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. FCBI is a Florida corporation registered with the Board of Governors of the Federal Reserve System 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, and Charlotte counties. At December 31, 2002, FCBI had total assets of approximately $521 million, total deposits of approximately $424 million and stockholders' equity of approximately $34 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 Banking and Finance ("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 and Ft. Myers.
The Company employs approximately 130 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 may use the automated teller machines (the "ATMs") of other financial institutions and operates drive-in teller services and 24-hour depository vaults.
The following loan services are offered by the Bank:
(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. As of June 30, 2002, there were approximately 46 banks and 5 savings institutions operating in the PSA, operating a total of approximately 326 banking offices. 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, 2002 the Bank operated seven branch offices with an eighth 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 for a five-year period. 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 Punta Gorda branch office building is owned by the Bank and the underlying land is subject to a 99-year lease, which commenced in 2000. The Cape Coral branch land was purchased in 2001 and the branch opened in 2002. All of the branch facilities are in good condition.
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.
In addition, the FDIC has adopted a minimum leverage ratio of 3%. 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 3% 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 3% 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
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.
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 Bank cannot be determined at this time.
ITEM 2.
ITEM 2. PROPERTIES
For the description of the property of the Company, see "ITEM I - DESCRIPTION OF BUSINESS - Facilities."
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
There are no material proceedings to which the Company is a party.
ITEM 4.
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 2002.
PART II
ITEM 5.
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 2002, the Company issued 1.2 shares for 1.0 share stock split, thereby increasing the number of shares outstanding from 2,602,764 to 3,123,316.
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. To the best of management's knowledge, the last trade in December was executed at a price of $24.00 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.
As of March 15, 2003, there were 3,213,316 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 $.35 per share (split-adjusted) in the second quarter of 2002. During October 2002, the Company's Board of Directors adopted a policy of capital retention that ceases cash dividends for the foreseeable future.
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, 2002.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents on a historical basis selected financial data and ratios for the Company.
ITEM 7.
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.
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 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. Net income per common share for 2002 was $2.04 (diluted) compared to $1.71 in 2001 and $1.63 in 2000. 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 1999 to 2000 and from 2000 to 2001 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.
Earning Assets
During 2002, earning assets averaged $426 million, an increase of $118 million (38.3%) over 2001. During 2001, earning assets averaged $308 million, an increase of $61 million (24.7%) over 2000. Average earning assets during 2000 totaled $247 million, an increase of $54 million (28.0%) over 1999.
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.
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 $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 maturities of the loan portfolio and the sensitivity to interest rate changes of the Company's loan portfolio (in thousands):
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 $1.2 million or 3.5% from 2001 to 2002. The balance in the securities portfolio decreased by $7.3 million or 17.2% from 2000 to 2001. The balance in the securities portfolio decreased as funds were allocated to the loan portfolio throughout 2001. The securities portfolio increased by 9.06% or $3.5 million from 1999 to 2000. The balance in the securities portfolio increased as deposits increased faster than loans in 2000.
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 securities are carried at estimated fair market value and are equity securities at year-end 2002, 2001 and 2000. Held-to-Maturity securities are carried at amortized cost and represent the largest portion of the total securities portfolio. At December 31, 2002, 2001 and 2000 there were no material unrealized gains (losses) in the Available-for-Sale portfolio. At December 31, 2002, 2001 and 2000, net unrealized gains (losses) in the Held-to-Maturity portfolio amounted to $780,513, $249,651 and ($66,363), respectively.
The following table presents the carrying amounts of the securities portfolio at December 31, in each of the last three years.
There were no securities held by the Company of which the aggregate value at December 31, 2002, 2001 and 2000 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.)
Deposits and Borrowed Funds
Average deposits increased $95.2 million (35.1%) in 2002 compared to 2001. Total deposits increased $106 million (33.4%) from year-end 2001 to 2002. The largest area of growth in 2002 was in certificates of deposit, which increased $89.8 million. From 2001 to 2002, noninterest-bearing demand deposits decreased $5.7 million or 9.4% and savings deposits increased $22.1 million (31.7%)
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.
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:
At December 31, 2002, time deposits of $100,000 or greater aggregated approximately $140.8 million. The following table indicates, as of December 31, 2002, 2001 and 2000 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)
At December 31, 2002 and 2001, respectively, borrowed funds consisted primarily of long-term debt. The Bank had $22,250,000 in available lines to purchase federal funds, on an unsecured basis, from commercial banks. 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 and 2000. At December 31, 2002 and 2001 the Company also had credit available of approximately $78 million and $58 million, respectively, with the Federal Home Loan Bank of Atlanta. Of the credit available, $50,000,000 and $32,500,000 had been utilized at December 31, 2002 and 2001, respectively. The line is secured by residential and commercial real estate loans, investment securities and cash.
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, 2002.
Maturities of Long-term Debt (In thousands)
Capital Resources
Shareholders' equity increased $5.3 million to $34.5 million as of December 31, 2002, and increased $3.2 million $29.1 to million as of December 31, 2001. Shareholders' equity increased $3.1 million to $26.0 million as of December 31, 2000. The increase in shareholders' equity for 2002, 2001 and 2000 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 accounts for the FCBI Trust preferred securities as a minority interest. Subject to certain limitations, the preferred securities qualify as Tier 1 capital and are presented in the Consolidated Statements of Financial Condition as "Guaranteed preferred beneficial interests in the Company's subordinated debentures." 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
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 subordinated debt was repaid by the Bank from proceeds of the Trust Preferred securities issued by the Company and injected into the Bank as Tier I capital.
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The table below illustrates the Company's regulatory capital ratios under federal guidelines at December 31, 2002, 2001 and 2000:
Capital Adequacy Ratios
Information on the Bank capital ratios appears in Footnote 11 to the consolidated financial statements contained elsewhere herein.
On December 31, 2002 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 $22,250,000 and $21,164,000 of federal funds available at December 31, 2002 and 2001, 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 $28,000,000 and $25,500,000 was available and unused at December 31, 2002 and 2001, respectively, subject to the availability of assets to pledge to secure such borrowings.
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, 2002.
Interest Rate Sensitivity Analysis (In thousands)
The above table indicates that in a rising interest rate environment, the Company's earnings may be positively affected in the short-term, (0-30 days) due to earning assets repricing faster than interest-bearing liabilities. As seen in the preceding table, for the first 30 days of repricing opportunity there is an excess of earning assets over interest-bearing liabilities of approximately $80 million. For the first 365 days, interest-bearing liabilities exceed earning assets by approximately $35 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. Due to management's continued emphasis on profitability, $3.0 million of the higher-yielding securities presented in the table above have call features, which may result in such securities having a shorter effective life. This in turn may reduce the interest rate sensitivity gap presented above. It should be noted, therefore, that a matched interest-sensitive position by itself would 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 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 (24.5%) to $19.8 million in 2002 compared to 2001. Net interest income increased $1.2 million (7.8%) to $15.9 million from 2000 to 2001. The increase each year in the net interest income is primarily due to increased volume in total loans.
Interest income was $31.6 million in 2002, which represented an increase of 13.1% over 2001. Interest income produced by the loan portfolio increased $4.2 million (16.9%) 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 $298 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 was $25.0 million in 2000, which represented an increase of $6.8 million (37.5%) over 1999. Interest income produced by the loan portfolio increased $6.5 million (40.6%) in 2000 from 1999. The Bank benefited from a rise in the national interest rate levels and the asset sensitive position of the loan portfolio. Interest income on securities increased $441 thousand (21.9%) from 1999 to 2000. The increase in securities income from 1999 to 2000 is due to an increase in the average volume of taxable securities.
Interest income other than loans and securities decreased by $259 thousand from 2001 to 2002. During 2001, the Bank maintained a slightly larger investment in federal funds sold (averaging $11.7 million) compared to 2000 while rates declined significantly (about 2.8%), resulting in the decreased 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 $231 thousand (1.9%) in 2002 compared to 2001. 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 "Rate/Volume Analysis" following this section.) Interest expense on time deposit accounts decreased $285 thousand although the average volume increased by $64.6 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.
Total interest expense increased by $4.0 million or 64.9% in 2000 from 1999. The interest expense increase from 1999 to 2000 is primarily due to the increase in time deposit accounts and long-term borrowings and an increase of 107 basis points in the average rate paid on total interest-bearing liabilities. Interest expense on time deposit accounts increased $2.5 million or 70.2% from 1999 to 2000 and interest expense on long-term borrowings increased $1.0 million over the same period of time.
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 2002 to 7.40% compared to 9.08% in 2001. Most of the decline was caused by the drop in Prime rate 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 4.83% in 2001 to 3.30% in 2002. The Bank's net interest margin (net interest income divided by average interest earning assets) declined in 2002 to 4.64% compared to 5.17% in 2001. The decline was caused by the Bank's asset sensitive position during a period of dropping interest rates as discussed more fully in the section titled "Interest Rate Sensitivity Management" elsewhere in this report.
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. Most of the decline was caused by the drop in Prime rate 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.
The net interest margin decreased 23 basis points in 2000 from 6.19% at year-end 1999 to 5.96% at year-end 2000, reflecting a major shift (as a percent of deposits) from lower cost savings accounts to higher cost certificates of deposit. The shift in funding was driven by a rapid loan growth requiring a significant increase in rates to attract certificates of deposit. Partially offsetting the higher rates paid on certificates of deposit in 2000 compared to 1999, the yield on earning assets increased 71 basis points to 10.12% from 9.41% during the same period.
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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.
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.
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.
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 $6,319,000 on December 31, 2002, $3,803,000 on December 31, 2001, $3,267,000 on December 31, 2000, $2,261,000 on December 31, 1999, and $1,750,000 on December 31, 1998, 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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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, 2002.
In evaluating the allowance, management also considers the historical loan loss experience of the Bank, the amount of past due and nonperforming loans, current and anticipated economic conditions, lender requirements and other appropriate information. The Bank allocates the allowance for loan losses to specific loan categories based on an average of historical losses and the volume of each loan category.
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Nonperforming Assets
Nonperforming assets include nonperforming loans and foreclosed real estate held for sale. Nonperforming loans include loans classified as nonaccrual or renegotiated. The Bank's policy is to place a loan on nonaccrual status when it is contractually past due 90 days or more as to payment of principal or interest unless the collateral value is greater than both the principal due and the accrued interest. At the time a loan is placed on nonaccrual status, interest previously accrued but not collected is reversed and charged against current earnings. Recognition of any interest after a loan has been placed on nonaccrual is accounted for on a cash basis.
The Bank had nonperforming assets at December 31, 2002, 2001, 2000, 1999, and 1998 of approximately $7,698,000, $2,367,000, $1,548,000, $3,076,000, and $4,219,000, respectively.
The following table presents information concerning outstanding balances of nonperforming assets at December 31, 2002, 2001, 2000, 1999, and 1998.
It is the general policy of the Bank to stop accruing interest income and place the recognition of interest on a cash basis when any commercial, industrial or real estate loan is past due as to principal or interest and the ultimate collection of either is in doubt. Accrual of interest income on consumer installment loans is suspended when any payment of principal or interest, or both, is more than 90 days delinquent. When a loan is placed on a nonaccrual basis, any interest previously accrued but not collected is reversed against current income unless the collateral for the loan is sufficient to cover the accrued interest or a guarantor assures payment of interest.
There has been no significant impact on the Company's consolidated financial statements as a result of the provisions of Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan, or Statement of Financial Accounting Standards No. 118, Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures.
Noninterest Income
Noninterest income consists of revenues generated from a broad range of financial services and activities including fee-based services and profits and commissions earned through credit life insurance sales and other activities. In addition, gains or losses realized from the sale of investment portfolio securities are included in noninterest income. Total noninterest income increased by $317 thousand (18.7%) for the year ended December 31, 2002 compared to 2001. The increase was due to higher service charges on deposit accounts (increased $156 thousand) and gains on sale of available-for-sale securities (increased $36 thousand). Total noninterest income decreased by $105 thousand or 5.8% for the year ended December 31, 2001 compared to 2000. The decline was due primarily to a decrease of $256 thousand in insurance proceeds (a non-recurring event) offset by increased fess on customer accounts. Total noninterest income increased by $380 thousand or 26.7% for the year ended December 31, 2000 as compared to 1999 caused in large part by the insurance proceeds noted above.
The table below sets forth the Bank's noninterest income for the periods indicated.
Noninterest Expenses
From 2001 to 2002, noninterest expense increased $795 thousand (9.7%). Salaries and employee benefits in 2002 increased $320 thousand (6.1%) from 2001 to a total of $5.6 million. The increase in 2002 reflected the effect of adding staff for new branches and higher employee benefits costs.
From 2000 to 2001, noninterest expense increased $672 thousand (8.9%). Salaries and employee benefits in 2001 increased $468 thousand (9.8%) from 2000 to a total of $5.2 million for 2001. The increase in 2001 reflected the staffing required to open two branches and additional support personnel for loans and deposits. From 1999 to 2000, noninterest expense increased $742 thousand (10.9%). Salaries and employee benefits in 2000 increased $671
(16.4%) from 1999 to a total of $4.8 million at year-end 2000. These increases also can be attributed to the overall growth and expansion of the Bank in 2000 and 1999.
Occupancy and equipment expense increased $328 thousand (24.1%) from 2001 to 2002 and increased $252 thousand (22.7%) from 2000 to 2001. Occupancy and equipment expense rose $79 thousand or 7.7% from 1999 to 2000. The occupancy and equipment expense increases were a result of the additional property and equipment added as a result of new branch locations and the associated depreciation expense.
The table below sets forth the Bank's noninterest expenses for the periods indicated.
Income Taxes
Income tax expense increased $559 thousand (17.0%) to $3.9 million for the year ended December 31, 2002, increased $411 thousand (14.3%) to $3.3 million for the year ended December 31, 2001, $805 thousand (38.8%) to $2.9 for the year ended December 31, 2000, and increased $611 thousand (41.7%) to $2.1 million for the year ended December 31, 1999. The effective tax rate as a percentage of pretax income was 37.5% in 2002, 38.1% in 2001, and 36.2% in 2000. The statutory federal rate was 34 percent during 2002, 2001, and 2000. There is no current or pending tax legislation of which management is aware that if passed would have any material effect on the financial statements. For further information concerning the provision for income taxes, refer to Note 14, Income Taxes, of the "Notes to Financial Statements."
Impact of Inflation and Changing Prices
A bank's asset and liability structure is substantially different from that of an industrial company in that virtually all assets and liabilities of a bank are monetary in nature. Management believes the impact of inflation on its financial results depends upon the Company's ability to react to changes in interest rates and by such reaction to reduce the inflationary impact on performance. Interest rates do not necessarily move in the same direction, or at the same magnitude, as the prices of other goods and services. As discussed previously, management seeks to manage the relationship between interest-sensitive assets and liabilities in order to protect against wide interest rate fluctuations, including those resulting from inflation.
Market Risk
Market risk is the risk arising from adverse changes in the fair value of financial instruments due to a change in interest rates, exchange rates and equity prices. The Company's primary risk is interest rate risk.
The primary objective of Asset/Liability Management of the Company is to manage interest rate risk and achieve reasonable stability in net interest income throughout interest rate cycles. This is achieved by maintaining the proper balance of rate sensitive earning assets and rate sensitive liabilities. The relationship of rate sensitive earning assets to rate sensitive liabilities is the principal factor in projecting the effect that fluctuating interest rates will have on future net interest income. Rate sensitive earning assets and interest-bearing liabilities are those that can be repriced to current market rates within a relatively short time period. Management monitors the rate sensitivity of earning assets and interest-bearing liabilities over the entire life of these instruments, but places particular emphasis on the first year and through three years.
The Company has not experienced a high level of volatility in net interest income primarily because of the relatively large base of core deposits that do not reprice on a contractual basis. These deposit products include regular savings, interest-bearing transaction accounts and money market savings accounts. Balances for these accounts are reported based on historical repricing experienced at each bank. However, the rates paid are typically not directly related to market interest rates, since management has some discretion in adjusting these rates as market rates change.
The Company uses additional tools to monitor and manage interest rate sensitivity. One of the primary tools is simulation analysis. Simulation analysis is the primary method of estimating earnings at risk and capital at risk under varying interest rate conditions. Simulation analysis is used to test the sensitivity of the Company's net interest income and shareholders' equity to both the level of interest rates and the slope of the yield curve. Simulation analysis accounts for the expected timing and magnitude of assets and liability cash flows, as well as the expected timing and magnitude of deposits that do not reprice on a contractual basis. In addition, simulation analysis includes adjustments for the lag between movements in market interest rates on loans and interest-bearing deposits. These adjustments are made to reflect more accurately possible future cash flows, repricing behavior and ultimately net interest income. The estimated impact on the Company's net interest income before provision for loan loss sensitivity over a one-year time horizon is shown below. Such analysis assumes a sustained parallel shift in interest rates and the Company's estimate of how interest-bearing transaction accounts will reprice in each scenario. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes and changes in market conditions and management's strategies, among other factors.
Other Accounting Issues
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. The accounting for changes in the fair value of a derivative is to be determined based upon the intended use of the derivative. For certain hedge designations (cash flow and foreign currency exposure) the derivative's gain or loss is reported as a component of other comprehensive income. Other designations require the gain or loss to be recognized in earnings in the period of change. This statement, amended as to effective date by SFAS No. 137, is effective for financial statements for periods beginning after June 15, 2000. In June 2000, the Financial Accounting Standards Board also issued SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities - an Amendment of SFAS No. 133. The adoption of SFAS No. 133, as amended by SFAS No. 138 did not have a material impact on the Company's consolidated financial statements. In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - a replacement of FASB Statement No. 125. While SFAS No. 140 carries over most of the provisions of SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, it provides new standards for reporting financial assets transferred as collateral and new standards for the derecognition of financial assets, in particular transactions involving the use of special purpose entities. SFAS No. 140 also prescribes additional disclosures for collateral transactions and for securitization transactions accounted for as sales. The new collateral standards and disclosure requirements are effective for fiscal years ending after December 15, 2000, while the new standards for the derecognition of financial assets are effective for transfers made after March 31, 2001. The adoption of this statement did not have a material effect on the Company's consolidated financial statements.
In May 2001, the Auditing Standards Board issued Statement on Auditing Standards ("SAS") No. 94, The Effect of Information Technology on the Auditor's Consideration of Internal Control in a Financial Statement Audit. This statement amends SAS No. 55, Consideration of Internal Control in a Financial Statement Audit, by providing additional guidance related to the understanding by the auditor of an entity's use of information technology relevant to the audit. This auditing standard is effective for audits of financial statements for periods beginning on or after June 1, 2001. The impact on the audit of the Company's consolidated financial statements resulting from the issuance of this auditing standard was not material.
In June 2001, the FASB issued SFAS No. 141, Business Combinations. This statement addresses financial accounting and reporting for business combinations and supersedes Accounting Principles Board ("APB") Opinion No. 16, Business Combinations, and SFAS No. 38, Accounting for Preacquisition Contingencies of Purchased Enterprises. All business combinations in the scope of SFAS No. 141 are to be accounted for using one method, the purchase method. Prior to the issuance of this statement, subject to certain criteria, business combinations were accounted for using one of two methods, the pooling-of-interests method or the purchase method. The two methods produce different financial statement results. The single-method approach used in SFAS No. 141 reflects the conclusion that virtually all business combinations are acquisitions and therefore should be accounted for in the same manner as other asset acquisitions based on the values exchanged. This statement provides expanded and revised guidance related to the allocation of the purchase price to goodwill and other intangibles arising from the business combination. The provisions of SFAS No. 141 apply to all business combinations initiated after June 30, 2001.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets, which addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, Intangible Assets. SFAS No. 142 provides new standards for accounting relating to intangible assets after initial recognition in the financial statements. This statement proscribes the accounting practice of amortizing or expensing intangibles ratably over a prescribed period of time and imposes new guidance requiring that goodwill and certain other intangibles be tested for impairment at least annually by comparing fair values of those assets with their recorded amounts. Additional disclosure requirements also are provided. The provisions of SFAS No. 142 are required to be applied in fiscal years beginning after December 15, 2001.
The adoption of SFAS No. 141 and SFAS No. 142 did not have a material effect on the Company's consolidated financial statements.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. This statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. This statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. The adoption of this statement is not expected to have a material effect on the Company's consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived Assets. This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business (as previously defined
in that opinion). This statement also amends Accounting Research Bulletin No. 51, Consolidated Financial Statements, to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. The major changes resulting from this statement relate to the establishment of a single method for the recognition of impairment losses on long-lived assets to be held and used whether from discontinuance of a business segment or otherwise. This statement is effective for financial statements issued for fiscal years beginning after December 15, 2001. The adoption of this statement did not have a material effect on the Company's consolidated financial statements.
In December 2001, the Accounting Standards Executive Committee issued Statement of Position ("SOP") 01-6, Accounting by Certain Entities (Including Entities With Trade Receivables) That Lend to or Finance the Activities of Others. This statement reconciles and conforms the accounting and financial reporting provisions for similar transactions as applied to different entities within the financial services industry. It eliminates differences in disclosure practices where not warranted and should provide greater consistency in reporting by entities in the financial services industry. This statement is effective for annual and interim financial statements issued for fiscal years beginning after December 15, 2001. The adoption of SOP 01-6 did not have a material effect on the Company's consolidated financial statements.
In December 2001, the Auditing Standards Board issued SAS No. 95, Generally Accepted Auditing Standards. This statement supersedes Generally Accepted Auditing Standards of SAS No. 1 and generally provides additional guidance to the independent auditor in the conduct of an audit engagement, primarily by addressing authoritative and nonauthoritative publications for audit consideration and guidance. This SAS is effective for audits of financial statements for periods beginning on or after December 15, 2001. The impact on the audit of the Company's consolidated financial statements resulting from the issuance of this auditing standard was not material.
In January 2002, the Auditing Standards Board issued SAS No. 96, Audit Documentation. This statement supersedes SAS No. 41, Working Papers and amends SAS No. 47, Audit Risk and Materiality in Conducting an Audit, SAS No. 56, Analytical Procedures and SAS No. 59, The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern. This statement provides revised guidance to the independent auditor as to the type, purpose and requirements of audit documentation. This SAS is effective for audits of financial statements for periods beginning on or after May 15, 2002. The impact on the audit of the Company's consolidated financial statements resulting from the issuance of this auditing standard was not material.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145 addresses accounting and financial reporting for extinguishments of debt, intangible assets of motor carriers and leases. SFAS No. 145 is effective for fiscal years beginning after and transactions occurring after May 15, 2002. The adoption of this statement is not expected to have a material effect on the Company's consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. The statement addresses financial reporting and accounting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). The primary difference between SFAS No. 146 and Issue 94-3 relates to the requirement for recognition of a liability related to the cost of an exit or disposal activity when the liability is incurred. Under 94-3, such liability would be recognized at the date of an entity's commitment to an exit plan. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002, with early application encouraged. The adoption of this statement is not expected to have a material impact on the Company's consolidated financial statements.
In June 2002, the Auditing Standards Board issued SAS No. 97, Amendment to Statement on Auditing Standards No. 50, Reports on the Application of Accounting Principles. This statement prohibits an accountant from providing a written report on the application of accounting principles not involving facts and circumstances of a specific entity. This SAS is effective for written reports issued or oral advice provided on or after June 30, 2002. The impact on the audit of the Company's consolidated financial statements resulting from the issuance of this auditing standard is not expected to be material.
In September 2002, the Auditing Standards Board issued SAS No. 98, Omnibus Statement on Auditing Standards - 2002. This statement revises and amends several previously issued Statements on Auditing Standards. The
changes required impose enhanced quality controls and audit considerations on a firm of independent auditors in the conduct of their audit of a company's financial statements. The additional requirements primarily relate to more descriptive guidance on the application of auditing procedures, the auditors report and related disclosures and supplementary information. This SAS No. 98 was effective upon issuance except for the amendment to SAS No. 70, which is effective for reports issued on or after January 1, 2003. The impact on the audit of the Company's consolidated financial statements resulting from the issuance of this auditing standard was not material.
In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain Financial Institutions, an amendment of SFAS No. 72 and 144 and FASB Interpretation No. 9. Except for transactions between two or more mutual enterprises, SFAS No. 147 removes acquisitions of financial institutions from the scope of SFAS No. 72 and Interpretation 9 and requires those transactions be accounted for in accordance with SFAS No. 141 and 142. SFAS No. 147 also amends SFAS No. 144 to include in its scope long-term customer-relationship intangible assets of financial institutions such as depositor and borrower relationship intangible assets and credit cardholder intangible assets. Consequently, those intangible assets are subject to the same undiscounted cash flow recoverability test and impairment loss recognition and measurement provisions that SFAS No. 144 requires for other long-lived assets that are held and used. The provisions of SFAS No. 72 requiring the intangible recognition and subsequent amortization of any excess fair value of net liabilities assumed in an acquisition will no longer apply. SFAS No. 147 is essentially effective as of October 1, 2002. As a result, the Company adopted SFAS No. 147 on October 1, 2002, with no material impact on the Company's consolidated financial statements.
In October 2002, the Auditing Standards Board issued SAS No. 99, Consideration of Fraud in a Financial Statement Audit. This statement supersedes SAS No. 82 and amends SAS No. 1 and SAS No. 85. SAS No. 99 describes fraud and its characteristics; discusses the need for auditors to exercise professional skepticism; requires (as part of planning the audit) that there be a discussion among the audit team members regarding the risks of material misstatement due to fraud; and requires auditors to gather information necessary to identify risks of material misstatement due to fraud. This SAS is effective for audits of financial statements for periods beginning on or after December 15, 2002. The impact on the audit of the Company's consolidated financial statements resulting from the issuance of this auditing standard is not expected to be material.
In November 2002, the Auditing Standards Board issued SAS No. 100, Interim Financial Information. This statement supersedes SAS No. 71 and establishes standards on the nature, timing and extent of the procedures to be performed by an independent accountant when conducting a review of interim financial information. This SAS is effective for interim periods within fiscal years beginning after December 15. 2002. The impact on the audit of the Company's consolidated financial statements resulting from the issuance of this auditing standard is not expected to be material.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. This interpretation changes the current practice of accounting for, and the disclosures related to guarantees. Interpretation No. 45 requires certain guarantees to be recorded at fair value, which is a change from the current practice of generally only recording a liability when a loss is probable and reasonably estimable. The interpretation also requires a guarantor to make new disclosures, even when the likelihood of making any payments under the guarantee is remote, which is another change from current practice. The disclosure requirements of this interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002. The interpretation's initial recognition and initial measurement provisions are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The guarantor's previous accounting for guarantees issued prior to the date of Interpretation No. 45 are not to be revised or restated to reflect the interpretation's provisions. The adoption of the disclosure requirements of Interpretation No. 45 did not have a material impact on the Company's consolidated financial statements. The adoption of the initial recognition and initial measurement provisions of Interpretation No. 45 is not expected to have a material impact on the Company's consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure. This statement amends SFAS No. 123 to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It amends the disclosure provisions of that Statement to require prominent disclosure about the effects on reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation. This Statement also
amends APB Opinion No. 28 to require disclosure about those effects in interim financial information. This Statement is effective for financial statements for fiscal years ending after December 15, 2002 and for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002. The adoption of SFAS No. 148 did not have a material impact on the Company's consolidated financial statements.
In January 2003, the Auditing Standards Board Issued SAS No. 101, Auditing Fair Value Measurements and Disclosures. This statement establishes standards on auditing the measurement and disclosure of assets, liabilities, and specific components of equity presented or disclosed at fair value in financial statements. This SAS is effective for audits of financial statements for periods beginning on or after June 15, 2003. The impact on the audit of the Company's consolidated financial statements resulting from the issuance of this auditing standard is not expected to be material.
In January 2003, the FASB issued FIN 46, which clarifies the application of Accounting Research Bulletin ("ARB") 51, Consolidated Financial Statements, to certain entities (called variable interest entities) in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The disclosure requirements of this Interpretation are effective for all financial statements issued after January 31, 2003. The consolidation requirements apply to all variable interest entities created after January 31, 2003. In addition, public companies must apply the consolidation requirements to variable interest entities that existed prior to February 1, 2003 and remain in existence as of the beginning of annual or interim periods beginning after June 15, 2003. Management is currently assessing the impact of FIN 46, and does not expect this Interpretation to have a material impact to the Consolidated Financial Statements.
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ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by Regulation S-X and by Item 302 of Regulation S-K are set forth in the pages listed below.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders Florida Community Banks, Inc. and Subsidiaries Immokalee, Florida
We have audited the accompanying consolidated statements of financial condition of Florida Community Banks, Inc. (a Florida corporation) and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Florida Community Banks, Inc. and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.
Birmingham, Alabama January 31, 2003 /s/ Schauer Taylor Cox Vise Morgan & Fowler, P.C. -------------------------------------------------- Schauer Taylor Cox Vise Morgan & Fowler, P.C.
See notes to consolidated financial statements
FLORIDA COMMUNITY BANKS, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION December 31, 2002 and 2001
See notes to consolidated financial statements
FLORIDA COMMUNITY BANKS, INC. CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, 2002, 2001 and 2000
See notes to consolidated financial statements
FLORIDA COMMUNITY BANKS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Years Ended December 31, 2002, 2001 and 2000
See notes to consolidated financial statements
FLORIDA COMMUNITY BANKS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2002, 2001 and 2000
(Continued on following page) See notes to consolidated financial statements
FLORIDA COMMUNITY BANKS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED Years Ended December 31, 2002, 2001 and 2000
See notes to consolidated financial statements
FLORIDA COMMUNITY BANKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2002, 2001 and 2000
Note 1 - Summary of Significant Accounting Policies
Florida Community Banks, Inc. ("FCBI") (a Florida corporation) and its wholly-owned subsidiaries, Florida Community Bank (the "Bank") (a Florida corporation) and FCBI Capital Trust I (the " Trust")(a Delaware statutory trust), collectively referred to herein as the "Company," is headquartered in Immokalee, Florida. The Bank's main office also is in Immokalee, Florida with seven additional branch locations in Southwest Florida. The Bank provides a full range of banking services to individual and corporate customers in Charlotte, Collier, Glades, Hendry and Lee counties and the surrounding areas.
The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America and to general practice within the banking industry. The following summarizes the most significant of these policies.
Business Combination
Florida Community Banks was incorporated on February 20, 2002. FCBI had no assets, liabilities, revenues or operations until April 15, 2002, when FCBI acquired 100% of the outstanding shares of Florida Community Bank common stock pursuant to a Plan of Reorganization and Share Exchange by exchanging one common share of FCBI for one common share of the Bank. The combination has been accounted for as a statutory pooling of interest between affiliates, and, accordingly, all periods presented reflect FCBI and the Bank on a combined basis. Since April 15, 2002, FCBI's predominate activity has been acting as a one-bank holding company for the Bank. The Bank has continued to conduct its activities in substantially the same manner as it had before the acquisition.
Basis of Consolidation
The consolidated financial statements include the accounts of Florida Community Banks, Inc., the Bank and the Trust. All significant inter-company balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The determination of the adequacy of the allowance for loan losses is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions. In connection with the determination of the estimated losses on loans, management obtains independent appraisals for significant collateral. While management uses available information to recognize losses on loans, further reductions in the carrying amounts of loans may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans. Such agencies may require the Bank to recognize
Note 1 - Summary of Significant Accounting Policies - Continued
additional losses based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the estimated losses on loans may change materially in the near term. However, the amount of the change that is reasonably possible cannot be estimated.
Securities
Securities are classified as either held-to-maturity, available-for-sale, or trading.
Securities held-to-maturity are those securities for which management has the ability and intent to hold on a long-term basis or until maturity. These securities are carried at amortized cost, adjusted for amortization of premiums, and accretion of discount to the earlier of the maturity or call date.
Securities available-for-sale represent those securities intended to be held for an indefinite period of time, including securities that management intends to use as part of its asset/liability strategy, or that may be sold in response to changes in interest rates, changes in prepayment risk, the need to increase regulatory capital, or other similar factors. Securities available-for-sale are recorded at market value with unrealized gains and losses net of any tax effect, added or deducted directly from shareholders' equity.
Securities carried in trading accounts are carried at market value with unrealized gains and losses reflected in income.
Realized and unrealized gains and losses are based on the specific identification method.
Declines in the fair value of individual held-to-maturity and available-for-sale securities below their cost that are other than temporary result in write-downs of the individual securities to their fair value. The related write-downs are included in earnings as realized losses.
The Company has no trading securities.
Loans
Loans are stated at unpaid principal balances, less the allowance for loan losses, unearned discounts and net deferred loan fees.
Unearned discounts on installment loans are recognized as income over the term of the loans using a method that approximates the interest method.
Loan origination and commitment fees, as well as certain direct origination costs, are deferred and amortized as a yield adjustment over the lives of the related loans using the interest method or the straight-line method.
Note 1 - Summary of Significant Accounting Policies - Continued
Allowance for Possible Loan Losses
A loan is considered impaired, based on current information and events, if it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Uncollateralized loans are measured for impairment based on the present value of expected future cash flows discounted at the historical effective interest rate, while all collateral-dependent loans are measured for impairment based on the fair value of the collateral. Smaller balance homogeneous loans, which consist of residential mortgages and consumer loans, are evaluated collectively and reserves are established based on historical loss experience.
The allowance for loan losses is established through charges to earnings in the form of a provision for loan losses. Increases and decreases in the allowance due to changes in the measurement of the impaired loans are considered in the provision for loan losses. Loans continue to be classified as impaired unless they are brought fully current and the collection of scheduled interest and principal is considered probable. When a loan or portion of a loan is determined to be uncollectible, the portion deemed uncollectible is charged against the allowance and subsequent recoveries, if any, are credited to the allowance.
Management's periodic evaluation of the adequacy of the allowance is based on the Bank's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrowers' ability to repay, estimated value of any underlying collateral, and an analysis of current economic conditions. While management believes that it has established the allowance in accordance with generally accepted accounting principles and has taken into account the views of banking regulators and the current economic environment, there can be no assurance that in the future the Bank's regulators or its economic environment will not require further increases in the allowance.
Income Recognition on Impaired and Non-accrual Loans
Loans, including impaired loans, are generally classified as non-accrual if they are past due as to maturity or payment of principal or interest for a period of more than 90 days, unless such loans are well collateralized and in the process of collection. If a loan or a portion of a loan is classified as doubtful or is partially charged off, the loan is generally classified as non-accrual. Loans that are on a current payment status or past due less than 90 days may also be classified as non-accrual if repayment in full of principal and/or interest is in doubt.
Loans may be returned to accrual status when all principal and interest amounts contractually due are reasonably assured of repayment within an acceptable period of time, and there is a sustained period of repayment performance by the borrower, in accordance with the contractual terms of interest and principal.
Note 1 - Summary of Significant Accounting Policies - Continued
While a loan is classified as non-accrual and the future collectability of the recorded loan balance is doubtful, collections of interest and principal are generally applied as a reduction to principal outstanding, except in the case of loans with scheduled amortizations where the payment is generally applied to the oldest payment due. When the future collectability of the recorded loan balance is expected, interest income may be recognized on a cash basis. In the case where a non-accrual loan has been partially charged off, recognition of interest on a cash basis is limited to that which would have been recognized on the recorded loan balance at the contractual interest rate. Receipts in excess of that amount are recorded as recoveries to the allowance for loan losses until prior charge offs have been fully recovered. Interest income recognized on a cash basis was immaterial for the years ended December 31, 2002, 2001 and 2000.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation. Expenditures for additions and major improvements that significantly extend the useful lives of the assets are capitalized. Expenditures for repairs and maintenance are charged to expense as incurred. The carrying values of assets traded in are used to adjust the carrying values of the new assets acquired by trade. Assets that are disposed of are removed from the accounts and the resulting gains or losses are recorded in operations.
Depreciation is provided generally by accelerated and straight-line methods based on the estimated useful lives of the respective assets.
Foreclosed Real Estate
Foreclosed real estate includes both formally foreclosed property and in-substance foreclosed property. In-substance foreclosed properties are those properties for which the institution has taken physical possession, regardless of whether formal foreclosure proceedings have taken place.
At the time of foreclosure, foreclosed real estate is recorded at the lower of the carrying amount or fair value less cost to sell, which becomes the property's new basis. Any write-downs based on the asset's fair value at date of acquisition are charged to the allowance for loan losses. After foreclosure, these assets are carried at the lower of their new cost basis or fair value less cost to sell. Costs incurred in maintaining foreclosed real estate and subsequent adjustments to the carrying amount of the property are included in income (loss) on foreclosed real estate.
Advertising Costs
The Company's policy is to expense advertising costs as incurred. Advertising expense for the years ended December 31, 2002, 2001 and 2000 amounted to approximately $135,000, $130,000 and $161,000, respectively.
Note 1 - Summary of Significant Accounting Policies - Continued
Income Taxes
Income taxes are provided for the tax effects of the transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the basis of the allowance for loan losses, accumulated depreciation, and accrued employee benefits for financial and income tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred tax assets and liabilities are reflected at income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
Stock-Based Compensation
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based Compensation; which defines a fair value based method of accounting for an employee stock option plan. This statement establishes financial accounting and reporting standards for stock-based employee compensation plans and stock-based non-employee compensation. Under the fair value based method, compensation is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. However, SFAS No. 123 allows an entity to continue to measure compensation costs for those plans using the intrinsic value based method of accounting prescribed by APB Opinion No, 25, Accounting for Stock Issued to Employees. The Company has elected to follow APB No. 25 in accounting for its stock option plans.
Retirement Plan
The Company has a defined contribution Pension Plan and a Profit-Sharing Plan covering all eligible employees. Employer contributions to the plans are included in salaries and employee benefits expense. Pension Plan contributions are required at 10 percent of total eligible employee compensation. Profit-Sharing contributions are determined by the board of directors. The Company also has deferred compensation plans with certain executive officers and directors. The Company contributes amounts to the pension fund sufficient to satisfy funding requirements of the Employee Retirement Income Security Act.
Off-Balance Sheet Financial Instruments
In the ordinary course of business the Company has entered into off-balance sheet financial instruments consisting of commitments to extend credit, commercial letters of credit and standby letters of credit. Such financial instruments are recorded in the financial statements when paid.
The Bank has available as a source of financing a line of credit with the Federal Home Loan Bank of Atlanta that is limited to 15% of assets (an amount of approximately $78,000,000 at December 31, 2002), of which $28,000,000 was available and unused. The ability to utilize the remaining line is dependent on the amount of eligible collateral that is available to pledge to the Federal Home Loan Bank.
Note 1 - Summary of Significant Accounting Policies - Continued
The Bank also has available as a source of short-term financing the purchase of federal funds from other commercial banks from available lines totaling $25,000,000.
Segment Information
All of the Company's offices offer similar products and services, are located in the same geographic region, and serve the same customer segments of the market. As a result, management considers all units as one operating segment and therefore feels that the basic consolidated financial statements and related footnotes provide details related to segment reporting.
Reclassifications
Certain amounts in 2001 and 2000 have been reclassified to conform with the 2002 presentation.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. The accounting for changes in the fair value of a derivative is to be determined based upon the intended use of the derivative. For certain hedge designations (cash flow and foreign currency exposure) the derivative's gain or loss is reported as a component of other comprehensive income. Other designations require the gain or loss to be recognized in earnings in the period of change. This statement, amended as to effective date by SFAS No. 137, is effective for financial statements for periods beginning after June 15, 2000. In June 2000, the FASB also issued SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities - an Amendment of SFAS No. 133. The adoption of SFAS No. 133, as amended by SFAS No. 138 did not have a material impact on the Company's consolidated financial statements.
In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - a replacement of FASB Statement No. 125. While SFAS No. 140 carries over most of the provisions of SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, it provides new standards for reporting financial assets transferred as collateral and new standards for the derecognition of financial assets, in particular transactions involving the use of special purpose entities. SFAS No. 140 also prescribes additional disclosures for collateral transactions and for securitization transactions accounted for as sales. The new collateral standards and disclosure requirements are effective for fiscal years ending after December 15, 2000, while the new standards for the derecognition of financial assets are effective for transfers made after March 31, 2001. The adoption of this statement did not have a material effect on the Company's consolidated financial statements.
Note 1 - Summary of Significant Accounting Policies - Continued
In May 2001, the Auditing Standards Board issued Statement on Auditing Standards ("SAS") No. 94, The Effect of Information Technology on the Auditor's Consideration of Internal Control in a Financial Statement Audit. This statement amends SAS No. 55, Consideration of Internal Control in a Financial Statement Audit, by providing additional guidance related to the understanding by the auditor of an entity's use of information technology relevant to the audit. This auditing standard is effective for audits of financial statements for periods beginning on or after June 1, 2001. The impact on the audit of the Company's consolidated financial statements resulting from the issuance of this auditing standard was not material.
In June 2001, the FASB issued SFAS No. 141, Business Combinations. This statement addresses financial accounting and reporting for business combinations and supersedes Accounting Principles Board ("APB") Opinion No. 16, Business Combinations, and SFAS No. 38, Accounting for Preacquisition Contingencies of Purchased Enterprises. All business combinations in the scope of SFAS No. 141 are to be accounted for using one method, the purchase method. Prior to the issuance of this statement, subject to certain criteria, business combinations were accounted for using one of two methods, the pooling-of-interests method or the purchase method. The two methods produce different financial statement results. The single-method approach used in SFAS No. 141 reflects the conclusion that virtually all business combinations are acquisitions and therefore should be accounted for in the same manner as other asset acquisitions based on the values exchanged. This statement provides expanded and revised guidance related to the allocation of the purchase price to goodwill and other intangibles arising from the business combination. The provisions of SFAS No. 141 apply to all business combinations initiated after June 30, 2001.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets, which addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, Intangible Assets. SFAS No. 142 provides new standards for accounting relating to intangible assets after initial recognition in the financial statements. This statement proscribes the accounting practice of amortizing or expensing intangibles ratably over a prescribed period of time and imposes new guidance requiring that goodwill and certain other intangibles be tested for impairment at least annually by comparing fair values of those assets with their recorded amounts. Additional disclosure requirements also are provided. The provisions of SFAS No. 142 are required to be applied in fiscal years beginning after December 15, 2001.
The adoption of SFAS No. 141 and SFAS No. 142 did not have a material effect on the Company's consolidated financial statements.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. This statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. This statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. The adoption of this statement is not expected to have a material effect on the Company's consolidated financial statements.
Note 1 - Summary of Significant Accounting Policies - Continued
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived Assets. This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business (as previously defined in that opinion). This statement also amends Accounting Research Bulletin No. 51, Consolidated Financial Statements, to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. The major changes resulting from this statement relate to the establishment of a single method for the recognition of impairment losses on long-lived assets to be held and used whether from discontinuance of a business segment or otherwise. This statement is effective for financial statements issued for fiscal years beginning after December 15, 2001. The adoption of this statement did not have a material effect on the Company's consolidated financial statements.
In December 2001, the Accounting Standards Executive Committee issued Statement of Position ("SOP") 01-6, Accounting by Certain Entities (Including Entities With Trade Receivables) That Lend to or Finance the Activities of Others. This statement reconciles and conforms the accounting and financial reporting provisions for similar transactions as applied to different entities within the financial services industry. It eliminates differences in disclosure practices where not warranted and should provide greater consistency in reporting by entities in the financial services industry. This statement is effective for annual and interim financial statements issued for fiscal years beginning after December 15, 2001. The adoption of SOP 01-6 did not have a material effect on the Company's consolidated financial statements.
In December 2001, the Auditing Standards Board issued SAS No. 95, Generally Accepted Auditing Standards. This statement supersedes Generally Accepted Auditing Standards of SAS No. 1 and generally provides additional guidance to the independent auditor in the conduct of an audit engagement, primarily by addressing authoritative and nonauthoritative publications for audit consideration and guidance. This SAS is effective for audits of financial statements for periods beginning on or after December 15, 2001. The impact on the audit of the Company's consolidated financial statements resulting from the issuance of this auditing standard was not material.
In January 2002, the Auditing Standards Board issued SAS No. 96, Audit Documentation. This statement supersedes SAS No. 41, Working Papers and amends SAS No. 47, Audit Risk and Materiality in Conducting an Audit, SAS No. 56, Analytical Procedures and SAS No. 59, The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern. This statement provides revised guidance to the independent auditor as to the type, purpose and requirements of audit documentation. This SAS is effective for audits of financial statements for periods beginning on or after May 15, 2002. The impact on the audit of the Company's consolidated financial statements resulting from the issuance of this auditing standard was not material.
Note 1 - Summary of Significant Accounting Policies - Continued
In April 2002, the Financial Accounting Standards Board issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145 addresses accounting and financial reporting for extinguishments of debt, intangible assets of motor carriers and leases. SFAS No. 145 is effective for fiscal years beginning after and transactions occurring after May 15, 2002. The adoption of this statement is not expected to have a material effect on the Company's consolidated financial statements.
In June 2002, the Financial Accounting Standards Board issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. The statement addresses financial reporting and accounting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). The primary difference between SFAS No. 146 and Issue 94-3 relates to the requirement for recognition of a liability related to the cost of an exit or disposal activity when the liability is incurred. Under 94-3, such liability would be recognized at the date of an entity's commitment to an exit plan. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002, with early application encouraged. The adoption of this statement is not expected to have a material impact on the Company's consolidated financial statements.
In June 2002, the Auditing Standards Board issued SAS No. 97, Amendment to Statement on Auditing Standards No. 50, Reports on the Application of Accounting Principles. This statement prohibits an accountant from providing a written report on the application of accounting principles not involving facts and circumstances of a specific entity. This SAS is effective for written reports issued or oral advice provided on or after June 30, 2002. The impact on the audit of the Company's consolidated financial statements resulting from the issuance of this auditing standard is not expected to be material.
In September 2002, the Auditing Standards Board issued SAS No. 98, Omnibus Statement on Auditing Standards - 2002. This statement revises and amends several previously issued Statements on Auditing Standards. The changes required impose enhanced quality controls and audit considerations on a firm of independent auditors in the conduct of their audit of a company's financial statements. The additional requirements primarily relate to more descriptive guidance on the application of auditing procedures, the auditors report and related disclosures and supplementary information. This SAS No. 98 was effective upon issuance except for the amendment to SAS No. 70, which is effective for reports issued on or after January 1, 2003. The impact on the audit of the Company's consolidated financial statements resulting from the issuance of this auditing standard was not material.
In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain Financial Institutions, an amendment of SFAS No. 72 and 144 and FASB Interpretation No. 9. Except for transactions between two or more mutual enterprises, SFAS No. 147 removes acquisitions of financial institutions from the scope of SFAS No. 72 and Interpretation 9 and requires those transactions be accounted for in accordance with SFAS No. 141 and 142. SFAS No. 147 also amends SFAS No. 144 to include in its scope long-term customer-relationship intangible assets of financial institutions such as depositor and borrower relationship intangible assets and credit cardholder intangible assets. Consequently, those intangible assets are subject to the same undiscounted cash flow recoverability test and impairment loss recognition
Note 1 - Summary of Significant Accounting Policies - Continued
and measurement provisions that SFAS No. 144 requires for other long-lived assets that are held and used. The provisions of SFAS No. 72 requiring the intangible recognition and subsequent amortization of any excess fair value of net liabilities assumed in an acquisition will no longer apply. SFAS No. 147 is essentially effective as of October 1, 2002. As a result, the Company adopted SFAS No. 147 on October 1, 2002, with no material impact on the Company's consolidated financial statements.
In October 2002, the Auditing Standards Board issued SAS No. 99, Consideration of Fraud in a Financial Statement Audit. This statement supersedes SAS No. 82 and amends SAS No. 1 and SAS No. 85. SAS No. 99 describes fraud and its characteristics; discusses the need for auditors to exercise professional skepticism; requires (as part of planning the audit) that there be a discussion among the audit team members regarding the risks of material misstatement due to fraud; and requires auditors to gather information necessary to identify risks of material misstatement due to fraud. This SAS is effective for audits of financial statements for periods beginning on or after December 15, 2002. The impact on the audit of the Company's consolidated financial statements resulting from the issuance of this auditing standard is not expected to be material.
In November 2002, the Auditing Standards Board issued SAS No. 100, Interim Financial Information. This statement supersedes SAS No. 71 and establishes standards on the nature, timing and extent of the procedures to be performed by an independent accountant when conducting a review of interim financial information. This SAS is effective for interim periods within fiscal years beginning after December 15. 2002. The impact on the audit of the Company's consolidated financial statements resulting from the issuance of this auditing standard is not expected to be material.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. This interpretation changes the current practice of accounting for, and the disclosures related to guarantees. Interpretation No. 45 requires certain guarantees to be recorded at fair value, which is a change from the current practice of generally only recording a liability when a loss is probable and reasonably estimable. The interpretation also requires a guarantor to make new disclosures, even when the likelihood of making any payments under the guarantee is remote, which is another change from current practice. The disclosure requirements of this interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002. The interpretation's initial recognition and initial measurement provisions are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The guarantor's previous accounting for guarantees issued prior to the date of Interpretation No. 45 are not to be revised or restated to reflect the interpretation's provisions. The adoption of the disclosure requirements of Interpretation No. 45 did not have a material impact on the Company's consolidated financial statements. The adoption of the initial recognition and initial measurement provisions of Interpretation No. 45 is not expected to have a material impact on the Company's consolidated financial statements.
Note 1 - Summary of Significant Accounting Policies - Continued
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure. This statement amends SFAS No. 123 to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It amends the disclosure provisions of that Statement to require prominent disclosure about the effects on reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation. This Statement also amends APB Opinion No. 28 to require disclosure about those effects in interim financial information. This Statement is effective for financial statements for fiscal years ending after December 15, 2002 and for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002. The adoption of SFAS No. 148 did not have a material impact on the Company's consolidated financial statements.
In January 2003, the Auditing Standards Board Issued SAS No. 101, Auditing Fair Value Measurements and Disclosures. This statement establishes standards on auditing the measurement and disclosure of assets, liabilities, and specific components of equity presented or disclosed at fair value in financial statements. This SAS is effective for audits of financial statements for periods beginning on or after June 15, 2003. The impact on the audit of the Company's consolidated financial statements resulting from the issuance of this auditing standard is not expected to be material.
In January 2003, the FASB issued FIN 46, which clarifies the application of Accounting Research Bulletin ("ARB") 51, Consolidated Financial Statements, to certain entities (called variable interest entities) in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The disclosure requirements of this Interpretation are effective for all financial statements issued after January 31, 2003. The consolidation requirements apply to all variable interest entities created after January 31, 2003. In addition, public companies must apply the consolidation requirements to variable interest entities that existed prior to February 1, 2003 and remain in existence as of the beginning of annual or interim periods beginning after June 15, 2003. Management is currently assessing the impact of FIN 46, and does not expect this Interpretation to have a material impact to the Consolidated Financial Statements.
Note 1 - Summary of Significant Accounting Policies - Continued
Earnings Per Common Share
Basic earnings per common share are computed by dividing earnings available to stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect per share amounts that would have resulted if dilutive potential common stock had been converted to common stock, as prescribed by SFAS No. 128, Earnings per Share. All per share amounts included in these consolidated financial statements have been retroactively adjusted to reflect the effects of the 1.2 for 1.0 stock splits which occurred during 2002, 2001 and 2000. The following reconciles the weighted average number of shares outstanding:
In May 2000, June 2001 and April 2002, the Company issued 1.2-for-1.0 stock splits. All per share amounts included in these consolidated financial statements have been retroactively adjusted to give effect to these splits.
Comprehensive Income
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income, on December 31, 1998. This statement establishes standards for the reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. The statement requires that an enterprise classify items of other comprehensive income by their nature in the financial statement and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid in capital in the equity section of a statement of financial condition. Comprehensive income is generally defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners.
Comprehensive income is the total of net income and all other non-owner changes in equity. Items that are to be recognized under accounting standards as components of comprehensive income are displayed in statements of shareholders' equity.
In the calculation of comprehensive income, certain reclassification adjustments are made to avoid double counting items that are displayed as part of net income for a period that also had been displayed as part of other comprehensive income in that period or earlier periods. The Company had no such items to be reclassified at December 31, 2002, 2001 and 2000.
Note 1 - Summary of Significant Accounting Policies - Continued
Statements of Cash Flows
The Company includes cash, due from banks, and certain cash equivalents in preparing the statements of cash flows. The following is supplemental disclosure to the statements of cash flows for the three years ended December 31, 2002.
Note 2- Restrictions on Cash and Due from Bank Accounts
The Bank is required by regulatory authorities to maintain average reserve balances either in vault cash or on deposit with the Federal Reserve. The average amount of those reserves required at December 31, 2002 and 2001, were approximately $3,877,000 and $3,168,000, respectively.
Note 3 - Securities
The carrying amounts of securities as shown in the consolidated statements of financial condition and their approximate fair values at December 31, 2002 and 2001 were as follows:
Note 3 - Securities - Continued
The contractual maturities of securities held-to-maturity and securities available-for-sale at December 31, 2002, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Mortgage-backed securities have been included in the maturity tables based upon the guaranteed payoff date of each security.
Note 3 - Securities - Continued
Gross realized gains and losses from the sale of securities for the years ended December 31 are as follows:
Dispositions through calls, maturities and paydowns resulted in no net gain or loss during 2002, 2001 and 2000.
Equity securities are restricted investments in The Bankers Bank, Independent Bankers' Bank and Federal Home Loan Bank stock, which must be maintained to secure the available lines of credit. The amount of investment in the stocks amounted to $2,874,977 and $1,960,475 at December 31, 2002 and 2001, respectively.
Investment securities pledged to secure public funds on deposit, FHLB advances and for other purposes as required by law amounted to approximately $29,677,000 and $23,319,000 at December 31, 2002 and 2001, respectively.
Note 4 - Loans
The Company grants loans to customers primarily in Charlotte, Collier, Glades, Hendry and Lee Counties of Southwest Florida.
The major classifications of loans as of December 31, 2002 and 2001 are as follows:
Note 4 - Loans - Continued
Deposits reclassified as loans and included in the other loan category amounted to $474,064 and $157,061, at December 31, 2002 and 2001, respectively.
Loans the Company considered to be impaired (including non-accrual loans) at December 31, 2002 and 2001 totaled $5,035,395 and $4,581,704, respectively. The impaired loans at December 31, 2002 and 2001 had related allowances of $757,906 and $632,321, respectively. The average recorded investment in impaired loans for the years ended December 31, 2002 and 2001 was approximately $4,808,550 and $3,791,619, respectively. For the years ended December 31, 2002 and 2001, the difference between gross interest income that would have been recorded in such period if the nonaccruing loans had been current in accordance with their original terms and the amount of interest income on those loans that was included in such period's net income was approximately $350,302 and $187,850, respectively.
The Company has no commitments to lend additional funds to the borrowers of non-accrual loans.
Net unamortized deferred loan fees and origination costs included in unearned income amounted to $1,192,851 and $283,076, for the years ended as of December 31, 2002 and 2001.
Commercial and residential real estate loans pledged to secure Federal Home Loan Bank advances amounted to approximately $58,790,000 and $32,461,000 at December 31, 2001 and 2000, respectively (see Note 9).
Note 5 - Allowance for Loan Losses
Changes in the allowance for loan losses for the years ended December 31, 2002, 2001 and 2000 were as follows:
Note 6 - Premises and Equipment
Premises and equipment as of December 31, 2002 and 2001 is as follows:
The provision for depreciation charged to occupancy and equipment expense for the years ended December 31, 2002, 2001 and 2000 was $687,466, $555,439, and $527,415, respectively.
Note 7 - Deposits
The aggregate amounts of time deposits of $100,000 or more, including certificates of deposit of $100,000 or more at December 31, 2002 and 2001 were $140,799,724 and $75,786,468, respectively. Time deposits of less than $100,000 totaled $111,773,587 and $86,992,478 at December 31, 2002 and 2001, respectively. Demand deposits reclassified as loan balances as of December 31, 2002 and 2001 amounted to $474,064 and $153,772, respectively.
The maturities of time certificates of deposit and other time deposits issued by the Bank at December 31, 2002, are as follows:
Note 8 - Short-term Borrowings
Short-term borrowings at December 31, 2001 consisted of Federal funds purchased totaling $1,086,000. No short-term borrowings were outstanding at December 31, 2002.
Note 9 - Long-term Debt
At December 31, 2002 and 2001, the Company had long-term debt totaling $60,039,415 and $37,579,761, respectively.
Long-term debt consists of the following at December 31:
In June 2002, the Company formed a wholly-owned Delaware statutory business trust, FCBI Capital Trust I, which issued $10,000,000 of guaranteed preferred securities representing undivided beneficial interests in the assets of the trust ("Trust Preferred Securities"). The common securities of the trust are owned by the Company. The proceeds from the issuance of the Trust Preferred Securities ($10,000,000) and common securities ($310,000) were used by the trust to purchase $10,310,000 of junior subordinated deferrable interest debentures of the Company. The debentures, which bear interest at Prime rate plus 0.5%, represent the sole asset of the trust. The Company is allowed to treat the Trust Preferred Securities as Tier 1 capital under current Federal Reserve Board guidelines.
The Company has entered into an agreement, which fully and unconditionally guarantees payment of accrued and unpaid distributions required to be paid on the Trust Preferred Securities, with respect to any Trust Preferred Securities called for redemption.
Note 9 - Long-term Debt - Continued
The Trust Preferred Securities mature in September 2032 and may be called by the Company at any time after June 2007. Maturities of long-term debt following December 31, 2002, are as follows:
Note 10 - Shareholders' Equity
At December 31, 2002 and 2001, shareholders' equity of the Company consisted of the following:
Common Stock: 10,000,000 shares authorized with a par value of $0.01 per share. Voting rights equal to one vote per share.
Paid-in Capital: Represents the funds received in excess of par value upon the issuance of stock, net of issuance costs and the related effects of the stock dividends and stock splits.
Retained Earnings: Represents the accumulated net earnings of the Company as reduced by dividends paid to shareholders and the effect of stock dividends issued in previous periods.
Stock Dividends and Stock Splits: In May 2000, the Bank issued a 1.2 shares for 1.0 share stock split, thereby increasing the number of shares outstanding to 2,168,970. In conjunction with the split, the par value of the stock was reduced from $5.00 per share to $4.00 per share. In June 2001, the Bank issued a 1.2 shares for 1.0 share stock split, thereby increasing the number of shares outstanding to 2,602,764. In conjunction with the split, the par value of the stock was reduced from $4.00 per share to $3.20 per share. In April 2002, each share of the Bank was converted into one share of the Company's $.01 par value common stock. In December 2002, the Company issued a 1.2 for 1 common stock split resulting in an increase in the number of outstanding shares to 3,213,316. All per share amounts included in these consolidated financial statements have been adjusted to give retroactive effect to the stock splits.
Accumulated Other Comprehensive Income: Represents the change in equity during each period from the effects of unrealized holding gains and losses on securities available-for-sale, net of tax.
Note 11 - Regulatory Capital Matters
The Company and the Bank are subject to various regulatory capital requirements administered by the state and federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators, which if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under regulatory capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and its subsidiary bank must meet specific capital guidelines involving quantitative measures of the Company's and its subsidiary bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification under the prompt corrective guidelines are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of Total capital and Tier I capital to risk-weighted assets (as defined in the regulations), and Tier I capital to adjusted total assets (as defined). Management believes, as of December 31, 2002, that the Company and the Bank meet all capital adequacy requirements to which they are subject.
As of December 31, 2002, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To remain categorized as well capitalized, the Bank will have to maintain minimum Total capital, Tier 1 capital, and Tier 1 leverage ratios as disclosed in the table below. There are no changes in conditions or events since the most recent notification that management believes have changed the Bank's prompt corrective action category.
The Company's and the Bank's actual capital amounts and ratios are also presented in the table.
Note 11 - Regulatory Capital Matters - Continued
Note 12 - Stock Option Plans
The Company has adopted its 2002 Key Employee Stock Compensation Program under which it has granted statutory and non-statutory stock options to certain key employees to purchase up to 55,200 shares (as adjusted for the stock split) at $15.00 per share. The options granted provide for these key employees to purchase shares of the Company's $0.01 par value common stock at no less than the market value at the dates of grant. The options granted may be exercised within ten years from the dates of grant.
The following sets forth certain information regarding stock options for the years ended December 31, 2002 and 2001.
Fixed Options
Of the 55,200 outstanding options at December 31, 2002, 22,080 were exercisable with the remaining 33,120 having remaining vesting periods of up to three years. Total unexercised options of 55,200 have a weighted average contractual life of 8.82 years and a weighted average exercise price of $15.00.
At December 31, 2002, the shares under option include nonqualified options of 7,350 and incentive stock options of 47,850 issued to certain key employees of the Company.
Note 12 - Stock Option Plans - Continued
The number of shares and weighted average exercise price have been restated to give effect for the 1.2 for 1 stock split effective December 2002.
If the Company had elected to recognize compensation cost for options granted in 2002 and 2001, based on the fair value of the options as permitted by SFAS No. 123, net income and earnings per share would have been reduced to the pro forma amounts indicated below:
All options are assumed to be exercised in the calculation of diluted average common shares outstanding, causing the equivalent number of shares outstanding on a diluted basis to be 17,123 and 2,929 greater than that used to calculate basic earnings per share for 2002 and 2001, respectively. There was a $0.01 and $0.00 dilutive effect on earnings per share for the years ended December 31, 2002 and 2001, respectively.
The Company's options outstanding have a weighted average contractual life of 8.83 years. The fair value of each grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
The effects of applying SFAS No. 123 for providing proforma disclosures are not likely to be representative of the effects on reported earnings for future years, nor are the dividend estimates representative of commitments on the part of the Company's Board.
Note 13 - Other Operating Expenses
The major components of other operating expenses included in noninterest expenses at December 31, 2002, 2001 and 2000 are as follows:
Note 14 - Income Taxes
Federal and state income taxes receivable (payable) as of December 31, 2002 and 2001 included in other assets and other liabilities, respectively, were as follows:
Note 14 - Income Taxes - Continued
The components of the deferred income tax asset included in other assets as of December 31, 2002 and 2001 are as follows:
The tax effects of each type of income and expense item that gave rise to deferred taxes are:
The components of income tax expense for the years ended December 31, 2002, 2001 and 2000 were as follows:
Note 14 - Income Taxes - Continued
There were no material tax effects of securities transactions for the years ended December 31, 2002, 2001 and 2000.
The principal reasons for the difference in the effective tax rate and the federal statutory rate are as follows for the years ended December 31, 2002, 2001 and 2000:
Note 15 - Benefit Plans
The Company has two qualified employee benefit plans: 1) A Pension Plan, and 2) A Profit Sharing Plan. The Plans cover substantially all employees, subject to similar eligibility requirements. The Company contributes 10% of eligible compensation under the Pension Plan, annually. The Company's annual contribution to the Profit Sharing Plan is discretionary as determined by the board of directors. For the years ended December 31, 2002, 2001 and 2000, the Company's contributions charged to operations amounted to $347,214, $274,904 and $235,412 for the Pension Plan and $362,215, $289,170 and $253,285 for the Profit Sharing Plan, respectively.
The Company also has a Director's Benefit Plan (the "Benefit Plan") covering certain directors and a Salary Continuation Plan (the "Salary Plan") for a former officer. These plans were obtained resulting from a business combination that occurred in 1998.
The Benefit Plan provides for the payment of scheduled benefits to the participants or their beneficiaries at age 65 or their normal retirement date, whichever occurs later. If the participant dies prior to receiving 180 monthly payments, the participant's beneficiary shall receive any remaining monthly payments. Payment of benefits under the Benefit Plan requires that the participant fulfill certain conditions related to age and length of service. The Company is accruing the present value of the future benefits to be paid under the Benefit Plan over the term of each participant's service period.
Note 15 - Benefit Plans - Continued
The Salary Plan provides for the payment of a retirement benefit of $30,000 per year for a period of ten years. Payment of these benefits commenced on January 1, 1995, and continued throughout the current year according to the terms of the Plan. The Company has accrued the present value of the future benefits to be paid under the Salary Plan.
The Company has determined that the following disclosures are relevant to the Benefit Plan and the Salary Plan, however, the plans are non-qualified and unfunded. Payments to retired directors and officers are funded through operations.
Net pension cost for the Director's Benefit Plan and the Salary Continuation Plan for 2002, 2001 and 2000 included the following components:
The following table sets forth the accumulated benefit obligation of the Director's Benefit Plan and the Salary Continuation Plan recognized in the Company's statements of financial condition at December 31, 2002 and 2001.
The weighted average discount rate used in determining present value of the projected benefit obligation for the Director's Benefit Plan and Salary Continuation Plan was nine percent.
Note 16 - Commitments and Contingencies
In the normal course of business, the Company offers a variety of financial products to its customers to aid them in meeting their requirements for liquidity, credit enhancement, and interest rate protection. Generally accepted accounting principles recognize these transactions as contingent liabilities and, accordingly, they are not reflected in the accompanying consolidated financial statements.
Note 16 - Commitments and Contingencies - Continued
Loan commitments are made to accommodate the financial needs of the Company's customers. Standby letters of credit commit the Company to make payments on behalf of customers when certain specified future events occur. Historically, most loan commitments and standby letters of credit expire unused. The Company's exposure to credit loss in the event of nonperformance by the counter-party to the financial instrument for loan commitments and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same underwriting standards in making commitments and conditional obligations as it does for on-balance sheet instruments. The amount of collateral obtained is based on management's credit evaluation of the customer. Collateral held varies, but may include accounts receivable, inventory, property, plant, and equipment, and income-producing commercial properties.
The total amounts of loan commitments and standby letters of credit are summarized as follows at December 31:
Management conducts regular reviews of these instruments on an individual customer basis, and the results are considered in assessing the adequacy of the Company's allowance for loan losses. The total reserve allocated for unfunded commitments was approximately $374,000 and $265,000 at December 31, 2002 and 2001, respectively
Note 17 - Concentrations of Credit
Most of the Company's loans, commitments, and commercial and standby letters of credit have been granted to customers in the Company's market area. Many such customers are depositors of the Company. The concentrations of credit by type of loan are set forth in note 4. The distribution of commitments to extend credit related primarily to unused real estate draw lines. Commercial and standby letters of credit were granted primarily to commercial borrowers.
The Company maintains its cash accounts at various commercial banks in the United States. The total cash balances in commercial banks are insured by the FDIC up to $100,000. Total uninsured balances held at correspondent commercial banks amounted to $5,967,875 and $13,017,358 at December 31, 2002 and 2001, respectively.
Note 18 - Restrictions on Dividends
The Bank is subject to the dividend restrictions set forth by the State Banking Department (Florida). Under such restrictions, the Bank may not, without the prior approval of the State Banking Department, declare dividends in excess of the sum of the current year's earnings plus the retained earnings from the prior two years. For the year ending December 31, 2003, the Bank can declare dividends, without prior regulatory approval, of approximately $8,343,375 plus an additional amount equal to its net profits for 2003.
Note 19 - Litigation
While the Company is party to various legal proceedings arising from the ordinary course of business, management believes after consultation with legal counsel that there are no proceedings threatened or pending against the Company that will, individually or in the aggregate, have a material adverse effect on the business or financial condition of the Company.
Note 20 - Leases
The Company leased facilities under non-cancelable operating leases during 2002, 2001 and 2000. The leases provided for renewal options and generally required the Company to pay maintenance, insurance and property taxes. For the years ended December 31, 2002, 2001 and 2000, rental expense for such leases was $182,870, $160,342 and $13,126, respectively. The Company also entered into a sale/leaseback transaction with a related party in January 2001 for a branch facility, future minimum payments under this lease are included in the table below (see also Note 21).
Future minimum lease payments under such non-cancelable operating leases at December 31, 2002 are as follows:
Note 21 - Related Party Transactions
Loans: Certain directors, executive officers and principal shareholders, including their immediate families and associates were loan customers of the Company during 2002 and 2001. Such loans are made in the ordinary course of business at normal credit terms, including interest rates and collateral and do not represent more than a normal risk of collection. A summary of activity and amounts outstanding are as follows:
Deposits: Deposits held from related parties were $9,446,535 and $10,793,946 at December 31, 2002 and 2001, respectively.
Other: On January 11, 2001, the board of directors of the Bank adopted a resolution to sell the land and premises of the Cypress Lake Branch at fair market value to a Bank Director and lease the property back at a fair rental. The sales price of $1,855,000 is greater than the appraised value and is based on the cost to the Bank of the land, building and closing costs. The agreement specifies a 15-year net lease of $11,805 per month with annual increases of 2.5%.
Note 22 - Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Cash and Short-Term Investments: For those short-term instruments, the carrying amount is a reasonable estimate of fair value.
Securities: For securities available-for-sale and securities held-to-maturity, fair values are based on quoted market prices or dealer quotes. For other securities held as investments, fair value equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.
Loans: For certain homogeneous categories of loans, such as some residential mortgage, credit card receivables, and other consumer loans, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.
Accrued Interest Receivable: The carrying amount of accrued interest receivable approximates its fair value.
Note 22 - Fair Value of Financial Instruments - Continued
Deposits: The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities.
Accrued Interest Payable: The carrying amount of accrued interest payable approximates its fair value.
Short-Term Borrowings: The carrying amounts of short-term borrowings approximate their fair values.
Long-Term Debt: Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate fair value of existing debt.
Commitments to Extend Credit, Standby Letters of Credit, and Financial Guarantees Written: The fair value of commitments, letters of credit, and financial guarantees is estimated to be approximately the same as the notional amount of the related commitment.
The estimated fair values of the Company's financial instruments as of December 31, 2002 and 2001 are as follows:
Note 23 - Condensed Parent Company Information
Statement of Financial Condition
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Note 23 - Condensed Parent Company Information - Continued
Statement of Income
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Note 23 - Condensed Parent Company Information - Continued
Statement of Cash Flows
Florida Community Banks, Inc., the parent holding company of Florida Community Bank and FCBI Capital Trust I, was formed during the second quarter of 2002 and had no assets, liabilities or income for the years 2001 and 2000.
Note 24 - Quarterly Results of Operations (Unaudited)
Selected quarterly results of operations for the four quarters ended December 31 are as follows:
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information appearing under the headings "ELECTION OF DIRECTORS," "BOARD OF DIRECTORS" and "COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934" on pages 3 to 6 and 11 in the Proxy Statement (the "2003 Proxy Statement") relating to the annual meeting of shareholders of the Company, scheduled to be held on April 17, 2003, is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information appearing under the headings "EXECUTIVE COMPENSATION" and "EMPLOYEE BENEFITS" on pages 6 to 10 of the 2003 Proxy Statement is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND Management
The information appearing under the heading "ELECTION OF DIRECTORS" on pages 3 to 5 of the 2002 Proxy Statement and from Item 5 above is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing under the heading "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" on pages 10 to 11 of the 2003 Proxy Statement is incorporated herein by reference.
ITEM 14.
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
The Company has evaluated the effectiveness of its disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-14. The evaluation was performed under the supervision and with the participation of management, including the chief executive officer and the chief financial officer, within 90 days prior to the date of the filing of this annual
report. Based on this evaluation, the chief executive officer and chief financial officer have concluded that the disclosure controls and procedures are effective in ensuring that all material information required to be disclosed in this annual report has been communicated to them in a manner appropriate to allow timely decisions regarding required disclosure.
(b) Changes in internal controls.
Subsequent to the date of their evaluation, there were no significant changes in internal controls or other factors that could significantly affect internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses.
ITEM 15.
ITEM 15. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT 11 - STATEMENTS RE: COMPUTATION OF PER SHARE EARNINGS
Florida Community Banks, Inc. Computation of Net Income Per Common Share
The following tabulation presents the calculation of basic and diluted earnings per common share for the years ended December 31, 2002, 2001 and 2000.
Exhibit 12 - Statements Re: Computation of Ratios
Florida Community Banks, Inc. Computation of Ratio of Earnings to Fixed Charges
Exhibit 21 - SUBSIDIARIES OF THE REGISTRANT
Subsidiaries - Direct/Wholly-owned State of Incorporation - ---------------------------------- ---------------------- Florida Community Bank Florida FCBI Capital Trust I Delaware
EXHIBIT 99.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with Florida Community Banks, Inc.'s ("Company") Annual Report on Form 10-K for the period ended December 31, 2002 ("Report"), each of the undersigned certify that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: March 20, 2003 By: /s/ Stephen L. Price ------------------------------------- Stephen L. Price President and Chief Executive Officer
EXHIBIT 99.3
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with Florida Community Banks, Inc.'s ("Company") Annual Report on Form 10-K for the period ended December 31, 2002 ("Report"), each of the undersigned certify that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: March 20, 2003 By: /s/ Thomas V. Ogletree ------------------------------------- Thomas V. Ogletree Chief Financial Officer
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FLORIDA COMMUNITY BANKS, INC.
Date: March 20, 2003 By: /s/ Stephen L. Price ------------------------------------ Stephen L. Price Chairman and Chief Executive Officer
Date: March 20, 2003 By: /s/ Thomas V. Ogletree ------------------------------------ Thomas V. Ogletree Chief Financial Officer
Exhibit 24 - POWER OF ATTORNEY
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Stephen L. Price and Thomas V. Ogletree and each of them, his true and lawful attorney-in-fact, as agent with full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacity, to sign any or all amendments to this Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Federal Deposit Insurance Corporation, granting unto said attorney-in-fact and agents in full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as they might or could be in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, and their substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in capacities and on the dates indicated.
CERTIFICATIONS
I, Stephen L. Price, certify that:
1. I have reviewed this annual report on Form 10-K of Florida Community Banks, Inc.
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 20, 2003
/s/ Stephen L. Price - ------------------------- Stephen L. Price Chief Executive Officer
CERTIFICATIONS
I, Thomas V. Ogletree, certify that:
1. I have reviewed this annual report on Form 10-K of Florida Community Banks, Inc.
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 20, 2003
/s/ Thomas V. Ogletree - ------------------------- Thomas V. Ogletree Chief Financial Officer