<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Year Fiscal Ended December 31, 1998
Commission File Number 33 Act File No. -33-90524
VALRICO BANCORP, INC.
(Exact name of registrant as specified in its Charter)
(FLORIDA) 65-0553757
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1815 EAST STATE ROAD 60, VALRICO, FLORIDA 33594
(Address of principal executive offices and zip code)
(813) 689-1231
(Registrant's telephone number, including area code)
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. (1) Yes X (2) No
As of December 31, 1998, there were 307,790 shares of common stock outstanding.
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ITEM 1. BUSINESS
GENERAL
Valrico Bancorp, Inc. (the "Company") is a one-bank holding company
which was a newly-formed corporation on May 31, 1995 with its principal place of
business in Valrico, Florida. The Company subsequently acquired all of the
outstanding common stock of Valrico State Bank (the "Bank"), a wholly-owned
subsidiary. All shares held by the Bank's shareholders were exchanged on a
one-to-one basis for Valrico Bancorp, Inc. shares. The Company's common stock,
no par value, authorized 1,000,000 shares, had 307,790 issued and outstanding
shares as of December 31, 1998. The Company derives substantially all of its
income from dividends and lease from its subsidiary. The results of operations
of the Company for 1998 are minimal and are not material to the consolidated
financial statements. The Bank and the Company share the same board of
directors, which is comprised of nine individuals. Those individuals are C.
Dennis Carlton, H. Leroy English, Gregory L. Henderson, Douglas A. Holmberg,
Charles E. Jennings, Jr., J.E. McLean, III, Justo Noriega, Jr., LeVaughn
Amerson, and Jerry L. Ball.
SUBSIDIARY BANK
Valrico State Bank (the "Bank") was incorporated under the laws of the
state of Florida on August 29, 1988. The Bank was chartered as a Florida state
bank effective June 23, 1989 after receiving approval to organize from the
Florida Department of Banking and Finance (the "Florida Department"). The Bank
commenced operations on June 23, 1989. The Bank is supervised, regulated and
regularly examined by the Florida State Banking Department and the Federal
Deposit Insurance Corporation. The Bank is not currently a member of the Federal
Reserve Bank.
DESCRIPTION OF BUSINESS
The Company, through its subsidiary bank, conducts a general commercial
banking business from its main office located at 1815 East State Road 60,
Valrico, Florida 33594-3623 and its four branch facilities located at 102 West
Robertson Street, Brandon, Florida 33511, 305 South Wheeler Street, Plant City,
Florida 33566, 2602 Jim Redman Parkway, Plant City, Florida 33566 and 10101
Bloomingdale Ave, Riverview, Florida 33569. The Company's primary telephone
number is (813) 689-1231. Valrico is a community located in the eastern portion
of Hillsborough County, Florida, and is approximately 14 miles east of Tampa,
Florida, which is located on the west coast of the state of Florida. While the
Bank's overall market area extends throughout Hillsborough County, it expects to
draw most of its business from eastern Hillsborough County (the
Brandon/Valrico/Dover/Plant City/Riverview area) and estimates that more than
75% of its business will come from customers whose businesses or residences are
located in an area within a radius of approximately five miles of the Bank's
principle offices (the "Bank's Assessment Area"). The Company, through its
subsidiary bank, intends for the near future, to service (with few exceptions)
only residents and businesses located in Hillsborough County, but may choose to
accept some business from outside of Hillsborough County. The Bank received
approval in January 1994 from the Federal Deposit Insurance Corporation and the
Florida Department of Banking and Finance to open a branch located at 102 West
Robertson Street, Brandon, Florida 33511. Therefore, the Bank successfully
opened its first branch on April 29, 1994, which is located approximately one
and a half miles west of the main office and located in our current community
and assessment area. The location is in the center of Brandon, extremely
convenient to many businesses and professional offices. The Bank, after
receiving regulatory approval, opened its second branch on September 15, 1995,
in Plant City located at 305 South Wheeler Street (corner of Renfro and
Wheeler). The Bank purchased, from Barnett Bank, a former Glendale Federal Bank
branch, a free standing building with approximately 2,400 square feet including
the land and furniture. This positioned the Bank to better service the Plant
City market in which the Bank was already servicing a small customer base. The
Bank, after receiving regulatory approval, opened its third branch on June 23,
1997 as an in-store branch facility in the Wal-Mart Supercenter on Jim Redman
Parkway in Plant City, Florida. The Bank leases the facilities at this site. The
Bank, after receiving regulatory approval, opened its fourth branch on January
22, 1999, in Riverview located at 10101 Bloomingdale Ave (corner of Bloomingdale
and US 301). The Bank purchased, from Nationsbank, a free standing building with
approximately 6,000 square feet, the purchased included the land surrounding the
building.
The Company, through it subsidiary, conducts substantially the same
business operations as a typical
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independent commercial bank with special emphasis on retail banking. The Bank
offers a wide range of consumer and commercial banking services traditionally
offered by commercial banks, such as personal and commercial checking accounts,
regular negotiable order of withdrawal ("NOW") accounts, certificates of
deposits, money market accounts, savings accounts, IRA accounts, foreign
currency exchanges, credit cards, debit cards, money orders, travelers' cheques,
notary service, safe deposit boxes and wire transfers. It also offers discounted
brokerage services, profit sharing programs, 401(k)s and other similar programs.
These depository services are further complemented by direct deposit programs,
night depository services, and bank by mail. The Bank's main, Brandon and the
new North Riverview offices lobby hours are from 9:00 a.m. to 4:00 p.m., Mondays
through Thursdays, 9:00 a.m. to 6:00 p.m. on Fridays, and 9:00 a.m. to 12:00
p.m. on Saturdays. The Bank also offers drive-up teller facilities which are
open from 8:00 a.m. to 6:00 p.m., Mondays through Fridays, and 9:00 a.m. to
12:00 p.m. on Saturdays. The Wheeler Street branches have the same office hours,
except they have no Saturday lobby hours. The Jim Redman Parkway branch offers
extended hours of service from 10:00 a.m. to 8:00 p.m. Monday through Saturday.
The Bank does currently owns three automatic teller machines (ATM) at the Jim
Redman Parkway, Main, and North Riverview offices and may purchase additional
machines in the immediate future. It also offers ATM and Mastermoney Debit cards
to its customers which can be used at ATM machines which are members of the
Southeast Switch, which includes HONOR Network (Florida and other southeastern
states) and CIRRUS (a worldwide network).
The Bank originates a wide range of loans including, but not limited
to, commercial and consumer loans, as well as loans secured by deposit accounts
and other marketable collateral. As of December 31, 1998, commercial and
consumer loans accounted for approximately 58.2% and 14.3%, respectively, of the
Bank's loan portfolio. Loans are also made to enable borrowers to purchase,
refinance, construct or improve residential or other real estate and usually are
secured by mortgages on such real estate. As of December 31, 1998, real estate
mortgage loans accounted for approximately 6.6% of the Bank's loan portfolio. To
service the agricultural segment of the Bank's market area, the Bank employs an
agricultural lender. As of December 31, 1998, 20.7% of the total loan portfolio
was comprised of agricultural loans. All loans are made in compliance with
applicable Federal and state regulations.
The Bank uses a computer system to handle all accounting and statement
processing. In addition, the Bank makes extensive use of personal computers in
its teller and lobby locations, which allows for efficient handling and tracking
of new accounts, loans and other paper intensive services, and provides every
employee of the Bank access to complete customer profiles at all times. We have
currently upgraded many of our desktop systems in order to effectively utilize
many of the newer programs available today.
The Bank offers a complete brokerage service through a third party
which permits its customers to buy and sell stocks and bonds and otherwise trade
in securities at a discount with full accountability of their transactions. The
Bank offers, through third parties, standard and self-directed IRA, the new Roth
and Educational IRA, qualified pension plans, SEPs, Keogh and profit-sharing
plans, including 401(k) plans, etc.
Management of the Company believes that the emerging dominance of large
regional holding companies in the banking industry has created a need for more
locally-owned institutions with personalized banking services. The Bank was
organized as a locally-owned, locally-managed community financial institution,
owned and managed by people who are actively involved in the Bank's market area
and committed to its economic growth and development. With local ownership,
management and directors, the Bank believes it can be more responsive to the
community it serves and tailor services to its customers' needs rather than the
standardized services that large holding companies tend to offer. Local
ownership and operation will allow faster, more responsive and flexible
decision-making, which may not be available at the majority of financial
institutions in or near the Bank's Assessment Area which are branch offices of
large regional holding company banks with headquarters located elsewhere in
Florida or in the United States.
The principal business of the Bank is to attract deposits from the
general public, and to invest those funds in various types of loans and other
interest-earning assets. Funds provide for the operations of the Bank through
proceeds from the sale of investments and loans, from amortization and repayment
of outstanding loans, from
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borrowings, and from working capital. Earnings of the Bank depend primarily upon
the difference between (1) the interest and fees received by the Bank from
loans, the securities held in its investment portfolio, and other investments,
and (2) expenses incurred by the Bank in connection with obtaining funds for
lending (including interest paid on deposits and other borrowings) and expenses
relating to day-to-day operations.
The primary sources of the Bank's funds for lending and for other
general business purposes are the Bank's capital, deposits, loan repayments,
borrowings and funds provided from operations. The Bank expects that loan
repayments and funds provided from operations will be relatively stable sources
of funds, while deposit inflows and outflows will be significantly influenced by
prevailing interest rates, money market and general economic conditions.
Generally, short-term borrowings are used to compensate for reductions in normal
sources of funds while longer-term borrowings are used to support expanded
lending activities. The Bank's customers are primarily individuals,
professionals, small and medium size businesses, and citrus and agricultural
enterprises located predominantly in eastern and southern Hillsborough County,
Florida. The Bank's business is not dominated by a single customer or by a few
customers. The loss of any one or more would not have a materially adverse
effect on the business of the Bank. The Bank attempts to tailor its services to
the needs of its customers since there is a heavy emphasis on retail and
service-oriented businesses in the Company's market area. Moreover, the Bank's
main office location is on a major east-west artery in one of eastern
Hillsborough County's faster growing areas in terms of the number of new
residents. The exposure provided by the site and the population growth of the
area are expected to contribute to the growth of the Company.
The Bank continually seeks to develop new business through an ongoing
program of personal calls on both present and potential customers. As a local
independent bank, the Bank utilizes traditional local advertising media, as well
as direct mailings, telephone contacts, and brochures to promote the Bank and
develop loans and deposits. In addition, the Company's directors all have worked
and/or lived in or near eastern Hillsborough County for a number of years. The
Bank believes that this factor, coupled with the past and continued involvement
of the directors in various local community activities, will further promote its
image as a locally-oriented independent institution, which management believes
is an important factor to its targeted customer base.
The banking business in Florida in general, and in Hillsborough County
in particular, is highly competitive with respect to both loans and deposits.
The Bank competes with other commercial banks in Hillsborough County and the
surrounding area for all services customarily provided by commercial banks. In
addition, the Bank competes with savings and loan associations, finance
companies, insurance companies, money market mutual funds, credit unions, other
financial institutions and various other non-bank competitors. Many of these
competitors are larger and have greater resources, including more personnel and
a larger asset base, than the Bank and provide certain services, such as trust
services, which the Bank does not currently provide.
As of December 31, 1998, there were 13 commercial banks (including the
Company's subsidiary bank) with 36 offices and 1 savings and loan association
with 5 offices; at least 8 credit unions; and various other financial entities
as competitors in the Bank's Assessment Area. The Company expects to receive
substantial competition from most of these financial institutions. The Bank's
main office is located on East State Road 60, a primary east-west artery in the
Bank's Assessment Area, and 800 feet west of Valrico Road, a primary north-south
artery in the Bank's Assessment Area. The Brandon branch facility is located in
the center of Brandon, the Plant City branch facility is located in the center
of Plant City, and the Jim Redman Parkway branch is located in the eastern
section of Plant City. The North Riverview Branch is located at the intersection
of US 301 and Bloomingdale Ave in the Riverview community. The Bank is one of
only four financial institutions which have their headquarters in eastern
Hillsborough County. The other financial institutions, being Sunshine State
Savings and Loan and Hillsboro Bank in Plant City, and the newly opened Platinum
Bank in Brandon. All others are branches of institutions which have their
headquarters in other parts of Hillsborough County or elsewhere in Florida.
Several actually are owned by banks with headquarters in Georgia, Alabama, North
Carolina, Ohio, and New Jersey. The Bank's second branch was opened in 1995 in
the Plant City market and the Bank expanded in this market area with an in-store
branch which opened on June 23, 1997 within a Walmart Supercenter on Jim Redman
Parkway. This location is in a growing area
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and a very active shopping center with an estimated 50,000 plus customers per
week. This Wal-Mart is one of their largest supercenters in Florida. The bank
expanded its market area with the opening of its fourth branch on January 22,
1999 in Riverview area. In order to compete with major financial institutions
and others in the Bank's Assessment Area, the Bank will continue to emphasize
specialized services, local promotional activity and personal contacts by the
Bank's officers, directors and employees. The Bank believes that its local
ownership and community-oriented operating philosophy and personalized banking
services are competitive factors in which it has strength.
As of December 31, 1998, total deposits of the Bank were distributed
among demand deposits (26.8%), savings and time deposits (52.8%) and NOW and
money market deposits (20.4%). The Bank's deposits are attracted primarily from
individuals, professionals, small and medium size businesses and citrus and
agricultural enterprises located predominantly in eastern Hillsborough County,
Florida. As of December 31, 1998, approximately 24.4% of the Bank's total
deposits were from businesses and 75.6% were from individuals. Management of the
Bank has no reason to believe that the loss of any one or a few of its deposit
accounts would have a material adverse effect upon the operations of the Bank or
erode its deposit base.
The Company is regulated under both state and Federal law. The Company
is regulated by the Federal Reserve Bank of Atlanta and is subject to the rules
and regulations of the Securities and Exchange Commission. The Company's
subsidiary bank is not a member of the Federal Reserve System, but is subject to
the rules and regulations of the Federal Deposit Insurance Corporation ("FDIC")
which agency also insures the Bank's deposits up to applicable limits. As a
state-chartered bank, the Bank is subject to the regulations of the Florida
Department. The Bank will be subject to periodic examinations by both the FDIC
and the Florida Department focusing on fund reserves, loans and loan policy,
investments, management policy and practices, and various other aspects of the
Bank's operations.
Neither the Company nor its subsidiary hold any patents, registered
trademarks, licenses (other than licenses which have been obtained from
appropriate banking regulatory agencies), franchises or concessions.
Prior to the organization of the Bank, the organizers of the Bank
conducted economic and other surveys to evaluate the banking needs for the
community of Valrico and its immediate environs. The results of those surveys
were used to support the application to the Florida Department for permission to
organize the Bank and the application to the FDIC for insurance of the Bank's
accounts. Since it commenced operations, officers of the Bank have engaged
continually in marketing activities, including the evaluation of development of
new services, to enable the Bank to improve its competitive position in the
Bank's Assessment Area. The cost to the Bank for these marketing activities
cannot be calculated with any degree of certainty. In the fourth quarter of
1993, the Bank gathered and reviewed new economic data for the purpose of
supporting an application to the Florida Department for permission to open a
full service branch facility in Brandon, Florida, and performed similar research
in the summer of 1995 to support an application to the Florida Department for
permission to open a full service branch in Plant City, Florida. The cost of
collecting and evaluating this information likewise cannot be determined with
any degree of certainty, as most of the information was collected from public
sources and other sources already utilized by the Company for its day-to-day
evaluations. In the fourth quarter of 1996, the Bank reviewed data submitted by
International Banking Technologies for the purpose of supporting the application
for the in-store branch in Plant City. In the fourth quarter of 1998, the Bank
gathered and reviewed new economic data for the purpose of supporting an
application to the Florida Department for permission to open a full service
branch facility in Riverview, Florida.
As of December 31, 1998, the Bank employed 38 full-time employees, of
which two were executive officers, and 15 part-time employees, of which two are
bank officers. The Bank's employees are not represented by a collective
bargaining group, and the Bank considers its relations with its employees to be
excellent. The Bank also maintains training and educational programs designed to
equip employees for positions of increasing responsibility in both management
and operating positions. The Bank provides employees certain benefits customary
in the banking industry, which includes major medical insurance, group term life
insurance and normal vacation and sick leave. The Bank implemented a K-SOP plan
in 1997.
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As of December 31, 1998, the Bank has been in operation for nine and
one-half years. Management believes that there is some seasonality in its
deposit base due primarily to its agricultural relationships. The seasonality in
these deposits, however, has not been substantial to impact the core base of
deposits, therefore, management does not believe its deposit relationship is
affected. In its lending portfolio, the Bank sees a greater affect on this
seasonal business during the period from September to May reflecting larger
outstandings in the agricultural portfolio.
ITEM 2. PROPERTIES
The Company, through its subsidiary, has a principal office located at 1815 East
State Road 60 in Valrico, Florida, in a traditional, southern, Greek
neo-classical two-story building with 9,860 square feet. The Brandon office,
located at 102 West Robertson Street in Brandon, Florida, is in a leased 3,000
square foot end unit in a retail plaza at a major intersection in the center of
Brandon. The Plant City office is located at 305 South Wheeler Street in
facilities purchased in July 1995. The Jim Redman office, located at 2606 Jim
Redman Parkway, is in a leased 507 square foot unit located within the Wal-Mart
Supercenter in Plant City. The North Riverview Office, located at the
intersection of US 301 and Bloomingdale Avenue in Riverview was purchased in
October of 1998.
In January, 1997, the premises, previously leased from Roy J. and Ann M. Winter,
were purchased by Valrico Bancorp, Inc. for approximately $1,683,000. The annual
lease payments from the Bank to the Company is $204,000.
The Bank leases its Brandon branch office space pursuant to an agreement dated
March 31, 1994 (the "Lease") with J. "Bill" Noriega, Jr. (the "Lessor"). Mr.
Noriega currently serves as a director of the Bank. This lease expired March 31,
1997 and was renewed at an annual rental of $42,000. The Bank has the option to
renew the lease for four additional three-year terms at rentals to be negotiated
at the time of the renewal.
The aggregate lease expense paid by the Bank under these leases, including the
Bank building lease, totaled $64,163 for the fiscal year ended December 31,
1998.
The Company, through its subsidiary, purchased from Barnett Bank, a former
Glendale Federal Bank branch with approximately 2,400 square feet. The purchase
included building and land located at 305 South Wheeler Street (corner of Renfro
and Wheeler). On September 15, 1995, the Bank opened its second branch at this
location.
The Company, through its subsidiary, owns a parcel of land for future expansion.
The partially improved property, totaling approximately one acre, is immediately
adjacent to the Company's main office property on the west side. The site is
ideally located for the development of an Operations Center when the growth of
the Company will require additional space beyond that which is available in the
existing Company facility.
The Company, through its subsidiary, purchased from Nationsbank, a building with
approximately 6,000 square feet. The purchase included building and land located
at 10101 Bloomingdale Avenue (corner of US 301 and Bloomingdale). On January 22,
1999 the bank opened its fourth branch at this location.
ITEM 3. LEGAL PROCEEDINGS
As of the date of this Annual Report, the management of the Company has no
knowledge of any material pending legal proceedings, including proceedings
contemplated by governmental authorities, to which the Company and its
subsidiary or any of its property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to votes of the stockholders of the Company
during the last quarter of 1998.
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ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
There is no trading market at the current time for the Common Stock of the
Company, and it is not expected that a trading market will develop for shares of
the Company's Common Stock in the near future. The Company is aware of 17 sale
transactions that occurred during fiscal year 1998 at prices ranging from $14.00
to $16.00 per share, exclusive of commissions. The Bank is also aware of 24 sale
transactions that occurred during fiscal year 1997 at prices ranging from $13.75
to $14.00 per share, exclusive of commissions. As of March 15, 1999, there were
503 holders of record of the Common Stock of the Company.
Holders of Common Stock are entitled to share pro rata in the distribution of
dividends when and as declared by the Board of Directors from funds legally
available for such purpose. The Bank cannot pay dividends in any one year in
which its net income from the current year, combined with its retained net
income for the preceding two years, is a loss or which would cause the capital
accounts of the Bank to fall below the minimum amount required by law.
Additionally, under certain circumstances, approval of the FDIC and the Florida
Department may be required prior to the payment of a dividend.
At the discretion of the Board of Directors of the Company and after careful
review of certain factors, such as results of operations, capital requirements,
regulatory restrictions, tax considerations and general economic conditions, the
Board declared its first dividend in September 1993 at ten cents per share and
paid said dividend on October 5, 1993. It likewise paid a similar dividend in
1994, 1995, 1996 and 1997. In 1998, the dividend paid increased to twelve cents
per share. The dividends were based on respective year earnings and paid on
October 1 of each year.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth, in summary form, certain comparative financial
data of the Company for a five year period encompassing the periods ended
December 31, 1994, December 31, 1995, December 31, 1996, December 31, 1997 and
December 31, 1998. This information should be read in conjunction with the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations, and Other Statistical Disclosure" and the audited financial
statements of the Company for the years ended December 31, 1996, 1997 and 1998,
and related notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
INCOME STATEMENT DATA (in Thousands, except Per Share Data)
<S> <C> <C> <C> <C> <C>
Interest income $ 5,543 $ 4,711 $ 4,206 $ 3,767 $ 3,107
Interest expense (2,060) (1,888) (1,544) (1,413) (1,057)
--------- --------- --------- --------- ---------
Net interest income 3483 2,823 2,662 2,354 2,050
Provision for loan losses (210) (300) (181) (97) (78)
--------- --------- --------- --------- ---------
Net interest income after
provision for loan losses 3,273 2,523 2,481 2,257 1,972
Non-interest income 657 516 431 383 331
Non-interest expense (3,051) (2,614) (2,408) (2,156) (1,964)
--------- --------- --------- --------- ---------
Income before income taxes and
change in accounting principle 879 425 504 484 339
Income taxes (318) (101) (156) (115) (103)
--------- --------- --------- --------- ---------
Income before change in
accounting principle 561 324 348 369 236
Change in accounting principle
cumulative effect FAS 109 0 0 0 0 0
--------- --------- --------- --------- ---------
Net income $ 561 $ 324 $ 348 $ 369 $ 236
========= ========= ========= ========= =========
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net income $ 1.88 $ 1.09 $ 1.17 $ 1.22 $ .78
Cash dividends .12 .10 .10 .10 .10
Book value 16.00 14.17 13.10 11.91 10.70
Number of shares used in net
income-per-share calculations 299,221 297,026 297,545 302,071 302,779
BALANCE SHEET DATA
Total assets $ 80,685 $ 63,802 $ 54,919 $ 49,592 $ 42,793
Total investment securities 8,832 7,942 10,400 8,025 9,211
Total net loans (2) 55,694 47,873 37,897 33,191 29,117
Total deposits 70,505 55,047 48,876 44,774 38,792
Shareholders' equity 4,924 4,237 3,899 3,595 3,238
</TABLE>
(1) Based on average shares outstanding during the period.
(2) Net loans means total loans net of allowance for possible future loan
losses.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The purpose of this discussion is to focus on significant changes in the
financial condition and results of operations of the Company and its subsidiary
during the past three years. The discussion and analysis is intended to
supplement and highlight information contained in the accompanying consolidated
financial statements and the selected financial data presented elsewhere in this
report. The following discussion and analysis is based on the Company's
financial condition and results of operations for the periods from January 1,
1998 through December 31, 1998, January 1, 1997 through December 31, 1997, and
January 1, 1996 through December 31, 1996. This discussion and analysis should
be read in conjunction with the financial statements of the Company, including
the related notes thereto, and supplementary schedules, included elsewhere in
this Annual Report.
RESULTS OF OPERATIONS
The following table presents a condensed comparative summary of the Company
results of operations for the periods January 1, 1998 through December 31, 1998,
January 1, 1997 through December 31, 1997, and January 1, 1996 through December
31, 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
INCOME STATEMENT DATA
Interest income $ 5,542,909 $ 4,711,323 $ 4,206,568
Interest expense (2,059,839) (1,887,926) (1,544,456)
----------- ----------- -----------
Net interest income 3,483,070 2,823,397 2,662,112
Provision for loan losses (210,000) (300,000) (181,444)
----------- ----------- -----------
Net interest income after provision for
loan losses 3,273,070 2,523,397 2,480,668
Non-interest income 657,066 515,361 430,995
Non-interest expense (3,050,682) (2,613,955) (2,407,808)
----------- ----------- -----------
Income before income taxes 879,454 424,803 503,855
Income taxes (318,387) (100,991) (155,864)
----------- ----------- -----------
Net income $ 561,067 $ 323,812 $ 347,991
=========== =========== ===========
PER SHARE DATA
Net income $ 1.88 $ 1.09 $ 1.17
</TABLE>
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The Company had a positive net income of $561,067 or $1.88 per share for the
period ended December 31, 1998, as compared to a net income of $323,812, or
$1.09 per share for the period ended December 31, 1997, and a net income of
$347,991, or $1.17 per share for the period ended December 31, 1996. Net income
is after taxes. The Bank set aside $210,000 as provision for loan losses for the
year ended December 31, 1998, compared to $300,000 and $181,444 in 1997 and
1996, respectively. The Bank continued to experience good deposit growth during
1998 resulting in a net increase from January 1, 1998 to December 31, 1998 of
$15,458,793 or 28.1%, compared to a 12.6% growth in 1997 and 9.2% growth in
1996. During the same periods, the Bank's net loans outstanding increased
$7,821,457 or 16.3% for total net outstandings of $55,694,340 as compared to
26.3% growth in 1997 and 14.2% in 1996. The ratio of net loans to deposits
decreased slightly from the previous year from 86.9% at December 31, 1997 to
79.0% at December 31, 1998. The ratio of net loans to deposits was 77.5% at
December 31, 1996.
The major component of the Bank's earning capacity is net interest income
which is the difference or spread between interest income on earning assets
(primarily loans, Federal funds sold [funds loaned on a short-term basis to
other banks] and investment securities) and interest expense on interest-bearing
liabilities (primarily deposits). The spread is considered positive when
interest income exceeds interest expense and negative when interest expense
exceeds interest income. Net interest income is also affected by changes in
interest rates earned and interest rates paid and by changes in the volume of
interest-earning assets and interest-bearing liabilities.
The Bank's net interest income increased 13.1% in 1996 from $2,354,264
(includes loan fees of $112,560) to $2,662,112 (includes loan fees of $126,445),
6.1% in 1997 from $2,662,112 to $2,823,397 (includes loan fees of $110,084) and
23.4% in 1998 from $2,823,397 to $3,483,070 (includes loan fees of $141,189) for
the period ended December 31, 1998. The Bank's continued increase in net
interest income from 1996 to 1998 is due to the mix of interest-earning assets
where net loans contributed a higher percent of total interest income increasing
from $3,454,488 in 1996 to $4,801,507 in 1998. Interest income from other
interest-earning assets, such as investments and Federal funds sold which are
normally the lower yielding assets, earned $752,080 in 1996, $721,352 in 1997
and $741,402 in 1998. The substantial increase in interest income was directly
proportionate to the strong growth in loans and Federal funds sold. During the
same three year periods, interest expense on deposits increased from $1,514,224
in 1996 to $1,659,414 in 1997 and increased to $1,939,552 in 1998 due primarily
to an increase in deposits. Interest income yields on loans, which are normally
higher than interest income yields on investment securities and Federal funds
sold, was favorable to the Bank's profit. For the period from January 1, 1998
through December 31, 1998, the loan interest income of $4,660,318 earned on
average net loans of $50,349,271 gave an average interest yield of 9.26%, as
compared to 9.41% in 1997 and 9.44% in 1996. The investment interest income of
$476,159 earned on average investment securities of $7,843,974 gave an average
interest yield of 6.01% for the period from January 1, 1998 through December 31,
1998, as compared to 6.40% in 1997 and 6.11% in 1996.
The net interest spread measures the difference between the average yield on
earning assets and the average rate paid on interest-bearing sources of funds.
The net interest spread decreased from the twelve-month period ended December
31, 1996 of 4.67% to 4.61% for the twelve-month period ended December 31, 1997,
and a slight decrease to 4.56% for the twelve-month period ended December 31,
1998. As of December 31, 1998, the net yield on earning assets was 5.08%, as
compared to 5.14% for the year ended December 31, 1997. To the extent possible,
the Bank follows a strategy intended to insulate the Bank's interest rate spread
from adverse changes in interest rates by maintaining spreads through the
adjustability of its earning assets and interest-bearing liabilities.
Interest rate sensitivity is a function of the repricing characteristics of
the Bank's portfolio of assets and liabilities. These repricing characteristics
are the time frames within which the interest-bearing assets and liabilities are
subject to change in interest rates. The change in interest rates can be either
at replacement, repricing or maturity during the life of the assets or
liabilities. Interest rate sensitivity management is to concentrate on the
maturities of assets and liabilities as they reprice during time periods of
changes in market interest rates. Effective management is to ensure that both
assets and liabilities respond to changes in interest rates within an acceptable
time frame while minimizing
9
<PAGE> 10
the effect of interest rate changes on net interest income.
The major elements used to manage interest rate risk include the mix of fixed
and variable rate assets and liabilities and the maturity pattern of assets and
liabilities. The Bank performs a monthly review of assets and liabilities that
reprice and the time bands within which the repricing occurs. Through such
analysis, the Bank monitors and manages its interest sensitivity gap to minimize
the effects of changing interest rates.
The interest rate sensitivity structure within the Bank's balance sheet at
December 31, 1998, indicated a net interest sensitive liability gap of 106.2%
when projecting out one year. In the near term, defined as 90 days, the Bank had
a net interest sensitivity asset gap of 210.1%. This information represents a
general indication of repricing characteristics over time; however, the
sensitivity of certain deposit products may vary during extreme swings in
interest rates. Since all interest rates and yields do not adjust at the same
velocity, the interest rate sensitivity gap is only a general indicator of the
potential effects of interest rate changes on net interest income.
At December 31, 1998, residential (1-4 family) real estate related loans
totaled $3,756,597, an decrease of $1,469,998 from the total of $5,226,595 at
December 31, 1997. The decrease is due primarily as a result of the decreasing
interest rate and increased refinancing activity, as opposed to a planned
marketing strategy. The total of $3,756,597 is approximately 6.6% of the Bank's
total loan portfolio, a slight decrease from the 10.8% at December 31, 1997, and
is approximately 5.2% of the Bank's earning assets, an decrease from the 9.1% at
December 31, 1997. Real estate loans include primarily intermediate-term loans
secured by real estate and payable in periodic installments. At December 31,
1998, commercial loans totaled $32,916,814, an increase from $25,567,352 at
December 31, 1997. Total commercial loans of $32,916,814 is approximately 58.2%
of the loan portfolio, an increase from the approximate 52.7% at December 31,
1998. Total commercial loans are approximately 45.9% of the Bank's earning
assets at December 31, 1997, an increase from the approximate 44.6% at December
31, 1997. Commercial loans include business purpose loans to both businesses and
individuals which are payable on demand or within a specified period of time.
As of December 31, 1998, agricultural loans totaled $11,723,329, an increase
from the $10,290,535 in 1997. The total of $11,723,329 is approximately 20.7% of
the total loan portfolio, an decrease from the 21.2% in December 31, 1997, and
is approximately 16.3% of the Bank's earning assets which is an increase over
December 31, 1997 of 12.8%. At December 31, 1998, consumer loans totaled
$7,406,185, which represented approximately 14.3% of the Bank's total loan
portfolio, a decrease from the approximately 15.3% at December 31, 1997. Total
consumer loans were approximately 10.3% of the Bank's total earning assets at
December 31, 1998, a slight decrease from the previous year of approximately
12.9%. Consumer loans are consumer purpose loans made to both businesses and
individuals.
The Bank's investment portfolio at December 31, 1998 of $8,832,145 (based on
securities held available for sale marked to approximate fair market value)
comprised approximately 12.3% of the Bank's total earning assets, as compared to
13.8% at December 31, 1997. The investment securities are primarily concentrated
in U. S. Treasury securities, obligations of other U. S. Government agencies,
municipals and corporations. As of December 31, 1998, the Bank's investment
portfolio had 28.4% adjustable rate securities.
The FASB 115 rule regarding "Accounting For Certain Investments in Debt and
Equity Securities" was implemented the first quarter of 1994. The new rule
required financial institutions to segregate their investment portfolio into
three categories; 1) securities held-to-maturity (HTM), 2) securities available
for sale (AFS), and 3) trading securities. Securities available for sale are to
be marked to a fair market value. Unrealized holding gains and losses for AFS
securities are excluded from earnings and reported as a net amount in a separate
component of shareholders' equity until realized. Unrealized holding gains and
losses for trading securities are included in earnings. As of December 31, 1998,
the Bank's investment portfolio, based on Marked to Market, consisted of
$6,782,714 in AFS and $2,049,431, in HTM. The net effect to stockholders' equity
as of December 31, 1998 was a net gain in reserve for securities of $8,790.
10
<PAGE> 11
Reclassifying of securities as to available for sale and held-to-maturity
took place at December 1995, based upon a regulatory change which allowed a
window of opportunity to reclassify the investment portfolio.
The market value of securities fluctuates during the investment period and is
determined on the basis of market quotations. The Bank reprices its securities
on a monthly basis. The Bank invests in securities for interest income and
liquidity.
When calculating total earning assets, the amount of $907,296 as of December
31, 1998 was added to total earning assets. This amount represents the cash
surrender value of whole life insurance policies purchased primarily to fund a
deferred benefit pension plan implemented in 1993 for officers of the Bank who
qualified for the program.
Non-interest earning assets accounted for approximately 12.1% of the Company's
total assets at December 31, 1998, a increase from the approximately 11.1% at
December 31, 1997. The total non-interest earning assets primarily consisted of
cash and funds placed on deposit in accounts with other banks. Of the total
$9,802,098 of non-interest earning assets, cash and non-interest bearing
deposits totaled $4,454,308. Other significant non-interest earning assets
consisted of fixed assets and interest receivable.
The primary source of funds for the Bank's lending and investment activities
is deposits. At December 31, 1998, the Bank's total deposits were $70,505,400,
an increase of $15,458,793 from total deposits of $55,046,607 at December 31,
1997 or an increase of 28.1%. Approximately 82.0% of the Bank's total deposits
at December 31, 1998 were concentrated in interest-bearing accounts, which is
typical in the Bank's market area. Also note that included in interest-bearing
accounts are the Bank's NOW accounts which are the only types of checking
accounts offered to its customers. Only a percentage of these accounts maintain
a sufficient balance to earn interest. The Bank had 20.4% of its deposits in NOW
and money market accounts, compared with 25.0% at December 31, 1997. The Bank
had 52.8% of its deposits in time deposits (savings accounts and certificates of
deposits), a slight decrease from the approximately 58.3% at December 31, 1997.
The cost of funds (interest expense) of $1,931,549 paid on the Bank's average
interest-bearing deposits of $50,684,870 for the period from January 1, 1998
through December 31, 1998 was 3.8%, as compared to the cost of funds of
$1,659,414 paid on the Bank's average interest-bearing deposits of $42,880,000
for the period from January 1, 1997 through December 31, 1997 of 3.9%. While
there is a high concentration of certificates of deposits, the Bank does not
anticipate the maturity of such certificates to affect the Bank's liquidity, as
management believes that such high concentration is primarily due to customer
relationships and not the higher than market rates typically offered by such
certificates. The Bank is not in the practice of paying above market rates on
deposits.
Effective August 15, 1995, the Federal Housing Finance Board approved Valrico
State Bank's membership to the Federal Home Loan Bank of Atlanta. Being a member
offers alternative funding sources for the Bank.
The Bank's non-interest income for the period from January 1, 1998 through
December 31, 1998 was $657,066. The sources reflected in non-interest income
were from service charges on deposit accounts of $562,780 and non-deposit income
of $94,286. This is an increase of $47,419 compared to the $515,361 of
non-interest income reported for the twelve month period ended December 31,
1997.
The Bank's non-interest expenses for the period from January 1, 1998 through
December 31, 1998 were $3,050,682 or approximately $254,224 average per month as
compared to $2,613,955 or approximately $217,830 average per month for the
period from January 1, 1997 through December 31, 1997. Non-interest expense for
1996 was $2,407,808 or approximately $200,651 average per month for the twelve
month period ended December 31, 1996. The amount of $2,613,955 for December 31,
1998 consisted primarily of $1,487,036 in salaries and benefits, $420,535 of
occupancy expense for all its offices, equipment expenses of $297,859 and
$742,540 of other operating expenses. Other operating expenses primarily
consisted of marketing expense, taxes (intangible and sales), insurance (FDIC,
blanket bond and property), state assessments, professional fees (accounting,
audit and legal), office supplies,
11
<PAGE> 12
postage and delivery, service fees and amortization of capitalized expenses.
The allowance for loan losses is established through a provision for loan
losses charged to expense. Loans are charged against the allowance for loan
losses when management of the Bank believes that the collectibility of the
principal on such loans is unlikely. The allowance is an amount that management
of the Bank believes will be adequate to absorb losses inherent in existing
loans and commitments to extend credit, based on evaluations of the
collectibility of outstanding loans and prior loan loss experience relating to
loans and commitments to extend credit. The evaluations take into consideration
such factors as changes in the nature and volume of the loan portfolio, overall
portfolio quality, review of specific problem loans, and current economic
conditions that may affect the borrowers' ability to pay. Subsequent recoveries,
if any, on loans charged against the allowance will be credited to the
allowance.
The Bank derives its loan loss reserve based on several methods. One is to
review the Bank's historical loss percentages calculated by dividing
year-to-date charge-offs by the amount of reservable loans. Secondly, a review
of classified loans based on a specific reserve allocation method, a percentage
method, and a blended reserve based on specific and percentage methods. The
reserve allocation is based on the overall assessment of all the methods to
determine the appropriate amount to charge to the provision for loan losses.
Additionally, the Bank's loan portfolio is periodically reviewed by Federal
and state regulators as a normal part of their examination process. Governmental
examination procedures require individual judgments about a borrower's ability
to repay loans, sufficiency of collateral values and the effects of changing
economic circumstances. These procedures are similar to those employed by the
Bank in determining the adequacy of the allowance for loan losses and in
classifying loans.
As a result of their examinations, regulators may propose adjustments to the
allowance for loan losses or in the loan classifications. As a practical matter,
management and Board of Directors of the Bank promptly consider and implement
those proposed adjustments.
The Bank charged to operations $210,000 for provision for loan losses in 1998
and $300,000 and $181,444, respectively, for 1997 and 1996. The amount of
$210,000 was added to the beginning balance of $576,347 for the period ended
December 31, 1997 for a total accumulated provision less net charge-offs for the
period ended December 31, 1998 of $786,347. The Bank charged off loans during
the period from January 1, 1998 through December 31, 1998 in the amount of
$23,672 and reflected recoveries of $13,707 leaving a net balance in the
allowance for loan losses for the period ended December 31, 1998 of $776,382. As
of December 31, 1998, the allowance for loan losses of $776,382 was 1.37% of
total loans outstanding of $56,535,334.
Loans on which the accrual of interest has been discontinued are designated
as nonaccrual loans. Accrual of interest on loans is discontinued either when
reasonable doubt exists as to the full and timely collection of interest or
principal or both, or when a loan becomes contractually past due by 90 days or
more with respect to interest or principal. When a loan is placed on nonaccrual
status, all interest previously accrued but not collected is reversed against
current period interest income. Income on such loans is then recognized only to
the extent that cash is received and where the future collection of principal is
probable. Interest accruals are resumed on such loans only when they are brought
fully current with respect to interest and principal and when, in the judgement
of management, the loans are estimated to be fully collectible as to both
principal and interest. At December 31, 1998 and December 31, 1997, the Bank's
loans designated as nonaccrual totaled $163,399 and $49,000, respectively.
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 114 ("FASB 114"), Accounting by Creditors for
Impairment of a Loan, which sets the standard for recognition of loan impairment
and the measurement methods for certain impaired loans and loans whose terms are
modified in troubled debt restructurings.
12
<PAGE> 13
Under FASB 114, a loan is impaired when it is probable that a creditor will
be unable to collect the full amount of principal and interest due according to
the contractual terms of the loan agreement. When a loan is impaired, a creditor
has a choice of ways to measure the impairment. The measurement of impairment
may be based on (1) the present value of the expected future cash flows of the
impaired loan discounted at the loan's original effective interest rate, (2) the
observable market price of the impaired loan, or (3) the fair value of the
collateral of a collateral-dependent loan. Creditors may select the measurement
method on a loan-by-loan basis, except that collateral-dependent loans for which
foreclosure is probable must be measured at the fair value of the collateral. A
creditor in a troubled debt restructuring involving a restructured loan should
measure impairment by discounting the total expected future cash flows at the
loan's original effective rate of interest. At December 31, 1998 and December
31, 1997, loans totaling $188,704 and $336,362, respectively, had been
classified as impaired.
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 (FAS 109), "Accounting for Income Taxes," which
uses the asset and liability method of accounting for income taxes. Provisions
for income taxes are based on amounts reported in the statements of operations,
after exclusion of nontaxable income, such as interest on state and municipal
securities, tax-exempt loans, and includes deferred taxes on temporary
differences in the recognition of income and expense for tax and financial
statement purposes. Deferred taxes are computed on the liability method pursuant
in FAS 109, Accounting for Income Taxes. For 1997, net income before taxes was
$879,454 and after taxes of $318,387, the net income was $561,067. See Note N of
Notes to Consolidated Financial Statements.
A good capital position, which is vital to the continued profitability of the
Company, also promotes depositor and shareholder confidence and provides a solid
foundation for the future growth of the Bank. The Bank has provided for its
capital requirements through the retention of earnings. At December 31, 1998,
the Bank's Tier 1 capital position was 6.12% ($4,846,608 shareholders' equity
divided by total assets of $79,239,640) and the Bank's Tier 2 capital was 7.10%
determined by adding loan loss reserves of $776,382 to shareholders' equity of
$4,846,608 and dividing by total assets of $79,239,640 Total Tier 1 capital to
total risk-weighted assets as of December 31, 1997 was 7.89% and total capital
(Tier 2) to total risk-weighted assets was 9.14% compared to 8.44% and 9.60%,
respectively, in 1996.
Liquidity is the ability of the Bank to meet present and future financial
obligations either through the sale or maturity of existing assets or by the
acquisition of funds through asset and liability management. Management of the
Bank continually evaluates its liquidity position and seeks to achieve its
desired liquidity objectives from both assets and liabilities. Asset liquidity
is achieved through the continuous maturing of earning assets and by investing
in short-term marketable assets. Liability liquidity is available through
continued deposit growth, maturity structure and accessibility to market sources
of funds.
As of December 31, 1998, the Bank's liquidity ratio was 26.4% derived by
dividing net cash, short-term, and marketable assets of $6.9 million by net
deposits of $52.7 million. The Bank's dependency ratio as of December 31, 1998
was 2.57%. This ratio is determined by taking the Bank's volatile liabilities
(primarily Jumbo certificates) of $8.5 million less short-term investments of
$6.9 million divided by adjusted total earning assets of $64.0 million. In 1998
and 1997, the Bank had maintained a liquidity ratio on an average of 20% to 35%.
As noted in "Funding Sources" above, management of the Bank believes that the
high concentration of time deposits is primarily due to customer relationships
and not the attraction of the higher than market rates typically offered by
certificates of deposits.
FAS 121, which was effective for the first quarter of 1996, did not have any
significant effect on the Company. The Bank does not have any financial
instruments which would be affected by Financial Accounting Standard Boards
Statement No. 119 ("FAS 119"). FAS 119 requires new qualitative disclosures
regarding derivative financial instruments (e.g. futures, forwards, swaps and
options). In June 1997, the Financial Accounting Standards Board issued
Statement No., 130 ("FAS130"), Reporting Comprehensive Income, establishes
standards for reporting comprehensive income in financial statements. It
requires that all items that are required to be recognized under
13
<PAGE> 14
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. Some of the items included in comprehensive income are
unrealized gains or losses on securities available-for-sale, underfunded pension
obligations and employee stock options. FAS 130 is effective for periods
beginning after December 15, 1997. Reclassification of financial statements for
earlier periods provided for comparative purposes is required. Implementation of
FAS 130 will require additional disclosures in the 1998 financial statements but
will not have an impact on the Company's balance sheet or Statement of Income.
As a financial institution, we have an unusual consideration to
consider when dealing with the year 2000 or Y2K issues. This is in being an
issuer of loans that will extend beyond the end of the millennium, we must
insure that our systems will be able to move through the turn of the century
with as little difficulty as possible. To prepare with these upcoming issues,
we have made a number of equipment and software purchases. We have also
gathered information of a number of our systems that include information (IT)
and non-IT technologies. This includes our security systems, phone systems,
network operating systems, and the like, to determine our Y2K readiness.
The bank currently operates under two different network operating
systems, which are Novell NetWare 3.20 and a Unix system. The Novell system is
primarily used as a client server system with Win 95/98 desktops. As of February
1999, the Novell system was tested as Y2K compliant. The Unix system, which
holds our "core" system, has received an upgrade of Operating Software and
additional hardware which was necessary before our testing could begin. We are
currently awaiting the results of the test on our Unix system handled by an
outside group. Our "core" system, Banker II completed its testing in the first
quarter of 1999. We are currently continuing our review of our software
applications for Y2K compliance. We are currently developing a contingency plan
to minimize the effects of third party non compliance with the year 2000. The
effect of third party compliance can not at this time be evaluated.
Being an institution who deals with a number of varied groups and
individuals, such as individual persons, small business, corporations, it would
be difficult to ensure 100 percent compliance of our customers. We are currently
attempting to raise awareness of the issues with our loan customers by using a
survey dealing with their Y2K readiness. With our deposit customers, we feel
that it is more important that they understand that we are moving towards a
compliant position and as such are planning to publish flyers to give to our
customers dealing with Y2K compliance. We are also proceeding through a customer
awareness program to assist in informing our customer base the problems we as a
financial institution are facing and how we are going about solving those
problems.
The bank has currently spent approximately $125,000 on system and
software upgrades, with the anticipation of spending an additional $40,000. Not
included in this cost were a number of computers that were replaced, not for Y2K
reasons, but as a planned replacement of antiquated machines. This move was more
for improved efficiency than Y2K as most of the machines replaced had already
been tested for Y2K. The cost of our testing program is difficult to assess as
it is being handled by currently employed staff who continue to complete their
daily positions, this cost is estimated and is included above.
In an attempt to head off possible loan losses relating to Y2K, we are
planning to set aside $8,000 a month until the year 2000. This reserve is for
the potential loan losses as a direct result of Y2K problems and also litigation
concerns arising for Y2K. We feel that with our current loan portfolio and our
current size that this provision will be sufficient to cover those losses. A
review will be conducted periodically to modify this provision as needs are more
recognized.
Although not presently anticipated, regulatory agencies require that management
disclose the worst case scenario, or if the bank's systems fail to operate
in the new year. This worst case scenario would include the interruption of
normal customer service and the bank's funds management. We are currently
working on contingency plans to minimize the potential of this scenario and its
effects to both customers and stockholders.
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<PAGE> 15
Management will continue to review the issues related to Y2K on an
ongoing basis to ensure continued compliance. Management feels that this issue
is important and will prepare reviews with both internal and external auditors
to prepare the bank for the year 2000.
FORWARD LOOKING STATEMENTS
This filing contains forward-looking statements that involve risks and
uncertainties, and there are certain important factors that could cause actual
results to differ materially from those anticipated. These important factors
include, but are not limited to, economic conditions (both generally and more
specifically in the Bank's market), competition for customers from other
providers of financial services, government legislation and regulation which
changes from time to time and over which the Company and the Bank have no
control, changes in interest rates, the impact of the Bank's growth, and other
risks detailed in the Annual Report on Form 10-K and in the Company's other
filings with the Securities and Exchange Commission, all of which are difficult
to predict and many of which are beyond the control of the Company.
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15
<PAGE> 16
TABLES TO ITEM 7
The following tables attached to this Form 10-K in response to Item 7 are
intended to be supplementary information to be read in conjunction with
management's discussion and analysis of financial condition and result of
operations.
Table I - Distribution of Assets, Liabilities, and Stockholder's
Equity; Interest Rates and Interest Differentials
Table II - Investment Portfolio
Table III - Loan Portfolio
Table IV - Summary of Loan Loss Experience
Table V - Deposits
Table VI - Return on Equity and Assets
Table VII - Short-Term Borrowings
(Remainder of this page intentionally left blank)
16
<PAGE> 17
TABLE I
AVERAGE BALANCES, INTEREST, AND YIELD/RATE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
------------------------------ -----------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Earning assets:
Loans, net of unearned income $ 50,349 $ 4,660 9.26% $ 41,230 $ 3,880 9.41%
Investments securities:
Taxable 6,447 392 6.01% 8,321 550 6.61%
Tax exempt 1,421 81 5.70% 1,285 65 5.06%
Federal funds sold 4,881 265 5.43% 2,011 107 5.32%
-------- -------- -------- --------
Total earnings assets 63,098 5,398 8.55% 52,847 4,602 8.71%
-------- --------
Allowance for loan losses (671) (541)
Cash and due from banks 3,792 3,994
Other assets 4,022 4,022
-------- --------
Total assets $ 70,826 $ 60,322
======== ========
LIABILITIES AND SHAREHOLDERS'
EQUITY:
Interest bearing liabilities:
Deposits:
NOW accounts $ 12,497 $ 220 1.76% $ 9,459 $ 168 1.78%
Money market accounts 4,265 103 2.43% 3,923 108 2.75%
Savings accounts 7,568 179 2.36% 6,287 146 2.32%
Time, $100,000 and over 6,397 360 5.62% 5,315 293 5.51%
Other time deposits 19,958 1,070 5.36% 17,896 945 5.28%
-------- -------- -------- --------
Total interest bearing deposits 50,685 1,932 3.81% 42,880 1,660 3.87%
Securities sold under agreement to
repurchase, Federal funds purchased
and other borrowings 4,241 259 6.11% 3,113 228 7.32%
-------- -------- -------- --------
Total interest bearing liabilities 54,926 2,191 3.99% 45,993 1,888 4.10%
-------- --------
Demand deposits (non-interest bearing) 10,634 9,411
Accrued expenses and other
liabilities 675 862
Shareholders' equity 4,591 4,056
-------- --------
Total liabilities and
shareholders' equity $ 70,826 $ 60,322
======== ========
Net interest income/
net interest spread $ 3,207 4.56% $ 2,714 4.61%
======== ========
Net yield on earning assets 5.08% 5.14%
</TABLE>
<TABLE>
<CAPTION>
1996
----------------------------
AVERAGE YIELD/
BALANCE INTEREST RATE
-------- -------- ------
<S> <C> <C> <C>
ASSETS:
Earning assets:
Loans, net of unearned income $ 35,271 $ 3,328 9.44%
Investments securities:
Taxable 8,812 549 6.23%
Tax exempt 839 41 4.89%
Federal funds sold 3,034 162 5.34%
-------- --------
Total earnings assets 47,956 4,080 8.51%
--------
Allowance for loan losses (480)
Cash and due from banks 3,035
Other assets 2,532
--------
Total assets $ 53,043
========
LIABILITIES AND SHAREHOLDERS'
EQUITY:
Interest bearing liabilities:
Deposits:
NOW accounts $ 8,275 $ 142 1.72%
Money market accounts 4,228 106 2.51%
Savings accounts 6,195 147 2.37%
Time, $100,000 and over 4,398 227 5.16%
Other time deposits 16,465 893 5.42%
-------- --------
Total interest bearing deposits 39,561 1,515 3.83%
Securities sold under agreement to
repurchase, Federal funds purchased
and other borrowings 697 30 4.30%
-------- --------
Total interest bearing liabilities 40,258 1,545 3.84%
--------
Demand deposits (non-interest bearing) 8,439
Accrued expenses and other
liabilities 669
Shareholders' equity 3,677
--------
Total liabilities and
shareholders' equity $ 53,043
========
Net interest income/
net interest spread $ 2,535 4.67%
========
Net yield on earning assets 5.29%
</TABLE>
The following table sets forth the extent to which changes in volume and rates
of earning assets and interest-bearing liabilities affected the change in
interest income or interest expense in the indicated time periods. For each
major balance sheet category, information is provided relating to 1) changes in
volume (changes in average balance multiplied by the prior year's average
interest rate), 2) changes in rate (changes in average interest rate multiplied
by the prior year's average balance), and 3) the total change in interest
income/expenses. Changes attributable jointly to volume and rate have been
allocated proportionately.
VOLUME AND RATE ANALYSIS
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 VERSUS 1997 1997 VERSUS 1996
CHANGE DUE TO: CHANGE DUE TO:
------------------------ -------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ----- ----- ------ ----- -----
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans $ 847 $ (67) $ 780 $ 563 $ (11) $ 552
Investment securities (104) (38) (142) (9) 34 25
Other earning assets 155 3 158 (54) (1) (55)
----- ----- ----- ----- ----- -----
Total 898 (102) 796 500 22 522
----- ----- ----- ----- ----- -----
INTEREST EXPENSE
Deposits 300 (28) 272 129 16 145
Borrowings 76 (45) 31 176 22 198
----- ----- ----- ----- ----- -----
Total 376 (73) 303 305 38 343
----- ----- ----- ----- ----- -----
Net change $ 522 $ (29) $ 493 $ 195 $ (16) $ 179
===== ===== ===== ===== ===== =====
</TABLE>
17
<PAGE> 18
TABLE I (CONTINUED)
INTEREST RATE SENSITIVITY - REPRICING INTERVAL
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AFTER THREE AFTER ONE AFTER THREE
WITHIN MONTHS BUT YEAR BUT YEARS BUT AFTER
THREE WITHIN ONE WITHIN THREE WITHIN FIVE FIVE
DECEMBER 31, 1998 MONTH YEAR YEARS YEARS YEARS
- ------------------------------------------ -------- ----------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C>
ASSETS
Loans $ 18,704 $ 7,853 $ 13,713 $ 13,178 $ 3,021
Short term investments 6,356 0 0 0 0
Securities 826 1,606 1,871 1,871 2,877
-------- -------- -------- -------- --------
Total interest sensitive assets (ISA) 25,886 9,459 15,584 14,798 5,898
-------- -------- -------- -------- --------
LIABILITIES
Interest bearing deposits 10,608 23,697 12,310 11,829 0
Federal funds purchased 0 0 0 0 2,000
Long term borrowings 3,222 0 0 0 0
Short term borrowings 500 0 0 0 0
-------- -------- -------- -------- --------
Total interest sensitive liabilities (ISL) 14,330 23,697 12,310 11,829 2,000
-------- -------- -------- -------- --------
Net position of ISA minus ISL $ 11,556 $(14,238) $ 3,274 $ 2,969 $ 3,898
Cumulative net position of ISA minus ISL $ 11,556 $ (2,682) $ 592 $ 3,561 $ 7,459
Cumulative net position as a percent
of total assets 6.44 (3.32) 0.73 4.41 9.24
</TABLE>
(Remainder of this page intentionally left blank)
18
<PAGE> 19
TABLE II
INVESTMENT PORTFOLIO
(AMORTIZED COST)
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997 1996
- ---------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Securities to be held-to-maturity:
1. U. S. Treasury securities $ 0 $ 0 $ 0
2. U. S. Government agencies 0 0 0
3. Mortgage-backed securities 765,417 1,147,657 1,958,698
4. Other 1,284,014 1,282,827 1,281,692
----------- ----------- -----------
Subtotals 2,049,431 2,430,484 3,240,390
----------- ----------- -----------
Securities available-for-sale:
1. U. S. Treasury securities 502,194 753,063 1,260,346
2. U. S. Government agencies 500,000 924,300 2,002,281
3. Mortgage-backed 3,504,024 3,295,644 3,505,924
4. Other 2,247,545 533,641 400,412
----------- ----------- -----------
Subtotals 6,753,763 5,506,648 7,168,963
----------- ----------- -----------
Total investment securities $ 8,803,194 $ 7,937,132 $10,409,353
=========== =========== ===========
</TABLE>
INVESTMENT SECURITIES MATURITY SCHEDULE
(DOLLARS IN THOUSANDS)
MATURITY SCHEDULE
<TABLE>
<CAPTION>
IN 1998 IN 1997 IN 1996
---------------------- ---------------------- ----------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
---------- ------- ---------- ------- ---------- -------
SECURITY TYPE: WITHIN ONE YEAR
---------------------
<S> <C> <C> <C> <C> <C> <C>
1. U. S. Treasury securities $ 502,194 6.23% $ 247,626 6.12% $ 0 0.00%
2. U. S. Government agencies 0 0.00% 0 0.00% 0 0.00%
3. Mortgage-backed securities 0 0.00% 0 0.00% 18,764 9.52%
4. Other 0 0.00% 0 0.00% 251,811 5.31%
---------- ---------- ----------
Totals $ 502,194 $ 247,626 $ 270,575
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
SECURITY TYPE: AFTER ONE YEAR BUT
WITHIN FIVE YEARS
---------------------
<S> <C> <C> <C> <C> <C> <C>
1. U. S. Treasury securities $ 0 0.00% $ 505,437 6.23% $1,260,346 6.16%
2. U. S. Government agencies 0 0.00% 250,000 7.00% 1,165,000 6.38%
3. Mortgage-backed securities 816,867 6.39% 566,061 6.63% 630,270 7.88%
4. Other 719,140 5.44% 275,000 4.60% 0 0.00%
---------- ---------- ----------
Totals $1,596,007 $1,596,498 $3,055,616
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
SECURITY TYPE: AFTER FIVE YEARS BUT
WITHIN TEN YEARS
---------------------
<S> <C> <C> <C> <C> <C> <C>
1. U. S. Treasury securities $ 0 0.00% $ 0 0.00% $ 0 0.00%
2. U. S. Government agencies 500,000 6.05% 674,300 6.21% 673,419 6.65%
3. Mortgage-backed securities 1,600,570 4.94% 1,221,299 5.87% 1,451,000 7.43%
4. Other 2,415,293 5.04% 266,414 5.15% 540,647 4.82%
---------- ---------- ----------
Totals $4,515,863 $2,162,013 $2,665,066
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
SECURITY TYPE: AFTER TEN YEARS
---------------------
<S> <C> <C> <C> <C> <C> <C>
1. U. S. Treasury securities $ 0 0.00% $ 0 0.00% $ 0 0.00%
2. U. S. Government agencies 0 0.00% 0 0.00% 163,861 6.69%
3. Mortgage-backed securities 1,955,488 6.05% 2,655,941 6.44% 3,364,588 6.45%
4. Other 243,231 5.50% 1,275,054 6.38% 889,647 5.81%
---------- ---------- ----------
Totals $2,198,719 $3,930,995 $4,418,096
========== ========== ==========
</TABLE>
19
<PAGE> 20
TABLE III
LOAN PORTFOLIO
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997 1996
- ----------------------------------------- -------------------- --------------------- ---------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
LOAN TYPE:
1. Commercial $ 43,524 77.0% $ 25,567 52.7% $ 21,241 55.3%
2. Real estate (1-4 family) 6,724 11.9% 5,227 10.8% 4,368 11.4%
3. Installment and other 6,287 11.1% 7,406 15.3% 6,576 17.1%
-------- --------- -------- --------- -------- ---------
Total loans 56,535 100.0% 48,490 100.0% 38,434 100.0%
Less: unearned income (65) (41) (36)
Less: allowance for loan losses (776) (576) (501)
-------- -------- --------
Total loans less allowance and
unearned income $ 55,694 $ 47,873 $ 37,897
======== ======== ========
</TABLE>
SELECTED LOAN MATURITY AND INTEREST RATE SENSITIVITY SCHEDULES
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997 1996
- ------------------------------ ------- ------- -------
WITHIN WITHIN WITHIN
LOAN TYPE: ONE YEAR ONE YEAR ONE YEAR
------- ------- -------
<S> <C> <C> <C>
1. Commercial $12,815 $22,407 $19,486
2. Real estate (1-4 family) 1,176 1,964 2,339
3. Installment and other 1,138 3,302 2,633
------- ------- -------
Totals $15,129 $27,673 $24,458
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AFTER ONE AFTER ONE AFTER ONE
YEAR BUT YEAR BUT YEAR BUT
WITHIN WITHIN WITHIN
LOAN TYPE: FIVE YEARS FIVE YEARS FIVE YEARS
---------- ---------- ----------
<S> <C> <C> <C>
1. Commercial $28,488 $10,718 $ 7,771
2. Real estate (1-4 family) 4,779 2,593 1,856
3. Installment and other 4,608 3,565 3,541
------- ------- -------
Totals $37,875 $16,876 $13,168
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AFTER FIVE AFTER FIVE AFTER FIVE
LOAN TYPE: YEARS YEARS YEARS
---------- ---------- ----------
<S> <C> <C> <C>
1. Commercial $2,221 $2,732 $ 233
2. Real estate (1-4 family) 769 670 173
3. Installment and other 541 539 402
------ ------ ------
Totals $3,531 $3,941 $ 808
====== ====== ======
</TABLE>
RATE STRUCTURE FOR LOANS MATURING OVER ONE YEAR
(IN THOUSANDS)
<TABLE>
<CAPTION>
WITH PRE- WITH WITH PRE- WITH WITH PRE- WITH
DETERMINED FLOATING DETERMINED FLOATING DETERMINED FLOATING
INTEREST OR INTEREST OR INTEREST OR
RATE ADJUSTABLE RATE ADJUSTABLE RATE ADJUSTABLE
RATE RATE RATE
--------- ---------- ---------- ---------- ---------- ----------
LOAN TYPE: AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT
--------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
1. Commercial $29,155 $ 1,554 $11,034 $ 2,416 $ 5,658 $ 2,346
2. Real estate (1-4 family) 5,548 0 3,263 0 2,029 0
3. Installment and other 5,149 0 4,104 0 3,943 0
------- ------- ------- ------- ------- -------
Totals $39,852 $ 1,554 $18,401 $ 2,416 $11,630 $ 2,346
======= ======= ======= ======= ======= =======
</TABLE>
20
<PAGE> 21
TABLE IV
SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 1997 1996
- ---------------------------------- -------- -------- --------
<S> <C> <C> <C>
Balance at beginning of period $576,347 $500,504 $491,563
-------- -------- --------
Charge-offs:
Commercial loans 0 213,248 189,491
Commercial mortgage loans 0 0 0
Construction loans 0 0 0
Residential mortgage loans 0 947 0
Consumer loans 23,672 48,524 14,875
-------- -------- --------
Total charge-offs 23,672 262,719 204,366
-------- -------- --------
Recoveries:
Commercial loans 4,962 27,237 30,656
Commercial mortgage loans 0 0 0
Construction loans 0 0 0
Residential mortgage loans 0 0 0
Consumer loans 8,745 11,325 1,207
-------- -------- --------
Total recoveries 13,707 38,562 31,863
-------- -------- --------
Net of charge-offs less recoveries 9,965 224,157 172,503
Additions charged to operations 210,000 300,000 181,444
-------- -------- --------
Balance at end of period $776,382 $576,347 $500,504
======== ======== ========
</TABLE>
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997 1996
- --------------------------------------- ------------------------ ------------------------ ------------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS IN EACH LOANS IN EACH LOANS IN EACH
CATEGORY TO CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
-------- ------------- -------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at end of period applicable to:
Commercial and agricultural $579,415 79.0 $411,786 73.9 $350,354 71.5
Real estate 100,727 6.6 100,327 10.8 100,100 11.4
Installment and other 96,240 14.4 64,234 15.3 50,050 17.1
-------- ----- -------- ----- -------- -----
$776,382 100.0 $576,347 100.0 $500,504 100.0
======== ===== ======== ===== ======== =====
</TABLE>
21
<PAGE> 22
TABLE V
DEPOSITS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 1997 1996
- ------------------------------------- ------------------ ------------------ -------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
------- ------- ------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Deposits:
Non-interest demand deposits $10,634 0.00% $ 9,411 0.00% $ 8,439 0.00%
------- ------- -------
Interest earning deposits:
NOW accounts 12,497 1.76% 9,459 1.78% 8,275 1.72%
Money market accounts 4,265 2.43% 3,923 2.75% 4,228 2.51%
Savings accounts 7,568 2.36% 6,287 2.32% 6,195 2.37%
Time, $100,000 and over 6,397 5.62% 5,315 5.51% 4,398 5.16%
Other time deposits 19,958 5.36% 17,896 5.28% 16,465 5.42%
------- ------- -------
Total interest earning deposits 50,685 3.81% 42,880 3.87% 39,561 3.83%
------- ------- -------
Total deposits $61,319 $52,291 $48,000
======= ======= =======
</TABLE>
MATURITIES OF TIME DEPOSITS OVER $100,000
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997 1996
- ------------------------------ ----------------------- ----------------------- -----------------------
Other Other Other
Certificates Time Certificates Time Certificates Time
Of Deposits Deposits Of Deposits Deposits Of Deposits Deposits
Over Over Over Over Over Over
$100,000 $100,000 $100,000 $100,000 $100,000 $100,000
------------ -------- ------------ -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Three months or less $1,464 $ 0 $1,923 $ 0 $1,255 0
Over three through six months 1,697 0 1,328 0 1,461 0
Over six through twelve months 2,186 0 1,953 0 300 0
Over twelve months 2,514 0 1,100 0 1,439 0
------ ------ ------ ------ ------ ------
Total $7,861 $ 0 $6,304 $ 0 $4,455 $ 0
====== ====== ====== ====== ====== ======
</TABLE>
22
<PAGE> 23
TABLE VI
RETURN ON EQUITY AND ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997 1996
- -------------------------------------- ------- ------- -------
PERCENT PERCENT PERCENT
------- ------- -------
<S> <C> <C> <C>
Return on average assets 0.70% 0.54% 0.66%
Return on average common equity 11.40% 7.64% 9.46%
Common dividend payout ratio 6.38% 9.17% 8.55%
Average equity to average assets ratio 6.48% 6.72% 6.93%
</TABLE>
LEVERAGE RATIO CALCULATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997 1996
- ------------------------------------- ------- ------- -------
<S> <C> <C> <C>
Total average assets $70,826 $60,322 $53,043
Less intangibles 0 0 0
------- ------- -------
Total tangible average assets $70,826 $60,322 $53,043
======= ======= =======
Total common shareholders' equity $ 4,923 $ 4,237 $ 3,920
Less intangibles 0 0 0
------- ------- -------
Total tangible period-end common
shareholders' equity $ 4,923 $ 4,237 $ 3,920
======= ======= =======
Leverage ratio 6.95% 7.02% 7.39%
</TABLE>
RISK-BASED CAPITAL RATIOS
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997 1996
- ----------------------------------- ------ ------ ------
<S> <C> <C> <C>
Risk-based capital ratios:
Tier I capital ratio 6.12% 8.44% 9.55%
Total risk-based capital ratio 9.14% 9.60% 10.78%
</TABLE>
23
<PAGE> 24
TABLE VII
SHORT-TERM BORROWINGS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 1997 1996
------------------------- ------------------------- --------------------------
SECURITIES SECURITIES SECURITIES
FEDERAL SOLD UNDER FEDERAL SOLD UNDER FEDERAL SOLD UNDER
FUNDS AGREEMENTS FUNDS AGREEMENTS FUNDS AGREEMENTS
PURCHASED TO REPURCHASE PURCHASED TO REPURCHASE PURCHASED TO REPURCHASE
--------- ------------- --------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Maximum outstanding at any month-end $2,400 $ 900 $3,562 $ 800 $1,745 $ 656
Average balance $ 575 $ 449 $ 770 $2,011 $ 468 $ 770
Ending balance $ 500 $ 646 $1,100 $1,872 $ 500 $1,100
Average interest rate 8.60% 4.54% 5.76% 5.88% 3.75% 5.76%
Average interest rate at year-end 9.89% 3.15% 5.75% 5.82% 3.45% 5.75%
</TABLE>
(Remainder of this page intentionally left blank)
24
<PAGE> 25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statement of the Company and the related notes thereto required by
Subpart F have been included immediately following Item 13 of this Annual
Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in accountants, nor were there any disagreements with
accountants on accounting and financial disclosure.
ITEM 10. DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY
DIRECTORS OF THE COMPANY
The information required by Item 10 pertaining to directors of the Company is
incorporated herein by reference to the sections entitled "Election of
Directors" in the Company's definitive proxy statement for its 1999 Annual
Meeting of Shareholders, which will be filed with the Securities and Exchange
within 120 days of the end of the Company's fiscal year ended December 31, 1998.
PRINCIPAL OFFICERS OF THE COMPANY AND ITS SUBSIDIARY BANK
All principal officers of the Company are elected by the Board of Directors and
serve at the pleasure of the Board. There are no arrangements or understanding
between the Company and any principal officer pursuant to which any such person
was elected as a principal officer of the Company.
J. E. "BOB" MCLEAN, III, 62, is Chairman of the Bank and Company and was elected
President and CEO in May 1997 of the Company. Mr. McLean is the owner and
President of J. E. McLean & Sons, a family business he took over in 1967. He is
a citrus grower who also harvests and ships fruit. Prior to that, Mr. McLean was
a banker at Marine Bank of Tampa and was employed with Tampa Electric for three
and a half years. He is a third generation of Valrico, attending Brandon High
School and the University of Florida for a couple of years. Mr. McLean served in
the Army. He has served as Chairman of the Board of the Bank since its inception
in 1989 and has served as Chairman of the Board for the Company since May 1995.
JERRY L. BALL, 46, The President and CEO of the Bank is also the Executive Vice
President of the Company. In May 1997, Mr. Ball was promoted to his current
position. From 1989 to May 1995, Mr. Ball served in the position of Senior Vice
President and Cashier. From 1980 to April 1989, Mr. Ball was an Assistant Vice
President and Branch Manager for First Union National Bank of Florida. Mr. Ball
attended King College and received a B.A. degree in Business and Economics. He
is a graduate of the School of Banking at the University of Florida. Mr. Ball
has over 21 years of banking experience.
DONALD WEAVER, 56, joined the Company and Bank in November 1995. He was hired as
Senior Vice President of Commercial Loans of the Bank. In May 1997, he was
promoted to Executive Vice President and Director of Commercial Loans and was
elected to the position of Secretary to the Company. He has 35 years in
commercial banking, all within the Hillsborough County area. He came to our Bank
from Peoples Bank of Lakeland where he served as Vice President and Commercial
Loan Manager since 1990. He attended Hillsborough Community College and has
attended a number of banking schools. He has been a resident of the Brandon area
for over 24 years.
Set forth below are the names and ages of the other principal officers of the
Company's subsidiary bank, giving their principal occupation and business
experience of each such principal officer during the past six years. All of such
information has been furnished by each such person.
25
<PAGE> 26
GLENN J. CHASTEEN, 47, is currently serving as Senior Vice President-Consumer
Loans. He has been the Bank?s installment lender since June 1989. From January
1987 to October 1988, Mr. Chasteen served as Senior Vice President of San
Antonio Citizens Federal Credit Union. From February 1980 to January 1987, Mr.
Chasteen served as Vice President-Consumer Lending with Sun Bank of Tampa Bay
(formerly known as Brandon State Bank).
ROBERT N. MORRIS, 72, has served as Senior Vice President-Agriculture Loans of
the Bank since April 1991. Mr. Morris serves in this position on a part-time
basis. From June 1985 to December 1990, Mr. Morris was employed as Vice
President-Agriculture Loans of Barnett Bank. Mr. Morris has over 30 years of
banking experience.
ROY SCHRETT, 61, has served as Senior Vice President-Commercial Loans since his
employment April 1997. Mr. Schrett was with South Hillsborough Community Bank, a
local independent bank, serving in the capacity of Senior Vice President and
Senior Lending Officer. Prior employment has been with Southtrust Bank of West
Florida, Nazareth National Bank, and Marine Midland Bank, N.A. Mr. Schrett has
over 39 years of banking experience. Mr. Schrett graduated Summa Cum Laude, B.A.
degree from Allentown College of St. Frances de Sales, University of Buffalo,
A.A.S. degree, Graduate Lending School, University of Oklahoma and has taken
several banking courses.
CAROL TODD JOHNSON, 67, has served as Vice President and Business Development
Officer of the Bank since June 1991. Mrs. Johnson serves in this position on a
part-time basis and was promoted in 1995 to Vice President-Business Development.
From 1972 to May 1991, Mrs. Johnson was Vice President of Business and Community
Development Officer at the Brandon office of Barnett Bank.
ITEM 11. MANAGEMENT COMPENSATION AND TRANSACTIONS
The information required by Item 11 pertaining to management compensation and
transactions with management of the Company is incorporated herein by reference
to the sections entitled "Executive Compensation and Other Information" and
"Certain Transactions" in the Company's definitive proxy statement for its 1999
Annual Meeting of Shareholders, which will be filed with the Federal Deposit
Insurance Corporation within 120 days of the end of the Company's fiscal year
ended December 31, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The only class of voting securities of the Company is its Common Stock, 307,790
shares of which were outstanding as of December 31, 1998. To the best knowledge
of the Company, other than Messrs. Carlton, Holmberg and Amerson (whose
shareholdings are listed in "Security Ownership of Management" below), there are
no other persons who own beneficially more than five percent (5%) of the
Company's Common Stock.
SECURITY OWNERSHIP OF MANAGEMENT
The information set forth below as to the beneficial ownership of shares of
Common Stock of the Company by each director of the Company, and by all
directors and principal officers of the Company as a group, as of December 31,
1998 has been furnished by the respective persons.
26
<PAGE> 27
<TABLE>
<CAPTION>
AMOUNT AND NATURE
NAME OF BENEFICIAL OF BENEFICIAL
OWNER OWNERSHIP PERCENT OF CLASS
- --------------------------------------------- --------------------- ------------------
<S> <C> <C>
LeVaughn Amerson 29,000 (1) 9.42
Jerry L. Ball 250 (1) .08
C. Dennis Carlton 24,075 (2) 7.82
H. Leroy English 4,122 (1) 1.34
Gregory L. Henderson 10,500 (3) 3.41
Douglas A. Holmberg 29,107 (4) 9.46
Charles E. Jennings, Jr. 8,466 (5) 2.75
J. E. "Bob" McLean, III 6,270 (6) 2.04
J. "Bill" Noriega, Jr. 7,526 (7) 2.45
Donald M. Weaver 300 (8) .10
All directors and principal 119,616 38.86
officers as a group (10 persons)
</TABLE>
(1) All of these shares are owned as joint tenant with this individual's
spouse.
(2) Includes 23925 shares which Mr. Carlton owns individually and 50 shares
each owned by Mr. Carlton's trust for his three children (a total of
150 shares) of which Mr. Carlton is sole trustee.
(3) Includes 10,000 shares which Dr. Henderson owns as joint tenant with
his wife and 125 shares each owned by a trust set up for Dr.
Henderson's four children (a total of 500 shares).
(4) Includes 29,007 shares which Mr. Holmberg owns individually. Also
includes 100 shares which is owned by Mr. Holmberg's wife, as to which
shares Mr. Holmberg disclaims beneficial ownership.
(5) Includes 5,000 shares held in C. E. Jennings, Jr. Harbor Trust IRA, of
which Mr. Jennings is sole beneficiary; 3,166 shares which Mr. Jennings
owns individually and 200 shares which Mr. Jennings owns as joint
tenant with his wife. Also includes 100 shares which Mr. Jennings' wife
owns, as to which shares Mr. Jennings disclaims beneficial ownership.
(6) Includes 4,000 shares which Mr. McLean owns as joint tenant with his
wife and daughter and 1,170 shares owned by Mr. McLean in trust for his
grandchildren for which Mr. McLean is sole trustee. Also includes 1,100
shares owned by Mr. McLean's daughter, son-in-law and wife as to which
these 1,100 shares Mr. McLean disclaims beneficial ownership.
(7) Includes 7,226 shares which Mr. Noriega owns individually and 100
shares each owned joint with three of Mr. Noriega's children (a total
of 300 shares).
(8) Includes 100 shares which Mr. Weaver owns individually and 200 shares
owned in joint with Mr. Weavers spouse.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain officers, directors, security holders with more than five percent
ownership, and corporations and individuals related to such persons have
indebtedness in the form of loans. These loans to such persons are made in the
ordinary course of business. The loans are made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons, and do not involve more than the
normal risk of collectibility, nor do they present other unfavorable features.
27
<PAGE> 28
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS:
<TABLE>
<S> <C> <C> <C>
(1) Independent Auditors' Report 29
(2) Consolidated Balance Sheets as of December 31, 1998 and 1997 30
(3) Consolidated Statements of Income for Each of the Three Years
in the Period Ended December 31, 1998 31
(4) Consolidated Statements of Changes in Stockholders' Equity for Each
of the Three Years in the Period Ended December 31, 1998 32
(5) Consolidated Statements of Cash Flows for Each of the Three Years
in the Period Ended December 31, 1998 33
(6) Notes to Consolidated Financial Statements 34-47
</TABLE>
(2) FINANCIAL STATEMENT SCHEDULES:
The following financial statement schedules have been omitted since the
required information is not applicable or has been included in the
Notes to Consolidated Financial Statements:
Schedule I - U. S. Treasury Securities, Obligations of Other
U. S. Government Agencies and Corporations, Obligations of
States and Political Subdivisions, and Other Bonds, Notes and
Debentures
Schedule IV - Company Premises and Equipment
Schedule V - Investment In, Income From Dividends, And Equity
In Earnings Or Losses Of Subsidiaries And Associated Companies
Schedule VI - Allowance For Possible Loan Losses
The following financial statement schedules are attached to this 10-K in
response to Item 14:
Report of Independent Auditors on Supplementary Schedules
Schedule II - Loans to Officers, Directors, Principal Security
Holders, and any Associates of the Foregoing Persons
Schedule III - Loans and Lease Financing Receivables
(Remainder of this page intentionally left blank)
28
<PAGE> 29
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Stockholders
Valrico Bancorp, Inc. and Subsidiary
Valrico, Florida
We have audited the accompanying consolidated balance sheets of Valrico Bancorp,
Inc. and subsidiary as of December 31, 1998 and December 31, 1997, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company'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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Valrico Bancorp,
Inc. and subsidiary at December 31, 1998 and December 31, 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
Certified Public Accountants
Tampa, Florida
January 27, 1999
29
<PAGE> 30
VALRICO BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1998 1997
---- ----
ASSETS
<S> <C> <C>
Cash and non interest bearing deposits $ 4,454,308 $ 3,516,862
Federal funds sold 6,356,000 -
Securities available-for-sale 6,782,714 5,511,678
Securities to be held-to-maturity (approximate fair value of
$2,140,029 for 1998; $2,504,515 for 1997) 2,049,431 2,430,484
Loans 55,694,340 47,872,883
Facilities 3,404,642 2,852,443
Other real estate 101,574 -
Accrued interest receivable 478,788 468,465
Other assets 1,362,786 1,149,279
------------ ------------
Total assets $ 80,684,583 $ 63,802,094
============ ============
LIABILITIES
Deposits:
Demand deposits $ 12,704,041 $ 9,210,202
NOW accounts 14,354,403 10,108,131
Money market accounts 6,206,633 3,632,693
Savings accounts 8,128,151 7,267,013
Time, $100,000 and over 6,990,780 6,303,932
Other time deposits 22,121,392 18,524,636
------------ ------------
Total deposits 70,505,400 55,046,607
Federal funds purchased - 1,872,000
Securities sold under agreements to repurchase 646,409 499,582
Accounts payable and accrued liabilities 886,853 474,615
Advances under line-of-credit 499,950 399,950
Note payables 3,222,196 1,272,191
------------ ------------
Total liabilities 75,760,808 59,564,945
------------ ------------
Commitments and contingencies (Notes O and P)
STOCKHOLDERS' EQUITY
Common stock, no par value, authorized 1,000,000
shares, issued and outstanding 307,790 shares for 1998;
299,115 for 1997 307,790 299,115
Capital surplus 2,566,070 2,431,145
Retained earnings 2,041,125 1,515,796
Accumulated other comprehensive income 8,790 (8,907)
------------ ------------
Total stockholders' equity 4,923,775 4,237,149
------------ ------------
Total liabilities and stockholders' equity $ 80,684,583 $ 63,802,094
============ ============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
30
<PAGE> 31
VALRICO BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996
---- ---- ----
INTEREST INCOME
<S> <C> <C> <C>
Interest and fees on loans $4,801,507 $3,989,971 $3,454,488
Interest on investment securities:
U. S. Treasury 46,378 73,250 58,219
U. S. Government agencies and corporations 314,215 452,010 466,197
Other 115,566 89,252 65,921
Income on Federal funds sold 265,243 106,840 161,743
---------- ---------- ----------
Total interest income 5,542,909 4,711,323 4,206,568
---------- ---------- ----------
INTEREST EXPENSE
Interest on deposits 1,939,552 1,659,414 1,514,224
Interest on short-term borrowings 35,840 127,095 30,232
Interest on long-term debt 84,447 101,417 --
---------- ---------- ----------
Total interest expense 2,059,839 1,887,926 1,544,456
---------- ---------- ----------
Net interest income 3,483,070 2,823,397 2,662,112
PROVISION FOR LOAN LOSSES 210,000 300,000 181,444
---------- ---------- ----------
Net interest income after provision
for loan losses 3,273,070 2,523,397 2,480,668
---------- ---------- ----------
OTHER INCOME
Service charges on deposit accounts 562,780 428,698 350,745
Miscellaneous income 94,286 86,663 80,250
---------- ---------- ----------
Total other income 657,066 515,361 430,995
---------- ---------- ----------
OTHER EXPENSES
Salaries and employee benefits 1,487,036 1,304,265 1,159,949
Occupancy expense 420,535 243,388 391,068
Equipment expense 297,859 270,367 263,318
Stationery, printing and supplies 102,712 95,485 87,709
Miscellaneous expenses 742,540 700,450 505,764
---------- ---------- ----------
Total other expenses 3,050,682 2,613,955 2,407,808
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 879,454 424,803 503,855
INCOME TAXES 318,387 100,991 155,864
---------- ---------- ----------
NET INCOME 561,067 323,812 347,991
OTHER COMPREHENSIVE INCOME
Unrealized gains on securities 17,697 12,238 14,480
---------- ---------- ----------
COMPREHENSIVE INCOME $ 578,764 $ 336,050 $ 362,471
========== ========== ==========
PER SHARE INFORMATION 299,221 297,026 297,545
Average shares outstanding
---------- ---------- ----------
Basic EPS $ 1.88 $ 1.09 $ 1.17
========== ========== ==========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
31
<PAGE> 32
VALRICO BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
COMMON CAPITAL RETAINED OTHER TOTAL
STOCK SURPLUS EARNINGS COMPREHENSIVE STOCKHOLDERS?
INCOME EQUITY
---------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ 299,279 $ 2,323,160 $ 1,008,662 $ (35,625) $ 3,595,476
Comprehensive Income:
Net income -- -- 347,991 -- 347,991
Other comprehensive income, net of tax:
Net change in net
unrealized holding
losses on securities -- -- -- 14,480 14,480
-----------
Total comprehensive
income 362,471
-----------
Stock redemption (2,434) (18,498) (8,326) -- (29,258)
Cash dividends -- -- (29,685) -- (29,685)
Transfer -- 49,531 (49,531) -- --
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1996 296,845 2,354,193 1,269,111 (21,145) 3,899,004
Comprehensive Income:
Net income -- -- 323,812 -- 323,812
Other comprehensive income, net of tax:
Net change in net
unrealized holding
losses on securities -- -- -- 12,238 12,238
-----------
Total comprehensive
income 336,050
-----------
Stock issuance 2,370 30,810 -- -- 33,180
Cash dividends -- -- (29,685) -- (29,685)
Stock redemption (100) (1,300) -- -- (1,400)
Transfer -- 47,442 (47,442) -- --
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 299,115 2,431,145 1,515,796 (8,907) 4,237,149
Comprehensive income: -- -- 561,067 -- 561,067
Net income
Other comprehensive
income, net of tax
Net change in net -- -- -- 17,697 17,697
unrealized holding
losses on securities
Total comprehensive
-----------
income 578,764
-----------
Stock issuance 14,675 212,925 -- -- 227,600
Cash dividends -- -- (35,738) -- (35,738)
Stock redemption (6,000) (78,000) -- -- (84,000)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1998 $ 307,790 $ 2,566,070 $ 2,041,125 $ 8,790 $ 4,923,775
=========== =========== =========== =========== ===========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
32
<PAGE> 33
VALRICO BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1998 1997 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 561,067 $ 323,812 $ 347,991
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 210,000 300,000 181,444
Depreciation and amortization 286,930 247,821 226,168
Net amortization (accretion) of investment (10,572)
security premiums and discounts (12,799) 35,324
Loss (gain) on sale of assets -- (336) 54,437
Deferred income taxes (127,950) 1,502 (17,332)
(Increase) in assets: (10,325)
Accrued interest receivable (52,287) (40,690)
Other assets (106,807) (6,425) (132,074)
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities 412,239 (81,520) (277,261)
------------ ------------ ------------
Net cash provided by operating activities 1,214,582 719,768 378,007
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available-for-sale: (3,635,205)
Purchase of securities (501,100) (3,322,279)
Proceeds from maturities of securities 2,400,009 911,512 1,274,383
Proceeds from sale of securities -- 1,252,969 --
Securities to be held to maturity:
Purchase of securities -- -- (1,005,945)
Proceeds from maturities of securities 384,737 820,203 666,640
Decrease (increase) in Federal funds sold (6,356,000) 358,000 2,965,000
Net increase in loans (8,133,031) (10,275,583) (5,045,090)
Purchase of facilities (829,136) (2,075,327) (82,789)
Proceeds from sale of other real estate -- -- 281,219
------------ ------------ ------------
Net cash used in investing activities (16,168,626) (9,509,326) (4,268,861)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES 15,458,793
Net increase in deposits 6,170,807 4,102,178
Increase (decrease) in Federal funds purchased (1,872,000) 772,000 1,100,000
Net increase in securities sold under
agreements to repurchase 146,830 11,700 98,241
Proceeds from issuance of long-term debt 2,000,000 1,712,950 --
Principal payments on long-term debt (49,995) (40,809) --
Proceeds from issuance of common stock 227,600 33,180 --
Cash dividends paid (35,738) (29,685) (29,685)
Redemption of common stock (84,000) (1,400) (29,258)
Net borrowings on line-of-credit 100,000 -- --
------------ ------------ ------------
Net cash provided by financing activities 15,891,490 8,628,743 5,241,476
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH 937,446 (160,815) 1,350,622
CASH, BEGINNING OF YEAR 3,516,862 3,677,677 2,327,055
CASH, END OF YEAR $ 4,454,308 $ 3,516,862 $ 3,677,677
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for interest $ 2,131,999 $ 1,857,465 $ 1,820,149
Cash paid during the year for income taxes $ 100,787 $ 174,203 $ 245,547
Loans transferred to foreclosed real estate during the year $ 101,574 -- --
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
33
<PAGE> 34
VALRICO BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
General:
The consolidated financial statements include the accounts and transactions
of Valrico Bancorp, Inc. (Company) and its wholly-owned subsidiary, Valrico
State Bank (Bank). All significant intercompany accounts and transactions
have been eliminated in consolidation.
The Bank provides a wide range of banking services to individual and
corporate customers primarily in Hillsborough County, Florida.
The Company and the Bank are subject to regulations issued by certain
regulatory agencies and undergo periodic examinations by those agencies.
Basis of Financial Statement Presentation:
The accounting and reporting policies of the Company conform with generally
accepted accounting principles and with general practices within the banking
industry. In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported amounts
of assets and liabilities as of the date of the balance sheet and revenues
and expenses for the period. Actual results could differ significantly from
those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and the
valuation of foreclosed assets. Additionally, management has made extensive
estimates in determining fair values of financial instruments.
Management believes that the allowance for losses on loans is adequate. While
management uses available information to recognize losses on loans, including
independent appraisals for significant properties, future additions to the
allowance may be necessary based on changes in economic conditions. In
addition, various regulatory agencies, as an integral part of their
examination process, periodically review the allowance for losses on loans.
Such agencies may require the Company to recognize additions to the allowance
based on their judgments about information available to them at the time of
their examination.
Investments:
Statement of Financial Accounting Standards No. 115 ("FAS 115"), Accounting
for Certain Investments in Debt and Equity Securities, sets the standard for
classification of and accounting for investments in equity securities that
have readily determinable fair values, and all investments in debt securities
which are to be classified as held-to-maturity securities, available-for-sale
securities, or trading securities.
Debt securities that an enterprise has the positive intent and ability to
hold to maturity are classified as held-to-maturity securities and reported
at amortized cost. Debt and equity securities that are bought and held
principally for the purpose of selling them in the near term are classified
as trading securities and reported at fair value, with unrealized gains and
losses included in net income. Debt and equity securities not classified as
either held-to-maturity securities or trading securities are classified as
available-for-sale securities and reported at fair value, with unrealized
gains and losses included as accumulated other comprehensive income in a
separate component of stockholders' equity.
The Bank classifies its investments at the purchase date in accordance with
the above-described guidelines. Premiums or discounts on securities at the
date of purchase are being amortized or accreted, respectively, over the
estimated life of the security using a method which approximates the level
yield method. Gains and losses realized on the disposition of securities are
based on the specific identification method and are reflected in other
income.
34
<PAGE> 35
VALRICO BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONTINUED)
Loans:
Loans receivable are stated at unpaid principal balance, less the allowance
for loan losses and net deferred loan origination fees and costs.
Interest on loans is accounted for on the accrual basis. Generally, the
Company's policy is to discontinue the accrual of interest on loans
delinquent over ninety days unless fully secured and in the process of
collection. The accrued and unpaid interest is reversed from current income
and thereafter interest is recognized only to the extent payments are
received. A non-accrual loan may be restored to accrual basis when interest
and principal payments are current and prospects for future recovery are no
longer in doubt.
Statement of Financial Accounting Standards No. 114 ("FAS 114"), Accounting
by Creditors for Impairment of a Loan, sets the standard for recognition of
loan impairment and the measurement methods for certain impaired loans and
loans whose terms are modified in troubled debt restructurings.
Under FAS 114, a loan is impaired when it is probable that a creditor will be
unable to collect the full amount of principal and interest due according to
the contractual terms of the loan agreement. When a loan is impaired, a
creditor has a choice of ways to measure the impairment. The measurement of
impairment may be based on (1) the present value of the expected future cash
flows of the impaired loan discounted at the loan's original effective
interest rate, (2) the observable market price of the impaired loan, or (3)
the fair value of the collateral of a collateral-dependent loan. Creditors
may select the measurement method on a loan-by-loan basis, except that
collateral-dependent loans for which foreclosure is probable must be
measured at the fair value of the collateral. A creditor in a troubled debt
restructuring involving a restructured loan should measure impairment by
discounting the total expected future cash flows at the loan's original
effective rate of interest.
Facilities:
Facilities are stated at cost, less accumulated depreciation and
amortization. Charges to income for depreciation and amortization are
computed on the straight-line method over the assets' estimated useful lives.
When properties are sold or otherwise disposed of, the gain or loss resulting
from the disposition is credited or charged to income. Expenditures for
maintenance and repairs are charged against income and renewals and
betterments are capitalized.
Allowance for Loan Losses:
The allowance for loan losses is established through a provision for loan
losses charged to expense. Loans are charged-off against the allowance when
management believes that the collectibility of principal is unlikely.
Recoveries of amounts previously charged-off are credited to the allowance.
The allowance for loan losses is based on management's evaluation of various
factors including prevailing and anticipated economic conditions,
diversification and size of the loan portfolio, current financial status and
credit standing of the borrower, the status and level of nonperforming
assets, past and expected loan loss experience, adequacy of collateral,
specific impaired loans and economic conditions. Allowances for impaired
loans are generally determined based on collateral values or the present
value of estimated cash flows.
Off Balance Sheet Financial Instruments:
In the ordinary course of business the Bank 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 become payable.
Income Taxes:
The Bank accounts for income taxes under the asset and liability method as
prescribed in FAS No. 109, Accounting for Income Taxes. Deferred tax assets
and liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and operating loss and
tax credit carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the year in
which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
35
<PAGE> 36
VALRICO BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONTINUED)
Comprehensive Income:
In June 1997, the Financial Accounting Standards Board issued FAS 130,
Reporting Comprehensive Income. The statement establishes standards for
reporting and display of comprehensive income and its components in a full
set of general purpose financial statements. It requires an enterprise to
classify items of other comprehensive income by their nature and to display
the accumulated balance of other comprehensive income separately in the
equity section of a statement of financial position.
This statement is effective for fiscal years beginning after December 15,
1997. Reclassification of financial statements for earlier periods provided
for comparative purposes is required.
The effect of FAS 130 is not significant to the Company's financial
statements.
Earnings:
Basic EPS is computed by dividing net income by the weighted average shares
of common stock outstanding during the year.
Statement of Cash Flows:
For purposes of reporting cash flows, cash includes cash on hand and amounts
on deposit in non-interest bearing accounts with other commercial banks.
Reclassification of Accounts:
Certain items in the consolidated financial statements for prior years have
been reclassified to conform to classifications used in the current year.
NOTE B - INVESTMENT SECURITIES
The amortized cost and estimated fair value of investments in debt securities at
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
Securities available-for-sale:
<S> <C> <C> <C> <C>
U. S. Treasury $ 502,194 $ 5,341 $- $ 507,535
U. S. Government agencies 500,000 4,874 - 504,874
Mortgage-backed securities 3,504,024 14,138 17,417 3,500,745
Other 2,247,545 22,015 - 2,269,560
--------- ------ --------- ---------
$ 6,753,763 $ 46,368 $ 17,417 $ 6,782,714
=========== ======== ======== ===========
Securities to be held-to-maturity: $ 765,417 $ 9,158 $ - $ 774,575
Mortgage-backed securities
Other 1,284,014 81,440 - 1,365,454
--------- ------ --------- ---------
$ 2,049,431 $ 90,598 $ - $ 2,140,029
=========== ======== ========= ===========
</TABLE>
36
<PAGE> 37
VALRICO BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE B - INVESTMENT SECURITIES (CONTINUED)
The amortized cost and estimated fair value of investments in debt securities at
December 31, 1997, are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
Securities available-for-sale:
U. S. Treasury $ 753,063 $ 5,571 $- $ 758,634
U. S. Government agencies 924,300 7,603 1,623 930,280
Mortgage-backed securities 3,295,644 19,142 29,814 3,284,972
Other 533,641 4,150 - 537,792
----------- -------- -------- -----------
$ 5,506,648 $ 36,466 $ 31,437 $ 5,511,678
=========== ======== ======== ===========
Securities to be held-to-maturity:
Mortgage-backed securities $ 1,147,657 $ 43,240 $ 279 $ 1,190,618
Other 1,282,827 32,339 1,269 1,313,897
----------- -------- -------- -----------
$ 2,430,484 $ 75,579 $ 1,548 $ 2,504,515
=========== ======== ======= ===========
</TABLE>
The fair value of securities fluctuates during the investment period. No
provision for loss has been made in connection with the decline of fair value
below book value, because the securities are purchased for investment purposes
and the decline is not deemed to be other than temporary. The estimated fair
value of securities is determined on the basis of market quotations. Securities
with amortized cost of approximately $907,000 and $919,000 and market values of
approximately $918,000 and $931,000 were pledged to secure repurchase
agreements, Federal funds purchased and deposit accounts at December 31, 1998
and December 31, 1997, respectively.
There were no security sales during 1996 and 1998. During 1997, the Company had
a $336 gain on the sale-of-securities for $1,252,969.
At December 31, 1995, securities with an amortized cost of approximately
$1,646,000 were transferred to held-to-maturity from available-for-sale due to a
one-time opportunity to reassess security classifications in accordance with
guidelines issued by the FASB. These securities had a net unrealized loss of
$15,000 at December 31, 1998.
The cost and estimated fair value of debt securities at December 31, 1998, by
contractual maturities, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
SECURITIES AVAILABLE-FOR-SALE SECURITIES TO BE
HELD-TO-MATURITY
--------------------------- ----------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---- ----- ---- -----
<S> <C> <C> <C> <C>
Due in one year or less $ 502,194 $ 507,534 $ - $-
Due from one to five years 1,167,510 1,177,434 413,638 425,715
Due from five to ten years 3,247,647 3,248,430 765,784 818,220
Due after ten years 1,836,412 1,849,316 870,009 896,094
----------- ----------- ----------- -----------
$ 6,753,763 $ 6,782,714 $ 2,049,431 $ 2,140,029
=========== =========== =========== ===========
</TABLE>
37
<PAGE> 38
VALRICO BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE C - LOANS
The loan portfolio is classified as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1998 1997
---- ----
<S> <C> <C>
Commercial and agricultural $ 44,640,144 $ 35,857,887
Real estate 3,756,597 5,226,595
Installment and other loans 8,138,593 7,406,185
------------ ------------
Total loans 56,535,334 48,490,667
Less, unearned income (64,612) (41,437)
Less, allowance for loan losses (776,382) (576,347)
------------ ------------
$ 55,694,340 $ 47,872,883
============ ============
</TABLE>
The following is a summary of the transactions in the allowance for loan losses:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year $ 576,347 $ 500,504 $ 491,563
Provision charged to operating expenses 210,000 300,000 181,444
Loans charged-off (23,672) (262,719) (204,366)
Recoveries 13,707 38,562 31,863
--------- --------- ---------
$ 776,382 $ 576,347 $ 500,504
========= ========= =========
</TABLE>
Loans on which interest was not being accrued totaled $163,399 and $49,000 at
December 31, 1998 and December 31, 1997, respectively. Had interest been accrued
on these non-accrual loans at originally contracted rates, interest income
(before income taxes) would have been increased by approximately $8,517 for 1998
and $2,229 for 1997.
A loan is considered impaired when it is probable that the Bank will be unable
to collect all amounts due according to the contractual terms of the agreement.
At December 31, 1998 and December 31, 1997, the Bank has classified loans in the
amount of $188,704 and $336,362 as impaired loans, respectively. The allowance
for loan losses includes amounts applicable to impaired loans. These allowances
are not significant to the Bank's financial statements.
NOTE D - FACILITIES
Facilities are summarized as follows:
<TABLE>
<CAPTION>
ACCUMULATED ESTIMATED
COST DEPRECIATION & NET BOOK USEFUL
AMORTIZATION VALUE LIVES
----------- ------------ ----- -----
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
Land $ 1,060,506 $ - $ 1,060,506 N/A
Building 1,713,826 87,471 1,626,355 39 1/2 years
Leasehold improvements 602,948 252,211 350,737 3 - 15 years
Furniture, fixtures and equipment 1,525,989 1,158,945 367,044 2 - 15 years
--------- --------- -------
$ 4,903,269 $ 1,498,627 $ 3,404,642
=========== =========== ===========
</TABLE>
38
<PAGE> 39
VALRICO BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE D - FACILITIES (CONTINUED)
<TABLE>
<CAPTION>
ACCUMULATED ESTIMATED
COST DEPRECIATION & NET BOOK USEFUL
AMORTIZATION VALUE LIVES
------------ ----- -----
DECEMBER 31, 1997
<S> <C> <C> <C> <C>
Land $ 741,905 $ - $ 741,905
Building 1,539,582 182,030 1,357,552 39 1/2 years
Leasehold improvements 350,485 55,714 294,771 3 - 15 years
Furniture, fixtures and equipment 1,442,159 983,944 458,215 2 - 15 years
----------- ----------- -----------
$ 4,074,131 $ 1,221,688 $ 2,852,443
=========== =========== ===========
</TABLE>
Other expenses for the years ended December 31, 1998, 1997 and 1996, include
depreciation and amortization of facilities of $276,939, $237,829, and $226,168,
respectively.
NOTE E - TIME DEPOSITS
Time deposits at December 31, 1998 totaled $29,112,172. Maturities (in
thousands) of such deposits are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
<S> <C>
1999 $ 21,922
2000 $ 3,059
2001 $ 1,213
2002 $ 1,295
2003 $ 1,623
</TABLE>
NOTE F - LINE-OF-CREDIT
During 1997, the Company entered into an open end loan agreement with
Independent Banker's Bank of Florida which provides for maximum borrowings of
$500,000 at the prime interest rate. The security for the loan agreement
consists of the Bank's common stock and a security interest in other Company
assets.
At December 31, 1998, the outstanding balance was $499,950. Interest expense for
the year ended December 31, 1998 was $34,032.
NOTE G - LONG-TERM DEBT
During 1998, the Bank entered into a long-term note payable for the purpose of
fund matching.
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1998 1997
---- ----
<S> <C> <C>
Note payable to Independent Banker's Bank of Florida, principal and
interest of $12,930 payable monthly at 8.5% for the first year and
adjustable each year based on the U.S. Treasury Note three-year $ 1,222,196 $ 1,272,191
index; due on January 14, 2012. Secured by real estate.
Note payable to the Federal Home Loan Bank of Atlanta, interest payable
quarterly at 5.51%, principal due March 26, 2008. The loan is callable 2,000,000 -
as of March 26, 2003 and may be prepaid. Collateralized by mortgage
loans and Federal Home Loan Bank stock. ----------- -----------
3,222,196 1,272,191
Less: current portion (53,316) (48,987)
----------- -----------
Long-term debt $ 3,168,880 $ 1,223,204
=========== ===========
</TABLE>
39
<PAGE> 40
VALRICO BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE G - LONG-TERM DEBT (CONTINUED)
Estimated maturities on long-term debt are as follows:
<TABLE>
<S> <C>
2000 $ 57,741
2001 63,133
2002 68,713
2003 74,787
Thereafter 2,904,506
------------
$ 3,168,880
===========
</TABLE>
Interest expense for the year ended December 31, 1998 was $189,608.
NOTE H - STOCK OPTION PLAN
The Company adopted the 1998 Stock Option Plan on December 15, 1998, replacing
its previous stock option plan. All options under the old plan have been
terminated. Under the new plan 65,000 shares of the Company's common stock have
been reserved to grant to officers, directors and other key personnel of the
Bank. Option prices per share are set by a committee of the Board of Directors
at the time of the grant, but the price cannot be less than the fair market
value of the stock at the date of the grant. The options are generally
nontransferable and expire following termination of employment with the Bank,
except in the event of death or disability.
At December 31, 1998, options for 59,910 shares had been granted with an
exercise price of $16 per share. All such options expire December 14, 2008. At
December 31, 1998, options on 5,090 shares remain available for grant.
The Company accounts for these options based upon APB Opinion No. 25.
Accordingly, no compensation cost has been recognized for its stock options. Had
the compensation cost been determined based upon FAS Opinion No. 123, the
Company's net income would have been reduced approximately $152,000.
NOTE I - EMPLOYEE BENEFIT PLANS
The Bank has an Employee stock ownership plan containing Internal Revenue Code
Section 401(k) Provisions. The plan became effective January 1, 1997 and is for
the benefit of employees who have completed 6 months of service and attained age
18. The plan provides for three types of Company contributions:
(1) Basic contributions - discretionary contribution made for all
non-highly compensated participants in order to satisfy the
nondiscrimination requirements of the Internal Revenue Code.
(2) Matching contribution - the Bank matches 25% of salary reduction
contributions up to 6% of compensation.
(3) Optional contributions - additional discretionary contribution made by
the Bank allocated to the accounts of participants on the basis of
total relative compensation.
The Bank contributed $7,980 in 1998 to the plan.
40
<PAGE> 41
VALRICO BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE J - REGULATORY CAPITAL MATTERS
The Federal Reserve Board and other bank regulatory agencies have adopted
risk-based capital guidelines for banks and bank holding companies. The main
objectives of the risk-based capital framework are to provide a more consistent
system for comparing capital positions of banking organizations and to take into
account the different risks among banking organizations' assets, liabilities and
off-balance sheet items. Bank regulatory agencies have supplemented the
risk-based capital standard with a leverage ratio for Tier I capital to total
reported assets.
Failure to meet the capital adequacy guidelines and the framework for prompt
corrective actions could initiate actions by the regulatory agencies which could
have a material effect on the financial statements.
As of December 31, 1998, the most recent notification from the FDIC, the Bank
was categorized as adequately capitalized under the regulatory framework for
prompt corrective action. To remain categorized as well capitalized, it will
have to maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as disclosed in the table below. There are no conditions or
events since the most recent notification that management believes have changed
the prompt corrective action category.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE ACTION
ACTUAL ADEQUACY PURPOSES PROVISIONS
------ ----------------- ----------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Risk-Based Capital
(to Risk-Weighted Assets) $5,615 9.14% $4,915 8.00% $6,144 10.00%
Tier I Capital
(to Risk-Weighted Assets) $4,847 7.89% $2,458 4.00% $3,686 6.00%
Tier I Capital
(to Adjusted Total Assets) $4,847 6.60% $2,939 4.00% $3,674 5.00%
As of December 31, 1997
Total Risk-Based Capital
(to Risk-Weighted Assets) $4,764 9.60% $3,970 8.00% $4,963 10.00%
Tier I Capital
(to Risk-Weighted Assets) $4,188 8.44% $1,985 4.00% $2,978 6.00%
Tier I Capital
(to Adjusted Total Assets) $4,188 6.62% $2,530 4.00% $3,163 5.00%
</TABLE>
NOTE K - OPERATING LEASES
The Bank's home office is located on property previously leased from a director
of the Bank. The lease, which expired March 30, 1996, provided for annual base
rentals of $165,000, with annual rent adjustments based on the Consumer Price
Index. The annual rental was increased from $196,518 to $204,378 effective April
1, 1995. The Bank continued to occupy the space on a month-to-month rental
basis. On January 14, 1997, the premises were purchased by Valrico Bancorp, Inc.
for approximately $1,683,000. The Bank also leases two branch locations. One
branch is leased from a director of the Bank. This lease expires March 31, 2000,
and provided for annual rentals of $42,000. The Bank has the option to renew the
lease for three additional three year terms at rentals to be negotiated at the
time of the renewal. The second branch is located in Wal-Mart. This lease
provides for a monthly rental of $2,083 for five years. The Bank has the option
to renew the lease for 2 additional 5 year terms with annual rentals of $31,250
and $39,062 respectively. Rental expense under said leases was $66,996, $64,163,
and $246,378 for each of the years ended December 31, 1998, 1997 and 1996,
respectively.
41
<PAGE> 42
VALRICO BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE K - OPERATING LEASES (CONTINUED)
These leases are accounted for as operating leases.
The future minimum rental commitment for said leases are as follows:
<TABLE>
<S> <C>
1999 $ 67,000
2000 $ 39,000
2001 $ 25,000
</TABLE>
NOTE L - DEFERRED COMPENSATION AGREEMENTS
The Bank entered into deferred compensation agreements with certain executive
officers. The agreements provide for a flat annual retirement benefit at the
time the employee participates in the agreement. The benefit may be increased by
a cost of living adjustment annually and is to be paid for 15 years. Provisions
under these agreements for 1998, 1997, and 1996 were $4,741, $7,326, and
$30,485, respectively.
NOTE M - NON INTEREST OPERATING EXPENSES
Other expenses for 1998, 1997 and 1996, were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Advertising and public relations $ 104,346 $ 96,740 $ 48,141
Professional fees 72,955 94,372 38,380
Postage 63,802 52,693 48,193
Taxes 86,752 103,863 84,657
Insurance 73,760 63,152 48,114
Telephone 36,403 37,664 30,393
Other miscellaneous expenses 304,522 251,966 207,886
------- ------- -------
$ 742,540 $ 700,450 $ 505,764
========= ========= =========
</TABLE>
NOTE N - INCOME TAXES
The provision for income taxes is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996
---- ---- ----
Current income taxes
<S> <C> <C> <C>
Federal $ 381,529 $ 86,563 $ 163,440
State 64,808 12,926 9,756
--------- -------- ---------
Total current income taxes 446,337 99,489 173,196
Deferred income taxes (credit) (127,950) 1,502 (17,332)
--------- -------- ---------
Income tax provision $ 318,387 $ 100,991 $ 155,864
========= ========= =========
</TABLE>
42
<PAGE> 43
VALRICO BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE N - INCOME TAXES (CONTINUED)
A reconciliation of the income tax computed at the Federal statutory rate of 34%
and the income tax provision shown on the statement of income follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Tax computed at statutory rate $ 299,014 $ 144,433 $ 171,311
Increase (decrease) resulting from: (15,382) (30,571) (16,664)
Tax exempt income
State income tax, net of Federal tax benefit 30,744 12,234 10,123
Other 4,011 (25,105) (8,906)
--------- -------- ---------
Income tax provision $ 318,387 $ 100,991 $ 155,864
========= ========= =========
</TABLE>
The components of the deferred income tax asset included in other assets are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1998 1997
---- ----
<S> <C> <C>
Deferred tax liability:
Federal $ (29,326) $ (60,019)
State (4,973) (10,273)
--------- ---------
(34,299) (70,292)
--------- ---------
Deferred tax asset:
Federal 234,362 142,950
State 40,067 24,470
--------- ---------
274,429 167,420
--------- ---------
Net deferred tax asset $ 240,130 $ 97,128
========= ========
</TABLE>
The tax effects of each type of significant item that gave rise to deferred
taxes are:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1998 1997
---- ----
<S> <C> <C>
Accumulated other comprehensive income $ (23,418) $ (6,078)
Depreciation (10,881) (21,430)
Cash to accrual adjustment (32,088) (42,785)
Deferred loan fees 24,313 --
Allowance for loan losses 221,455 160,557
Deferred compensation 8,648 6,864
Life insurance taxable gain 52,101 --
-------- --------
Net deferred tax asset $240,130 $ 97,128
======== ========
</TABLE>
43
<PAGE> 44
VALRICO BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE O - COMMITMENTS AND CONTINGENCIES
The financial statements do not reflect various commitments and contingent
liabilities which arise in the normal course of business and which involve
elements of credit risk, interest rate risk and liquidity risk. These
commitments and contingent liabilities are commitments to extend credit and
standby letters of credit. A summary of these commitments and contingent
liabilities follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Commitments to extend credit $ 5,188,063 $ 5,892,892
Standby letters of credit $ 292,181 $ 313,706
</TABLE>
The Bank uses the same credit policies in making commitments to extend credit
and in issuing standby letters of credit as it does for extensions of credit
shown on the balance sheets.
The Bank is party to litigation, outstanding commitments and other contingent
liabilities arising in the normal course of business. In the opinion of
management, the resolution of such matters will not have a material effect on
the financial statements.
The Bank has a $5,000,000 unused line-of-credit with Federal Home Loan Bank and
a $1,000,000 unused line-of-credit with Independent Bankers Bank of Florida for
the purchase of Federal funds.
NOTE P - CONCENTRATIONS OF CREDIT
Substantially all of the Bank's loans, commitments and standby letters of credit
have been granted to customers in Hillsborough County, Florida. The
concentrations of credit by type of loan are set forth in Note C. The
distribution of commitments to extend credit approximates the distribution of
loans outstanding. Standby letters of credit were granted primarily to
commercial borrowers.
At December 31, 1998, the Bank had $1,096,268 in excess of FDIC deposit
insurance in non-interest bearing accounts with other financial institutions.
NOTE Q - RELATED PARTIES
Certain officers, directors, employees of the Bank and certain corporations and
individuals related to such persons have deposits and indebtedness, in the form
of loans, as customers. The total of such deposits at December 31, 1998 was
$3,672,712. Total loans to such persons and their affiliates amounted to
$3,629,395 and $2,390,983 at December 31, 1998 and 1997, respectively. During
1998, originations of related party loans totaled $3,898,801 and payments on
related party loans totaled $2,660,389.
NOTE R - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and Short-term Investments:
For those short-term instruments, the carrying amount is a reasonable
estimate of fair value.
44
<PAGE> 45
VALRICO BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE R - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Investment Securities:
For securities held as investments, fair value equals quoted market
price, if available. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar securities.
Loans Receivable:
For loans subject to repricing and loans intended for sale within six
months, fair value is estimated at the carrying amount plus accrued
interest.
The fair value of other types of loans is estimated by discounting the
future cash flows using the current rates at which similar loans would be
made to borrowers with similar credit ratings and for the same remaining
maturities.
Deposit Liabilities:
The fair value of demand deposits, savings accounts, and certain money
market deposits is the amount payable on demand at the reporting date.
The fair value of long-term fixed maturity certificates of deposit is
estimated using the rates currently offered for deposits of similar
remaining maturities.
Short-term Debt:
For short-term debt, including accounts and demand notes payable, the
carrying amount is a reasonable estimate of fair value.
The estimated fair values of the Bank's financial instruments at December 31,
1998 are as follows:
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
------ -----
<S> <C> <C>
FINANCIAL ASSETS
Cash and short-term investments $10,810,308 $10,810,308
Investment securities 8,832,145 8,922,743
Loans 55,694,340 57,729,000
----------- -----------
Total assets valued $75,336,793 $77,462,051
=========== ===========
FINANCIAL LIABILITIES
Deposits $70,505,400 $71,029,000
Short-term borrowings 1,146,359 1,146,359
Long-term debt 3,222,196 3,383,306
----------- -----------
$74,873,955 $75,558,665
=========== ===========
</TABLE>
NOTE S - YEAR 2000 ISSUE
The Bank is in the process of evaluating and implementing changes to its
computer systems and applications necessary to achieve a year 2000 conversion.
These changes are necessary to ensure that the computer system and applications
will properly recognize and process information for the year 2000 and beyond.
The total cost of conversion and its effects on the results of operations is
being determined as part of the evaluation process.
45
<PAGE> 46
VALRICO BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE T - PARENT COMPANY FINANCIAL INFORMATION
Presented below are condensed financial statements for Valrico Bancorp, Inc.
(parent only):
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS AS OF DECEMBER 31: 1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Investment in subsidiary bank, net $ 109,483 $ 41,009
Facilities, net 4,858,668 4,162,003
Other assets 1,648,790 1,677,666
30,637 29,812
---------- ----------
Total assets $6,647,578 $5,910,490
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accrued liabilities $ 1,657 $ 1,200
Line-of-credit 499,950 399,950
Note payable 1,222,196 1,272,191
---------- ----------
Total liabilities 1,723,803 1,673,341
Stockholders equity 4,923,775 4,237,149
---------- ----------
Total liabilities and stockholders equity $6,647,578 $5,910,490
========== ==========
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF OPERATIONS AND STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31: 1998 1997
----------- -----------
<S> <C> <C>
Equity in net income of subsidiary bank:
Distributed $ - $ 29,685
Undistributed 578,986 302,062
Rent income 204,000 187,000
Other income 11,160 208
Interest expense (139,192) (132,579)
Other expenses (93,887) (62,564)
----------- -----------
Net Income 561,067 323,812
STOCKHOLDERS EQUITY
Beginning of year 4,237,149 3,899,004
Dividends paid (35,738) (29,685)
Stock issuance 227,600 33,180
Stock redemption (84,000) (1,400)
Net change in unrealized holding losses
on securities in subsidiary bank 17,697 12,238
----------- -----------
End of year $ 4,923,775 $ 4,237,149
=========== ===========
</TABLE>
46
<PAGE> 47
VALRICO BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE T - PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31: 1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 561,067 $ 323,812
Adjustment to reconcile net income to net
cash provided by operating activities:
Equity in undistributed earnings (loss) of subsidiary (578,986) (302,062)
Deferred income taxes -- 5,790
Depreciation 28,876 26,469
Amortization 9,991 9,991
Increase in other assets (10,815) --
Increase in accounts payable and accrued liabilities 468 1,200
----------- -----------
Net cash provided by operating activities 10,601 65,200
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of facilities -- (1,702,634)
Purchase of investment in subsidiary (99,994) --
----------- -----------
Net cash used in investing activities (99,994) (1,702,634)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock 227,600 33,180
Redemption of common stock (84,000) (1,400)
Cash dividend on common stock (35,738) (29,685)
Proceeds from issuance of long-term debt -- 1,313,000
Principal payments on long-term debt (49,995) (40,809)
Net increase in short-term borrowings 100,000 399,950
----------- -----------
Net cash provided by financing activities 157,867 1,674,236
----------- -----------
NET INCREASE IN CASH 68,474 36,802
CASH AT BEGINNING OF YEAR 41,009 4,207
----------- -----------
CASH AT END OF YEAR $ 109,483 $ 41,009
=========== ===========
</TABLE>
Page 47
<PAGE> 48
SCHEDULE II
LOANS TO OFFICERS, DIRECTORS, PRINCIPAL SECURITY
HOLDERS, AND ANY ASSOCIATES OF THE FOREGOING PERSONS
Year ended December 31, 1998
<TABLE>
<CAPTION>
BALANCE REDUCTIONS BALANCE
BEGINNING ------------------------------ END OF
NAME OF OF PERIOD AMOUNTS AMOUNTS PERIOD
BORROWER 1-01-98 ADDITIONS COLLECTED CHARGED OFF 12-31-98
- -------- ------- --------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
LeVaughn Amerson (1) $ 60,882 $ 122,000 $ 105,000 $ 0 $ 77,882
C. Dennis Carlton (2) 33,521 0 2,690 0 30,831
Carlton & Carlton (3) 6,770 0 6,289 0 482
Carlton, Sr. (4) 103,481 0 7,392 0 96,089
Carlton & Carlton 18,930 0 18,930 0 0
Carlton & Carlton (5) 21,802 0 4,305 0 17,496
C. Dennis Carlton (6) 0 108,750 24,964 0 83,786
C. Dennis Carlton (7) 0 23,850 3,576 0 20,275
C. Dennis Carlton (8) 0 278,000 23,737 0 254,263
C. Dennis Carlton (9) 0 80,000 0 0 80,000
C. Dennis Carlton (10) 0 72,972 24,324 0 48,648
Holmberg Farms 200,000 0 200,000 0 0
Holmberg Farms (11) 1,698 654906 340478 0 316,126
Holmberg Farms (12) 0 84,161 8,030 0 76,131
Holmberg Farms (13) 0 250,000 0 0 250,000
5 Directors & Officers 1,943,899 2,224,162 1,890,674 0 2,277,386
------------- ------------ ------------ ---------- -------------
Totals $ 2,390,983 $ 3,898,801 $ 2,660,389 $ 0 $ 3,629,395
============= ============ ============ ========== =============
</TABLE>
NOTES
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(1) LEVAUGHN AMERSON (2) C.DENNIS CARLTON
- -------------------- --------------------
Original date: February 20, 1992 Original date: June 28, 1995
Maturity: February 21, 1999 Maturity: June 18, 1999
Rate: Prime plus .5 Rate: 9.5%
Terms: Quarterly interest Terms: Principal & Interest
Monthly.
Collateral: Unsecured Collateral: First Mortgage
(3) CARLTON & CARLTON (4) C. DENNIS CARLTON
- --------------------- ---------------------
Original date: January 31, 1996 Original date: October 4, 1991
Maturity: February 5, 1999 Maturity: October 4, 2001
Rate: 8% Rate: Prime plus 1
Terms: Principal & Interest Terms: Principal & Interest
monthly semi-annually
Collateral: Automobile Collateral: First Mortgage
(5) CARLTON & CARLTON (6) C. DENNIS CARLTON
- --------------------- ---------------------
Original date: July 25, 1997 Original date: July 14, 1998
Maturity: August 5, 2002 Maturity: July 13, 1999
Rate: 8.9% Rate: Prime plus 1
Terms: Principal & Interest Terms: Interest Monthly
monthly
Collateral: Automobile Collateral: Real Estate
(7) C. DENNIS CARLTON (8) C. DENNIS CARLTON
- --------------------- ---------------------
Original date: June 24, 1998 Original date: September 10, 1998
Maturity: June 24, 2001 Maturity: September 10, 2001
Rate: 8.25% Rate: Prime plus 1
Terms: Principal & Interest Terms: Principal & Interest
monthly monthly
Collateral: Automobile Collateral: Accounts Receivable / Inventory
</TABLE>
Page 48
<PAGE> 49
<TABLE>
<S> <C> <C> <C>
(9) C. DENNIS CARLTON (10) C. DENNIS CARLTON
- --------------------- ----------------------
Original date: February 20, 1998 Original date: February 19, 1997
Maturity: February 18, 2000 Maturity: February 19, 2000
Rate: Prime plus 1 Rate: Prime plus 1
Terms: Principal annually Terms: Principal annually
Interest quarterly Interest quarterly
Collateral: Real Estate Collateral: Accounts Receivable / Inventory
(11) HOLMBERG FARMS (12) HOLMBERG FARMS
- ------------------- -------------------
Original date: December 30, 1997 Original date: September 10, 1998
Maturity: December 29, 1998 Maturity: September 10, 1999
Rate: Prime plus 1 Rate: Prime plus 1
Terms: Interest monthly Terms: Principal annually
Interest monthly
Collateral: Agriculture equipment Collateral: Unsecured
(13) HOLMBERG FARMS
- -------------------
Original date: May 20, 1998
Maturity: May 19, 2003
Rate: 8.9%
Terms: Principal & Interest monthly
Collateral: Automobile
</TABLE>
(Remainder of this page intentionally left blank)
Page 49
<PAGE> 50
SCHEDULE II
LOANS TO OFFICERS, DIRECTORS, PRINCIPAL SECURITY
HOLDERS, AND ANY ASSOCIATES OF THE FOREGOING PERSONS
Year ended December 31, 1997
<TABLE>
<CAPTION>
BALANCE REDUCTIONS BALANCE
BEGINNING -------------------------------- END OF
NAME OF OF PERIOD AMOUNTS AMOUNTS PERIOD
BORROWER 1-01-97 ADDITIONS COLLECTED CHARGED OFF 12-31-97
- -------- ------- --------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
LeVaughn Amerson (1) $ 0 $ 220,118 $ 159,236 $ 0 $ 60,882
C. Dennis Carlton 154,000 0 154,000 0 0
C. Dennis Carlton (2) 35,990 0 2,469 0 33,521
C. Dennis Carlton 50,000 0 50,000 0 0
Carlton & Carlton (3) 11,332 0 4,562 0 6770
Carlton, Sr. (4) 110,871 0 7,390 0 103,481
Carlton & Carlton (5) 0 24,565 5,635 0 18,930
Carlton & Carlton (6) 0 22,976 1,174 0 21,802
Holmberg Farms (7) 0 200,000 0 0 200,000
Holmberg Farms (8) 0 1,698 0 0 1,698
5 Directors & Officers 2,463,721 1,030,932 1,550,754 0 1,943,899
----------- ------------ ----------- -------- ----------
Totals $ 2,825,914 $ 1,500,289 $ 1,935,220 $ 0 $2,390,983
=========== ============ =========== ======== ==========
</TABLE>
SCHEDULE II
LOANS TO OFFICERS, DIRECTORS, PRINCIPAL SECURITY
HOLDERS, AND ANY ASSOCIATES OF THE FOREGOING PERSONS
Year ended December 31, 1996
<TABLE>
<CAPTION>
BALANCE REDUCTIONS BALANCE
BEGINNING -------------------------------- END OF
NAME OF OF PERIOD AMOUNTS AMOUNTS PERIOD
BORROWER 1-01-96 ADDITIONS COLLECTED CHARGED OFF 12-31-96
- -------- ------- --------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
J. E. McLean & Sons $ 219,952 $ 0 $ 10,000 $ 0 $ 209,952
J. E. McLean & Sons 34,995 0 5,000 0 29,995
J. E. McLean & Sons 25,000 0 0 0 25,000
J. E. McLean & Sons 20,525 0 20,525 0 0
J. E. McLean & Sons 25,000 0 25,000 0 0
J. E. McLean & Sons 0 25,000 0 0 25,000
J. E. McLean & Sons 0 29,000 0 0 29,000
C. Dennis Carlton 165,000 0 11,000 0 154,000
C. Dennis Carlton 37,718 0 1,728 0 35,990
C. Dennis Carlton 0 50,000 0 0 50,000
C. Dennis Carlton 0 15,103 3,771 0 11,332
R. F. Kustom Homes 42,700 0 42,700 0 0
R. F. Kustom Homes 56,800 0 56,800 0 0
R. F. Kustom Homes 43,624 0 43,624 0 0
R. F. Kustom Homes 2,298 114,902 117,200 0 0
Holmberg Farms 193,000 57,000 250,000 0 0
5 Directors & Officers 1,144,038 1,418,023 306,416 0 2,255,645
------------- ------------- ------------- ------------ -------------
Totals $ 2,010,650 $ 1,709,028 $ 893,764 $ 0 $ 2,825,914
============= ============= ============= ============ =============
</TABLE>
Page 50
<PAGE> 51
SCHEDULE III
LOANS AND LEASE FINANCING RECEIVABLES
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 1997 1996
--------- --------- ----------
<S> <C> <C> <C>
1. Loans secured by real estate:
a. Construction and land development $ 6,470 $ 4,352 $ 1,324
b. Secured by farmland (including farm residential and other
improvements) 2,780 3,505 3,361
c. Secured by 1 - 4 family residential properties:
(1) Revolving, open-end loans secured by 1 - 4 family residential
properties and extended under lines of credit 0 0 0
(2) All other loans secured by 1-4 family residential properties:
(a) Secured by first liens 6,724 7,119 5,741
(b) Secured by junior liens 550 699 744
d. Secured by multifamily (5 or more) residential properties 346 851 821
e. Secured by non-farm nonresidential properties 15,226 13,507 12,710
2. Loans to depository institutions 0 0 3
3. Loans to finance agricultural production and other loans to farmers 9,406 7,300 3,108
4. Commercial and industrial loans 8,768 6,136 5,828
5. Acceptance of other banks 0 0 0
6. Loans to individuals for household, family, and other personal expenditures
(i.e., consumer loans) (includes purchase paper):
a. Credit cards and related plans (includes check credit and other revolving
credit plans) 402 375 221
b. Other (includes single payment, installment, and all student loans) 5,535 4,485 4,471
7. Obligations (other than securities and leases) of states and political
subdivisions in the U. S. (includes non-rated industrial development
obligations:
a. Taxable obligations 0 0 0
b. Tax-exempt obligations 0 0 0
8. All other loans (exclude consumer loans) 327 161 102
9. Lease financing receivables (net of unearned income) 0 0 0
10. LESS: Any unearned income on loans reflected in items 1 - 8 above (65) (41) (36)
-------- -------- --------
11. Total loans and leases, net of unearned income (sum of items 1 through 9
minus item 10) $ 56,469 $ 48,449 $ 38,398
======== ======== ========
</TABLE>
SCHEDULE IV
BANK PREMISES AND EQUIPMENT
PLEASE REFERENCE NOTES TO FINANCIAL STATEMENTS
NOTE D - FACILITIES
SCHEDULE V
INVESTMENT IN, INCOME FROM DIVIDENDS, AND EQUITY IN
EARNINGS OR LOSSES, OF SUBSIDIARIES AND ASSOCIATED COMPANIES
NOT APPLICABLE
SCHEDULE VI
ALLOWANCE FOR POSSIBLE LOAN LOSSES
PLEASE REFERENCE NOTES TO FINANCIAL STATEMENTS
NOTE C - LOANS
Page 51
<PAGE> 52
REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended December 31, 1997.
EXHIBITS
(3)(i) Articles of Incorporation of the Company (a)
(3)(ii) Bylaws of the Company (a)
(10)(a) Lease - Valrico State Bank - Jim Redman Parkway Office (c)
(b) Lease - Valrico State Bank - Brandon Office (b) (c)
(c) Valrico State Bank Stock Option Plan (b) (c)
(d) Valrico Bancorp Inc, Stock Option Plan
(21) Valrico State Bank (b)
(27) Financial Data Schedule (for SEC use only)
(a) Incorporated by reference to the Company's Registration
Statement #33-90524 on Form S-4 for the registrant.
(b) Incorporated by reference to the Company's December 31, 1995
Form 10-K.
(c) Incorporated by reference to the Company's December 31, 1997
Form 10-K
Page 52
<PAGE> 53
SIGNATURES
Pursuant to the requirements 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 on March 29, 1999.
By: /s/ Bob McLean By: /s/ Jerry L. Ball
------------------------------ ------------------------------
Bob McLean, President & CEO Jerry L. Ball, Executive Vice
President
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 on
March 29, 1999.
<TABLE>
<CAPTION>
Signatures Titles
- ---------- ------
<S> <C>
/s/ J. E. "Bob" McLean, III President and Chief Executive Officer
- -------------------------------
J. E. "Bob" McLean, III
/s/ Jerry L. Ball Executive Vice President and Director
- -------------------------------
Jerry L. Ball
/s/ C. Dennis Carlton Director
- -------------------------------
C. Dennis Carlton
/s/ H. Leroy English Director
- -------------------------------
H. Leroy English
/s/ Gregory L. Henderson Director
- -------------------------------
Gregory L. Henderson
/s/ Douglas A. Holmberg Director
- -------------------------------
Douglas A. Holmberg
/s/ Charles E. Jennings, Jr. Director
- -------------------------------
Charles E. Jennings, Jr.
/s/ J. "Bill" Noriega, Jr. Director
- -------------------------------
J. "Bill" Noriega, Jr.
/s/ LeVaughn Amerson Director
- -------------------------------
LeVaughn Amerson
</TABLE>
Page 53
<PAGE> 1
EXHIBIT 10 (d)
VALRICO BANCORP, INC.
1998 STOCK OPTION PLAN
ARTICLE I
Definitions
Section 1.1 Definitions. As used herein, the following terms shall have the
meaning set forth below, unless the context clearly requires otherwise:
(a) "Applicable Event" shall mean (i) the expiration of a tender offer or
exchange offer (other than an offer by the Company) pursuant to which more
than 30% of the Company's issued and outstanding stock has been purchased,
or (ii) the approval by the shareholders of the Company of an agreement to
merge or consolidate the Company with or into another entity where the
Company is not the surviving entity, an agreement to sell or otherwise
dispose of all or substantially all of the Company's assets (including a
plan of liquidation), or the approval by the shareholders of the Company of
an agreement to merge or consolidate the Company with or into another
entity where the Company is the surviving entity, pursuant to which more
than 25% of the Company's issued and outstanding stock has been
transferred.
(b) "Bank" shall mean Valrico State Bank, and any subsidiary of Valrico State
Bank or Valrico Bancorp, Inc.
(c) "Committee" shall mean a Committee consisting of the members of the Board
of Directors of the Company or Bank, or in the absence of the designation
of a Committee, the Board of Directors.
(d) "Company shall mean Valrico Bancorp, Inc.
(e) "Director" shall mean a member of the Board of Directors of the Company
and/or the Bank.
(f) "Effective Date" with respect to the Plan shall mean the date specified in
Section 2.3 as the Effective Date.
(g) "Fair Market Value" with respect to a share of Stock shall mean the fair
market value of the Stock, as determined by application of such reasonable
valuation methods as the Committee shall adopt or apply. The Committee's
determination of Fair Market Value shall be conclusive and binding on the
Company and the Optionee.
(h) "Option" shall mean an option to purchase Stock granted pursuant to the
provisions of the Plan. Options granted under the Plan shall be
Non-qualified Stock Options.
(i) "Optionee" shall mean a director, officer or employee of the Bank or the
Company to whom an Option has been granted.
(j) "Plan" shall mean the Valrico Bancorp, Inc. 1998 Stock Option Plan, the
terms of which are set forth herein.
(k) "Plan Year" shall mean the twelve-month period beginning on the Effective
Date, and each twelve-month period thereafter beginning on the anniversary
date of the Effective Date.
(l) "Stock" shall mean the Common Stock of the Company or, in the event that
the outstanding shares of Stock are changed into or exchanged for shares of
a different stock or securities of the Company or some other entity, such
other stock or securities.
(m) "Stock Option Agreement" shall mean the agreement between the Company and
the Optionee under which the Optionee may purchase Stock pursuant to the
terms of the Plan.
<PAGE> 2
ARTICLE II
The Plan
Section 2.1 Name. This plan shall be known as the "Valrico Bancorp, Inc. 1998
Stock Option Plan"
Section 2.2 Purpose. The purpose of the Plan is to advance the interests of the
Company and its shareholders by affording to Directors and officers of the
Company and the Bank an opportunity to acquire or increase their proprietary
interest in the Company by the grant to such persons of Options under the terms
set forth herein. By encouraging such persons to become owners of the Company,
the Company seeks to attract, motivate, reward and retain those highly competent
individuals upon whose judgement, initiative, leadership and efforts the success
of the Company depends.
Section 2.3 Effective Date and Term. The Plan shall be effective as of December
15, 1998. The Plan shall terminate upon the tenth anniversary of the Effective
Date.
ARTICLE III
Administration
Section 3.1 Administration.
(a) The Plan shall be administered by the Committee. Subject to the express
provisions of the Plan, the Committee shall have sole discretion and
authority to determine from time to time the individuals to whom Options
may be granted, the number of shares of Stock to be subject to each
Optionee, the period during which such Option may be exercised and the
price at which such Option may be exercised.
(b) Meetings of the Committee shall be held at such times and places as shall
be determined from time to time by the Committee. A majority of the members
of the Committee shall constitute a quorum for the transaction of business
and the vote of a majority of those members presents at any meeting shall
decide any question brought before the meeting. In addition, the Committee
may take any action otherwise proper under the Plan by the affirmative
vote, taken without a meeting, of a majority of the members.
(c) No member of the Committee shall be liable for any act or omission of any
other member of the Committee or for any act of omission on his own part,
including, but not limited to, the exercise of any power or discretion
given to him under the Plan, except those resulting from his own gross
negligence or willful misconduct. All questions of interpretations and
application with respect to the Plan or Options granted thereunder shall be
subject to the determination, which shall be final and binding, of a
majority of the whole Committee.
Section 3.2 Company Assistance. The Company and the Bank shall supply full and
timely information to the Committee on all matters relating to eligible
employees, their employment, death, retirement, disability or other termination
of employment and such other pertinent facts as the Committee may require. The
Company and the Bank shall furnish the Committee with such clerical and other
assistance as is necessary in the performance of its duties.
ARTICLE IV
Optionees
Section 4.1 Eligibility. Directors and officers of the Company and the Bank
shall be eligible to participate in the Plan. The Committee may grant Options to
any eligible individual pursuant to the Plan.
<PAGE> 3
ARTICLE V
Shares of Stock Subject to Plan
Section 5.1 Grant of Options and Limitations.
(a) Initial Plan Year. For the initial Plan Year, the Committee shall grant
Options according to the following schedule:
1. Each person who is a Director of the Company as of the Effective
Date shall receive Options for 4,703 shares of Stock, except for the
Chairman of the Board who shall receive Options for 7,489; provided that
the granting of all such Options pursuant to this section shall be subject
to the written surrender by such Optionees of all options granted to them
under the Valrico State Bank Option Plan adopted August 29, 1989, which
plan was assumed by the Company after its acquisition of the Bank.
2. Such other individuals, excluding individuals identified in Section
5.1 (a)(1), as are designated by the Committee shall be eligible to receive
Options for the number of shares of Stock determined by the Committee.
(b) Subsequent Years. As of the first day of each subsequent Plan Year, Options
may be granted to such individuals as are designated by the Committee as
eligible to receive Options for the number of shares of Stock as determined
by the Committee in its sole discretion.
(c) Stock Available for Options. Subject to adjustment pursuant to the
provisions of Section 8.4 hereof, the aggregate number of shares with
respect to which Options may be granted during the term of the Plan shall
not exceed Sixty-five Thousand (65,000) shares of Stock. Shares with
respect to which Options may be granted may be either authorized and
unissued shares or shares issued and thereafter acquired by the Company.
Section 5.2 Options Under the Plan. Shares of Stock with respect to which an
Option granted hereunder shall have been exercised shall not again be available
for grant hereunder. If Options granted hereunder shall expire, terminate or be
canceled for any reason without being wholly exercised, new Options may be
granted hereunder covering the number of shares to which such Option expiration,
termination or cancellation relates.
ARTICLE VI
Options
Section 6.1 Option Grant and Agreement. Each Option granted hereunder shall be
evidenced by minutes of a meeting or the written consent of at least a majority
of the members of the Committee and by a written Stock Option Agreement dated as
of the date of grant and executed by the Company and the Optionee. The Stock
Option Agreement shall set forth such terms and conditions as may be determined
by the Committee consistent with the Plan.
Section 6.2 Option Price. The exercise price of the Stock subject to each Option
shall not be less than the Fair Market Value of the Stock on the date the Option
is granted.
Section 6.3 Option Grant and Exercise Periods. No Option may be granted after
the tenth anniversary of the Effective Date. The period for exercise of each
Option shall be determined by the Committee subject to the provisions of Section
6.4(c) hereof.
Section 6.4 Option Exercise.
(a) The Company shall not be required to sell or issue shares under any Option
if the issuance of such shares shall constitute or result in a violation by
the Optionee or the Company of any provisions of any law, statute or
regulation of any governmental authority. Specifically, in connection with
the Securities Act of 1933 (the "Act"), upon exercise of any Option, the
Company shall not be required to issue such shares unless the Committee has
received evidence satisfactory to it to the effect that registration under
the Act and applicable state securities laws is not required or unless the
offer and sale of securities under the Plan is registered or qualified
under the Act and applicable state laws. Any determination in this
connection by the Committee shall be final, binding and conclusive. If
shares are issued under any Option without registration under the Act or
applicable state securities laws, the Optionee may be required to accept
the shares subject to such restrictions on transferability as may in the
reasonable judgment of the Committee be required
<PAGE> 4
to comply with exemptions from registrations under such laws. The Company
may, but shall in no event be obligated to, register any securities covered
hereby pursuant to the Act of applicable state securities laws. The Company
shall not be obligated to take any other affirmative action in order to
cause the exercise of an Option or the issuance of shares pursuant thereto
to comply with any law or regulation of any governmental authority.
(b) Subject to Section 6.4(c) and such terms and conditions as may be
determined by the Committee in its sole discretion upon the grant of an
Option, an Option may be exercised in whole or in part and from time to
time by delivering to the Company at its principal office written notice of
intent to exercise the Option with respect to a specified number of shares.
(c) An Option shall be exercisable immediately upon receipt and shall not be
subject to any further vesting period, unless such a vesting period shall
be specifically set forth in the Stock Option Agreement awarding such
Option.
(d) Subject to such terms and conditions as may be determined by the Committee
in its sole discretion upon grant of any Option, payment for the shares to
be acquired pursuant to exercise of the Option shall be made as follows:
1. by delivering to the Company at its principal office a check
payable to the order of the Company, in the amount of the Option price for
the number of shares of Stock with respect to which the Option is then
being exercised; or
2. by delivering to the Company at its principal office certificates
representing Stock, duly endorsed for transfer to the Company, having an
aggregate Fair Market Value as of the date of exercise equal to the amount
of the Option price, for the number of shares of Stock with respect to
which the Option is then being exercised; or
3. by use of a "cashless exercise" which shall mean the issuance by
the Company, in exchange for the cancellation of the Option, shares of the
Company equal in "market value" to the difference between the then current
market value of the Company's shares and the Option exercise price. Use of
a cashless exercise is dependent upon the Company and the Optionee agreeing
upon the market value of the Company's shares at the date of proposed
exercise. In the event that the Company and the Optionee are unable to
agree on the market value of the Company's shares, Optionee shall not be
entitled to utilize a cashless exercise to pay for such Options; or
4. by any combination of payments delivered pursuant to paragraphs
(d)(1), (d)(2) and (d)(3) above.
Section 6.5 Rights as Shareholder. An Optionee shall have no rights as a
shareholder of the Company with respect to any share subject to such Option
prior to the exercise of the Option and the purchase of such shares.
Section 6.6 Limited Rights. Within the earlier of (i) 90 days after the
occurrence of an Applicable Event, or (ii) 90 days following the date on which
the Company obtains knowledge of and notifies an Optionee of an Applicable
Event, an Optionee shall have the right (without regard to any limitation on the
exercise of Options set forth in the Stock Option Agreement) to exercise Options
then held by such Optionee.
ARTICLE VII
Termination, Amendment and Modification of Plan
The Plan shall expire with respect to the granting of Stock Options ten (10)
years following the effective date of the Plan; provided, however, that the time
period for the exercise of outstanding Options shall not be limited by the
expiration of the date for granting of new Options under the Plan. The Board of
Directors of the Company may at any time and from time to time and in any
respect amend, modify or terminate the Plan, provided, however, that such shall
not materially adversely affect any Stock Option Agreement previously executed
pursuant to the Plan without the consent of the affected Optionee.
ARTICLE VIII
Miscellaneous
Section 8.1 Transferability. During the Grantee's Lifetime, any Option may be
exercised only by the Grantee or any guardian or legal representative of
the Grantee, and the Option shall not be transferable except: (i) in case
of the death of the Grantee, by will or the laws of descent and
distribution; (ii) as specifically permitted by and solely to the extent
<PAGE> 5
permitted in the Stock Option Agreement; or (iii) to an immediate family
member, a partnership consisting solely of immediate family members or
trusts for the benefit of the Optionee or any of Optionees immediate
family members.
Section 8.2 Designation of Beneficiary. A participant may file a written
designation of a beneficiary who is to receive any stock obtained
hereunder. Such designation of beneficiary may be changed by the
participant at any time by written notice to the Treasurer of the Company.
Upon the death of a participant and upon receipt by the Company of proof
of identity and existence at the participant's death of a beneficiary
validly designated by him under the Plan, the Company shall deliver such
stock to such beneficiary. In the event of the death of a participant and
in the absence of a beneficiary validly designated under the Plan who is
living at the time of such participant's death, the Company shall deliver
such stock to the executor or administrator of the estate of the
participant, or if no such executor or administrator has been appointed
(to the knowledge of the Company), the Company, in its discretion, may
deliver such stock to the spouse or to any one or more dependents of the
participant as the Company may designate. No beneficiary shall, prior to
the death of the participant by whom he has been designated, acquire any
interest in the stock credited to the participant under the Plan.
Section 8.3 Effect of Termination of Employment/Affiliation or Death.
(a) If an Optionee's status as a Director or as an Employee of the Company or
the Bank terminates for any reason, other than the death, disability or
termination of service after attainment of age 65, before the date of
expiration of Stock Options held by such Optionee, such Stock Options shall
become null and void on the 90th day following the date of such
termination. An Optionee who terminates employment with the Company or the
Bank, but retains his status as a Director is not considered terminated for
purposes of this Section 8.3. The date of such termination shall be the
date the Optionee ceases to be a Director or an employee of the Company or
the Bank.
(b) If an Optionee dies before the expiration of Stock Options held by the
Optionee, such Stock Options shall terminate on the earlier of (i) the date
of expiration of the Stock Options or (ii) one year following the date of
the Optionee's death. The executor or administrator or personal
representative of the estate of a deceased Optionee, or the person or
persons to whom a Stock Option granted hereunder shall have been validly
transferred by the executor or the administrator or the personal
representative of the Optionee's estate, shall have the right to exercise
the Optionee's Stock Option. To the extent that such Stock Options would
otherwise be exercisable under the terms of the Plan and the Optionee's
Stock Option Agreement, such exercise may occur at any time prior to the
termination date specified in this paragraph.
(c) If an Optionee separates from service after attainment of age 65 before the
expiration of Stock Options held by the Optionee, such Stock Options shall
terminate on the earlier of (i) the date of expiration of the Stock Options
or (ii) two years following the date of the Optionee's termination of
service.
(d) If an Optionee becomes totally disabled before the expiration of Stock
Options held by the Optionee, such Stock Options shall terminate on the
earlier of (i) the date of expiration of the Stock Options or (ii) one year
following the date of the Optionee's termination of service due to
disability.
(e) With respect to any option granted pursuant to this Plan to a Director or
an employee of the Company or the Bank, in the event that such person shall
be terminated "for cause," then all Options granted to such person shall be
null an void as of 12:01 a.m. of the date of termination.
For purposes of this Plan, termination "for cause" shall be defined to
include, but shall not be limited to, termination resulting from acts of
the person which constitute embezzlement, theft or similar defalcation of
the Company and/or the Bank or for a violation of FIRREA, FIDICIA, the Bank
Secrecy Act, the Money Laundering Control Act or Rule 10B-5 under the
Securities and Exchange Act of 1934 and any amendments thereof promulgated
hereafter.
Section 8.4 Antidulution. The aggregate number and kind of shares subject to
Options which may be granted hereunder shall be adjusted accordingly in the
event that the outstanding shares of Stock are changed into or exchanged for a
different number or kind of shares or other securities of the Company or another
entity by reason or any merger, consolidation, reorganization, recapitalization,
reclassification, combination, stock split or stock dividend. The foregoing
adjustments and the manner of application of the foregoing provisions shall be
determined solely by the Committee and any such adjustment may provide for the
elimination of fractional share interests.
<PAGE> 6
Section 8.5 Application of Funds. The proceeds received by the Company from the
sale of Stock pursuant to Options shall be used for general corporate purposes.
Section 8.6 Tenure. Nothing in the Plan or in any Stock Option Agreement
relating thereto shall confer upon any Director, or upon any officer or
employee, the right to continue in such position with the Company or the Bank.
Section 8.7 Other Compensation Plans. The adoption of the Plan shall not affect
any other stock option, incentive or other compensation plans in effect for the
Company or the Bank, nor shall the Plan preclude the Company or the Bank from
establishing any other forms of incentive or other compensation for Directors,
officers or employees of the Company or the Bank.
Section 8.8 No Obligation to Exercise Options. The granting of an Option shall
impose no obligation upon the Optionee to exercise such Option.
Section 8.9 Plan Binding on Successors. The Plan and any Options issued
hereunder shall be binding upon the successors and assigns of the Company.
Section 8.10 Singular. Plural Gender. Whenever used herein, nouns in the
singular shall include the plural, and the masculine pronoun shall include the
feminine.
Section 8.11 Headings, Etc., No Part of Plan. Headings of Articles and Sections
hereof are inserted for convenience of reference; they constitute no part of the
Plan.
Section 8.12 Governing Law. Except as otherwise required by law, the validity,
construction and administration of this Plan shall be determined under the Laws
of the State of Florida.
Signed as of this 15th day of December, 1998.
VALRICO BANCORP, INC.
By: _______________________________________
J.E. McLean, III, Chairman of the Board
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000942789
<NAME> VALRICO BANCORP, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 4,454
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 6,356
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 6,783
<INVESTMENTS-CARRYING> 2,049
<INVESTMENTS-MARKET> 2,140
<LOANS> 56,535
<ALLOWANCE> 776
<TOTAL-ASSETS> 80,685
<DEPOSITS> 70,505
<SHORT-TERM> 1,146
<LIABILITIES-OTHER> 475
<LONG-TERM> 3,222
0
0
<COMMON> 308
<OTHER-SE> 4,616
<TOTAL-LIABILITIES-AND-EQUITY> 80,685
<INTEREST-LOAN> 4,660
<INTEREST-INVEST> 473
<INTEREST-OTHER> 265
<INTEREST-TOTAL> 5,398
<INTEREST-DEPOSIT> 1,932
<INTEREST-EXPENSE> 259
<INTEREST-INCOME-NET> 3,207
<LOAN-LOSSES> 210
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<EXPENSE-OTHER> 3,051
<INCOME-PRETAX> 879
<INCOME-PRE-EXTRAORDINARY> 879
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 579
<EPS-PRIMARY> 1.88
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</TABLE>
