================================================================================
Securities and Exchange Commission
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT
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Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2003 Commission File No. 000-1170902
FLORIDA COMMUNITY BANKS INC.
(Exact Name of Registrant As Specified In Its Charter)
Florida 35-2164765
- ------------------------ ----------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
1400 North 15th Street, Immokalee, Florida 34142-2202
- ------------------------------------------ -------------------
(Address of principal executive offices) (Including zip code)
(239) 657-3171
(Issuer's Telephone Number, Including Area Code)
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE ACT:
Name of each exchange
Title of each class on which registered
- ------------------- ---------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $0.01 Par Value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2):
Yes X No
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The issuer's revenues for its most recent fiscal year were $36,247,917.
There is no established trading market for the registrant's capital stock. The
aggregate market value of the stock held by non-affiliates of the registrant at
March 10, 2004, was $71,115,372 based on a per share price of $25.75, which is
the price of the last trade of which management is aware as of such date.
Although directors and executive officers of the registrant were assumed to be
"affiliates" of the registrant for purposes of this calculation, the
classification is not to be interpreted as an admission of such status.
At March 10, 2004, there were 3,766,384 shares of the registrant's Common Stock
outstanding.
Documents Incorporated by Reference
Portions of the registrant's definitive Proxy Statement for the 2003 Annual
Meeting of Shareholders are incorporated by reference into Part III of this
report.
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FLORIDA COMMUNITY BANKS INC.
2003 Form 10-K Annual Report
TABLE OF CONTENTS
Item Number Page or
in Form 10-K Description Location
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PART I
Item 1. Business................................................................... 3
Item 2. Properties................................................................. 8
Item 3. Legal Proceedings.......................................................... 8
Item 4. Submission of Matters to a Vote of Security Holders........................ 8
PART II
Item 5. Market for the Registrant's Common Equity and Related
Shareholder Matters........................................................ 9
Item 6. Selected Financial Data.................................................... 10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................ 11
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................. 11
Item 8. Financial Statements and Supplementary Data................................ 31
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................................... 70
Item 9A. Controls and Procedures.................................................... 70
PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.......................... 71
Item 11. Executive Compensation..................................................... 71
Item 12. Security Ownership of Certain Beneficial Owners and Management............. 71
Item 13. Certain Relationships and Related Transactions............................. 71
Item 14. Principal Accountant Fees and Service...................................... 71
PART IV
Item 15. Exhibits and Reports on Form 8-K........................................... 72
Signatures
Certification of Periodic Financial Reports
PART I
--------
ITEM 1. BUSINESS
General
Florida Community Banks, Inc. ("FCBI" or the "Company") is a bank holding
company, which owns all of the common stock of Florida Community Bank ("Bank" or
"FCB") and a special purpose business trust organized to issue Trust Preferred
Securities. The special purpose business trust is not consolidated in the
financial statements that are included elsewhere herein. FCBI is a Florida
corporation registered with the Board of Governors of the Federal Reserve System
as a bank holding company under the Bank Holding Company Act of 1956, as
amended. Through its subsidiary Bank, FCBI is engaged in the commercial banking
business in southwestern Florida with offices in Collier, Lee, Hendry, Glades
and Charlotte counties. At December 31, 2003, FCBI had total assets of
approximately $526 million, total deposits of approximately $424 million and
stockholders' equity of approximately $42 million.
Florida Community Bank is a Florida-chartered commercial bank, which
commenced operations in Everglades City, Florida on May 19, 1923, under the name
"Bank of the Everglades." The Bank changed its place of business from Everglades
City, Florida to Immokalee, Florida in September 1962. FCB changed its name from
Bank of the Everglades to "First Bank of Immokalee" in July 1967 and then to
"Florida Community Bank" in July 1996 as part of its merger with Tri-County Bank
of Lehigh Acres. The Bank is subject to regulation by the Florida Department of
Financial Services ("Department") and the Federal Deposit Insurance Corporation
("FDIC"). The Bank's main office is located at 1400 North 15th Street,
Immokalee, Florida and its telephone number is (239) 657-3171. In addition to
the main banking office in Immokalee, the Bank currently operates full-service
branches in the southwest Florida cities of Lehigh Acres, LaBelle, Naples
(Golden Gate area), Port Charlotte, Punta Gorda, Cape Coral and Ft. Myers.
The Company employs approximately 150 persons and it believes that its
relationship with these employees is good.
The Bank is engaged primarily in soliciting deposits from the general
public and investing such deposits, together with other funds, in commercial
loans, consumer loans, agricultural loans, and real estate loans. To a lesser
extent, the Bank invests its funds in securities issued or guaranteed by
agencies of the United States Government and municipalities.
The Bank operates as a locally operated institution aimed at providing
prompt, efficient and personalized service to individuals, small and
medium-sized businesses, professionals and other local organizations. The Bank's
primary service area encompasses Charlotte, Lee, Collier, Glades and Hendry
Counties (the "PSA"). The Bank's principal markets within the PSA are:
(i) commercial and small business lending and deposit services;
(ii) residential real estate mortgage and retail lending and deposit
services; and
(iii) commercial and residential real estate development lending.
The principal sources of funds for the Bank's loans and other investments
are demand, time, savings and other deposits, amortization and prepayment of
loans, sales to other lenders or institutions of loans or participations in
loans, principal payments or maturities of investment securities, and
borrowings. The principal sources of income for the Bank are interest and fees
collected on loans, including fees received for servicing loans sold to other
lenders or institutions, and to a lesser extent, interest and dividends
collected on other investments. The principal expenses of the Bank are interest
paid on savings and other deposits, interest paid on other borrowings by the
Bank, employee compensation, office expenses and other overhead and operational
expenses.
The Bank offers several deposit accounts, including demand deposit
accounts, negotiable order of withdrawal accounts ("NOW" and "Super-NOW"
accounts), money market accounts, certificates of deposit and various retirement
accounts. In addition, the Bank belongs to an electronic banking network so that
its customers
3
may use the automated teller machines (the "ATMs") of other financial
institutions and operates drive-in teller services and 24-hour depository
vaults.
The Bank offers the following loan services:
(a) consumer loans, automobile loans, real estate equity lines of credit,
education loans and real estate loans secured by single-family
residences;
(b) commercial and business loans for small to medium-sized companies,
including Small Business Administration and other
government-guaranteed financing;
(c) individual and builder short-term residential construction financing;
(d) home improvement loans; and
(e) commercial and residential real estate development loans.
The Bank provides a full range of competitive banking services and
emphasizes the manner in which the services are delivered. Management focuses
its efforts on filling the void created by the decreasing number of
locally-owned community banks due to acquisitions by large regional holding
companies, which it believes has negatively impacted the personal nature of the
delivery, quality and availability of banking services available in the PSA and
surrounding areas.
Primary Service Area
The PSA enjoys an abundant work force, attractive business climate and a
good relationship between the private and public sectors.
In general, commercial real estate in the PSA consists of small shopping
centers and office buildings. The type of residential real estate within the PSA
varies, with a number of condominiums, townhouses, apartments and single-family
housing developments dispersed throughout the PSA.
Competition
The business of banking is highly competitive. The Bank competes with other
banks, savings and loan associations and credit unions within the PSA. The Bank
believes that its operation as a locally owned and controlled bank with a broad
base of ownership in the PSA enhances its ability to compete with those
non-local financial institutions now operating in its market, but no assurances
can be given in this regard.
The Bank's competitive strategy with respect to the financial institutions
described above consists of:
o reviewing and acting upon loan requests quickly with a locally-based
loan committee,
o maintaining flexible but prudent lending policies,
o personalizing service by establishing long-term banking relationships
with its customers; and
o maintaining an appropriate ratio of employees to customers to enhance
the level of service.
Facilities
The Bank's main office in Immokalee, Florida was purchased in 1962. At
December 31, 2003, the Bank operated eight branch offices, with a ninth office
under construction. The Lehigh Acres branch was acquired in 1996 as a result of
the acquisition of Tri-County Bank of Lehigh Acres. The Golden Gate branch
operates in a facility leased in 1997, on a month-to-month basis, with
adjustments made annually to the lease cost based on the Consumer Price Index.
The LaBelle branch was acquired as a result of the acquisition of Hendry County
Bank by merger in 1998. The land for the Port Charlotte branch was purchased in
1998 and the branch opened in 1999 after construction was completed. The
facility for the Ft. Myers branch is leased for 15 years (with renewal options
after that period) and opened in 2000. The Bank owns the Punta Gorda branch and
the underlying land is subject to a 99-year lease, which commenced in 2000. Land
for a second Cape Coral branch was purchased in 2003 and is under construction.
All of the branch facilities are in good condition.
4
Regulation
The Bank is subject to comprehensive regulation, examination and
supervision by the Department and the FDIC, and is subject to other laws and
regulations applicable to banks. Such regulations include limitations on loans
to a single borrower and to the Bank's directors, officers and employees;
restrictions on the opening and closing of branch offices; the maintenance of
required capital and liquidity ratios; the granting of credit under equal and
fair conditions; disclosure of the costs and terms of such credit; and
restrictions as to permissible investments. The Bank is examined periodically by
both the Department and the FDIC and submits periodic reports regarding its
financial condition and other matters to each of them. Both the Department and
the FDIC have a broad range of powers to enforce regulations under their
respective jurisdictions, and to take discretionary actions determined to be for
the protection of the safety and soundness of the Bank, including the
institution of cease and desist orders and the removal of directors and
officers.
FDIC Regulations. The Bank's deposit accounts are insured by the Bank
Insurance Fund of the FDIC up to a maximum of $100,000 per insured depositor.
The FDIC issues regulations, conducts periodic examinations, requires the filing
of reports and generally supervises the operations of its insured banks. The
approval of the FDIC is required prior to a merger or consolidation or the
establishment or relocation of an office facility. This supervision and
regulation is intended primarily for the protection of depositors and not of
stockholders.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") substantially revised the depository institution regulatory and
funding provisions of the Federal Deposit Insurance Act. Among other things,
FDICIA requires the federal banking regulators to take prompt corrective action
in respect to depository institutions that do not meet minimum requirements.
FDICIA established five capital tiers: "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," and
"critically undercapitalized." A depository institution is well capitalized if
it significantly exceeds the minimum level required by regulation for each
relevant capital measure, adequately capitalized if it meets each such measure,
undercapitalized if it fails to meet any such measure, significantly
undercapitalized it is significantly below any such measure and critically
undercapitalized if it fails to meet any critical capital level set forth in the
regulations. The critically undercapitalized level occurs where tangible equity
is less than 2% of total tangible assets or less than 65% of the minimum
leverage ratio prescribed by regulation (except to the extent that 2% would be
higher than such 65% level). A depository institution may be deemed to be in a
capitalization category that is lower than is indicated by its actual capital
position if it receives an unsatisfactory examination rating.
FDICIA generally prohibits a depository institution from making any capital
distribution (including payment of a dividend) if the depository institution
would thereafter be undercapitalized. In addition, undercapitalized depository
institutions are subject to growth limitations and are required to submit
capital restoration plans to the FDIC. The federal banking agencies may not
accept a capital plan without determining, among other things, that the plan is
based on realistic assumptions and is likely to succeed in restoring the
depository institution's capital. If a depository fails to submit an acceptable
plan, it is treated as if it is significantly undercapitalized.
Significantly undercapitalized depository institutions may be subject to a
number of requirements and restrictions, including orders to sell sufficient
voting stock to become adequately capitalized, requirements to reduce total
assets and cessation of the receipt of deposits from correspondent banks.
Critically undercapitalized depository institutions are subject to the
appointment of a receiver or conservator.
FDICIA provides authority for special assessments against insured deposits
and for the development of a general risk-based insurance assessment system. The
risk-based insurance assessment system would be used to calculate a depository
institution's semi-annual deposit insurance assessment based on the probability
(as defined in the FDICIA) that the BIF will incur a loss with respect to the
institution. In accordance with FDICIA, the FDIC implemented a transitional
risk-based insurance premium system and increased deposit insurance premiums for
commercial banks to an average of 25.4 basis points.
FDICIA also contains various provisions related to an institution's
interest rate risk. Under certain circumstances, an institution may be required
to provide additional capital or maintain higher capital levels to address
interest rate risks.
5
In addition, the FDIC has adopted a minimum leverage ratio of 4%. The
minimum leverage ratio is the ratio of common equity, retained earnings and
certain amounts of perpetual preferred stock (after subtracting goodwill and
after making certain other adjustments) to the total assets of the institution.
Generally, banking organizations are expected to operate well above the minimum
required capital level of 4% unless they meet certain specified criteria,
including that they have the highest regulatory ratings. Most banking
organizations are required to maintain a leverage ratio of 4% plus an additional
cushion of 1% to 2%. The guidelines also provide that banking organizations
experiencing internal growth or making acquisitions are expected to maintain
strong capital positions substantially above the minimum supervisory levels
without significant reliance upon intangible assets.
Dividend Restrictions. In addition to dividend restrictions placed on the
Bank by the FDIC based on the Bank's minimum capital requirements, the Florida
Financial Institutions Code prohibits the declaration of dividends in certain
circumstances. Section 658.37 (Florida Statutes), prohibits the declaration of
any dividend until a bank has charged off bad debts, depreciation and other
worthless assets, and has made provision for reasonably-anticipated future
losses on loans and other assets. Such dividends are limited to the aggregate of
the net profits of the dividend period, combined with a bank's retained net
profits for the preceding two years. A bank may declare a dividend from retained
net profits that accrued prior to the preceding two years with the approval of
the Department. However, a bank will be required, prior to the declaration of a
dividend on its common stock, to carry 20% of its net profits for such preceding
period to its surplus fund, until the surplus fund equals at least the amount of
the bank's common and preferred stock then issued and outstanding. In no event
may a bank declare a dividend at any time in which its net income from the
current year, combined with its retained net income from the preceding two years
is a loss or which would cause the capital accounts of the bank to fall below
the minimum amount required by law, regulation, order or any written agreement
with the Department or other state or federal regulatory agency.
Riegle-Neal Interstate Banking and Branching Efficiency Act. The
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 provides
that as of June 1, 1997, adequately capitalized and managed banks will be able
to engage in interstate branching by merging banks in different states,
including Florida, which did not opt out of the application of this provision.
If a state did not opt out, banks will be required to comply with the host
state's regulations with respect to branching across state lines.
Gramm-Leach-Bliley Act. On November 12, 1999, President Clinton signed into
law the Gramm-Leach-Bliley Act which reforms and modernizes certain areas of
financial services regulation. The law permits the creation of new financial
services holding companies that can offer a full range of financial products
under a regulatory structure based on the principle of functional regulation.
The legislation eliminates the legal barriers to affiliations among banks and
securities firms, insurance companies, and other financial services companies.
The law also provides financial organizations with the opportunity to structure
these new financial affiliations through a holding company structure or a
financial subsidiary. The new law reserves the role of the Federal Reserve Board
as the supervisor for bank holding companies. At the same time, the law provides
a system of functional regulation, which is designed to utilize the various
existing federal and state regulatory bodies.
The law also includes a minimum federal standard of financial privacy.
Financial institutions are required to have written privacy policies that must
be disclosed to customers. The disclosure of a financial institution's privacy
policy must take place at the time a customer relationship is established and
not less than annually during the continuation of the relationship. The act also
provides for the functional regulation of bank securities activities. The law
repeals the exemption that banks were afforded from the definition of "broker,"
and replaces it with a set of limited exemptions that allow the continuation of
some historical broker activities performed by banks. In addition, the act
amends the securities laws to include banks within the general definition of
dealer. Regarding new bank products, the law provides a procedure for handling
products sold by banks that have securities elements.
In the area of CRA activities, the law generally requires that financial
institutions address the credit needs of low-to-moderate income individuals and
neighborhoods in the communities in which they operate. Bank regulators are
required to take the CRA ratings of a bank or of the bank subsidiaries of a
holding company into account when acting upon certain branch and bank merger and
acquisition applications filed by the institution. Under the law, financial
holding companies and banks that desire to engage in new financial activities
are required to have satisfactory or better CRA ratings when they commence the
new activity.
Most of the provisions of the law took effect on March 11, 2000, with other
provisions being phased in over a one to two year period thereafter. It is
anticipated that the effects of the law, while providing additional flexibility
to bank holding companies and banks, may result in additional affiliations of
different financial services
6
providers, as well as increased competition, resulting in lower prices, more
convenience, and greater financial products and services available to consumers.
USA Patriot Act. On October 26, 2001, President Bush signed into law the
Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001 (the "USA Patriot Act"), which is
designed to deny terrorists and others the ability to obtain access to the
United States financial system. Title III of the USA Patriot Act is the
International Money Laundering Abatement and Anti-Terrorist Financing Act of
2001. Among its provisions, the USA Patriot Act mandates or will require
financial institutions to implement additional policies and procedures with
respect to, or additional measures, including additional due diligence and
recordkeeping, designed to address, any or all of the following matters, among
others: money laundering; suspicious activities and currency transaction
reporting; and currency crimes. The U.S. Department of the Treasury in
consultation with the Federal Reserve Board and other federal financial
institution regulators has promulgated rules and regulations implementing the
USA Patriot Act which (i) prohibits U.S. correspondent accounts with foreign
banks that have no physical presence in any jurisdiction; (ii) require financial
institutions to maintain certain records for correspondent accounts of foreign
banks; (iii) require financial institutions to produce certain records relating
to anti-money laundering compliance upon request of the appropriate federal
banking agency; (iv) require due diligence with respect to private banking and
correspondent banking accounts; (v) facilitate information sharing between the
government and financial institutions; and (vi) require financial institutions
to have in place a money laundering program. In addition, an implementing
regulation under the USA Patriot Act regarding verification of customer
identification by financial institutions has been proposed, although such
regulation has not yet been finalized. The Company has implemented, and will
continue to implement, the provisions of the USA Patriot Act as such provisions
become effective. The Company currently maintains and will continue to maintain
policies and procedures to comply with the USA Patriot Act requirements. At this
time, the Company does not expect that the USA Patriot Act will have a
significant impact on the financial position of the Company.
Federal Reserve System. FCBI is a bank holding company subject to the
supervision and regulations of the Board of Governors of the Federal Reserve
System ("Federal Reserve"). As such, the Company is required to file periodic
reports and such other information as the Federal Reserve may deem necessary.
The Federal Reserve also conducts examinations of the Company. The Federal
Reserve maintains the position that the Company should serve as a source of
financial and managerial strength for the Bank and may not conduct its
operations in an unsound manner.
Corporate Governance. The Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley
Act"), which became law on July 30, 2002, and added new legal requirements for
public companies affecting corporate governance, accounting and corporate
reporting.
The Sarbanes-Oxley Act provides for, among other things:
|X| a prohibition on personal loans made or arranged by the issuer to its
directors and executive officers (except for loans made by a bank
subject to Regulation O);
|X| independence requirements for audit committee members;
|X| independence requirements for company auditors;
|X| certification of financial statements on Forms 10-K and 10-Q, reports
by the chief executive officer and chief financial officer;
|X| the forfeiture by the chief executive officer and the chief financial
officer of bonuses or other incentive-based compensation and profits
from the sale of an issuer's securities by such officers in the twelve
month period following the initial publication of any financial
statements that later require restatement due to corporate misconduct;
|X| disclosure of off-balance sheet transactions;
|X| two-business day filing requirements for insiders filing Form 4s;
|X| disclosure of a code of ethic for financial officers and filing a Form
8-K for a change in or waiver of such code;
7
|X| the reporting of securities violations "up the ladder" by both
in-house and outside attorneys;
|X| restrictions on the use of non-GAAP financial measures in the press
release and SEC filings;
|X| the formation of a public accounting oversight board; and
|X| various increase criminal penalties for violations of securities laws.
The Sarbanes-Oxley Act contains provisions, which became effective upon
enactment on July 30, 2002 and provisions that became effective over varying
periods. The SEC has been delegated the task of enacting rules to implement
various provisions. In addition, each of the national stock exchanges has
adopted new corporate governance rules, including rules strengthening director
independence requirements for boards, the adoption of corporate governance codes
and charters for the nominating, corporate governance and audit committees.
Recent Regulatory Developments
Possible authority for financial holding companies to engage in real estate
brokerage and property management services remained under consideration by the
federal banking regulators at the end of 2003. However, renewal of a statutory
moratorium on implementation of regulation granting such authority passed one
house in Congress and was pending in the other house at the end of the year. It
is not possible at present to assess the likelihood of ultimate adoption of
final regulations.
Changes in the federal deposit insurance program were recommended during
2003 by the FDIC and in the federal budget. A deposit insurance reform bill that
would, among other things, merge the BIF and the SAIF, increase the index
deposit insurance coverage, give the FDIC flexibility in setting premium
assessments, and replace a fixed deposit reserve ratio with a reserve range, was
passed by the House of Representatives in April 2003, but no action on the
subject was taken by the Senate during the remainder of the year. It is not
possible to predict if deposit insurance reform legislation will be enacted, or
if enacted, what its effect will be on our banking subsidiary.
Federal banking regulators continued their preparations for the expected
issuance in mid-2004 by the Basel Committee on Banking Supervision of final
"Basel II" regulatory capital guidelines, would mandate changes for large banks
in the way in which their risk-based capital requirements are calculated. The
guidelines are widely believed likely to permit significant reductions in the
levels of required capital for such banks. It is uncertain at the present time
if our banking subsidiary or the Holding Company will be either required to or
permitted to make changes in the regulatory capital structure in accordance with
Basel II guidelines.
The foregoing is necessarily a general description of certain provisions of
federal and state law and does not purport to be complete. Proposals to change
the laws and regulations governing the banking industry are frequently
introduced in Congress, in the state legislatures and before the various bank
regulatory agencies. The likelihood and timing of any such changes and the
impact such changes might have on the Company cannot be determined at this time.
ITEM 2. PROPERTIES
For the description of the property of the Company, see "ITEM I -
DESCRIPTION OF BUSINESS - Facilities."
ITEM 3. LEGAL PROCEEDINGS
There are no material proceedings to which the Company is a party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2003.
8
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
There is no established trading market for the Company's Common Stock, $.01
par value (the "Common Stock"), which has been traded inactively in private
transactions. Therefore, no reliable information is available as to trades of
the Common Stock or as to the prices at which Common Stock has traded.
In December 2003, the Company issued 1.2 shares for 1.0 share stock split,
thereby increasing the number of shares outstanding from 3,123,316 to 3,747,641.
Management has reviewed the limited information available as to the ranges
at which the Common Stock has been sold and is aware of trades that occurred
during 2002 and 2003. To the best of management's knowledge, the last trade in
December was executed at a price of $24.75 per share. The per share price data
regarding the Common Stock is provided for information purposes only and should
not be viewed as indicative of the actual or market value of the Common Stock.
Estimated Price
Range Per Share
High Low
------------- --------------
2003 (Split Adjusted):
First Quarter................................................................. $ 21.46 $ 20.00
Second Quarter................................................................ 25.00 21.88
Third Quarter................................................................. 23.54 20.63
Fourth Quarter................................................................ 24.75 23.96
2002 (Split Adjusted):
First Quarter................................................................. $ 18.06 $ 17.36
Second Quarter................................................................ 18.58 18.06
Third Quarter................................................................. 19.44 18.06
Fourth Quarter................................................................ 20.00 19.44
As of March 10, 2004, there were 3,766,384 shares of Common Stock
outstanding held by approximately 900 shareholders of record.
The payment of future dividends will be at the sole discretion of the
Company's Board of Directors and will depend on, among other things, future
earnings, capital requirements, the general financial condition of the Company
and general business conditions. The Company paid a dividend of $.21 per share
(split-adjusted) in the fourth quarter of 2003 and a dividend of $.29 per share
(split-adjusted) in the second quarter of 2002.
Equity compensation plan
At their Annual Meeting, the Bank's shareholders adopted the 2002 Key Employee
Stock Compensation Program ("Employee Program"), which was assumed by FCBI upon
its acquisition of the Bank. The following table reflects the number of shares
to be issued upon the exercise of options granted under the Employee Program,
the weighted-average exercise price of all such options, and the total number of
shares of common stock reserved for the issuance upon the exercise of
authorized, but not-yet-granted options, as of December 31, 2003.
Number of Equity Securities
Number of Securities to be Weighted-average Remaining Available for
Issued Upon the Exercise Exercise Price of Future Issuance Under
Plan Category of Outstanding Options Outstanding Options Equity Compensation Plan
- ------------------------------------ ------------------------- ---------------------- ---------------------------
Equity Compensation Plans
Approved by Shareholders......... 87,440 $ 14.55 99,958
Equity Compensation Plans
Not Approved by Shareholders..... -- -- --
----------- ------------- -----------
Total............................ 87,440 $ 14.55 99,958
=========== ============= ===========
9
ITEM 6. SELECTED FINANCIAL DATA
The following table presents on a historical basis selected financial data
and ratios for the Company.
Years Ended December 31,
------------------------------------------------------------
2003 2002 2001 2000 1999
---------- --------- --------- ---------- ----------
(Dollars in thousands except per share data)
Earnings Summary:
Interest income................................... $ 33,520 $ 31,266 $ 27,903 $ 24,991 $ 18,160
Less interest expense............................. 10,081 11,787 12,018 10,276 6,231
Net interest income............................... 23,439 19,479 15,885 14,715 11,929
Provision for loan losses......................... 1,700 2,510 720 1,000 810
Net interest income after provision for
loan losses..................................... 21,739 16,969 15,165 13,715 11,119
Non-interest income............................... 2,729 2,320 1,699 1,804 1,424
Non-interest expense.............................. 10,980 9,020 8,226 7,553 6,811
Income before income taxes........................ 13,488 10,269 8,638 7,966 5,732
Applicable income taxes........................... 5,091 3,851 3,292 2,881 2,076
Net income........................................ 8,397 6,418 5,346 5,085 3,656
Per Common Share Data:
(Retroactively adjusted for effects of stock dividends
and stock splits)
Net income - basic ............................... $ 2.24 $ 1.71 $ 1.43 $ 1.36 $ 0.98
Net income - diluted.............................. 2.22 1.70 1.43 1.36 0.98
Cash dividends declared per common share.......... 0.21 0.29 0.58 0.53 0.46
Selected Average Balances:
Total assets...................................... $ 513,583 $ 446,318 $ 324,188 $ 263,289 $ 211,132
Total loans....................................... 425,278 370,062 255,294 206,333 154,771
Securities........................................ 32,618 41,106 40,418 39,676 34,727
Earning assets.................................... 486,643 426,374 307,524 247,238 193,220
Deposits.......................................... 411,084 366,632 271,431 216,348 184,127
Long-term borrowings.............................. 55,660 41,701 17,478 15,607 59
Shareholders' equity.............................. 38,867 32,025 28,009 24,724 22,134
Shares outstanding (split adjusted, in thousands). 3,748 3,748 3,748 3,748 3,748
Selected Period-End Balances:
Total assets...................................... $ 525,508 $ 521,758 $ 388,061 $ 296,452 $ 238,360
Total loans....................................... 437,593 416,414 318,666 227,155 181,764
Securities........................................ 38,938 36,524 35,001 42,270 38,757
Earning assets.................................... 491,153 498,509 364,012 273,356 220,587
Deposits.......................................... 423,284 423,935 317,861 249,059 204,018
Long-term borrowings.............................. 50,332 60,349 37,580 15,093 39
Shareholders' equity.............................. 42,086 34,464 29,139 25,970 22,873
Shares outstanding (split adjusted, in thousands). 3,748 3,748 3,748 3,748 3,748
Selected Ratios:
Return on average equity.......................... 21.60% 20.04% 19.09% 20.57% 16.52%
Return on average assets.......................... 1.63 1.44 1.65 1.93 1.73
Net interest margin............................... 4.82 4.57 5.17 5.95 6.19
Allowance for loan losses to loans................ 1.84 1.52 1.19 1.44 1.24
Net charge-offs to average loans.................. (0.01) 0.00 0.07 0.00 0.19
Average equity to average assets.................. 7.57 7.18 8.64 9.39 10.48
Cash Dividends Declared.............................. $ 781 $ 1,093 $ 2,178 $ 1,988 $ 1,725
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The purpose of this discussion is to focus on significant changes in the
financial condition and results of operations of the Company and its
subsidiaries during the past three years. The discussion and analysis is
intended to supplement and highlight information contained in the accompanying
consolidated financial statements and the selected financial data presented
elsewhere in this report.
ITEM 7A. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Forward-Looking Statements
This report, including Management's Discussion and Analysis of Financial
Condition and Results of Operations, and documents incorporated herein by
reference, may contain certain statements relating to the future results of the
Company based upon information currently available. These "forward-looking
statements" (as defined in Section 21E of The Securities and Exchange Act of
1934) are typically identified by words such as "believes", "expects",
"anticipates", "intends", "estimates", "projects", and similar expressions.
These forward-looking statements are based upon assumptions the Company believes
are reasonable and may relate to, among other things, the allowance for loan
loss adequacy, simulation of changes in interest rates and litigation results.
Such forward-looking statements are subject to risks and uncertainties, which
could cause the Company's actual results to differ materially from those
included in these statements. These risks and uncertainties include, but are not
limited to, the following: (1) changes in political and economic conditions; (2)
interest rate fluctuations; (3) competitive product and pricing pressures within
the Company's markets; (4) equity and fixed income market fluctuations; (5)
personal and corporate customers' bankruptcies; (6) inflation; (7) acquisitions
and integration of acquired businesses; (8) technological changes; (9) changes
in law; (10) changes in fiscal, monetary, regulatory and tax policies; (11)
monetary fluctuations; (12) success in gaining regulatory approvals when
required; and (13) other risks and uncertainties listed from time to time in the
Company's SEC reports and announcements.
General
The Company, through its subsidiary Bank, conducts a commercial banking
business, which consists of attracting deposits from the general public and
applying those funds to the origination of commercial, consumer and real estate
loans (including commercial loans collateralized by real estate). The Company's
profitability depends primarily on net interest income, which is the difference
between interest income generated from interest-earning assets (i.e., loans and
investments) less the interest expense incurred on interest-bearing liabilities
(i.e., customer deposits and borrowed funds). Net interest income is affected by
the relative amounts of interest-earning assets and interest-bearing
liabilities, and the interest rate paid and earned on these balances. Net
interest income is dependent upon the Company's interest rate spread, which is
the difference between the average yield earned on its interest-earning assets
and the average rate paid on its interest-bearing liabilities. When
interest-earning assets approximates or exceeds interest-bearing liabilities,
any positive interest rate spread will generate interest income. The interest
rate spread is impacted by interest rates, deposit flows and loan demand.
Additionally, and to a lesser extent, the Company's profitability is affected by
such factors as the level of non-interest income and expenses, the provision for
loan losses and the effective tax rate. Non-interest income consists primarily
of deposit account service charges and other customer service fees. Non-interest
expenses consist of compensation and benefits, occupancy-related expenses, and
other expenses.
Summary
Net income for 2003 was $8,396,549, a 30.8% increase over 2002 net income.
Net income for 2002 was $6,418,306, a 20.05% increase over 2001 net income. Net
income for 2001 was $5,346,217, a 5.1% increase over 2000 net income. Diluted
net income per common share for 2003 was $2.22 compared to $1.70 in 2002 and
$1.43 in 2001. Net income for 2000 was $5,085,061, a 39.1% increase from 1999
net income of $3,656,265.
The increases in net income from 2000 to 2001 and from 2001 to 2002 were
primarily attributable to increased volume of loans, with the resulting increase
in interest and fees. In 2001 and 2002, the volume increase in loans more than
offset the decrease in loan interest rates as discussed more fully below. The
increase from 2002 to 2003 was primarily attributable to an increase in the net
interest margin as deposit costs decreased more than loan yields decreased.
11
Earning Assets
During 2003, earning assets averaged $486 million, an increase of $61
million (13.8%) over 2002. During 2002, earning assets averaged $426 million, an
increase of $118 million (38.3%) over 2001. Average earning assets during 2001
totaled $308 million, an increase of $61 million (24.7%) over 2000.
The management of the Company considers many criteria in managing earning
assets, including creditworthiness, diversification, maturity, and interest rate
sensitivity. The following table sets forth the Company's interest-earning
assets by category at December 31, in each of the last three years.
December 31,
----------------------------------------
2003 2002 2001
----------- ----------- -----------
(In thousands)
Interest-bearing deposits with banks.................................... $ 857 $ 12,668 $ 10,345
Securities.............................................................. 38,938 36,524 35,001
Federal funds sold...................................................... 13,765 32,902 --
Loans:
Real estate.......................................................... 381,709 361,420 272,310
Commercial and other................................................. 55,884 54,994 46,356
----------- ----------- -----------
Total loans........................................................ 437,593 416,414 318,666
----------- ----------- -----------
Interest-earning assets ................................................ $ 491,153 $ 498,508 $ 364,012
=========== =========== ===========
Loan Portfolio
Loan and deposit growth is emphasized in each market the Company operates.
The Company has been successful in competing for loans against other larger
institutions due primarily to a lending strategy that includes direct
involvement by local management. Different customers require different solutions
to their financial needs and appreciate local banking officers that understand
the local environment and can provide for their business requirements.
Average loans increased $55 million (14.9%) in 2003 compared to 2002. The
increase in loans was a result of successful marketing efforts to originate real
estate construction loans and other real estate loans. Loan growth for 2003 was
funded primarily by issuance of brokered certificates of deposit.
Average loans increased $115 million (45.3%) in 2002 compared to 2001. The
increase in loans was a result of successful marketing efforts to originate real
estate construction loans and other real estate loans. Loan growth for 2002 was
funded primarily by issuance of brokered certificates of deposit and Federal
Home Loan Bank of Atlanta advances.
Average loans increased $49 million (23.7%) in 2001 compared to 2000. The
increase in loans was a result of population growth, branch openings, and strong
loan demand. Loan growth for 2001 was funded primarily with customer deposits
and Federal Home Loan Bank of Atlanta advances.
The following table sets forth the balances in certain categories of loans
at December 31 for each of the five years ending December 31, 2003.
[The remainder of this page intentionally left blank.]
12
Loan Portfolio
December 31,
2003 2002 2001 2000 1999
------------------ ----------------- ----------------- ----------------- -----------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(Dollars in Thousands)
Commercial, financial
and agricultural. $ 45,274 10.31% $ 42,876 10.27% $ 38,007 11.92% $37,628 16.56% $ 32,718 17.98%
Real estate -
construction..... 172,890 39.37 140,723 33.70 93,049 29.17 73,665 32.42 48,442 26.63
Real estate -
mortgage 208,819 47.55 220,697 52.84 179,261 56.20 110,409 48.60 95,257 52.35
Consumer........... 10,440 2.38 12,089 2.89 8,481 2.66 5,267 2.32 5,221 2.87
Other.............. 1,712 0.39 1,226 0.30 157 0.05 221 0.10 303 0.17
-------- -------- -------- ------- -------- ------- ------- ------- -------- -------
439,135 100.00% 417,611 100.00% 318,955 100.00% 227,190 100.00% 181,941 100.00%
======== ======= ======= ======= =======
Unearned income.... (1,542) (1,197) (289) (35) (177)
Allowance for loan
losses........... (8,067) (6,319) (3,803) (3,267) (2,261)
-------- -------- -------- ------- --------
Net loans.......... $429,526 $410,095 $314,863 $223,888 $179,503
======== ======== ======== ======== ========
The following table sets forth maturities of the loan portfolio and the
sensitivity to interest rate changes of the Company's loan portfolio (in
thousands):
Selected Loan Maturity and Interest Rate Sensitivity
Rate Structure for Loans
Maturity Maturing Over One Year
--------------------------------------------------- -----------------------------
Over One
One Year Over Predetermined Floating or
Year or Through Five Interest Adjustable
Less Five Years Years Total Rate Rate
----------- ----------- ----------- ----------- ------------- --------------
(Amounts in thousands)
Commercial, financial
and agricultural............ $ 22,472 $ 22,273 $ 529 $ 45,274 $ 20,734 $ 2,068
Real estate - construction..... 73,105 71,409 28,376 172,890 23,466 76,319
----------- ----------- ----------- ----------- ------------- --------------
Total....................... $ 95,577 $ 93,682 $ 28,905 $ 218,164 $ 44,200 $ 78,387
=========== =========== =========== =========== ============= ==============
For the purposes of this schedule, loans that have reached the fixed
contractual floor rate are treated as having a pre-determined interest rate.
Securities Portfolio
The securities portfolio increased by $2.4 million or 6.6% from 2002 to
2003. The balance in the securities portfolio increased by $1.5 million or 4.4%
from 2001 to 2002. The balance in the securities portfolio was relatively flat
for the past three years as funds were allocated primarily to the loan portfolio
throughout that period.
The Company maintains an investment strategy of seeking portfolio yields
within acceptable risk levels, as well as providing liquidity through borrowings
secured by that portfolio. On a daily basis, funds available for short-term
investment are determined. Funds available for long-term investment are
projected based upon anticipated loan and deposit growth, liquidity needs,
pledging requirements, maturities of securities, and other factors. The Company
holds two classifications of securities: "Held-to-Maturity" and
"Available-for-Sale." The Available-for-Sale
13
securities are carried at estimated fair market value and are equity securities
at year-end 2003, 2002 and 2001. Held-to-Maturity securities are carried at
amortized cost and represent the largest portion of the total securities
portfolio. At December 31, 2003, 2002 and 2001 there were no material unrealized
gains (losses) in the Available-for-Sale portfolio. At December 31, 2003, 2002
and 2001, net unrealized gains (losses) in the Held-to-Maturity portfolio
amounted to ($456,579), $780,513 and $249,651, respectively.
The following table presents the carrying amounts of the securities
portfolio at December 31, in each of the last three years.
Securities Portfolio
December 31,
----------------------------------------------
2003 2002 2001
------------- ------------- --------------
(In thousands)
Held-to-Maturity:
U.S. government and agencies................................. $ 1,768 $ 3,000 $ 16,098
State and municipal.......................................... -- -- 110
Mortgage-backed securities................................... 33,985 30,339 16,833
------------- ------------- --------------
Total Held-to-Maturity..................................... 35,753 33,339 33,041
------------- ------------- --------------
Available-for-Sale:
Equity securities............................................ 3,185 3,185 1,960
------------- ------------- --------------
Total Available-for-Sale................................... 3,185 3,185 1,960
------------- ------------- --------------
Total Securities................................................ $ 38,938 $ 36,524 $ 35,001
============= ============= ==============
The following table indicates the respective maturities and weighted
average yields of securities (dollars in thousands):
Security Portfolio Maturity Schedule
December 31, 2003
------------------------------
Weighted
Average
Amount Yield
------------- ---------
U.S. Treasury and other U.S. Government agencies:
Maturing within one year....................................................... $ -- 0.00%
Maturing after one year within five years...................................... 1,768 1.75
Maturing after five within ten years........................................... -- 0.00
Maturing after ten years....................................................... -- 0.00
Mortgage-backed securities........................................................ 33,985 3.77
Equity securities................................................................. 3,185 3.22
-------------
Total.......................................................................... $ 38,938 3.54%
=============
There were no securities held by the Company of which the aggregate value
at December 31, 2003, 2002 and 2001 exceeded ten percent of shareholders' equity
at that date. (Securities, which are payable from, and secured by the same
source of revenue or taxing authority, are considered to be securities of a
single issuer. Securities of the U.S. Government and U.S. Government agencies
and corporations are not included.)
14
Deposits and Borrowed Funds
Average deposits increased $44 million (12.1%) in 2003 compared to 2002.
Average deposits increased $95 million (35.1%) in 2002 compared to 2001. The
largest area of growth in 2003 was in average money market, savings, and
non-interest bearing demand deposits, which increased $29.7 million in total.
From 2001 to 2002, the greatest increase was in time deposits.
Average deposits rose $55 million or 25.5% in 2001 compared to 2000. Total
deposits increased $69 million or 27.5% from year-end 2000 to 2001. The largest
area of growth in 2001 was in certificates of deposit, which increased $32
million. From 2000 to 2001, interest-bearing transaction deposits increased $5.1
million or 25.5%, savings deposits increased $18 million or 34.5%, other time
deposits of less than $100,000 increased $13 million or 17.2%, and time deposits
of $100,000 or more increased $19 million or 34.2%. From year-end 2000 to
year-end 2001, total non-interest bearing deposits increased $14 million or
29.4%.
The following table sets forth the Company's deposit structure at December
31 in each of the last three years.
December 31,
----------------------------------------------
2003 2002 2001
------------- ------------- --------------
(In thousands)
Noninterest-bearing deposits:
Individuals partnerships and corporations.................... $ 72,498 $ 49,970 $ 43,736
U.S. Government and states and political subdivisions........ 3,201 2,311 2,408
Certified and official checks................................ 2,598 2,197 14,017
------------- ------------- --------------
Total non-interest-bearing deposits........................ 78,297 54,478 60,161
------------- ------------- --------------
Interest-bearing deposits:
Interest - bearing demand accounts........................... 29,885 24,774 24,959
Savings accounts............................................. 103,060 92,109 69,963
Certificates of deposit, less than $100,000.................. 69,096 111,774 86,992
Certificates of deposit, more than $100,000.................. 142,946 140,800 75,786
------------- ------------- --------------
Total interest-bearing deposits............................ 344,987 369,457 257,700
------------- ------------- --------------
Total deposits............................................. $ 423,284 $ 423,935 $ 317,861
============= ============= ==============
The following table presents a breakdown by category of the average amount
of deposits and the weighted average rate paid on deposits for the periods
indicated:
Years Ended December 31,
-----------------------------------------------------------------------
2003 2002 2001
---------------------- ---------------------- -----------------------
Amount Rate Amount Rate Amount Rate
---------- ---------- ---------- --------- --------- ----------
(Dollars in thousands)
Non interest-bearing deposits............ $ 64,306 0.00% $ 53,376 0.00% $ 43,735 0.00%
Savings deposits......................... 105,121 1.29 86,383 1.99 66,586 3.14
Time deposits............................ 214,268 3.02 203,413 3.99 138,773 6.05
Interest-bearing demand deposits......... 27,389 0.38 23,460 0.90 22,337 1.92
---------- ---------- ---------
Total deposits......................... $ 411,084 1.93 $ 366,632 2.74 $ 271,431 4.02
========== ========== =========
15
At December 31, 2003, time deposits of $100,000 or greater aggregated
approximately $142.9 million. The following table indicates, as of December 31,
2003, 2002 and 2001 the dollar amount of $100,000 or more time deposits by the
time remaining until maturity (in thousands):
Maturities of Large Time Deposits
(In thousands)
2003 2002 2001
------------- ------------- --------------
Three months or less............................................ $ 33,888 $ 49,384 $ 27,855
Over three through six months................................... 9,440 7,461 3,301
Over six through twelve months.................................. 58,378 40,581 27,476
Over twelve months.............................................. 41,240 43,374 17,154
------------- ------------- --------------
Total...................................................... $ 142,946 $ 140,800 $ 75,786
============= ============= ==============
At December 31, 2003 and 2002, respectively, borrowed funds consisted
primarily of long-term debt. The Bank had $41,500,000 in available lines to
purchase federal funds, on an unsecured basis, from other financial
institutions. At December 31, 2003, the Bank had $7,000,000 advanced under one
of those lines and, at December 31, 2001, the Bank had $1,086,000 advanced
against these lines. There were no advances against these lines at the end of
2002. At December 31, 2003 and 2002 the Company also had credit available of
approximately $79 million with the Federal Home Loan Bank of Atlanta. Of the
credit available, $46,000,000 (of which $6,000,000 was a letter of credit used
to secure public funds) and $50,000,000 had been utilized at December 31, 2003
and 2002, respectively. The line is secured by residential and commercial real
estate loans and investment securities at December 31, 2003.
The following table sets forth the expected debt service for the next five
years based on interest rates and repayment provisions as of December 31, 2003.
Maturities of Long-term Debt
(In thousands)
2004 2005 2006 2007 2008
--------- --------- -------- -------- -----------
Interest on indebtedness......................... $ 1,831 $ 1,448 $ 1,160 $ 1,160 $ 1,160
Repayment of principal........................... 5,019 15,003 -- -- --
--------- --------- -------- ---------- -----------
$ 6,850 $ 16,451 $ 1,160 $ 1,160 $ 1,160
========= ========= ======== ========== ===========
Capital Resources
Shareholders' equity increased $7.6 million to $42.1 million as of December
31, 2003, and increased $5.3 million to $34.5 million as of December 31, 2002.
Shareholders' equity increased $3.2 million $29.1 to million as of December 31,
2001. The increase in shareholders' equity for 2003, 2002 and 2001 was
attributable to net income less dividends declared.
On June 21, 2002, FCBI Capital Trust I ("FCBI Trust"), a Delaware statutory
trust established by the Company, received $10,000,000 in proceeds in exchange
for $10,000,000 principal amount of FCBI Trust's floating rate cumulative trust
preferred securities (the "preferred securities") in a trust preferred private
placement. The proceeds of that transaction were then used by FCBI Trust to
purchase an equal amount of floating-rate subordinated debentures (the
"subordinated debentures") of the Company. The Company has fully and
unconditionally guaranteed all obligations of FCBI Trust on a subordinated basis
with respect to the preferred securities. The Company does not consolidate the
FCBI Trust preferred securities and accounts for the debentures issues to FCBI
16
Trust as debt. Subject to certain limitations, the preferred securities qualify
as Tier 1 capital, although the Federal Reserve regulators are re-considering
this treatment, as a result of recent accounting rules changes, discussed more
fully elsewhere herein. The sole asset of FCBI Trust is the subordinated
debentures issued by the Company. Both the preferred securities of FCBI Trust
and the subordinated debentures of the Company each have approximately 30-year
lives. However, both the Company and FCBI Trust have a call option after five
years, subject to regulatory capital requirements.
A strong capital position, which is vital to the continued profitability of
the Company, also promotes depositor and investor confidence and provides a
solid foundation for the future growth of the organization. The objective of
management is to maintain a level of capitalization that is sufficient to take
advantage of profitable growth opportunities while meeting regulatory
requirements. This is achieved by improving profitability through effectively
allocating resources to more profitable businesses, improving asset quality,
strengthening service quality, and streamlining costs. The primary measures used
by management to monitor the results of these efforts are the ratios of return
on average assets, return on average common equity and average equity to average
assets.
The table below summarizes these and other key ratios for the Company for
each of the last three years.
Return on Equity and Assets
2003 2002 2001
----------- ----------- -----------
Return on average assets........................................... 1.63% 1.44% 1.65%
Return on average common equity.................................... 21.60 20.04 19.09
Dividend payout ratio.............................................. 9.30 17.03 40.74
Average common shareholders' equity to average
assets ratio.................................................... 7.57 7.18 8.64
In addition, bank holding companies are required to maintain capital to
support, on a risk-adjusted basis, certain off-balance sheet activities such as
loan commitments. The Federal Reserve has adopted capital guidelines governing
the activities of bank holding companies. These guidelines require the
maintenance of an amount of capital based on risk-adjusted assets so that
categories of assets with potentially higher credit risk will require more
capital backing than assets with lower risk.
The capital guidelines classify capital into two tiers, referred to as Tier
I and Tier II. Under risk-based capital requirements, Total Capital consists of
Tier I Capital, which is generally common shareholders' equity less goodwill,
and Tier II Capital, which is primarily a portion of the allowance for loan
losses and certain qualifying debt instruments. In determining risk-based
capital requirements, assets are assigned risk-weights of 0% to 100%, depending
primarily on the regulatory assigned levels of credit risk associated with such
assets. Off-balance sheet items are considered in the calculation of
risk-adjusted assets through conversion factors established by the regulators.
The framework for calculating risk-based capital requires banks and bank holding
companies to meet the regulatory minimums of 4% Tier I and 8% total risk-based
capital. In 1990 regulators added a leverage computation to the capital
requirements, comparing Tier I Capital to total average assets less goodwill.
Banks have similar capital requirements.
During 2001, the Bank issued $5,000,000 in subordinated debt to qualify as
Tier II Capital. Portions of this debt qualify according to maturity as
allowable Tier II Capital. In 2001, the Bank had $4,400,000 as qualifying Tier
II Capital. There were no similar transactions during 2000. The Bank repaid the
subordinated debt from the proceeds of the Trust Preferred securities, issued by
the Company and injected into the Bank as Tier I capital.
17
The table below illustrates the Company's regulatory capital ratios under
federal guidelines at December 31, 2003, 2002 and 2001:
Capital Adequacy Ratios
Statutory Years ended December 31,
----------------------------------------
Minimum 2003 2002 2001
------------ ----------- ----------- -----------
(Amounts in thousands)
Tier I Capital........................................... $ 52,086 $ 44,464 $ 29,139
Tier II Capital.......................................... 6,136 5,856 8,203
----------- ----------- -----------
Total Qualifying Capital................................. $ 58,222 $ 50,320 $ 37,342
=========== =========== ===========
Risk Adjusted Total Assets (including
off-balance-sheet exposures)............................. $ 488,931 $ 468,050 $ 350,629
=========== =========== ===========
Adjusted quarterly average assets........................ $ 508,561 $ 485,977 $ 351,496
=========== =========== ===========
Tier I Capital Ratio..................................... 4.00% 10.65% 9.50% 8.31%
Total Capital Ratio...................................... 8.00 11.91 10.75 10.65
Leverage Ratio........................................... 4.00 10.24 9.15 8.29
Information on the Bank capital ratios appears in Note 11 to the
consolidated financial statements contained elsewhere herein.
On December 31, 2003 the Company and the Bank exceeded the regulatory
minimums and qualified as well capitalized institutions under the regulations.
Liquidity Management
Liquidity is the ability of a company to convert assets into cash without
significant loss and to raise funds by increasing liabilities. Liquidity
management involves having the ability to meet the day-to-day cash flow
requirements of its customers, whether they are depositors wishing to withdraw
funds or borrowers requiring funds to meet their credit needs.
The primary function of asset/liability management is not only to assure
adequate liquidity in order for the Bank to meet the needs of its customer base,
but to maintain an appropriate balance between interest-sensitive assets and
interest-sensitive liabilities so that the Bank can remain profitable in varying
interest rate environments. Both assets and liabilities are considered sources
of liquidity funding and both are, therefore, monitored on a daily basis.
The asset portion of the balance sheet provides liquidity primarily through
loan repayments and maturities of or pledge of securities. Additional sources of
liquidity are investments in federal funds sold and prepayments from the
mortgage-backed securities in the securities portfolio.
The liability portion of the balance sheet provides liquidity through
various interest bearing and noninterest-bearing deposit accounts. The Bank had
$34,500,000 and $22,250,000 of federal funds available at December 31, 2003 and
2002, respectively. The Bank also had available as a source of financing, a line
of credit with the Federal Home Loan Bank of Atlanta of which $32,700,000 and
$28,000,000 was available and unused at December 31, 2003 and 2002,
respectively, subject to the availability of assets to pledge to secure such
borrowings.
18
Interest Rate Sensitivity Management
Interest rate sensitivity is a function of the re-pricing characteristics
of the Company's portfolio of assets and liabilities. These re-pricing
characteristics are the time frames within which the interest-bearing assets and
liabilities are subject to change in interest rates either at replacement or
maturity during the life of the instruments. Sensitivity is measured as the
difference between the volume of assets and liabilities in the Bank's current
portfolio that are subject to re-pricing in future time periods. The differences
are known as interest sensitivity gaps and are usually calculated separately for
segments of time ranging from zero to thirty days, thirty-one to ninety days,
ninety-one days to one year, one to five years, over five years and on a
cumulative basis.
The following table shows interest sensitivity gaps for different intervals
as of December 31, 2003.
Interest Rate Sensitivity Analysis
(In thousands)
0-30 31-90 90-365 1-5 Over 5
Days Days Days Years Years Total
----------- ----------- ----------- ----------- ----------- -----------
Interest-earning assets (1)
Loans............................ $ 41,783 $ 41,145 $ 104,609 $ 174,351 $ 65,978 $ 427,866
Securities and federal funds sold 13,765 850 1,787 19,272 17,029 52,703
Interest-bearing deposits in banks 857 -- -- -- -- 857
----------- ----------- ----------- ----------- ----------- -----------
56,405 41,995 106,396 193,623 83,007 481,426
----------- ----------- ----------- ----------- ----------- -----------
Interest-bearing liabilities (2)
Demand deposits (3).............. 9,962 9,962 9,962 -- -- 29,885
Savings deposits (3)............. 34,353 34,353 34,353 -- -- 103,060
Time deposits.................... 17,391 31,524 96,560 66,567 -- 212,042
Long-term borrowings............. -- -- 5,019 15,003 30,310 50,332
----------- ----------- ----------- ----------- ----------- -----------
61,706 75,839 145,894 81,570 30,310 395,319
----------- ----------- ----------- ----------- ----------- -----------
Interest sensitivity gap............ $ (5,301) $ (33,844) $ (39,498) $ 112,053 $ 52,697 $ 86,107
=========== =========== =========== =========== =========== ===========
Cumulative interest sensitivity gap. $ (5,301) $ (39,145) $ (78,643) $ 33,410 $ 86,107
=========== =========== =========== =========== ===========
Ratio of interest-earning assets to
Interest-bearing liabilities... 0.91 0.55 0.73 2.37 2.74
Cumulative ratio.................... 0.91 0.72 0.72 1.09 1.22
Ratio of cumulative gap to total
interest-earning assets.......... (0.011) (0.081) (0.163) 0.069 0.179
(1) Excludes non-accrual loans. Securities maturities are based on projected
re-payments at current interest rate levels.
(2) Excludes matured certificates, which have not been redeemed by the customer
and on which no interest is accruing.
(3) Interests bearing demand and savings deposits are assumed to be subject to
movement into other deposit instruments in equal amounts during the 0-30
day period, the 31-90 day period, and the 91-365 day period.
The above table indicates that in a rising interest rate environment, the
Company's earnings may be negatively affected in the short-term, (0-365 days)
due to earning assets re-pricing slower than interest-bearing liabilities. As
seen in the preceding table, for the first 30 days of re-pricing opportunity
there is an excess of earning assets over interest-bearing liabilities of
approximately $5.6 million. For the first 365 days, interest-bearing liabilities
exceed earning assets by approximately $79 million. Changes in the mix of
earning assets or supporting liabilities can either increase or decrease the net
interest margin without affecting interest rate sensitivity. In addition, the
interest rate spread and the level of interest-bearing assets and liabilities
may change, thus impacting net interest income. It should be noted that a
matched interest-sensitive position by itself does not ensure maximum net
interest income.
Management continually evaluates the condition of the economy, the pattern
of market interest rates, and other economic data to determine the types of
investments that should be made and at what maturities. Using this
19
analysis, management from time to time assumes calculated interest sensitivity
gap positions to maximize net interest income based upon anticipated movements
in the general level of interest rates.
Results of Operations
Net Interest Income
Net interest income is the principal component of a financial institution's
income stream and represents the spread between interest and fee income
generated from earning assets and the interest expense paid on deposits and
borrowings. The following discussion is on a fully taxable equivalent basis.
Net interest income increased approximately $3.9 million (20.3%) to $23.4
million in 2003 compared to 2002. Net interest income increased $3.6 million
(22.6%) to $19.5 million from 2001 to 2002. The increase each year in the net
interest income is primarily due to increased volume in average loans
outstanding during the periods.
Interest income was $33.5 million in 2003, which represented an increase of
$2.2 million (7.2%) over 2002. Interest income produced by the loan portfolio
increased $3.0 million (10.6%) in 2003 from 2002. A significant factor in the
higher interest income from loans in 2003 was the effect of contractual limits
on the lowest level to which variable rate loans could decline ("floors"). While
floors on interest rates in loan contracts have been beneficial in the current
low-rate environment, it is likely that future increases in interest rates,
should that occur, will not increase the rates on "floored" loans as rapidly as
interest expense will increase. Thus, net interest income will be negatively
impacted. At December 31, 2003, management estimated that approximately $119
million of the $285 million in variable rate loans have reached the floor rate.
Interest income on securities decreased $858 thousand (39.2%) from 2002 to 2003.
The decrease in securities income from 2002 to 2003 is due the combined effects
of lower rates earned and lower average balances invested.
Interest income was $31.3 million in 2002, which represented an increase of
12.1% over 2001. Interest income produced by the loan portfolio increased $3.9
million (15.7%) in 2002 compared to 2001. The increase in loan interest
reflected the offsetting effects of a lower average rate earned on a greater
average investment in loans. Interest income on securities decreased $299
thousand (12.0%) in 2002 compared to 2001. The decrease in securities interest
from 2001 to 2002 reflected an increase in the average volume more than offset
by the decline in yield. The call of higher rate U.S. Government Agency
securities contributed to the lower yields.
Interest income was $27.9 million in 2001, which represented an increase
$2.9 million (11.6%) over 2000. Interest income produced by the loan portfolio
increased $2.4 (10.8%) in 2001 compared to 2000. The increase in loan interest
reflected the offsetting effects of a lower average rate earned on a greater
average investment in loans. Interest income on securities increased $37
thousand (1.5%) in 2001 compared to 2000. The minor increase in securities
income from 2000 to 2001 reflected a stable average investment in securities
during 2001 and 2000.
Interest income other than loans and securities increased by $57 thousand
in 2003 and decreased by $258 thousand from 2001 to 2002. During 2001, the Bank
maintained a slightly larger investment in federal funds sold (averaging $10.7
million) compared to 2000 while rates declined significantly (about 2.8%),
resulting in the decreased income. In 2003, the average amount invested in fed
funds sold cause the increase in interest income.
Interest income other than loans and securities increased by $436 thousand
from 2000 to 2001. During 2001, the Company maintained a larger investment in
federal funds sold (averaging $11 million) compared to 2000, resulting in the
increased income. Interest income other than loans and securities decreased by
$106 thousand from 1999 to 2000. The decrease is due primarily to the decline in
the average federal funds sold balance.
Total interest expense decreased by $1.7 million (14.5%) in 2003 compared
to 2002 and decreased by $231 thousand (1.9%) in 2002 compared to 2001. The
decrease in interest expense in 2003 was caused by lower time deposit rates. The
interest expense decrease from 2001 to 2002 is primarily due to the volume
increase in time deposit accounts and FHLB advances more than offset by a
decline in the average rate paid on both. (See the
20
"Rate/Volume Analysis" following this section.) Interest expense on time deposit
accounts decreased $1,641 thousand although the average volume increased by
$10.9 million. The significant rate decline was cause by a shift from locally
generated time deposits to brokered time deposits and the general decline in
rates during 2002.
Total interest expense increased by $1.7 million (17.0%) in 2001 compared
to 2000. The interest expense increase from 2000 to 2001 is primarily due to the
volume increase in time deposit accounts, partially offset by a 38 basis point
decline in the average rate paid on total interest-bearing liabilities. Interest
expense on time deposit accounts increased $2.2 million (36.7%) from 2000 to
2001 as the Bank relied on that source of funds to make loans.
The trend in net interest income is commonly evaluated by measuring the
average yield on earning assets, the average cost of funds, and the net interest
margin. The Company's average yield on earning assets (total interest income
divided by average interest earning assets) decreased in 2003 to 6.89% compared
to 7.33% in 2002. The drop in Prime rate caused most of the decline during 2002,
which carried over into 2003 at the same time the Bank had over $100 million in
loans tied to that index. In line with the national interest rate markets, the
Bank's average cost of funds (total interest expense divided by average interest
bearing liabilities) declined from 3.30% in 2002 to 2.49% in 2003. The Bank's
net interest margin (net interest income divided by average interest earning
assets) increased in 2003 to 4.82% compared to 4.57%, in 2002. The decline was
caused by the Bank's asset sensitive position during a period of dropping
interest rates in 2002 and the re-pricing of longer-term interest bearing
liabilities (primarily certificates of deposit) in 2003 as discussed more fully
in the section titled "Interest Rate Sensitivity Management" elsewhere in this
report.
The net interest margin decreased 60 basis points in 2002 from 5.17% in
2001 to 4.57%, reflecting a major decline in the average Prime rate for the
year. The decline in rate was driven by national economic factors and was offset
by rapid loan growth resulting in higher interest income on loans in 2002. That
loan growth required a significant increase in brokered certificate of deposit
utilization to keep rates as low as possible. Raising funds in the local
southwest Florida market would have cost more due to competing financial
institutions also offering higher than national rates.
The Bank's average yield on earning assets (total interest income divided
by average interest earning assets) decreased in 2001 to 9.08% compared to
10.12% in 2000. The drop in Prime rate caused most of the decline during 2001 at
the same time the Bank had over $100 million in loans tied to that index. In
line with the national interest rate markets, the Bank's average cost of funds
(total interest expense divided by average interest bearing liabilities)
declined from 5.21% in 2000 to 4.83% in 2001. The Bank's net interest margin
(net interest income divided by average interest earning assets) declined in
2001 to 5.17% in 2001 compared to 5.96% in 2000. The decline was caused by the
Bank's asset sensitive position during a period of dropping interest rates.
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21
The tables that follow show, for the periods indicated, the daily average
balances outstanding for the major categories of interest-bearing assets and
interest-bearing liabilities, and the average interest rate earned or paid
thereon. Such yields are calculated by dividing income or expense by the average
balance of the corresponding assets or liabilities. Also shown are the changes
in income attributable to changes in volume and changes in rate.
Average Balances, Interest Income/Expense and Yields/Rates
Taxable Equivalent Basis
Years Ended December 31,
------------------------------------------------------------------------------------------------------
2003 2002 2001
--------------------------------- --------------------------------- -------------------------------
Interest Average Interest Average Interest Average
Average Income/ Yields/ Average Income/ Yields/ Average Income/ Yields/
Balance Expense Rates Balance Expense Rates Balance Expense Rates
------- ---------- ---------- ------- ---------- ---------- ------- ---------- --------
(Dollars in thousands)
Assets:
Earning assets:
Loans, net of
unearned income(1)$425,278 $ 31,874 7.49% $370,062 $ 28,824 7.79% $255,294 $ 24,908 9.76%
Securities:
Taxable............ 32,618 1,331 4.08 41,024 2,185 5.32 40,093 2,459 6.13
Tax-exempt......... -- -- 0.00 82 5 7.32 325 29 8.31
------- ---------- ------- ---------- ------- ----------
Total securities. 32,618 1,331 4.08 41,106 2,190 5.33 40,418 2,488 6.15
Interest-bearing deposits
in other banks..... 7,301 80 1.10 3,483 78 2.24 1,137 55 4.84
Federal funds sold... 21,446 237 1.11 11,723 182 1.55 10,675 463 4.34
------- ---------- ------- ---------- ------- ----------
Total interest-
earning assets(2)486,643 33,522 6.89 426,374 31,274 7.34 307,524 27,914 9.08
Non-interest earning assets:
Cash and due from
banks............. 19,688 10,689 8,756
Accrued interest and
other assets..... 14,373 13,995 11,449
Allowance for
loan losses...... (7,121) (4,740) (3,541)
------- ------- -------
Total assets..... $513,583 $446,318 $324,188
======== ======== ========
Liabilities and Shareholders' Equity:
Interest-bearing liabilities:
Demand deposits.... $ 27,389 104 0.38% 23,460 210 0.90% $ 22,337 429 1.92
Savings deposits... 105,121 1,353 1.29 86,383 1,714 1.98 66,586 2,088 3.14
Time deposits...... 214,268 6,467 3.02 203,413 8,108 3.99 138,773 8,392 6.05
------- ---------- -------- ---------- -------- ----------
Total deposits... 346,778 7,924 2.29 313,256 10,032 3.20 227,696 10,909 4.79
Long-term borrowings 55,660 2,131 3.83 41,701 1,699 4.07 17,478 1,004 5.74
Short-term borrowings 2,239 26 1.16 2,759 56 2.03 3,773 105 2.78
------- ---------- -------- ---------- -------- ----------
Total interest-
bearing
liabilities... 404,677 10,081 2.49 357,716 11,787 3.30 248,947 12,018 4.83
------- ---------- -------- ---------- -------- ----------
Non interest-bearing liabilities:
Demand deposits.... 64,306 53,376 43,735
Accrued interest and
other liabilities 5,733 3,201 3,497
Shareholders' equity 38,867 32,025 28,009
------- -------- --------
Total liabilities and
shareholders'
equity........ $513,583 $446,318 $324,188
======== ======== ========
Net interest income/net
interest spread..... 23,441 4.40% 19,487 4.04% 15,896 4.25%
========= ========== ========= ========== =======
Net yield on earning assets 4.82% 4.57% 5.17%
========== ========== =======
Taxable equivalent adjustment:
Securities......... -- 1 9
Loans.............. 2 6 2
--------- --------- ----------
Total taxable
equivalent adjustment 2 7 11
--------- --------- ----------
Net interest income.. $ 23,439 $ 19,480 $ 15,885
========= ========= ==========
(1) Average loans include nonaccrual loans. All loans and deposits are domestic.
(2) Tax equivalent adjustments have been based on an assumed tax rate of 34 percent, and do not give effect to the disallowance
for federal income tax purpose of interest expense related to certain tax-exempt earning assets.
22
Rate/Volume Variance Analysis
Taxable Equivalent Basis
Average Volume Change in Volume Average Rate
------------------------------- -------------------- ------------------------------
2003 2002 2001 2003-2002 2002-2001 2003 2002 2001
--------- --------- --------- --------- --------- -------- -------- --------
(Dollars in thousands)
Earning assets:
Loans, net of unearned
income (1)........... $ 425,278 $ 370,062 $ 255,294 $ 55,216 $ 117,768 7.49% 7.79% 9.76%
Securities:
Taxable................. 32,618 41,024 40,093 (8,406) 931 4.08 5.32 6.13
Tax exempt.............. -- 82 325 (82) (243) 0.00 6.10 8.92
--------- --------- --------- --------- ---------
Total securities...... 32,618 41,106 40,418 (8,488) 688 4.08 5.33 6.16
--------- --------- --------- --------- ---------
Interest-bearing deposits
with other banks........ 7,301 3,483 1,137 3,818 2,346 1.10 2.24 4.84
Federal funds sold......... 21,446 11,723 10,675 9,723 1,048 1.11 1.55 4.34
--------- --------- --------- --------- ---------
Total earning assets.. $ 486,643 $ 426,374 $ 307,524 $ 60,269 $ 118,850 6.89 7.33 9.08
========= ========= ========= ========= =========
Interest-bearing liabilities:
Deposits:..................
Demand deposits......... $ 27,389 $ 23,460 $ 22,337 $ 3,929 $ 1,123 0.38 0.90 1.92
Savings................. 105,121 86,383 66,586 18,738 19,797 1.29 1.98 3.14
Time certificates....... 214,268 203,413 138,773 10,855 64,640 3.02 3.99 6.05
--------- --------- --------- --------- ---------
Total deposits........ 346,778 313,256 227,696 33,522 85,560 2.29 3.20 4.79
Long-term borrowings....... 55,660 41,401 17,478 14,269 23,923 3.83 4.10 5.74
Other borrowings........... 2,239 2,759 3,773 (520) (1,014) 1.16 2.03 2.78
--------- --------- --------- --------- ---------
Total interest-bearing
liabilities......... $ 404,677 $ 357,416 $ 248,947 $ 47,261$ 108,469 2.49 3.30 4.83
========= ========= ========= ========= ==========
Net interest income/net interest spread 4.40 4.04 4.25
Net yield on earning assets 4.82 4.57 5.17
Net cost of funds.......... 2.07 2.76 3.91
Variance Attributed to
-----------------------------------------------
Interest
Income/Expense Variance 2003 2002
------------------------ -------------------- ----------------------- ----------------------
2003 2002 2001 2003-2002 2002-2001 Volume Rate Mix Volume Rate Mix
------ ------ ------- --------- --------- ------- ------- ----- ------- ------ -----
(Dollars in thousands)
Earning assets:
Loans, net of
unearned income....... $31,873 $28,824 $24,908 $ 3,055 $ 3,910 $ 4,300 $(1,083) $(162) $11,197 $(5,027)$(2,260)
Securities:
Taxable.............. 1,332 2,184 2,459 (853) (274) (448) (509) 105 57 (325) (7)
Tax exempt........... -- 5 29 (5) (24) (5) (5) 5 (22) (9) 7
------ ------ ------- --------- --------- ------- ------ ----- ------- ------ -----
Total securities... 1,332 2,189 2,488 (858) (298) (453) (514) 110 35 (334) --
------ ------ ------- --------- --------- ------- ------ ----- ------- ------ -----
Interest-bearing deposits
with other banks..... 80 78 55 3 22 86 (40) (44) 113 (30) (60)
Federal funds sold...... 237 182 463 55 (281) 151 (52) (44) 45 (297) (29)
------ ------ ------- --------- --------- ------- ------ ------ ------- ------ -----
Total earning assets 33,522 31,276 27,914 2,249 3,358 4,084 (1,689) (140) 11,390 (5,688) (2,349)
------ ------- ------- --------- ------- ------- ------- ------ ------- ------ -----
Interest-bearing liabilities:
Deposits:
Demand............... 104 210 429 (108) (219) 35 (121) (20) 22 (229) (12)
Savings.............. 1,353 1,714 2,088 (381) (373) 372 (602) (131) 621 (766) (228)
Time certificates.... 6,467 8,108 8,392 (1,641) (285) 433 (1,969) (105) 3,909 (2,861) (1,332)
------ ------ ------- --------- --------- ------- ------ ------ ------- ------ -----
Total deposits..... 7,924 10,032 10,909 (2,108) (877) 840 (2,692) (256) 4,552 (3,857) (1,572)
------ ------ ------- --------- --------- ------- ------- ------ ------- ------ -----
Long-term borrowings.... 2,131 1,699 1,004 432 695 585 (114) (39) 1,374 (287) (392)
Short-term borrowings... 26 56 105 (30) (49) (11) (24) 5 (28) (28) 7
------ ------ ------- --------- --------- ------- ------- ------ ----- ------ -----
Total interest-
bearing
liabilities.... 10,081 11,787 12,018 (1,706) (231) 1,414 (2,830) (290) 5,898 (4,172) (1,957)
------ ------- ------- --------- --------- ------- ------- ------ ----- ----- -----
Net interest income/net
interest spread...... $23,441 $19,480 $15,896 $ 3,955 $ 3,589 $ 2,670 $ 1,141 $ 150 $5,492 $(1,516) $ (392)
====== ====== ====== ========= ========= ======= ======= ====== ====== ===== =====
23
Allowance for Loan Losses
Each of the Bank's loans is assigned to a lending officer responsible for
the ongoing review and administration of that loan. Lending officers make the
initial identification of loans, which present some difficulty in collection or
where there is an indication that the probability of loss exists. Lending
officers are responsible for the collection effort on a delinquent loan. Senior
management is informed of the status of delinquent and problem loans on a
monthly basis. In addition to the lending officers, there is an independent loan
review officer responsible for reviewing the credit ratings on loans and
administering the loans.
Senior management makes recommendations monthly to the Board of Directors
as to charge-offs. Senior management reviews the allowance for possible loan
losses on a monthly basis. The Bank's policy is to discontinue interest accrual
when payment of principal and interest is 90 days or more in arrears unless the
value of the collateral exceeds the principal plus accrued interest.
The allowance for possible loan losses represents management's assessment
of the risks associated with extending credit and its evaluation of the quality
of the loan portfolio. Management analyzes the loan portfolio to determine the
adequacy of the allowance for possible loan losses and the appropriate
provisions required to maintain a level considered adequate to absorb
anticipated loan losses. In assessing the adequacy of the allowance, management
reviews the size, quality and risk of loans in the portfolio. Management also
considers such factors as loan loss experience, the amount of past due and
nonperforming loans, specific known risk, the status and amount of nonperforming
assets, underlying collateral values securing loans, current and anticipated
economic conditions and other factors which affect the allowance for potential
credit losses. Although recent historical loan losses have been minimal, there
was a significant increase in non-performing loans at December 31, 2003 causing
management to increase the allowance during 2003. Due to the level of collateral
securing most of the non-performing loans, management believes that the reserve
is adequate despite the fact that the level of the allowance to non-performing
loans is far lower than peer financial institutions.
While it is the Bank's policy to charge off in the current period the loans
in which a loss is considered probable, there are additional risks of future
losses, which cannot be quantified precisely or attributed to particular loans
or classes of loans. Because these risks include the future state of the
economy, management's judgment as to the adequacy of the allowance is
necessarily approximate and imprecise.
Management believes that $8,066,817 on December 31, 2003, and $6,319,298 on
December 31, 2002, in the allowance for loan losses were adequate to absorb
known risks in the portfolio. No assurance can be given, however, that adverse
economic circumstances will not result in increased losses in the loan
portfolio, and require greater provisions for possible loan losses in the
future.
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24
The following table sets forth certain information with respect to the
Bank's loans, net of unearned income, and the allowance for loan losses for the
five years ended December 31, 2003.
Summary of Loan Loss Experience
2003 2002 2001 2000 1999
--------- --------- -------- -------- ---------
(Dollars in thousands)
Allowance for loan losses at beginning of year..... $ 6,319 $ 3,803 $ 3,267 $ 2,261 $ 1,750
Loans charged off:
Commercial, financial and agricultural........... 139 161 162 50 166
Real estate - mortgage........................... 10 -- 185 8 479
Consumer......................................... 74 46 43 52 38
--------- --------- -------- -------- ---------
Total loans charged off........................ 223 207 390 110 683
--------- --------- -------- -------- ---------
Recoveries on loans previously charged off:
Commercial, financial and agricultural........... 245 193 47 33 7
Real estate - mortgage........................... 2 3 131 72 340
Consumer......................................... 23 17 28 11 37
--------- --------- -------- -------- ---------
Total recoveries............................... 271 213 206 116 384
--------- --------- -------- -------- ---------
Net loans charged off (recovered).................. (48) (6) 184 (6) 299
Provision for loan losses.......................... 1,700 2,510 720 1,000 810
--------- --------- -------- -------- ---------
Allowance for loan losses at end of period......... $ 8,067 $ 6,319 $ 3,803 $ 3,267 $ 2,261
========= ========= ======== ======== =========
Loans, net of unearned income, at end of period.... $ 437,593 $ 416,414 $318,666 $227,155 $ 181,764
Average loans, net of unearned income,
ou