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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________________ to ________________________.
Commission file number: 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, 2000, was $31,305,075. The number of shares of
the registrant's common stock outstanding as of January 31, 2000, was 7,006,595.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's definitive Proxy Statement relating to the registrant's 2000
annual meeting of shareholders to be held on April 20, 2000, 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 Mercantile Bank Leasing, Inc. ("MBL"), 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. MBL 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 MBL. 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." MBL is an
equipment leasing company that arranges financing for a variety of equipment for
all types of businesses. MBL 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 and the Gramm-Leach-Bliley Act of 1999,
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 2,477,475 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, night depository facilities,
telephone banking services and internet banking services. 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.
2
<PAGE>
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,
1999, commercial and consumer loans accounted for approximately 84.6% and 9.2%,
respectively, of Mercantile's loan portfolio. Loans on residential real estate
accounted for the remaining 11.2% 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 STAR and CIRRUS networks.
Mercantile's data processing is handled by an outside service bureau --
FiServ, Inc. of Atlanta, Georgia. However, this function will be performed
internally starting in the second quarter of 2000. Mercantile handles the item
processing function internally. 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, 1999, Mercantile paid $701,000 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 1999 was 896,000. Hillsborough County
had a residential population of 834,000 as of the 1990 census and the estimated
1999 population was 956,000. Pasco County had a residential population of
281,000 as of the 1990 census and the estimated 1999 population was 326,000. 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 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.
3
<PAGE>
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) 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 depends 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 through 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, most of Mercantile's directors 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.
4
<PAGE>
There are approximately 30 commercial banks and savings and loan
associations with 289 branch offices in Pinellas County. In Hillsborough County
there are approximately 33 such institutions with 200 offices, and in Pasco
County, there are approximately 20 such institutions with 89 offices. 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, 1999, Gulf West employed 181 employees of which 161
were full-time and 20 were part-time, including four senior 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, stock purchase 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 Company'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. MBL 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 16,650 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, the item processing department, the human resources
department and the accounting department.
5
<PAGE>
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". The high and low bids for
the Company's common stock on the Nasdaq National Market System from March 25,
1998 through December 31,1999 were as follows :
QUARTER ENDED HIGH LOW
------------- ---- ---
March 31, 1998 $ 11.255 $ 9.740
June 30, 1998 $ 12.338 $ 9.308
September 30, 1998 $ 11.255 $ 7.576
December 31, 1998 $ 9.762 $ 6.493
March 31, 1999 $ 8.810 $ 7.619
June 30, 1999 $ 8.333 $ 7.619
September 30, 1999 $ 9.524 $ 7.857
December 31, 1999 $ 9.750 $ 8.563
The Company paid cash dividends of $0.03 per share in 1995, a 5% stock
dividend in 1996, a 10% stock dividend in February 1998, a 10% stock dividend in
December 1998 and a 5% stock dividend in November 1999. (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 21, 2000, the Company had approximately 1,100 holders of
record of common stock. Certain of the Company's shares are held in "nominee" or
"street" name and, accordingly, the exact number of owners of such shares is not
known.
6
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- ------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE FIGURES)
<S> <C> <C> <C> <C> <C>
Cash and due from banks ...................... $ 11,924 16,045 9,046 8,631 5,555
Federal funds sold and securities purchased
under agreements to resell ............... 12,323 11,654 8,903 3,356 5,600
Investment securities ........................ 77,857 69,087 53,183 40,231 33,489
Loans, net ................................... 283,225 208,608 122,555 112,979 73,948
All other assets ............................. 31,273 26,780 11,161 9,617 7,344
-------- -------- -------- -------- --------
Total assets ............................. $416,602 332,174 204,848 174,814 125,936
======== ======== ======== ======== ========
Deposits ..................................... 356,567 286,372 169,101 149,335 109,192
Other borrowings ............................. 27,417 15,438 20,237 12,047 3,799
All other liabilities ........................ 2,284 1,400 969 332 431
Stockholders' equity ......................... 30,334 28,964 14,541 13,100 12,514
-------- -------- -------- -------- --------
Total liabilities and stockholders' equity $416,602 332,174 204,848 174,814 125,936
======== ======== ======== ======== ========
YEAR ENDED DECEMBER 31,
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
Total interest income ........................ $ 26,854 21,018 14,039 10,844 8,447
Total interest expense ....................... 12,455 9,602 6,026 4,659 3,736
-------- -------- -------- -------- --------
Net interest income .......................... 14,399 11,416 8,013 6,185 4,711
Provision for loan losses .................... 670 440 437 401 240
-------- -------- -------- -------- --------
Net interest income after provision
for loan losses .......................... 13,729 10,976 7,576 5,784 4,471
Noninterest income ........................... 3,478 2,856 1,987 1,031 849
Noninterest expenses ......................... 12,773 10,132 7,654 6,324 4,181
-------- -------- -------- -------- --------
Earnings before income taxes ................. 4,434 3,700 1,909 491 1,139
Income taxes ................................. 1,364 1,179 654 177 431
-------- -------- -------- -------- --------
Net earnings ................................. $ 3,070 2,521 1,255 314 708
======== ======== ======== ======== ========
Earnings per share (1):
Basic .................................... $ 0.44 0.36 0.30 0.08 0.20
======= ======== ======== ======== ========
Diluted .................................. $ 0.43 0.35 0.29 0.08 0.19
======== ======== ======== ======== ========
Without SAIF Assessment**
Net earnings ................................. $ 3,070 2,521 1,255 608 708
======== ======== ======== ======== ========
Earnings per common share - basic (1) ........ $ 0.44 0.36 0.30 0.15 0.20
======== ======== ======== ======== ========
Earnings per common share - diluted (1) ...... $ 0.43 0.35 0.29 0.14 0.19
======== ======== ======== ======== ========
</TABLE>
** SAIF assessment was paid in 1996
(continued)
7
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE
YEAR ENDED DECEMBER 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE FIGURES)
<S> <C> <C> <C> <C> <C>
FOR THE PERIOD:
Return on average assets .................. 0.79% 0.84% 0.69% 0.22% 0.63%
Return on average equity .................. 10.35% 9.22% 9.18% 2.45% 6.93%
Average equity to average assets .......... 7.59% 9.15% 7.50% 8.87% 9.11%
Interest rate spread during the period (2) 3.66% 3.57% 4.02% 4.01% 3.99%
Net interest margin ....................... 4.12% 4.25% 4.84% 4.78% 4.71%
Noninterest expense to average assets ..... 3.27% 3.39% 4.20% 4.39% 3.73%
Dividend pay-out ratio .................... -- -- -- -- 0.16%
AT THE END OF THE PERIOD:
Ratio of average interest-earning assets to
average interest-bearing liabilities .. 1.13 1.19 1.22 1.21 1.19
Nonperforming loans, and foreclosed real
estate as a percentage of total assets 0.80% 0.43% 0.31% 0.46% 1.01%
Allowance for loan losses as a percentage
of total loans ........................ 1.00% 1.15% 1.26% 1.04% 1.11%
Allowance for loan losses as a percentage
of nonperforming loans ................ 96.15% 219.97% 245.53% 148.19% 107.37%
Total number of offices ................... 12 11 9 8 5
Full-service banking offices .............. 12 11 9 8 5
Total shares outstanding at
end of period (1) ..................... 7,006,595 6,975,902 4,246,869 4,225,720 4,166,935
Book value per share (1) .................. 4.33 4.15 3.42 3.10 3.01
</TABLE>
(1) All per share information is presented to reflect the two stock
dividends of 10% declared January 15, 1998 and November 19, 1998 and
the 5% stock dividends declared in 1996 and on October 21, 1999.
(2) Difference between weighted-average yield on all interest-earning assets
and weighted-average rate on all interest-bearing liabilities.
8
<PAGE>
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. The Holding Company also operates Mercantile Bank Leasing, Inc.
("MBL"). MBL is an equipment leasing company that arranges financing for a
variety of equipment for all types of businesses and is headquartered in Tampa.
The Holding Company's only business activities are the operations of Mercantile
and MBL. 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, telephone banking
services and internet banking services. 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, 1999, Gulf West had total consolidated assets of $416.6 million,
an increase of 25% over total assets of $332.2 million at December 31, 1998.
During the year ended December 31, 1999, net loans receivable increased $74.6
million or 36%. Gulf West's portfolio of investment securities increased to
$77.9 million as of December 31, 1999 from $69.1 million as of December 31,
1998. Mercantile's deposits increased to $356.6 million as of December 31, 1999
from $286.4 million as of December 31, 1998, a 25% increase. Gulf West had
consolidated net earnings of $3,070,000 or $.44 basic earnings per share ($.43
diluted earnings per share) for the year ended December 31, 1999 compared to
consolidated net earnings of $2,521,000 or $.36 basic earnings per share (.35
diluted earnings per share) for 1998.
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.
9
<PAGE>
On November 12, 1999 the Gramm-Leach-Bliley Act (the "Act") was enacted into
law. This financial services reform legislation does three fundamental things.
First, it repeals provisions of the Glass Steagall Act to permit commercial
banks to affiliate with investment banks. Second, it substantially modifies the
forty-three year old Bank Holding Company Act of 1956 to permit companies that
own commercial banks to engage in any type of financial activity. Finally, it
allows subsidiaries of banks to engage in a broad range of financial activities
that are not permitted for banks themselves. As a result of this new Act,
banking companies and other types of financial companies, for example,
securities, insurance and financial technology companies, will be able to
combine more readily. Besides these key items, the Act includes many other
important provisions including provisions regarding the privacy of customer
information; increased access by community banks to the Federal Home Loan Bank
System; and significant changes to the requirements imposed by the Community
Reinvestment Act. Pursuant to one of the provisions in the Act, Mercantile
applied for membership in the Federal Home Loan Bank of Atlanta and was approved
for membership on January 28, 2000. Management is evaluating the ramifications
of the Act for the Company, however there are no immediate plans to engage in
any of the activities newly authorized by the Act.
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 2.5 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 accounted for this transaction using the
purchase method of accounting.
YEAR 2000 COMPLIANCE
Gulf West's operating and financial systems have been found to be compliant; the
"Y2K Problem" has not adversely affected Gulf West's operations nor does
management expect that it will.
10
<PAGE>
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,
---------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonperforming (nonaccrual) loans:
Residential real estate loans ............................. $ 98 84 51 91 --
Commercial real estate .................................... 2,625 653 488 628 747
Commercial loans .......................................... 240 343 83 41 --
Consumer loans and other .................................. -- 28 15 39 26
------ ------ ------ ------ ------
Total nonperforming (nonaccrual) loans ................ 2,963 1,108 637 799 773
------ ------ ------ ------ ------
Total nonperforming loans to total assets ............. .71% .33% .31% .46% .61%
====== ====== ====== ====== ======
Foreclosed real estate:
Real estate acquired by foreclosure or deed
in lieu of foreclosure .................................. 353 309 -- -- 497
------ ------ ------ ------ ------
Total nonperforming loans and foreclosed real estate... $3,316 1,417 637 799 1,270
====== ====== ====== ====== ======
Total nonperforming and foreclosed real estate
to total assets .................................... .80% .43% .31% .46% 1.01%
====== ====== ====== ====== ======
</TABLE>
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,
--------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest income that would have been recognized $259 108 71 82 23
Interest income recognized .................... 216 63 51 66 15
---- ---- ---- ---- ----
$ 43 45 20 16 8
==== ==== ==== ==== ====
</TABLE>
11
<PAGE>
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,
--------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Average loans outstanding, net ........................... $ 264,010 174,476 116,148 87,000 65,747
========= ========= ========= ========= =========
Allowance at beginning of year ........................... 2,436 1,564 1,184 830 663
--------- --------- --------- --------- ---------
Charge-offs:
Commercial loans ...................................... (251) (92) (36) -- (41)
Consumer loans ........................................ (36) (91) (60) (54) (57)
Residential ........................................... (8) -- -- -- --
--------- --------- --------- --------- ---------
Total loans charged-off ............................. (295) (183) (96) (54) (98)
--------- --------- --------- --------- ---------
Recoveries ............................................... 38 87 39 7 25
--------- --------- --------- --------- ---------
Net charge-offs ..................................... (257) (96) (57) (47) (73)
--------- --------- --------- --------- ---------
Provision from acquisition of Citizens National Bank
and Trust ........................................... -- 528 -- -- --
--------- --------- --------- --------- ---------
Provision for loan losses charged to operating expenses 670 440 437 401 240
--------- --------- --------- --------- ---------
Allowance at end of year .............................. $ 2,849 2,436 1,564 1,184 830
========= ========= ========= ========= =========
Ratio of net charge-offs to average loans outstanding . .0973 .0550 .0491 .0540 .1100
========= ========= ========= ========= =========
Allowance as a percent of total loans ................. 1.00% 1.15% 1.26% 1.04% 1.11%
========= ========= ========= ========= =========
Total loans at end of year ............................ $ 286,109 211,114 124,291 114,065 74,654
========= ========= ========= ========= =========
</TABLE>
12
<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,
------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------------------- ------------------- ------------------ ------------------- -------------------
% 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 $ 714 13.9% $ 541 14.3% $ 328 15.9% $ 179 15.9% $ 136 19.5%
Commercial real
estate loans .. 1,864 70.7 1,616 59.3 985 58.2 782 55.4 447 37.2
Residential real
estate loans .. 114 11.2 140 20.6 63 15.3 67 19.4 120 33.4
Consumer loans .. 157 4.2 139 5.8 188 10.6 156 9.3 127 9.9
------ ---- ------ ----- ------ ----- ------ ----- ------ -----
Total allowance
for loan
losses .. $2,849 100.0% $2,436 100.0% $1,564 100.0% $1,184 100.0% $ 830 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
13
<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, 1999 and December 31, 1998, Mercantile has liquidity of
approximately $67.5 million and $74.9 million, or approximately 19.4% and 27.6%
of total deposits (net of secured deposits), respectively.
During the year ended December 31, 1999, 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, and proceeds from short term borrowings collateralized by investment
securities. Gulf West used its capital resources principally to purchase
investment securities, fund existing and continuing loan commitments and to
purchase participation interests in loans originated by other financial
institutions. At December 31, 1999, Gulf West had commitments to originate loans
totaling $10.9 million. Scheduled maturities of certificates of deposit during
the 12 months following December 31, 1999 totaled $136.3 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, 1999:
U.S. Treasury
securities ...... $ 1,002 6.31% $ 4,975 5.64% $ -- -- % $ -- --% $ 5,977 5.76%
U.S. agency
obligations ..... -- -- 4,840 6.04 6,835 5.99 -- -- 11,675 6.01
Corporate and other
obligations ..... 425 4.83 726 7.51 3,897 8.47 250 8.02 5,298 8.03
------- ------- ------- ------- -------
$ 1,427 5.88% $10,541 5.95% $10,732 6.86% $ 250 8.02% $22,950 6.41%
======= ==== ======= ==== ======= ==== ======= ==== ======= ====
Mortgage-backed
securities ................................................................................... 54,907 6.41%
-------
Total .......................................................................................... $77,857 6.41%
======= ====
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%
======= ====
</TABLE>
14
<PAGE>
REGULATORY CAPITAL REQUIREMENTS
Gulf West (on a consolidated basis) and Mercantile are subject to various
regulatory capital requirements administered by the federal and state
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 and Mercantile's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective actions, Gulf
West and Mercantile must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities and certain off-balance
sheet items as calculated under regulatory accounting practices. The
capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors. Prompt corrective action provisions are not applicable to bank
holding companies.
Quantitative measures established by regulation to ensure capital adequacy
require Gulf West and Mercantile to maintain minimum amounts and ratios
(set forth in the following table) of total and Tier I capital (as defined
in the regulations) to risk-weighted assets (as defined) and of Tier I
capital (as defined) to average assets (as defined). Management believes,
as of December 31, 1999 and 1998, that Gulf West and Mercantile met all
capital adequacy requirements to which they are subject.
As of December 31, 1999, the most recent notification from the Federal
Deposit Insurance Corporation categorized as well capitalized, institution
must maintain minimum total risk-based, Tier I risk-based and Tier I
leverage ratios as set forth in the following tables. There are no
conditions or events since the notification that management believes have
changed Mercantile's category. Gulf West's and Mercantile's actual capital
amounts and percentages as of December 31, 1999 and 1998 are also presented
in the table.
<TABLE>
<CAPTION>
MINIMUM TO BE WELL
CAPITALIZED UNDER
MINIMUM CAPITAL PROMPT CORRECTIVE
ACTUAL REQUIREMENT ACTION PROVISIONS
---------------- ---------------- --------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1999:
Total capital to Risk-Weighted Assets:
Gulf West ........................ $33,090 11.1 23,957 8.0% N/A N/A
Mercantile ....................... 32,098 10.7 24,021 8.0 30,026 10.0
Tier I Capital to Risk Weighted Assets:
Gulf West ........................ 30,241 10.1 12,217 4.0 N/A N/A
Mercantile ....................... 29,249 9.7 12,012 4.0 18,018 6.0
Tier I Capital to Average Assets:
Gulf West ........................ 30,241 7.4 16,324 4.0 N/A N/A
Mercantile ....................... 29,249 7.2 16,295 4.0 20,369 5.0
AS OF DECEMBER 31, 1998:
Total capital to Risk-Weighted Assets:
Gulf West ........................ 29,359 13.1 17,998 8.0 N/A N/A
Mercantile ....................... 28,340 12.6 17,965 8.0 22,456 10.0
Tier I Capital to Risk Weighted Assets:
Gulf West ........................ 26,923 12.0 9,004 4.0 N/A N/A
Mercantile ....................... 25,904 11.5 8,979 4.0 13,468 6.0
Tier I Capital to Average Assets:
Gulf West ........................ 26,923 8.3 12,959 4.0 N/A N/A
Mercantile ....................... 25,904 8.1 12,856 4.0 16,069 5.0
</TABLE>
15
<PAGE>
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.
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).
16
<PAGE>
Gulf West also maintains a 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, 1999, 6.1% 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 19.4%.
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 $178.3
million, representing 50% of total deposits at December 31, 1999. Management
anticipates that these accounts will increase and in the future comprise a
significant portion of its deposit base.
As of December 31, 1999, Gulf West's one-year negative interest-rate sensitivity
gap in dollars was $112 million. Although management believes that the
implementation of the foregoing strategies has reduced the potential adverse
effects of changes in interest rates on Gulf West's results of operations, any
substantial and prolonged increase in market rates of interest could have an
adverse impact on Gulf West's results of operations. As discussed above, on a
quarterly basis management performs an income simulation analysis to measure the
volatility of Gulf West's projected net interest income when subjected to 200
basis point interest rate shocks. As a result of this simulation analysis,
management believes that its present gap position is appropriate for the current
interest rate environment and that a negative gap will continue in the one year
time period.
17
<PAGE>
The following table sets forth certain information relating to Gulf West's
interest-earning assets and interest-bearing liabilities at December 31, 1999
that are estimated to mature or are scheduled to reprice within the period
shown. Since assets and liabilities within each interest-sensitive period may
not reprice by the same amount or at the same time, the following table may not
be reflective of changes in net interest income which would result from changes
in the general level of interest rates.
<TABLE>
<CAPTION>
MORE
THAN MORE
THREE THAN SIX MORE MORE
MONTHS MONTHS THAN ONE THAN FIVE
THREE TO SIX TO ONE YEAR TO YEARS AND
MONTHS MONTHS YEAR FIVE YEARS INSENSITIVE TOTAL
---------- ---------- --------- ---------- ----------- -----
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Loans (1),(2):
Adjustable rate .............. $ 2,979 1,433 2,936 6,720 301 14,369
Fixed rate ................... 320 363 64 355 19,185 20,287
Consumer and other loans ..... 70,589 9,435 6,434 125,225 39,770 251,453
--------- --------- --------- --------- --------- ---------
Total loans ............... 73,888 11,231 9,434 132,300 59,256 286,109
Investments (3),(4) ............ 12,323 174 11,594 23,776 42,313 90,180
--------- --------- --------- --------- --------- ---------
Total rate-sensitive assets 86,211 11,405 21,028 156,076 101,569 376,289
--------- --------- --------- --------- --------- ---------
Deposit accounts (5):
Savings and NOW .............. 33,660 -- -- -- 51,451 85,111
Money market ................. 32,938 -- -- -- 4,890 37,828
Time deposits ................ 39,334 38,346 58,665 41,861 12 178,218
--------- --------- --------- --------- --------- ---------
Total deposit accounts ......... 105,932 38,346 58,665 41,861 56,353 301,157
Other borrowings ............... 27,417 -- -- -- -- 27,417
--------- --------- --------- --------- --------- ---------
Total rate-sensitive
liabilities ........... 133,349 38,346 58,665 41,861 56,353 328,574
--------- --------- --------- --------- --------- ---------
Gap (repricing differences) .... $ (47,138) (26,941) (37,637) 114,215 45,216 47,715
========= ========= ========= ========= ========= =========
Cumulative GAP ................. $ (47,138) (74,079) (111,716) 2,499 47,715
========= ========= ========= =========
Cumulative GAP/total assets .... (11.31)% (17.78)% (26.82)% .60% 11.45%
========= ========= ========= ========= =========
</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, 1999.
<TABLE>
<CAPTION>
RESIDENTIAL
YEARS ENDING COMMERCIAL MORTGAGE CONSUMER
DECEMBER 31, LOANS LOANS LOANS TOTAL
- ------------ ---------- ----------- --------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
2000 ....................................... $ 24,513 1,889 3,521 29,923
2001 ....................................... 33,881 1,880 2,935 38,696
2002-2003 .................................. 20,284 1,917 3,353 25,554
2004-2005 .................................. 20,506 2,756 1,367 24,629
2006-2013 .................................. 109,579 9,413 798 119,790
Thereafter ................................. 33,112 14,270 135 47,517
-------- -------- -------- --------
Total ................................. $241,875 32,125 12,109 286,109
======== ======== ======== ========
</TABLE>
Of the $256,186 of loans due after 2000, 29% of such loans have fixed rates of
interest and 71% 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,
-------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Originations and purchases:
Commercial loans ...................... $ 25,799 23,066 12,102 12,543 8,030
Commercial real estate loans .......... 107,828 71,624 31,329 49,234 18,342
Residential real estate ............... 15,410 16,085 4,197 3,125 2,314
Consumer loans ........................ 8,271 11,046 11,692 9,689 8,979
--------- --------- --------- --------- ---------
Total loans originated and purchased 157,308 121,821 59,320 74,591 37,665
Loans acquired with purchase of Citizens .... -- 30,744 -- -- --
Principal reductions ........................ (82,313) (65,742) (49,094) (35,180) (27,070)
--------- --------- --------- --------- ---------
Increase in gross loans ............ $ 74,995 86,823 10,226 39,411 10,595
========= ========= ========= ========= =========
</TABLE>
19
<PAGE>
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,
------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------------------------------------------------------------------------------------------------
% 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 ........ $ 39,612 13.9% $ 30,102 14.3% $ 19,752 15.9% $ 18,169 15.9% $ 14,531 19.5%
Commercial
real estate ..... 202,263 70.7 125,089 59.3 72,396 58.2 63,207 55.4 27,772 37.2
Residential
real estate ..... 32,125 11.2 43,427 20.6 18,966 15.3 22,095 19.4 24,949 33.4
Consumer .......... 12,109 4.2 12,496 5.8 13,177 10.6 10,594 9.3 7,402 9.9
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans.... 286,109 100.0% 211,114 100.0% 124,291 100.0 114,065 100.0% 74,654 100.0%
Less:
Deferred loan
fees............ (35) (70) (172) (221) (134)
Allowance for
loan losses..... (2,849) (2,436) (1,564) (1,184) (830)
-------- -------- --------- --------- --------
Loans, net...... $ 283,225 $208,608 $ 122,555 $ 112,660 $ 73,690
========= ======== ========= ========= ========
</TABLE>
The following table shows the distribution of, and certain other information
relating to, deposit accounts by type:
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------
1999 1998
-----------------------------------------------
% OF % OF
AMOUNT DEPOSIT AMOUNT DEPOSIT
--------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Demand deposits............................ $ 55,410 15.5% $ 45,943 16.0%
Savings and NOW deposits................... 85,111 23.9 86,696 30.3
Money-market deposits...................... 37,828 10.7 25,819 9.0
Time deposits.............................. 178,218 49.9 127,914 44.7
-------- ------ --------- -----
Total deposits............................. $ 356,567 100.0% $ 286,372 100.0%
========= ====== ========= =====
</TABLE>
Jumbo certificates ($100,000 and over) mature as follows:
AT DECEMBER 31,
---------------
1999
----
(IN THOUSANDS)
Due three months or less.............................. $ 13,493
Due over three months to six months................... 11,220
Due over six months to one year....................... 16,083
Due over one year..................................... 8,879
--------
$ 49,675
The scheduled maturities of time deposits are as follows:
AT DECEMBER 31,
---------------
1999
----
(IN THOUSANDS)
Due in one year or less............................. $ 136,345
Due in more than one but less than three years...... 36,892
Due in more than three but less than five years..... 4,969
Due in over five years.............................. 12
----------
$ 178,218
==========
20
<PAGE>
The following table sets forth the net deposit flows of Gulf West during the
periods indicated (in thousands):
YEAR ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
Net increase before interest credited .... $58,857 42,120 13,848
Deposits assumed with Citizens acquisition -- 66,388 --
Net credited ............................. 11,338 8,763 5,918
------- ------- -------
Net deposit increase ................ $70,195 117,271 19,766
======= ======= =======
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>
1999 1998 1997
------------------- --------------------- ---------------------
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 ........... $ 86,707 1.94% $ 75,140 2.72% $ 40,267 3.09%
Money market deposits .............. 33,243 3.46 19,938 2.99 13,747 2.70
Time deposits ...................... 168,151 5.12 116,567 5.33 72,841 5.43
-------- ---- -------- ----- -------- -----
Total interest-bearing deposits $288,101 3.97% $211,645 4.18% $126,855 4.39%
======== ==== ======== ===== ======== =====
</TABLE>
21
<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,
--------------------------------------------------------------------------------------
1999 1998 1997
--------------------------------------------------------------------------------------
INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE
AVERAGE AND YIELD/ AVERAGE AND YIELD/ AVERAGE AND YIELD/
BALANCE DIVIDENDS RATE BALANCE DIVIDENDS RATE BALANCE DIVIDENDS RATE
--------- --------- ------- ------- --------- ------- ------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (1) ........................... $264,010 21,813 8.26% $174,476 15,395 8.82% $116,148 10,934 9.41%
Securities .......................... 74,693 4,522 6.05% 79,462 4,818 6.06% 41,335 2,661 6.44%
Other interest-earning
assets (2) ...................... 10,570 519 4.91% 14,964 805 5.38% 8,187 444 5.42%
-------- ------- -------- ------- -------- ------
Total interest-earning
assets ........................ 349,273 26,854 7.69% 268,902 21,018 7.82% 165,670 14,039 8.47%
------- ------- ------
Noninterest-earning assets (3) ......... 41,601 29,967 16,754
-------- -------- --------
Total assets .................... $390,874 $298,869 $182,424
======== ======== ========
Interest-bearing liabilities:
Savings and NOW deposits ............ 86,707 1,685 1.94% 75,140 2,042 2.72% 40,267 1,245 3.09%
Money-market deposits ............... 33,243 1,149 3.46% 19,938 596 2.99% 13,747 371 2.70%
Time deposits ....................... 168,151 8,607 5.12% 116,567 6,212 5.33% 72,841 3,953 5.43%
Other borrowings .................... 21,042 1,014 4.82% 14,113 752 5.33% 8,705 457 5.25%
-------- ------- -------- ------- ---- --------- ------
Total interest-bearing
liabilities ................. 309,143 12,455 4.03% 225,758 9,602 4.25% 135,560 6,026 4.45%
------- ------- ------
Demand deposits ........................ 51,035 44,135 33,153
Noninterest-bearing liabilities ........ 1,046 1,632 36
Stockholders' equity ................... 29,650 27,344 13,675
-------- ------- --------
Total liabilities and
stockholders' equity ........ $390,874 $298,869 $182,424
======== ======== ========
Net interest income .................... $14,399 $11,416 $8,013
======= ======= ======
Interest-rate spread (4) ............... 3.66% 3.57% 4.02%
==== ==== ====
Net interest margin (5) ................ 4.12% 4.25% 4.84%
==== ==== =====
Ratio of average interest-earning assets
to average interest-bearing
liabilities ......................... 1.13 1.19 1.22
==== ==== ====
</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 divided by average
interest-earning assets.
22
<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,
1999 VS. 1998
------------------------------------------
INCREASE (DECREASE) DUE TO
------------------------------------------
RATE/
RATE VOLUME VOLUME TOTAL
-------- ------ ------ -----
(In thousands)
<S> <C> <C> <C> <C>
Interest earning assets:
Loans ....................... $ (977) 7,896 (501) 6,418
Securities .................. (8) (289) -- (297)
Other interest-earning assets (70) (236) 21 (285)
------- ------- ------- -------
Total ..................... (1,055) 7,371 (480) 5,836
------- ------- ------- -------
Interest-bearing liabilities:
Deposits:
Savings and NOW deposits .. (586) 315 (90) (361)
Money market deposits ..... 94 398 63 555
Time deposits ............. (245) 2,749 (107) 2,397
Other borrowings .......... (72) 369 (35) 262
------- ------- ------- -------
Total ..................... (809) 3,831 (169) 2,853
------- ------- ------- -------
Net change in net interest income $ (246) 3,540 (311) 2,983
======= ======= ======= =======
</TABLE>
<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>
23
<PAGE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1999 AND 1998
GENERAL
Net earnings for the year ended December 31, 1999 were $3,070,000 or $.44 per
basic share ($.43 per diluted share) compared to net earnings of $2,521,000 or
$.36 per basic share ($.35 per diluted share) for the year ended December 31,
1998. 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 $21.0 million for the year ended December 31,
1998 to $26.9 million for the year ended December 31, 1999. Interest income on
loans increased $6.4 million due to an increase in the average loan portfolio
balance from $174.5 million for the year ended December 31, 1998 to $264.0
million for the year ended December 31, 1999, partially offset by a decrease in
the weighted-average yield earned on the portfolio. Interest on investment
securities decreased $.3 million due to a decrease in the average investment
securities portfolio to $74.7 million in 1999 from $79.5 million in 1998 and a
decrease in the average yield in 1999. Interest on other interest-earning assets
decreased $.3 million due to a decrease in average other interest-earning assets
from $15.0 million in 1998 to $10.6 million in 1999.
Interest expense increased to $12.5 million for the year ended December 31, 1999
from $9.6 million for the year ended December 31, 1998. Interest expense on
deposit accounts increased primarily due to an increase in average
interest-bearing deposit balances from $211.6 million during the year ended
December 31, 1998 to $288.1 million for 1999. Interest expense on other
borrowings increased $.3 million primarily due to an increase in average
borrowings from $14.1 million in 1998 to $21.0 million in 1999 partially offset
by a decrease in average rates. The average cost of all interest-bearing
liabilities decreased from 4.25% for the year ended December 31, 1998 to 4.03%
for the year ended December 31, 1999.
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 $440,000 for the year ended December 31, 1998 to
$670,000 for the year ended December 31, 1999. Management believes that the
allowance for loan losses of $2,849,000 is adequate at December 31, 1999.
NONINTEREST INCOME
Total noninterest income increased $.6 million to $3.5 million for the year
ended December 31, 1999 from $2.9 million reported in 1998, principally from an
increase in service fees on deposits, an increase in leasing fees from MBL and
increased cash surrender value of Bank owned life insurance.
NONINTEREST EXPENSES
Total noninterest expenses increased $2.7 million to $12.8 million for the year
ended December 31, 1999 from $10.1 million for the year ended December 31, 1998,
primarily due to an increase in salaries and employee benefits and occupancy
expense relating to additional banking offices opened in 1998 and 1999 as well
as an increase in leased space for back office operations.
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997
GENERAL
Net earnings for the year ended December 31, 1998 were $2,521,000 or $.36 per
basic share ($.35 per diluted share) compared to net earnings of $1,255,000 or
$.30 per basic share ($.29 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.
24
<PAGE>
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 MBL, 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.
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, 2001.
Management does not anticipate that this Statement will have a material impact
on Gulf West.
25
<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>
1999 1998
--------------------------------------------------------------------------------------
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............ $ 7,256 6,970 6,625 6,003 5,494 5,121 5,208 5,195
Interest expense........... 3,423 3,219 2,998 2,815 2,566 2,489 2,273 2,274
Net interest income........ 3,833 3,751 3,627 3,188 2,928 2,632 2,935 2,921
Provision for loan
losses.................. 91 225 98 256 90 90 110 150
Earnings before
income taxes............ 1,355 1,057 1,260 762 1,047 797 897 959
Net earnings............... 912 737 868 553 766 554 586 615
Basic earnings per
common share (1)........ .13 .10 .12 .08 .11 .08 .09 .09
Diluted earnings per
common share (1)........ .13 .10 .12 .08 .10 .08 .09 .09
Cash dividends declared
per common share........ - - - - - - -
Market price range (1):
High.................... 9.75 9.52 8.33 8.81 9.76 11.26 12.34 11.26
Low.................8.56 7.86 7.62 7.62 6.49 7.58 9.31 9.74
</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 19, 1998 and the 5% stock dividend declared October 21, 1999.
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."
26
<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,
------------
1999 1998
---- ----
ASSETS
<S> <C> <C>
Cash and due from banks..................................................................... $ 11,924 16,045
Federal funds sold and securities purchased under agreements to resell...................... 12,323 11,654
-------- --------
Total cash and cash equivalents.................................................... 24,247 27,699
Securities available for sale............................................................... 77,857 69,087
Loans receivable, net of allowance for loan losses of $2,849 and $2,436..................... 283,225 208,608
Premises and equipment, net................................................................. 11,903 9,978
Cash surrender value of bank owned life insurance........................................... 12,857 12,020
Accrued interest receivable................................................................. 2,069 1,646
Deferred tax asset.......................................................................... 1,639 118
Goodwill, net............................................................................... 1,547 1,643
Foreclosed real estate, net................................................................. 353 309
Other assets................................................................................ 905 1,066
--------- -------
Total.............................................................................. $ 416,602 332,174
========= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Noninterest-bearing demand deposits...................................................... 55,410 45,943
Savings, NOW deposits and money-market deposits.......................................... 122,939 112,515
Time deposits............................................................................ 178,218 127,914
--------- -------
Total deposits..................................................................... 356,567 286,372
Other borrowings......................................................................... 27,417 15,438
Other liabilities........................................................................ 2,284 1,400
--------- -------
Total liabilities.................................................................. 386,268 303,210
--------- -------
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; 25,000,000 shares
authorized, 7,006,595 and 6,643,717 issued and outstanding............................ 7,007 6,644
Additional paid-in capital............................................................... 24,206 21,397
Retained earnings........................................................................ 583 537
Accumulated other comprehensive income (loss)............................................ (1,462) 386
--------- -------
Total stockholders' equity......................................................... 30,334 28,964
--------- -------
Total.............................................................................. $ 416,602 332,174
========= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
27
<PAGE>
GULF WEST BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Interest income:
Loans receivable........................................................ $ 21,813 15,395 10,934
Securities available for sale........................................... 4,522 4,818 2,661
Other interest-earning assets........................................... 519 805 444
-------- ------- -------
Total interest income.............................................. 26,854 21,018 14,039
------ ------ ------
Interest expense:
Deposits................................................................ 11,441 8,850 5,569
Other borrowings........................................................ 1,014 752 457
-------- ------- -------
Total interest expense............................................. 12,455 9,602 6,026
------ ------ ------
Net interest income.......................................................... 14,399 11,416 8,013
Provision for loan losses.......................................... 670 440 437
-------- ------- -------
Net interest income after provision for loan losses.......................... 13,729 10,976 7,576
------ ------ ------
Noninterest income:
Service fees on deposit accounts........................................ 1,420 1,152 816
Gain from sale of securities available for sale......................... 60 101 237
Income from mortgage banking activity................................... 31 57 56
Leasing fees and commissions............................................ 869 647 508
Income from bank owned life insurance................................... 601 354 71
Other income............................................................ 497 545 299
-------- ------- --------
Total noninterest income........................................... 3,478 2,856 1,987
------- ------ -------
Noninterest expenses:
Salaries and employee benefits.......................................... 7,154 5,605 4,273
Occupancy expense....................................................... 2,426 1,958 1,502
Data processing......................................................... 701 608 409
Federal deposit insurance premium....................................... 141 107 93
Advertising............................................................. 337 249 205
Stationery, printing and supplies....................................... 416 300 216
Telephone and postage .................................................. 303 263 215
Other expense........................................................... 1,295 1,042 741
------- ------ -------
Total noninterest expenses......................................... 12,773 10,132 7,654
------ ------ ------
Earnings before income taxes ................................................ 4,434 3,700 1,909
Income taxes....................................................... 1,364 1,179 654
------ ------ -------
Net earnings................................................................. $ 3,070 2,521 1,255
====== ====== ======
Earnings per share:
Basic................................................................... $ .44 .36 .30
======== ====== ======
Diluted................................................................. $ .43 .35 .29
======== ====== ======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
28
<PAGE>
GULF WEST BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
($ IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON STOCK COMPRE-
------------------------ ADDITIONAL HENSIVE TOTAL
NUMBER OF PAID-IN RETAINED INCOME STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS (LOSS) EQUITY
------------- ---------- ----------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
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 ......................... -- -- -- -- -- 1,370
---------
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 ......................... -- -- -- -- -- 2,722
---------
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
Comprehensive income:
Net earnings for 1999 ........................ -- -- -- 3,070 -- 3,070
Net change in unrealized gains (losses) on
available-for-sale securities, net of taxes -- -- -- -- (1,848) (1,848)
---------
Comprehensive income ......................... -- -- -- -- -- 1,222
---------
Shares issued under employee stock purchase plan . 10,830 11 39 -- -- 50
Other ............................................ -- -- 3 -- -- 3
Shares issued under stock option plan ............ 18,613 18 79 -- -- 97
Cash for fractional shares ....................... -- -- -- (2) -- (2)
Stock dividends .................................. 333,435 334 2,688 (3,022) -- --
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1999 ..................... 7,006,595 $ 7,007 24,206 583 (1,462) 30,334
========= ========= ========= ========= ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
29
<PAGE>
GULF WEST BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1999 1998 1997
-------- --------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings ....................................................... $ 3,070 2,521 1,255
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation ................................................... 1,056 910 778
(Increase) decrease in other assets ............................ (441) (1,242) 25
Provision for loan losses ...................................... 670 440 437
Deferred income tax (credit) provision ......................... (412) 90 (183)
Income from mortgage banking activity .......................... (31) (57) (56)
Increase (decrease) in other liabilities ....................... 884 (10) 624
(Increase) decrease in accrued interest receivable ............. (423) 173 (213)
Net amortization of fees, premiums and discounts ............... 330 190 (9)
Write-down (gain) on foreclosed real estate .................... 18 5 (23)
Gain on sale of securities available for sale .................. (60) (101) (237)
Proceeds from sale of loans held for sale ...................... 1,729 4,223 6,429
Originations of loans held for sale ............................ (1,700) (3,460) (6,768)
Stock issued for compensation .................................. -- 50 13
Amortization of goodwill ....................................... 96 104 --
Decrease in goodwill from sale of trust operations ............. -- 322 --
-------- -------- --------
Net cash flow provided by operating activities ............. 4,786 4,158 2,072
-------- -------- --------
Cash flows from investing activities:
Net increase in loans .............................................. (93,395) (55,276) (10,331)
Purchase of securities available for sale .......................... (24,640) (26,479) (37,420)
Proceeds from sale and maturity of securities available for sale ... 17,486 29,070 21,932
Principal repayments on securities available for sale .............. 13,138 15,613 2,914
Proceeds from sale of foreclosed real estate, net .................. 67 -- 74
Net purchase of premises and equipment ............................. (2,981) (3,472) (1,306)
Purchase bank owned life insurance ................................. (235) (10,008) --
Purchase of Citizens National Bank and Trust, net of cash acquired . -- 9,323 --
-------- -------- --------
Net cash used in investing activities ...................... (90,560) (41,229) (24,137)
-------- -------- --------
Cash flows from financing activities:
Net increase in deposits ........................................... 70,195 50,693 19,766
Net increase (decrease) of other borrowings ........................ 11,979 (4,799) 8,190
Issuance of common stock and other ................................. 150 931 71
Cash dividend paid for fractional shares ........................... (2) (4) --
-------- -------- --------
Net cash provided by financing activities .................. 82,322 46,821 28,027
-------- -------- --------
Net (decrease) increase in cash and cash equivalents ....... (3,452) 9,750 5,962
Cash and cash equivalents at beginning of year .......................... 27,699 17,949 11,987
-------- -------- --------
Cash and cash equivalents at end of year ................................ $ 24,247 27,699 17,949
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest ....................................................... $ 13,368 8,763 5,918
======== ======== ========
Income taxes...........................................$ ....... 1,587 1,412 623
======== ======== ========
Noncash transactions:
Reclassification of loans to foreclosed real estate ............ $ 175 314 179
======== ======== ========
Reclassification of foreclosed real estate to loans ............ $ 66 -- 128
======== ======== ========
Loans converted into available for sale securities ............. $ 18,032 -- --
======== ======== ========
Acquisition of Citizens National Bank and Trust:
Fair value of assets acquired .............................. $ -- 77,744 --
======== ======== ========
Liabilities assumed ........................................ $ -- 67,020 --
======== ======== ========
Common stock issued ........................................ $ -- 10,724 --
======== ======== ========
Net change in unrealized gain (loss) on available for sale
securities, net of taxes ............................... $ (1,848) 201 115
======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
30
<PAGE>
GULF WEST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998 AND FOR EACH OF THE YEARS
IN THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1999
(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
("Mercantile") and Mercantile Bank Leasing, Inc. ("MBL"). Mercantile is a
State (Florida) chartered commercial bank. The Bank's deposits are insured
by the Federal Deposit Insurance Corporation. 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. MBL 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 MBL. 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. Gulf West 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 Gulf West 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 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 are deferred and certain direct origination costs
are capitalized; both are 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. Generally when interest accrual is discontinued, all unpaid
accrued interest is reversed. Interest income is subsequently recognized
only to the extent cash payments are received.
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Management's periodic
evaluation of the adequacy of the allowance is based on Gulf West'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.
(continued)
31
<PAGE>
GULF WEST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
LOANS RECEIVABLE, CONTINUED. A loan is considered impaired when, based on
current information and events, it is probable that Gulf West will be
unable to collect the scheduled payments of principal or interest when
due according to the contractual terms of the loan agreement. Factors
considered by management in determining impairment include payment
status, collateral value, and the probability of collecting scheduled
principal and interest payments when due. Loans that experience
insignificant payment delays and payment shortfalls generally are not
classified as impaired. Management determines the significance of payment
delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the
borrower, including the length of the delay, the reasons for the delay,
the borrower's prior payment record, and the amount of the shortfall in
relation to the principal and interest owed. Impairment is measured on a
loan by loan basis by either the present value of expected future cash
flows discounted at the loan's effective interest rate, the loan's
obtainable market price, or the fair value of the collateral if the loan
is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, Gulf West does not separately
identify individual consumer and residential loans for impairment
disclosures.
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 and amortization computed on the straight-line
basis over the estimated useful life of the related asset or remaining
term of the lease, whichever is shorter.
TRANSFER OF FINANCIAL ASSETS. Transfers of financial assets are accounted
for as sales, when control over the assets has been surrendered. Control
over transferred assets is deemed to be surrendered when (1) the assets
have been isolated from Gulf West, (2) the transferee obtains the right
(free of conditions that constrain it from taking advantage of that
right) to pledge or exchange the transferred assets, and (3) Gulf West
does not maintain effective control over the transferred assets through
an agreement to repurchase them before their maturity.
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.
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.
(continued)
32
<PAGE>
GULF WEST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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.
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 1998 and 1997 financial
statements have been reclassified to conform to the 1999 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, 2001. Management does not anticipate
that this Statement will have a material impact on Gulf West.
(continued)
33
<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 2.5
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
-------------
Interest income ................................. $19,327
=======
Net interest income ............................. $ 9,869
=======
Net earnings .................................... $ 1,531
=======
Earnings per share:
Basic ........................................ $ .36
=======
Diluted ...................................... $ .35
=======
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
1997 or of future operations of the combined entities under the ownership
and management of Gulf West.
(3) SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
Mercantile enters into purchases of securities under agreements to resell
substantially identical securities. These agreements generally mature
daily. The agreements were with a major bank. Securities purchased under
agreements to resell averaged approximately $0 and $8,099,000 during 1999
and 1998, and the maximum amounts outstanding at any month-end during
1999 and 1998 were $0 and $17,000,000, respectively.
(continued)
34
<PAGE>
GULF WEST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(4) SECURITIES AVAILABLE FOR SALE
Debt securities have been classified as available for sale, 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>
DECEMBER 31, 1999:
U.S. agency obligations........................... $ 6,011 10 44 5,977
U.S. Treasury securities.......................... 11,947 - 272 11,675
Corporate and other obligations................... 5,304 16 22 5,298
Mortgage-backed securities........................ 56,933 64 2,090 54,907
------ ----- ----- ------
$ 80,195 90 2,428 77,857
====== ==== ===== ======
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
====== === ======= ======
</TABLE>
The scheduled maturities of securities available for sale at December
31, 1999 are as follows (in thousands).
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999
----------------------
AMORTIZED FAIR
COST VALUE
<S> <C> <C>
Due in one year or less................................................... $ 1,425 1,427
Due after one year through five years..................................... 10,740 10,541
Due in five years to ten years............................................ 10,850 10,732
Due after ten years....................................................... 247 250
Mortgage-backed securities................................................ 56,933 54,907
------ ------
$ 80,195 77,857
====== ======
</TABLE>
(continued)
35
<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):
YEAR ENDED DECEMBER 31,
--------------------------
1999 1998 1997
------ ------ ------
Principal received from sales $8,352 3,000 19,582
====== ====== ======
Gross gains ................. 67 101 237
Gross loss .................. 7 -- --
------ ------ ------
Net gain .................... $ 60 101 237
====== ====== ======
Gulf West had pledged securities with book values as follows (in
thousands):
AT DECEMBER 31,
-------------------
1999 1998
-------- ------
Security for public funds ................... $ 9,210 8,922
Treasury tax deposits ....................... 298 307
As bankruptcy trustee ....................... 100 4,056
Securities sold under agreement to repurchase 28,997 17,439
(5) LOANS
The components of loans was as follows (in thousands):
AT DECEMBER 31,
-----------------------
1999 1998
-------- --------
Commercial ................................... $ 39,612 30,102
Commercial real estate ....................... 202,263 125,089
Residential real estate ...................... 32,125 43,427
Consumer ..................................... 12,109 12,496
--------- ---------
Subtotal .................................. 286,109 211,114
Net deferred loan fees, premiums and discounts (35) (70)
Allowance for loan losses .................... (2,849) (2,436)
--------- ---------
$ 283,225 208,608
========= =========
An analysis of the change in the allowance for loan losses follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Balance at January 1 ......................................... $ 2,436 1,564 1,184
------- ------- -------
Loans charged off ............................................ (295) (183) (96)
Recoveries ................................................... 38 87 39
------- ------- -------
Net loans charged off ..................................... (257) (96) (57)
Allowance from acquisition of Citizens National Bank and Trust -- 528 --
Provision for loan losses .................................... 670 440 437
------- ------- -------
Balance at December 31 ....................................... $ 2,849 2,436 1,564
======= ======= =======
</TABLE>
(continued)
36
<PAGE>
GULF WEST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(5) LOANS, CONTINUED
Impaired loans were as follows (in thousands):
1999 1998 1997
------ ------- ------
Balance at end of year ..................... $2,546 -- 489
Average balance during year ................ 7 243 492
Total related allowance for losses ......... -- -- 100
Interest income recognized on impaired loans -- -- 38
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
generally 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. However, Gulf West has a concentration of loans in the
hospitality industry, the aggregate amount of loans at December 31, 1999
and 1998 was $54,654,000 and $36,714,000, respectively on 26 and 21
loans, respectively.
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, 1999 and 1998 was approximately $3,452,000 and
$2,041,000, respectively. The loans outstanding as of December 31, 1999
were made up of $1,916,000 of mortgage loans and $1,536,000 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):
AT DECEMBER 31,
----------------------
1999 1998
-------- --------
Land................................................. $ 3,873 3,637
Buildings and leasehold improvements ................ 7,428 5,546
Furniture, fixtures and equipment ................... 5,414 4,657
-------- -------
Total, at cost .................................. 16,715 13,840
Less accumulated depreciation and amortization ...... (4,812) (3,862)
-------- -------
$ 11,903 9,978
======== =======
(continued)
37
<PAGE>
GULF WEST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(6) PREMISES AND EQUIPMENT, CONTINUED
GulfWest leases certain facilities and equipment under operating leases
with noncancellable terms. Rent expense amounted to approximately
$703,000, $558,000 and $388,000 for the years ended December 31, 1999,
1998 and 1997, respectively. Some leases contain escalation clauses and
expense pass-throughs as well as renewal options. A summary of the
operating lease commitments at December 31, 1999 follows (in
thousands):
YEAR ENDING
DECEMBER 31, AMOUNT
- ------------ ------
2000........................................................... $ 767
2001........................................................... 640
2002........................................................... 561
2003........................................................... 527
2004........................................................... 477
Thereafter .................................................... 1,840
------
$4,812
(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,
------------------
1999 1998
------- -------
Loan portfolios serviced for:
FNMA ............................................. $26,024 11,223
FHLMC ............................................ 1,518 2,155
Other investors .................................. 3,990 3,605
------- -------
$31,532 16,983
======= =======
Custodial balances maintained in connection
with loans serviced for others.....................$ 296 502
======= =======
(8) DEPOSITS
The aggregate amount of certificates of deposit with a minimum denomination
of $100,000 was approximately $49,675,000 and $35,393,000 at December
31, 1999 and 1998, respectively.
A schedule of maturities for certificate accounts follows (in thousands):
YEAR ENDING AT DECEMBER 31,
DECEMBER 31, 1999
- ------------ ---------------
2000............................................................ $136,345
2001 and 2002 ................................................... 36,892
2003 and 2004 ................................................... 4,969
Thereafter ...................................................... 12
--------
$178,218
=========
(continued)
38
<PAGE>
GULF WEST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(9) OTHER BORROWINGS
Other borrowings are summarized as follows:
AT DECEMBER 31,
------------------
1999 1998
------- -------
Securities sold under reverse repurchase agreements $24,417 15,438
Federal funds purchased ........................... 3,000 --
------- -------
Total other borrowings ................. $27,417 15,438
======= =======
Securities sold under reverse repurchase agreements were delivered to the
broker-dealers who arranged the transactions. Securities
collateralizing customer reverse repurchase agreements are held by a
third party. The agreements at December 31, 1999 mature within three
months. Information concerning securities sold under agreements to
repurchase is summarized as follows ($ in thousands):
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
------- ------- ------
Average balance during the year ......... $21,042 14,113 8,646
Average interest rate during the year ... 4.82% 5.33% 5.25%
Maximum month-end balance during the year $27,917 18,644 18,237
The average rate was determined by dividing the total interest paid by the
average outstanding borrowings.
At December 31, 1999 and 1998, Gulf West had seven variable-rate lines of
credit from other financial institutions, totaling $31,500,000 and
$20,500,000, respectively. At December 31, 1999 and 1998, borrowings
against these lines totaled $3,000,000 and $0, respectively.
(10) INCOME TAXES
Allocation of Federal and State income taxes between current and deferred
portion is as follows (in thousands):
YEAR ENDED DECEMBER 31
------------------------------
1999 1998 1997
------- ------- -------
Current:
Federal .............. $ 1,573 962 751
State ................ 203 127 86
------- ------- -------
Total current .... 1,776 1,089 837
------- ------- -------
Deferred:
Federal .............. (352) 77 (156)
State ................ (60) 13 (27)
------- ------- -------
Total deferred ... (412) 90 (183)
------- ------- -------
Total income taxes $ 1,364 1,179 654
======= ======= =======
(continued)
39
<PAGE>
GULF WEST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(10) INCOME TAXES, CONTINUED
Thereasons for the differences between the statutory federal income tax
rate and the effective tax rates are as follows (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- --------------------
% OF % OF % OF
PRETAX PRETAX PRETAX
AMOUNT EARNINGS AMOUNT EARNINGS AMOUNT EARNINGS
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Tax provision at statutory rate ............. $ 1,508 34.0% $ 1,258 34.0% $ 649 34.0%
Increase (reduction) in taxes
resulting from:
State taxes, net of federal income
tax benefit ....................... 94 2.1 92 2.5 39 2.1
Tax-exempt income ................... (327) (7.3) (226) (6.1) (30) (1.6)
Other, net .................. 89 2.0 55 1.5 (4) (.2)
------- ---- ------- ---- ------- ----
Income tax provision ........ $ 1,364 30.8% $ 1,179 31.9% $ 654 34.3%
======= ==== ======= ==== ======= ====
</TABLE>
The tax effects of each type of item that gives rise to deferred taxes
are as follows (in thousands):
AT DECEMBER 31,
---------------
1999 1998
---- ----
Deferred tax assets:
Allowance for loan losses .......................... $ 938 799
Net unrealized loss on securities available for sale 877 --
Deferred compensation .............................. 190 140
Interest income from loans on nonaccrual status .... 20 13
Other .............................................. 29 --
------ ------
Total gross deferred tax assets .............. 2,054 952
------ ------
Deferred tax liabilities:
Accumulated depreciation ........................... 214 308
Purchase accounting adjustments, net ............... 194 282
Prepaid expenses ................................... 7 12
Net unrealized gain on securities available for sale -- 232
------ ------
Total gross deferred tax liabilities ......... 415 834
------ ------
Net deferred tax asset ....................... $1,639 118
====== ======
(continued)
40
<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, 1999 AT DECEMBER 31, 1998
--------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents ...................... $ 24,247 24,247 27,699 27,699
Securities available for sale .................. 77,857 77,857 69,087 69,087
Loans receivable ............................... 283,225 283,122 208,608 210,823
Accrued interest receivable .................... 2,069 2,069 1,646 1,646
Financial liabilities:
Deposit liabilities ............................ 356,567 357,342 286,372 287,832
Short-term borrowings .......................... 27,417 27,417 15,438 15,438
</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, 1999, follows (in thousands):
Unfunded loan commitments at variable rates $10,894
=======
Available lines of credit ................. $29,922
=======
Standby letters of credit ................. $ 682
=======
(continued)
41
<PAGE>
GULF WEST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(12) STOCKHOLDERS' EQUITY
The Board of Directors declared a 5% stock dividend on October 21, 1999 and
10% stock dividends on November 19, 1998 and on January 15, 1998. All
per share amounts have been presented to reflect these stock dividends.
In the calculation of comprehensive income, certain reclassification
adjustments are made to avoid double counting items that are displayed
as part of net earnings for a period that also had been displayed as
part of other comprehensive income in that period or earlier periods.
The disclosure of the reclassification amount is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Holding gains (losses) arising during the year, net of tax ............ $(1,811) 264 33
Less: reclassification adjustment for gains included in net
earnings, net of tax ............................................ (37) (63) (148)
------- ------- -------
Net unrealized gain (loss) on available-for-sale securities . $(1,848) 201 115
======= ======= =======
</TABLE>
The net after tax amounts of these unrealized gains have been included under
the caption of comprehensive income in the accompanying statements of
stockholders' equity.
(continued)
42
<PAGE>
GULF WEST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(13) STOCK OPTION PLAN
Certain key employees and directors of Gulf West have options to purchase
shares of Gulf West's common stock under its stock option plan. Under the
plan, the total number of shares which may be issued shall not exceed 12%
(currently 840,791 shares) of Gulf West's total outstanding shares. At
December 31, 1999, 39,512 remain available for grant. All per share
amounts reflect the 5% stock dividend declared October 21, 1999 and the
10% stock dividends declared January 15, 1998 and November 19, 1998. Some
options are fully vested when granted while others generally vest over
four years. A summary of stock option transactions follows ($ 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, 1996 421,855 $ 2.29-3.36 2.61 1,098
Options granted ................ 84,409 4.03-4.32 4.22 356
Options exercised .............. (7,108) 2.29-2.99 2.62 (19)
Options forfeited .............. (5,002) 2.55 2.55 (13)
------- ------
Outstanding at December 31, 1997 494,154 2.29-4.32 2.88 1,422
Options granted ................ 343,497 4.72-11.25 5.01 1,720
Options exercised .............. (221,551) 2.29-4.72 2.74 (607)
Options forfeited .............. -- -- -- --
------- ------
Outstanding at December 31, 1998 616,100 2.29-11.25 4.11 2,535
Options granted ................ 205,300 7.97-8.77 8.01 1,647
Options exercised .............. (19,543) 2.39-4.72 2.97 (58)
Options forfeited .............. (578) 7.79 7.79 (5)
------- ------
Outstanding at December 31, 1999 801,279 $ 2.29-11.25 5.13 4,119
======== ============ ==== ======
</TABLE>
The weighted-average remaining contractual life of the outstanding stock
options at December 31, 1999, 1998 and 1997 was eighty-five months,
eighty-eight months and sixty-eight months, respectively.
These options are exercisable as follows:
NUMBER WEIGHTED-AVERAGE
YEAR ENDING OF SHARES EXERCISE PRICE
- ----------- --------- --------------
2000................................... 565,541 $ 4.76
2001................................... 76,553 5.73
2002................................... 74,109 5.82
2003................................... 65,776 6.05
2004................................... 19,300 8.09
------- --------
801,279 $ 5.13
======= ========
(continued)
43
<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,
-------------------------
1999 1998 1997
------- ------ ------
<S> <C> <C> <C>
Net earnings:
As reported ................................................ $ 3,070 2,521 1,255
======= ===== =====
Proforma ................................................... $ 2,829 2,074 1,215
======= ===== =====
Basic earnings per share:
As reported................................................ $ .44 .36 .30
======= ===== =====
Proforma .................................................. $ .40 .30 .29
======= ===== =====
Diluted earnings per share:
As reported................................................ $ .43 .35 .29
======= ===== =====
Proforma................................................... $ .39 .30 .28
======= ===== =====
</TABLE>
Thefair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions:
YEAR ENDED DECEMBER 31,
-------------------------
1999 1998 1997
----- ---- ----
Risk-free interest rate ..................... 6.0% 6.0% 6.0%
Dividend yield .............................. -- % -- % -- %
Expected volatility ......................... 60% 20% -- %*
Expected life in years ...................... 10 10 10
Per share fair value of options at grant date $5.99 2.43 1.82
===== ==== ====
- ----------------------
* There was no active market in 1997.
(continued)
44
<PAGE>
GULF WEST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(14) EARNINGS PER SHARE ("EPS")
Thefollowing is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations. Options to purchase
2,310 shares and 2,200 shares of common stock at $11.25 and $11.82 a
share in 1999 and 1998 were not included in the computation of diluted
EPS because the option's exercise price was not less than the average
market price of the common shares. These options expire on June 17, 2008
and August 21, 2007, respectively ($ in thousands, except per share
amounts).
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------
1999 1998 1997
----------------------------- ---------------------------- -----------------------------
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>
Basic EPS:
Net earnings
available to
common
stockholders .... $ 3,070 6,999,041 $ .44 $ 2,521 6,933,766 $ .36 $ 1,255 4,239,227 $ .30
========= ======
Effect of dilutive
securities-
Incremental shares
from assumed
exercise of
options ......... 196,877 186,248 109,148
---------
Diluted EPS:
Net earnings
available to
common
stockholders
and assumed
conversions ..... $ 3,070 7,195,918 $ .43 $ 2,521 7,120,014 $ .35$ $ 1,255 4,348,375 $ .29
========= ========= ===== ========= ========= ====== ======= ========= ======
</TABLE>
(continued)
45
<PAGE>
GULF WEST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(15) REGULATORY MATTERS
GulfWest (on a consolidated basis) and Mercantile are subject to various
regulatory capital requirements administered by the federal banking
agencies. Failure to meet minimum capital requirements can initiate
certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on
the Gulf West's and Mercantile's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
actions, Gulf West and Mercantile must meet specific capital guidelines
that involve quantitative measures of their assets, liabilities and
certain off-balance sheet items as calculated under regulatory
accounting practices. The capital amounts and classification are also
subject to qualitative judgments by the regulators about components,
risk weightings, and other factors. Prompt corrective action provisions
are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy
require Gulf West and Mercantile to maintain minimum amounts and ratios
(set forth in the following table) of total and Tier I capital (as
defined in the regulations) to risk-weighted assets (as defined) and of
Tier I capital (as defined) to average assets (as defined). Management
believes, as of December 31, 1999 and 1998, that Gulf West and
Mercantile met all capital adequacy requirements to which they are
subject.
As of December 31, 1999, the most recent notification from the Federal
Deposit Insurance Corporation categorized Mercantile as well
capitalized. An institution must maintain minimum total risk-based, Tier
I risk-based and Tier I leverage ratios as set forth in the following
tables. There are no conditions or events since the notification that
management believes have changed Mercantile's category. Gulf West's and
Mercantile's actual capital amounts and percentages as of December 31,
1999 and 1998 re also presented in the table.
<TABLE>
<CAPTION>
MINIMUM TO BE WELL
CAPITALIZED UNDER
MINIMUM CAPITAL PROMPT CORRECTIVE
ACTUAL REQUIREMENT ACTION PROVISIONS
---------------- ------------------- -----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- ------ ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1999:
Total Capital to Risk-Weighted Assets:
Gulf West...................... $ 33,090 11.1% $ 23,957 8.0% N/A N/A
Mercantile..................... 32,098 10.7 24,021 8.0 $ 30,026 10.0
Tier I Capital to Risk-Weighted Assets:
Gulf West...................... 30,241 10.1 12,217 4.0 N/A N/A
Mercantile..................... 29,249 9.7 12,012 4.0 18,018 6.0
Tier I Capital to Average Assets:
Gulf West...................... 30,241 7.4 16,324 4.0 N/A N/A
Mercantile..................... 29,249 7.2 16,295 4.0 20,369 5.0
AS OF DECEMBER 31, 1998:
Total Capital to Risk-Weighted Assets:
Gulf West...................... 29,359 13.1 17,998 8.0 N/A N/A
Mercantile..................... 28,340 12.6 17,965 8.0 22,456 10.0
Tier I Capital to Risk-Weighted Assets:
Gulf West...................... 26,923 12.0 9,004 4.0 N/A N/A
Mercantile..................... 25,904 11.5 8,979 4.0 13,468 6.0
Tier I Capital to Average Assets:
Gulf West...................... 26,923 8.3 12,959 4.0 N/A N/A
Mercantile..................... 25,904 8.1 12,856 4.0 16,069 5.0
</TABLE>
(continued)
46
<PAGE>
GULF WEST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(16) PROFIT SHARING PLAN
GulfWest 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 $127,000, $89,000 and $63,000 for the years ended
December 31, 1999, 1998 and 1997, respectively.
(17) DEFERRED COMPENSATION PLANS
GulfWest 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
$135,000, $111,000 and $96,000 for the years ended December 31, 1999,
1998 and 1997, respectively.
(continued)
47
<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)
AT DECEMBER 31,
---------------------
1999 1998
-------- --------
ASSETS
Cash and cash equivalents with subsidiary $ 626 581
Investments in wholly-owned subsidiaries 29,506 27,980
Other assets ............................ 204 405
------- -------
Total ............................... $30,336 28,966
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities ....................... 2 2
Stockholders' equity .................... 30,334 28,964
------- -------
Total ............................... $30,336 28,966
======= =======
CONDENSED STATEMENTS OF EARNINGS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED DECEMBER 31,
-----------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues ...................................................... $ -- -- --
Expenses ...................................................... 293 269 62
------- -------- --------
Loss before earnings of subsidiaries and income tax benefit (293) (269) (62)
Income tax benefit ............................................ (99) (94) (24)
Earnings of subsidiaries ...................................... 3,264 2,696 1,293
------- ------- -------
Net earnings .............................................. $ 3,070 2,521 1,255
======= ======= =======
</TABLE>
(continued)
48
<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,
-----------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings ................................................ $ 3,070 2,521 1,255
Adjustments to reconcile net earnings to net cash provided by
(used in) operating activities:
Equity in undistributed earnings of subsidiaries ........ (3,264) (2,696) (1,293)
Net decrease (increase) in other assets ................. 201 (154) (82)
Decrease in other liabilities ........................... -- (2) --
------- ------- -------
Net cash provided by (used in) operating activities . 7 (331) (120)
------- ------- -------
Cash flows from investing activity-
Investment in subsidiaries .................................. (110) (167) (62)
------- ------- -------
Cash flows from financing activities:
Net proceeds from issuance of common stock and other ........ 150 931 58
Cash dividends for fractional shares ........................ (2) (4) --
------- ------- -------
Net cash provided by financing activities ........... 148 927 58
------- ------- -------
Net increase (decrease) in cash and cash equivalents ............ 45 429 (124)
Cash and cash equivalents, beginning of year .................... 581 152 276
------- ------- -------
Cash and cash equivalents, end of year .......................... $ 626 581 152
======= ======= =======
</TABLE>
(19) YEAR 2000 ISSUES
GulfWest's operating and financial systems have been found to be
compliant; the "Y2K Problem" has not adversely affected Gulf West's
operations nor does management expect that it will.
49
<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, 1999 and 1998,
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,
1999. 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, 1999 and 1998, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1999, in
conformity with generally accepted accounting principles.
/s/ HACKER, JOHNSON, COHEN & GRIEB PA
Tampa, Florida
January 21, 2000
50
<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/ Chief Financial Officer
51
<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 2000 Annual Meeting of Shareholders. 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 2000 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 2000 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 2000 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.
52
<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 at page 53 herein.
(b) No reports on Form 8-K were filed by the Company during the quarter
ended December 31, 1999.
53
<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 17, 2000
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>
/s/ GORDON W. CAMPBELL President, Chairman of the Board February 17, 2000
- ----------------------------
Gordon W. Campbell
/s/ BARRY K. MILLER Secretary/ (principal financial February 17, 2000
- ---------------------------- officer and principal accounting
Barry K. Miller officer)
/s/ HENRY W. HANFF, M.D. Director February 17, 2000
- ----------------------------
Henry W. Hanff, M.D.
/s/ THOMAS M. HARRIS Director February 17, 2000
- ----------------------------
Thomas M. Harris
/s/ PANDURANG V. KAMAT, M.D. Director February 17, 2000
- ----------------------------
Pandurang V. Kamat, M.D.
/s/ ALGIS KONCIUS Director February 17, 2000
- ----------------------------
Algis Koncius
/s/ LOUIS P. ORTIZ Director February 17, 2000
- ----------------------------
Louis P. Ortiz
/s/ JOHN C. PETAGNA, JR. Director February 17, 2000
- ----------------------------
John C. Petagna, Jr.
Director February 17, 2000
- -----------------------------
P. N. Risser, III
/S/ ROSS E. ROEDER Director February 17, 2000
- -----------------------------
Ross E. Roeder
</TABLE>
54
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
- -------------- -----------------------
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.
3.3**** Articles of Amendment to Articles of Incorporation 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
10.6 Executive Officer Bonus Program
11** Statement regarding computation of per share earnings
21* Subsidiaries of Registrant
27 Financial Data Schedule (for SEC use only)
*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.
****incorporated by reference to the exhibits included in Gulf West's
Form 10-Q for the quarter ended June 30, 1999, as filed with the Securities and
Exchange Commission on July 27, 1999.
55
EXHIBIT 10.6
GULF WEST BANKS, INC.
EXECUTIVE OFFICER BONUS PROGRAM
TERM:
Continuous with annual review by Board. The Board may revoke the bonus program
by making the revocation effective for the year immediately after the second
calendar year-end following the revocation.
ELIGIBILITY:
Only Executive officers are eligible, however, to receive any bonus the officer
must be employed by the Bank at the time the bonus is paid.
BONUS CALCULATION:
Bonus payment will be made upon achieving minimal target levels of return on
average equity. The return on average equity shall be computed by dividing the
net income for the calendar year, after subtracting the after tax provision for
any Stakeholder bonuses and Executive Bonuses, by the average equity (net
worth). Any bonus payouts per the schedule below shall be reduced as needed to
be able to pay Stakeholder bonuses and still maintain the scheduled return on
average assets. The average equity shall be computed by adding the equity at
January 1 of each year to the equity at month end during the year and dividing
by 13.The following schedule shall apply:
BONUS PAYMENT
AS A
RETURN ON % OF
AVERAGE EQUITY ANNUAL SALARY
-------------- -------------
10% 10%
11% 15%
12% 20%
13% 25%
14% 30%
15% 35%
16% 40%
17% 45%
18% and over 50%
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 11,924
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 12,323
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 77,857
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 286,074
<ALLOWANCE> 2,849
<TOTAL-ASSETS> 416,602
<DEPOSITS> 356,567
<SHORT-TERM> 27,417
<LIABILITIES-OTHER> 2,284
<LONG-TERM> 0
0
0
<COMMON> 7,007
<OTHER-SE> 23,327
<TOTAL-LIABILITIES-AND-EQUITY> 416,602
<INTEREST-LOAN> 21,813
<INTEREST-INVEST> 4,522
<INTEREST-OTHER> 519
<INTEREST-TOTAL> 26,854
<INTEREST-DEPOSIT> 11,441
<INTEREST-EXPENSE> 12,455
<INTEREST-INCOME-NET> 14,399
<LOAN-LOSSES> 670
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 12,906
<INCOME-PRETAX> 4,434
<INCOME-PRE-EXTRAORDINARY> 4,434
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,070
<EPS-BASIC> .44
<EPS-DILUTED> .43
<YIELD-ACTUAL> 4.12
<LOANS-NON> 2,963
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,436<F1>
<CHARGE-OFFS> (295)
<RECOVERIES> 38
<ALLOWANCE-CLOSE> 2,849
<ALLOWANCE-DOMESTIC> 2,849
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
(F1)Other expense includes: salaries and employee benefits of $7.154, occupancy
of $2,559, data processing of $701, federal deposit insurance of $141,
advertising of $337, stationary, telephone and postage of $303 and supplies of
$416 and other expenses which totaled $1,295.
</FN>
</TABLE>
