ITEM 1.
BUSINESS
General
Florida Community Banks, Inc. ("FCBI") is a bank holding company, which owns all of the common stock of Florida Community Bank ("Bank" or "FCB") (in this report we refer to FCBI and the Bank collectively, as the "Company"), two special purpose business trust’s organized to issue Trust Preferred Securities and 50% of a partnership organized to build and lease an office building. The special purpose business trusts are not consolidated in the financial statements that are included elsewhere herein. FCBI is a Florida corporation registered with the Board of Governors of the Federal Reserve System as a bank holding company under the Bank Holding Company Act of 1956, as amended. Through its subsidiary bank, FCBI is engaged in the commercial banking business in southwestern Florida with offices in Collier, Lee, Hendry and Charlotte counties. At December 31, 2007, FCBI had total assets of approximately $943 million, total deposits of approximately $754 million and stockholders' equity of approximately $98 million.
Florida Community Bank is a Florida-chartered commercial bank, which commenced operations in Everglades City, Florida on May 19, 1923, under the name "Bank of the Everglades." The Bank changed its place of business from Everglades City, Florida to Immokalee, Florida in September 1962. FCB changed its name from Bank of the Everglades to "First Bank of Immokalee" in July 1967 and then to "Florida Community Bank" in July 1996 as part of its merger with Tri-County Bank of Lehigh Acres. The Bank is subject to regulation by the Florida Department of Financial Services ("Department") and the Federal Deposit Insurance Corporation ("FDIC"). The Bank's main office is located at 1400 North 15th Street, Immokalee, Florida and its telephone number is (239) 657-3171. In addition to the main banking office in Immokalee, the Bank currently operates full-service branches in the southwest Florida cities of Lehigh Acres, LaBelle, Naples (Golden Gate area), Port Charlotte, Punta Gorda, Cape Coral and Ft. Myers.
The Company employs approximately 181 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" accounts), money market accounts, savings 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 Bank offers the following loan services:
(a)
consumer loans, automobile loans, real estate equity lines of credit, education loans and real estate loans secured by single-family residences;
(b)
commercial and business loans for small to medium-sized companies, including Small Business Administration and other government-guaranteed financing;
(c)
individual and builder short-term residential construction financing;
(d)
home improvement loans; and
(e)
commercial and residential real estate development loans.
The Bank provides a full range of competitive banking services and emphasizes the manner in which the services are delivered. Management focuses its efforts on filling the void created by the decreasing number of locally-owned community banks due to acquisitions by large regional holding companies, which it believes has negatively impacted the personal nature of the delivery, quality and availability of banking services available in the PSA and surrounding areas.
Primary Service Area
The PSA enjoys an abundant work force, attractive business climate and a good relationship between the private and public sectors.
In general, commercial real estate in the PSA consists of small shopping centers and office buildings. The type of residential real estate within the PSA varies, with a number of condominiums, townhouses, apartments and single-family housing developments dispersed throughout the PSA.
Competition
The business of banking is highly competitive. The Bank competes with other banks, savings and loan associations and credit unions within the PSA. The Bank believes that its operation as a locally owned and controlled bank with a broad base of ownership in the PSA enhances its ability to compete with those non-local financial institutions now operating in its market, but no assurances can be given in this regard.
The Bank's competitive strategy with respect to the financial institutions described above consists of:
·
reviewing and acting upon loan requests quickly with a locally-based loan committee,
·
maintaining flexible but prudent lending policies,
·
personalizing service by establishing long-term banking relationships with its customers; and
·
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, 2007, the Bank operated eleven branch offices; the new Caloosa branch opened on State Road 80 (east Fort Myers) in November 2007. The Bank intends to open three new branches in 2008; Ave Maria, Bonita Springs and North Port. The Lehigh Acres branch was acquired in 1996 as a result of the acquisition of Tri-County Bank of Lehigh Acres. The Golden Gate branch operates in a facility leased in 1997, on a month-to-month basis, with adjustments made annually to the lease cost based on the Consumer Price Index. The LaBelle branch was acquired as a result of the acquisition of Hendry County Bank by merger in 1998. The land for the Port Charlotte branch was purchased in 1998 and the branch opened in 1999 after construction was completed. The facility for the Ft. Myers branch is leased for 15 years (with renewal options after that period) and opened in 2000. The Bank owns the Punta Gorda branch and the underlying land is subject to a 99-year lease, which commenced in 2000. Land for a second Cape Coral branch was purchased in 2003 and the branch opened operations in January 2005. All of the branch facilities are in good condition.
Regulation
The Bank is subject to comprehensive regulation, examination and supervision by the Florida Office of Financial Regulation (“OFR”) 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 OFR and the FDIC and submits periodic reports regarding its financial condition and other matters to each of them. Both the OFR 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 if 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 4%. The minimum leverage ratio is the ratio of common equity, retained earnings and certain amounts of perpetual preferred stock (after subtracting goodwill and after making certain other adjustments) to the total assets of the institution. Generally, banking organizations are expected to operate well above the minimum required capital level of 4% unless they meet certain specified criteria, including that they have the highest regulatory ratings. Most banking organizations are required to maintain a leverage ratio of 4% plus an additional cushion of 1% to 2%. The guidelines also provide that banking organizations experiencing internal growth or making acquisitions are expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance upon intangible assets.
Dividend Restrictions. In addition to dividend restrictions placed on the Bank by the FDIC based on the Bank's minimum capital requirements, the Florida Financial Institutions Code prohibits the declaration of dividends in certain circumstances. Section 658.37 (Florida Statutes), prohibits the declaration of any dividend until a bank has charged off bad debts, depreciation and other worthless assets, and has made provision for reasonably-anticipated future losses on loans and other assets. Such dividends are limited to the aggregate of the net profits of the dividend period, combined with a bank's retained net profits for the preceding two years. A bank may declare a dividend from retained net profits that accrued prior to the preceding two years with the approval of the OFR. 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 OFR 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.
Corporate Governance. The Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley Act"), which became law on July 30, 2002, and added new legal requirements for public companies affecting corporate governance, accounting and corporate reporting.
The Sarbanes-Oxley Act provides for, among other things:
§
a prohibition on personal loans made or arranged by the issuer to its directors and executive officers (except for loans made by a bank subject to Regulation O);
§
independence requirements for audit committee members;
§
independence requirements for company auditors;
§
certification of financial statements on Forms 10-K and 10-Q, reports by the chief executive officer and chief financial officer;
§
the forfeiture by the chief executive officer and the chief financial officer of bonuses or other incentive-based compensation and profits from the sale of an issuer's securities by such officers in the twelve month period following the initial publication of any financial statements that later require restatement due to corporate misconduct;
§
disclosure of off-balance sheet transactions;
§
two-business day filing requirements for insiders filing Form 4s;
§
disclosure of a code of ethic for financial officers and filing a Form 8-K for a change in or waiver of such code;
§
the reporting of securities violations "up the ladder" by both in-house and outside attorneys;
§
restrictions on the use of non-GAAP financial measures in the press release and SEC filings;
§
the formation of a public accounting oversight board; and
§
various increase criminal penalties for violations of securities laws.
Recent Regulatory Developments
Changes in the federal deposit insurance program were recommended during 2003 by the FDIC and in the federal budget. A deposit insurance reform bill that would, among other things, merge the BIF and the SAIF, increase the index deposit insurance coverage, give the FDIC flexibility in setting premium assessments, and replace a fixed deposit reserve ratio with a reserve range, was passed by the House of Representatives in April 2003, but no action on the subject was taken by the Senate during the remainder of the year. It is not possible to predict if deposit insurance reform legislation will be enacted, or if enacted, what its effect will be on our banking subsidiary.
Federal banking regulators continued their preparations for the expected issuance by the Basel Committee on Banking Supervision of final "Basel II" regulatory capital guidelines, would mandate changes for large banks in the way in which their risk-based capital requirements are calculated. The guidelines are widely believed likely to permit significant reductions in the levels of required capital for such banks. It is uncertain at the present time if our banking subsidiary or the Holding Company will be either required to or permitted to make changes in the regulatory capital structure in accordance with Basel II guidelines.
The foregoing is necessarily a general description of certain provisions of federal and state law and does not purport to be complete. Proposals to change the laws and regulations governing the banking industry are frequently introduced in Congress, in the state legislatures and before the various bank regulatory agencies. The likelihood and timing of any such changes and the impact such changes might have on the Company cannot be determined at this time.
Available Information
The Company presently maintains an internet website located at www.floridacommunitybank.net on which, among other things, the Company makes available, free of charge, select reports that it files with the Securities and Exchange Commission.
Also, paper copies of the Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and a copy of the Company Code of Ethics as adopted and filed with the Securities and Exchange Commission are available at no charge because all reports are currently not on the Company's website. Those who would like a paper copy should contact Guy W. Harris, Chief Financial Officer, Florida Community Banks, Inc., 1400 North 15th Street, Immokalee, Florida 34142. Currently periodic reports are filed with the Securities and Exchange Commission (including Form 10-Ks, Form 10-Qs, Proxy Statements, etc.). These periodic reports are filed electronically via EDGAR and they can be reviewed at the Securities and Exchange Commission's website: www.sec.gov.
ITEM 1A.
ITEM 1A.
RISK FACTORS
Industry Factors
The commercial banking business can be affected by general business, economic and market conditions. Our business and earnings are affected by conditions that include short-term and long-term interest rates, inflation, deflation, money supply, fluctuations in both debt and equity capital markets and the strength of the U.S. and local economy. The local economy can be affected by weather conditions that include but are not limited to tropical storms, hurricanes and below freezing temperatures. For example, an economic downturn that suddenly decreased property values, caused an increase in unemployment, or other events that negatively impact household and/or corporate customers could decrease ability to pay interest or principal on loans or cause a decrease in the demand for the Company's products and services.
The fiscal and monetary policy of the Board of Governors of the Federal Reserve System can significantly affect the earnings of the Company. The Federal Reserve generally sets the cost of funds for lending and investing and the return we earn on loans and investments, which in turn has an impact on our net interest margin. The rate policy can also affect the value of financial instruments we hold such as debt securities. The Federal Reserve policy is hard to predict and beyond the control of the Company.
The Company is subject to extensive governmental regulation. The regulations are designed for the protection of the depositors, federal deposit insurance funds, federal crimes prevention and the banking system as a whole. Federal and state law limits the Company's ability to declare and pay dividends. Also, failure to comply with laws, regulations or policies could result in sanctions by the regulatory agencies and damage to our reputation. Changes to regulations, including changes in interpretation or implementation of statures, regulations or policies can have a substantial and unpredictable effect on the Company; refer to the discussions in Item 1 - Business and Note 11 - Regulatory Capital.
Company Factor
There is no established trading market for the Company's stock, and there can be no assurance that a trading market will develop during the near future. See Item 5 - Market For The Registrants Common Equity And Related Shareholder Matters.
The Company continuously is adapting to changes to mitigate risks that challenge the success of the business. If the Company were unable to fully adjust to any specific risk, or make changes imposed by the risk environment, it could have an effect on financial performance. The Company competes, and will continue to compete, with well established banks, credit unions, insurance companies and other financial institutions, some of which have greater resources and lending limits than the Company. Some of these competitors may also provide certain services that the Company does not provide.
If a significant number of loans are not repaid, it would have an adverse effect on our earnings and overall financial condition. Like all financial institutions, we maintain an allowance for loan losses to provide for losses inherent in the loan portfolio. The allowance for loan losses reflects our management’s best estimate of probable losses in the loan portfolio at the relevant balance sheet date. This evaluation is primarily based upon a review of our and the banking industry’s historical loan loss experience, known risks contained in the loan portfolio, composition and growth of the loan portfolio, and economic factors. However, the determination of an appropriate level of loan loss allowance is an inherently difficult process and is based on numerous assumptions. As a result, our allowance for loan losses may not be adequate to cover actual losses, and future provisions for loan losses may adversely affect our earnings.
A significant portion of our loan portfolio consists of mortgages secured by real estate located in the Charlotte/Hendry/Glades/Collier/Lee County markets. Real estate values and real estate markets are generally affected by, among other things, changes in national, regional or local economic conditions; fluctuations in interest rates and the availability of loans to potential purchasers; changes in the tax laws and other governmental statutes, regulations and policies; and acts of nature. If real estate prices continue to decline in any of these markets, the value of the real estate collateral securing our loans could be reduced. Such a reduction in the value of our collateral could increase the number of non-performing loans and adversely affect our financial performance.
Our success is largely dependent on the personal contacts of our officers and employees in our market areas. If we lose key employees, temporarily or permanently, our business could be hurt. We could be particularly hurt if our key employees went to work for our competitors. Our future success depends on the continued contributions of our existing senior management personnel, including our President and Chief Executive Officer Stephen L. Price and our market area Presidents.
Our directors, if acting together, will be able to significantly influence all matters requiring approval by our shareholders, including elections of directors and the approval of mergers or other business combination transactions. Our executive officers and directors own approximately 1,178,000 shares, representing approximately 15% of the total number of shares outstanding. The interest of these shareholders may differ from the interests of our other shareholders, and these shareholders, acting together, will be able to influence all matters requiring approval by shareholders. As a result, these shareholders could approve or cause us to take actions of which you may disapprove or that may be contrary to your interests and those of other investors.
Our primary market areas are Charlotte/Hendry/Glades/Collier/Lee Counties, Florida. The banking business in these areas is extremely competitive, and the level of competition facing us following our expansion plans may increase further, which may limit our asset growth and profitability. Our subsidiary bank experiences competition in both lending and attracting funds from other banks, savings institutions, and non-bank financial institutions located within its market area, many of which are significantly larger institutions. Non-bank competitors competing for deposits and deposit type accounts include mortgage bankers and brokers, finance companies, credit unions, securities firms, money market funds, life insurance companies and the mutual funds industry. For loans, we encounter competition from other banks, savings associations, finance companies, mortgage bankers and brokers, insurance companies, small loan and credit card companies, credit unions, pension trusts and securities firms.
We have the power to issue common stock without shareholder approval, up to the number of authorized shares set forth in our Articles of Incorporation. Our board of directors may determine from time to time a need to obtain additional capital through the issuance of additional shares of common stock or other securities, subject to limitations imposed by the Federal Reserve Board. There can be no assurance that such shares can be issued at prices or on terms better than or equal to the terms obtained by our current shareholders. The issuance of any additional shares of common stock by us in the future may result in a reduction of the book value or market price, if any, of the then-outstanding common stock. Issuance of additional shares of common stock will reduce the proportionate ownership and voting power of our existing shareholders.
Pursuant to our Articles of Incorporation, we have the authority to issue additional series of preferred stock and to determine the designations, preferences, rights and qualifications or restrictions of those shares without any further vote or action of the shareholders. The rights of the holders of our common stock will be subject to, and may be materially adversely affected by, the rights of the holders of any preferred stock that may be issued by us in the future.
Our shares of common stock are not deposits, savings accounts or other obligations of us, our subsidiaries or any other depository institution, are not guaranteed by us or any other entity, and are not insured by the Federal Deposit Insurance Corporation or any other governmental agency.
We may need to incur additional debt or equity financing in the near future to fund future growth and meet our capital needs. We cannot assure you that such financing will be available to us on acceptable terms or at all. If we are unable to obtain future financing, we may not have the resources available to fund our planned growth.
Additional risk factors could have a negative impact on the Company and its performance. Many of these factors are general economic and financial market conditions, competition, consolidation of the financial services industry, litigation, regulatory actions and operating conditions.
ITEM 1B.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2.
PROPERTIES
For the description of the property of the Company, see "ITEM I - BUSINESS - Facilities."
ITEM 3.
ITEM 3.
LEGAL PROCEEDINGS
The Company’s subsidiary, Florida Community Bank (“Bank”), is subject to examinations by the Federal Deposit Insurance Corporation (“FDIC”) and the Florida Office of Financial Regulation (“OFR”). Following the 2006 OFR examination, the OFR requested the Bank to enter into a voluntary Cease and Desist Order due to issues raised in the examination primarily regarding compliance with the Bank Secrecy Act and other anti-money laundering laws and regulations (collectively, “BSA”), internal controls and credit administration. The Board and management believed that the Bank was compliant with BSA, had proper internal controls and adequate credit administration. The Board and management also believed that the criticisms raised in the examination did not warrant a voluntary Cease and Desist Order. The Board's and management's position was that the OFR's concerns could be best addressed through an informal agreement or corrective action plan. On October 18, 2006, the OFR filed an Administrative Complaint/Notice of Rights regarding its intent to issue an Order to Cease and Desist (Administrative Proceeding No. 0342-B-9/06). On November 7, 2006, the Bank, through its counsel, filed a Petition for Formal Administrative Hearing pursuant to Section 120.57, Florida Statutes. Subsequent to a later examination by the FDIC no further administrative action was requested by the Bank. To resolve the pending litigation, the Bank and OFR entered into a Stipulation and Consent Agreement dated May 25, 2007 (the “Stipulation Agreement”). A copy of the Stipulation Agreement was included in the June 30, 2007 Form 10-Q as Exhibit 10.9. Management believes that it is addressing, or has addressed, all of the substantive items in, and is compliant with the Stipulation Agreement.
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 2007.
PART II
ITEM 5.
ITEM 5.
MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
There has been no established trading market for the Company's Common Stock, $.01 par value (the "Common Stock"), which has been traded inactively in private transactions. However, during the course of 2006 and 2007 several institutional brokers have been trying to make a market for our stock. Several large blocks of stock were traded in early 2006 when the closing price on E*Trade was between $21 and $26 per share and at the end of 2007 sold a significant amount of shares were traded when the closing price on E*Trade was listed at between $19 and $25 per share; management does not know the exact price that all these shares were traded at.
In October 2007, the Company issued 1.2 shares for 1.0 share stock split, thereby increasing the number of shares outstanding from 6,591,387 to 7,909,261.
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 2006 and 2007. To the best of management's knowledge, the last private trade in December was executed at a price of $29.00 per share; at the same time there was a brokered sale at $19.72 per share. E*TRADE had the stock listed at $20.75 per share at the close of business on December 31, 2007. 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. The dividends paid on Common Stock (split-adjusted) during 2007 and 2006 are disclosed.
As of March 10, 2008, there were 7,909,261 shares of Common Stock outstanding held by approximately 1,200 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 graph on the next page compares the Company's cumulative stockholder return on our common stock with: (i) SNL Financial LC's index for southeastern banks and bank holding companies listed on the Over-the-Counter Bulletin Board and Pink Sheets; and (ii) the NASDAQ Composite index for the period from December 31, 2002 to December 31, 2007, inclusive. The graph assumes an initial investment of $100 on December 31, 2002.
Equity compensation plan
At their Annual Meeting, the Bank's shareholders adopted the 2002 Key Employee Stock Compensation Program ("Employee Program"), which was assumed by FCBI upon its acquisition of the Bank. Stock options granted under the Employee Program are generally granted with an exercise price equal to the fair market value of the Company's stock at the date of grant. Stock options generally vest over four years of continuous service and have a ten year contractual term. Certain options provide for accelerated vesting if there is a change of control (as defined in the plan), 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, 2007.
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ITEM 6.
ITEM 6.
SELECTED FINANCIAL DATA
The following table presents on a historical basis selected financial data and ratios for the Company. All averages are daily averages.
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 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 some of which are discussed in more detail in Item 1A. Risk Factors, 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 2007 was $10,909,219, a 53% decrease from 2006 net income of $23,146,069. Net income for 2006 was $23,146,069, a 27% increase from 2005 net income of $18,218,031. Net income for 2005 was $18,218,031, a 49% increase over 2004 net income. Diluted net income per common share for 2007 was $1.36 compared to $2.90 in 2006 and $2.29 in 2005.
The increase in net income from 2004 through 2006 was primarily attributable to an increase in loan volume, which grew at an average rate of almost 26% over that time period. The decrease from 2006 to 2007 was primarily attributable to a 12% decrease in loan volume and a 126% increase in non-performing loans, both of which were due to the depressed real estate economy in Southwest Florida.
Earning Assets
During 2007, earning assets averaged $950 million, a decrease of $18 million (1.9%) from 2006. During 2006, earning assets averaged $968 million, an increase of $218 million (29.0%) over 2005. During 2005, earning assets averaged $750 million, an increase of $197 million (35.7%) over 2004.
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.
(1) Real Estate loans included loans held-for-sale.
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 decreased $64 million (7.3%) in 2007 compared to 2006. The decrease in loans was a result of the depressed real estate economy that started slowing down during the latter half of 2006. Recognizing the impending slow down management tightened its lending standards, which resulted in fewer loans being made.
Average loans increased $206 million (31%) in 2006 compared to 2005. The increase in loans was a result of the growth of the bank and the ability to make larger loans as well as the tremendous growth in the real estate construction loan market. Loan growth was again funded primarily by the issuance of broker certificate of deposits, as well as by the growth in the bank’s core deposits, namely demand deposits, money market and savings.
Average loans increased $180 million (36.8%) in 2005 compared to 2004. 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 2005 was funded primarily by issuance of brokered certificate of deposits, as well as by the growth in the bank's core deposits (demand deposits, money market and savings accounts).
The following table sets forth the balances in certain categories of loans at December 31 for each of the five years ending December 31, 2007.
Loan Portfolio
The following table shows the maturity distribution of selected loan classifications at December 31, 2007, and an analysis of those loans maturing in over one year:
Selected Loan Maturity and Interest Rate Sensitivity
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 $34.7 million or 32.5% from 2006 to 2007. The securities portfolio increased by $41 million or 62.3% from 2005 to 2006. The securities portfolio decreased by $8 million or 10.8% from 2004 to 2005. The increase in securities in 2007 and 2006 was done to make the portfolio less sensitive to falling interest rates, as well as to increase the bank’s liquidity position. The decrease in the securities portfolio from 2004 to 2005 was as a result of the normal pay downs during the year and the fact that no securities were purchased in 2005.
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 "Other Investment Securities." Other Investment Securities are carried at cost at year-end 2007, 2006 and 2005. Held-to-Maturity securities are carried at amortized cost and represent the largest portion of the total securities portfolio. At December 31, 2007, 2006 and 2005 there were no material unrealized gains (losses) in the Other Investment Securities. At December 31, 2007, net unrealized gains (losses) in the Held to Maturity portfolio amounted to $689,941. At December 31, 2006 and 2005, net unrealized gains (losses) in the Held-to-Maturity portfolio amounted to $(1,133,080) and ($1,742,917), respectively.
The following table presents the carrying amounts of the securities portfolio at December 31, in each of the last three years.
Securities Portfolio
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The following table indicates the respective contractual maturities and weighted average yields of securities (dollars in thousands). Taxable equivalent adjustments, using a 30 percent tax rate, have been made in calculating yields on the tax-exempt obligations.
Security Portfolio Maturity Schedule
There were no securities held by the Company of which the aggregate value at December 31, 2007, 2006 and 2005 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 decreased $40.6 million (4.9%) in 2007 compared to 2006. Average deposits increased $191 million (29.8%) in 2006 compared to 2005. Average deposits increased $157.4 million (32.6%) in 2005 compared to 2004. In 2007, the largest growth area was again in money markets, which grew on average $27.7 million or 16.1%, however deposits on a whole declined due to the slowing economy; brokered certificate of deposits were reduced by approximately $56 million in 2007. In 2006, the largest growth area was in super money markets, which increased $72 million or 79.7% in total; broker certificate of deposits increased $45.1 million or 14.1% and local area certificate of deposits increased $18.4 million or 22.2%; non-interest and interest bearing demand deposits and savings and regular money markets decreased $37.5 million in total. In 2005, the largest growth area was in broker certificate of deposits, which increased $156.0 million or 103.2% in total; money market, non-interest and interest bearing demand deposits and savings increased $62.8 million in total.
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, 2007, time deposits of $100,000 or greater aggregated approximately $355.3 million. The following table indicates, as of December 31, 2007, 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, 2007, borrowed funds consisted of $85.9 million in long-term debt. The Bank had $15,000,000 in unsecured lines to purchase federal funds and $50,000,000 in secured lines, of which $65,000,000 was available at December 31, 2007. The Bank had a separate line with the Federal Reserve Bank of Atlanta, secured by loans, which $9,000,000 was available, and the Company had a $5,000,000 line of credit with another financial institution that was available for borrowing purposes. At December 31, 2006, borrowed funds consisted of $694 thousand in short-term (overnight) borrowing and $85.9 million in long-term debt. At December 31, 2005 borrowed funds consisted of $25 million in short-term (overnight) borrowings and $70.3 million in long-term debt.
At December 31, 2007, the Bank had credit available of approximately $140 million with the Federal Home Loan Bank of Atlanta, of which $85 million 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, which at December 31, 2007, was approximately $25 million. The line is secured by investment securities and residential real estate loans at December 31, 2007. At December 31, 2006, the Bank had credit available of approximately $151 million with the Federal Home Loan Bank of Atlanta, of which $96 million 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, which at December 31, 2006, was approximately $33 million. The line is secured by residential and commercial real estate loans and investment securities at December 31, 2006. At December 31, 2005, the Bank had credit available of approximately $136 million with the Federal Home Loan Bank of Atlanta, of which $76 million 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, which at December 31, 2005, was $40 million.
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, 2007.
Maturities of Long-term Debt
(In thousands)
Capital Resources
Shareholders' equity increased $7.6 million to $98.2 million as of December 31, 2007, increased $20.5 million to $90.6 million as of December 31, 2006, and increased $17.2 million to $70.1 million as of December 31, 2005. The increase in shareholders' equity for 2007, 2006 and 2005 was attributable to net income, less dividends declared.
On June 21, 2002, FCBI Capital Trust I ("Trust I"), a Delaware statutory trust established by the Company, received $10,000,000 in proceeds in exchange for $10,000,000 principal amount of Trust I's floating rate cumulative trust preferred securities (the "preferred securities") in a trust preferred private placement. On May 12, 2006, FCBI Capital Trust II ("Trust II"), a Delaware statutory trust was established by the Company, received $20,000,000 in proceeds in exchange for $20,000,000 principal amount of Trust II’s floating rate cumulative trust preferred securities. The proceeds of both the transactions were then used by the Trust’s 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 the Trust’s on a subordinated basis with respect to the preferred securities. The Company does not consolidate the FCBI Trust preferred securities and accounts for the debenture’s issues to the Trust’s as debt. Subject to certain limitations, the preferred securities qualify as Tier 1 capital. The sole assets of the Trust’s are the subordinated debentures issued by the Company. Both the preferred securities of the Trust’s and the subordinated debentures of the Company each have approximately 30-year lives. However, both the Company and the Trust’s 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.
The table below illustrates the Company's regulatory capital ratios under federal guidelines at December 31, 2007, 2006 and 2005:
Capital Adequacy Ratios
Information on the Bank capital ratios appears in Note 12 to the consolidated financial statements contained elsewhere herein.
On December 31, 2007, 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. Additionally the Parent Company requires cash for various operating needs including dividends to shareholders, the servicing of debt, and the payment of general corporate expenses. The primary source of liquidity for FCBI is dividends from the subsidiary bank. At December 31, 2007, the subsidiary bank could have paid additional dividends to FCBI of approximately $30 million while continuing to meet their regulatory requirements. The Company does not anticipate any liquidity requirements in the near future that it will not be able to meet.
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 non-interest-bearing deposit accounts. The Bank had $65,000,000 and $54,306,000 of federal funds available at December 31, 2007 and 2006, respectively and the Company had $5,000,000 of credit line available at December 31, 2007 and 2006. The Bank also had available as a source of financing, a line of credit with the Federal Home Loan Bank of Atlanta of which $85,000,000 and $96,000,000 was available and unused at December 31, 2007 and 2006, respectively, subject to the availability of assets to pledge to secure such borrowings. The Bank also has available a line of credit with the Federal Reserve Bank of Atlanta totaling $9,000,000 for December 31, 2007, subject to the availability of assets (loans) to pledge to secure such borrowings.
Contractual Obligations
The Company has various contractual obligations that they must fund as part of their normal operations. The following table shows aggregate information about their contractual obligations, including interest, and the periods in which payments are due. The amounts and time periods are measured from December 31, 2007.
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 Company's current portfolio that is 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, 2007.
Interest Rate Sensitivity Analysis
(In thousands)
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(1)
Excludes nonaccrual loans. Securities maturities are based on projected re-payments at current interest rate levels.
(2)
Excludes matured certificates, which have not been redeemed by the customer and on which no interest is accruing.
(3)
Interests bearing demand and savings deposits are assumed to be subject to movement into other deposit instruments in equal amounts during the 0-30 day period, the 31-90 day period, and the 91-365 day period.
The above table indicates that in a decreasing interest rate environment, like the one we are currently in, the Company's earnings may be negatively affected in the short-term (0-30 days) by the higher amount of interest earning assets compared to interest bearing-liabilities that will re-price lower, but positively affected in the slightly longer-term, (31-365 days) due to interest-bearing liabilities re-pricing faster than earning assets. The opposite would likely be true in a rising rate environment. As seen in the preceding table, for the first 30 days of re-pricing opportunity there is an excess of earning assets over interest-bearing liabilities of approximately $400 million, but by the 365th day the excess of interest-bearing assets over liabilities has declined to approximately $39 million. Changes in the mix of earning assets or supporting liabilities can either increase or decrease the net interest margin without affecting interest rate sensitivity. In addition, the interest rate spread and the level of interest-bearing assets and liabilities may change, thus impacting net interest income. It should be noted that a matched interest-sensitive position by itself does not ensure maximum net interest income.
Management continually evaluates the condition of the economy, the pattern of market interest rates, and other economic data to determine the types of investments that should be made and at what maturities. Using this 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 decreased approximately $11.9 million (23.2%) to $39.4 million in 2007 compared to 2006. Net interest income increased approximately $10.8 million (26.7%) to $51.3 million in 2006 compared to 2005. Net interest income increased approximately $10.1 million (33.1%) to $40.5 million in 2005 compared to 2004. The decrease in 2007 is primarily due to a decrease in average loans outstanding and an increase in non-performing loans; the increase’s in the preceding years was primarily due to increased volume in average loans outstanding during the periods.
Interest income was $77.8 million in 2007, which represented a decrease of $7.9 million (9.2%) over 2006. Interest income was $85.7 million in 2006, which represented an increase of $27.8 million (48.0%) over 2005. Interest income was $57.9 million in 2005, which represented an increase of $18.3 million (46.2%) over 2004. The primary reason for the decrease in interest income in 2007 was the decrease in loans and rates during the year, combined with an increase in non-performing loans; average loans outstanding decreased approximately $64 million; the prime rate decreased 100 basis points during the last four months of the year (from 8.25% down to 7.25%) and non-performing loans averaged $52.2 million for the year, with almost $2 million in interest income reversed. Security income increased $2.9 million, partially offsetting the $7.9 million decrease in loan income. The reason for the significant increase in interest income in 2006 was the tremendous loan growth that carried over from 2005 into the beginning of 2006; the average loan volume increased approximately $206 million compared to $180 million in 2005; also rates were significantly higher in 2006 than 2005. The reason for the significant increase in interest income in 2005 was the tremendous growth in the loan volume during the year (average loans increased $180.4 million compared to $65.2 million in 2004); this combined with an increase in the loan rates (prime), and the loans coming off of their floors, resulted in the higher income. During 2004 and to a lesser extent 2003, the higher interest income from loans was the effect of contractual limits on the lowest level to which variable rate loans could decline ("floors"). While floors on interest rates in loan contracts were beneficial in the low-rate environment, when rates started to rise in 2004 and continued to rise in 2005 the loan rates did not immediately increase with each rate increase until the loan rates got above their floors. There was no impact to the net interest margin due to rate floors in 2007, however if rates continue to decrease in 2008 loan rates will start to hit their floors, which will slow down the decrease in the net interest margin.
Interest income on securities increased $2.9 million (83.9%) from 2006 to 2007. The increase was due to the purchase of approximately $90 million in securities ($44 million in 2007) over the course of the past 18 months. In 2006 management decided to increase the securities portfolio with securities that would provide some interest rate protection when rates declined. Interest income on securities increased $575 thousand (19.9%) from 2005 to 2006. The increase was due to approximately $46 million in new securities purchased at higher yields. Interest income on securities increased $1.3 million (77.7%) from 2004 to 2005. The increase was as a result of the approximately $30 million in securities that were purchased at the end of 2004.
Interest income, other than loans and securities, decreased by $108 thousand in 2007, increased by $464 thousand in 2006, and increased by $66 thousand in 2005. In 2007, the average amount invested in fed funds sold decreased by approximately $3.3 million. In 2006, the average amount invested in fed funds sold increased by approximately $7.7 million. In 2005, the average amount invested in fed funds sold declined by approximately $10 million, however, the average rates increased significantly during the year offsetting the effects of the volume decline.
Total interest expense increased by $4 million (11.7%) in 2007, increased by $17 million (97.7%) in 2006, and increased by $8.2 million (88.9%) in 2005. The increase in interest expense in 2007 was primarily due to the changes in rates compared to 2006; with the loans decreasing in 2007, the average balance in deposits and borrowed funds decreased as well by approximately $38.8 million. The increase in interest expense in 2006 was caused by higher rates and a $199.5 million increase in average interest bearing liabilities. There was also significant change in the deposit mix with lower cost deposits (non-interest checking, now, savings and regular money market accounts) decreasing and the higher cost deposits (super money market and certificate of deposits) increasing. The increase in interest expense in 2005 was caused by the increase in rates during the year and the significant increase in volume (average interest bearing liabilities increased $152.2 million in 2005 compared to $38.2 million in 2004).
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 7.5% in 2007 to 8.19% compared to 8.85% in 2006 and 7.71% in 2005. The impact of the non-performing loans, combined with the decrease in prime rate during the last quarter had a negative affect on the yield. Higher rates in 2006 (the prime rate increase 17 times from June 2004 through June 2006) and the increases in the loan and security volumes resulted in these year over year increases for 2006 and 2005. In line with the national interest rate markets, the Company's average cost of funds (total interest expense divided by average interest bearing liabilities) increased to 4.85% in 2007, from 4.32% in 2006 and from 2.92% in 2005. The increase in 2007 was due to the change in deposit mix referred to above and higher rates that did not start to come down appreciably until the very end of the year.
The Bank's net interest margin (net interest income divided by average interest earning assets) decreased in 2007 to 4.15% compared to 5.30% in 2006 and 5.39% in 2005. The decrease in 2007 was due to the significant increase in non-performing loans and increase in the cost of funds. The decrease in 2006 was caused by the increase in the cost of funds and the negative impact that the increase in non-performing loans had on interest income (See the Non-Performing section). The decrease in 2005 was caused by the increase in the cost of funds and the negative impact that the loan floor rates had on the yield during the first half of the year. The opposite was true during the years 2003 thru 2004 when the floor rates helped to stabilize the drop in loan yields caused by the drop in the prime rate, which resulted in lower deposit rates (cost of funds) during that time 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.
Average Balances, Interest Income/Expense and Yields/Rates
Taxable Equivalent Basis
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(1)
Average loans include nonaccrual loans. All loans and deposits are domestic.
(2)
Tax equivalent adjustments on securities and loans exempt from income taxes have been based on an assumed tax rate of 30 percent, and give effect to the disallowance for federal income tax purpose of interest expense related to certain tax-exempt earning assets.
The following tables set forth, for the years ended December 31, 2007, 2006 and 2005, a summary of the changes in interest income and interest expense resulting from changes in interest rates and in changes in the volume of earning assets and interest-bearing liabilities, segregated by category. The change due to volume is calculated by multiplying the change in volume by the prior year’s rate. The change due to rate is calculated by multiplying the change in rate by the prior year’s volume. The change attributable to both volume and rate is calculated by multiplying the change in volume by the change in rate. Figures are presented on a taxable equivalent basis.
Rate/Volume Variance Analysis
Taxable Equivalent Basis
(1)
Average loans include nonaccrual loans. All loans and deposits are domestic.
(2)
Tax equivalent adjustments on securities and loans exempt from income taxes have been based on an assumed tax rate of 30 percent, and give effect to the disallowance for federal income tax purpose of interest expense related to certain tax-exempt earning assets.
Allowance for Loan Losses
Each of the Bank's loans is assigned to a lending officer responsible for the ongoing review and administration of that loan. Lending officers make the initial identification of loans, which present some difficulty in collection or where there is an indication that the probability of loss exists. Lending officers are responsible for the collection effort on a delinquent loan. Senior management is informed of the status of delinquent and problem loans on a monthly basis. In addition to the lending officers, there is an independent loan review officer responsible for reviewing the credit ratings on loans and administering the loans.
Senior management makes recommendations monthly to the board of directors as to charge-offs. Senior management reviews the allowance for 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 loan losses represents management's assessment of the risks associated with extending credit and its evaluation of the quality of the loan portfolio. Management analyzes the loan portfolio to determine the adequacy of the allowance for possible loan losses and the appropriate provisions required to maintain a level considered adequate to absorb anticipated loan losses. In assessing the adequacy of the allowance, management reviews the size, quality and risk of loans in the portfolio. Management also considers such factors as loan loss experience, the amount of past due and nonperforming loans, specific known risk, the status and amount of nonperforming assets, underlying collateral values securing loans, current and anticipated economic conditions and other factors which affect the allowance for potential credit losses. Although recent historical loan losses have been minimal, a depressed real estate economy and a significant increase in non-performing loans during the year resulted in management charging off or writing down a portion of the principal on some loans and increasing the reserve in 2007. In 2006, management increased the reserve due to the slowing real estate economy and what was the beginning of the increase in non-performing loans. The increase in 2005 was as a result of the loan volume and the trend in loans that had been down graded during the latter half of the year.
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 $18,309,279 on December 31, 2007, $13,590,000 on December 31, 2006 and $11,522,910 on December 31, 2005, 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, 2007.
Summary of Loan Loss Experience
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. From 2001 through 2002, management allocated the allowance for loan losses to specific loan categories based on an average of historical losses and the volume of each loan category. In 2003, as presented following, management began to allocate the allowance for loan losses based on the level of nonperforming loans in each category. The change in method was due to the minimal historical loan losses on which to base the allocation.
In 2007, management identified $113.2 million in loans as being impaired as a result of the provisions of Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan. While management believes that the vast majority of these loans have sufficient collateral, $1.7 million in principal write downs were necessary, and $8.6 million was specifically reserved for probable losses that were inherent in these loans.
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Management allocated the allowance for loan losses to specific loan categories as follows:
Allocation of Allowance for Loan Losses
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 while on nonaccrual is accounted for on the cash basis when actually received.
The Bank had nonperforming assets at December 31, 2007, 2006, 2005, 2004, and 2003 of approximately $118,982,000, $54,582,000, $3,137,000, $10,012,000, and $22,269,000, respectively. While the increase in non-accrual loans can be attributed to the depressed real estate economy, management believes that the back log of cases going through bankruptcy court is partially to blame for the high number on the books at this time. Under normal circumstances, it usually takes a few months to go through bankruptcy proceedings, but today it’s taking anywhere from six months to a year or longer. So when we would normally have some loans going on and some coming off, we have them coming on and staying on for extended periods of time. Management anticipates that a significant number of loans will start coming off in 2008.
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The following table presents information concerning outstanding balances of nonperforming assets at December 31, 2007, 2006, 2005, 2004, and 2003.
Nonperforming Assets
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 fixed assets or other real estate owned are included in noninterest income. Total noninterest income decreased by $1.1 million (27.8%) for the year ended December 31, 2007, compared to 2006. Fees earned on the money service businesses were down $1.08 million in 2007 due to the closing of all the “high risk” accounts at the end of 2006; fees from secondary market loan sales decreased $362 thousand due to the slowing real estate economy; a $405 thousand gain was earned on the sale of other real estate property in 2007. Total noninterest income increased by $2 thousand (0.05%) for the year ended December 31, 2006, compared to 2005. While service charges on deposits increased $212 thousand (14.5%), fees from secondary market loan sales decreased $221 thousand (22.7%) due to the slow real estate market in 2006. Fees related to the money service businesses increased $83 thousand (10.7%), but management closed all of the "high risk" accounts at the end of the year due to regulatory constraints and that income (approximately $860 thousand) did not occur in 2007. Total noninterest income increased by $106 thousand (2.78%) for the year ended December 31, 2005 compared to 2004. This increase is misleading due to approximately $1 million in gains that were recognized in 2004. Take away the gains and noninterest income actually increased $1.07 million or 38%. Total noninterest income increased by $1.05 million (39.6%) for the year ended December 31, 2004, compared to 2003 due primarily to the gain on the sale of other real estate owned of $589 thousand and a gain from the sale of the old drive-thru building in LaBelle of $415 thousand.
The table below sets forth the Company's noninterest income for the periods indicated.
Noninterest Expenses
From 2006 to 2007, noninterest expense increased $2.6 million (17.2%). Salaries and employee benefits in 2007 increased $1.1 million (11.5%) from 2006 to a total of $10.7 million. Approximately 50% of the increase was due to additional staff positions that were added during the year; the impact in 2007 of the staff hired in 2006 was approximately 15% of the increase; the remaining 35% of the increase or approximately $385 thousand can be attributed to the normal increases from year to year for salaries, benefits and insurance costs.
From 2005 to 2006, noninterest expense increased $2.1 million (16.5%). Salaries and employee benefits in 2006 increased $1.8 million (22.4%) from 2005 to a total of $9.6 million. The increase was due a combination of factors, from the normal increases from year to year for salaries and benefits (approximately $934 thousand or 11%), the addition of several new officer positions and their related hiring costs (approximately $100 thousand), $356 thousand less in deferred loan origination costs and one time accrual of sick time of $309 thousand.
From 2004 to 2005, noninterest expense increased $682 thousand (5.6%). Salaries and employee benefits in 2005 increased $122 thousand (1.6%) from 2004 to a total of $7.9 million. The increase was due to the normal increases from year to year for salaries, benefits, and insurance costs; however, the increase was offset by an increase ($217 thousand) in the deferred loan origination costs (due to the increase in loan volume) that reduces the overall expense in this category.
Occupancy and equipment expense increased $148 thousand (6.5%) from 2006 to 2007, increased $88 thousand (4.0%) from 2005 to 2006, and increased $476 thousand (27.5%) from 2004 to 2005. During 2007 occupancy expense increased primarily due to increases in building and equipment/software maintenance expenses and higher depreciation expense. During 2006 occupancy expense increased primarily due to higher equipment maintenance fees, higher depreciation and real estate taxes. During 2005 occupancy expense increased primarily due to increased insurance expense, building repairs due to hurricane damage in 2005, increases in depreciation and maintenance expense (due to additional equipment added) and increases to electricity and real estate taxes.
Expenses related to other real estate owned were $162 thousand in 2007, which included approximately $90 thousand in writedowns, compared to the $0 in 2006 and $126 thousand in 2005. While we were able to sell a $2.2 million property for a $405 thousand gain, we added $956 thousand in mostly smaller lot loans in 2007. Management believes that these expenses will increase in 2008 as more loans are foreclosed on; however, no significant gains or losses are anticipated at this time.
Other expenses were not significantly higher in 2007 compared to 2006 and 2005. Regulatory fees and assessments were significantly higher in 2007 as the FDIC started to assess banks again to maintain their reserve ratio between a designated range. Due to the increase in non-performing loans, expenses related to these loans (legal fees, appraisals, insurance, real estate taxes, etc.) were also significantly higher. Professional fees were higher due to an increase in legal fees related to the stipulation agreement with the OFR (see Item 3. Legal Proceedings). Increases in expenses related to telephone and software maintenance were due to system upgrades. the other expenses were not significantly higher in 2007 compared to 2006 and 2005, with postage, courier and correspondent bank fees actually decreasing.
The table below sets forth the Company's noninterest expenses for the periods indicated.
Income Taxes
Income tax expense decreased $8.2 million (56.1%) to $6.4 million for the year ended December 31, 2007, increased $3.2 million (28.2%) to $14.6 million for the year ended December 31, 2006, increased $3.7 million (48.2%) to $11.4 million for the year ended December 31, 2005 and increased $2.6 million (51.1%) to $7.7 million for the year ended December 31, 2004. The effective tax rate as a percentage of pretax income was 37% in 2007, 38.7% in 2006 and 38.5% in 2005. The statutory federal rate was 34 percent during 2007, 2006 and 2005. 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 15, Income Taxes, of the "Notes to Consolidated 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 or sustained 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 re-priced 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 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 re-price 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, re-pricing 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 re-price 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.
The Company has not experienced a high level of volatility in net interest income primarily because of the relatively short duration of its balance sheet. Management is very much aware of its asset sensitivity and the potential interest rate risk in a declining rate environment; however, they believe that there are mitigating factors, such as the loan rate floors that will help to mitigate this risk. By keeping both sides of the balance sheet short, management is reducing its interest rate risk and increasing its capability to react to changes in interest rates quicker and more effectively than if they were longer.
Recent Accounting Standards
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. SFAS No. 157 applies to other accounting pronouncements that require or permit fair value measurements. The new guidance is effective for financial statements issued for fiscal years beginning after November 15, 2007, and for interim periods within those fiscal years. We are currently evaluating the potential impact, if any, of the adoption of FASB Statement No. 157 on our consolidated financial position, results of operations and cash flows.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilitie-Including an amendment of FASB Statement No. 115." SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS No. 159 is effective as of the beginning of an entity's first fiscal year that begins after November 15, 2007. We do not expect the adoption of SFAS No. 159 to have a significant impact on our consolidated financial statements.
In March 2007, the FASB ratified Emerging Issues Task Force ("EITF") Issue No. 06-10 “Accounting for Collateral Assignment Split-Dollar Life Insurance Agreements” (EITF 06-10). EITF 06-10 provides guidance for determining a liability for the postretirement benefit obligation as well as recognition and measurement of the associated asset on the basis of the terms of the collateral assignment agreement. EITF 06-10 is effective for fiscal years beginning after December 15, 2007. We are currently evaluating EITF 06-10 but believe it will not have a material impact on our consolidated financial statements or disclosures.
In December 2007, the FASB issued proposed FASB Staff Position ("FSP") 157-b, “Effective Date of FASB Statement No. 157,” that would permit a one-year deferral in applying the measurement provisions of Statement No. 157 to non-financial assets and non-financial liabilities (non-financial items) that are not recognized or disclosed at fair value in an entity’s financial statements on a recurring basis (at least annually). Therefore, if the change in fair value of a non-financial item is not required to be recognized or disclosed in the financial statement on an annual basis or more frequently, the effective date of application of Statement No. 157 to that item is deferred until fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. This deferral does not apply, however, to an entity that applies Statement No. 157 in interim or annual financial statements before proposed FSP 157-b is finalized. The Company is currently evaluating the impact, if any, that the adoption of FSP 157-b will have on the Company’s financial statements.
On November 5, 2007, the SEC issued Staff Accounting Bulletin ("SAB") No. 109, “Written Loan Commitments Recorded at Fair Value Through Earnings.” SAB 109 expresses the views of the staff regarding written loan commitments that are accounted for at fair value through earnings under generally accepted accounting principles. To make the staff’s views consistent with current authoritative accounting guidance, the SAB revises and rescinds portions of SAB No. 105, “Application of Accounting Principles to Loan Commitments.” Specifically, the SAB revises the SEC staff’s views on incorporating expected net future cash flows related to loan servicing activities in the fair value measurement of a written loan commitment. The SAB retains the staff’s views on incorporating expected net future cash flows related to internally-developed intangible assets in the fair value measurement of a written loan commitment. The staff expects registrants to apply the views in Question 1 of SAB 109 on a prospective basis to derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007. The Company does not expect SAB 109 to have a material impact on its financial statements.
In December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51.”. This Statement establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The guidance will become effective as of the beginning of a company’s fiscal year beginning after December 15, 2008. The Company does not expect the adoption of this statement to have a material effect on the consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141(R) “Business Combinations.” SFAS No. 141(R) establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The Statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The guidance will become effective as of the beginning of a company’s fiscal year beginning after December 15, 2008. The Company does not expect the adoption of this statement to have a material effect on 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.
FLORIDA COMMUNITY BANKS, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
INDEX
MANAGEMENT'S REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. This internal control system was designed to provide reasonable assurance to management and the Board of Directors as to the reliability of the Company's financial reporting and the preparation and fair presentation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
All internal control systems, no matter how well designed, have inherent limitations and may not prevent or detect misstatements in the Company's financial statements, including the possibility of human error and the circumvention of overriding controls. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control - Integrated Framework.
Based on this assessment, management believes that, as of December 31, 2007, the Company’s internal control over financial reporting is effective based on those criteria.
Schauer Taylor, P.C., an independent registered public accounting firm, has issued an audit report on the effectiveness of the Company's internal control over financial reporting, which is included herein.
/s/ Stephen L. Price
/s/ Guy W. Harris
Stephen L. Price
Guy W. Harris
Chairman, President and
Chief Financial Officer
Chief Executive Officer
March 17, 2008
March 17, 2008
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Florida Community Banks, Inc. and subsidiary:
We have audited the accompanying consolidated statements of financial condition of Florida Community Banks, Inc. and subsidiary (the "Company") as of December 31, 2007 and 2006, and the related consolidated statements of income, shareholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2007. We have also audited the Company’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying "Management's Report on Internal Control Over Financial Reporting." Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company's internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audit of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Out audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Florida Community Banks, Inc. and subsidiary as of December 31, 2007 and 2006, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, Florida Community Banks, Inc. and subsidiary maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control - Integrated Framework issued by COSO.
Birmingham, Alabama
/s/ Schauer Taylor, P.C.
March 17, 2008
Schauer Taylor, PC
FLORIDA COMMUNITY BANKS, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 2007 AND 2006
See notes to consolidated financial statements
FLORIDA COMMUNITY BANKS, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2007, 2006 and 2005
See notes to consolidated financial statements
FLORIDA COMMUNITY BANKS, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 2007, 2006 and 2005
See notes to consolidated financial statements
FLORIDA COMMUNITY BANKS, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2007, 2006 and 2005
(Continued on following page)
See notes to consolidated financial statements
FLORIDA COMMUNITY BANKS, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Years Ended December 31, 2007, 2006 and 2005
See notes to consolidated financial statements
FLORIDA COMMUNITY BANKS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2007, 2006 and 2005
Note 1 - Summary of Significant Accounting Policies
Florida Community Banks, Inc. ("FCBI") (a Florida corporation) and its wholly owned subsidiary, Florida Community Bank (the "Bank") (a Florida corporation) collectively referred to herein as the "Company," is headquartered in Immokalee, Florida. The Bank's main office is in Immokalee, Florida with ten additional branch offices in Southwest Florida; the Caloosa Shores branch was opened in November. The Company plans to open three new branches in 2008; a branch in the new town of Ave Maria, is scheduled to open in the late spring; a branch in Bonita Springs, in the Bonita Center and one in North Port in front of the new Home Depot, are both scheduled to open by the middle of the year. The Bank plans on moving its executive offices to the building in Ave Maria when it opens. 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 and to general practice within the banking industry. The following summarizes the most significant of these policies.
Basis of Consolidation
The consolidated financial statements include the accounts of Florida Community Banks, Inc., and the Bank. All significant inter-company balances and transactions have been eliminated. Variable interest entities ("VIEs") are consolidated if the Company is exposed to the majority of the VIE's expected losses and/or residual returns (i.e., the Company is considered to be the primary beneficiary). Unconsolidated investments in VIEs in which the Company has significant influence over operating and financing decisions (usually defined as a voting or economic interest of 20% to 50%) are accounted for using the equity method. Unconsolidated investments in VIEs in which the Company has a voting or economic interest of less than 20% are generally carried at cost.
Significant Concentration of Credit Risk and Uncertainty
A significant portion of the company's loan portfolio consists of mortgages secured by real estate located in the Charlotte, Hendry, Glades, Collier and Lee County markets. Real estate values and real estate markets have been generally affected by the attention given by various news media to the national sub-prime market decline. The company does not engage in sub-prime lending, but the values securing our real estate loans have declined and valuations fluctuate on a regular basis. The result of the decline is an economic downturn for the area that has caused past due and non-accrual loans to be unusually high. While management believes that it has established the allowance for loan losses in accordance with generally accepted accounting principles and has taken into account the current economic environment views and the views of banking regulators in recent interagency guidance, uncertainty exists about the valuation of collateral dependent loans. The uncertainty about the ability to determine a true fair market value in volatile real estate markets causes concern about significant estimates. It is therefore unclear if it is: (a) at least reasonably possible that the estimate will change in the near term due to one or more future
FLORIDA COMMUNITY BANKS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2007, 2006 and 2005
Note 1 - Summary of Significant Accounting Policies - Continued
confirming events and (b) if the effect of the change would be material to the financial statements This general economic downturn has increased the number of non-performing loans and without recovery could adversely affect our financial performance.
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 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.
FLORIDA COMMUNITY BANKS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2007, 2006 and 2005
Note 1 - Summary of Significant Accounting Policies - Continued
Realized and unrealized gains and losses are based on the specific identification method.
Purchase premiums and discounts are recognized in interest income using a method which approximates the interest method over the terms of the securities. 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. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery of fair value.
The Company has no available-for-sale or trading securities.
Other Investments
The Company has invested in selected equity instruments issued in the form of restricted stocks, common stock of special purpose trusts formed to issue trust preferred securities and non-controlling partnership interests. The restricted stocks and trust stocks are categorized as Other Investments - Securities and are accounted for under the cost method. These investments represent less than a 20% economic interest and have no readily ascertainable market value, however, management is not aware of any conditions that would require adjustments to the reflected carrying values. The investments categorized as Other Investments - Partnerships represent ownership interests by the Company in limited liability partnerships. The Company accounts for partnership interests using the cost method or equity method depending upon the Company's economic interest and ability to significantly influence operating and financing decisions. Management has determined that none of its partnership interests required consolidation as of December 31, 2007 and 2006.
Loans Held-for-Sale
Loans held-for-sale are carried at the lower of aggregate cost or market. The cost of loans held-for-sale is the note amount plus certain net origination costs less discounts collected. Gains and losses resulting from changes in the market value of the inventory are netted. Any net gain that results is deferred; any net loss that results is recognized when incurred. The aggregate cost of loans held-for-sale at December 31, 2007 and 2006, approximates their aggregate net realizable value. Gains or losses on the sale of loans held-for-sale are included in other income.
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.
Note 1 - Summary of Significant Accounting Policies - Continued
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.
Allowance for Loan Losses
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.
The allowance consists of specific and general components. The specific component relates to loans that are classified as doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors.
A loan is considered impaired, based on current information and events, if it is probable that the Company 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. All other loans are categorized in homogeneous groups and are evaluated collectively; reserves are established based on their historical loss experience, which are adjusted for qualitative environmental factors.
Management's periodic evaluation of the adequacy of the allowance is based on the Company'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. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. 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 Company's regulators or its economic environment will not require further increases in the allowance.
FLORIDA COMMUNITY BANKS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2007, 2006 and 2005
Note 1 - Summary of Significant Accounting Policies - Continued
Income Recognition on Impaired and Nonaccrual Loans
Loans, including impaired loans, are generally classified as nonaccrual 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 nonaccrual. Loans that are on a current payment status or past due less than 90 days may also be classified as nonaccrual 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.
While a loan is classified as nonaccrual 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 nonaccrual 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.
Premises and Equipment
Land is carried at cost. Other 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.
FLORIDA COMMUNITY BANKS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2007, 2006 and 2005
Note 1 - Summary of Significant Accounting Policies - Continued
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. Costs incurred to complete, repair/renovate or make the property whole are to be capitalized.
Retirement Plan
The Company has a Profit-Sharing Plan covering all eligible employees, allowing employee elective contributions under Internal Revenue Code section 401K. The Company also adopted an Employee Stock Ownership Plan ("ESOP"), which also allows elective employee contributions. Employer contributions to the plans are included in salaries and employee benefits expense. Profit-Sharing and ESOP contributions are determined by the board of directors. The Company also has deferred compensation plans with certain executive officers and directors.
On December 31, 2006, the Company adopted the recognition provision of Statement of Financial Accounting Standards ("SFAS") No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of SFAS Nos. 87, 88, 106 and 132(R). SFAS No. 158 requires an employer to recognize the funded status of a defined benefit postretirement plan as an asset or liability in its statement of financial condition and to recognize changes in that funded status in the year in which the changes occur in accumulated other comprehensive income. At December 31, 2007, the Company had a defined benefit postretirement plan, which is discussed further in Note 16 that met the recognition criteria of SFAS No. 158. Accordingly, at December 31, 2007, the Company determined the plans are non-qualified and unfunded and have been recorded as a liability of the Company at the present value of the future benefit obligation.
Advertising Costs
The Company's policy is to expense advertising costs as incurred. Advertising expense for the years ended December 31, 2007, 2006 and 2005 amounted to approximately $481,000, $381,000, and $288,000, respectively.
FLORIDA COMMUNITY BANKS, INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2007, 2006 and 2005
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.
In June 2006, the Financial Accounting Standards Board ("FASB") issued Financial Interpretation No. ("FIN") 48, Accounting For Uncertainty in Income Taxes. This interpretation clarifies the accounting for uncertainty in income taxes recognized in an entity's financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006, with early adoption allowed. Accordingly, on January 1, 2007, the Company adopted the provisions of this interpretation. The adoption of this interpretation is not expected to have a material effect on the consolidated financial statements.
Stock-Based Compensation
On January 1, 2003, the Company adopted SFAS No. 123, Accounting for Stock-Based Compensation, as provided by SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure. SFAS No. 148 allowed for a prospective method of adoption of SFAS No. 123, whereby, the Company prospectively accounted for the current expensing of options granted during 2003 and thereafter. Options granted prior to 2003 have been accounted for under the recognition and measurement provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and the related interpretations. The compensation cost recognized for stock options granted in 2005, 2006 and 2007 was calculated based on the fair value at the date of grant. In accordance with the transition provisions of SFAS No. 148, this compensation expense has been included in net income for all periods presented. The unrecognized compensation expense for options granted prior to 2004 was immaterial for the years ended December 31, 2007, 2006 and 2005. Accordingly, the pro forma basic and diluted earnings per share of the Company that would result from this unrecognized compensation are approximately the same as that reported. On January 1st of 2006, the Company adopted SFAS No. 123(R), Share-Based Payment which requires all stock-based payments to employees to be recognized in the income statement based on their fair values, the same method employed by the Company since January 1, 2003. The Company adopted SFAS No. 123(R) using the modified prospective transition method. The
FLORIDA COMMUNITY BANKS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2007, 2006 and 2005
Note 1 - Summary of Significant Accounting Policies - Continued
modified prospective transition method does not require the restatement of prior periods to reflect the fair value method of expensing stock-based compensation. SFAS No. 123(R) does require a cumulative effect adjustment of previously recognized compensation expense in order to estimate forfeitures for awards outstanding on the adoption date. The cumulative effect adjustment was immaterial.
The Company uses the Black-Scholes option pricing model for all grant date estimations of fair value as the Company believes that its stock options have characteristics for which the Black-Scholes model provides an acceptable measure of fair value. The expected term of an option represents the period of time that the Company expects the options granted to be outstanding. The Company bases this estimate on a number of factors including vesting period, historical data, expected volatility and blackout periods. The expected volatility used in the option pricing calculation is estimated considering historical volatility. The Company believes that historical volatility is a good predictor of the expected volatility. The expected dividend yield represents the expected dividend rate that will be paid out on the underlying shares during the expected term of the option, taking into account any expected dividend increases. The Company's options do not permit option holders to receive dividends and therefore the expected dividend yield was factored into the calculation. The risk-free rate is assumed to be a short-term treasury rate on the date of grant, such as a U.S. Treasury zero-coupon issue with a term equal to the expected term of the option.
Stock option expense was computed with the following weighted average assumptions as of the grant dates:
The Company estimates forfeitures at the date of grant based upon historical forfeitures and management's estimate of future forfeitures. Prior to the adoption of SFAS No. 123(R), forfeitures were recognized as they occurred.
FLORIDA COMMUNITY BANKS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2007, 2006 and 2005
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. The following reconciles the weighted average number of shares outstanding:
In October 2007, October 2006 and October 2005, 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 reflect the effects of the 1.2-for-1.0 stock splits which occurred during 2007, 2006 and 2005.
Comprehensive Income
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 has no such items to be reclassified at December 31, 2007, 2006 and 2005.
FLORIDA COMMUNITY BANKS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2007, 2006 and 2005
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 consolidated statements of cash flows. The following is supplemental disclosure to the consolidated statements of cash flows for the three years ended December 31, 2007.
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 funded.
The Bank has available as a source of financing a line of credit with the Federal Home Loan Bank of Atlanta ("FHLB") that is limited to 15% of assets (approximately $140,000,000 at December 31, 2007), of which approximately $85,000,000 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 FHLB. In addition, as a part of the borrowing agreement, the Bank is required to purchase FHLB stock (see Note 4).
The Bank also has available as a source of short-term financing the purchase of $65,000,000 ($50,000,000 of which is secured by investment securities) of federal funds from other commercial banks and commercial lines of credit. At December 31, 2007, the total amount available for short-term financing was $65,000,000.
The Bank also has available as a source of short-term financing, a line with the Federal Reserve Bank of Atlanta, which is secured by commercial loans. At December 31, 2007, the total amount available for short-term financing was $9,000,000.
FLORIDA COMMUNITY BANKS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2007, 2006 and 2005
Note 1 - Summary of Significant Accounting Policies - Continued
The Company has available a $5,000,000 line of credit with the Silverton Bank, (fka the Bankers Bank). This line is secured by 51% of the Bank's common stock and is due on demand by the lender. At December 31, 2007, $5,000,000 was available for additional funding.
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 2006 and 2005 have been reclassified to conform with the 2007 presentation.
Recently Issued Accounting Standards
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. SFAS No. 157 applies to other accounting pronouncements that require or permit fair value measurements. The new guidance is effective for financial statements issued for fiscal years beginning after November 15, 2007, and for interim periods within those fiscal years. We are currently evaluating the potential impact, if any, of the adoption of FASB Statement No. 157 on our consolidated financial position, results of operations and cash flows.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilitie-Including an amendment of FASB Statement No. 115." SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS No. 159 is effective as of the beginning of an entity's first fiscal year that begins after November 15, 2007. We do not expect the adoption of SFAS No. 159 to have a significant impact on our consolidated financial statements.
In March 2007, the FASB ratified Emerging Issues Task Force ("EITF") Issue No. 06-10 “Accounting for Collateral Assignment Split - Dollar Life Insurance Agreements” (EITF 06-10). EITF 06-10 provides guidance for determining a liability for the postretirement benefit obligation as well as recognition and measurement of the associated asset on the basis of the terms of the collateral assignment agreement. EITF 06-10 is effective for fiscal years beginning after December 15, 2007. We are currently evaluating EITF 06-10 but believe it will not have a material impact on our consolidated financial statements or disclosures.
FLORIDA COMMUNITY BANKS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2007, 2006 and 2005
Note 1 - Summary of Significant Accounting Policies - Continued
In December 2007, the FASB issued proposed FASB Staff Position ("FSP") 157-b, “Effective Date of FASB Statement No. 157,” that would permit a one-year deferral in applying the measurement provisions of Statement No. 157 to non-financial assets and non-financial liabilities (non-financial items) that are not recognized or disclosed at fair value in an entity’s financial statements on a recurring basis (at least annually). Therefore, if the change in fair value of a non-financial item is not required to be recognized or disclosed in the financial statement on an annual basis or more frequently, the effective date of application of Statement No. 157 to that item is deferred until fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. This deferral does not apply, however, to an entity that applies Statement No. 157 in interim or annual financial statements before proposed FSP 157-b is finalized. The Company is currently evaluating the impact, if any, that the adoption of FSP 157-b will have on the Company’s financial statements.
On November 5, 2007, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 109, “Written Loan Commitments Recorded at Fair Value Through Earnings.” SAB 109 expresses the views of the staff regarding written loan commitments that are accounted for at fair value through earnings under generally accepted accounting principles. To make the staff’s views consistent with current authoritative accounting guidance, the SAB revises and rescinds portions of SAB No. 105, “Application of Accounting Principles to Loan Commitments.” Specifically, the SAB revises the SEC staff’s views on incorporating expected net future cash flows related to loan servicing activities in the fair value measurement of a written loan commitment. The SAB retains the staff’s views on incorporating expected net future cash flows related to internally-developed intangible assets in the fair value measurement of a written loan commitment. The staff expects registrants to apply the views in Question 1 of SAB 109 on a prospective basis to derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007. The Company does not expect SAB 109 to have a material impact on its financial statements.
In December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51.”. This Statement establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The guidance will become effective as of the beginning of a company’s fiscal year beginning after December 15, 2008. The Company does not expect the adoption of this statement to have a material effect on the consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141(R) “Business Combinations.” SFAS No. 141(R) establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The Statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The guidance will become effective as of the beginning of a company’s fiscal year beginning after December 15, 2008. The Company does not expect the adoption of this statement to have a material effect on the consolidated financial statements.
FLORIDA COMMUNITY BANKS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2007, 2006 and 2005
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 Bank. The average amount of those reserves required at December 31, 2007 and 2006, were approximately $311,000 and $407,000, respectively.
Note 3 - Securities
The carrying amounts of securities held-to-maturity as shown in the consolidated statements of financial condition and their approximate fair values at December 31, 2007 and 2006 were as follows:
FLORIDA COMMUNITY BANKS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2007, 2006 and 2005
Note 3 - Securities - Continued
The following table shows our investments' gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2007 and 2006.
FHLB and FHLMC Agency Notes - The unrealized losses on the Company's investments in FHLB and FHLMC agency notes were caused by interest rate changes. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Because the Company has the ability and intent to hold these investments until maturity, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2007.
Municipal Securities - The unrealized losses on the Company's investment in municipal securities were caused by interest rate changes. The contractual cash flows of these investments are guaranteed by various state and local government agencies. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company's investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold these investments until maturity, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2007.
Mortgage-Backed Securities - The unrealized losses on the Company's investment in mortgage-backed securities were caused by interest rate changes. The contractual cash flows of those investments are guaranteed by an agency of the U.S. government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company's investment. Because the decline in
FLORIDA COMMUNITY BANKS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2007, 2006 and 2005
Note 3 - Securities - Continued
market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold these investments until maturity, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2007.
The contractual maturities of securities held-to-maturity at December 31, 2007, are shown below. Actual maturities may 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 table based upon the guaranteed payoff date of each security.
There was a $7,816 net loss on the sale of eleven “odd lot” (small) mortgage-backed securities at the end of 2007, which were sold and replaced with one mortgage-backed security that could be used for pledging. There were no gross realized gains and losses from the sale of securities for the years ended December 31 2006 and 2005.
Dispositions through calls, maturities and pay-downs resulted in no net gain or loss during 2007, 2006 and 2005.
Investment securities pledged to secure public funds on deposit, FHLB advances and for other purposes as required by law amounted to approximately $119,124,000 and $43,053,000 at December 31, 2007 and 2006, respectively.
FLORIDA COMMUNITY BANKS, INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2007, 2006 and 2005
Note 4 - Other Investments
The carrying amounts of other investments as shown in the consolidated statements of financial condition at December 31, 2007 and 2006 were as follows:
Other Investments - Securities - The aggregate carrying value of the Company's cost-method investments totaled $5,599,965 at December 31, 2007 and $5,595,465 at December 31, 2006. These investments were not evaluated for impairment because (a) the Company did not estimate the fair value of those investments in accordance with paragraphs 14 and 15 of SFAS No. 107 and (b) the Company did not identify any events or changes in circumstances that may have had a significant adverse effect on the fair value of those investments. The Company estimated that the fair value exceeded the cost of investments (that is, the investments were not impaired). Included in this amount are restricted investments in the Federal Home Loan Bank of Atlanta, Community Financial Services, Inc., and the Independent Bankers of Florida. The investments in FCBI Capital Trust I and Capital Trust II represent the Company's capitalization of newly-formed special purpose trusts created to issue preferred securities. These investments represent 100 percent of the common stock issued by the trust’s, however, in accordance with the provisions of FIN 46(R), these subsidiaries have not been consolidated into these consolidated financial statements since the Company is not considered the primary beneficiary (see Note 10).
Other Investments - Partnerships - The investment in Capital Security Investments, LLC, represents a 20% investment in a limited liability company with four other financial institutions for the purpose of buying trust preferred securities. The equity method is used to account for this partnership interest. The
FLORIDA COMMUNITY BANKS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2007, 2006 and 2005
Note 4 - Other Investments - Continued
$863,875 investment in AMD-FCB, LLP, represents capital contributions made to-date, for a 50% partnership interest with Ave Maria Development, LLP to purchase land and construct an office building in the town of Ave Maria. The Bank has committed to lease a total of 16,809 square feet, or approximately one-half of the building that will include a branch, executive and administrative offices (see Note 20). The Company is planning on moving their corporate headquarters to the Ave Maria building. Although the Company owns a 50% interest in the partnership, management has determined that the Company is not the primary beneficiary under the rules of FIN 46(R) and therefore the equity method will be applied to this investment, with the original investment recorded at cost and adjusted periodically to recognize the Company’s share of earnings or losses. Intercompany profits and losses will be eliminated by reducing the investment balance and income from the Company’s share of the unrealized intercompany profits and losses. The Company has also guaranteed 50% of the construction loan to fund completion of the project (see Note 17).
Note 5 - 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, 2007 and 2006 are as follows:
FLORIDA COMMUNITY BANKS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2007, 2006 and 2005
Note 5 - Loans - Continued
In addition to the major categories listed above, at December 31, 2007, the Company had a significant concentration in unimproved commercial land loans totaling approximately $224 million, of which $37.5 million is currently on nonaccrual.
Deposit overdrafts reclassified as loans and included in the other loan category amounted to $220,718 and $672,028, at December 31, 2007 and 2006, respectively.
Information about impaired loans as of and for the years ended December 31 is as follows:
For the years ended December 31, 2007 and 2006, 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 $6,888,666, $2,491,750 and $14,000, respectively.
The Company has no commitments to lend additional funds to the borrowers of nonaccrual loans.
Net unamortized deferred loan fees and origination costs included in unearned income amounted to $1,356,800 and $2,790,323 as of December 31, 2007 and 2006.
FLORIDA COMMUNITY BANKS, INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2007, 2006 and 2005
Note 5 - Loans - Continued
Commercial and residential real estate loans pledged to secure FHLB advances and letters of credit amounted to approximately $20,500,000 and $33,300,000 at December 31, 2007 and 2006, respectively (see Note 10). Commercial real estate loans pledged to secure the Federal Reserve Bank line of credit amounted to approximately $12,200,000 and $13,780,000 at December 31, 2007 and 2006, respectively.
Note 6 - Allowance for Loan Losses
Changes in the allowance for loan losses for the years ended December 31, 2007, 2006 and 2005 were as follows:
Note 7 - Premises and Equipment
Premises and equipment as of December 31, 2007 and 2006 is as follows:
The provision for depreciation charged to occupancy and equipment expense for the years ended December 31, 2007, 2006 and 2005 was $951,351, $919,381, and $835,001, respectively.
Note 8 - Deposits
The aggregate amounts of time deposits of $100,000 or more, including certificates of deposit of $100,000 or more at December 31, 2007 and 2006 were $355,279,633 and $403,097,572, respectively. Time deposits of less than $100,000 totaled $93,704,639 and $63,246,291 at December 31, 2007 and 2006, respectively.
The maturities of time certificates of deposit and other time deposits issued by the Bank at December 31, 2007, are as follows:
FLORIDA COMMUNITY BANKS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2007, 2006 and 2005
Note 9 - Short-term Borrowings
Short-term borrowings at December 31, 2007 and 2006 consist of the following:
Note 10 - Long-term Debt
At December 31, 2007 and 2006, the Company had long-term debt totaling $85,929,000 and $85,929,000, 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"). In May 2006, the Company formed another wholly-owned Delaware statutory business trust, FCBI Capital Trust II, which issued $20,000,000 of guaranteed preferred securities. The common securities of the both trusts are owned by the Company. The proceeds from the issuance of the Trust Preferred Securities ($30,000,000) and common securities ($929,000) were used by the trust to purchase $30,929,000 of junior subordinated deferrable interest debentures of the Company. The debentures, which bear interest at Prime rate plus 0.5% and three month LIBOR plus 1.55%
FLORIDA COMMUNITY BANKS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2007, 2006 and 2005
Note 10 - Long-term Debt - Continued
respectively, represent the sole asset of the trusts. The Company has fully and unconditionally guaranteed all obligations of the Trusts on a subordinated basis with respect to the Trust Preferred Securities. In accordance with the provisions of FIN 46(R), the Company accounts for the Trust Preferred Securities as a long-term debt liability to the Trust in the amount of $30,929,000. Subject to certain limitations, the Trust Preferred Securities qualify as Tier 1 capital.
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.
The Trust Preferred Securities mature in September 2032 and July 2036, and may be called by the Company at any time after June 2007 and July 2011 respectively.
Maturities of long-term debt following December 31, 2007, are as follows:
Note 11 - Shareholders' Equity
At December 31, 2007 and 2006, shareholders' equity of the Company consisted of the following:
Preferred Stock: 5,000,000 shares authorized with a par value of $0.01 per share, nonvoting.
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, the effect of issuance of stock options 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 splits: In December 2005, the Company issued a 1.2 for 1.0 common stock split resulting in an increase in the number of outstanding shares by 903,864. In October 2006, the Company issued a 1.2 for 1.0 common stock split resulting in an increase in the number of outstanding shares by 1,098,246. In October 2007, the Company issued a 1.2 for 1.0 common stock split resulting in an increase in the number of outstanding shares by 1,317,874. All per share amounts included in these consolidated financial statements have been adjusted to give retroactive effect to the stock splits.
Note 12 - 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. Prompt corrective action provisions are not applicable to bank holding companies.
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 1 capital to risk-weighted assets (as defined in the regulations), and Tier 1 capital to adjusted total assets (Tier 1 "leverage")(as defined). Management believes, as of December 31, 2007, that the Company and the Bank meet all capital adequacy requirements to which they are subject.
As of December 31, 2007, the most recent notification from the applicable regulatory agencies 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 following table. 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 subsidiary, Florida Community Bank (“Bank”), is subject to examinations by the Federal Deposit Insurance Corporation (“FDIC”) and the Florida Office of Financial Regulation (“OFR”). Following the 2006 OFR examination, the OFR requested the Bank to enter into a voluntary Cease and Desist Order due to issues raised in the examination primarily regarding compliance with the Bank Secrecy Act and other anti-money laundering laws and regulations (collectively, “BSA”), internal
FLORIDA COMMUNITY BANKS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2007, 2006 and 2005
Note 12 - Regulatory Capital Matters - Continued
controls and credit administration. The Board and management believed that the Bank was compliant with BSA, had proper internal controls and adequate credit administration. The Board and management also believed that the criticisms raised in the examination did not warrant a voluntary Cease and Desist Order. The Board's and management's position was that the OFR's concerns could be best addressed through an informal agreement or corrective action plan. On October 18, 2006, the OFR filed an Administrative Complaint/Notice of Rights regarding its intent to issue an Order to Cease and Desist (Administrative Proceeding No. 0342-B-9/06). On November 7, 2006, the Bank, through its counsel, filed a Petition for Formal Administrative Hearing pursuant to Section 120.57, Florida Statutes. Subsequent to a later examination by the FDIC no further administrative action was requested by the Bank. To resolve the pending litigation, the Bank and OFR entered into a Stipulation and Consent Agreement dated May 25, 2007 (the “Stipulation Agreement”). A copy of the Stipulation Agreement was included in the June 30, 2007 Form 10-Q as Exhibit 10.9. Management believes that it is addressing, or has addressed, all of the substantive items in, and is compliant with the Stipulation Agreement.
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FLORIDA COMMUNITY BANKS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2007, 2006 and 2005
Note 12 - Regulatory Capital Matters - Continued
The Company's and the Bank's actual capital amounts and ratios are also presented in the table.
FLORIDA COMMUNITY BANKS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2007, 2006 and 2005
Note 13 - Stock Option Plans
The Company has adopted the 2002 Key Employee Stock Compensation Program ("Employee Program"). The Employee Program provides for the granting of stock options generally with an exercise price equal to the fair market value of the Company's stock at the date of grant. The stock options generally vest over four years of continuous service and have a ten year contractual term. Certain options provide for accelerated vesting if there is a change of control (as defined in the plan). 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, 2007.
Options to purchase Florida Community Banks, Inc. stock have been granted to directors, officers and employees under the Employee Program. Under the Employee Program, options may be granted to purchase up to a maximum of 388,591 common shares, as adjusted for all subsequent stock dividends and splits.
The stock options expire 10 years after the date of grant and are issued at an option price no less than the market price of the Company's stock on the date of grant. Options granted are generally exercisable at 40% after one year and in annual 20% increments thereafter.
FLORIDA COMMUNITY BANKS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2007, 2006 and 2005
Note 13 - Stock Option Plans - Continued
The following table summarizes the Company's stock option activity since December 31, 2006:
The following tables provide additional information about the Company's stock options:
Total compensation cost for stock based compensation recognized under the fair value method for the years ended December 31, 2007, 2006 and 2005 was $36,299, $92,035, and $56,738, respectively, with related tax benefits of $7,529, $18,609, and $10,717, respectively.
FLORIDA COMMUNITY BANKS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2007, 2006 and 2005
Note 13 - Stock Option Plans - Continued
As of December 31, 2007, there was $22,531 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the plans. This cost is expected to be recognized over a weighted-average period of approximately 2.0 years. Intrinsic value represents the difference between the closing stock price of the Company's common stock and the exercise price of the underlying stock options. Aggregate intrinsic value in a previous table represents the value that would have been received by option holders if they had exercised all stock options at December 31, 2007. The total intrinsic value of options exercised during the year ended December 31, 2007, was $0.
Note 14 - Other Operating Expenses
The major components of other operating expenses included in noninterest expenses at December 31, 2007, 2006 and 2005 are as follows (in thousands):
FLORIDA COMMUNITY BANKS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2007, 2006 and 2005
Note 15 - Income Taxes
Federal and state income taxes receivable as of December 31, 2007 and 2006 included in other assets, respectively, were as follows:
The components of the deferred income tax asset included in other assets as of December 31, 2007 and 2006 are as follows:
The tax effects of each type of income and expense item that gave rise to deferred taxes are:
The Company did not establish a valuation allowance related to the net deferred tax asset due to taxes paid within the carryback period being sufficient to offset future deductions resulting from the reversal of these temporary differences.
FLORIDA COMMUNITY BANKS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2007, 2006 and 2005
Note 15 - Income Taxes - Continued
The components of income tax expense for the years ended December 31, 2007, 2006 and 2005 were as follows:
There were no material tax effects of securities transactions for the years ended December 31, 2007, 2006 and 2005.
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, 2007, 2006 and 2005.
Note 16 - Benefit Plans
During the years ended December 31, 2007, 2006 and 2005, the Company had two qualified employee benefit plans: 1) a Profit Sharing Plan and 2) an ESOP. The plans cover substantially all employees, subject to similar eligibility requirements. 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, 2007, 2006 and 2005, the Company’s contributions charged to operations for the Profit Sharing Plan amounted to $546,918, $526,813, and $511,518, respectively. The Company’s annual contribution to the ESOP is discretionary as determined by the board of directors. The Company’s contribution to the ESOP for 2007, 2006 and 2005 was $561,243, $533,895 and $442,101, respectively.
FLORIDA COMMUNITY BANKS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2007, 2006 and 2005
Note 16 - Benefit Plans - Continued
The Company also has a Director's Benefit Plan (the "Benefit Plan") covering certain directors. This plan was 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.
The Company has determined that the following disclosures are relevant to the Benefit Plan, however, the plan is non-qualified and unfunded and has been recorded as a liability of the Company at the present value of the future benefit obligation. Payments to retired directors are funded through operations.
Net pension cost for the Director's Benefit Plan for 2007, 2006 and 2005 included the following components:
The following table sets forth the accumulated benefit obligation of the Director's Benefit Plan recognized in the Company's statements of financial condition at December 31, 2007 and 2006.
The weighted average discount rate used in determining present value of the projected benefit obligation for the Director's Benefit Plan was nine percent.
The aggregate benefit cost expected-to-be accrued for the year ending December 31, 2008, is $0.
The measurement date for the plan is December 31 of each year. There are no plan assets on which to compute long-term rates of return.
Expected benefit payments for the Benefit Plan following December 31, 2007, are as follows:
Note 17 - 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.
FLORIDA COMMUNITY BANKS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2007, 2006 and 2005
Note 17 - 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 estimated value of the collateral held to secure standby letters of credit at December 31, 2007, was approximately $4,474,000. The Company records a liability for the estimated fair value of standby letters of credit based on the fees charged for these arrangements. At December 31, 2007 and 2006 these recorded liabilities amounted to $94,557 and $25,822, respectively.
The approximate total amounts of loan commitments and standby letters of credit are summarized as follows at December 31:
The Company, as part of its retail mortgage loan production activities, routinely enters into short-term commitments to originate fixed rate loans. Most of the loans will be sold to third party correspondent banks upon closing. For those loans, the Company enters into individual forward sale commitments at the same time the commitment to originate is finalized. While the forward sales commitments function as an economic hedge and effectively eliminate the Company's financial risk of rate changes during the rate lock period, both the commitment to originate mortgage loans that will be sold and the commitment to sell the mortgage loans are derivatives, the fair values of which are essentially equal and offsetting. The fair values are calculated based on changes in market interest rates after the commitment date. The notional amounts of these mortgage loan origination commitments and the related forward sales commitments were immaterial at December 31, 2007 and 2006. The unrealized gains/losses of the origination and sales commitments were not material at December 31, 2007 and 2006.
FLORIDA COMMUNITY BANKS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2007, 2006 and 2005
Note 17 - Commitments and Contingencies - Continued
The Company invested in a partnership, AMD-FCB, LLP (the "Partnership"), formed to build and lease an office building in which the Bank will lease space starting in 2008. In early 2007, the Partnership entered into a construction agreement with a third party bank. The Company and the other 50% partner have each guaranteed 50% of a construction loan totaling approximately $6,600,000. In addition, the Bank has entered into a 15 year lease agreement with the Partnership to lease 16,809 square feet of the building, approximately one-half. The annual lease payments are projected to be approximately $450,000, with annual increases based on the Consumer Price Index ("CPI") (see Note 20).
The Company also entered into lease agreements with North Port Gateway, LLC to lease office space for a branch in North Port, Florida, to be opened in mid 2008 and with Center of Bonita Springs, Inc. to lease office space for a branch in Bonita Springs, Florida. Annual lease payments are projected to be approximately $190,000 and $138,000 respectively, with annual increases based on the CPI.
Note 18 - 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 5. 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 balances in commercial banks are insured by the FDIC up to $100,000. Total uninsured balances held at commercial banks amounted to $4,490,871 and $2,207,184 at December 31, 2007 and 2006, respectively.
Note 19 - Restrictions on Subsidiary Dividends, Advances and Loans
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, 2008, the Bank can declare dividends, without prior regulatory approval, of approximately $30,353,000 plus an additional amount equal to its net profits for 2008.
FLORIDA COMMUNITY BANKS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2007, 2006 and 2005
Note 20 - Leases
The Company leased facilities under non-cancelable operating leases during 2007, 2006 and 2005. The leases provide for renewal options and generally require the Company to pay maintenance, insurance and property taxes. For the years ended December 31, 2007, 2006 and 2005, rental expense for such leases was $197,348, $187,181 and $184,045, respectively. The Company leases land and premises for one of its locations from a director of the Company (see Note 22).
The Bank has also entered into three long-term operating leases for branch and office space in Ave Maria, Bonita Springs and North Port. The future minimum lease payments under these leases are projected to be approximately $450,000 annually or $7,753,000 over the course of the fifteen year lease term for Ava Maria, $138,000 annually or $1,537,000 over the course of the ten year lease term for Bonita Springs and $190,000 annually or $1,949,000 over the course of the ten year lease term for North Port; all the leases are subject to annual rate increases based on the CPI. The leases may be extended by two five year extension periods. Commencement of the Ave Maria, Bonita Springs and North Port leases are projected to be in the spring of 2008. These leases have been included in the future minimum lease payments following.
Future minimum lease payments under non-cancelable operating leases at December 31, 2007, including the Ave Maria, Bonita Springs and North Port leases are as follows:
Note 21 - 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.
FLORIDA COMMUNITY BANKS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2007, 2006 and 2005
Note 22 - Related Party Transactions
Loans: Certain directors, executive officers and principal shareholders, including their immediate families and associates were loan customers of the Company during 2007 and 2006. 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 $9,038,314 and $10,029,740 at December 31, 2007 and 2006, respectively.
Other: The Company leases the land and premises of the Cypress Lake branch from a director. The lease was initiated in 2001 for a term of 15 years at an arms length fair rental. Noncancelable lease payments for the years ending December 31, 2008 through 2012 are $168,740, $172,958, $177,282, $181,714 and $186,257, respectively. The agreement provides for annual increases of 2.5 percent.
The Company, through the normal course of business, sells loan participations to certain directors and parties related to directors. The transactions are at arms length and do not have terms that are significantly different from other participations sold by the Company. The balance of participations sold to these parties at December 31, 2007 and 2006 was $4,584,969 and $6,177,314.
The Company invested as a 50% partner in a partnership, AMD-FCB, LLP, that will be constructing and leasing branch and office space to the Bank in 2008, for a term of 15 years at an arms length fair rental. The lease payments are projected to be $450,000 per year, subject to annual increases based on the CPI (see Notes 4 and 17).
Note 23 - 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 held-to-maturity, fair values are based on quoted market prices or dealer quotes.
Other Investments: For other investments, fair value is estimated to be approximately the carrying amount.
Loans Held-for-Sale: For these short-term instruments, the carrying amount is a reasonable estimate of fair value.
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.
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.
Short-Term Borrowings: The carrying amounts of short-term borrowings approximate their fair values.
Accrued Interest Payable: The carrying amount of accrued interest payable approximates its fair value.
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 fees charged for these arrangements.
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FLORIDA COMMUNITY BANKS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2007, 2006 and 2005
Note 23 - Fair Value of Financial Instruments - Continued
The estimated fair values of the Company's financial instruments as of December 31, 2007 and 2006 are as follows:
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FLORIDA COMMUNITY BANKS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2007, 2006 and 2005
Note 24 - Condensed Parent Company Information
Statements of Financial Condition
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FLORIDA COMMUNITY BANKS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2007, 2006 and 2005
Note 24 - Condensed Parent Company Information - Continued
Statements of Income
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FLORIDA COMMUNITY BANKS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2007, 2006 and 2005
Note 24 - Condensed Parent Company Information - Continued
Statements of Cash Flows
FLORIDA COMMUNITY BANKS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2007, 2006 and 2005
Note 25 - 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.
ITEM 9A.
ITEM 9A.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Management of the Company, with the participation and under the supervision of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this annual report. Based on this evaluation the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this annual report to provide reasonable assurance that material information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms. A controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls are met, and no evaluation of controls can provide absolute assurance that all controls and instances of fraud, if any, within a company have been detected.
Management's Report On Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. This internal control system was designed to provide reasonable assurance to management and the Board of Directors as to the reliability of the Company's financial reporting and the preparation and fair presentation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
All internal control systems, no matter how well designed, have inherent limitations and may not prevent or detect misstatements in the Company's financial statements, including the possibility of human error and the circumvention of overriding controls. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control - Integrated Framework.
Based on this assessment, management believes that, as of December 31, 2007, the Company’s internal control over financial reporting is effective based on those criteria.
Schauer Taylor, P.C., an independent registered public accounting firm, has issued an audit report on the effectiveness of the Company's internal control over financial reporting, which is included herein.
Changes In Internal Control Over Financial Reporting
There was no change in the Company’s internal control over financial reporting that occurred during the Company’s most recently completed fiscal quarter that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B.
ITEM 9B.
OTHER INFORMATION
The Company did not fail to file any Form 8-K to disclose any information required to be disclosed therein during the fourth quarter of 2007.
PART III
ITEM 10.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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 8 and 16 in the Proxy Statement (the "2008 Proxy Statement") relating to the annual meeting of shareholders of the Company, scheduled to be held on April 24, 2008, is incorporated herein by reference. On March 3, 2003, the Company adopted a Code of Ethic applicable to its Chief Financial Officer and its Chief Executive Officer.
ITEM 11.
ITEM 11.
EXECUTIVE COMPENSATION
The information appearing under the headings "EXECUTIVE COMPENSATION" and "EMPLOYEE BENEFITS" on pages 8 to 14 of the 2008 Proxy Statement is incorporated herein by reference.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
The information appearing under the heading "ELECTION OF DIRECTORS" on pages 3 to 5 of the 2008 Proxy Statement and from Item 5 above is incorporated herein by reference.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information appearing under the heading "TRANSACTIONS WITH RELATED PERSONS, PROMOTORS AND CERTAIN CONTROL PERSONS" on pages 14 to 15 of the 2008 Proxy Statement is incorporated herein by reference.
ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees The aggregate fees billed for professional services by Schauer Taylor in connection with the audit of the annual financial statements and the reviews of the financial statements included in the Company's quarterly filings with the Securities and Exchange Commission for the fiscal years ended December 31, 2007 and 2006, were $128,535 and $143,870, respectively.
Audit-Related Fees: In 2007 and 2006, Schauer Taylor also billed the Company $67,933 and $96,705, respectively, for fees reasonably related to the performance of its audit and reviews of financial statements. Such fees included travel and miscellaneous related fees.
Tax Fees: In 2007 and 2006, Schauer Taylor also billed the Company $17,700 and $21,980, respectively, for tax compliance and advice, including the preparation of the Company's corporate tax returns.
Profit Sharing and Employee Stock Ownership Plans: In 2007 and 2006, Schauer Taylor also billed the Company $40,000 and $40,000, respectively, for audit and tax work related to these plans.
In all instances, Schauer Taylor's performance of those services was pre-approved by the Company's Audit Committee.
PART IV
ITEM 15.
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
(a)
1.
Financial Statements.
The following consolidated financial statements are located in Item 8 of this Report:
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Financial Condition as of December 31, 2007 and 2006
Consolidated Statements of Income for the Years Ended December 31, 2007, 2006 and
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2007, 2006 and 2005
Consolidated Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and
Notes to Consolidated Financial Statements
Quarterly Results (Unaudited)
2.
Financial Statement Schedules.
Schedules to the consolidated financial statements are omitted, as the required information is not applicable.
3.
Exhibits.
The following exhibits are filed or incorporated by reference as part of this Report:
* The referenced exhibit is a compensatory contract, plan or arrangement.
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.
EXHIBIT INDEX
The following exhibits are filed as part of this report (in addition to those exhibits listed in Item 15 which are filed as a part of this report and incorporated by reference):