BANK OF NORTH AMERICA BANCORP, INC.,
AND SUBSIDIARIES
Consolidated Statement of Financial Condition
September 30, 1996
ASSETS
Cash and due from banks .................................. $ 16,814,384
Interest bearing deposits with banks ..................... 19,795,279
Securities held to maturity .............................. 66,345,143
Federal Home Loan Bank of Atlanta stock .................. 2,775,000
Loans held for sale (approximate market
value:$856,000)...................................... 841,150
Loans receivable, net .................................... 397,037,593
Accrued interest receivable .............................. 4,180,593
Premises and equipment ................................... 8,276,716
Cost of mortgage loan servicing rights acquired .......... 2,020,000
Other intangible assets .................................. 128,901
Foreclosed real estate ................................... 1,016,527
Deferred income taxes .................................... 2,756,779
Other assets ............................................. 2,734,500
-----------
Total assets ........................................ $524,722,565
===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Deposits:
Non-interest bearing ................................ $ 57,599,832
Interest bearing .................................... 420,121,876
-----------
Total deposits .................................. 477,721,708
Securities sold under agreements to repurchase ...... 2,022,000
Other borrowings .................................... 5,000,000
Accrued interest payable ............................ 507,613
Other liabilities ................................... 3,589,448
-----------
Total liabilities ............................... 488,840,769
-----------
Commitments and contingencies
Stockholder's equity:
Common stock, $1.00 par value. Authorized, 5,000,000
shares; issued and outstanding 100,000 shares ..... 100,000
Additional paid-in capital .......................... 30,000,000
Retained earnings ................................... 5,781,796
-----------
Total stockholder's equity ...................... 35,881,796
-----------
Total liabilities and stockholder's equity .......... $524,722,565
===========
See accompanying notes to consolidated financial statements.
BANK OF NORTH AMERICA BANCORP, INC.,
AND SUBSIDIARIES
Consolidated Statement of Operations
For the Nine-Month Period Ended September 30, 1996
Interest income and fees
Loans ................................................. $ 25,687,515
Short-term investments ................................ 1,252,130
Securities ............................................ 3,767,961
-----------
Total interest income ............................. 30,707,606
-----------
Interest expense
Transaction accounts .................................. 3,379,324
Time deposits ......................................... 12,243,963
Borrowings ............................................ 715,987
-----------
Total interest expense ............................ 16,339,274
-----------
Net interest income ............................... 14,368,332
Provision for loan losses .................................. 3,242,798
-----------
Net interest income after provision for loan losses 11,125,534
-----------
Non-interest income
Service charges on deposits ........................... 2,272,773
Mortgage servicing income, net ........................ 884,169
Gains on sales of loans, net .......................... 263,483
Securities transactions, net .......................... (2,953,044)
Other ................................................. 498,554
-----------
Total non-interest income ......................... 965,935
-----------
Operating expenses
Compensation and benefits ............................. 6,572,011
Occupancy and equipment ............................... 2,291,739
Data processing ....................................... 863,142
Regulatory insurance and assessments .................. 905,370
Savings Association Insurance Fund one-time assessment 2,317,549
Office expenses ....................................... 823,451
Professional fees ..................................... 402,733
Marketing ............................................. 267,172
Other intangible amortization ......................... 75,150
Other ................................................. 1,591,739
-----------
Total operating expenses .......................... 16,110,056
-----------
Loss before income taxes ................................... (4,018,587)
Income tax credit .......................................... (1,499,940)
-----------
Net loss ................................................... $ (2,518,647)
===========
Net loss per share.......................................... (25.19)
===========
Weighted average number of shares outstanding................ 100,000
===========
See accompanying notes to consolidated financial statements.
BANK OF NORTH AMERICA BANCORP, INC.,
AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
For the Nine-Month Period Ended September 30, 1996
Cash flows from operating activities:
Net loss .................................................. $ (2,518,647)
Adjustments to reconcile net loss to net cash provided
(used) by operating activities:
Amortization of mortgage loan servicing rights acquired 257,000
Other amortization and depreciation ................... 2,113,673
Provision for loan losses ............................. 3,242,798
Deferred tax benefit .................................. (1,531,073)
Proceeds from loan sales of loans held for sale ....... 18,957,992
Origination and purchase of loans held for sale ....... (17,007,335)
Net realized losses on available for sale securities .. 2,953,044
Net realized gains on sales of loans .................. (263,483)
Changes in other assets and other liabilities:
Accrued interest receivable, current income taxes
and other assets .................................... (147,028)
Accrued interest payable and other liabilities ........ 2,069,384
-----------
Net cash provided by operating activities ................. 8,126,325
-----------
Cash flow from investing activities:
Purchase of available for sale securities ................. (10,081,094)
Proceeds from sales of available for sale securities ...... 102,998,495
Proceeds from maturities of available for sale securities . 5,597,925
Purchases of held to maturity securities .................. (66,462,187)
Originations of loans ..................................... (102,995,679)
Proceeds from maturities of loans ......................... 78,222,839
Net purchases of premises and equipment ................... (861,601)
Proceeds from sale of foreclosed properties ............... 393,872
-----------
Net cash provided by investing activities ................. 6,812,570
-----------
Cash flows from financing activities:
Net decrease in deposits .................................. (15,990,601)
Net increase in securities sold under agreements
to repurchase and short term other borrowings .......... 1,201,527
Repayments of long term other borrowings .................. (15,000,000)
-----------
Net cash used by financing activities ..................... (29,789,074)
-----------
Net decrease in cash and cash equivalents ................. (14,850,179)
Cash and cash equivalents at beginning of period ............... 51,459,842
-----------
Cash and cash equivalents at end of period ..................... $ 36,609,663
===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest .............................................. $ 16,493,864
===========
Income taxes .......................................... $ --
===========
Supplemental non-cash investing and financing information:
Transfers to foreclosed real estate ....................... $ 384,594
============
Transfers to loans held for sale .......................... $ 296,600
============
See accompanying notes to consolidated financial statements.
BANK OF NORTH AMERICA BANCORP, INC.,
AND SUBSIDIARIES
Consolidated Statement of Stockholder's Equity
For the Nine-Month Period Ended September 30, 1996
Unrealized
Gain (Loss)
on
Additional Securities
Common Paid-in Retained Available
Stock Capital Earnings For Sale, Net Total
------- ---------- ---------- -------------- ----------
Balance at December 31, 1995....................... $100,000 $30,000,000 $ 8,300,443 $(459,379) $37,941,064
Change in unrealized loss on securities available
for sale, net.................................. - - - 459,379 459,379
Net loss for the nine month period ended
September 30, 1996............................. - - (2,518,647) - (2,518,647)
------- ---------- ---------- -------- ----------
Balance at September 30, 1996...................... $100,000 $30,000,000 $ 6,786,500 $ - $35,881,796
======= ========== ========== ======== ==========
See accompanying notes to consolidated financial statements.
BANK OF NORTH AMERICA BANCORP, INC.,
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Nine-Month Period Ended September 30, 1996
Note 1. Potential Sale to BankAtlantic, A Federal Savings Bank ("BankAtlantic")
On April 9, 1996, BankAtlantic entered into an agreement to acquire Bank of
North America Bancorp, Inc. (the "Company") for approximately $54 million in
cash, subject to adjustment, as specified in the Stock Purchase Agreement.
BankAtlantic is a wholly owned subsidiary of BankAtlantic Bancorp, Inc., a
unitary savings bank holding company. The Company's primary asset is its wholly
owned subsidiary, Bank of North America (the "Bank"), a Florida chartered
commercial bank. The Bank has 13 branches, with 11 located in Broward County,
and one each in Dade and Palm Beach counties.
Closing of the acquisition is subject to certain conditions and is expected
to occur in the fourth quarter of 1996.
Note 2. Business and Summary of Significant Accounting and Reporting Policies
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the
Company, its wholly owned subsidiary, Bank of North America, and two
non-bank subsidiaries. The two non-bank subsidiaries are inactive. All
significant intercompany transactions and balances have been eliminated in
consolidation.
(b) Basis of Financial Statement Presentation
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles and with general
practices within the banking industry. In preparing the consolidated
financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities
as of the date of the consolidated statement of financial condition
and revenues and expenses for the period. Actual results could differ
significantly from those estimates. Material estimates that are
particularly susceptible to significant change relate to the
determination of the allowance for loan losses, the carrying value of
foreclosed real estate, and the carrying value of mortgage servicing
rights.
(c) Cash and Cash Equivalents
Cash and cash equivalents include cash, due from banks,
interest-bearing balances with banks, federal funds sold and securities
purchased under agreements to resell. Cash and cash equivalents have
maturities, at acquisition date, of three months or less.
(d) Securities
The Bank classifies its debt and equity securities in one of three
categories: trading, available-for-sale, or held-to-maturity. Trading
securities are bought and held principally for the purpose of selling them
in the near term. Held-to-maturity securities are those securities in which
the Bank has the ability and intent to hold the security until maturity.
All other securities not included in trading or held-to-maturity are
classified as available-for-sale.
Trading and available-for-sale securities are recorded at fair value.
Held-to-maturity securities are recorded at amortized cost, adjusted for
the amortization or accretion of premiums or discounts. Unrealized holding
gains and losses on trading securities are included in earnings. Unrealized
holding gains and losses, net of the related tax effect, on
available-for-sale securities are excluded from earnings and are reported
as a separate component of stockholder's equity until realized. Realized
gains and losses from the sale of available-for-sale securities are
determined on a specific identification basis.
A decline in the market value of any available-for-sale or
held-to-maturity security below cost that is deemed other than temporary
results in a reduction in carrying amount to fair value. The impairment is
charged to earnings and a new cost basis for the security is established.
Premiums and discounts are amortized or accreted over the life of the
related security as an adjustment to yield using the effective interest
method. Dividend and interest income are recognized when earned.
(e) Loan Purchases, Securitization and Sales
Loans are stated at the unpaid principal balance, net of unearned
income and discounts and allowance for loan losses, plus prepaid dealer
reserves. Loan packages of primarily one to four family residential loans
have been acquired through Federal Deposit Insurance Corporation ("FDIC")
and Resolution Trust Corporation ("RTC") loan offerings and in private
transactions. The purchase price of these loans is determined based upon
factors such as credit quality, the type of loan product being offered and
inherent market conditions at the time of purchase. Upon the purchase of
these loan packages, an allocation of the purchase price is made among the
allowance for loan losses and purchased discount or premium.
The amount allocated to the allowance for loan losses is based on an
evaluation of the estimated discounted credit losses to be incurred for the
loans purchased. When loans are sold, gains or losses resulting from such
sales are measured by using the cost basis allocated to such loans at the
time of purchase, adjusted for amortization of premiums and accretion of
discounts. Specific allowances for loan losses, which are identified as
part of loans being sold, are included as part of the cost basis of such
loans at time of sale. This cost allocation methodology is also utilized
for purchased loans which are securitized.
The Bank classifies loans which it intends to sell or securitize and
sell as loans held for sale These loans are carried at the aggregate of
lower of cost or market.
(f) Allowance for Loan Losses
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Management's periodic
evaluation of the adequacy of the allowance is based on the Bank's past
loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay, the estimated
value of any underlying collateral, and current economic conditions.
Management believes that the allowance for loan losses is adequate;
however, regulatory agencies, as an integral part of their examination
process, periodically review the allowance for losses on loans. Such
agencies may require the recognition of additions or reductions to the
allowance based on their judgement of information available at the time of
their examination. Management, considering current information and events
regarding the borrowers' ability to repay their obligations, considers a
loan to be impaired when it is probable that the Bank will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. When a loan is considered to be impaired, the amount of the
impairment is measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate or at the fair value
of collateral, if the loan is collateral dependent Impairment losses and
changes in estimates to the impairment losses are included in the allowance
for loan losses through a provision for loan losses. The Bank recognizes
interest income on impaired loans on a cash basis.
(g) Loan Interest Income Recognition
Interest income on commercial and real estate mortgage loans is
recognized as earned based upon the principal amounts outstanding. Interest
income on installment loans is recognized using a method which approximates
the interest method. Loans are placed on non-accrual status when management
believes that interest on such loans may not be collected in the normal
course of business or when the loans become ninety days delinquent,
whichever is earlier. Premiums and discounts on purchased loans are
amortized or accreted using the level yield method.
(h) Loan Fees
Loan origination, prepaid dealer reserves, certain other fees and
certain direct loan origination costs are deferred and the net amount is
amortized as an adjustment to the related loan's yield, generally over the
contractual life of the related loans, or if the related loan is held for
sale, until the loan is sold. Fees received in connection with loan
commitments are deferred until the loan is advanced and are then recognized
over the term of the loan as an adjustment of the yield. Fees on
commitments that expire unused are recognized in other non-interest income
at expiration.
(i) Mortgage Loan Servicing Rights
The Bank services mortgage loans for investors. These mortgage loans
serviced are not included in the accompanying consolidated statement of
financial condition. Loan servicing fees are based on a stipulated
percentage of the outstanding loan principal balances being serviced and
are recognized as income when related loan payments from mortgagors are
collected. Loan servicing costs are charged to expense using the level
yield method over the estimated life of the loan, and continually adjusted
for prepayments. Management evaluates the carrying value of purchased
mortgage servicing rights by estimating the future net servicing income of
the portfolio on a discounted basis, based on estimates of the remaining
loan lives. The unpaid principal balances of mortgage loans serviced for
others was approximately $275 million at September 30, 1996.
In May 1995 the FASB issued Statement of Financial Accounting
Standards No. 122, "Accounting for Mortgage Servicing Rights" ("SFAS No.
122") which eliminated the accounting distinction between rights to service
mortgage loans for others that are acquired through loan origination
activities and those acquired through purchase transactions. SFAS No. 122
requires an entity to recognize as separate assets rights to service
mortgage loans for others, however those servicing rights are acquired.
SFAS No. 122 requires the periodic evaluation of capitalized mortgage
servicing rights for impairment based on fair value. On January 1, 1996,
this statement was implemented prospectively. The impact of SFAS No 122
upon implementation was not significant to the Bank's financial condition
or results of operations. No additional valuation allowance was required.
The initial valuation of mortgage servicing rights ("MSR") was on an
individual loan basis. During the nine-month period ended September 30,
1996, the Bank did not capitalize any MSR's. Amortization of MSR's amounted
to approximately $257,000 for the nine-month period ended September 30,
1996. MSR's are amortized to expense using the level yield method over the
estimated life of the loan and continually adjusted for prepayments. The
fair value of capitalized mortgage servicing rights at September 30, 1996
was estimated at $4.2 million. For the purpose of evaluating and measuring
impairment of MSR's, the Bank stratifies those rights based on the
predominant risk characteristics of the underlying loans. Such predominent
risk characteristics include the servicing type, maturity, and whether the
loan is fixed or adjustable. The amount of any impairment recognized is the
amount by which the MSR's exceed their fair value. Future adjustments to
the valuation allowance will be reflected in results of operations.
(j) Premises and Equipment
Land is carried at cost. Bank premises, furniture and equipment, and
leasehold improvements are carried at cost, less accumulated depreciation
and amortization, computed principally by the straight-line method.
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of",
("SFAS No. 121") which requires that long-lived assets and certain
identifiable intangibles to be held by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable.
SFAS No. 121 was effective as of January 1, 1996. The adoption of this
pronouncement did not have a significant impact on the Company's results of
operations or financial condition.
(k) Income Taxes
The operating results of the Company and its subsidiaries are included
in consolidated federal and state income tax returns. Each subsidiary pays
its allocation of income taxes to the Company, or receives payment from the
Company to the extent that tax benefits are realized based on amounts
computed as if each subsidiary was an individual company.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. Deferred tax assets are required
to be reduced by a valuation allowance to the extent that, based on the
weight of available evidence, it is more likely than not that the deferred
tax assets will not be realized.
(l) Other Intangible Assets
Excess cost over fair value of assets acquired of $51,008 at September
30, 1996 is being amortized on a straight-line basis over a seven year
period. The remaining core deposit premium of $77,893 is being amortized
over its estimated remaining economic life of approximately one year at
September 30, 1996.
(m) Foreclosed Real Estate
Real estate properties acquired through, or in lieu of, foreclosure
are initially recorded at fair value at the date of foreclosure,
establishing a new cost basis. After foreclosure, valuations are
periodically performed by management and the real estate is carried at the
lower of (1) cost or (2) fair value minus estimated costs to sell. Revenue
and expenses from operations and adjustments of the fair value are included
in earnings. Foreclosed real estate is not depreciated.
(n) Interest-Rate Exchange Agreements ("swaps")
The swap held by the Bank is held for purposes other than trading.
Swaps used in asset/liability management activities are accounted for
using the accrual method. Net interest income (expense) resulting from the
differential between exchanging floating and fixed-rate interest payments
is recorded on a current basis. Gains or losses on the sales of swaps used
in asset/liability management activities are deferred and amortized into
interest income or expense over the maturity period of the swap. There were
no sales of swaps during the nine-month period ended September 30, 1996.
Note 3. Securities
Securities held to maturity at September 30, 1996 are presented below.
Debt Security Maturity
----------------------
After 1 Year Total
Through Carrying Value Gross Unrealized Estimated
1 Year or Less 5 Years (Amortized Cost) Gains Losses Fair Value
-------------- ------------ ---------------- ------- ------- ----------
U.S. Treasury $10,004,002 $56,341,141 $66,345,143 $25,851 $(12,713) $66,358,281
========== ========== ========== ====== ======= ==========
There were no securities available for sale at September 30, 1996.
Gross gains resulting from the disposition of securities available for
sales amounted to $64,962 during the nine month period ended September 30, 1996.
Gross losses amounted to $3,018,006 during the nine month period ended September
30, 1996.
Investment securities with a carrying value of approximately $611,000 were
pledged as required by government regulation as of September 30, 1996. In
addition, at September 30, 1996, investment securities with carrying values of
approximately $2,027,000 and $500,000 were pledged to secure securities sold
under agreements to repurchase and an interest rate swap agreement,
respectively.
Note 4. Loans
The composition of loans at September 30, 1996 is summarized as follows:
Real estate - residential...................... $222,937,283
Real estate - commercial....................... 56,199,855
Commercial..................................... 31,778,614
Consumer....................................... 90,216,604
Overdrafts..................................... 754,534
-----------
Subtotal.................................. 401,886,890
Add: prepaid dealer reserve.................. 4,631,764
Less: net deferred loan fees.................. (491,960)
Less: net purchased discounts and premiums.... (2,589,250)
Less: allowance for loan losses............... (6,399,851)
-----------
Loans, net..................................... $397,037,593
===========
Note 5. Allowance for Loan Losses
An analysis of the allowance for loan losses for the nine months ended
September 30, 1996 is presented below:
Balance, beginning of period................... $ 5,501,147
Provision for loan losses...................... 3,242,798
Charge-offs.................................... (2,549,330)
Recoveries..................................... 205,236
----------
Balance, end of period......................... $ 6,399,851
==========
All loans on non-accrual status are considered to be impaired loans for
purposes of SFAS No. 114. Impairment of loans having recorded investments of
approximately $5.1 million at September 30, 1996 have been recognized in
conformity with SFAS No. 114, as amended by SFAS No. 118. The average recorded
investment in impaired loans during the nine- month period ended September 30,
1996 was approximately $4.8 million. The total allowance for loan losses related
to these loans was approximately $848,000 on September 30, 1996 Interest Income
on impaired loans of approximately $119,000 was recognized for cash payments
received in the nine-month period ended September 30, 1996.
The Bank is not committed to lend additional funds to debtors whose loans
have been modified.
The provision for loan losses for the nine-month period ended September 30,
1996 included approximately $1.6 million for charge-offs and increased
allowances related to forced placed collateral protection insurance.
Note 6. Premises and Equipment
Premises and equipment at September 30, 1996 are summarized as follows:
Land, building and improvements................ $6,751,209
Leasehold improvements......................... 1,112,853
Furniture, fixtures and equipment.............. 4,404,325
---------
Subtotal.................................... 12,268,387
Accumulated depreciation and amortization...... 3,991,671
---------
Premises and equipment, net.................... $8,276,716
=========
The Bank is obligated under operating leases for office premises and
equipment. At September 30, 1996, the total remaining minimum lease commitments
were as follows:
Year Ending
September 30,
-------------
1997 $1,043,000
1998 582,000
1999 402,000
2000 365,000
2001 267,000
thereafter 6,000
---------
$2,665,000
=========
Rent expense for the nine-month period ended September 30, 1996, was
approximately $1,042,000 and is included in occupancy and equipment expense.
In connection with a lease for the Bank's corporate offices, a letter of
credit with a redemption value of $48,750 at September 30, 1996, was issued by
the Bank in favor of the owner of such premises.
The Bank is lessor under operating leases for office premises. The building
being leased had cost and carrying value of approximately $5.6 million and $5.1
million at September 30, 1996, respectively. Minimum future rentals on leases as
of September 30, 1996 were as follows:
Year Ending
September 30,
-------------
1997 $305,000
1998 252,000
1999 160,000
2000 54,000
2001 3,000
---- -------
$774,000
=======
Note 7. Deposits
Deposits at September 30, 1996 are summarized as follows:
Non-interest bearing:
Customers.................... $ 55,466,886
Official checks.............. 2,132,946
Savings......................... 72,208,184
NOW............................. 41,502,203
Money market.................... 37,833,618
Certificates of deposit......... 268,577,871
-----------
Total deposits................ $477,721,708
===========
As of September 30, 1996, the Bank held certificates of deposit of $100,000
or more of approximately $42.6 million. The interest expense on certificates of
deposit of $100,000 or more amounted to approximately $1,963,000, during the
nine-month period ended September 30, 1996.
The following table sets forth the amount and maturities of certificates of
deposits as of September 30, 1996:
Amount
Amount Due During Due After
Year Ending September 30, September 30,
------------------------------------------ -------------
1997 1998 1999 1999 Total
---- ---- ---- ---- ------------
2.00% to 3.00% $ 105,630 - - - $ 105,630
3.01% to 4.00% 6,177,109 887,408 121,966 - 7,186,483
4.01% to 5.00% 43,821,842 1,838,531 853,862 12,939 46,527,174
5.01% to 6.00% 101,740,464 21,218,198 1,415,932 55,651 124,430,245
6.01% to 7.00% 51,948,532 3,616,224 7,398,187 1,017,848 63,980,791
7.01% to 8.00% 26,183,305 2,783 161,460 - 26,347,548
----------- ---------- --------- --------- -----------
Total $229,976,882 $27,563,144 $9,951,407 $1,086,438 $268,577,871
=========== ========== ========= ========= ===========
Note 8. Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase are summarized as follows:
Balance at September 30, 1996...................................... $2,022,000
Average balance for the nine-month period ended September 30, 1996. 1,937,606
Maximum amount outstanding at any
month end during the nine-month period ended September 30, 1996.. 3,880,570
Average interest rate:
During the nine-month period ended September 30, 1996............ 5.00%
At September 30, 1996............................................ 5.40%
At September 30, 1996, the Bank had sold United States treasury securities
under agreements to repurchase those same securities, with a one business day
maturity. The Bank sells securities under agreements to repurchase to its
customers. Securities sold are maintained under the Bank's control.
Note 9. Other Borrowings
Other borrowings consist of Federal Home Loan Bank of Atlanta ("FHLB")
advances of a short-term nature and advances with original maturities in excess
of one year. Short-term FHLB advances are summarized as follows:
Balance at September 30, 1996...................................... -
Average balance for the nine-month period ended September 30, 1996. $ 1,094,891
Maximum amount outstanding at any
month end during the nine-month period ended September 30, 1996.. 10,000,000
Average interest rate:
During the nine-month period ended September 30, 1996............ 5.50%
At September 30, 1996............................................ -
At September 30, 1996, one FHLB advance with an original maturity in excess
of one year was outstanding:
7.73% advance, due 1997....................................... $ 5,000,000
=========
The Bank has been advised by the FHLB that it has a total credit
availability of $100 million with maturities of up to 10 years. The FHLB credit
availability does not represent a firm commitment by the FHLB. Rather, it is the
FHLB's assessment of what the Bank could borrow given the Bank's current
financial condition. The credit availability is subject to change at any time
based upon the Bank's financial condition and that of the FHLB, as well as
changes in FHLB policies or Congressional mandates. At September 30, 1996, the
Bank's available credit from the FHLB was $95 million.
In connection with its borrowings from the FHLB, the Bank is required to
own FHLB stock with a par value equal to at least five percent of total advances
outstanding. At September 30, 1996, the Bank's investment in FHLB stock had a
par and carrying value of $2,775,000, and was automatically pledged against FHLB
advances. Advances from the FHLB are secured by eligible investment securities
or first mortgage loans. Generally, short-term FHLB advances are secured by
pledging and delivering specific investment security collateral under terms and
at rates comparable to those available in the repurchase agreement market. All
other FHLB advances are secured by a blanket floating lien on the Bank's
residential, one-to-four family first mortgage loans. For advances secured by
the blanket floating lien, the Bank is not required to specifically identify,
deliver, or otherwise segregate first mortgage loans pledged as collateral for
advances, but must maintain eligible first mortgage loan collateral equal to
approximately 133% of outstanding advances, or approximately $6.7 million at
September 30, 1996.
Note 10. Income Taxes
The income tax credit reflected in the consolidated statement of operations
for the nine months ended September 30, 1996 is detailed below:
Current tax payable:
Federal............................ $ 31,133
State.............................. -
----------
Total current..................... 31,133
----------
Deferred tax benefit:
Federal............................ (1,194,285)
State.............................. (336,788)
----------
Total deferred.................... (1,531,073)
----------
Total income tax credit........... $(1,499,940)
==========
The actual income tax rate differs from the "expected" income tax rate (the
U.S. Federal corporate tax rate of 34%) for the nine-month period ended
September 30, 1996 is as follows:
Tax at federal statutory rate................. (34.0%)
State income tax, net of federal benefit...... (3.6%)
Amortization of intangibles................... 0.3%
Tax-exempt interest........................... (0.3%)
Other, net.................................... 0.2%
----
Total income tax credit..................... (37.4%)
====
Approximate temporary differences between financial statement carrying
amounts and tax basis of assets and liabilities that give rise to significant
portions of the net deferred tax asset at September 30, 1996 are as follows:
Deferred tax assets:
Provision for loan losses................................. $1,875,885
Savings Association Insurance Fund one-time assessment.... 872,094
Intangible asset amortization............................. 193,394
Depreciation.............................................. 153,872
Loan fees................................................. 137,494
State tax net operating loss carry forward................ 132,351
Delinquent interest reserve............................... 117,046
Other..................................................... 22,621
---------
Gross deferred tax assets.................................. 3,504,757
Valuation allowance....................................... -
---------
Net deferred tax assets................................... 3,504,757
---------
Deferred tax liabilities:
Intangible asset amortization............................. 371,391
Purchased loans........................................... 281,320
Stock dividends........................................... 91,223
Other..................................................... 4,044
---------
Total deferred tax liabilities............................. 747,978
---------
Deferred tax assets, net................................... $2,756,779
=========
An analysis of the changes in the net deferred tax asset is presented
below:
Balance, December 31, 1995............................ $1,502,866
Deferred tax benefit.................................. 1,531,073
Change in unrealized loss on
securities available for sale........................ (277,160)
---------
Balance, September 30, 1996........................... $2,756,779
=========
The deferred tax asset is considered realizable as it is more likely than
not that the results of future operations will generate sufficient taxable
income to realize such deferred tax assets.
Note 11. Financial Instruments
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers and
to reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit, standby letters of credit and
financial guarantees, and one interest-rate swap. Those instruments involve, to
varying degrees, elements of credit and interest-rate risk in excess of the
amount recognized in the consolidated statements of financial condition The
contract or notional amounts of those instruments reflect the extent of the
Bank's involvement in particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit,
standby letters of credit, and financial guarantees written is represented by
the contractual notional amount of those instruments The Bank uses the same
credit policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments. For its interest-rate swap transaction, the
contract or notional amount does not represent exposure to credit loss. The Bank
controls the credit risk of its interest-rate swap agreement through credit
approvals, limits, and monitoring procedures.
Unless noted otherwise, the Bank does not require collateral or other
security to support financial instruments with credit risk.
INTEREST-RATE EXCHANGE AGREEMENTS. The Bank has entered into one
interest-rate swap transaction in managing its interest-rate exposure.
Interest-rate swap transactions generally involve the exchange of fixed and
floating-rate interest-payment obligations without the exchange of the
underlying principal amounts.
Entering into interest-rate swap agreements involves not only the risk of
dealing with counterparties and their ability to meet the terms of the contracts
but also the interest-rate risk associated with unmatched positions. Notional
principal amounts often are used to express the volume of these transactions,
but the amounts potentially subject to credit risk are much smaller.
During the nine-month period ended September 30, 1996, the Bank entered
into an agreement to make fixed-rate interest payments in exchange for receiving
variable market-indexed interest payments (interest-rate swap). The notional
principal amount of the interest-rate swap outstanding was $4.0 million at
September 30, 1996. The original term was for five years. The fixed-payment rate
was 6.27% at September 30, 1996 Variable-interest payments received are based on
6-month LIBOR. At September 30, 1996, the rate of the variable market-indexed
interest payment obligation to the Bank was 5.75%. The net cost of this
agreement was approximately $17,000 for the nine-month period ended September
30, 1996, which was amortized to income.
CREDIT COMMITMENTS. The Bank has outstanding at any time a significant
number of commitments to extend credit. Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the loan commitment contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Since some of the commitments are expected to expire without being
drawn upon, the total commitment amount does not necessarily represent future
cash requirements. Each customer's credit worthiness is evaluated on an
individual basis and the amount of collateral required, if deemed necessary, is
based on management's credit evaluation. As of September 30, 1996, there were
approximately $49.1 million of commitments to extend credit, generally with
terms of up to 90 days. Commitments at September 30, 1996, include approximately
$165,000 in fixed rate commitments.
Loan commitments have off-balance-sheet credit risk because only
origination fees and accruals for probable losses are recognized in the
statement of financial condition until the commitments are fulfilled. Credit
risk represents the accounting loss that would be recognized at the reporting
date if counterparties failed completely to perform as contracted The credit
risk amounts are equal to the contractual amounts, assuming that the amounts are
fully advanced and that the collateral or other security is of no value.
The Bank's policy with regard to collateral-dependent loans is to require
customers to provide collateral prior to the disbursement of approved loans. For
consumer loans, the Bank usually retains a security interest in the property or
products financed, which provides repossession rights in the event of default by
the customer. For commercial loans and financial guarantees, collateral is
usually in the form of inventory or marketable securities (held in trust) or
real estate (notations on title).
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. At September 30, 1996,
there were approximately $2.8 million of standby letters of credit outstanding
with maturities of up to one year. The credit risk involved in issuing letters
of credit is essentially the same as that involved in extending loan facilities
to customers. The Bank holds certificates of deposit as collateral supporting
those commitments for which collateral is deemed necessary. The extent of
collateral held for those commitments at September 30, 1996, varies from
unsecured to 100 percent.
The Bank has not incurred any losses on its commitments in the nine-month
period ended September 30, 1996.
Note 12. Concentrations of Credit Risk
Concentrations of credit risk (whether on or off balance sheet) arising
from financial instruments exist in relation to certain groups of customers. A
group concentration arises when a number of customers have similar economic
characteristics that would cause their ability to meet contractual obligations
to be similarly affected by changes in economic or other conditions. The Bank
does not have a significant exposure to any individual customer The major
concentrations of credit risk for the Bank arise by customer type in relation to
loans and credit commitments, as shown in the following table. A geographic
concentration arises because the Bank operates primarily in Florida, where a
majority of loan customers and related collateral are located.
Residential Commercial
Real Estate Real Estate Commercial Consumer Total
----------- ----------- ----------- ----------- -----------
Credit Risk: (in thousands)
September 30, 1996
Loans..................... $234,824,942 $49,636,785 $31,778,614 $86,487,699 $402,728,040
Credit commitments........ 27,025,000 4,891,000 17,126,000 15,000 49,057,000
----------- ---------- ---------- ---------- ----------
$261,849,942 $54,527,785 $48,904,614 $86,502,699 $451,785,040
=========== ========== ========== ========== ===========
The credit risk amounts represent the maximum accounting loss that would be
recognized at the reporting date if customers failed completely to perform as
contracted and any collateral or security proved to be of no value. The amounts
of credit risk shown, therefore, greatly exceed expected losses, which are
included in the allowance for loan losses.
Note 13. Commitments and Contingencies
In the ordinary course of business, the Bank has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. In addition, the Bank is
involved in various claims and legal actions arising in the ordinary course of
business. The outcome of these claims and actions are not presently
determinable, however, in the opinion of the Bank's management, after consulting
with their legal counsel, the ultimate disposition of these matters will not
have a material adverse effect on the consolidated financial statements.
The Internal Revenue Service is in the process of conducting an examination
of the Company's Federal Income Tax Returns for the years ended December 31,
1993 and 1992 In the opinion of management, the ultimate disposition will not
have a material adverse effect on the consolidated financial statements.
Because of the legal structure of its acquisitions, the Bank pays deposit
insurance premiums to the FDIC's Savings Association Insurance Fund ("SAIF").
The majority of commercial banks pay such premiums to the FDIC's Bank Insurance
Fund ("BIF"). The SAIF and the BIF previously assessed deposit insurance
premiums at the same rate. However, effective September 30, 1995, the FDIC
reduced the minimum assessment rate applicable to BIF deposits, but not SAIF
deposits, from 23 basis points of covered deposits to four basis points of
covered deposits and, effective January 1, 1996, further reduced the BIF rate to
zero This disparity in assessment rates may place the Bank at a competitive
disadvantage to institutions whose deposits are exclusively or primarily
BIF-insured (such as most commercial banks).
On September 30, 1996, President Clinton signed into law H.R. 3610, which
is intended to recapitalize the SAIF and substantially bridge the assessment
rate disparity existing between SAIF and BIF-insured institutions. The new law
subjects institutions with SAIF-assessable deposits, including the Bank, to a
one-time assessment estimated to be approximately 0.657% of covered deposits as
of March 31, 1995 and provides for a 20% reduction of this assessment for
certain institutions, including the Bank. The new law remains to be implemented
by the FDIC, and the FDIC's interpretation of the new law may affect actual
amounts paid by depository institutions, including the Bank. At this time, the
Bank believes that its one-time assessment would result in a pre-tax charge of
approximately $2,317,549, which will be payable not later than November 29, 1996
and, under provisions of the new law, may be treated for tax purposes as a fully
deductible "ordinary and necessary business expense" when paid. Results of
operations for the nine-month period ended September 30, 1996 include a charge
for this estimated one-time assessment.
Note 14. Employee Benefit Plan
The Bank sponsors a defined contribution 401(k) retirement savings plan
("Plan"). The Plan provides for certain contributions made by employees to be
matched by the Bank Substantially all full-time employees with one year of
service can participate in the Plan During the nine-month period ended September
30, 1996, Bank contributions to the Plan and Plan administrative expenses paid
by the Bank amounted to approximately $104,000.
Note 15. Related Party Transactions
Through January 31, 1996, the Bank was a party to a loan subservicing
agreement with a mortgage servicing company owned by the Company's stockholder
("Loan Servicer"). The agreement was under market terms and conditions and
covered subservicing of one to four family residential loans which the Bank owns
or for which the Bank has purchased servicing rights. During the nine-month
period ended September 30, 1996, the Bank paid approximately $93,000 in
servicing fees to the Loan Servicer.
The agreement was terminated effective January 31, 1996 and the servicing
was transferred to a subsidiary of BankAtlantic under a new servicing agreement.
The BankAtlantic servicing agreement was negotiated and servicing transferred to
BankAtlantic prior to any negotiations relating to the sale of the Company to
BankAtlantic.
In conjunction with servicing performed by the Loan Servicer for the Bank
and for its own account, escrow funds and other servicing-related non-interest
bearing deposits are maintained at the Bank. Such funds averaged $637,000 for
the nine-month period ended September 30, 1996.
During the nine-month period ended September 30, 1996, the Loan Servicer
paid the Bank rent of approximately $97,000, for use of office space in a
building owned by the Bank.
Through January of 1996, the Bank provided certain human resource services
to the Loan Servicer primarily with regard to payroll, health insurance
processing, and policies and procedures. During the nine-month period ended
September 30, 1996, the Bank charged the Loan Servicer approximately $750 for
those services.
In the ordinary course of business, the Bank enters into transactions with
Directors of the Bank, with the Company's stockholder and with firms with which
the Directors or stockholder are affiliated. During the nine-month period ended
September 30, 1996 the Bank paid marketing, advertising, and public relations
fees of approximately $119,000 to a company owned by one of the Bank's
Directors. Another of the Bank's Directors is an employee of a law firm which
performs routine legal services for the Bank. During the nine-month period ended
September 30, 1996, the Bank paid legal fees of approximately $7,000, to that
law firm. In addition, the Bank rents office space to a firm managed by one of
the Bank's Directors under a three year lease agreement expiring on June 30,
1997. Rental income earned by the Bank from that lease for the nine-month period
ended September 30, 1996 was approximately $10,000. The aggregate unpaid
principal balance of loans outstanding to the Bank's Directors or their business
interests was approximately $405,000 at September 30, 1996.
The Company's stockholder has an ownership interest in a building which
houses one of the Bank's offices. Rent expense on that office was approximately
$5,000 for the nine-month period ended September 30, 1996. The Bank has loans
outstanding to a firm in which the Company's stockholder has ownership
interests. The principal balance of those loans was approximately $36,000 as of
September 30, 1996. The Company's stockholder or firms controlled by the
stockholder had approximately $4.0 million on deposit at the Bank on September
30, 1996.
Note 16. Restrictions on Retained Earnings
The Bank is subject to certain restrictions on the amount of dividends that
it may declare without prior regulatory approval. At September 30, 1996, the
Bank could not declare any dividends without such regulatory approval.
Note 17. Regulatory Matters
The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company must meet specific capital guidelines that involve quantitative measures
of the Company's assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Company's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of September 30, 1996, that the
Company meets all capital adequacy requirements to which it is subject.
As of September 30, 1996 the most recent notification from the Federal
Deposit Insurance Corporation categorized the Company as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as well
capitalized the Company must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institution's category.
The Company's actual capital amounts and ratios are also presented in the
table. No amount was deducted from capital for interest-rate risk at September
30, 1996.
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------ ----------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ----- ---------- ----- ----------- -----
As of September 30, 1996:
Total Capital (to risk Weighted Assets)..... $39,780,000 12.4% $25,584,000 8.0% $31,980,000 10.0%
Tier I Capital (to risk Weighted Assets).... 35,712,000 11.2% 12,792,000 4.0% 19,188,000 6.0%
Tier I Capital (to Average Assets).......... 35,712,000 6.7% 21,444,000 4.0% 26,805,000 5.0%
Note 18. Fair Values of Financial Instruments
Statement of Financial Accounting Standards No. 107, Disclosures about
Fair Value of Financial Instruments, defines the fair value of a financial
instrument as the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale.
The following table presents the carrying amounts and fair values of the Bank's
financial instruments at September 30, 1996 (in thousands):
Carrying
Amount Fair Value
-------- ----------
Financial assets:
Cash and due from banks and interest-bearing
deposits with banks........................... $36,609 $36,609
Securities held to maturity.................... 66,345 66,358
FHLB stock..................................... 2,775 2,775
Loans held for sale............................ 841 856
Loans receivable, net.......................... 397,038 398,627
Financial liabilities:
Deposit liabilities............................ 477,722 477,832
Securities sold under agreements to repurchase. 2,022 2,022
Other borrowings............................... 5,000 5,027
Off-balance- sheet assets (liabilities):
Commitments to extend credit................... - 30
Standby letters of credit...................... - -
Interest rate swap in a net payable position... - 52
ESTIMATION OF FAIR VALUES
The following notes summarize the major methods and assumptions used in
estimating the fair values of financial instruments.
Short-term financial instruments are valued at their carrying amounts
included in the consolidated statement of financial condition, which are
reasonable estimates of fair value due to the relative short period to maturity
of the instruments. This approach applies to cash and cash equivalents.
Loans held for sale are valued at quoted market prices or investor
commitments.
Loans are valued on the basis of estimated future receipts of principal and
interest, discounted at various rates. Loan prepayments are assumed to occur at
the same rate as in previous periods when interest rates were at levels similar
to current levels. Future cash flows for homogeneous categories of consumer
loans, such as motor vehicle loans, are estimated on a portfolio basis and
discounted at current rates offered for similar loan terms to new borrowers. The
fair value of nonaccrual loans is estimated based on the fair value of related
collateral for collateral-dependent loans or on a present value basis, using
higher discount rates appropriate to the higher risk involved.
Securities are valued at quoted market prices.
FHLB stock is valued at the redemption value.
Fair value of demand deposits and deposits with no defined maturity is
taken to be the amount payable on demand at the reporting date. The fair value
of fixed-maturity deposits is estimated using rates currently offered for
deposits of similar remaining maturities. The intangible value of long-term
relationships with depositors is not taken into account in estimating the fair
values shown in the previous table.
Rates currently available to the Bank for term borrowings with similar
terms and remaining maturities are used to estimate the fair value of existing
borrowings as the present value of expected cash flows.
Commitments to extend credit and standby letters of credit are valued on
the basis of fees currently charged for commitments for similar loan terms to
new borrowers with similar credit profiles.