - 115 115
-------- --- ------
Comprehensive income................................... - - - 1,255 115 1,370
----- --- -----
Shares issued under employee stock purchase plan....... 7,691 8 31 - - 39
Shares issued under stock option plan.................. 5,595 6 13 - - 19
Shares issued to directors as compensation ............ 3,360 3 10 - - 13
---------- ------- ------- -------- ----- --------
Balance at December 31, 1997........................... 3,342,676 3,343 9,308 1,705 185 14,541
----- --- ------
Comprehensive income:
Net earnings for 1998.............................. - - - 2,521 2,521
Net change in unrealized gains on available-
for-sale securities, net of taxes............... - - - - 201 201
-------- --- -------
Comprehensive income................................... - - - 2,521 201 2,722
----- --- ------
Shares issued in exchange for Citizens National
Bank and Trust Company............................. 1,949,919 1,950 8,774 - - 10,724
Shares issued under employee stock purchase plan....... 15,818 16 68 - - 84
Shares issued under stock option plan.................. 177,875 178 669 - - 847
Shares issued to directors as compensation............. 8,330 8 42 - - 50
Cash for fractional shares............................. - - - (4) - (4)
Stock dividends........................................ 1,149,099 1,149 2,536 (3,685) - -
--------- ----- ------ ----- ----- ---------
Balance at December 31, 1998........................... 6,643,717 $ 6,644 21,397 537 386 28,964
========= ===== ====== ====== === ======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
26
<PAGE>
GULF WEST BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings........................................................ $ 2,521 1,255 314
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation.................................................... 910 778 463
(Increase) decrease in other assets............................. (1,242) 25 (140)
Provision for loan losses....................................... 440 437 401
Deferred income tax (credit) provision.......................... 90 (183) (119)
Income from mortgage banking activity........................... (57) (56) (39)
(Decrease) increase in other liabilities........................ (10) 624 (99)
Increase (decrease) in accrued interest receivable.............. 173 (213) (109)
Net amortization of fees, premiums and discounts................ 190 (9) (61)
Write-down on foreclosed real estate............................ 5 - 106
(Gain) loss on sale of securities available for sale........... (101) (237) 10
(Gain) loss on sale of other real estate........................ - (23) 17
Proceeds from sale of loans held for sale....................... 4,223 6,429 5,225
Originations of loans held for sale............................. (3,460) (6,768) (5,247)
Stock issued for compensation................................... 50 13 -
Amortization of goodwill........................................ 104 - -
Decrease in goodwill from sale of trust operations.............. 322 - -
------- --------- ----------
Net cash flow provided by operating activities.............. 4,158 2,072 722
------ ------ --------
Cash flows from investing activities:
Net increase in loans............................................... (55,276) (10,331) (39,265)
Purchase of securities available for sale........................... (26,479) (37,420) (27,384)
Proceeds from sale and maturity of securities available for sale.... 29,070 21,932 16,378
Principal repayments on securities available for sale............... 15,613 2,914 4,421
Proceeds from sale of foreclosed real estate, net .................. - 74 269
Net purchase of premises and equipment.............................. (3,472) (1,306) (2,756)
Purchase bank owned life insurance.................................. (10,008) - -
Purchase of Citizens National Bank and Trust, net cash acquired..... 9,323 - -
------- --------- ----------
Net cash used in investing activities....................... (41,229) (24,137) (48,337)
------ ------ ------
Cash flows from financing activities:
Net increase (decrease) in time deposits............................ 17,533 (2,128) 20,223
Net increase in demand, savings, NOW and
money-market deposit accounts................................... 33,160 21,894 19,920
Net (decrease) increase of other borrowings......................... (4,799) 8,190 8,248
Issuance of common stock............................................ 931 71 56
Cash dividend paid for fractional shares............................ (4)
------- --------- ----------
Net cash provided by financing activities................... 46,821 28,027 48,447
------ ------ ------
Net increase in cash and cash equivalents................... 9,750 5,962 832
Cash and cash equivalents at beginning of year........................... 17,949 11,987 11,155
------ ------ ------
Cash and cash equivalents at end of year................................. $ 27,699 17,949 11,987
====== ====== ======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest .................................................... $ 8,763 5,918 4,635
====== ====== ======
Income taxes.................................................... $ 1,412 623 427
====== ======= =======
Noncash transactions:
Reclassification of loans to foreclosed real estate............. $ 314 179 -
======= ======= =========
Reclassification of foreclosed real estate to loans............. $ - 128 106
======= ======= =======
Issuance of common stock for acquisition of Liberty Leasing..... $ - - 150
======= ========= =======
Acquisition of Citizens National Bank and Trust:
Fair value of assets acquired............................... $ 77,744 - -
====== ========= =========
Liabilities assumed......................................... $ 67,020 - -
====== ========= =========
Common stock issued......................................... $ 10,724 - -
====== ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
27
<PAGE>
GULF WEST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997 AND FOR EACH OF THE YEARS
IN THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL. Gulf West Banks, Inc. (the "Holding Company") is a one-bank holding
company which owns 100% of the outstanding stock of Mercantile Bank (the
"Mercantile") and Liberty Leasing Corporation ("Liberty"). Mercantile is
a State (Florida) chartered commercial bank. Mercantile, through eleven
banking offices, provides a wide range of banking services to individuals
and businesses located primarily in Pinellas, Hillsborough and Pasco
Counties, Florida. Liberty is an equipment leasing company that arranges
financing for a variety of equipment for all types of businesses and is
headquartered in Tampa, Florida. The Holding Company's only business
activities are the operations of Mercantile and Liberty. Collectively the
entities are referred to as "Gulf West". Gulf West operates in only one
reportable industry segment: banking.
BASIS OF PRESENTATION. The accompanying consolidated financial statements
include the accounts of the Holding Company and its wholly-owned
subsidiaries. All significant intercompany accounts and transactions have
been eliminated in consolidation. The accounting and reporting practices
of Gulf West conform to generally accepted accounting principles and to
general practice within the banking industry.
ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
SECURITIES. Mercantile may classify its securities as either trading, held
to maturity or available for sale. Trading securities are held
principally for resale and recorded at their fair values. Unrealized
gains and losses on trading securities are included immediately in
earnings. Held-to-maturity securities are those which Mercantile has the
positive intent and ability to hold to maturity and are reported at
amortized cost. Available-for-sale securities consist of securities not
classified as trading securities nor as held-to-maturity securities.
Unrealized holding gains and losses, net of tax, on available-for-sale
securities are reported as a net amount in a other comprehensive income.
Gains and losses on the sale of available-for-sale securities are
determined using the specific-identification method. Premiums and
discounts on securities available for sale and held to maturity are
recognized in interest income using the interest method over the period
to maturity.
LOANS HELD FOR SALE. Mortgage loans originated and intended for sale in the
secondary market are carried at the lower of cost or estimated market
value in the aggregate.
LOANS RECEIVABLE. 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 adjusted for any charge-offs,
the allowance for loan losses, and any deferred fees or costs on
originated loans.
Loan origination fees and certain direct origination costs are
capitalized and recognized as an adjustment of the yield of the related
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.
(continued)
28
<PAGE>
GULF WEST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
LOANS RECEIVABLE, CONTINUED. 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 Mercantile'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.
FORECLOSED REAL ESTATE. Real estate properties acquired through, or in lieu
of, loan foreclosure are to be sold and are initially recorded at fair
value at the date of foreclosure establishing a new cost basis. After
foreclosure, valuations are periodically performed by management and the
real estate is carried at the lower of carrying amount or fair value less
cost to sell. Revenue and expenses from operations are included in the
statements of earnings.
PREMISES AND EQUIPMENT. Premises and equipment are stated at cost less
accumulated depreciation. Depreciation of premises and equipment is
provided on the straight-line basis over the estimated useful life of the
related asset.
ADVERTISING. Gulf West expenses all media advertising as incurred.
INCOME TAXES. Provisions for income taxes are based on taxes payable or
refundable for the current year (after exclusion of nontaxable income
such as interest on state and municipal securities) and deferred taxes on
temporary differences between the amount of taxable income and pretax
financial income and between the tax bases of assets and liabilities and
their reported amounts in the financial statements. Deferred tax assets
and liabilities are included in the financial statements at currently
enacted income tax rates applicable to the period in which the deferred
tax assets and liabilities are expected to be realized or settled. As
changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.
STOCK-BASED COMPENSATION. Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("Statement 123")
establishes a "fair value" based method of accounting for stock-based
compensation plans and encourages all entities to adopt that method of
accounting for all of their employee stock compensation plans. However,
it also allows an entity to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees" (Opinion 25). Gulf West has elected to follow Opinion 25 and
related interpretations in accounting for its employee stock options.
COMPREHENSIVE INCOME. On January 1, 1998, Gulf West adopted Financial
Accounting Standards 130 - Reporting Comprehensive Income. This Statement
establishes rules for the reporting of comprehensive income and its
components. Comprehensive income consists of net earnings and net change
in unrealized gains (losses) on available- for-sale securities, net of
taxes and is presented in the consolidated statements of stockholders'
equity. The adoption of SFAS 130 had no impact on total stockholders'
equity. Prior year financial statements have been reclassified to conform
to the SFAS 130 requirements.
EARNINGS PER SHARE. Basic earnings per share is computed on the basis of the
weighted-average number of common shares outstanding. Diluted earnings
per share is computed based on the weighted-average number of shares
outstanding plus the effect of outstanding stock options, computed using
the treasury stock method.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS. In the ordinary course of business,
Gulf West has entered into off-balance- sheet financial instruments
consisting of commitments to extend credit and standby letters of credit.
Such financial instruments are recorded in the financial statements when
they are funded or related fees are incurred or received.
(continued)
29
<PAGE>
GULF WEST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
FAIR VALUES OF FINANCIAL INSTRUMENTS. The following methods and assumptions
were used by Gulf West in estimating fair values of financial instruments
disclosed herein:
CASH AND CASH EQUIVALENTS. The carrying amounts of cash and cash
equivalents approximate their fair value.
SECURITIES AVAILABLE FOR SALE. Fair values for securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
LOANS. For variable-rate loans that reprice frequently and have no
significant change in credit risk, fair values are based on carrying
values. Fair values for certain fixed-rate mortgage (e.g. one-to-four
family residential), commercial real estate and commercial loans are
estimated using discounted cash flow analyses, using interest rates
currently being offered for loans with similar terms to borrowers of
similar credit quality.
DEPOSIT LIABILITIES. The fair values disclosed for demand, NOW,
money-market and savings deposits are, by definition, equal to the amount
payable on demand at the reporting date (that is, their carrying
amounts). Fair values for fixed-rate certificates of deposit are
estimated using a discounted cash flow calculation that applies interest
rates currently being offered on certificates to a schedule of aggregated
expected monthly maturities on time deposits.
SHORT-TERM BORROWINGS. Rates currently available to Gulf West for debt
with similar terms and remaining maturities are used to estimate fair
value of existing debt.
ACCRUED INTEREST. The carrying amounts of accrued interest approximate
their fair values.
OFF-BALANCE-SHEET INSTRUMENTS. Fair values for off-balance-sheet lending
commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and
the counterparties' credit standing.
RECLASSIFICATIONS. Certain amounts in the 1997 and 1996 financial
statements have been reclassified to conform to the 1998 presentation.
FUTURE ACCOUNTING REQUIREMENTS. Financial Accounting Standards 133 -
ACCOUNTING FOR DERIVATIVE INVESTMENTS AND HEDGING ACTIVITIES requires
companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for
depending on the use of the derivatives and whether they qualify for
hedge accounting. The key criterion for hedge accounting is that the
hedging relationship must be highly effective in achieving offsetting
changes in fair value or cash flows. Gulf West will be required to adopt
this Statement effective January 1, 2000. Management does not anticipate
that this Statement will have a material impact on Gulf West.
(continued)
30
<PAGE>
GULF WEST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(2) ACQUISITIONS
During January 1998, Gulf West acquired Citizens National Bank and Trust
Company, Port Richey, Florida ("Citizens"). Gulf West exchanged 2.4
million shares of its common stock (adjusted for subsequent stock
dividends) for all the outstanding shares of Citizens. Citizens operated
one banking office in Pasco County, Florida. Gulf West accounted for this
transaction using the purchase method of accounting. The excess purchase
price over fair market value of the underlying net assets was allocated
to goodwill. During 1998 Mercantile sold its trust operations and reduced
the acquired goodwill by the proceeds. Goodwill of $1.6 million, after
this reduction, is being amortized over 20 years. The unaudited pro forma
results below assume the acquisition occurred at the beginning of the
year ended December 31, 1996 (dollars in thousands, except per share
amounts):
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996
---- ----
Interest income............................ $ 19,327 15,834
====== ======
Net interest income........................ $ 9,869 8,235
====== =======
Net earnings............................... $ 1,531 809
====== =======
Earnings per share:
Basic................................... $ .38 .20
======= =======
Diluted................................. $ .37 .20
======= =======
In management's opinion, the unaudited pro forma combined results of
operations are not indicative of the actual results that would have
occurred had the acquisition been consummated at the beginning of fiscal
1996 or of future operations of the combined entities under the ownership
and management of Gulf West.
During 1996, Gulf West acquired all the outstanding common shares of Liberty
in exchange for 38,115 shares of its common stock. The acquisition has
been accounted for using the purchase method of accounting. Liberty had
nominal assets and liabilities and goodwill of $157,000 resulted.
Goodwill is being amortized over ten years.
(3) SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
Mercantile enters into purchases of securities under agreements to resell
substantially identical securities. At December 31, 1998 and 1997, these
agreements matured daily. The agreements were with a major bank.
Securities purchased under agreements to resell averaged approximately
$8,099,000 and $6,061,000 during 1998 and 1997, and the maximum amounts
outstanding at any month-end during 1998 and 1997 were $17,000,000 and
$10,522,000, respectively.
(continued)
31
<PAGE>
GULF WEST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(4) SECURITIES AVAILABLE FOR SALE
Debt securities have been classified according to management's intent. The
carrying amounts and approximate fair values are as follows (in
thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------- ---------- ---------- -----
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE:
DECEMBER 31, 1998:
U.S. agency obligations................... $ 8,001 127 - 8,128
U.S. Treasury securities.................. 8,237 64 - 8,301
Corporate and other obligations........... 6,141 117 - 6,258
Mortgage-backed securities................ 46,090 315 5 46,400
------ --- -- ------
$ 68,469 623 5 69,087
====== === == ======
DECEMBER 31, 1997:
U.S. agency obligations................... 1,000 4 - 1,004
U.S. Treasury securities.................. 11,454 140 19 11,575
Mortgage-backed securities................ 40,432 190 18 40,604
------ --- -- ------
$ 52,886 334 37 53,183
====== === == ======
</TABLE>
The scheduled maturities of securities available for sale at December 31,
1998 are as follows (in thousands).
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
--------------------
AMORTIZED FAIR
COST VALUE
---- -----
<S> <C> <C>
Due in one year or less................................................... $ 7,287 7,313
Due after one year through five years..................................... 10,439 10,615
Due in five years to ten years............................................ 2,388 2,452
Due after ten years....................................................... 2,266 2,307
Mortgage-backed securities................................................ 46,089 46,400
------- ------
$ 68,469 69,087
====== ======
</TABLE>
For purposes of the maturity table, mortgage-backed securities, which are
not due at a single maturity date, have been allocated over maturity
groupings based on the weighted-average contractual maturities of
underlying collateral. The mortgage-backed securities may mature earlier
than their weighted-average contractual maturities because of principal
prepayments.
(continued)
32
<PAGE>
GULF WEST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(4) SECURITIES AVAILABLE FOR SALE, CONTINUED
Securities sales transactions are summarized as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Principal received from sales .............................. $ 3,000 19,582 9,478
===== ====== =====
Gross gains................................................. 101 237 -
Gross loss.................................................. - - 10
-------- -------- ------
Net gain (loss)............................................. $ 101 237 (10)
====== ====== ======
</TABLE>
Gulf West had pledged securities with book values as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------
1998 1997
---- ----
<S> <C> <C>
Security for public funds................................... $ 8,922,000 3,622,000
Treasury tax deposits....................................... 307,000 498,000
As bankruptcy trustee....................................... $ 4,056,110 4,030,000
========= =========
</TABLE>
(5) LOANS
The components of loans was as follows (in thousands):
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------
1998 1997
---- ----
<S> <C> <C>
Commercial............................................................... $ 30,102 19,752
Commercial real estate................................................... 125,089 72,396
Residential real estate.................................................. 43,427 18,966
Consumer................................................................. 12,496 13,177
-------- -------
Subtotal.............................................................. 211,114 124,291
Net deferred loan fees, premiums and discounts........................... (70) (172)
Allowance for loan losses................................................ (2,436) (1,564)
-------- --------
$ 208,608 122,555
======= =======
</TABLE>
An analysis of the change in the allowance for loan losses follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance at January 1................................................. $ 1,564 1,184 830
----- ----- ------
Loans charged off.................................................... (183) (96) (54)
Recoveries........................................................... 87 39 7
------ ------ -------
Net loans charged off............................................. (96) (57) (47)
Provision from acquisition of Citizens National Bank and Trust....... 528 - -
Provision for loan losses............................................ 440 437 401
------ ------ -----
Balance at December 31............................................... $ 2,436 1,564 1,184
===== ===== =====
</TABLE>
(continued)
33
<PAGE>
GULF WEST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(5) LOANS, CONTINUED
Impaired loans were as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance at end of year............................................. $ - 489 494
Average balance during year........................................ 243 492 501
Total related allowance for losses................................. - 100 100
Interest income recognized on impaired loans....................... - 38 52
===== === ===
</TABLE>
CREDIT RISK AND CREDIT LOSSES. A credit risk concentration results when Gulf
West has a significant credit exposure to an individual or a group
engaged in similar activities or having similar economic characteristics
that would cause their ability to meet contractual obligations to be
similarly affected by changes in economic or other conditions.
Most of Gulf West's business activity is with customers located within
Pinellas, Pasco and Hillsborough Counties, Florida. The loan portfolio is
diversified among individuals and types of industries. Loans are expected
to be repaid from cash flow or proceeds from the sale of selected assets
of the borrowers. The amount of collateral obtained upon extension of
credit is based on Gulf West's credit evaluation of the customer.
Collateral primarily includes accounts receivable, inventory, property
and equipment, income-producing commercial properties and residential
homes.
LOANS TO RELATED PARTIES. The aggregate amount of loans owed to Gulf West by
its executive and senior officers, directors, and their related entities
at December 31, 1998 and 1997 was approximately $2,041,000 and
$1,105,000, respectively. The loans outstanding as of December 31, 1998
were made up of $1,426,000 of mortgage loans and $615,000 of various
other types of loans. These loans have been made on substantially the
same terms, including collateral, as those prevailing at the time for
comparable transactions with unrelated persons and do not involve more
than normal risk of collectibility.
(6) PREMISES AND EQUIPMENT
A summary of premises and equipment follows (in thousands):
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------
1998 1997
---- ----
<S> <C> <C>
Land..................................................................... $ 3,637 1,800
Buildings and leasehold improvements..................................... 5,546 4,125
Furniture, fixtures and equipment........................................ 4,657 3,692
------ -----
Total, at cost....................................................... 13,840 9,617
Less accumulated depreciation............................................ (3,862) (2,574)
------ -----
$ 9,978 7,043
====== =====
</TABLE>
(continued)
34
<PAGE>
GULF WEST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(6) PREMISES AND EQUIPMENT, CONTINUED
Gulf West leases facilities and certain equipment under operating leases
with noncancellable terms. Rent expense amounted to approximately
$558,000, $388,000 and $248,000 for the years ended December 31, 1998,
1997 and 1996, respectively. A summary of the operating lease
commitments at December 31, 1998 follows (in thousands):
YEAR ENDING
DECEMBER 31, AMOUNT
------------ ------
1999........................................ $ 611
2000........................................ 617
2001........................................ 564
2002........................................ 538
2003........................................ 509
Thereafter.................................. 2,097
-----
$ 4,936
=====
(7) LOAN SERVICING
Loans serviced for others are not included in the accompanying consolidated
balance sheets. The unpaid principal balances of these loans are
summarized as follows (in thousands):
AT DECEMBER 31,
------------------
1998 1997
---- ----
Loan portfolios serviced for:
FNMA............................. $ 11,223 15,210
FHLMC............................ 2,155 3,765
Other investors.................. 3,605 3,633
------ ------
$ 16,983 22,608
====== ======
Custodial balances maintained in connection
with loans serviced for others.......... $ 502 388
======== =======
(8) DEPOSITS
The aggregate amount of certificates of deposit with a minimum denomination
of $100,000 was approximately $35,393,000 and $20,503,000 at December
31, 1998 and 1997, respectively.
A schedule of maturities for certificate accounts follows (in thousands):
AT DECEMBER 31,
YEAR ENDING ---------------
DECEMBER 31, 1998
------------ ----
1999........................................ $ 92,070
2000 and 2001............................... 28,480
2002 and 2003............................... 7,361
Thereafter.................................. 3
-------
$ 127,914
=======
(continued)
35
<PAGE>
GULF WEST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(9) OTHER BORROWINGS
Securities sold under reverse repurchase agreements were delivered to the
broker-dealers who arranged the transactions. Securities
collateralizing customer reverse repurchase agreements are held by a
third party. The agreements at December 31, 1998 mature within three
months. Information concerning securities sold under agreements to
repurchase is summarized as follows ($ in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Average balance during the year............................... $ 14,113 8,646 5,447
Average interest rate during the year......................... 5.33% 5.25% 4.88%
Maximum month-end balance during the year..................... $ 18,644 18,237 12,547
</TABLE>
The average rate was determined by dividing the total interest paid by the
average outstanding borrowings.
Securities pledged as collateral for these agreements are as follows (in
thousands):
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------
1998
----
<S> <C>
Carrying value, at estimated fair value........................... $ 17,439
======
</TABLE>
At December 31, 1998 and 1997, Gulf West had six variable-rate lines of
credit from other financial institutions, totaling $20,500,000 and
$12,500,000, respectively. At December 31, 1998 and 1997, borrowings
against these lines totaled $0 and $2,000,000, respectively.
(10) INCOME TAXES
The consolidated provision for income taxes consisted of the following (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current:
Federal...................................................... $ 962 751 278
State........................................................ 127 86 18
------ ---- ---
Total current............................................ 1,089 837 296
----- --- ---
Deferred:
Federal...................................................... 77 (156) (102)
State........................................................ 13 (27) (17)
------- ---- ---
Total deferred........................................... 90 (183) (119)
------- --- ---
Total income taxes....................................... $ 1,179 654 177
===== === ===
</TABLE>
(continued)
36
<PAGE>
GULF WEST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(10) INCOME TAXES, CONTINUED
The provision for income taxes is different from that computed by applying
the federal statutory rate of 34% as indicated in the following analysis
(dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1998 1997 1996
----------------- ------ -------- ------ --------
% OF % OF % OF
PRETAX PRETAX PRETAX
AMOUNT EARNINGS AMOUNT EARNINGS AMOUNT EARNINGS
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Tax provision at statutory rate....... $ 1,258 34.0% $ 649 34.0% $ 167 34.0%
Increase (reduction) in taxes
resulting from:
State taxes, net of federal income
tax benefit.................. 92 2.5 39 2.1 18 3.7
Tax-exempt income............... (226) (6.1) (30) (1.6) (17) (3.5)
Other, net...................... 55 1.5 (4) (.2) 9 1.8
------- ---- ---- ----- ---- ----
Income tax provision............ $ 1,179 31.9% $ 654 34.3% $ 177 36.0%
===== ==== === ==== === ====
</TABLE>
The tax effects of each type of item that gives rise to deferred taxes are
as follows (in thousands):
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses............................................................. $ 799 489
Interest income from loans on nonaccrual status....................................... 13 2
Deferred compensation................................................................. 140 101
--- ---
Total gross deferred tax assets................................................. 952 592
--- ---
Deferred tax liabilities:
Net unrealized gain on securities available for sale.................................. 232 112
Accumulated depreciation.............................................................. 308 143
Purchase accounting adjustments, net.................................................. 282 -
Prepaid expenses...................................................................... 12 9
---- ----
Total gross deferred tax liabilities............................................ 834 264
--- ---
Net deferred tax asset.......................................................... $ 118 328
=== ===
</TABLE>
(continued)
37
<PAGE>
GULF WEST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(11) FINANCIAL INSTRUMENTS
Gulf West 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 are commitments to extend
credit and standby letters of credit and may involve, to varying
degrees, elements of credit and interest-rate risk in excess of the
amount recognized in the balance sheet. The contract amounts of these
instruments reflect the extent of involvement Gulf West has in these
financial instruments.
Gulf West's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend
credit and standby letters of credit is represented by the contractual
amount of those instruments. Gulf West uses the same credit policies
in making commitments as it does for on-balance-sheet instruments.
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 some of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. Gulf West evaluates each customer's credit worthiness on
a case-by-case basis. The amount of collateral obtained if deemed
necessary by Gulf West upon extension of credit is based on
management's credit evaluation of the counterparty. Standby letters of
credit and conditional commitments are issued by Gulf West to
guarantee the performance of a customer to a third party. The credit
risk involved in issuing letters of credit is essentially the same as
that included in extending loans to customers.
The estimated fair values of Gulf West's financial instruments were as
follows (in thousands):
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998 AT DECEMBER 31, 1997
-------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents....................... $ 27,699 27,699 $ 17,949 17,949
Securities available for sale................... 69,087 69,087 53,183 53,183
Loans receivable................................ 208,608 210,823 122,555 122,579
Accrued interest receivable..................... 1,646 1,646 1,119 1,119
Financial liabilities:
Deposit liabilities............................. 286,372 287,832 169,101 169,335
Short-term borrowings........................... 15,438 15,438 20,237 20,237
</TABLE>
A summary of the notional amounts of Gulf West's financial instruments,
which approximate fair value, with off-balance- sheet risk at December
31, 1998, follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Unfunded loan commitments at variable rates.................................. $ 7,079
Available lines of credit.................................................... $ 25,869
Standby letters of credit.................................................... $ 1,197
</TABLE>
(continued)
38
<PAGE>
GULF WEST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(12) STOCKHOLDERS' EQUITY
The Board of Directors declared 10% stock dividends on November 19, 1998
and on January 15, 1998 and a 5% stock dividend in 1996. All per share
amounts have been presented to reflect these stock dividends.
During the years ended December 31, 1998, 1997 and 1996, Gulf West held
securities classified as available-for-sale, which had unrealized gains
(losses) of $201,000, $115,000 and $66,000 after tax. The before tax
and after tax amount of these gains (losses), as well as the tax
(expense) benefit is summarized below (in thousands).
<TABLE>
<CAPTION>
TAX
BEFORE (EXPENSE) AFTER
TAX BENEFIT TAX
--- -------- ---
<S> <C> <C> <C>
DECEMBER 31, 1998:
Unrealized holding gains......................................... $ 423 (159) 264
Reclassification adjustment for gains included in net earnings... (101) 38 (63)
--- --- ---
$ 322 (121) 201
=== === ===
DECEMBER 31, 1997:
Unrealized holding losses........................................ (62) 29 (33)
Reclassification adjustment for gains included in net earnings... 237 (89) 148
--- --- ---
$ 175 (60) 115
=== === ===
DECEMBER 31, 1996:
Unrealized holding gains......................................... 122 (50) 72
Reclassification adjustment for gains included in net earnings... (10) 4 (6)
--- ---- ----
$ 112 (46) 66
=== === ===
</TABLE>
The net after tax amounts of these unrealized gains have been included under
the caption of comprehensive income in the accompanying statements of
stockholders' equity.
(continued)
39
<PAGE>
GULF WEST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(13) STOCK OPTION PLAN
Certain key employees and directors of Gulf West have options to purchase
shares of Gulf West's common stock under its stock option plan. Under the
plan, the total number of shares which may be issued shall not exceed 12%
(currently 797,246 shares) of Gulf West's total outstanding shares. At
December 31, 1998, 210,449 remain available for grant. All per share
amounts reflect the 10% stock dividends declared January 15, 1998 and
November 19, 1998. A summary of stock options transactions follows ($ in
thousands, except per share amounts):
<TABLE>
<CAPTION>
RANGE
OF PER WEIGHTED
SHARE AVERAGE AGGREGATE
NUMBER OF OPTION PER SHARE OPTION
SHARES PRICE PRICE PRICE
------ ----- ----- -----
<S> <C> <C> <C> <C>
Outstanding at December 31, 1995...................... 409,346 $ 2.41-3.54 2.72 1,112
Options granted....................................... 12,705 3.54 3.54 45
Options exercised..................................... (11,116) 2.41-3.14 2.67 (30)
Options forfeited..................................... (9,133) 2.52-3.54 3.37 (29)
-------- ------
Outstanding at December 31, 1996...................... 401,802 2.41-3.54 2.74 1,098
Options granted....................................... 80,390 4.23-4.54 4.43 356
Options exercised..................................... (6,770) 2.41-3.14 2.75 (19)
Options forfeited..................................... (4,764) 2.68 2.68 (13)
-------- ------
Outstanding at December 31, 1997...................... 470,658 2.65-3.89 3.02 1,422
Options granted....................................... 327,140 4.96-11.82 5.26 1,720
Options exercised..................................... (211,001) 2.41-4.96 2.88 (607)
Options forfeited..................................... - - - -
------- -----
Outstanding at December 31, 1998...................... 586,797 $ 2.41-11.82 4.32 2,535
======= ========== ==== =====
</TABLE>
The weighted-average remaining contractual life of the outstanding stock
options at December 31, 1998, 1997 and 1996 was eighty-eight months,
sixty-eight months and sixty-nine months, respectively.
These options are exercisable as follows:
<TABLE>
<CAPTION>
NUMBER WEIGHTED-AVERAGE
YEAR ENDING OF SHARES EXERCISE PRICE
----------- --------- --------------
<S> <C> <C>
1999................................................... 432,904 $ 3.97
2000................................................... 55,680 5.18
2001................................................... 53,031 5.28
2002................................................... 45,182 5.46
------- ----
586,797 $ 4.32
======= ====
</TABLE>
(continued)
40
<PAGE>
GULF WEST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(13) STOCK OPTION PLAN, CONTINUED
FASB Statement 123 requires proforma information regarding net earnings and
earnings per share. This proforma information has been determined as if
Gulf West had accounted for its employee stock options under the fair
value method of that statement and is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net earnings:
As reported................................................$ 2,521 1,255 314
===== ===== ===
Proforma...................................................$ 2,074 1,215 290
===== ===== ===
Basic earnings per share:
As reported................................................$ .38 .31 .08
======= ======= ===
Proforma ..................................................$ .31 .30 .07
======= ======= ===
Diluted earnings per share:
As reported................................................$ .37 .30 .08
======= ======= ===
Proforma...................................................$ .31 .29 .07
======= ======= ===
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate........................................... 6.0% 6.0% 6.0%
Dividend yield.................................................... - % - % - %
Expected volatility............................................... 20% - %* - %*
Expected life in years............................................ 10 10 10
</TABLE>
* There was no active market in 1997 and 1996.
(continued)
41
<PAGE>
GULF WEST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(14) EARNINGS PER SHARE ("EPS")
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations. Options to purchase
2,200 shares and 42,000 shares of common stock at $11.82 and $5.50 a
share in 1998 and 1997 were not included in the computation of diluted
EPS because the options exercise price was not less than the average
market price of the common shares. These options expire on June 17, 2008
and August 21, 2007, respectively ($ in thousands, except per share
amounts).
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------
1998 1997 1996
------------------------- ---------------------------- ---------------------------
WEIGHTED- PER WEIGHTED- PER WEIGHTED- PER
AVERAGE SHARE AVERAGE SHARE AVERAGE SHARE
EARNINGS SHARES AMOUNT EARNINGS SHARES AMOUNT EARNINGS SHARES AMOUNT
-------- ------ ------ -------- ------ ------ -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net earnings
available to
common
stockholders...... $ 2,521 6,603,587 $ .38 $ 1,255 4,037,359 $ .31 314 3,989,731 $ .08
=== === ===
Effect of dilutive
securities-
Incremental shares
from assumed
exercise of
options .......... 177,379 103,950 85,423
--------- --------- ---------
Diluted EPS:
Net earnings
available to
common
stockholders
and assumed
conversions....... $ 2,521 6,780,966 $ .37 $ 1,255 4,141,309 $ .30 $ 314 4,075,154 $ .08
===== ========= === ===== ========= === === ========= ===
</TABLE>
(15) REGULATORY MATTERS
Mercantile and Gulf West are subject to various regulatory capital
requirements administered by the various 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 Gulf West's
financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, Mercantile must meet
specific capital guidelines that involve quantitative measures of
Mercantile's assets, liabilities, and certain off-balance-sheet items
as calculated under regulatory accounting practices. Mercantile's
capital amounts and classification are also subject to qualitative
judgements by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require Mercantile to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier I capital (as defined in the
regulations) to risk- weighted assets (as defined), and of Tier I
capital (as defined) to average assets (as defined). Management
believes, as of December 31, 1998, that Mercantile meets all capital
adequacy requirements to which it is subject.
(continued)
42
<PAGE>
GULF WEST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(15) REGULATORY MATTERS, CONTINUED
As of December 31, 1998, the most recent notification from the State and
Federal regulators categorized Mercantile as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as
well capitalized, Mercantile must maintain minimum total risk-based,
Tier I risk-based, and Tier I leverage ratios as set forth in the table
below. There are no conditions or events since that notification that
management believes have changed Mercantile's category.
Mercantile's actual capital amounts and ratios are also presented in the
table.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES: ACTION PROVISIONS:
--------------------- -------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C>
AS OF DECEMBER 31, 1998:
Total capital (to Risk-
Weighted Assets).......... $ 28,340 12.6% $ 17,965 8.0% $ 22,456 10.0%
Tier I Capital (to Risk-
Weighted Assets).......... 25,904 11.5 8,979 4.0 13,468 6.0
Tier I Capital
(to Average Assets)....... 25,904 8.1 12,856 4.0 16,069 5.0
AS OF DECEMBER 31, 1997:
Total capital (to Risk-
Weighted Assets).......... $ 15,458 11.3% $ 10,922 8.0% $ 13,652 10.0%
Tier I Capital (to Risk-
Weighted Assets).......... 13,894 10.2 5,461 4.0 8,191 6.0
Tier I Capital
(to Average Assets)....... 13,894 7.5 7,397 4.0 9,246 5.0
</TABLE>
(16) PROFIT SHARING PLAN
Gulf West sponsors a Section 401(k) profit sharing plan. The profit sharing
plan is available to all employees electing to participate after
meeting certain length-of-service requirements. Gulf West's
contributions to the profit sharing plan are comprised of two
components: a guaranteed match and a discretionary match. Expense
relating to Gulf West's contributions to the profit sharing plan
included in the accompanying consolidated statements of earnings was
approximately $89,000, $63,000 and $49,000 for the years ended December
31, 1998, 1997 and 1996, respectively.
(17) DEFERRED COMPENSATION PLANS
Gulf West has deferred compensation agreements with certain officers. The
terms of the agreements provide for the payments of specified benefits
to these participants upon severance or retirement or their
beneficiaries in the event of death of the participant while employed
by Gulf West or while receiving benefits. Gulf West is accruing the
present value of the future benefits over the terms of the agreements.
The expense of the deferred compensation plans included in the
accompanying consolidated statements of earnings was approximately
$111,000, $96,000 and $76,000 for the years ended December 31, 1998,
1997 and 1996, respectively.
(continued)
43
<PAGE>
GULF WEST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(18) PARENT COMPANY ONLY FINANCIAL STATEMENTS
Condensed financial statements of the Holding Company are presented below.
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents with subsidiary........................................... $ 581 152
Investments in wholly-owned subsidiaries............................................ 27,980 14,138
Other assets........................................................................ 405 251
------- -------
Total........................................................................... $ 28,966 14,541
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities................................................................... 2 -
Stockholders' equity................................................................ 28,964 14,541
------ ------
Total........................................................................... $ 28,966 14,541
====== ======
</TABLE>
CONDENSED STATEMENTS OF EARNINGS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues ............................................................ $ - - -
Expenses ............................................................ 269 62 25
----- ------ ---
Loss before earnings of subsidiaries and income tax benefit......... (269) (62) (25)
Income tax benefit...................................................... (94) (24) -
Earnings of subsidiaries................................................ 2,696 1,293 339
----- ----- ---
Net earnings........................................................ $ 2,521 1,255 314
===== ===== ===
</TABLE>
(continued)
44
<PAGE>
GULF WEST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(18) PARENT COMPANY ONLY FINANCIAL STATEMENTS, CONTINUED
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings........................................................ $ 2,521 1,255 314
Adjustments to reconcile net earnings to net cash used in
operating activities:
Equity in undistributed earnings of subsidiaries................ (2,696) (1,293) (339)
Net (increase) decrease in other assets......................... (154) (82) 12
Decrease in other liabilities................................... (2) - -
------ ------ -------
Net cash used in operating activities....................... (331) (120) (13)
------ ------ -------
Cash flows from investing activities-
Investment in subsidiaries.......................................... (167) (62) (3,082)
------- ------ -----
Net cash used in investing activities....................... (167) (62) (3,082)
------- ------ -----
Cash flows from financing activities:
Net proceeds from issuance of common stock.......................... 931 58 56
Cash dividends for fractional shares................................ (4) - -
--------- -------- --------
Net cash provided by financing activities................... 927 58 56
-------- ------- -------
Net increase (decrease) in cash and cash equivalents.................... 429 (124) (3,039)
Cash and cash equivalents, beginning of year............................ 152 276 3,315
------ ------ -----
Cash and cash equivalents, end of year.................................. $ 581 152 276
====== ====== ======
</TABLE>
(19) YEAR 2000 ISSUES
Gulf West is acutely aware of the many areas affected by the Year 2000
computer issue, as addressed by the Federal Financial Institutions
Examination Council ("FFIEC") in its interagency statement which
provided an outline for institutions to effectively manage the Year
2000 challenges. A Year 2000 plan has been approved by the Board of
Directors which includes multiple phases, tasks to be completed, and
target dates for completion. Issues addressed therein include
awareness, assessment, renovation, validation, implementation, testing,
and contingency planning.
Gulf West has formed a Year 2000 committee that is charged with the
oversight of completing the Year 2000 project on a timely basis. Gulf
West has completed its awareness, assessment and renovation phases and
is actively involved in validating and implementing its plan. At the
present time, Gulf West has substantially completed its testing phase,
the results of which indicate that Gulf West's internal systems appear
to be Year 2000 ready. Since it routinely upgrades and purchases
technologically advanced software and hardware on a continual basis,
Gulf West has determined that the cost of making modifications to
correct any Year 2000 issues will not materially affect reported
operating results.
(continued)
45
<PAGE>
GULF WEST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(19) YEAR 2000 ISSUES, CONTINUED
Gulf West's vendors and suppliers have been contacted for written
confirmation of their product readiness for Year 2000 compliance.
Negative or deficient responses are analyzed and periodically reviewed
to prescribe timely actions within Gulf West's contingency planning.
Gulf West's main service provider has completed testing of its mission
critical application software and item processing software; the test
results, which have been documented and validated, are deemed to be
Year 2000 compliant. FFIEC guidance on testing Year 2000 compliance of
service providers states that proxy tests are acceptable compliance
tests. In proxy testing, the service provider tests with a
representative sample of financial institutions that use a particular
service, with the results of such testing shared with all similarly
situated clients of the service provider. Gulf West has authorized the
acceptance of proxy testing since the proxy tests have been conducted
with financial institutions that are similar in type and complexity to
its own, using the same version of the Year 2000 ready software and the
same hardware and operating systems.
Gulf West also recognizes the importance of determining that its borrowers
are facing the Year 2000 problem in a timely manner to avoid
deterioration of the loan portfolio solely due to this issue. All
material relationships have been identified and questionnaires have
been completed to assess the inherent risks. Deposit customers have
received statement stuffers and informational material in this regard.
Gulf West plans to work on a one-on-one basis with any borrower who has
been identified as having high Year 2000 risk exposure.
Accordingly, management does not believe that Gulf West has incurred or
will incur material costs associated with the Year 2000 issue. Yet,
there can be no assurances that all hardware and software that Gulf
West will use will be Year 2000 compliant. Management cannot predict
the amount of financial difficulties it may incur due to customers and
vendors inability to perform according to their agreements with Gulf
West or the effects that other third parties may cause as a result of
this issue. Therefore, there can be no assurance that the failure or
delay of others to address the issue or that the costs involved in such
process will not have a material adverse effect on Gulf West's
business, financial condition, and results of operations.
Gulf West's contingency plans relative to Year 2000 issues have been
formulated. Based on testing results to date (as noted above), Gulf
West's mission critical systems have been deemed to be Year 2000
compliant and, therefore a contingency plan has not been developed with
respect to those systems. With regards to non-mission critical internal
systems, Gulf West's contingency plans are to replace those systems
that test as being noncompliant. Alternatively, some systems could be
handled manually on an interim basis. Should outside service providers
not be able to provide compliant systems, Gulf West will terminate
those relationships and transfer to other vendors. It is anticipated
that Gulf West's deposit customers will have increased demands for cash
in the latter part of 1999 and correspondingly Gulf West will maintain
higher liquidity levels.
46
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Gulf West Banks, Inc.
St. Petersburg, Florida:
We have audited the accompanying consolidated balance sheets of Gulf West
Banks, Inc. and Subsidiaries ("Gulf West") at December 31, 1998 and 1997, and
the related consolidated statements of earnings, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1998.
These financial statements are the responsibility of Gulf West's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Gulf West at
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ HACKER, JOHNSON, COHEN & GRIEB PA
Tampa, Florida
January 15, 1999
47
<PAGE>
RESPONSIBILITIES FOR FINANCIAL REPORTING
To Our Stockholders:
Gulf West Banks, Inc. has prepared and is responsible for the following
consolidated financial statements. The financial statements were prepared in
conformity with generally accepted accounting principles in the United States.
Other financial information in this Annual Report is consistent with the
financial statements.
Management maintains a system of internal control designed to provide
reasonable, but not absolute, assurance that we are meeting our responsibility
for the integrity and objectivity of the financial statements. This control
system includes:
- subsidiary reporting, including budget analysis, that provides
reasonable assurance that errors or irregularities that could be
material to the consolidated financial statements would be detected
promptly
- a corporate code of professional ethics monitored regularly
- an internal audit function
- continuing review and evaluation of the control environment.
The audit report of Hacker, Johnson, Cohen & Grieb PA, independent public
accountants, follows the consolidated financial statements.
The Board of Directors pursues its oversight role for these financial
statements through its Audit Committee, composed solely of directors who are
neither officers nor employees of Gulf West Banks, Inc. The Audit Committee
meets periodically with the independent public accountants and internal
auditors, with and without the presence of management, to review their
activities and to discuss internal accounting control, auditing and financial
reporting matters.
/s/ Gordon W. Campbell
- ----------------------
Gordon W. Campbell
Chairman and President
/s/ Barry K. Miller
- ----------------------
Barry K. Miller
Secretary/Treasurer
48
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item regarding the Company's directors and
executive officers is incorporated herein by reference to the information set
forth under the caption "MANAGEMENT" in the Company's definitive Proxy Statement
for the 1999 Annual Meeting of Shareholders, as filed with the Commission on
March 16, 1999 (the "1999 Proxy Statement"). The information required by this
Item regarding compliance with Section 16(a) of the Securities Exchange Act of
1934 is incorporated herein by reference to the information set forth under the
caption "EXECUTIVE COMPENSATION -- Section 16(a) Beneficial Ownership Reporting
Compliance" in the Company's 1999 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated herein by reference
to the information set forth under the caption "EXECUTIVE COMPENSATION" in the
Company's 1999 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated herein by reference
to the information set forth under the caption "SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT" in the 1999 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Mercantile has extended loans to various officers and directors of
Mercantile and Gulf West. All of these loans were made in the ordinary course of
business, were made on substantially the same terms (including interest rates
and collateral) as those prevailing at the time for comparable transactions with
other persons, and did not involve more than the normal risk of collectability
or present other unfavorable features.
49
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this Annual Report on Form 10-K:
(1) Financial Statements included in Form 10-K
(2) All schedules have been included as an exhibit to this Annual
Report on Form 10-K or the information is included elsewhere in the
financial statements or notes thereto.
(3) The exhibits required to be filed herewith are listed on the
"Exhibit Index" commencing on page 53 herein.
(b) No reports on Form 8-K were filed by the Company during the quarter
ended December 31, 1998.
50
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized:
GULF WEST BANKS, INC.
By: /S/ GORDON W. CAMPBELL
--------------------------------------
Gordon W. Campbell, President
Date: February 18, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
GORDON W. CAMPBELL President, Chairman of the Board February 18, 1999
- -----------------------------------
Gordon W. Campbell
/S/ BARRY K. MILLER Secretary/ Treasurer (principal February 18, 1999
- ----------------------------------- financial officer and principal
Barry K. Miller accounting officer)
- ----------------------------------- Director
Henry W. Hanff, M.D.
/S/ THOMAS M. HARRIS Director February 18, 1999
- -----------------------------------
Thomas M. Harris
/S/ PANDURANG V. KAMAT, M.D. Director February 19, 1999
- -----------------------------------
Pandurang V. Kamat, M.D.
/S/ ALGIS KONCIUS Director February 18, 1999
- -----------------------------------
Algis Koncius
/S/ LOUIS P. ORTIZ Director February 18, 1999
- -----------------------------------
Louis P. Ortiz
/S/ JOHN C. PETAGNA, JR. Director February 18, 1999
- -----------------------------------
John C. Petagna, Jr.
/S/ P.N. RISSER, III Director February 18, 1999
- -----------------------------------
P. N. Risser, III
/S/ ROSS E. ROEDER Director February 18, 1999
- -----------------------------------
Ross E. Roeder
</TABLE>
51
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
<S> <C>
2* Amended and Restated Agreement and Plan of Merger by and among
Citizens National Bank and Trust Company, Inc., Gulf West Banks, Inc.
and Mercantile Bank
3.1* Articles of Incorporation of Gulf West Banks, Inc.
3.2* Bylaws of Gulf West Banks, Inc.
10.1* Form of Registration Rights Agreement with Gordon W. Campbell and
John Wm. Galbraith
10.2* Salary Continuation Agreements with Gordon W. Campbell, Barry K.
Miller, and Robert A. Blakley
10.3* Employment Contract with Gordon W. Campbell
10.4* Stock Option Plan
10.5*** Agreement to transfer fiduciary accounts to SunTrust Bank, Nature Coast
11** Statement regarding computation of per share earnings
21* Subsidiaries of Registrant
23.1 Consent of Hacker, Johnson, Cohen & Grieb PA
27 Financial Data Schedule (for SEC use only)
</TABLE>
*incorporated by reference to the exhibits included in Amendment No. 2 to
Gulf West's S-4 Registration Statement, as filed with the Securities and
Exchange Commission on December 4, 1997 (Registration No. 333-37307).
**incorporated by reference to Note 1 of the Consolidated Financial
Statements of Gulf West Banks, Inc. and Subsidiaries, as contained in this
Annual Report on Form 10-K.
***incorporated by reference to the exhibits included in Gulf West's Form
10-Q for the quarter ended March 31, 1998, as filed with the Securities and
Exchange Commission on May 8, 1998.
ACCOUNTANTS' CONSENT
The Board of Directors
Gulf West Banks, Inc.
St. Petersburg, Florida:
We consent to the use of our report dated January 15, 1999 relating to the
consolidated balance sheets as of December 31, 1998 and 1997 and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1998 of Gulf West
Banks, Inc., in the Annual Report for 1998 on Form 10-K of Gulf West Banks, Inc.
/s/ HACKER, JOHNSON, COHEN & GRIEB PA
HACKER, JOHNSON, COHEN & GRIEB PA
Tampa, Florida
February 19, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from Form 10-K
for the year ended December 31, 1998 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 16,045
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 11,654
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 69,087
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 211,044
<ALLOWANCE> 2,436
<TOTAL-ASSETS> 332,174
<DEPOSITS> 286,372
<SHORT-TERM> 15,438
<LIABILITIES-OTHER> 1,400
<LONG-TERM> 0
0
0
<COMMON> 6,644
<OTHER-SE> 22,320
<TOTAL-LIABILITIES-AND-EQUITY> 332,174
<INTEREST-LOAN> 15,395
<INTEREST-INVEST> 4,818
<INTEREST-OTHER> 805
<INTEREST-TOTAL> 21,018
<INTEREST-DEPOSIT> 8,850
<INTEREST-EXPENSE> 9,602
<INTEREST-INCOME-NET> 11,416
<LOAN-LOSSES> 440
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 10,132<F1>
<INCOME-PRETAX> 3,700
<INCOME-PRE-EXTRAORDINARY> 3,700
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,521
<EPS-PRIMARY> .38
<EPS-DILUTED> .37
<YIELD-ACTUAL> 4.25
<LOANS-NON> 1,108
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,092<F2>
<CHARGE-OFFS> (183)
<RECOVERIES> 87
<ALLOWANCE-CLOSE> 2,436
<ALLOWANCE-DOMESTIC> 2,436
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
(1) Other expense includes: salaries and employee benefits of $5,605,
occupancy of $1,958, data processing of $608, advertising of $249,
stationery and supplies of $300 and other expenses which totaled $1,412.
(2) Includes $528 allowance acquired in Citizens Acquisition.
</FN>
</TABLE>
