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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Fiscal Year Ended December 31, 1999
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Commission File No. 0-24683
FLORIDA BANKS, INC.
A Florida Corporation
(IRS Employer Identification No. 58-2364573)
5210 Belfort Road
Suite 310, Concourse II
Jacksonville, Florida 32256
(904) 332-7770
Securities Registered Pursuant to Section 12(b)
of the Securities Exchange Act of 1934:
None
Securities Registered Pursuant to Section 12(g)
of the Securities Exchange Act of 1934:
Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[ ]
The aggregate market value of the common stock of the registrant held by
nonaffiliates of the registrant (5,052,554 shares) on March 24, 2000 was
approximately $29,052,186 based on the closing price of the registrant's common
stock as reported on the Nasdaq National Market on March 24, 2000. For the
purposes of this response, officers, directors and holders of 5% or more of the
registrant's common stock are considered the affiliates of the registrant at
that date.
The number of shares outstanding of the registrant's common stock, as of March
24, 2000: 5,642,643 shares of $.01 par value common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement to be delivered to
shareholders in connection with the 2000 Annual Meeting of Shareholders
scheduled to be held on May 15, 2000 are incorporated by reference in response
to Part III of this Report.
PART I
Item 1. Business.
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General
Florida Banks, Inc. (the "Company") was formed to create a statewide
community banking system focusing on the largest and fastest growing markets in
Florida. The Company operates through its wholly owned banking subsidiary,
Florida Bank, N.A. (the "Bank"). The Company currently operates community
banking offices in the Tampa, Jacksonville, Alachua County (Gainesville),
Broward County (Ft. Lauderdale) and Pinellas County (St Petersburg - Clearwater)
markets and recently announced it plan to expand to the Ocala/Marion County
area. Future business plans include entry into the markets of Orlando and the
Palm Beaches (collectively, the "Identified Markets"). As opportunities arise,
the Company may also expand into other Florida market areas with demographic
characteristics similar to the Identified Markets. Within each of the Identified
Markets, the Company expects to offer a broad range of traditional banking
products and services, focusing primarily on small and medium-sized businesses.
See "--Strategy of the Company--Market Expansion" and "--Products and Services."
The Company has a community banking approach that emphasizes responsive
and personalized service to its customers. Management's expansion strategy
includes attracting strong local management teams who have significant banking
experience, strong community contacts and strong business development potential
in the Identified Markets. Once local management teams are identified, the
Company intends to establish community banking offices in each of the remaining
Identified Markets. Each management team will operate one or more community
banking offices within its particular market area, will have a high degree of
local decision-making authority and will operate in a manner that provides
responsive, personalized services similar to an independent community bank. The
Company maintains centralized credit policies and procedures as well as
centralized back office functions from its operations center in Tampa to support
the community banking offices. Upon the Company's entry into a new market area,
it undertakes a marketing campaign utilizing an officer calling program and
community-based promotions. In addition, management is compensated based on
profitability, growth and loan production goals, and each market area is
supported by a local board of advisory directors, which is provided with
financial incentives to assist in the development of banking relationships
throughout the community. See "--Model `Local Community Bank.'"
Management of the Company believes that the significant consolidation
in the banking industry in Florida has disrupted customer relationships as the
larger regional financial institutions increasingly focus on larger corporate
customers, standardized loan and deposit products and other services. Generally,
these products and services are offered through less personalized delivery
systems which has created a need for higher quality services to small and
medium-sized businesses. In addition, consolidation of the Florida banking
market has dislocated experienced and talented management personnel due to the
elimination of redundant functions and the need to achieve cost savings. As a
result of these factors, management believes the Company has a unique
opportunity to attract and maintain its targeted banking customers and
experienced management personnel within the Identified Markets.
The community banking offices within each market area are supported by
centralized back office operations. From the Company's main offices located in
Jacksonville and its operations center in Tampa, the Company provides a variety
of support services to each of the community banking offices, including back
office operations, investment portfolio management, credit administration and
review, human resources, compliance, internal audit, administration, training
and strategic planning. Core processing, check clearing and other similar
functions are currently outsourced to major vendors. As a result, these
operating strategies enable the Company to achieve cost efficiencies and to
maintain consistency in policies and procedures and allow the local management
teams to concentrate on developing and enhancing customer relationships.
The Company expects to establish community banking offices in new
market areas, primarily through the de novo branching of the Bank. Management
will also, however, evaluate opportunities for strategic acquisitions of
financial institutions in markets that are consistent with its business plan.
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Strategy of the Company
General
The Company's business strategy is to create a statewide community
banking system in Florida. The major elements of this strategy are to:
o Establish community banking offices in additional markets including
the remaining Identified Markets as soon as local management teams
are identified;
o Establish community banking offices with locally responsive
management teams emphasizing a high level of personalized customer
service;
o Target small and medium-sized business customers that require the
attention and service which a community-oriented bank is well suited
to provide;
o Provide a broad array of traditional banking products and services;
o Provide non-traditional products and services through strategic
partnerships with third party vendors
o Utilize technology to provide a higher level of customer service and
enhance deposit growth.
o Maintain centralized support functions, including back office
operations, credit policies and procedures, investment portfolio
management, administration, compliance, internal audit, human
resources and training, to maximize operating efficiencies and
facilitate responsiveness to customers; and
o Outsource core processing and back room operations to increase
efficiencies.
Model "Local Community Bank"
In order to achieve its expansion strategy, the Company intends to
establish community banking offices in the remaining Identified Markets through
the de novo branching of the Bank. The Company may, however, accomplish its
expansion strategy by acquiring existing banks within an Identified Market if an
opportunity for such an acquisition becomes available. Although each community
banking office is legally a branch of the Bank, the Company's business strategy
envisions that community banking office(s) located within each market will
operate as if it were an independent community bank.
Prior to expanding into a new market area, management of the Company
first identifies an individual who will serve as the president of that
particular market area, as well as those individuals who will serve on the local
board of directors. The Company believes that a management team that is familiar
with the needs of its community can provide higher quality personalized service
to their customers. The local management teams have a significant amount of
decision-making authority and are accessible to their customers. As a result of
the consolidation trend in Florida, management of the Company believes there are
significant opportunities to attract experienced bank managers who would like to
join an institution promoting a community banking concept.
Within each market area, the community banking offices have a local
board of directors that are comprised of prominent members of the community,
including business leaders and professionals. It is anticipated that certain
members of the local boards may serve as members of the Board of Directors of
the Bank and of the Company. These directors act as representatives of the Bank
within the community and are expected to promote the business development of
each community banking office.
The Company encourages both the members of its local boards of
directors as well as its lending officers to be active in the civic, charitable
and social organizations located in the local communities. Many members of the
local management team hold leadership positions in a number of community
organizations, and will continue to volunteer for other positions in the future.
Upon the Company's entry into a new market area, it undertakes a
marketing campaign utilizing an officer calling program, and community-based
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promotions and media advertising. A primary component of management compensation
is based on loan production goals. Such campaigns emphasize each community
banking office's local responsiveness, local management team and special focus
on personalized service.
The community banking office established in a market will typically
have the following banking personnel: a President, a Senior Lender, an Associate
Lending Officer, a Credit Analyst, a Branch/Operations Manager and an
appropriate number of financial service managers and tellers. The number of
financial service managers and tellers necessary will be dependent upon the
volume of business generated by that particular community banking office. Each
community banking office will also be staffed with enough administrative
assistants to assist the officers effectively in their duties and to enable them
to market products and services actively outside of the office.
The lending officers are primarily responsible for the sales and
marketing efforts of the community banking offices. Management emphasizes
relationship banking whereby each customer will be assigned to a specific
officer, with other local officers serving as backup or in supporting roles.
Through its experience in the Florida banking industry, management believes that
the most frequent customer complaints pertain to a lack of personalized service
and turnover in lending personnel, which limits the customer's ability to
develop a relationship with his or her lending officer. The Company has and will
continue to hire an appropriate number of lending officers necessary to
facilitate the development of strong customer relationships.
Management has and will continue to offer salaries to the lending
officers that are competitive with other financial institutions in each market
area. The salaries of the lending officers are comprised of base compensation
plus an incentive payment structure that is based upon the achievement of
certain loan production goals. Those goals will be reevaluated on a semi-annual
basis and paid annually as a percentage of base salary. Management of the
Company believes that such a compensation structure provides greater motivation
for participating officers.
The community banking offices are located in commercial areas in each
market where the local management team determines there is the greatest
potential to reach the maximum number of small and medium-sized businesses. It
is expected that these community banking offices will develop in the areas
surrounding office complexes and other commercial areas, but not necessarily in
a market's downtown area. Such determinations will depend upon the customer
demographics of a particular market area and the accessibility of a particular
location to its customers. Management of the Company expects to lease facilities
of approximately 4,000 to 6,000 square feet at market rates for each community
banking office. The Company is currently leasing its facilities in the Tampa,
Jacksonville, Gainesville, Ft. Lauderdale and St. Petersburg-Clearwater markets
and expects to lease its facility in the Ocala/Marion County market. To better
serve the Alachua County (Gainesville) market, future plans are to build and own
a free-standing office with traditional drive-in and lobby banking facilities.
The Company plans to continue to lease facilities in the other Identified
Markets to avoid investing significant amounts of capital in property and
facilities.
Loan Production Offices
In order to achieve its expansion strategy in a timely manner, the
Company may establish loan production offices ("LPO") as a prelude to
establishing full service community banking offices in the remaining Identified
Markets and other locations. Loan production offices would provide the same
lending products and services to the local market as the community banking
office with substantially less overhead expense. These offices would typically
be staffed with the President, Senior Lender and one administrative assistant.
By opening loan production offices, the Company can begin to generate
loans during the period it is preparing to open and staff the banking office and
reduce the overall cost of expansion into a new market. The same philosophy of
marketing, growth, customer service and incentive based compensation would be
followed in a loan production office. These offices would also establish local
boards which would be responsible for promoting the growth of the office.
The Company's first loan production office will be established in the
Ocala/Marion County market. The local President and Senior Lender have been
employed and the office is expected to open early in the second quarter of this
year. The Company expects to open a full service community banking office prior
to year end 2000.
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Market Expansion
The Company intends to expand into the largest and fastest growing
communities in Florida as well as other markets within the state which offer
strategic opportunities. In order to achieve its expansion strategy, the Company
intends to establish community banking offices through the de novo branching of
the Bank. The Company may, however, accomplish its expansion strategy by
acquiring existing banks if an opportunity for such an acquisition becomes
available. Once the Company has assembled a local management team and local
advisory board of directors for a particular market area, the Company intends to
establish a community banking office in that market either through the opening
of an LPO or a full service bank. The Company has established community banking
offices in the Tampa, Jacksonville Alachua County (Gainesville), Broward County
(Ft. Lauderdale) and Pinellas County (St. Petersburg - Clearwater) markets. In
addition, the Company has recently employed a local management team for the
Ocala/Marion County market. The Company is in the process of establishing a loan
production office in this market followed by the opening of a full service bank.
The other markets into which the Company presently intends to expand are Orlando
and the greater Palm Beach area. Management has identified these markets as
providing the most favorable opportunities for growth and intends to establish
community banking offices within these markets as soon as practicable.
Management is also considering expansion into other selected Florida
metropolitan areas.
Customers
Management believes that the recent bank consolidation within Florida
provides a community-oriented bank significant opportunities to build a
successful, locally-oriented franchise. Management of the Company further
believes that many of the larger financial institutions do not emphasize a high
level of personalized service to the smaller commercial or individual retail
customers. The Company focuses its marketing efforts on attracting small and
medium-sized businesses which include: professionals, such as physicians and
attorneys, service companies, manufacturing companies and commercial real estate
developers. Because the Company focuses on small and medium-sized businesses,
the majority of its loan portfolio is in the commercial area with an emphasis
placed on commercial and industrial loans secured by real estate, accounts
receivable, inventory, property, plant and equipment. However, in an effort to
maintain a high level of credit quality, the Company attempts to ensure that the
commercial real estate loans are made to borrowers who occupy the real estate
securing the loans or where a creditworthy tenant is involved.
Although the Company has concentrated on lending to commercial
businesses, management has attracted and will continue to attract consumer
business. Many of its retail customers are the principals of the small and
medium-sized businesses for whom a community banking office provides banking
services. Management emphasizes "relationship banking" in order that each
customer can identify and establish a comfort level with the bank officers
within a community banking office. Management intends to further develop its
retail business with individuals who appreciate a higher level of personal
service, contact with their lending officer and responsive decision-making. It
is expected that most of the Company's business will be developed through its
lending officers and local advisory boards of directors and by pursuing an
aggressive strategy of making calls on customers throughout the market area.
Products and Services
The Company currently offers a broad array of traditional banking
products and services to its customers through the Bank. The Bank currently
provides products and services that are substantially similar to those set forth
below. For additional information with respect to the Bank's current operations,
see "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Loans. The Bank offers a wide range of short to long-term commercial
and consumer loans. As of December 31, 1999, the Bank has established an
internal limit for loans of up to $5,000,000 to any one borrower.
Commercial. The Bank's commercial lending consists primarily of
commercial and industrial loans for the financing of accounts
receivable, inventory, property, plant and equipment. In making these
loans, the Bank manages its credit risk by actively monitoring such
measures as advance rate, cash flow, collateral value and other
appropriate credit factors.
Commercial Real Estate. The Bank offers commercial real estate loans
to developers of both commercial and residential properties. In making
these loans, the Bank manages its credit risk by actively monitoring
such measures as advance rate, cash flow, collateral value and other
appropriate credit factors. See "--Operations of the Holding
Company--Credit Administration."
4
Residential Mortgage. The Bank's real estate loans consist of
residential first and second mortgage loans, residential construction
loans and home equity lines of credit and term loans secured by first
and second mortgages on the residences of borrowers for home
improvements, education and other personal expenditures. The Bank makes
mortgage loans with a variety of terms, including fixed and floating to
variable rates and a variety of maturities. These loans are made
consistent with the Bank's appraisal policy and real estate lending
policy which detail maximum loan-to-value ratios and maturities.
Management believes that these loan-to-value ratios are sufficient to
compensate for fluctuations in the real estate market to minimize the
risk of loss. Mortgage loans that do not conform to the Bank's
asset/liability mix policies are sold in the secondary markets.
Consumer Loans. The Bank's consumer loans consist primarily of
installment loans to individuals for personal, family and household
purposes. In evaluating these loans, the Bank requires its lending
officers to review the borrower's level and stability of income, past
credit history and the impact of these factors on the ability of the
borrower to repay the loan in a timely manner. In addition, the Bank
requires that its banking officers maintain an appropriate margin
between the loan amount and collateral value. Many of the Bank's
consumer loans are made to the principals of the small and medium-sized
businesses for whom the community banking offices provide banking
services.
Credit Card and Other Loans. The Bank has issued credit cards to
certain of its customers. In determining to whom it will issue credit
cards, the Bank evaluates the borrower's level and stability of income,
past credit history and other factors. Finally, the Bank makes
additional loans which may not be classified in one of the above
categories. In making such loans, the Bank attempts to ensure that the
borrower meets its credit quality standards.
Deposits. The Bank offers a broad range of interest-bearing and
non-interest-bearing deposit accounts, including commercial and retail checking
accounts, money market accounts, individual retirement accounts, regular and
premium rate interest-bearing savings accounts and certificates of deposit with
a range of maturity date options. The primary sources of deposits are small and
medium-sized businesses and individuals. In each identified market, senior
management has the authority to set rates within specified parameters in order
to remain competitive with other financial institutions located in the
identified market. In additional to deposits within the local markets, the Bank
utilizes brokered certificates of deposits to supplement its funding needs.
Brokered CDs are sold by various investment firms which are paid a fee by the
Bank for placing the deposit. Generally, the cost of brokered deposits is
slightly higher that the cost of the same deposit in one of the local markets.
All deposits are insured by the FDIC up to the maximum amount permitted by law.
In addition, the Bank has implemented a service charge fee schedule, which is
competitive with other financial institutions in the community banking offices'
market areas, covering such matters as maintenance fees on checking accounts,
per item processing fees on checking accounts, returned check charges and other
similar fees.
Specialized Consumer Services. The Bank offers specialized products and
services to its customers, such as lock boxes, traveler's checks and safe
deposit services.
Courier Services. The Bank offers courier services to its customers.
Courier services, which the Bank may either provide directly or through a third
party, permit the Bank to provide the convenience and personalized service its
customers require by scheduling pick-ups of deposits. The Bank currently offers
courier services only to its business customers. The Bank has received
regulatory approval for and is currently offering courier services in all of its
existing markets and expects to apply for approval in other market areas.
Telephone Banking. The Bank believes that there is a need within its
market niche for consumer and commercial telephone banking. These services allow
customers to access detailed account information, via a toll free number 24
hours a day. Management believes that telephone banking services assist their
community banking offices in retaining customers and also encourages its
customers to maintain their total banking relationships with the community
banking offices. This service is provided through the Bank's third-party
provider.
Internet Banking. In the fourth quarter of 1999, the Bank began
offering its "DirectNet" Internet banking product. This service allows customers
to access detailed account information, execute transactions, download account
information, and pay bills electronically. Management believes that this service
is particularly attractive for its commercial customers since most transactions
can be handled over the Internet rather than over the phone or in person. In
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addition, DirectNet offers the opportunity of opening deposit accounts both
within and outside of the local markets. The Bank intends to expand its Internet
banking services in the future to offer additional bank services as well as
non-traditional products and services. The DirectNet banking service is provided
by the Bank's third-party data processor.
ACH EFT Services The Bank offers various Automated Clearing House and
Electronic Funds Transfer services to its commercial customers. These services
include payroll direct deposits, payroll tax payments, electronic payments and
other funds transfers. The services are customized to meet the needs of the
customer and offer an economical alternative to paper checks and drafts.
Automatic Teller Machines ("ATMs"). Presently, management does not
expect to establish an ATM network although certain banking offices may provide
one or more ATMs in the local market. As an alternative, management has made
other financial institutions' ATMs available to its customers and offers
customers up to ten free ATM transactions per month.
Other Products and Services. The Bank intends to evaluate other
services such as trust services, brokerage and investment services, insurance,
and other permissible activities. Management expects to introduce these services
in the future as they become economically viable.
Operations of the Holding Company
From its main offices in Jacksonville and its operations center in
Tampa, the Company provides a variety of support services for each of the
community banking offices. These services include back office operations,
investment portfolio management, credit administration and review, human
resources, training and strategic planning.
The Company uses the Bank's facilities for its data processing,
operational and back office support activities. The community banking offices
utilize the operational support provided by the Bank to perform account
processing, loan accounting, loan support, network administration and other
functions. The Bank has developed extensive procedures for many aspects of its
operations, including operating procedure manuals and audit and compliance
procedures. Management believes that the Bank's existing operations and support
management are capable of providing continuing operational support for all of
the community banking offices.
Outsourcing. Management of the Company believes that by outsourcing
certain functions of its back room operations, it can realize greater
efficiencies and economies of scale. In addition, various products and services,
especially technology-related services, can be offered through third-party
vendors at a substantially lower cost than the costs of developing these
products internally. The Bank is currently utilizing M&I Data Services, Inc.
("M&I") to provide its core data processing and certain customer products.
Credit Administration. The Company oversees all credit operations while
still granting local authority to each community banking office. The Company's
Chief Credit Officer is primarily responsible for maintaining a quality loan
portfolio and developing a strong credit culture throughout the entire
organization. The Chief Credit Officer is also responsible for developing and
updating the credit policy and procedures for the organization. In addition, he
works closely with each lending officer at the community banking offices to
ensure that the business being solicited is of the quality and structure that
fits the Company's desired risk profile. Credit quality is controlled through
uniform compliance to credit policy. The Company's risk-decision process is
actively managed in a disciplined fashion to maintain an acceptable risk profile
characterized by soundness, diversity, quality, prudence, balance and
accountability.
The Company's credit approval process consists of specific authorities
granted to the lending officers. Loans exceeding a particular lending officer's
level of authority are reviewed and considered for approval by the next level of
authority. The Chief Credit Officer has ultimate credit decision-making
authority, subject to review by the Chief Executive Officer and the Board of
Directors. Risk management requires active involvement with the Company's
customers and active management of the Company's portfolio. The Chief Credit
Officer reviews the Company's credit policy with the local management teams at
least annually but will review it more frequently if necessary. The results of
these reviews are then presented to the Board of Directors. The purpose of these
reviews is to attempt to ensure that the credit policy remains compatible with
the short and long-term business strategies of the Company. The Chief Credit
Officer will also generally require all individuals charged with risk management
to reaffirm their familiarity with the credit policy annually.
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Asset/Liability Management
The objective of the Bank is to manage assets and liabilities to
provide a satisfactory level of consistent operating profitability within the
framework of established liquidity, loan, investment, borrowing and capital
policies. The Chief Financial Officer of the Company is primarily responsible
for monitoring policies and procedures that are designed to maintain an
acceptable composition of the asset/liability mix while adhering to prudent
banking practices. The overall philosophy of management is to support asset
growth primarily through growth of core deposits. Management intends to continue
to invest the largest portion of the Bank's earning assets in commercial,
industrial and commercial real estate loans.
The Bank's asset/liability mix is monitored on a daily basis, with
monthly reports presented to the Bank's Board of Directors. The objective of
this policy is to control interest-sensitive assets and liabilities so as to
minimize the impact of substantial movements in interest rates on the Bank's
earnings. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Financial Condition--Interest Rate
Sensitivity and Liquidity Management."
Competition
Competition among financial institutions in Florida and the markets
into which the Company may expand is intense. The Company and the Bank compete
with other bank holding companies, state and national commercial banks, savings
and loan associations, consumer finance companies, credit unions, securities
brokerages, insurance companies, mortgage banking companies, money market mutual
funds, asset-based non-bank lenders and other financial institutions. Many of
these competitors have substantially greater resources and lending limits,
larger branch networks, and are able to offer a broader range of products and
services than the Company and the Bank.
Various legislative actions in recent years have led to increased
competition among financial institutions. As a result of such actions, most
barriers to entry to the Florida market by out-of-state financial institutions
have been eliminated. Recent legislative and regulatory changes and
technological advances have enabled customers to conduct banking activities
without regard to geographic barriers through computer and telephone-based
banking and similar services. The enactment of the Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994 and other laws and regulations
affecting interstate bank expansion, financial institutions located outside of
the State of Florida may now more easily enter the markets currently and
proposed to be served by the Company and the Bank. In addition, the recently
passed Gramm-Leach-Bliley Act repeals certain sections of the Glass-Steagall Act
and amends sections of the Bank Holding Company Act. See "---Supervision and
Regulation". Although final regulations have not been promulgated, the future
effect of these changes in regulations could be far ranging in their impact on
traditional banking activities. Mergers, partnerships and acquisitions between
banks and other financial and service companies could dramatically effect
competition within the Bank's markets.
There can be no assurance that the United States Congress, the Florida
Legislature or the applicable bank regulatory agencies will not enact
legislation or promulgate rules that may further increase competitive pressures
on the Company. The Company's failure to compete effectively for deposit, loan
and other banking customers in its market areas could have a material adverse
effect on the Company's business, future prospects, financial condition or
results of operations. See "--Strategy of the Company--Market Expansion."
Data Processing
The Bank currently has an agreement with M&I to provide its core
processing and certain customer products. The Company believes that M&I will be
able to provide state-of-the-art data processing and customer service-related
processing at a competitive price to support the Company's future growth. The
Company believes the M&I contract to be adequate for its business expansion
plans. See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Employees
The Company presently employs ten persons on a full-time basis and one
person on a part-time basis. The Company will hire additional persons as needed
to support its growth.
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The Bank presently employs 69 persons on a full-time basis and 6
persons on a part-time basis, including 32 officers. The Bank will hire
additional persons as needed, including additional tellers and financial service
representatives.
Supervision and Regulation
The Company and the Bank operate in a highly regulated environment, and
their business activities will be governed by statute, regulation, and
administrative policies. The business activities of the Company and the Bank are
closely supervised by a number of regulatory agencies, including the Federal
Reserve Board, the Office of the Comptroller of the Currency (the "OCC"), the
Florida Department of Banking and Finance (the "Florida Banking Department") (to
a limited extent) and the FDIC.
The Company is regulated by the Federal Reserve Board under the federal
Bank Holding Company Act, which requires every bank holding company to obtain
the prior approval of the Federal Reserve Board before acquiring more than 5% of
the voting shares of any bank or all or substantially all of the assets of a
bank, and before merging or consolidating with another bank holding company. The
Federal Reserve Board (pursuant to regulation and published policy statements)
has maintained that a bank holding company must serve as a source of financial
strength to its subsidiary banks. In adhering to the Federal Reserve Board
policy, the Company may be required to provide financial support to a subsidiary
bank at a time when, absent such Federal Reserve Board policy, the Company may
not deem it advisable to provide such assistance.
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994, the Company and any other bank holding company located in Florida is able
to acquire a bank located in any other state, and a bank holding company located
outside Florida can acquire any Florida-based bank, in either case subject to
certain other restrictions. In addition, adequately capitalized and managed bank
holding companies may consolidate their multi-state bank operations into a
single bank subsidiary and may branch interstate through acquisitions unless an
individual state has elected to prohibit out-of-state banks from operating
interstate branches within its territory. De novo branching by an out-of-state
bank is lawful only if it is expressly permitted by the laws of the host state.
Entry into Florida is permitted only by acquisition of existing banks. The
authority of a bank to establish and operate branches within a state remains
subject to applicable state branching laws.
Until March of 2000, a bank holding company was generally prohibited
from acquiring control of any company which was not a bank and from engaging in
any business other than the business of banking or managing and controlling
banks. In April 1997, the Federal Reserve Board revised and expanded the list of
permissible non-banking activities in which a bank holding company could engage,
however limitations continued to exist under certain laws and regulations. The
recently passed Gramm-Leach-Bliley Act repeals certain regulations pertaining to
Bank Holding Companies and eliminates many of the previous prohibitions.
Specifically, Title I of the Gramm-Leach-Bliley Act repeals sections 20 and 32
of the Glass-Steagall Act (12 U.S.C. ss.ss. 377 and 78, respectively) and is
intended to facilitate affiliations among banks, securities firms, insurance
firms, and other financial companies. To further this goal, the
Gramm-Leach-Bliley Act amends section 4 of the Bank Holding Company Act (12
U.S.C.ss. 1843) ("BHC Act") to authorize bank holding companies and foreign
banks that qualify as "financial holding companies" to engage in securities,
insurance and other activities that are financial in nature or incidental to a
financial activity. The activities of bank holding companies that are not
financial holding companies would continue to be limited to activities
authorized currently under the BHC Act, such as activities -that the Federal
Reserve Board previously has determined in regulations and orders issued under
section 4(c)(8) of the BHC Act to be closely related to banking and permissible
for bank holding companies.
The Gramm-Leach-Bliley Act defines a financial holding company as a
bank holding company that meets certain eligibility requirements. In order for a
bank holding company to become a financial holding company and be eligible to
engage in the new activities authorized under the Gramm-Leach-Bliley Act, the
Act requires that all depository institutions controlled by the bank holding
company be well capitalized and well managed.
To become a financial holding company, the Gramm-Leach-Bliley Act
requires a bank holding company to submit to the Federal Reserve Board a
declaration that the company elects to be a financial holding company and a
certification that all of the depository institutions controlled by the company
are well capitalized and well managed. The Act also provides that a Bank holding
company's election to become a financial holding company will not be effective
if the Board finds that, as of the date the company submits its election to the
Board, not all of the insured depository institutions controlled by the company
have achieved at least a "satisfactory" rating at the most recent examination of
the institution under the Community Reinvestment Act (12 U.S.C.ss. 2903 et seq.)
8
The Gramm-Leach-Bliley Act grants the Federal Reserve Board discretion
to impose imitations on the conduct or activities of any financial holding
company that controls a depository institution that does not remain both well
capitalized and well managed following the company's elections to be a financial
holding company.
As of the date of this report the Federal Reserve Board has issued
interim rules relating to the Gramm-Leach-Bliley Act which may be amended prior
to final adoption. Final rules by the Federal Reserve Board and the Office of
the Comptroller of the Currency could substantially affect the Company's future
business strategies, including its products and services. When final rules are
promulgated, the Company plans to submit the necessary documentation to become a
Financial Holding Company. The Company currently meets the requirements of the
interim rules, however there is no assurance that it will meet the requirements
of the final rules or will continue to meet these requirements on an ongoing
basis.
The State of Florida has adopted an interstate banking statute that
allows banks to branch interstate through mergers, consolidations and
acquisitions. Establishment of de novo bank branches in Florida by out-of-state
financial institutions is not permitted under Florida law.
The Company is also regulated by the Florida Banking Department under
the Florida Banking Code, which requires every bank holding company to obtain
the prior approval of the Florida Commissioner of Banking before acquiring more
than 5% of the voting shares of any Florida bank or all or substantially all of
the assets of a Florida bank, or before merging or consolidating with any
Florida bank holding company. A bank holding company is generally prohibited
from acquiring ownership or control of 5% or more of the voting shares of any
Florida bank or Florida bank holding company unless the Florida bank or all
Florida bank subsidiaries of the bank holding company to be acquired have been
in existence and continuously operating, on the date of the acquisition, for a
period of three years or more. However, approval of the Florida Banking
Department is not required if the bank to be acquired or all bank subsidiaries
of the Florida bank holding company to be acquired are national banks.
The Bank is also subject to the Florida banking and usury laws
restricting the amount of interest which it may charge in making loans or other
extensions of credit. In addition, the Bank, as a subsidiary of the Company, is
subject to restrictions under federal law in dealing with the Company and other
affiliates, if any. These restrictions apply to extensions of credit to an
affiliate, investments in the securities of an affiliate and the purchase of
assets from an affiliate.
Loans and extensions of credit by national banks are subject to legal
lending limitations. Under federal law, a national bank may grant unsecured
loans and extensions of credit in an amount up to 15% of its unimpaired capital
and surplus to any person if the loans and extensions of credit are not fully
secured by collateral having a market value at least equal to their face amount.
A national bank may grant loans and extensions of credit to such person up to an
additional 10% of its unimpaired capital and surplus, provided that the
transactions are fully secured by readily marketable collateral having a market
value determined by reliable and continuously available price quotations, at
least equal to the amount of funds outstanding. This 10% limitation is separate
from, and in addition to, the 15% limitation for unsecured loans. Loans and
extensions of credit may exceed the general lending limit if they qualify under
one of several exceptions. Such exceptions include certain loans or extensions
of credit arising from the discount of commercial or business paper, the
purchase of bankers' acceptances, loans secured by documents of title, loans
secured by U.S. obligations and loans to or guaranteed by the federal
government.
Both the Company and the Bank are subject to regulatory capital
requirements imposed by the Federal Reserve Board and the OCC. The Federal
Reserve Board and the OCC have issued risk-based capital guidelines for bank
holding companies and banks which make regulatory capital requirements more
sensitive to differences in risk profiles of various banking organizations. The
capital adequacy guidelines issued by the Federal Reserve Board are applied to
bank holding companies on a consolidated basis with the banks owned by the
holding company. The OCC's risk capital guidelines apply directly to national
banks regardless of whether they are a subsidiary of a bank holding company.
Both agencies' requirements (which are substantially similar) provide that
banking organizations must have capital equivalent to at least 8% of
risk-weighted assets. The risk weights assigned to assets are based primarily on
credit risks. Depending upon the risk of a particular asset, it is assigned to a
risk category. For example, securities with an unconditional guarantee by the
United States government are assigned to the lowest risk category, while a risk
weight of 50% is assigned to loans secured by owner-occupied one to four family
residential mortgages, provided that certain conditions are met. The aggregate
amount of assets assigned to each risk category is multiplied by the risk weight
assigned to that category to determine the weighted values, which are added
together to determine total risk-weighted assets. Both the Federal Reserve Board
and the OCC have also implemented new minimum capital leverage ratios to be used
9
in tandem with the risk-based guidelines in assessing the overall capital
adequacy of banks and bank holding companies. Under these rules, banking
institutions are required to maintain a ratio of at least 3% "Tier 1" capital to
total weighted risk assets (net of goodwill). Tier 1 capital includes common
shareholders equity, non-cumulative perpetual preferred stock and related
surplus, and minority interests in the equity accounts of consolidated
subsidiaries.
Both the risk-based capital guidelines and the leverage ratio are
minimum requirements, applicable only to top-rated banking institutions.
Institutions operating at or near these levels are expected to have
well-diversified risks, excellent control systems high asset quality, high
liquidity, good earnings and in general, must be considered strong banking
organizations, rated composite 1 under the CAMELS rating system for banks.
Institutions with lower ratings and institutions with high levels of risk or
experiencing or anticipating significant growth would be expected to maintain
ratios 100 to 200 basis points above the stated minimums.
The OCC's guidelines provide that intangible assets are generally
deducted from Tier 1 capital in calculating a bank's risk-based capital ratio.
However, certain intangible assets which meet specified criteria ("qualifying
intangibles") are retained as a part of Tier 1 capital. The OCC has modified the
list of qualifying intangibles, currently including only purchased credit card
relationships and mortgage and non-mortgage servicing assets. The OCC's
guidelines formerly provided that the amount of such qualifying intangibles that
may be included in Tier 1 capital was strictly limited to a maximum of 50% of
total Tier 1 capital. The OCC has amended its guidelines to increase the
limitation on such qualifying intangibles from 50% to 100% of Tier 1 capital, of
which no more than 25% may consist of purchased credit card relationships and
non-mortgage servicing assets.
In addition, the OCC has adopted rules which clarify treatment of asset
sales with recourse not reported on a bank's balance sheet. Among assets
affected are mortgages sold with recourse under Fannie Mae, Freddie Mac and
Farmer Mac programs. The rules clarify that even though those transactions are
treated as asset sales for bank Call Report purposes, those assets will still be
subject to a capital charge under the risk-based capital guidelines.
The risk-based capital guidelines of the OCC, the Federal Reserve Board
and the FDIC explicitly include provisions a bank's exposure to declines in the
economic value of its capital due to changes in interest rates to ensure that
the guidelines take adequate account of interest rate risk. Interest rate risk
is the adverse effect that changes in market interest rates may have on a bank's
financial condition and is inherent to the business of banking. The exposure of
a bank's economic value generally represents the change in the present value of
its assets, less the change in the value of its liabilities, plus the change in
the value of its interest rate off-balance sheet contracts. Concurrently, the
agencies issued a joint policy statement to bankers, effective June 26, 1996, to
provide guidance on sound practices for managing interest rate risk. In the
policy statement, the agencies emphasize the necessity of adequate oversight by
a bank's board of directors and senior management and of a comprehensive risk
management process. The policy statement also describes the critical factors
affecting the agencies' evaluations of a bank's interest rate risk when making a
determination of capital adequacy. The agencies' risk assessment approach used
to evaluate a bank's capital adequacy for interest rate risk relies on a
combination of quantitative and qualitative factors. Banks that are found to
have high levels of exposure and/or weak management practices will be directed
by the agencies to take corrective action.
The Comptroller, the Federal Reserve Board and the FDIC recently added
a provision to the risk-based capital guidelines that supplements and modifies
the usual risk-based capital calculations to ensure that institutions with
significant exposure to market risk maintain adequate capital to support that
exposure. Market risk is the potential loss to an institution resulting from
changes in market prices. The modifications are intended to address two types of
market risk: general market risk, which includes changes in general interest
rates, equity prices, exchange rates, or commodity prices, and specific market
risk, which includes particular risks faced by the individual institution, such
as event and default risks. The provision defines a new category of capital,
Tier 3, which includes certain types of subordinated debt. The provision
automatically applies only to those institutions whose trading activity, on a
worldwide consolidated basis, equals either (i) 10% or more of total assets or
(ii) $1 billion or more, although the agencies may apply the provision's
requirements to any institution for which application of the new standard is
deemed necessary or appropriate for safe banking practices. For institutions to
which the modifications apply, Tier 3 capital may not be included in the
calculation rendering the 8% credit risk ratio; the sum of Tier 2 and Tier 3
capital may not exceed 100% of Tier 1 capital; and Tier 3 capital is used in
both the numerator and denominator of the normal risk-based capital ratio
calculation to account for the estimated maximum amount that the value of all
positions in the institution's trading account, as well as all foreign exchange
and commodity positions, could decline within certain parameters set forth in a
model defined by the statute. Furthermore, beginning no later than January 1,
10
1999, covered institutions must "backtest," comparing the actual net trading
profit or loss for each of its most recent 250 days against the corresponding
measures generated by the statutory model. Once per quarter, the institution
must identify the number of times the actual net trading loss exceeded the
corresponding measure and must then apply a statutory multiplication factor
based on that number for the next quarter's capital charge for market risk.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (the
"FDICIA"), enacted on December 19, 1991, provides for a number of reforms
relating to the safety and soundness of the deposit insurance system,
supervision of domestic and foreign depository institutions and improvement of
accounting standards. One aspect of the FDICIA involves the development of a
regulatory monitoring system requiring prompt action on the part of banking
regulators with regard to certain classes of undercapitalized institutions.
While the FDICIA does not change any of the minimum capital requirements, it
directs each of the federal banking agencies to issue regulations putting the
monitoring plan into effect. The FDICIA creates five "capital categories" ("well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized") which are defined in the
FDICIA and which will be used to determine the severity of corrective action the
appropriate regulator may take in the event an institution reaches a given level
of undercapitalization. For example, an institution which becomes
"undercapitalized" must submit a capital restoration plan to the appropriate
regulator outlining the steps it will take to become adequately capitalized.
Upon approving the plan, the regulator will monitor the institution's
compliance. Before a capital restoration plan will be approved, any entity
controlling a bank (i.e., holding companies) must guarantee compliance with the
plan until the institution has been adequately capitalized for four consecutive
calendar quarters. The liability of the holding company is limited to the lesser
of five percent of the institution's total assets or the amount which is
necessary to bring the institution into compliance with all capital standards.
In addition, "undercapitalized" institutions will be restricted from paying
management fees, dividends and other capital distributions, will be subject to
certain asset growth restrictions and will be required to obtain prior approval
from the appropriate regulator to open new branches or expand into new lines of
business.
As an institution's capital levels decline, the extent of action to be
taken by the appropriate regulator increases, restricting the types of
transactions in which the institution may engage and ultimately providing for
the appointment of a receiver for certain institutions deemed to be critically
undercapitalized.
The FDICIA also provides that banks have to meet new safety and
soundness standards. In order to comply with the FDICIA, the Federal Reserve
Board, the OCC and the FDIC have adopted regulations defining operational and
managerial standards relating to internal controls, loan documentation, credit
underwriting, interest rate exposure, asset growth, and compensation, fees and
benefits.
Both the capital standards and the safety and soundness standards which
the FDICIA seeks to implement are designed to bolster and protect the deposit
insurance fund.
In response to the directive issued under the FDICIA, the regulators
have established regulations which, among other things, prescribe the capital
thresholds for each of the five capital categories established by the FDICIA.
The following table reflects the capital thresholds:
Total Risk-Based Tier 1 Risk-Based Tier 1
Capital Ratio Capital Ratio Leverage Ratio
---------------- ----------------- --------------
Well Capitalized(1)...................... 10.0% 6.0% 5.0%
Adequately Capitalized(1)................ 8.0% 4.0% 4.0%(2)
Undercapitalized(3)...................... < 8.0% < 4.0% < 4.0%(4)
Significantly Undercapitalized(3)........ < 6.0% < 3.0% < 3.0%
Critically Undercapitalized.............. - - < 2.0%(5)
- ---------------------------
(1) An institution must meet all three minimums.
(2) 3.0% for composite 1-rated institutions subject to appropriate federal
banking agency guidelines.
(3) An institution falls into this category if it is below the specified capital
level for any of the three capital measures.
(4) Less than 3.0% for composite 1-rated institutions, subject to appropriate
federal banking agency guidelines.
(5) Ratio of tangible equity to total assets.
As a national bank, the Bank is subject to examination and review by
the OCC. This examination is typically completed on-site at least every eighteen
months and is subject to off-site review at call. The OCC, at will, can access
quarterly reports of condition, as well as such additional reports as may be
required by the national banking laws.
11
As a bank holding company, the Company is required to file with the
Federal Reserve Board an annual report of its operations at the end of each
fiscal year and such additional information as the Federal Reserve Board may
require pursuant to the Act. The Federal Reserve Board may also make
examinations of the Company and each of its subsidiaries.
The scope of regulation and permissible activities of the Company and
the Bank is subject to change by future federal and state legislation. In
addition, regulators sometimes require higher capital levels on a case-by-case
basis based on such factors as the risk characteristics or management of a
particular institution. The Company and the Bank are not aware of any attributes
of their operating plan that would cause regulators to impose higher
requirements.
Item 2. Properties.
The Company's occupies 3,375 sq. ft. of leased space for its main
offices located at 5210 Belfort Road, Suite 310, Concourse II, Jacksonville,
Florida 32256. The Bank operates five banking offices and an operations center
in the following locations:
Florida Bank, N.A. - Alachua County (1)
3600 N.W. 43rd Street, Suite 1A
Gainesville, Florida 32606
Facilities: Leased - 2,710 sq. ft.
Florida Bank, N.A. - Jacksonville
5210 Belfort Road, Suite 140
Jacksonville, Florida 32256
Facilities: Leased 6001 sq. ft.
Florida Bank, N.A. - Tampa (2)
100 West Kennedy Boulevard
Tampa, Florida 33602
Facilities: Leased 12,573 sq. ft.
Florida Bank, N.A. - Broward County
600 North Pine Island Rd., Suite 350
Plantation, Florida 33324
Facilities: Leased 4,893 sq. ft.
Florida Bank, N.A. - Pinellas County
8250 Bryan Dairy Road
Suite 150
Largo, Florida 33777
Facilities: Leased 5,428 sq. ft.
Florida Bank, N.A. - Operations Center
6301 Benjamin Road
Suite 105
Tampa, Florida 33634
Facilities: Leased 5,056 sq. ft.
(1) The Alachua County Bank has contracted for the purchase and construction of
a 7,581 sq. ft. free-standing banking office to be located in a new
development known as the Florida Bank Office Park. The facility will be
located near the intersection of Newberry Road and NW 43rd Street in
Gainesville. A portion of the facility may be subleased until needed for
future expansion by the Bank.
(2) Approximately 5,546 sq. ft. of the Tampa Bank facility has been subleased
to a local law firm. The term of the sublease expires on June 30, 2003 in
conjunction with the expiration of Bank's lease.
12
This company is in the process of identifying a location for the
establishment of the Ocala/Marion County loan production office. It is
anticipated that this office will occupy approximately 1,500 square feet of
leased space prior to the opening of the full service community banking office.
Item 3. Legal Proceedings.
- ------ -----------------
There are no material pending legal proceedings to which the Company or
the Bank is a party or of which any of their properties are subject, nor are
there material proceedings known to the Company or the Bank to be contemplated
by any governmental authority.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------ ---------------------------------------------------
No matter was submitted during the fourth quarter ended December 31,
1999 to a vote of security holders of the Company.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
- ------ ---------------------------------------------------------------------
The Company's Common Stock is traded on the Nasdaq National Market
under the symbol "FLBK." The Common Stock began trading on the Nasdaq National
Market on July 30, 1998. The following table sets forth for the periods
indicated the quarterly high and low bid quotation per share as reported by the
Nasdaq National Market. These quotations also reflect inter-dealer prices
without retail mark-ups, mark-downs, or commissions and may not necessarily
represent actual transactions.
High Low
Fiscal year ended December 31, 1999
First Quarter $8.688 $6.813
Second Quarter 43.000 7.500
Third Quarter 11.125 6.625
Fourth Quarter 10.000 5.625
As of March 15, 2000, there were approximately 200 holders of record of
the Common Stock. Management of the Company believes that there are in excess of
4,000 beneficial holders of its Common Stock.
The Company has never declared or paid any dividends on its capital
stock. The Company currently anticipates that all of its earnings will be
retained for development of the Company's business, and does not anticipate
paying any cash dividends in the foreseeable future. Future cash dividends, if
any, will be at the discretion of the Company's Board of Directors and will
depend upon, among other things, the Company's future earnings, operations,
capital requirements and surplus, general financial condition, contractual
restrictions, and such other factors as the Board of Directors may deem
relevant.
In September of 1999, the Company's Board of Directors authorized a
stock repurchase plan covering up to ten percent (10%) of the outstanding shares
of common stock (approximately 585,000 shares). The share repurchase plan
authorizes the purchase of shares at any price below the then current book value
per share. As of December 31, 1999 the Company has repurchased 135,100 shares
for a total cost of $858,843.85 or an average cost of $6.36 per share.
Item 6. Selected Financial Data.
- ------ -----------------------
SELECTED FINANCIAL DATA
The following tables set forth selected financial data of the Company for the
periods indicated. Florida Banks, Inc. (the "Company") was incorporated on
October 15, 1997 for the purpose of becoming a bank holding company and
13
acquiring First National Bank of Tampa (the "Bank"). On August 4, 1998, the
Company completed its initial public offering and its merger (the "Merger") with
the Bank pursuant to which the Bank was merged with and into Florida Bank No. 1,
N.A., a wholly-owned subsidiary of the Company, and renamed Florida Bank, N.A.
Shareholders of the Bank received 1,375,000 shares of common stock of the
Company valued at $13,750,000. The Merger was considered a reverse acquisition
for accounting purposes, with the Bank identified as the accounting acquiror.
The Merger has been accounted for as a purchase, but no goodwill has been
recorded in the Merger and the financial statements of the Bank have become the
historical financial statements of the Company.
The number of shares of common stock, the par value of common stock and per
share amounts have been restated to reflect the shares exchanged in the Merger.
The selected financial data of the Company as of December 31, 1999, 1998, 1997,
1996 and 1995 and for each of the years then ended are derived from the
financial statements of the Company, which have been audited by Deloitte &
Touche LLP, independent auditors. The selected financial data of the Company as
of December 31, 1996 and 1995 and for the year ended December 31, 1995 are
derived from the financial statements of the Company, which were audited by
other independent certified public accountants. These selected financial data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the Company's financial
statements and notes thereto, and financial and other information included
elsewhere herein.
Year Ended December 31,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
Summary Income Statement:
Interest income $ 11,184 $ 5,432 $ 4,302 $ 3,614 $ 2,937
Interest expense 4,696 2,436 2,296 1,872 1,474
------ ------ ------ ------ ------
Net interest income 6,487 2,996 2,006 1,742 1,463
Provision (benefit) for loan losses 1,610 629 60 60 (138)
------ ------ ------ ------ ------
Net interest income after
provision for loan losses 4,877 2,367 1,946 1,682 1,602
Noninterest income 542 594 504 517 375
Noninterest expense (1) 8,342 7,903 1,842 1,598 1,621
------ ----- ------ ------ ------
Income (loss) before provision for
income taxes (2,923) (4,943) 608 601 356
(Benefit) provision for income taxes (2) (1,076) (350) 232 217 -
------ ------ ------ ------ ------
Net income (loss) $ (1,847) $(4,593) $ 376 $ 384 $ 356
====== ====== ====== ====== ======
Earnings (loss) per common share(3):
Basic $ (0.32) $ (1.46) $ 0.31 $ 0.32 $ 0.29
Diluted (0.32) (1.46) 0.29 0.30 0.28
(1) Noninterest expense for the Company for 1998 includes a nonrecurring
noncash charge of $3,939,000 relating to the February 3, 1998 sale of
Common Stock and Warrants included in the Units sold to accredited foreign
investors and the February 11, 1998 sale of 297,000 shares of Common Stock
to 14 officers, directors and consultants.
(2) The provision for income taxes for 1997 and 1996 is comprised solely of
deferred income taxes. The benefit of the utilization of net operating loss
carryforwards for 1997 and 1996 (periods subsequent to the effective date
of the Company's quasi-reorganization) have been reflected as increases to
additional paid-in capital.
(3) The earnings per share amounts have been restated to reflect the shares
exchanged in the Merger.
14
At December 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------ ------------ ------------ -----------
Summary Balance Sheet Date:
Investment securities $ 28,511 $22,242 $10,765 $ 8,551 $ 6,670
Loans, net of deferred loan fees 157,517 67,131 33,720 31,627 25,571
Earning assets 205,898 106,022 54,731 52,588 38,801
Total assets 218,142 113,566 60,396 55,505 41,748
Noninterest-bearing deposits 22,036 11,840 6,442 8,122 5,719
Total deposits 159,106 64,621 45,460 45,526 34,633
Other borrowed funds 18,279 5,718 8,317 6,480 4,212
Total shareholders' equity 39,235 42,588 6,314 3,269 2,678
Performance Ratios:
Net interest margin (1) 4.57 % 4.28 % 3.89 % 4.05 % 4.13%
Efficiency ratio (2) (118.68) (220.18) 73.39 70.76 88.16
Return on average assets (1.07) (5.42) 0.70 0.85 0.95
Return on average equity (3.12) (16.54) 10.62 13.18 14.85
Asset Quality Ratios:
Allowance for loan losses to total loans 1.18 % 1.60 % 1.42 % 1.36 % 1.28%
Non-performing loans to total loans (3) 1.46 2.80 - - -
Net charge-offs (recoveries) to average loans 0.80 0.09 0.03 (0.11) (0.07)
Capital and Liquidity Ratios:
Total capital to risk-weighted assets 18.19 % 63.25 % 14.29 % 12.26 % 12.42
Tier 1 capital to risk-weighted assets 17.29 61.59 13.00 11.01 11.17
Tier 1 capital to average assets 20.01 36.44 7.42 6.42 6.64
Average loans to average deposits 108.2 81.04 75.77 75.83 67.26
Average equity to average total assets 34.30 32.8 6.54 6.45 6.40
- ------------
(1) Computed by dividing net interest income by average earning assets.
(2) Computed by dividing noninterest expense by the sum of net interest income and noninterest income.
(3) The Bank had no non-performing loans at December 31, 1997, 1996 and 1995.
15
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
- ------ -----------------------------------------------------------------------
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This Report contains statements that constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These statements appear in a
number of places in this Report and include statements regarding the intent,
belief or current expectations of the Company, its directors or its officers
with respect to, among other things: (i) potential acquisitions by the Company;
(ii) trends affecting the Company's financial condition or results of
operations; and (iii) the Company's business and growth strategies. Investors
are cautioned that any such forward-looking statements are not guarantees of
future performance and involve risks and uncertainties, and that actual results
may differ materially from those projected in the forward-looking statements as
a result of various factors. These factors include the following: (a)
competitive pressure in the banking industry; (b) changes in the interest rate
environment; (c) the fact that general economic conditions may be less favorable
than we expect; and (d) changes in our regulatory environment. The accompanying
information contained in this Report, including, without limitation, the
information set forth under the headings "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business," as well as in
the Company's Securities Act filings, identifies important additional factors
that could adversely affect actual results and performance. Prospective
investors are urged to carefully consider such factors.
All forward-looking statements attributable to the Company are
expressly qualified in their entirety by the foregoing cautionary statements.
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Company (including the notes thereto)
contained elsewhere in this Report. The following discussion compares results of
operations for the years ended December 31, 1999, 1998 and 1997.
The Company
The Company was incorporated on October 15, 1997 to acquire or
establish a bank in Florida. Prior to the consummation of the merger with First
National Bank of Tampa (the "Merger"), the Company had no operating activities.
The Merger was consummated immediately prior to the closing of the Company's
initial public offering (the "Offering") on August 4, 1998. After the
consummation of the Merger, the Bank's shareholders owned greater than 50% of
the outstanding Common Stock of the Company, excluding the issuance of the
shares in connection with the Offering. Accordingly, the Merger was accounted
for as if the Bank had acquired the Company, the financial statements of the
Bank have become the historical financial statements of the Company and no
goodwill was recorded as a result of the Merger. In addition, the operating
results of the Company incurred prior to the Merger, which consisted of
organizational and start-up costs, are not included in the consolidated
operating results.
The Company funded its start-up and organization costs through the sale
of units, consisting of Common Stock, Preferred Stock and warrants to purchase
shares of Common Stock. As the Company had no operations during 1997, the
Management's Discussion and Analysis of Results of Operations of the Company as
of December 31, 1997 includes only information relevant to the Bank. Discussions
and financial information for December 31, 1999 and 1998 and for the period then
ended, includes consolidated financial data of the Company and Bank. As the
Company was not formed until 1997, the term "Company" used throughout
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" refers to the Company and the Bank for the period ended December 31,
1999 and 1998 and for the Bank only for the period ended December 31, 1997 and
prior periods. Unless otherwise indicated, the "Bank" refers to Florida Bank,
N.A., formerly First National Bank of Tampa.
Summary
The Company's net loss for 1999 decreased $2.8 million to a loss of
$1.8 million or 59.8% from $4.6 million in 1998. Net income for 1998 decreased
$5.0 million to a net loss of $4.6 million from a net income of $376,000 in
1997. Basic and diluted earnings per share was a loss of $.32 for 1999 as
compared to basic and diluted earnings of $1.46 for 1998 and basic and diluted
earnings of $.31 and $.29, respectively, for 1997. Diluted earnings per share
reflects the dilutive effect of outstanding options and has been adjusted for
the Offering and the exchange of shares related to the consummation of the
Merger.
16
The decrease in net income from 1998 to 1999 was primarily attributable
to an increase in net interest income, offset by increases in the provision for
loan losses and noninterest expenses. Net interest income increased to $6.5
million in 1999 from $3.0 million in 1998, an increase of 116.5%. The provision
for loan losses increased by 156.0% to $1.6 million in 1999 from $629,000 in
1998. Noninterest income decreased 8.7% to $542,000 in 1999 from $594,000 in
1998. Noninterest expense increased to $8.3 million in 1999 from $7.9 million in
1998, an increase of 5.6%. The provision for income taxes increased to $1.1
million in 1999 from $350,000 in 1998, an increase of 207.4%.
The decrease in net income from 1997 to 1998 primarily resulted from
expenses associated with the opening of the Jacksonville and Gainesville
offices, expenses related to the Merger, noncash compensation and financing
costs of $3.9 million or $1.26 per share related to the February 3, 1998 sale of
common stock and warrants included in the units sold to foreign investors and
the February 11, 1998 sale of the 297,000 shares of common stock to 14 officers,
directors and consultants and an increase in the provision for loan losses, all
of which were partially offset by an increase in net interest income. The
Company recorded such non-cash, non-recurring compensation expense and financing
costs measured as the difference between the fair value of common stock, based
upon the initial public offering price of $10.00 per share, and the sale price
or allocated proceeds of $.01 per share. These non-cash charges were recorded
with a corresponding increase in additional paid-in capital and therefore had no
effect on the Company's total shareholders' equity or book value. Net interest
income increased to $3.0 million in 1998 from $2.0 million in 1997, an increase
of 49.3%, reflecting the investment of the proceeds from the Offering. The
provision for loan losses increased to $629,000 in 1998 from $60,000 in 1997, an
increase of 948.3%. Noninterest expenses increased to $7.9 million in 1998 from
$1.8 million in 1997, an increase of 329.0%.
Total assets at December 31, 1999 were $218.1 million, an increase of
$104.6 million, or 92.1%, over the prior year. Total loans increased 134.2% to
$157.6 million at December 31, 1999, from $67.3 million at December 31, 1998.
Total deposits increased $94.5 million, or 146.2%, to $159.1 million at December
31, 1999 from $64.6 million at December 31, 1998. Shareholders' equity decreased
to $39.2 million at December 31, 1999 from $42.6 million at December 31, 1998.
These increases and decrease were attributable to the opening of the Pinellas
and Broward branches and a full year of start-up operations for the Gainesville
and Jacksonville branches.
The earnings performance of the Company is reflected in the
calculations of net income (loss) as a percentage of average total assets
("Return on Average Assets") and net income (loss) as a percentage of average
shareholders' equity ("Return on Average Equity"). During 1999, the Return on
Average Assets and Return on Average Equity were (1.07%) and (3.12%)
respectively, compared to (5.43%) and (16.54%), respectively, for 1998. The
Company's ratio of total equity to total assets decreased to 18.0% at December
31, 1999 from 37.5% at December 31, 1998, primarily as a result of growth from
the new branch operations.
17
Results of Operations
Net Interest Income
The following table sets forth, for the periods indicated, certain
information related to the Company's average balance sheet, its yields on
average earning assets and its average rates on interest-bearing liabilities.
Such yields and rates are derived by dividing income or expense by the average
balance of the corresponding assets or liabilities. Average balances have been
derived from the daily balances throughout the periods indicated.
Year Ended December 31,
------------------------------------------------------------------------
1999 1998
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- -------- ------ ------- -------- ------
ASSETS (Dollars in thousands)
Earning assets:
Loans, net of deferred loan fees (1 $103,492 $9,075 8.77% $39,917 $3,826 9.58%
Investment securities(2) 26,670 1,518 5.69 15,766 875 5.55
Repurchase agreements 6,420 333 5.19 5,342 277 5.19
Federal funds sold 5,512 257 4.66 9,033 454 5.03
------- ------ ------- -----
Total earning assets 142,094 11,183 7.87 70,058 5,432 7.75
Cash and due from banks 5,448 ------ 4,588 -----
Premises and equipment, net 1,428 627
Other assets 24,591 9,882
Allowance for loan losses (1,197) (550)
------- ------
Total assets $172,364 $84,605
======= ======
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits $4,912 99 2.02% $2,956 75 2.54%
Savings deposits 24,427 1,153 4.72 7,353 347 4.72
Money market deposits 1,674 37 2.21 1,417 35 2.47
Certificates of deposit of $100,000 or more 21,165 1,166 5.51 10,548 579 5.49
Other time deposits 28,723 1,598 5.56 18,161 1,071 5.90
Repurchase agreements 12,510 553 4.42 5,237 231 4.41
Other borrowed funds 1,657 90 5.43 1,641 98 5.97
------- ----- ------ -----
Total interest-bearing liabilities 95,068 4,696 4.94 47,313 2,436 5.15
Noninterest-bearing demand deposits 14,727 ----- 8,818 -----
Other liabilities 3,445 711
Shareholders' equity 59,124 27,763
------- ------
Total liabilities and shareholders' equity $172,364 $84,605
======= =======
Net interest income $6,487 $2,996
===== =====
Net interest spread 2.93% 2.60%
Net interest margin 4.57% 4.28%
- --------------------------
(1) At December 31, 1999 and 1998, $1.1 million and $725,000 of loans,
respectively were accounted for on a non-accrual basis.
(2) The yield on investment securities is computed based upon the average
balance of investment securities at amortized cost and does not reflect the
unrealized gains or losses on such investments.
18
Net interest income is the principal component of a financial
institution's income stream and represents the difference or spread between
interest and certain fee income generated from earning assets and the interest
expense paid on deposits and other borrowed funds. Fluctuations in interest
rates, as well as volume and mix changes in earning assets and interest-bearing
liabilities, can materially impact net interest income. The Company had no
investments in tax-exempt securities during 1999, 1998 and 1997. Accordingly, no
adjustment is necessary to facilitate comparisons on a taxable equivalent basis.
Net interest income increased 116.6% to $6.5 million in 1999 from $3.0
million in 1998. This increase in net interest income is attributable to growth
in loan volume due to new branch operations, and is partially offset by the
growth in savings deposits and repurchase agreements. The trend in net interest
income is commonly evaluated using net interest margin and net interest spread.
The net interest margin, or net yield on average earning assets, is computed by
dividing fully taxable equivalent net interest income by average earning assets.
The net interest margin increased 29 basis points to 4.57% in 1999 on average
earning assets of $142.1 million from 4.28% in 1998 on average earning assets of
$70.1 million. This increase is primarily due to the significant increase in
average earning assets from the operations of the new branches and to an overall
decrease in interest rates on interest-bearing liabilities. There was a 12 basis
point increase in the average yield on earning assets to 7.87% in 1999 from
7.75% in 1998 and a 21 basis point decrease in the average rate paid on
interest-bearing liabilities to 4.94% in 1999 from 5.15% in 1998. The increased
yield on earning assets was primarily the result of slightly higher market rates
on loans and investment securities. The decrease in the cost of interest-bearing
liabilities is attributable to decreases in rates on interest-bearing demand
deposits, other time deposits, money market accounts and other borrowed funds.
Net interest income increased 49.3% to $3.0 million in 1998 from $2.0
million in 1997. This increase in net interest income is attributable to growth
in average earning assets due to the investment of the proceeds from the
Offering, partially offset by the growth in savings deposits and repurchase
agreements. The net interest margin increased 39 basis points to 4.28% in 1998
on average earning assets of $70.1 million from 3.89% in 1997 on average earning
assets of $51.6 million. This increase is primarily due to the significant
increase in average earning assets from the investment of proceeds from the
Offering. The effect of the investment of the proceeds from the Offering more
than offset a 58 basis point decrease in the average yield on earning assets to
7.75% in 1998 from 8.33% in 1997 and a one basis point decrease in the average
rate paid on interest-bearing liabilities to 5.15% in 1998 from 5.16% in 1997.
The decreased yield on earning assets was primarily the result of lower market
rates on loans and investment securities. The decrease in the cost of
interest-bearing liabilities is attributable to minimal decreases in rates on
time deposits, money market and savings deposits and repurchase agreements.
The net interest spread increased 33 basis points to 2.93% in 1999 from
2.60% in 1998, as the yield on average earning assets increased 12 basis points
while the cost of interest-bearing liabilities decreased 21 basis points. The
net interest spread measures the absolute difference between the yield on
average earning assets and the rate paid on average interest-bearing sources of
funds. The net interest spread eliminates the impact of noninterest-bearing
funds and gives a direct perspective on the effect of market interest rate
movements. This measurement allows management to evaluate the variance in market
rates and adjust rates or terms as needed to maximize spreads.
The net interest spread decreased 57 basis points to 2.60% in 1998 from
3.17% in 1997, as the yield on average earning assets decreased 58 basis points
while the cost of interest-bearing liabilities increased one basis point.
During recent years, the net interest margins and net interest spreads
have been under pressure, due in part to intense competition for funds with
non-bank institutions and changing regulatory supervision for some financial
intermediaries. The pressure was not unique to the Company and was experienced
by the banking industry nationwide.
To counter potential declines in the net interest margin and the
interest rate risk inherent in the balance sheet, the Company adjusts the rates
and terms of its interest-bearing liabilities in response to general market rate
changes and the competitive environment. The Company monitors Federal funds sold
levels throughout the year, investing any funds not necessary to maintain
appropriate liquidity in higher yielding investments such as short-term U.S.
government and agency securities. The Company will continue to manage its
balance sheet and its interest rate risk based on changing market interest rate
conditions.
19
Rate/Volume Analysis of Net Interest Income
The table below presents the changes in interest income and interest
expense attributable to volume and rate changes between 1998 and 1999 and
between 1997 and 1998. The effect of a change in average balance has been
determined by applying the average rate in 1998 and 1997 to the change in
average balance from 1998 to 1999 and from 1997 to 1998, respectively. The
effect of change in rate has been determined by applying the average balance in
1998 and 1997 to the change in the average rate from 1998 to 1999 and from 1997
to 1998, respectively. The net change attributable to the combined impact of the
volume and rate has been allocated to both components in proportion to the
relationship of the absolute dollar amounts of the change in each.
Year Ended December 31, 1999 Year Ended December 31, 1998
Compared With Compared With
December 31, 1998 December 31, 1997
Increase (Decrease) Due to: Increase (Decrease) Due to:
Volume Yield/Rate Total Volume Yield/Rate Total
------ ---------- ----- ------ ---------- -----
Interest Earned On:
Taxable securities .............. $ 623,000 $ 21,000 $ 644,000 $ 322,000 $ (31,000) $291,000
Federal funds sold ............. (197,000) (197,000) 72,000 17,000 89,000
Net loans ...................... 5,543,000 (294,000) 5,249,000 544,000 (71,000) 473,000
Repurchase agreements .......... 89,000 (33,000) 56,000 277,000 N/A 277,000
--------- --------- --------- --------- -------- ---------
Total earning assets .......... 6,058,000 (306,000) 5,752,000 1,215,000 (85,000) 1,130,000
--------- --------- --------- --------- -------- ---------
Interest Paid On:
Money market and
interest-bearing, demand 32,000 (5,000) 27,000 (1,000) (1,000)
Savings deposits ............... 1,122,000 4,000 1,126,000 78,000 (3,000) 75,000
Time deposits .................. 1,171,000 (58,000) 1,113,000 (46,000) 4,000 (42,000)
Repurchase agreements .......... 320,000 2,000 322,000 56,000 (3,000) 53,000
Other borrowed funds ........... 1,000 (9,000) (8,000) 38,000 18,000 56,000
--------- --------- --------- --------- ------- --------
Total interest-bearing........ 2,646,000 (66,000) 2,580,000 126,000 16,000 142,000
--------- --------- --------- --------- -------- --------
Net interest income .......... $8,704,000 $ (372,000) $8,332,000 S1,089,000 $(101,000) $988,000
========= ========= ========= ========= ======== ========
Provision for Loan Losses
The provision for loan losses is the expense of providing an allowance
or reserve for anticipated future losses on loans. The amount of the provision
for each period is dependent upon many factors, including loan growth, net
charge-offs, changes in the composition of the loan portfolio, delinquencies,
management's assessment of loan portfolio quality, the value of loan collateral
and general business and economic conditions.
The provision for loan losses charged to operations in 1999 was $1.6
million as compared to $629,000 for 1998. The increase in the provision from
1998 to 1999 was generally due to the increases in the amount of loans
outstanding.
The provision for loan losses charged to operations in 1998 was
$629,000 as compared to $60,000 for 1997. Management's analysis of the allowance
for loan losses prepared as of December 31, 1998 indicated the need for a
specific reserve in the amount of $529,000 for an impaired credit in the Tampa
market. The remaining $100,000 provision in 1998 was generally due to increases
in the amount of loans outstanding. For additional information regarding
provision for loan losses, charge-offs and allowance for loan losses, see "--
Financial Condition--Asset Quality."
20
Noninterest Income
Noninterest income consists of revenues generated from a broad range of
financial services, products and activities, including fee-based services,
service fees on deposit accounts and other activities. In addition, gains
realized from the sale of the guaranteed portion of SBA loans, other real estate
owned, and available for sale investments are included in noninterest income.
Noninterest income decreased 8.7% to $542,000 in 1999 from $594,000 in
1998. This change resulted from an increase in the amount of service fees on
deposit accounts offset by decreased gains on the sale of the guaranteed portion
of SBA loans and available for sale securities. Service fees on deposit accounts
increased 18.9% to $455,000 in 1999 from $382,000 in 1998 due to an increase in
insufficient funds and returned check fees and increased volume in the number of
wire transfers transacted for customers. Gains on sale of the guaranteed portion
of SBA loans decreased 98.9% to $1,000 in 1999 from $106,000 in 1998 due to a
decrease in the principal amount of such loans sold. There were no sales of SBA
loans during 1999, compared to $1.2 million of loans sold in 1998, all of which
were originated in 1998. The Company substantially reduced its SBA lending
operations in 1998 due to the cost of maintaining this specialized lending
practice and due to recent charge-offs in the unguaranteed portion of the SBA
loans that were retained by the Bank. Other income, which includes various
recurring noninterest income items such as travelers checks fees and safe
deposit box fees, decreased 7.1% to $90,000 in 1999 from $98,000 in 1998.
Noninterest income increased 17.8% to $594,000 in 1998 from $504,000 in
1997. This change resulted from an increase in the amount of service fees on
deposit accounts and increased gains on the sale of the guaranteed portion of
SBA loans. Service fees on deposit accounts increased 17.8% to $382,000 in 1998
from $325,000 in 1997 due to an increase in insufficient funds and returned
check fees and increased volume in the number of wire transfers transacted for
customers. Gains on sale of the guaranteed portion of SBA loans increased 11.4%
to $106,000 in 1998 from $95,000 in 1997 due to an increase in the principal
amount of such loans sold. During 1998, the Company sold $1.2 million principal
balance of SBA loans all of which were originated in 1998, compared to $1.1
million of loans sold in 1997, of which $1.0 million were originated in 1997.
Other income, which includes various recurring noninterest income items such as
travelers checks fees and safe deposit box fees, increased 27.0% to $98,000 in
1998 from $76,000 in 1997.
The following table presents an analysis of the noninterest income for
the periods indicated with respect to each major category of noninterest income:
% Change % Change
1999 1998 1997 1999-1998 1998-1997
---- ---- ---- ---------- ---------
(Dollars in thousands)
Service fees .................................. $455 $382 $325 18.9% 17.8%
Gain on sale of loans ......................... 1 106 95 (98.9) 11.4
(Loss) gain on sale of available for sale
investment securities, net .................... (4) 8 8 (152.1) N/A
Other ......................................... 90 98 76 (7.1) 27.0
--- --- ---
Total ......................................... $542 $594 $504 (8.7%) 17.8%
=== === ===
21
Noninterest Expense
Noninterest expense increased 5.6% to $8.3 million in 1999 from $7.9
million in 1998. These increases are primarily attributable to increases in
personnel, occupancy, data processing and other expenses relating to opening of
the Broward County and Pinellas County banking offices. Salaries and benefits
decreased 1.7% to $5.3 million in 1999 from $5.4 million in 1998. This decrease
is attributable to a non-cash, non-recurring charge of approximately $3 million
in 1998 related to the sale of stock and warrants to the founders of the Company
and foreign investors and offset by increases in the number of personnel at the
holding company level and for the Broward and Pinellas County offices. Occupancy
and equipment expense increased 95.7% to $951,000 in 1999 from $486,000 in 1998
primarily as a result of the addition of the Broward and Pinellas County banking
offices. Data processing expense increased 86.6% to $265,000 in 1999 from
$142,000 in 1998 which is primarily attributable to the growth in loan and
deposit transactions and the addition of new services. Financing costs for 1998
represents a non-cash non-recurring charge of $972,000 for financing costs
relating to the issuance of common stock and warrants to foreign investors.
Other operating expenses increased 98.9% to $1.8 million in 1999 from $923,000
in 1998. This increase is attributable primarily to an increase of $40,000 in
marketing and advertising expenses, an increase of $106,000 in legal and
accounting fees associated with the growth of the Bank and the opening of new
banking offices, an increase of $138,000 in communications expense associated
with the network expansion at the holding company and the openings of new
banking offices and an increase of $109,000 in stationary, printing and supplies
associated with the opening of the Broward and Pinellas County banking offices.
Noninterest expense increased 329.0% to $7.9 million in 1998 from $1.8
million in 1997. Management attributes this increase to the $3.9 million
non-cash compensation and financing costs, the costs of the Merger and increases
in personnel expense, occupancy expense and data processing expense relating to
opening the Jacksonville and Gainesville banking offices. Salaries and benefits
increased 438.3% to $5.4 million in 1998 from $999,000 in 1997. This increase is
attributable to a non-cash, non-recurring charge of approximately $3 million
related to the sale of stock and warrants to the founders of the Company and
foreign investors and to increases in the number of personnel at the holding
company level and for the Jacksonville and Gainesville offices. Occupancy and
equipment expense increased 89.8% to $486,000 in 1998 from $256,000 in 1997
primarily as a result of the addition of the holding company and Jacksonville
banking offices. Data processing expense increased 53.6% to $142,000 in 1998
from $93,000 in 1997 which is primarily attributable to the growth in loan and
deposit transactions and the addition of new services. Financing costs for 1998
represents a non-cash non-recurring charge of $972,000 for financing costs
relating to the issuance of common stock and warrants to foreign investors.
Other operating expenses increased 86.8% to $923,000 in 1998 from $494,000 in
1997. This increase is attributable primarily to an increase of $47,000 in
marketing and advertising expenses, an increase of $137,000 in legal and
accounting fees associated with the Merger, an increase of $68,000 in
communications expense associated with the network expansion at the holding
company and Jacksonville banking offices and an increase of $49,000 in
stationary, printing and supplies associated with the Company name change and
opening of the Jacksonville banking office.
The following table presents an analysis of the noninterest expense for
the periods indicated with respect to each major category of noninterest
expense:
% Change % Change
1999 1998 1997 1999-1998 1998-1997
---- ---- ---- --------- ----------
(Dollars in thousands)
Salaries and benefits $5,291 $5,380 $999 (1.7%) 483.3%
Occupancy and equipment 951 486 256 95.7% 89.8
Data processing 265 142 93 86.6 53.6
Financing cost 0 972 0 N/A N/A
Other 1,835 923 494 98.9 86.8
----- ----- ---- ---- -----
Total $8,342 $7,903 $1,842 5.6% 329.0%
===== ===== =====
22
Provision for Income Taxes
The benefit for income taxes was $1.1 million for 1999 compared to
$350,000 for 1998. The effective tax rate for 1999 was a benefit of 36.8% as
compared to 1998 which was a benefit of 7.1%. The increase in the effective tax
rate is due to the effect of a higher level of nondeductible expenses in 1998 as
compared to 1999. These nondeductible expenses for 1998 are comprised primarily
of the $3.9 million in compensation and financing costs resulting from the sale
of common stock and warrants to founders and foreign investors. The Company paid
no income taxes during 1999 and 1998 due to the availability of net operating
loss carryforwards.
The provision (benefit) for income taxes was ($350,000) for 1998
compared to a provision of $232,000 for 1997. The effective tax rate for 1998
was a benefit of 7.1% as compared to an effective tax rate of 38.2% for 1997.
The decrease in the effective tax rate is due to the effect of a higher level of
nondeductible expenses in 1998 as compared to 1997. These nondeductible expenses
for 1998 are comprised primarily of the $3.9 million in compensation and
financing costs resulting from the sale of common stock and warrants to founders
and foreign investors. The Company paid no income taxes during 1998 due to the
availability of net operating loss carryforwards.
Certain income and expense items are recognized in different periods
for financial reporting purposes and for income tax return purposes. Deferred
income tax assets and liabilities reflect the differences between the values of
certain assets and liabilities for financial reporting purposes and for income
tax purposes, computed at the current tax rates. Deferred income tax expense is
computed as the change in the Company's deferred tax assets, net of deferred tax
liabilities and the valuation allowance. The Company's deferred income tax
assets consist principally of net operating loss carryforwards. A deferred tax
valuation allowance is established if it is more likely than not that all or a
portion of the deferred tax assets will not be realized.
First National Bank of Tampa reported losses from operations each year
from its inception in 1988 through 1994. These losses primarily resulted from
loan losses and high overhead costs. Management of First National Bank of Tampa
was replaced during 1992 and additional capital of $1.6 million was raised
through a private placement of common stock during 1993. Largely as a result of
these changes, the Company became profitable in 1995. In order to reflect this
fresh start, the Bank elected to restructure its capital accounts through a
quasi-reorganization. A quasi-reorganization is an accounting procedure that
allows a company to restructure its capital accounts to remove an accumulated
deficit without undergoing a legal reorganization. Accordingly, the Bank charged
against additional paid-in capital its accumulated deficit of $8.1 million at
December 31, 1995. As a result of the quasi-reorganization, the future benefit
from the utilization of the net operating loss carryforwards generated prior to
the date of the quasi-reorganization was required to be accounted for as an
increase to additional paid-in capital. Such benefits are not considered to have
resulted from the Bank's results of operations subsequent to the
quasi-reorganization.
As of December 31, 1999, the Company had $9.2 million in net operating
loss carryforwards available to reduce future taxable earnings, which resulted
in net deferred tax assets of $4.4 million. These net operating loss
carryforwards will expire in varying amounts in the years 2004 through 2019
unless fully utilized by the Company. Based on management's estimate of future
earnings and the expiration dates of the net operating loss carry forwards as of
December 31, 1999 and 1998, it was determined that it is more likely than not
that the benefit of the deferred tax assets will be realized.
Prior to 1997, because of the uncertain nature of the Company's
earnings, the Company recorded a valuation allowance equal to the full amount of
the deferred tax assets. At December 31, 1997, the Company assessed its earnings
history and trends over the past three years, its estimate of future earnings,
and the expiration dates of the net operating loss carryforwards and determined
that it was more likely than not that the benefit of the deferred tax assets
will be realized. Accordingly, no valuation allowance was required at December
31, 1997, and the elimination of the valuation allowance of $2.4 million has
been reflected as an increase to additional paid-in capital.
24
The following table presents the components of net deferred tax assets:
As of December 31,
1999 1998 1997
(Dollars in thousands)
Deferred tax assets .................... $4,426 $3,026 $2,525
Deferred tax liabilities ............... 61 133 105
Valuation allowance .................... - - -
------ ------ ------
Net deferred tax assets ................ $4,365 $2,893 $2,420
====== ====== ======
The utilization of the net operating loss carryforwards reduces the
amount of the related deferred tax asset by the amount of such utilization at
the current enacted tax rates. Other deferred tax items resulting in temporary
differences in the recognition of income and expenses such as the allowance for
loan losses, loan fees, accumulated depreciation and cash to accrual adjustments
will fluctuate from year-to-year.
As a result of the Merger, the Company will have the use of the
Company's net operating loss carryforwards. However, the portion of the
Company's net operating loss carryforwards which will be usable each year by the
Company will be limited under provisions of Section 382 of the Internal Revenue
Code relating to the change in control. The annual limitation is based upon the
purchase price of the Company multiplied by the applicable Long-Term Tax-Exempt
Rate (as defined in the Internal Revenue Code) at the date of acquisition. Based
upon the applicable Long-Term Tax-Exempt Rate for December 1998 acquisitions,
this annual limitation would be approximately $700,000. Management believes it
is more likely than not that the Company will produce sufficient taxable income
to allow the Company to fully utilize its net operating loss carryforwards prior
to their expiration.
Net Income
The Company reported a net loss of $1.8 million in 1999 compared to a
net loss of $4.6 million in 1998. The net loss for 1999 resulted primarily from
the openings of the Broward and Pinellas County Banking offices. Basic loss per
share were $.32 for 1999 and $1.46 for 1998.
Return on Average Assets increased 436 basis points to a deficit of
1.07% in 1999 from 5.43% in 1998. Return on Average Equity increased 1346 basis
points to a deficit of 3.12% in 1999 from 16.54% in 1998.
The Company reported a net loss of $4.6 million in 1998 compared to net
income of $376,000 in 1997. The net loss for 1998 resulted from the $3.9 million
non-cash non-recurring compensation and financing costs, expenses associated
with the opening of the Jacksonville and Gainesville offices, expenses related
to the Merger and an increase in the provision for loan losses, partially offset
by an increase in net interest income. Basic (loss) earnings per share were
$(1.46) for 1998 and $.31 for 1997.