10-K 1 fcbi123105form10k.txt FLORIDA COMMUNITY BANKS, INC. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------- FORM 10-K (Mark One) |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2005 |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ Commission File No. 000-1170902 Florida Community Banks, Inc. (Exact name of registrant as specified in its charter) Florida 35-2164765 ------------------------------- -------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) Incorporation or organization) 1400 North 15th Street, Immokalee, Florida 34142-2202 ------------------------------------------ ----------------------- Address of principal executive offices) (Including zip code) (239) 657-3171 (Issuer's Telephone Number, Including Area Code) SECURITIES REGISTERED UNDER SECTION 12(b) OF THE ACT: Name of each exchange Title of each class on which registered None None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, $0.01 Par Value (Title of Class) Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes |_| No |X| Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes |_| No |X| Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past 90 days. Yes |X| No | | Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. | | Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check One): Large accelerated filer |_| Accelerated filer |X| Non-accelerated filer |_| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes |_| No |X| The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant, computed by reference to the closing price of such stock on June 30, 2005, was approximately $100,918,350. The number of shares of the Registrant's common stock, $0.01 par value, outstanding on March 10, 2006, was 5,493,141. Document Incorporated by Reference This statement has not been reviewed or confirmed for accuracy or relevance by the Federal Deposit Insurance Corporation. Certain information required for Part III of this report is incorporated herein by reference to the Proxy Statement for the 2006 Annual Meeting of the Company's stockholders FLORIDA COMMUNITY BANKS, INC. 2005 Form 10-K Annual Report TABLE OF CONTENTS
Item Number Page or in Form 10-K Description Location PART I Item 1. Business................................................................... 3 Item 1A. Risk Factors............................................................... 8 Item 1B. Unresolved Staff Comments.................................................. 10 Item 2. Properties................................................................. 10 Item 3. Legal Proceedings.......................................................... 10 Item 4. Submission of Matters to a Vote of Security Holders........................ 10 PART II Item 5. Market for the Registrant's Common Equity and Related Shareholder Matters........................................................ 11 Item 6. Selected Financial Data.................................................... 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................ 13 Item 7A. Quantitative and Qualitative Disclosures About Market Risk................. 13 Item 8. Financial Statements and Supplementary Data................................ 35 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................................... 81 Item 9A. Controls and Procedures.................................................... 81 Item 9B. Other Information.......................................................... 82 PART III Item 10. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act.......................... 82 Item 11. Executive Compensation..................................................... 82 Item 12. Security Ownership of Certain Beneficial Owners and Management............. 82 Item 13. Certain Relationships and Related Transactions............................. 82 Item 14. Principal Accountant Fees and Service...................................... 82 PART IV Item 15. Exhibits and Financial Statements Schedules................................ 83 Signatures Certification of Periodic Financial Reports
PART I ITEM 1. BUSINESS General Florida Community Banks, Inc. ("FCBI" or the "Company") is a bank holding company, which owns all of the common stock of Florida Community Bank ("Bank" or "FCB") and a special purpose business trust organized to issue Trust Preferred Securities. The special purpose business trust is not consolidated in the financial statements that are included elsewhere herein. FCBI is a Florida corporation registered with the Board of Governors of the Federal Reserve System as a bank holding company under the Bank Holding Company Act of 1956, as amended. Through its subsidiary bank, FCBI is engaged in the commercial banking business in southwestern Florida with offices in Collier, Lee, Hendry, Glades and Charlotte counties. At December 31, 2005, FCBI had total assets of approximately $907 million, total deposits of approximately $737 million and stockholders' equity of approximately $70 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 164 persons and it believes that its relationship with these employees is good. The Bank is engaged primarily in soliciting deposits from the general public and investing such deposits, together with other funds, in commercial loans, consumer loans, agricultural loans, and real estate loans. To a lesser extent, the Bank invests its funds in securities issued or guaranteed by agencies of the United States Government and municipalities. The Bank operates as a locally operated institution aimed at providing prompt, efficient and personalized service to individuals, small and medium-sized businesses, professionals and other local organizations. The Bank's primary service area encompasses Charlotte, Lee, Collier, Glades and Hendry Counties (the "PSA"). The Bank's principal markets within the PSA are: (i) commercial and small business lending and deposit services; (ii) residential real estate mortgage and retail lending and deposit services; and (iii) commercial and residential real estate development lending. The principal sources of funds for the Bank's loans and other investments are demand, time, savings and other deposits, amortization and prepayment of loans, sales to other lenders or institutions of loans or participations in loans, principal payments or maturities of investment securities, and borrowings. The principal sources of income for the Bank are interest and fees collected on loans, including fees received for servicing loans sold to other lenders or institutions, and to a lesser extent, interest and dividends collected on other investments. The principal expenses of the Bank are interest paid on savings and other deposits, interest paid on other borrowings by the Bank, employee compensation, office expenses and other overhead and operational expenses. The Bank offers several deposit accounts, including demand deposit accounts, negotiable order of withdrawal accounts ("NOW" and "Super-NOW" accounts), money market accounts, certificates of deposit and various retirement accounts. In addition, the Bank belongs to an electronic banking network so that its customers may use the automated teller machines (the "ATMs") of other financial institutions and operates drive-in teller services and 24-hour depository vaults. 3 The Bank offers the following loan services: (a) consumer loans, automobile loans, real estate equity lines of credit, education loans and real estate loans secured by single-family residences; (b) commercial and business loans for small to medium-sized companies, including Small Business Administration and other government-guaranteed financing; (c) individual and builder short-term residential construction financing; (d) home improvement loans; and (e) commercial and residential real estate development loans. The Bank provides a full range of competitive banking services and emphasizes the manner in which the services are delivered. Management focuses its efforts on filling the void created by the decreasing number of locally-owned community banks due to acquisitions by large regional holding companies, which it believes has negatively impacted the personal nature of the delivery, quality and availability of banking services available in the PSA and surrounding areas. Primary Service Area The PSA enjoys an abundant work force, attractive business climate and a good relationship between the private and public sectors. In general, commercial real estate in the PSA consists of small shopping centers and office buildings. The type of residential real estate within the PSA varies, with a number of condominiums, townhouses, apartments and single-family housing developments dispersed throughout the PSA. Competition The business of banking is highly competitive. The Bank competes with other banks, savings and loan associations and credit unions within the PSA. The Bank believes that its operation as a locally owned and controlled bank with a broad base of ownership in the PSA enhances its ability to compete with those non-local financial institutions now operating in its market, but no assurances can be given in this regard. The Bank's competitive strategy with respect to the financial institutions described above consists of: o reviewing and acting upon loan requests quickly with a locally-based loan committee, o maintaining flexible but prudent lending policies, o personalizing service by establishing long-term banking relationships with its customers; and o maintaining an appropriate ratio of employees to customers to enhance the level of service. Facilities The Bank's main office in Immokalee, Florida was purchased in 1962. At December 31, 2005, the Bank operated ten branch offices, with a new Valencia office scheduled to open in late 2006 or early 2007, replacing the branch that is currently in a convenience store (in the same area). The Bank hopes to open at least three new branches in 2007. 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. 4 Regulation The Bank is subject to comprehensive regulation, examination and supervision by the Department and the FDIC, and is subject to other laws and regulations applicable to banks. Such regulations include limitations on loans to a single borrower and to the Bank's directors, officers and employees; restrictions on the opening and closing of branch offices; the maintenance of required capital and liquidity ratios; the granting of credit under equal and fair conditions; disclosure of the costs and terms of such credit; and restrictions as to permissible investments. The Bank is examined periodically by both the Department and the FDIC and submits periodic reports regarding its financial condition and other matters to each of them. Both the Department and the FDIC have a broad range of powers to enforce regulations under their respective jurisdictions, and to take discretionary actions determined to be for the protection of the safety and soundness of the Bank, including the institution of cease and desist orders and the removal of directors and officers. FDIC Regulations. The Bank's deposit accounts are insured by the Bank Insurance Fund of the FDIC up to a maximum of $100,000 per insured depositor. The FDIC issues regulations, conducts periodic examinations, requires the filing of reports and generally supervises the operations of its insured banks. The approval of the FDIC is required prior to a merger or consolidation or the establishment or relocation of an office facility. This supervision and regulation is intended primarily for the protection of depositors and not of stockholders. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") substantially revised the depository institution regulatory and funding provisions of the Federal Deposit Insurance Act. Among other things, FDICIA requires the federal banking regulators to take prompt corrective action in respect to depository institutions that do not meet minimum requirements. FDICIA established five capital tiers: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," and "critically undercapitalized." A depository institution is well capitalized if it significantly exceeds the minimum level required by regulation for each relevant capital measure, adequately capitalized if it meets each such measure, undercapitalized if it fails to meet any such measure, significantly undercapitalized it is significantly below any such measure and critically undercapitalized if it fails to meet any critical capital level set forth in the regulations. The critically undercapitalized level occurs where tangible equity is less than 2% of total tangible assets or less than 65% of the minimum leverage ratio prescribed by regulation (except to the extent that 2% would be higher than such 65% level). A depository institution may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it receives an unsatisfactory examination rating. FDICIA generally prohibits a depository institution from making any capital distribution (including payment of a dividend) if the depository institution would thereafter be undercapitalized. In addition, undercapitalized depository institutions are subject to growth limitations and are required to submit capital restoration plans to the FDIC. The federal banking agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital. If a depository fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized. Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and cessation of the receipt of deposits from correspondent banks. Critically undercapitalized depository institutions are subject to the appointment of a receiver or conservator. FDICIA provides authority for special assessments against insured deposits and for the development of a general risk-based insurance assessment system. The risk-based insurance assessment system would be used to calculate a depository institution's semi-annual deposit insurance assessment based on the probability (as defined in the FDICIA) that the BIF will incur a loss with respect to the institution. In accordance with FDICIA, the FDIC implemented a transitional risk-based insurance premium system and increased deposit insurance premiums for commercial banks to an average of 25.4 basis points. FDICIA also contains various provisions related to an institution's interest rate risk. Under certain circumstances, an institution may be required to provide additional capital or maintain higher capital levels to address interest rate risks. 5 In addition, the FDIC has adopted a minimum leverage ratio of 4%. The minimum leverage ratio is the ratio of common equity, retained earnings and certain amounts of perpetual preferred stock (after subtracting goodwill and after making certain other adjustments) to the total assets of the institution. Generally, banking organizations are expected to operate well above the minimum required capital level of 4% unless they meet certain specified criteria, including that they have the highest regulatory ratings. Most banking organizations are required to maintain a leverage ratio of 4% plus an additional cushion of 1% to 2%. The guidelines also provide that banking organizations experiencing internal growth or making acquisitions are expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance upon intangible assets. Dividend Restrictions. In addition to dividend restrictions placed on the Bank by the FDIC based on the Bank's minimum capital requirements, the Florida Financial Institutions Code prohibits the declaration of dividends in certain circumstances. Section 658.37 (Florida Statutes), prohibits the declaration of any dividend until a bank has charged off bad debts, depreciation and other worthless assets, and has made provision for reasonably-anticipated future losses on loans and other assets. Such dividends are limited to the aggregate of the net profits of the dividend period, combined with a bank's retained net profits for the preceding two years. A bank may declare a dividend from retained net profits that accrued prior to the preceding two years with the approval of the Department. However, a bank will be required, prior to the declaration of a dividend on its common stock, to carry 20% of its net profits for such preceding period to its surplus fund, until the surplus fund equals at least the amount of the bank's common and preferred stock then issued and outstanding. In no event may a bank declare a dividend at any time in which its net income from the current year, combined with its retained net income from the preceding two years is a loss or which would cause the capital accounts of the bank to fall below the minimum amount required by law, regulation, order or any written agreement with the Department or other state or federal regulatory agency. Riegle-Neal Interstate Banking and Branching Efficiency Act. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 provides that as of June 1, 1997, adequately capitalized and managed banks will be able to engage in interstate branching by merging banks in different states, including Florida, which did not opt out of the application of this provision. If a state did not opt out, banks will be required to comply with the host state's regulations with respect to branching across state lines. Gramm-Leach-Bliley Act. On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley Act which reforms and modernizes certain areas of financial services regulation. The law permits the creation of new financial services holding companies that can offer a full range of financial products under a regulatory structure based on the principle of functional regulation. The legislation eliminates the legal barriers to affiliations among banks and securities firms, insurance companies, and other financial services companies. The law also provides financial organizations with the opportunity to structure these new financial affiliations through a holding company structure or a financial subsidiary. The new law reserves the role of the Federal Reserve Board as the supervisor for bank holding companies. At the same time, the law provides a system of functional regulation, which is designed to utilize the various existing federal and state regulatory bodies. The law also includes a minimum federal standard of financial privacy. Financial institutions are required to have written privacy policies that must be disclosed to customers. The disclosure of a financial institution's privacy policy must take place at the time a customer relationship is established and not less than annually during the continuation of the relationship. The act also provides for the functional regulation of bank securities activities. The law repeals the exemption that banks were afforded from the definition of "broker," and replaces it with a set of limited exemptions that allow the continuation of some historical broker activities performed by banks. In addition, the act amends the securities laws to include banks within the general definition of dealer. Regarding new bank products, the law provides a procedure for handling products sold by banks that have securities elements. In the area of CRA activities, the law generally requires that financial institutions address the credit needs of low-to-moderate income individuals and neighborhoods in the communities in which they operate. Bank regulators are required to take the CRA ratings of a bank or of the bank subsidiaries of a holding company into account when acting upon certain branch and bank merger and acquisition applications filed by the institution. Under the law, financial holding companies and banks that desire to engage in new financial activities are required to have satisfactory or better CRA ratings when they commence the new activity. Most of the provisions of the law took effect on March 11, 2000, with other provisions being phased in over a one to two year period thereafter. It is anticipated that the effects of the law, while providing additional flexibility to bank holding companies and banks, may result in additional affiliations of different financial services 6 providers, as well as increased competition, resulting in lower prices, more convenience, and greater financial products and services available to consumers. USA Patriot Act. On October 26, 2001, President Bush signed into law the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the "USA Patriot Act"), which is designed to deny terrorists and others the ability to obtain access to the United States financial system. Title III of the USA Patriot Act is the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001. Among its provisions, the USA Patriot Act mandates or will require financial institutions to implement additional policies and procedures with respect to, or additional measures, including additional due diligence and recordkeeping, designed to address, any or all of the following matters, among others: money laundering; suspicious activities and currency transaction reporting; and currency crimes. The U.S. Department of the Treasury in consultation with the Federal Reserve Board and other federal financial institution regulators has promulgated rules and regulations implementing the USA Patriot Act which (i) prohibits U.S. correspondent accounts with foreign banks that have no physical presence in any jurisdiction; (ii) require financial institutions to maintain certain records for correspondent accounts of foreign banks; (iii) require financial institutions to produce certain records relating to anti-money laundering compliance upon request of the appropriate federal banking agency; (iv) require due diligence with respect to private banking and correspondent banking accounts; (v) facilitate information sharing between the government and financial institutions; and (vi) require financial institutions to have in place a money laundering program. In addition, an implementing regulation under the USA Patriot Act regarding verification of customer identification by financial institutions has been proposed, although such regulation has not yet been finalized. The Company has implemented, and will continue to implement, the provisions of the USA Patriot Act as such provisions become effective. The Company currently maintains and will continue to maintain policies and procedures to comply with the USA Patriot Act requirements. At this time, the Company does not expect that the USA Patriot Act will have a significant impact on the financial position of the Company. Federal Reserve System. FCBI is a bank holding company subject to the supervision and regulations of the Board of Governors of the Federal Reserve System ("Federal Reserve"). As such, the Company is required to file periodic reports and such other information as the Federal Reserve may deem necessary. The Federal Reserve also conducts examinations of the Company. The Federal Reserve maintains the position that the Company should serve as a source of financial and managerial strength for the Bank and may not conduct its operations in an unsound manner. Corporate Governance. The Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley Act"), which became law on July 30, 2002, and added new legal requirements for public companies affecting corporate governance, accounting and corporate reporting. The Sarbanes-Oxley Act provides for, among other things: o 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); o independence requirements for audit committee members; o independence requirements for company auditors; o certification of financial statements on Forms 10-K and 10-Q, reports by the chief executive officer and chief financial officer; o 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; o disclosure of off-balance sheet transactions; o two-business day filing requirements for insiders filing Form 4s; o disclosure of a code of ethic for financial officers and filing a Form 8-K for a change in or waiver of such code; 7 o the reporting of securities violations "up the ladder" by both in-house and outside attorneys; o restrictions on the use of non-GAAP financial measures in the press release and SEC filings; o the formation of a public accounting oversight board; and o various increase criminal penalties for violations of securities laws. The Sarbanes-Oxley Act contains provisions, which became effective upon enactment on July 30, 2002 and provisions that became effective over varying periods. The SEC has been delegated the task of enacting rules to implement various provisions. In addition, each of the national stock exchanges has adopted new corporate governance rules, including rules strengthening director independence requirements for boards, the adoption of corporate governance codes and charters for the nominating, corporate governance and audit committees. Recent Regulatory Developments 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. RISK FACTORS Industry Factors The commercial banking business can be affected by general business and economic conditions. Our business and earnings are affected by conditions that include short-term and long-term interest rates, inflation, 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 8 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 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 9 1,358,000 shares, representing approximately 25% 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. Each of our subsidiary banks 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. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES For the description of the property of the Company, see "ITEM I - BUSINESS - Facilities." ITEM 3. LEGAL PROCEEDINGS There are no material proceedings to which the Company is a party. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 2005. 10 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS There is no established trading market for the Company's Common Stock, $.01 par value (the "Common Stock"), which has been traded inactively in private transactions. Therefore, no reliable information is available as to trades of the Common Stock or as to the prices at which Common Stock has traded. In October 2005, the Company issued 1.2 shares for 1.0 share stock split, thereby increasing the number of shares outstanding from 4,519,321 to 5,423,185. 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 2004 and 2005. To the best of management's knowledge, the last trade in December was executed at a price of $28.50 per share. The per share price data regarding the Common Stock is provided for information purposes only and should not be viewed as indicative of the actual or market value of the Common Stock.
Estimated Price Range Per Share High Low 2005 (Split Adjusted): First Quarter................................................................. $ 22.50 $ 21.88 Second Quarter................................................................ 24.58 19.10 Third Quarter................................................................. 26.67 25.21 Fourth Quarter................................................................ 28.50 26.00 2004 (Split Adjusted): First Quarter................................................................. $ 20.83 $ 17.19 Second Quarter................................................................ 19.44 18.75 Third Quarter................................................................. 20.83 19.44 Fourth Quarter................................................................ 21.46 20.16
As of March 10, 2006, there were 5,493,141 shares of Common Stock outstanding held by approximately 980 shareholders of record. The payment of future dividends will be at the sole discretion of the Company's Board of Directors and will depend on, among other things, future earnings, capital requirements, the general financial condition of the Company, and general business conditions. The Company paid dividends of $.21 per share (split-adjusted) in the second and fourth quarter of 2005, $0.18 per share (split-adjusted) in the second and fourth quarters of 2004, $0.15 per share (split-adjusted) in the fourth quarter of 2003. Equity compensation plan At their Annual Meeting, the Bank's shareholders adopted the 2002 Key Employee Stock Compensation Program ("Employee Program"), which was assumed by FCBI upon its acquisition of the Bank. The following table reflects the number of shares to be issued upon the exercise of options granted under the Employee Program, the weighted-average exercise price of all such options, and the total number of shares of common stock reserved for the issuance upon the exercise of authorized, but not-yet-granted options, as of December 31, 2005.
Number of Equity Securities Number of Securities to be Weighted-average Remaining Available for Issued Upon the Exercise Exercise Price of Future Issuance Under Plan Category of Outstanding Options Outstanding Options Equity Compensation Plan ------------------------------------ ------------------------ ---------------------- --------------------------- Equity Compensation Plans Approved by Shareholders......... 161,474 $ 14.68 46,461 Equity Compensation Plans Not Approved by Shareholders..... -- -- -- ------------ ------------- ----------- Total............................ 161,474 $ 14.68 46,461 =========== ============= ===========
11 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.
Years Ended December 31, ------------------------------------------------------------ 2005 2004 2003 2002 2001 ---------- --------- --------- ---------- ---------- (Dollars in thousands except per share data) Earnings Summary: Interest income................................... $ 57,858 $ 39,584 $ 33,520 $ 31,266 $ 27,903 Interest expense.................................. 17,385 9,200 10,081 11,787 12,018 Net interest income............................... 40,473 30,384 23,439 19,479 15,885 Provision for loan losses......................... 1,762 1,971 1,700 2,510 720 Net interest income after provision for loan losses 38,711 28,413 21,739 16,969 15,165 Noninterest income................................ 3,844 3,774 2,729 2,320 1,699 Noninterest expense............................... 12,933 12,251 10,980 9,020 8,226 Income before income taxes........................ 29,622 19,936 13,488 10,269 8,638 Income taxes expense.............................. 11,404 7,694 5,091 3,851 3,292 Net income........................................ 18,218 12,242 8,397 6,418 5,346 Per Common Share Data: (Retroactively adjusted for effects of stock dividends and stock splits) Net income - basic ............................... $ 3.33 $ 2.26 $ 1.56 $ 1.19 $ 0.99 Net income - diluted.............................. 3.29 2.23 1.54 1.18 0.99 Cash dividends declared per common share.......... 0.42 0.35 0.15 0.20 0.40 Selected Average Balances: Total assets...................................... $ 791,418 $ 588,771 $ 513,583 $ 446,318 $ 324,188 Total loans....................................... 670,885 490,521 425,278 370,062 255,294 Securities........................................ 70,213 43,567 32,618 41,106 40,418 Earning assets.................................... 750,433 552,930 486,643 426,374 307,524 Deposits.......................................... 640,504 483,135 411,084 366,632 271,431 Long-term borrowings.............................. 70,912 50,762 55,660 41,701 17,478 Shareholders' equity.............................. 62,280 48,365 38,867 32,025 28,009 Shares outstanding (split adjusted, in thousands). 5,476 5,419 5,396 5,396 5,396 Selected Period-End Balances: Total assets...................................... $ 907,082 $ 660,864 $ 525,508 $ 521,758 $ 388,061 Total loans....................................... 791,609 552,509 437,593 416,414 318,666 Securities........................................ 66,242 74,265 38,938 36,524 35,001 Earning assets.................................... 863,042 627,722 491,153 498,509 364,012 Deposits.......................................... 737,256 520,585 423,284 423,935 317,861 Long-term borrowings.............................. 70,334 70,310 50,332 60,349 37,580 Shareholders' equity.............................. 70,076 52,928 42,086 34,464 29,139 Shares outstanding (split adjusted, in thousands). 5,493 5,423 5,396 5,396 5,396 Selected Ratios: Return on average equity.......................... 29.25 % 25.31% 21.60% 20.04% 19.09% Return on average assets.......................... 2.30 2.08 1.63 1.44 1.65 Net interest margin............................... 5.39 5.50 4.82 4.57 5.17 Allowance for loan losses to loans................ 1.46 1.77 1.84 1.52 1.19 Net charge-offs to average loans.................. 0.00 0.05 (0.01) 0.00 0.07 Average equity to average assets.................. 7.87 8.21 7.57 7.18 8.64 Cash Dividends Declared.............................. $ 2,289 $ 1,883 $ 781 $ 1,093 $ 2,178
12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The purpose of this discussion is to focus on significant changes in the financial condition and results of operations of the Company and its subsidiaries during the past three years. The discussion and analysis is intended to supplement and highlight information contained in the accompanying consolidated financial statements and the selected financial data presented elsewhere in this report. ITEM 7A. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Forward-Looking Statements This report, including Management's Discussion and Analysis of Financial Condition and Results of Operations, and documents incorporated herein by reference, may contain certain statements relating to the future results of the Company based upon information currently available. These "forward-looking statements" (as defined in Section 21E of The Securities and Exchange Act of 1934) are typically identified by words such as "believes", "expects", "anticipates", "intends", "estimates", "projects", and similar expressions. These forward-looking statements are based upon assumptions the Company believes are reasonable and may relate to, among other things, the allowance for loan loss adequacy, simulation of changes in interest rates and litigation results. Such forward-looking statements are subject to risks and uncertainties 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 2005 was $18,218,031, a 48.8% increase from 2004 net income of $12,241,932. Net income for 2004 was $12,241,932, a 45.8% increase over 2003 net income. Net income for 2003 was $8,396,549, a 30.8% increase over 2002 net income. Net income for 2002 was $6,418,306, a 20.1% increase over 2001 net income. Diluted net income per common share for 2005 was $3.29 compared to $2.23 in 2004 and $1.54 in 2003. The increases in net income from 2001 to 2002 were primarily attributable to increased volume of loans, with the resulting increase in interest and fees. In 2001 and 2002, the volume increase in loans more than offset the decrease in loan interest rates as discussed more fully below. The increase from 2002 to 2003 and from 2003 to 2004 was primarily attributable to an increase in the net interest margin as deposit costs decreased more than 13 loan yields decreased. The increase from 2004 to 2005 was primarily attributable to the increase in loan volume combined with an increase in rates. Earning Assets During 2005, earning assets averaged $750 million, an increase of $197 million (35.7%) over 2004. During 2004, earning assets averaged $553 million, an increase of $66 million (13.6%) over 2003. During 2003, earning assets averaged $487 million, an increase of $60 million (14.1%) over 2002. The management of the Company considers many criteria in managing earning assets, including creditworthiness, diversification, maturity, and interest rate sensitivity. The following table sets forth the Company's interest-earning assets by category at December 31, in each of the last three years.
December 31, ---------------------------------------- 2005 2004 2003 ----------- ----------- ----------- (In thousands) Interest-bearing deposits with banks.................................... $ 5,003 $ 948 $ 857 Securities.............................................................. 66,242 74,265 38,938 Federal funds sold...................................................... 188 -- 13,765 Loans: Real estate (1)...................................................... 748,384 492,966 381,709 Commercial and other................................................. 43,225 59,543 55,884 ----------- ----------- ----------- Total loans........................................................ 791,609 552,509 437,593 ----------- ----------- ----------- Interest-earning assets ................................................ $ 863,042 $ 627,722 $ 491,153 =========== =========== =========== (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 increased $180 million (36.8%) in 2005 compared to 2004. 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 $65 million (15.3%) in 2004 compared to 2003. 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 2004 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). Average loans increased $55 million (14.9%) in 2003 compared to 2002. The increase in loans was a result of successful marketing efforts to originate real estate construction loans and other real estate loans. Loan growth for 2003 was funded primarily by issuance of brokered certificates of deposit. 14 The following table sets forth the balances in certain categories of loans at December 31 for each of the five years ending December 31, 2005.
Loan Portfolio December 31, 2005 2004 2003 2002 2001 ----------------- ----------------- ---------------- ---------------- ----------------- Percent Percent Percent Percent Percent Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total -------- -------- ------- -------- -------- -------- ------- -------- -------- -------- (Dollars in Thousands) Commercial, financial and agricultural. $ 37,309 4.69% $ 51,378 9.26% $ 45,274 10.31% $42,876 10.27% $ 38,007 11.92% Real estate - construction..... 467,854 58.81 270,016 48.69 172,890 39.37 140,723 33.70 93,049 29.17 Real estate - mortgage......... 280,230 35.22 222,374 40.10 208,819 47.55 220,697 52.84 179,261 56.20 Consumer........... 7,502 0.94 8,086 1.46 10,665 2.43 12,089 2.89 8,481 2.66 Loans held-for-sale 300 0.04 576 0.10 -- 0.00 -- 0.00 -- 0.00 Other.............. 2,356 0.30 2,181 0.39 1,487 0.34 1,226 0.30 157 0.05 -------- -------- -------- ------- -------- ------ ------- ------- -------- ------- 795,551 100.00% 554,611 100.00% 439,135 100.00% 417,611 100.00% 318,955 100.00% ======== ======= ====== ======= ======= Unearned income.... (3,942) (2,102) (1,542) (1,197) (289) Allowance for loan losses........... (11,523) (9,791) (8,067) (6,319) (3,803) -------- -------- -------- ------- -------- Net loans.......... $780,086 $542,718 $429,526 $410,095 $314,863 ======== ======== ======== ======== ========
The following table shows the maturity distribution of selected loan classifications at December 31, 2005, and an analysis of those loans maturing in over one year:
Selected Loan Maturity and Interest Rate Sensitivity Rate Structure for Loans Maturity Maturing Over One Year Over One One Year Over Predetermined Floating or Year or Through Five Interest Adjustable Less Five Years Years Total Rate Rate ----------- ----------- ----------- ----------- ------------- -------------- (Amounts in thousands) Commercial, financial and agricultural............ $ 22,005 $ 14,695 $ 609 $ 37,309 $ 6,349 $ 8,955 Real estate - construction..... 215,807 226,534 25,513 467,854 45,632 206,415 ----------- ----------- ----------- ----------- ------------- -------------- Total....................... $ 237,812 $ 241,229 $ 26,122 $ 505,163 $ 51,981 $ 215,370 =========== =========== =========== =========== ============= ==============
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 decreased by $8 million or 10.8% from 2004 to 2005. The securities portfolio increased by $35 million or 90.7% from 2003 to 2004. The securities portfolio increased by $2.4 million or 6.6% from 2002 to 2003. 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 increase in the securities portfolio from 2003 to 2004 was largely as a result of a $30 million leverage transaction that was put together to better utilize the banks excess capital. 15 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 2005, 2004 and 2003. Held-to-Maturity securities are carried at amortized cost and represent the largest portion of the total securities portfolio. At December 31, 2005, 2004 and 2003 there were no material unrealized gains (losses) in the Other Investment Securities. At December 31, 2005, 2004 and 2003, net unrealized gains (losses) in the Held-to-Maturity portfolio amounted to $(1,742,917), ($338,296), and ($456,579), respectively. The following table presents the carrying amounts of the securities portfolio at December 31, in each of the last three years.
Securities Portfolio December 31, ---------------------------------------------- 2005 2004 2003 ------------- ------------- -------------- (In thousands) Held-to-Maturity: U.S. government and agencies................................. $ 1,997 $ 1,997 $ 1,768 Mortgage-backed securities................................... 59,036 67,333 33,985 ------------- ------------- -------------- Total Held-to-Maturity..................................... 61,033 69,330 35,753 Other Investment Securities..................................... 5,209 4,935 3,185 ------------- ------------- -------------- Total Securities................................................ $ 66,242 $ 74,265 $ 38,938 ============= ============= ==============
The following table indicates the respective maturities and weighted average yields of securities (dollars in thousands):
Security Portfolio Maturity Schedule Maturing ------------------------------------------------------------------------------- Within After One But After Five But After One Year Within Five Years Within Ten Years Ten Years ----------------- --------------------- -------------------- ----------------- Amount Yield Amount Yield Amount Yield Amount Yield -------- ------- -------- ------ -------- -------- -------- -------- (Amounts in thousands, except percentages) Securities Held-to-Maturity U.S. Government agencies...... $ -- 0.00% $ 1,997 3.55% $ -- 0.00% $ -- 0.00% Mortgage-backed securities.... -- 0.00 57 5.14 3,076 4.36 55,903 4.16 Other investment securities... -- 0.00 -- 0.00 -- 0.00 -- 0.00 Other Investment Securities U.S. Government agencies...... -- 0.00 -- 0.00 -- 0.00 -- 0.00 Mortgage-backed securities.... -- 0.00 -- 0.00 -- 0.00 -- 0.00 Other investment securities... -- 0.00 -- 0.00 -- 0.00 5,209 5.27 --------- --------- -------- -------- Total Securities................. $ -- 0.00 $ 2,054 3.59 $ 3,076 4.36 $ 61,112 4.26 ========= ========= ======== ========
There were no securities held by the Company of which the aggregate value at December 31, 2005, 2004 and 2003 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.) 16 Deposits and Borrowed Funds Average deposits increased $157.4 million (32.6%) in 2005 compared to 2004. Average deposits increased $72 million (17.5%) in 2004 compared to 2003. Average deposits increased $44 million (12.1%) in 2003 compared to 2002. 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. In 2004, the largest growth area was again in non-interest bearing demand deposits, money market and savings deposits, which increased $45.7 million in total. The largest area of growth in 2003 was in average money market, savings, and non-interest bearing demand deposits, which increased $29.7 million in total. The following table sets forth the Company's deposit structure at December 31 in each of the last three years.
December 31, ---------------------------------------------- 2005 2004 2003 ------------- ------------- -------------- (In thousands) Noninterest-bearing deposits: Individuals partnerships and corporations.................... $ 122,897 $ 106,569 $ 72,498 U.S. Government and states and political subdivisions........ 2,537 2,290 3,201 Certified and official checks................................ 4,126 4,358 2,598 ------------- ------------- -------------- Total noninterest bearing deposits......................... 129,560 113,217 78,297 ------------- ------------- -------------- Interest-bearing deposits: Interest - bearing demand accounts........................... 46,520 38,158 29,885 Savings accounts............................................. 158,294 120,171 103,060 Certificates of deposit, less than $100,000.................. 61,065 64,417 69,096 Certificates of deposit, more than $100,000.................. 341,817 184,622 142,946 ------------- ------------- -------------- Total interest bearing deposits............................ 607,696 407,368 344,987 ------------- ------------- -------------- Total deposits............................................. $ 737,256 $ 520,585 $ 423,284 ============= ============= ==============
The following table presents a breakdown by category of the average amount of deposits and the weighted average rate paid on deposits for the periods indicated:
Years Ended December 31, ----------------------------------------------------------------------- 2005 2004 2003 ---------------------- ---------------------- ----------------------- Amount Rate Amount Rate Amount Rate ---------- ---------- ---------- --------- --------- ---------- (Dollars in thousands) Noninterest bearing deposits............. $ 129,326 0.00% $ 94,085 0.00% $ 64,306 0.00% Interest-bearing demand deposits......... 42,745 0.47 33,216 0.30 27,389 0.38 Savings deposits......................... 154,183 2.33 121,024 1.00 105,121 1.29 Time deposits............................ 314,250 3.20 234,810 2.47 214,268 3.02 ---------- ---------- --------- Total deposits......................... $ 640,504 2.16 $ 483,135 1.47 $ 411,084 1.93 ========== ========== =========
17 At December 31, 2005, time deposits of $100,000 or greater aggregated approximately $341.8 million. The following table indicates, as of December 31, 2005, 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) Three months or less.......................................................................... $ 63,257 Over three through six months................................................................. 49,186 Over six through twelve months................................................................ 126,685 Over twelve months............................................................................ 102,689 -------------- Total....................................................................................... $ 341,817 ==============
At December 31, 2005, borrowed funds consisted of $25 million in short-term (overnight) borrowing and $70.3 million in long-term debt. The Bank had $55,000,000 in unsecured lines to purchase federal funds, of which $30,000,000 was available at December 31, 2005. The Bank had a separate line with the Federal Reserve Bank of Atlanta, secured by loans, which $4,200,000 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, 2004 and 2003, respectively, borrowed funds consisted primarily of long-term debt. The Bank had $50,150,000 in available lines to purchase federal funds and the Company had $5,000,000 in an available line from which to borrow funds, from another financial institution. At December 31, 2004, the Bank had $3,851,000 advanced against those lines. At December 31, 2003, the Bank had $7,000,000 advanced under one of those lines. 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. At December 31, 2004, the amount of credit available with the Federal Home Loan Bank of Atlanta, was approximately $99 million, of which approximately $39 million was available and unused. At December 31, 2003, the Bank had credit available of approximately $79 million with the Federal Home Loan Bank of Atlanta. Of the credit available, $46,000,000 (of which $6,000,000 was a letter of credit used to secure public funds) had been utilized at December 31, 2003. The line is secured by residential and commercial real estate loans and investment securities at December 31, 2005. 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, 2005.
Maturities of Long-term Debt (In thousands) 2006 2007 2008 2009 2010 --------- --------- -------- ---------- --------- Interest on indebtedness......................... $ 3,101 $ 2,761 $ 2,450 $ 2,360 $ 1,972 Repayment of principal........................... 5,010 10,010 5,004 5,000 5,000 --------- --------- -------- ---------- ----------- $ 8,111 $ 12,771 $ 7,454 $ 7,360 $ 6,972 ========= ========= ======== ========== ===========
Capital Resources Shareholders' equity increased $17.2 million to $70.1 million as of December 31, 2005, increased $10.8 million to $52.9 million as of December 31, 2004, increased $7.6 million to $42.1 million as of December 31, 2003. The increase in shareholders' equity for 2005, 2004 and 2003 was attributable to net income, less dividends declared. 18 On June 21, 2002, FCBI Capital Trust I ("FCBI Trust"), a Delaware statutory trust established by the Company, received $10,000,000 in proceeds in exchange for $10,000,000 principal amount of FCBI Trust's floating rate cumulative trust preferred securities (the "preferred securities") in a trust preferred private placement. The proceeds of that transaction were then used by FCBI Trust to purchase an equal amount of floating-rate subordinated debentures (the "subordinated debentures") of the Company. The Company has fully and unconditionally guaranteed all obligations of FCBI Trust on a subordinated basis with respect to the preferred securities. The Company does not consolidate the FCBI Trust preferred securities and accounts for the debentures issues to FCBI Trust as debt. Subject to certain limitations, the preferred securities qualify as Tier 1 capital, although the Federal Reserve regulators are re-considering this treatment, as a result of recent accounting rules changes, discussed more fully elsewhere herein. The sole asset of FCBI Trust is the subordinated debentures issued by the Company. Both the preferred securities of FCBI Trust and the subordinated debentures of the Company each have approximately 30-year lives. However, both the Company and FCBI Trust have a call option after five years, subject to regulatory capital requirements. A strong capital position, which is vital to the continued profitability of the Company, also promotes depositor and investor confidence and provides a solid foundation for the future growth of the organization. The objective of management is to maintain a level of capitalization that is sufficient to take advantage of profitable growth opportunities while meeting regulatory requirements. This is achieved by improving profitability through effectively allocating resources to more profitable businesses, improving asset quality, strengthening service quality, and streamlining costs. The primary measures used by management to monitor the results of these efforts are the ratios of return on average assets, return on average common equity and average equity to average assets. The table below summarizes these and other key ratios for the Company for each of the last three years.
Return on Equity and Assets 2005 2004 2003 ------------- ------------- -------------- Return on average assets........................................... 2.30% 2.08% 1.63% Return on average common equity.................................... 29.25 25.31 21.60 Dividend payout ratio.............................................. 12.56 15.38 9.30 Average common shareholders' equity to average assets ratio.................................................... 7.87 8.21 7.57
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. 19 The table below illustrates the Company's regulatory capital ratios under federal guidelines at December 31, 2005, 2004 and 2003:
Capital Adequacy Ratios Statutory Years ended December 31, ---------------------------------------- Minimum 2005 2004 2003 ------------ ----------- ----------- ----------- (Amounts in thousands) Tier I Capital........................................... $ 80,076 $ 62,928 $ 52,086 Tier II Capital.......................................... 10,959 7,608 6,136 ----------- ----------- ----------- Total Qualifying Capital................................. $ 91,035 $ 70,536 $ 58,222 =========== =========== =========== Risk Adjusted Total Assets (including off-balance sheet exposures)............................. $ 876,172 $ 606,473 $ 488,931 =========== =========== =========== Adjusted quarterly average assets........................ $ 893,741 $ 620,487 $ 508,561 =========== =========== =========== Tier I Capital Ratio..................................... 4.00% 9.14% 10.38% 10.65% Total Capital Ratio...................................... 8.00 10.39 11.63 11.91 Leverage Ratio........................................... 4.00 8.96 10.14 10.24
Information on the Bank capital ratios appears in Note 11 to the consolidated financial statements contained elsewhere herein. On December 31, 2005, 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 the Parent Company is dividends from the subsidiary bank. At December 31, 2005, the subsidiary bank could have paid additional dividends to the Parent Company of approximately $28 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 $30,000,000 and $50,150,000 of federal funds available at December 31, 2005 and 2004, respectively, and the Company had $5,000,000 of federal funds available at December 31, 2005. The Bank also had available as a source of financing, a line of credit with the Federal Home 20 Loan Bank of Atlanta of which $76,000,000 and $39,000,000 was available and unused at December 31, 2005 and 2004, respectively, subject to the availability of assets to pledge to secure such borrowings. Contractual Obligations The Company and the Bank have 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, 2005.
Payments due by period (in thousands) ----------------------------------------------------------------------- Less than More than Total 1 year 1-3 years 3-5 years 5 years -------------- ------------ ----------- ------------ ------------ Long-Term Debt........................ $ 103,444 $ 8,111 $ 20,224 $ 14,332 $ 60,777 Capital Lease Obligations............. -- -- -- -- -- Operating Lease Obligations........... 2,781 185 371 371 1,854 Time Deposits......................... 416,648 290,708 118,495 7,273 172 -------------- ------------ ----------- ----------- ----------- Total................................. $ 522,873 $ 299,004 $ 139,090 $ 21,976 $ 62,803 ============== ============ =========== =========== ===========
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, 2005.
Interest Rate Sensitivity Analysis (In thousands) 0-30 31-90 90-365 1-5 Over 5 Days Days Days Years Years Total ----------- ----------- ----------- ----------- ----------- ----------- Interest-earning assets (1) Loans............................ $ 547,582 $ 16,873 $ 69,070 $ 158,701 $ 2,831 $ 795,057 Securities and federal funds sold 1,804 -- 251 39,847 24,528 66,430 Interest-bearing deposits in banks 5,003 -- -- -- -- 5,003 ----------- ----------- ----------- ----------- ----------- ----------- 554,389 16,873 69,321 198,548 27,359 866,490 ----------- ----------- ----------- ----------- ----------- ----------- Interest-bearing liabilities (2) Demand deposits (3).............. 15,507 15,507 15,507 -- -- 46,521 Savings deposits (3)............. 52,765 52,765 52,765 -- -- 158,295 Time deposits.................... 24,026 48,476 208,474 121,737 169 402,882 Short-term borrowings............ 25,088 -- -- -- -- 25,088 Long-term borrowings............. -- 10,002 5,008 25,014 30,310 70,334 ------------ ----------- ----------- ----------- ----------- ----------- 117,386 126,750 281,754 146,751 30,479 703,120 ------------ ----------- ----------- ----------- ----------- ----------- Interest sensitivity gap............ $ 437,003 $ (109,877) $ (212,433) $ 51,797 $ (3,120) $ 163,370 =========== =========== =========== =========== =========== =========== Cumulative interest sensitivity gap. $ 437,003 $ 327,126 $ 114,693 $ 166,490 $ 163,370 =========== =========== =========== =========== =========== Ratio of interest-earning assets to Interest-bearing liabilities... 4.72 0.13 0.25 1.35 0.90 Cumulative ratio.................... 4.72 2.34 1.22 1.25 1.23 Ratio of cumulative gap to total interest-earning assets.......... 0.50 0.38 0.13 0.19 0.19 (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.
21 The above table indicates that in a rising interest rate environment, the Company's earnings may be positively affected in the short-term, (0-365 days) due to earning assets re-pricing faster than interest-bearing liabilities. As seen in the preceding table, for the first 30 days of re-pricing opportunity there is an excess of earning assets over interest-bearing liabilities of approximately $437.0 million. For the first 365 days, interest-earning assets exceed interest-bearing liabilities by approximately $114.7 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 increased approximately $10.1 million (33.2%) to $40.5 million in 2005 compared to 2004. Net interest income increased approximately $6.9 million (29.6%) to $30.4 million in 2004 compared to 2003. Net interest income increased approximately $3.9 million (20.3%) to $23.4 million in 2003 compared to 2002. The increase each year in the net interest income is primarily due to increased volume in average loans outstanding during the periods. Interest income was $57.9 million in 2005, which represented an increase of $18.3 million (46.2%) over 2004. Interest income was $39.6 million in 2004, which represented an increase of $6.1 million (18.1%) over 2003. Interest income was $33.5 million in 2003, which represented an increase of $2.2 million (7.2%) over 2002. Interest income produced by the loan portfolio increased $3.0 million (10.6%) in 2003 from 2002. 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. This impacted the net interest margin negatively during 2005; however, all loans are currently above their floor rate and are adjusting with each change in the rates. 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 on securities increased $291 thousand (21.9%) from 2003 to 2004. The increase in income was due to an increase in the securities purchased, which was partially offset by lower yields. Interest income on securities decreased $857 thousand (39.2%) from 2002 to 2003. The decrease in securities income from 2002 to 2003 was due to the combined effects of lower rates earned and lower average balances invested. 22 Interest income other than loans and securities, increased by $67 thousand in 2005, decreased by $95 thousand in 2004, and increased by $57 thousand in 2003. 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. In 2004, the average amount invested in fed funds sold declined, which caused the decline in interest income. In 2003 the opposite was true and there was an increase in fed funds sold, which caused the increase in interest income. Total interest expense increased by $8.2 million (88.9%) in 2005, decreased by $881 thousand (8.7%) in 2004, and decreased by $1.7 million (14.5%) in 2003 compared to 2002. 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 decrease in interest expense in 2004 was caused by lower deposit rates in general; a carryover from 2003's low rates. The decrease in interest expense in 2003 was caused by lower time deposit rates. (See the "Rate/Volume Analysis" following this section.) 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) increased in 2005 to 7.71% compared to 7.16% in 2004, and 6.89% in 2003. The increases in the Prime rate (13 times since June 2004) and the increases in the loan and security volumes resulted in these year over year increases, however, the effect of the floor rates on the loans caused the yield on loans to lag behind until a significant portion of the portfolio was free to adjust upwards with each increase. 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 2.92% in 2005 from a low of 2.08% in 2004 and 2.49% in 2003; which was down from 3.30% in 2002. The increase in 2005 was due to the rise in market rates paid on deposits and borrowed funds throughout the year. The Bank's net interest margin (net interest income divided by average interest earning assets) decreased in 2005 to 5.39% compared to 5.50% in 2004, which increased from 4.82% in 2003. 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. [The remainder of this page intentionally left blank] 23 The tables that follow show, for the periods indicated the daily average balances outstanding for the major categories of interest-bearing assets and interest-bearing liabilities, and the average interest rate earned or paid thereon. Such yields are calculated by dividing income or expense by the average balance of the corresponding assets or liabilities. Also shown are the changes in income attributable to changes in volume and changes in rate.
Average Balances, Interest Income/Expense and Yields/Rates Taxable Equivalent Basis Years Ended December 31, --------------------------------------------------------------------------------------------------------- 2005 2004 2003 -------------------------------- ------------------------------------- -------------------------------- Interest Average Interest Average Interest Average Average Income/ Yields/ Average Income/ Yields/ Average Income/ Yields/ Balance Expense Rates Balance Expense Rates Balance Expense Rates ---------- ---------- ------- ---------- ----------- ---------- ---------- --------- ---------- (Dollars in thousands) Assets: Earning assets: Loans, net of unearned income(1) $670,885 $54,709 8.15% $490,521 $37,743 7.69% $425,278 $31,874 7.49% Securities: Taxable............ 70,213 2,883 4.11 43,567 1,622 3.72 32,618 1,331 4.08 Tax-exempt......... -- -- 0.00 -- -- 0.00 -- -- 0.00 -------- --------- --------- ---------- --------- --------- Total securities. 70,213 2,883 4.11 43,567 1,622 3.72 32,618 1,331 4.08 Interest-bearing deposits in other banks..... 2,288 78 3.41 1,758 25 1.42 7,301 80 1.10 Federal funds sold... 7,047 210 2.98 17,084 197 1.15 21,446 237 1.11 -------- --------- --------- ---------- --------- --------- Total interest- earning assets(2) 750,433 57,880 7.71 552,930 39,587 7.16 486,643 33,522 6.89 Non-interest earning assets: Cash and due from banks 24,710 18,795 19,688 Accrued interest and other assets..... 26,252 25,785 14,373 Allowance for loan losses (9,977) (8,739) (7,121) --------- --------- -------- Total Assets..... $791,418 $588,771 $513,583 ========= ========= ======== Liabilities and Shareholders' Equity: Interest-bearing liabilities: Demand deposits.... $42,745 203 0.47% $33,216 101 0.30% $27,389 104 0.38% Savings deposits... 154,183 3,600 2.33 121,024 1,213 1.00 105,121 1,353 1.29 Time deposits...... 314,250 10,061 3.20 234,810 5,796 2.47 214,268 6,467 3.02 -------- --------- --------- ---------- --------- --------- Total deposits... 511,178 13,864 2.71 389,050 7,110 1.83 346,778 7,924 2.29 Long-term borrowings 70,912 3,021 4.26 50,762 2,034 4.01 55,660 2,131 3.83 Short-term borrowings 13,019 500 3.84 3,083 56 1.82 2,239 26 1.16 -------- -------- --------- ---------- --------- --------- Total interest- bearing liabilities 595,109 17,385 2.92 442,895 9,200 2.08 404,677 10,081 2.49 --------- -------- --------- ---------- --------- --------- Non interest-bearing liabilities: Demand deposits.... 129,326 94,085 64,306 Accrued interest and other liabilities 4,703 3,426 5,733 Shareholders' equity 62,280 48,365 38,867 --------- -------- -------- Total Liabilities and Shareholders' Equity......... $791,418 $588,771 $513,583 ======== ======== ======== Net Interest Income/Net Interest Spread.... 40,495 4.79% 30,387 5.08% 23,441 4.40% ========= ========= ========= Net yield on earning assets 5.39% 5.50% 4.82% ======= ======= ======= Taxable Equivalent adjustment: Securities......... -- -- -- Loans.............. 22 3 2 --------- --------- ---------- Total taxable equivalent adjustment..... 22 3 2 --------- --------- ---------- Net interest income.. $40,473 $ 30,384 $ 23,439 --======= ========= ========== (1) Average loans include nonaccrual loans. All loans and deposits are domestic. (2) Tax equivalent adjustments have been based on an assumed tax rate of 34 percent, and do not give effect to the disallowance for federal income tax purpose of interest expense related to certain tax-exempt earning assets.
24 The following tables set forth, for the years ended December 31, 2005, 2004 and 2003, 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 Average Volume Change in Volume Average Rate ------------------------------- ------------------------ ------------------------------- 2005 2004 2003 2005-2004 2004-2003 2005 2004 2003 --------- --------- --------- ----------- ----------- --------- --------- --------- (Dollars in thousands) Earning assets: Loans, net of unearned income (1) $ 670,885 $ 490,521 $ 425,278 $ 180,364 $65,243 8.15 % 7.69% 7.49% Securities Taxable................. 70,213 43,567 32,618 26,646 10,949 4.11 3.72 4.08 Tax exempt.............. -- -- -- -- -- 0.00 0.00 0.00 --------- --------- --------- ---------- ---------- Total Securities...... 70,213 43,567 32,618 26,646 10,949 4.11 3.72 4.08 --------- --------- --------- ---------- ---------- Interest-bearing deposits with other banks........ 2,288 1,758 7,301 530 (5,543) 3.41 1.42 1.10 Federal funds sold......... 7,047 17,084 21,446 (10,037) (4,362) 2.98 1.15 1.11 --------- --------- --------- --------- --------- Total Earning Assets.. $ 750,433 $ 552,930 $ 486,643 $ 197,503 $ 68,287 7.71 7.16 6.89 ========= ========= ========= ========= ========= Interest-Bearing Liabilities Deposits: Demand deposits......... $ 42,745 $ 33,216 $ 27,389 $ 9,529 $ 5,827 0.47 0.30 0.38 Savings................. 154,183 121,024 105,121 33,159 15,903 2.33 1.00 1.29 Time certificates....... 314,250 234,810 214,268 79,440 20,542 3.20 2.47 3.02 --------- --------- --------- --------- --------- Total Deposits........ 511,178 389,050 346,778 122,128 42,272 2.71 1.83 2.29 Long-term borrowings....... 70,912 50,762 55,660 20,150 (4,898) 4.26 4.01 3.83 Other borrowings........... 13,019 3,083 2,239 9,936 844 3.84 1.82 1.16 --------- --------- --------- --------- --------- Total Interest-Bearing Liabilities......... $ 595,109 $ 442,895 $ 404,677 $ 152,214 $ 38,218 2.92 2.08 2.49 ========= ========= ========= ========= ========= Net interest income/net interest spread 4.79 5.08 4.40 Net yield on earning assets 5.39 5.50 4.82 Net cost of funds.......... 2.32 1.66 2.07 Variance Attributed to Interest Income/Expense Variance 2005 2004 ------------------------ --------------------- ------------------------ ------------------------ 2005 2004 2003 2005-2004 2004-2003 Volume Rate Mix Volume Rate Mix ------ ------- ------- ---------- ---------- --------- ------- ----- --------- ------- ----- (Dollars in thousands) Earning assets: Loans, net of unearned income....... $54,709 $37,743 $31,873 $ 16,966 $ 5,870 $13,877 $2,259 $ 830 $4,888 $ 869 $ 113 Securities: Taxable.............. 2,883 1,622 1,332 1,261 290 992 167 102 476 (205) 19 Tax exempt........... -- -- -- -- -- -- -- -- -- -- -- ------- ------- ------- --------- --------- --------- ------ ----- -------- ------ ----- Total securities... 2,883 1,622 1,332 1,261 290 992 167 102 476 (205) 19 ------- ------- ------- --------- --------- --------- ------ ----- -------- ------ ----- Interest-bearing deposits with other banks..... 78 25 80 53 (55) 8 35 10 (61) 24 (18) Federal funds sold...... 210 197 237 13 (40) (116) 312 (183) (48) 9 (1) ------- ------- ------- --------- --------- -------- ------ ----- ------- ------ ----- Total earning assets 57,880 39,587 33,522 18,293 6,065 14,761 2,773 759 5,255 697 113 ------- ------- ------- --------- --------- -------- ------ ----- ------- ------ ----- Interest-bearing liabilities: Deposits: Demand............... 203 101 104 102 (3) 29 57 16 22 (21) (4) Savings.............. 3,600 1,213 1,353 2,387 (140) 332 1,613 442 205 (302) (43) Time certificates.... 10,061 5,796 6,467 4,265 ( 671) 1,961 1,722 582 620 (1,182) (109) ------- ------- ------- --------- --------- -------- ------ ----- ------- ------ ----- Total deposits..... 13,864 7,110 7,924 6,754 (814) 2,322 3,392 1,040 847 (1,505) (156) ------- ------- ------- --------- --------- -------- ------ ------ ------- ------ ----- Long-term borrowings.... 3,021 2,034 2,131 987 (97) 807 129 51 (188) 98 (7) Short-term borrowings... 500 56 26 444 30 180 62 202 10 15 5 ------- ------- ------- --------- --------- -------- ------ ------ ------- ------ ----- Total interest- bearing liabilities 17,385 9,200 10,081 8,185 (881) 3,309 3,583 1,293 669 (1,392) (158) ------- ------- ------- --------- --------- -------- ------ ------ ------- ------ ----- Net interest income/net interest spread......$40,495 $30,387 $23,441 $ 10,108 $ 6,946 $11,452 $ (810) $(534) $ 4,586 $ 2,089 $ 271 ======= ======= ======= ========= ========= ======= ====== ===== ======= ======= =====
25 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, an increase in the volume of loans that had been down graded during the latter half of 2005 required an additional increase in the allowance. During 2004 management increased the allowance due to the significant increase in nonperforming loans at the end of 2003. 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 $11,522,910 on December 31, 2005, $9,791,269 on December 31, 2004, and $8,066,817 on December 31, 2003, 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. [The remainder of this page intentionally left blank] 26 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, 2005.
Summary of Loan Loss Experience 2005 2004 2003 2002 2001 --------- --------- -------- -------- --------- (Dollars in thousands) Allowance for loan losses at beginning of year..... $ 9,791 $ 8,067 $ 6,319 $ 3,803 $ 3,267 Loans charged off: Commercial, financial and agricultural........... 131 209 139 161 162 Real estate - mortgage........................... -- 85 10 -- 185 Consumer......................................... 50 161 74 46 43 --------- --------- -------- -------- --------- Total loans charged off........................ 181 455 223 207 390 --------- --------- -------- -------- --------- Recoveries on loans previously charged off: Commercial, financial and agricultural........... 24 143 245 193 47 Real estate - mortgage........................... 2 30 2 3 131 Consumer......................................... 125 35 23 17 28 --------- --------- -------- -------- --------- Total recoveries............................... 151 208 271 213 206 --------- --------- -------- -------- --------- Net loans charged off (recovered).................. 30 247 (48) (6) 184 Provision for loan losses.......................... 1,762 1,971 1,700 2,510 720 --------- --------- -------- -------- --------- Allowance for loan losses at end of period......... $ 11,523 $ 9,791 $ 8,067 $ 6,319 $ 3,803 ========= ========= ======== ======== ========= Loans, net of unearned income, at end of period.... $ 791,609 $ 552,509 $437,593 $416,414 $ 318,666 Average loans, net of unearned income, outstanding for the period....................... 670,885 490,521 425,278 370,062 255,294 Ratio of net charge-offs to net average loans...... 0.00% 0.05% (0.01)% (0.00)% 0.07%
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 below, 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. Management allocated the allowance for loan losses to specific loan categories as follows:
Allocation of Allowance for Loan Losses December 31, --------------------------------------------------------------------------------------------- 2005 2004 2003 2002 2001 ------------------ ---------------- ----------------- --------------- --------------- Percent Percent Percent Percent Percent of Loans of Loans of Loans of Loans of Loans in Each in Each in Each in Each in Each Category Category Category Category Category to Total to Total to Total to Total to Total Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans --------- -------- ------- -------- -------- -------- -------- -------- -------- -------- (Dollars in Thousands) Domestic loans: Commercial, financial and agricultural $ 724 6.28% $ 271 9.26% $ 22 10.31% $2,494 10.27% $ 1,566 11.92% Real estate - mortgage and construction.. 10,757 93.36 9,512 88.89 8,039 86.92 3,357 86.54 2,021 85.37 Consumer.......... 42 0.36 8 1.85 6 2.77 468 3.19 216 2.71 --------- ------- ------- ------- ------- ------- ------ -------- ------- ------- $ 11,523 100.00% $ 9,791 100.00% $ 8,067 100.00% $6,319 100.00% $ 3,803 100.00% ========= ======= ======= ======= ======= ======= ====== ======== ======= =======
27 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, 2005, 2004, 2003, 2002, and 2001 of approximately $3,137,000, $10,012,000, $22,269,000, $7,698,000, and $2,367,000, respectively. The following table presents information concerning outstanding balances of nonperforming assets at December 31, 2005, 2004, 2003, 2002, and 2001.
Nonperforming Assets December 31, -------------------------------------------------------------------- 2005 2004 2003 2002 2001 ----------- ----------- ----------- ----------- ----------- (Amounts in thousands, except ratios) Nonaccruing loans........................... $ 194 $ 247 $ 9,727 $ 5,036 $ 1,333 Accruing loans 90 days or more past due..... 106 -- 6,420 2,662 984 Restructured loans.......................... 634 7,562 -- -- -- ----------- ----------- ------------ ------------ ----------- Total nonperforming loans.............. 934 7,809 16,147 7,698 2,317 Nonaccruing securities...................... -- -- -- -- -- Other real estate........................... 2,203 2,203 6,122 -- 50 ----------- ----------- ----------- ------------ ----------- Total.................................. $ 3,137 $ 10,012 $ 22,269 $ 7,698 $ 2,367 =========== =========== =========== =========== =========== Ratios: Loan loss allowance to total nonperforming assets................... 3.673 0.978 0.362 0.821 1.607 =========== =========== =========== ============ =========== Total nonperforming loans to total loans (net of unearned interest)............. 0.001 0.014 0.036 0.018 0.007 =========== =========== =========== ============ =========== Total nonperforming assets to total assets 0.003 0.015 0.042 0.015 0.006 =========== =========== =========== ============ ===========
There has been no significant impact on the Company's consolidated financial statements as a result of the provisions of Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan, or Statement of Financial Accounting Standards No. 118, Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures. Noninterest Income Noninterest income consists of revenues generated from a broad range of financial services and activities including fee-based services and profits and commissions earned through credit life insurance sales and other activities. In addition, gains or losses realized from the sale of investment portfolio securities are included in noninterest income. Total noninterest income increased by $70 thousand (1.85%) for the year ended December 31, 2005, compared to 2004. The minimal increase in 2005 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 (38.3%) 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. Total noninterest income increased by $408 thousand (17.6%) for the year ended December 31, 2003 compared to 2002 due to higher secondary market fees and service charges on deposit accounts. Total noninterest income increased by $621 thousand (36.6%) for the year ended 28 December 31, 2002 compared to 2001. The increase was due to higher service charges on deposit accounts (increased $507 thousand) and gains on sale of available-for-sale securities (increased $36 thousand). The table below sets forth the Company's noninterest income for the periods indicated.
2004/2005 2003/2004 Years Ended December 31, Percent Percent -------------------------------------------- 2005 2004 2003 Change Change ------------ ------------ ------------- ------------- -------------- (Dollars in thousands) Service charges on deposits........ $ 1,466 $ 1,350 $ 1,228 8.6% 9.9% Secondary market fees.............. 972 534 555 82.0 (3.7) Exchange fees...................... 778 554 416 40.4 33.2 Bookkeeping fees................... 167 117 100 42.7 17.0 Securities gains................... -- -- -- 0.0 0.0 Income/gains on other real estate.. -- 589 69 (100.0) 753.6 Gain on sale of fixed assets....... 21 415 -- (94.9) 100.0 Safe deposit box rental............ 68 66 66 3.0 0.0 Other.............................. 372 149 294 161.0 (49.4) ------------ ------------ ------------- $ 3,844 $ 3,774 $ 2,728 1.85 38.3 ============ ============ =============
Noninterest Expenses 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. From 2003 to 2004, noninterest expense increased $1.3 million (11.6%). Salaries and employee benefits in 2004 increased $721 thousand (10.3%) from 2003 to a total of $7.7 million. The increase was due to the normal increases from year to year for salaries, benefits and insurance costs. From 2002 to 2003, noninterest expense increased $2.0 million (21.7%). Salaries and employee benefits in 2003 increased $1.4 million (26.2%) from 2002 to a total of $7.0 million. The increase in 2003 was due to added staff for a new branch and increased secondary market loan brokerage operations. Occupancy and equipment expense increased $476 thousand (27.5%) from 2004 to 2005, increased $198 thousand (12.9%) from 2003 to 2004, and decreased $133 thousand (7.9%) from 2002 to 2003. 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. During 2004 occupancy expense increased primarily due to the expense of additional equipment added during 2003 and 2004 (increased depreciation and maintenance), increased building repairs due to the hurricanes in 2004 and higher property taxes in general. During 2003 occupancy expense decreased primarily due to lower maintenance contract costs. Expenses related to other real estate owned were down in 2005 compared to 2004 ($126 thousand compared to $479 thousand) and the $349 thousand in 2003. There were no additions to other real estate owned in 2005. Other expenses were significantly higher in 2005 compared to 2004 and 2003. Part of the increase was due to the overall growth of the bank (i.e. supplies, advertising, ATM, courier, etc.) but also due to increased professional fees that were necessary to comply with increased regulatory requirements. 29 The table below sets forth the Company's noninterest expenses for the periods indicated.
2004/2005 2003/2004 Years Ended December 31, Percent Percent -------------------------------------------- 2005 2004 2003 Change Change ------------ ------------ ------------- ------------- -------------- (Dollars in thousands) Salaries and employee benefits..... $ 7,851 $ 7,729 $ 7,008 1.6% 10.3% Occupancy and equipment expense.... 2,206 1,730 1,532 27.5 12.9 Professional fees.................. 405 249 263 62.7 (5.3) Advertising........................ 288 265 222 8.7 19.4 Telephone.......................... 264 188 175 40.4 7.4 Supplies........................... 224 171 152 31.0 12.5 Regulatory fees and assessments.... 202 176 154 14.8 14.3 ATM expense........................ 188 147 137 27.9 7.3 Courier fees....................... 176 127 113 38.6 12.4 Software maintenance............... 141 138 164 2.2 (15.9) Postage............................ 117 123 136 (4.9) (9.5) Correspondent bank fees............ 117 91 70 28.6 30.0 Director and committee fees........ 70 67 67 4.5 0.0 Employee education................. 66 70 69 (5.7) 1.5 Dues and subscriptions............. 57 48 44 18.8 9.1 Taxes and licenses................. 21 85 95 (75.3) (10.5) Other.............................. 540 847 579 (36.3) 46.3 ------------ ------------ ------------- Total........................... $ 12,933 $ 12,251 $ 10,980 5.6 11.6 ============ ============ =============
Income Taxes Income tax expense increased $3.7 million (48.2%) to $11.4 million for the year ended December 31, 2005, increased $2.6 million (51.1%) to $7.7 million for the year ended December 31, 2004, and increased $1.2 million (32.2%) to $5.1 million for the year ended December 31, 2003. The effective tax rate as a percentage of pretax income was 38.5% in 2005, 38.6% in 2004, and 37.7% in 2003. The statutory federal rate was 34 percent during 2005, 2004, and 2003. There is no current or pending tax legislation of which management is aware that if passed would have any material effect on the financial statements. For further information concerning the provision for income taxes, refer to Note 14, Income Taxes, of the "Notes to 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 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. 30 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.
Percentage Increase (Decrease) in Interest Income/Expense Given Interest Rate Shifts Down 200 Up 200 Basis Points Basis Points For the Twelve Months after December 31, 2005 Projected change in: Interest income.......................................................... (9.64)% 9.41% Interest expense......................................................... (10.10) 10.10 Net interest income...................................................... (9.42) 9.07
Other Accounting Issues In January 2003, the Auditing Standards Board issued Statement on Auditing Standards ("SAS") No. 101, Auditing Fair Value Measurements and Disclosures. This statement establishes standards on auditing the measurement and disclosure of assets, liabilities, and specific components of equity presented or disclosed at fair value in financial statements. This SAS is effective for audits of financial statements for periods beginning on or after June 15, 2003. The adoption of SAS No. 101 did not have a material impact on the Company's consolidated financial statements. 31 In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. The provisions of this statement are effective for contracts entered into or modified after June 20, 2003, and hedging relationships designated after June 30, 2003, and generally require that contracts with comparable characteristics be accounted for similarly. Except for the provisions related to FASB Statement 133, Accounting for Derivative Instruments and Hedging Activities, all provisions of this statement should be applied prospectively. The provisions of the statement related to Statement 133 Implementation Issues that have been effective for fiscal quarters that begin prior to June 15, 2003, should continue to be applied in accordance with their respective effective dates. The adoption of the provisions of this statement did not have a material effect on the Company's consolidated operating results or financial position. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires liability treatment for certain financial instruments which had previously been recognized as equity. The provisions of this statement are effective for financial instruments entered into or modified after May 31, 2003, and otherwise are effective at the beginning of the first interim period beginning after June 15, 2003. It is to be implemented by reporting the cumulative effect of a change in accounting principle for financial instruments created before May 15, 2003, and still existing at the beginning of the interim period of adoption. Restatement is not permitted. The adoption of the provisions of this statement did not have a material effect on the Company's consolidated operating results or financial position. In December 2003, the Financial Accounting Standards Board ("FASB") revised previously issued SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits. This statement revises employers' disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans required by FASB Statements No. 87, Employers' Accounting for Pensions, No. 88, Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions. This statement retains the disclosure requirements contained in FASB Statement No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits, which it replaces. It requires additional disclosures to those in the original Statement No. 132 about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The required information should be provided separately for pension plans and for other postretirement benefit plans. The provisions of this statement are effective for financial statements with fiscal years ending after December 15, 2003. The interim-period disclosures required by this statement are effective for interim periods beginning after December 15, 2003. The adoption of the provisions of this revised statement did not have a material effect on the Company's consolidated financial position or operating results. In December 2003, the FASB revised previously issued FIN 46, Consolidation of Variable Interest Entities, ("FIN 46R") which clarifies the application of Accounting Research Bulletin ("ARB") 51, Consolidated Financial Statements, to certain entities (called variable interest entities) in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The reporting and disclosure requirements of this Interpretation are effective for all financial statements of public companies for the first period ending after December 15, 2003 and for all other types of entities for periods ending after March 15, 2004. The adoption of this interpretation did not have a material impact on the Company's consolidated financial statements. In December 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer, which addresses the accounting for differences between contractual cash flows and expected cash flows for loans acquired in a transfer when those differences are attributable at least in part to a decline in credit quality. The scope of SOP 03-3 includes loans where there is evidence of deterioration in credit quality since origination, and includes loans acquired individually, in pools or as part of a business combination. Under SOP 03-3, the difference between expected cash flows and the purchase price is accreted as an adjustment to yield over the life. The adoption of SOP 03-03 did not have a material impact on the Company's consolidated financial position or operating results. 32 In March 2004, the Emerging Issues Task Force ("EITF") reached a consensus on the remaining portions of EITF 03-01, The Meaning of Other-Than-Temporary Impairment and It's Application to Certain Investments, effective for the first fiscal year or interim period beginning after June 15, 2004. EITF 03-01 provides guidance for determining when an investment is considered impaired, whether impairment is other-than-temporary, and measurement of an impairment loss. An investment is considered impaired if the fair value of the investment is less than its cost. Generally, an impairment is considered other-than-temporary unless: (1) the investor has the ability and intent to hold an investment for a reasonable period of time sufficient for an anticipated recovery of fair value up to (or beyond) the cost of the investment, and (2) evidence indicating that the cost of the investment is recoverable within a reasonable period of time outweighs evidence to the contrary. If impairment is determined to be other-than-temporary, then an impairment loss should be recognized equal to the difference between the investment's cost and its fair value. Certain disclosure requirements of EITF 03-01 were adopted in 2003 and the Company began presenting the new disclosure requirements in its consolidated financial statements for the year ended December 31, 2003. The recognition and measurement provisions were initially effective for other-than-temporary impairment evaluations in reporting periods beginning after June 15, 2004. In June 2005, the FASB decided not to provide additional guidance on the meaning of other-than-temporary impairment, but directed the staff to issue proposed FSP EITF 03-1-a, Implementation Guidance for the Application of Paragraph 16 of EITF Issue No. 03-1 as final. However, in November 2005 FASB issued FASB Staff Position (retitled FSP 115-1/124-1), The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments. This FSP provides additional guidance on when an investment in a debt or equity security should be considered impaired and when that impairment should be considered other-than-temporary and recognized as a loss in earnings. Specifically, the guidance clarifies that an investor should recognize an impairment loss no later than when the impairment is deemed other-than-temporary, even if a decision to sell has not been made. The FSP also requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The Company applied the guidance in this FSP in 2005 and there was no material affect to the results of operations or the statement of financial position. In March 2004, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 105, Application of Accounting Principles to Loan Commitments. SAB 105 requires that the fair value measurement of mortgage loan commitments, which are derivatives, exclude any expected future cash flows related to the customer relationship or servicing rights. The guidance in SAB 105 must be applied to mortgage loan commitments entered into after March 31, 2004. The impact on the Company is not material given the declines in mortgage banking volume, but could be in the future. The impact is primarily the timing of when gains should be recognized in the consolidated financial statements. In December 2004, the FASB issued SFAS No. 123 (revised 2004), entitled Share-Based Payment ("SFAS No. 123(R)") that will require compensation costs related to share-based payment transactions to be recognized in the financial statements. This statement eliminates the alternative to use Opinion 25's intrinsic value method of accounting that was provided in SFAS No. 123 as originally issued. Under Opinion 25, issuing stock options to employees generally resulted in recognition of no compensation cost. This statement requires entities to recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards (with limited exceptions). Recognition of that compensation cost helps users of financial statements to better understand the economic transactions affecting an entity and to make better resource allocation decisions. The Company is currently evaluating the provisions of SFAS No. 123(R) and will adopt it on January 1, 2006, the effective date of this statement. The adoption of this statement is not expected to have a material impact on the consolidated financial statements. On December 16, 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29. SFAS No. 153 amends the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged and more broadly provides exceptions regarding exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance when the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of SFAS No. 153 are effective for nonmonetary asset exchanges occurring in periods beginning after June 15, 2005. Management does not believe that the adoption of this standard will have a material impact on the financial condition or the operating results of the Company. In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, which replaces APB Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements--An Amendment of APB Opinion No. 28. SFAS No. 154 changes the requirements for the accounting and reporting of a change in accounting principle. It applies to all voluntary changes in accounting principle as well as to 33 changes required by an accounting pronouncement that does not include specific transition provisions. SFAS No. 154 eliminates the requirement in APB Opinion No. 20 to include the cumulative effect of changes in accounting principle in the income statement in the period of change. Instead, to enhance the comparability of prior period financial statements, SFAS No. 154 requires that changes in accounting principle be retrospectively applied. Under retrospective application, the new accounting principle is applied as of the beginning of the first period presented as if that principle had always been used. The cumulative effect of the change is reflected in the carrying value of assets and liabilities as of the first period presented and the offsetting adjustments are recorded to opening retained earnings. Each period presented is adjusted to reflect the period-specific effects of applying the change. SFAS No. 154 also redefines "restatement" as the revising of previously issued financial statements to reflect the correction of an error. Only direct effects of the change will be included in the retrospective application; all indirect effects will be recognized in the period of change. If it is impracticable to determine the cumulative effect for all prior periods, the new accounting principle should be applied as if it were adopted prospectively from the earliest date practicable. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. In February 2006, the FASB issued SFAS No. 155 entitled Accounting for Certain Hybrid Financial Instruments. SFAS No. 155 amends SFAS No. 133, entitled Accounting for Derivative Instruments and Hedging Activities, and SFAS No. 140, entitled Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This statement permits fair value remeasurement of certain hybrid financial instruments containing embedded derivatives and requires evaluation of securitized financial assets for purposes of identifying items of a derivative nature. The statement includes further clarification as to the derivative classification of selected financial instruments. The provisions of SFAS No. 155 are effective for all financial instruments acquired or issued after the beginning of the first fiscal year that begins after September 15, 2006. The fair value "election" within the literature may be utilized upon adoption of the guidance related to hybrid financial instruments. Earlier adoption is permitted as of the beginning of a fiscal year, provided that reporting entities have not yet issued financial statements. The provisions within SFAS No. 155 may be applied to instruments "held" at the date of adoption on an instrument-by-instrument basis. At adoption, any difference between the total carrying amount of the individual components of the existing hybrid financial instrument and the fair value of the combined hybrid financial instrument should be recognized as a cumulative-effect adjustment to beginning retained earnings. Reporting entities should separately disclose the gross gains and losses that make up the cumulative-effect adjustment, determined on an instrument-by-instrument basis. Prior periods should not be restated. The Company does not expect the adoption of this statement to have a material effect on the consolidated financial statements. [The remainder of this page intentionally left blank] 34 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 Page(s) Report of Independent Registered Public Accounting Firm.................................................... 36 Consolidated Statements of Financial Condition as of December 31, 2005 and 2004............................ 38 Consolidated Statements of Income for the Years Ended December 31, 2005, 2004 and 2003..................... 39 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2005, 2004 and 2003....... 40 Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003................. 41 Notes to Consolidated Financial Statements................................................................. 43 Quarterly Results (Unaudited).............................................................................. 80
35 [GRAPHIC OMITTED] Schauer Taylor, PC Certified Public Accountants and Consultants 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, 2005 and 2004, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2005. We also have audited management's assessment, included in the accompanying "Management Report on Internal Control Over Financial Reporting," that the Company maintained effective internal control over financial reporting as of December 31, 2005, 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. Our responsibility is to express an opinion on these consolidated financial statements, an opinion on management's assessment, and an opinion on the effectiveness of 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, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and 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. 36 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 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, 2005 and 2004, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, management's assessment that Florida Community Banks, Inc. and subsidiary maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the criteria established in Internal Control - Integrated Framework issued by COSO. Furthermore, in our opinion, Florida Community Banks, Inc. and subsidiary maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control - Integrated Framework issued by COSO. Birmingham, Alabama March 2, 2006 Schauer Taylor, PC 37 FLORIDA COMMUNITY BANKS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION December 31, 2005 and 2004
2005 2004 ------------------ ------------------ Assets Cash and due from banks............................................. $ 27,177,610 $ 18,665,823 Interest-bearing demand deposits with banks......................... 5,002,739 948,255 Federal funds sold.................................................. 188,000 -- ------------------ ------------------ Cash and Cash Equivalents....................................... 32,368,349 19,614,078 Securities held-to-maturity, fair value of $59,290,254 in 2005 and $68,991,864 in 2004...................................... 61,033,171 69,330,160 Other investment securities......................................... 5,209,265 4,935,077 Loans held-for-sale................................................. 300,000 576,200 Loans, net of unearned income....................................... 791,308,855 551,932,955 Allowance for loan losses........................................... (11,522,910) (9,791,269) ------------------ ------------------ Net Loans....................................................... 779,785,945 542,141,686 Premises and equipment, net......................................... 13,776,233 13,345,071 Accrued interest.................................................... 4,941,241 3,289,678 Foreclosed real estate.............................................. 2,203,435 2,203,435 Deferred taxes, net................................................. 5,830,225 4,313,485 Other assets........................................................ 1,633,670 1,115,434 ------------------ ------------------ Total Assets.................................................... $ 907,081,534 $ 660,864,304 ================== ================== Liabilities and Shareholders' Equity Liabilities Deposits Noninterest-bearing............................................... $ 129,559,895 $ 113,217,461 Interest-bearing.................................................. 607,695,861 407,367,970 ------------------ ------------------ Total Deposits.................................................. 737,255,756 520,585,431 Short-term borrowings............................................... 25,088,000 14,057,000 Accrued interest.................................................... 2,399,280 1,407,563 Deferred compensation............................................... 281,629 313,622 Notes payable....................................................... 23,939 -- FHLB advances....................................................... 60,000,000 60,000,000 Subordinated debentures............................................. 10,310,000 10,310,000 Other liabilities................................................... 1,647,148 1,262,989 ------------------ ------------------ Total Liabilities............................................... 837,005,752 607,936,605 Shareholders' Equity Common stock - par value $0.01 per share, 10,000,000 shares authorized, 5,493,141 shares issued and outstanding at December 31, 2005 and 5,423,185 issued and outstanding at December 31, 2004....................... 54,931 54,231 Paid-in capital..................................................... 18,364,812 17,146,496 Retained earnings................................................... 51,656,039 35,726,972 ------------------ ------------------ Total Shareholders' Equity...................................... 70,075,782 52,927,699 ------------------ ------------------ Total Liabilities and Shareholders' Equity...................... $ 907,081,534 $ 660,864,304 ================== ==================
See notes to consolidated financial statements 38 FLORIDA COMMUNITY BANKS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, 2005, 2004 and 2003
2005 2004 2003 ------------------ ------------------ ------------------ Interest Income Interest and fees on loans..................... $ 54,686,904 $ 37,739,970 $ 31,871,196 Interest and dividends on taxable securities... 2,883,246 1,622,283 1,331,446 Interest on federal funds sold................. 210,213 197,144 237,388 Interest on deposits in banks.................. 78,047 24,378 79,717 ------------------ ------------------ ------------------ Total Interest Income...................... 57,858,410 39,583,775 33,519,747 ------------------ ------------------ ------------------ Interest Expense Interest on deposits........................... 13,863,702 7,109,471 7,923,935 Interest on FHLB advances...................... 2,308,069 1,503,145 1,604,325 Interest on short-term borrowings.............. 500,749 56,072 27,801 Interest on subordinated debentures............ 712,617 530,931 524,680 ------------------ ------------------ ------------------ Total Interest Expense..................... 17,385,137 9,199,619 10,080,741 ------------------ ------------------ ------------------ Net interest income............................... 40,473,273 30,384,156 23,439,006 Provision for loan losses......................... 1,762,000 1,970,768 1,700,000 ------------------ ------------------ ------------------ Net Interest Income After Provision For Loan Losses................................ 38,711,273 28,413,388 21,739,006 Noninterest Income Customer service fees.......................... 1,465,639 1,350,302 1,365,106 Income and gain on sale from other real estate owned................................. -- 588,982 154,373 Secondary market loan fees..................... 972,349 533,847 555,103 Other operating income......................... 1,405,812 1,300,643 653,588 ------------------ ------------------ ------------------ Total Noninterest Income................... 3,843,800 3,773,774 2,728,170 ------------------ ------------------ ------------------ Noninterest Expenses Salaries and employee benefits................. 7,851,022 7,728,811 7,007,575 Occupancy and equipment expense................ 2,205,868 1,730,033 1,532,288 Expenses, write-downs, and losses on sale from other real estate owned............ 126,082 479,159 349,052 Other operating expenses....................... 2,750,343 2,313,330 2,091,035 ------------------ ------------------ ------------------ Total Noninterest Expenses................. 12,933,315 12,251,333 10,979,950 ------------------ ------------------ ------------------ Income before income taxes........................ 29,621,758 19,935,829 13,487,226 Income tax expense................................ 11,403,727 7,693,897 5,090,677 ------------------ ------------------ ------------------ Net Income........................................ $ 18,218,031 $ 12,241,932 $ 8,396,549 ================== ================== ================== Earnings Per Common Share Basic.......................................... $ 3.33 $ 2.26 $ 1.56 Diluted........................................ 3.29 2.23 1.54 Cash Dividends Declared Per Common Share................................... 0.42 0.35 0.15 Weighted Average Shares Outstanding Basic.......................................... 5,476,205 5,419,554 5,396,603 Diluted........................................ 5,529,177 5,478,143 5,438,176
See notes to consolidated financial statements 39 FLORIDA COMMUNITY BANKS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Years Ended December 31, 2005, 2004 and 2003
Common Paid-in Retained Stock Capital Earnings Total ---------------- ---------------- ----------------- ----------------- Balance at December 31, 2002................ $ 53,965 $ 16,657,323 $ 17,752,512 $ 34,463,800 Net income - 2003................... -- -- 8,396,549 8,396,549 ----------------- Comprehensive income................ -- -- -- 8,396,549 ----------------- Issuance of stock options........... -- 6,249 -- 6,249 Cash dividends - Common $0.15 per share.................. -- -- (780,829) (780,829) ---------------- ---------------- ----------------- ----------------- Balance at December 31, 2003................ 53,965 16,663,572 25,368,232 42,085,769 Net income - 2004................... -- -- 12,241,932 12,241,932 ----------------- Comprehensive income................ -- -- -- 12,241,932 ----------------- Sale of common stock................ 266 464,936 -- 465,202 Issuance of stock options........... -- 17,988 -- 17,988 Cash dividends - Common $0.35 per share.................. -- -- (1,883,192) (1,883,192) ---------------- ---------------- ----------------- ----------------- Balance at December 31, 2004................ 54,231 17,146,496 35,726,972 52,927,699 Net income - 2005................... -- -- 18,218,031 18,218,031 ----------------- Comprehensive income................ -- -- -- 18,218,031 ----------------- Sale of common stock................ 700 1,161,533 -- 1,162,233 Issuance of stock options........... -- 56,783 -- 56,783 Cash dividends - Common $0.42 per share.................. -- -- (2,288,964) (2,288,964) ---------------- ---------------- ----------------- ----------------- Balance at December 31, 2005................ $ 54,931 $ 18,364,812 $ 51,656,039 $ 70,075,782 ================ ================ ================= =================
See notes to consolidated financial statements 40 FLORIDA COMMUNITY BANKS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2005, 2004 and 2003
2005 2004 2003 ------------------ ------------------ ------------------ Operating Activities Net income..................................... $ 18,218,031 $ 12,241,932 $ 8,396,549 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses.................. 1,762,000 1,970,768 1,700,000 Depreciation, amortization, and accretion, net....................... 1,181,656 943,682 917,628 Deferred tax benefit....................... (1,512,872) (1,150,602) (1,202,370) Gain on disposition of other real estate.............................. -- (579,244) -- Gain on disposition of premises and equipment................... (21,216) (414,508) -- (Increase) decrease in accrued interest receivable...................... (1,651,563) (580,576) 195,047 Increase (decrease) in accrued interest payable......................... 991,717 548,780 (1,008,041) Other, net................................. (157,099) 829,720 40,660 ------------------ ------------------ ------------------ Net Cash Provided By Operating Activities..................... 18,810,654 13,809,952 9,039,473 ------------------ ------------------ ------------------ Investing Activities Purchases of other securities.................. (274,188) (1,750,100) (500,000) Purchases of investment securities held-to-maturity............................. -- (40,246,598) (29,251,273) Proceeds from sales, maturities, calls and pay-downs of investment securities held-to-maturity.................. 7,950,335 6,437,208 26,647,486 Proceeds from sale of other securities ........ -- -- 500,000 Net increase in loans to customers............. (239,099,700) (111,333,522) (27,502,464) Purchase of premises and equipment............. (1,329,146) (1,593,109) (3,345,158) Proceeds from disposition of premises and equipment....................... 41,000 718,505 21,842 Proceeds from disposition of foreclosed real estate....................... -- 715,564 -- ------------------ ------------------ ------------------ Net Cash Used In Investing Activities..................... (232,711,699) (147,052,052) (33,429,567) ------------------ ------------------ ------------------
(Continued on following page) See notes to consolidated financial statements 41 FLORIDA COMMUNITY BANKS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED Years Ended December 31, 2005, 2004 and 2003
2005 2004 2003 ------------------ ------------------ ------------------ Financing Activities Net increase in demand deposits, NOW accounts, and savings accounts............... $ 16,342,434 $ 60,294,535 $ 39,881,549 Net increase (decrease) in certificates of deposit................................... 200,327,891 37,006,494 (40,531,669) Net increase in short-term borrowings.......... 11,031,000 6,457,000 7,500,000 Issuance of long-term debt..................... -- 25,000,000 -- Repayments of long-term debt................... -- (5,021,698) (10,000,000) Increase in other debt, net.................... 23,939 -- -- Sale of common stock........................... 1,162,233 465,202 -- Compensation associated with the issuance of options, net of tax.............. 56,783 17,988 6,227 Cash dividends................................. (2,288,964) (1,883,192) (780,829) ------------------ ------------------ ------------------ Net Cash Provided By (Used In) Financing Activities.................... 226,655,316 122,336,329 (3,924,722) ------------------ ------------------ ------------------ Net (Decrease) Increase in Cash and Cash Equivalents............................... 12,754,271 (10,905,771) (28,314,816) Cash and Cash Equivalents at Beginning of Year........................... 19,614,078 30,519,849 58,834,665 ------------------ ------------------ ------------------ Cash and Cash Equivalents at End of Year................................. $ 32,368,349 $ 19,614,078 $ 30,519,849 ================== ================== ==================
See notes to consolidated financial statements 42 FLORIDA COMMUNITY BANKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005, 2004 and 2003 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 nine additional branch offices in Southwest Florida; a new Valencia branch is scheduled to open in December 2006 or early 2007, which will replace the branch that is currently in a convenience store. The Company plans to open three, possibly four new branches in 2007. 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. 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, trading, or other. 43 FLORIDA COMMUNITY BANKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005, 2004 and 2003 Note 1 - Summary of Significant Accounting Policies - Continued 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. Securities classified as other represent investments in equity securities carried at cost. These investments have no readily ascertainable market value; however, management is not aware of any conditions that would require adjustment to the reflected carrying values. Realized and unrealized gains and losses are based on the specific identification method. Declines in the fair value of individual held-to-maturity and available-for-sale securities below their cost that are other-than-temporary result in write-downs of the individual securities to their fair value. The related write-downs are included in earnings as realized losses. The Company has no available-for-sale or trading securities. 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, 2005 and 2004, 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. 44 FLORIDA COMMUNITY BANKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005, 2004 and 2003 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 A loan is considered impaired, based on current information and events, if it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Uncollateralized loans are measured for impairment based on the present value of expected future cash flows discounted at the historical effective interest rate, while all collateral-dependent loans are measured for impairment based on the fair value of the collateral. Smaller balance homogeneous loans, which consist of residential mortgages and consumer loans, are evaluated collectively and reserves are established based on historical loss experience. The allowance for loan losses is established through charges to earnings in the form of a provision for loan losses. Increases and decreases in the allowance due to changes in the measurement of the impaired loans are considered in the provision for loan losses. Loans continue to be classified as impaired unless they are brought fully current and the collection of scheduled interest and principal is considered probable. When a loan or portion of a loan is determined to be uncollectible, the portion deemed uncollectible is charged against the allowance and subsequent recoveries, if any, are credited to the allowance. Management's periodic evaluation of the adequacy of the allowance is based on the Bank's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrowers' ability to repay, estimated value of any underlying collateral, and an analysis of current economic conditions. While management believes that it has established the allowance in accordance with generally accepted accounting principles and has taken into account the views of banking regulators and the current economic environment, there can be no assurance that in the future the Bank's regulators or its economic environment will not require further increases in the allowance. Income Recognition on Impaired and 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. 45 FLORIDA COMMUNITY BANKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005, 2004 and 2003 Note 1 - Summary of Significant Accounting Policies - Continued 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. Interest income recognized on a cash basis was immaterial for the years ended December 31, 2005, 2004 and 2003. 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. 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. Retirement Plan During 2003 the Company had a defined contribution Pension Plan, which was terminated as of December 31, 2003. The Company also has a Profit-Sharing Plan covering all eligible employees that was amended as of December 31, 2003, to allow 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 46 FLORIDA COMMUNITY BANKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005, 2004 and 2003 Note 1 - Summary of Significant Accounting Policies - Continued and employee benefits expense. Pension Plan contributions were required at 10 percent of total eligible employee compensation. 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. The Company contributes amounts to the pension fund sufficient to satisfy funding requirements of the Employee Retirement Income Security Act. Advertising Costs The Company's policy is to expense advertising costs as incurred. Advertising expense for the years ended December 31, 2005, 2004 and 2003 amounted to approximately $288,000, $265,000, and $222,000, respectively. Income Taxes Income taxes are provided for the tax effects of the transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the basis of the allowance for loan losses, accumulated depreciation, and accrued employee benefits for financial and income tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred tax assets and liabilities are reflected at income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Stock-Based Compensation The Company has a stock-based employee compensation plan. The plan has been accounted for under the provisions of Statement of Financial Accounting Standards ("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 allows for a prospective method of adoption of SFAS No. 123, whereas, the Company can prospectively account for the current expense of options granted during 2003 and thereafter. Options granted prior to 2003 continue to be accounted for under the recognition and measurement provisions of APB No. 25, Accounting for Stock Issued to Employees, and the related Interpretations. The compensation cost recognized for stock options granted in 2003, 2004, and 2005 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 2003 was immaterial for the years ended December 31, 2003, 2004, 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. The Company adopted SFAS No. 123(R) using the modified prospective method for interim periods for stock option expense, as provided by SFAS No. 148. The adoption of SFAS No. 123(R) is not expected to have a material effect on the Company's consolidated operating results. 47 FLORIDA COMMUNITY BANKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005, 2004 and 2003 Note 1 - Summary of Significant Accounting Policies - Continued The following table illustrates the total stock compensation expense recorded in salaries and employee benefits expense for each quarter of 2005.
First Second Third Fourth Total ------------- ------------- ------------- ------------- -------------- Stock option expense.................. $ 13,553 $ 15,947 $ 23,222 $ 4,061 $ 56,783 Tax benefit........................... -- -- -- -- --
The Company has used the Black-Scholes option pricing model for all grant date estimations of fair value under SFAS No. 123 and will continue to use this model 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:
Years Ended December 31, -------------------------------------------------------------- 2005 2004 2003 ------------------ ------------------ ------------------ Assumptions: Average risk free interest rate................ 4.47% 3.97% 3.31% Average expected volatility.................... 13.00 11.10 6.60 Expected dividend yield........................ 1.50 3.75 3.17 Expected life.................................. 8.0 Years 8.0 Years 6.6 Years
Prior to the adoption of SFAS No. 123(R), forfeitures were recognized as they occurred. The effect of adopting SFAS No. 123(R), which includes the impact of changing from the prior method of recognizing forfeitures as they occur to estimating forfeitures at the grant date, is not expected to be material. 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. 48 FLORIDA COMMUNITY BANKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005, 2004 and 2003 Note 1 - Summary of Significant Accounting Policies - Continued The Bank has available as a source of financing a line of credit with the Federal Home Loan Bank of Atlanta that is limited to 15% of assets (approximately $136,000,000 at December 31, 2005), of which approximately $76,000,000 was available and unused. The ability to utilize the remaining line is dependent on the amount of eligible collateral that is available to pledge to the Federal Home Loan Bank. The Bank has available as a source of financing a line of credit with the Federal Reserve Bank of Atlanta that is limited to a percent of collateral value, the percent determined by the type of collateral. At December 31, 2005, approximately $4,200,000 was available and unused. The ability to utilize the line is dependent on the amount of eligible collateral that is available to pledge to the Federal Reserve Bank of Atlanta. The Bank also has available as a source of short-term financing the purchase of federal funds from other commercial banks and commercial lines of credit. At December 31, 2005, the total amount available for short-term financing was $30,000,000. The Company has available a $5,000,000 line of credit with 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, 2005, $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 2004 and 2003 have been reclassified to conform with the 2005 presentation. Recently Issued Accounting Standards In January 2003, the Auditing Standards Board issued Statement on Auditing Standards ("SAS") No. 101, Auditing Fair Value Measurements and Disclosures. This statement establishes standards on auditing the measurement and disclosure of assets, liabilities, and specific components of equity presented or disclosed at fair value in financial statements. This SAS is effective for audits of financial statements for periods beginning on or after June 15, 2003. The adoption of SAS No. 101 did not have a material impact on the Company's consolidated financial statements. In April 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. The provisions of this statement are effective for contracts entered into or modified after June 20, 2003, and hedging relationships designated after June 30, 2003, and generally require that contracts with comparable characteristics be accounted for similarly. Except for the provisions related to FASB Statement 133, Accounting for Derivative 49 FLORIDA COMMUNITY BANKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005, 2004 and 2003 Note 1 - Summary of Significant Accounting Policies - Continued Instruments and Hedging Activities, all provisions of this statement should be applied prospectively. The provisions of the statement related to Statement 133 Implementation Issues that have been effective for fiscal quarters that begin prior to June 15, 2003, should continue to be applied in accordance with their respective effective dates. The adoption of the provisions of this statement did not have a material effect on the Company's operating results or financial position. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires liability treatment for certain financial instruments which had previously been recognized as equity. The provisions of this statement are effective for financial instruments entered into or modified after May 31, 2003, and otherwise are effective at the beginning of the first interim period beginning after June 15, 2003. It is to be implemented by reporting the cumulative effect of a change in accounting principle for financial instruments created before May 15, 2003, and still existing at the beginning of the interim period of adoption. Restatement is not permitted. The adoption of the provisions of this statement did not have a material effect on the Company's operating results or financial position. In December 2003, the FASB revised previously issued SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits. This statement revises employers' disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans required by FASB Statements No. 87, Employers' Accounting for Pensions, No. 88, Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions. This statement retains the disclosure requirements contained in FASB Statement No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits, which it replaces. It requires additional disclosures to those in the original Statement No. 132 about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The required information should be provided separately for pension plans and for other postretirement benefit plans. The provisions of this statement are effective for financial statements with fiscal years ending after December 15, 2003. The interim-period disclosures required by this statement are effective for interim periods beginning after December 15, 2003. The adoption of the provisions of this revised statement did not have a material effect on the Company's consolidated financial position or operating results. In December 2003, the FASB revised previously issued Financial Interpretation ("FIN") No. 46, Consolidation of Variable Interest Entities, which clarifies the application of Accounting Research Bulletin ("ARB") 51, Consolidated Financial Statements, to certain entities (called variable interest entities) in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The new interpretation is referred to as FIN No. 46(R). The reporting and disclosure requirements of this Interpretation are effective for all financial statements of public companies for the first period ending after December 15, 2003, and for all other types of entities for periods ending after March 15, 2004. The adoption of this Interpretation did not have a material impact on the Company's consolidated financial statements. 50 FLORIDA COMMUNITY BANKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005, 2004 and 2003 Note 1 - Summary of Significant Accounting Policies - Continued In December 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer, which addresses the accounting for differences between contractual cash flows and expected cash flows for loans acquired in a transfer when those differences are attributable at least in part to a decline in credit quality. The scope of SOP 03-3 includes loans where there is evidence of deterioration in credit quality since origination, and includes loans acquired individually, in pools or as part of a business combination. Under SOP 03-3, the difference between expected cash flows and the purchase price is accreted as an adjustment to yield over the life. The adoption of SOP 03-03 did not have a material impact on the Company's consolidated financial position or operating results. In March 2004, the Emerging Issues Task Force ("EITF") reached a consensus on the remaining portions of EITF 03-01, The Meaning of Other-Than-Temporary Impairment and It's Application to Certain Investments, effective for the first fiscal year or interim period beginning after June 15, 2004. EITF 03-01 provides guidance for determining when an investment is considered impaired, whether impairment is other-than-temporary, and measurement of an impairment loss. An investment is considered impaired if the fair value of the investment is less than its cost. Generally, an impairment is considered other-than-temporary unless: (1) the investor has the ability and intent to hold an investment for a reasonable period of time sufficient for an anticipated recovery of fair value up to (or beyond) the cost of the investment, and (2) evidence indicating that the cost of the investment is recoverable within a reasonable period of time outweighs evidence to the contrary. If impairment is determined to be other-than-temporary, then an impairment loss should be recognized equal to the difference between the investment's cost and its fair value. Certain disclosure requirements of EITF 03-01 were adopted in 2003 and the Company began presenting the new disclosure requirements in its consolidated financial statements for the year ended December 31, 2003. The recognition and measurement provisions were initially effective for other-than-temporary impairment evaluations in reporting periods beginning after June 15, 2004. In June 2005, the FASB decided not to provide additional guidance on the meaning of other-than-temporary impairment, but directed the staff to issue proposed FSP EITF 03-1-a, Implementation Guidance for the Application of Paragraph 16 of EITF Issue No. 03-1 as final. However, in November 2005 FASB issued FASB Staff Position (retitled FSP 115-1/124-1), The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments. This FSP provides additional guidance on when an investment in a debt or equity security should be considered impaired and when that impairment should be considered other-than-temporary and recognized as a loss in earnings. Specifically, the guidance clarifies that an investor should recognize an impairment loss no later than when the impairment is deemed other-than-temporary, even if a decision to sell has not been made. The FSP also requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The Company applied the guidance in this FSP in 2005 and there was no material affect to the results of operations or the statement of financial position. In March 2004, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 105, Application of Accounting Principles to Loan Commitments. SAB 105 requires that the fair value 51 FLORIDA COMMUNITY BANKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005, 2004 and 2003 Note 1 - Summary of Significant Accounting Policies - Continued measurement of mortgage loan commitments, which are derivatives, exclude any expected future cash flows related to the customer relationship or servicing rights. The guidance in SAB 105 must be applied to mortgage loan commitments entered into after March 31, 2004. The impact on the Company is not material given the declines in mortgage banking volume, but could be in the future. The impact is primarily the timing of when gains should be recognized in the financial statements. In December 2004, the FASB issued SFAS No. 123 (revised 2004), entitled Share-Based Payment ("SFAS No. 123(R)") that will require compensation costs related to share-based payment transactions to be recognized in the financial statements. This statement eliminates the alternative to use Opinion 25's intrinsic value method of accounting that was provided in SFAS No. 123 as originally issued. Under Opinion 25, issuing stock options to employees generally resulted in recognition of no compensation cost. This statement requires entities to recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards (with limited exceptions). Recognition of that compensation cost helps users of financial statements to better understand the economic transactions affecting an entity and to make better resource allocation decisions. The Company is currently evaluating the provisions of SFAS No. 123(R) and will adopt it on January 1, 2006, the effective date of this statement. The adoption of this statement is not expected to have a material impact on the consolidated financial statements. On December 16, 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29. SFAS No. 153 amends the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged and more broadly provides exceptions regarding exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance when the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of SFAS No. 153 are effective for nonmonetary asset exchanges occurring in periods beginning after June 15, 2005. Management does not believe that the adoption of this standard will have a material impact on the financial condition or the operating results of the Company. In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, which replaces APB Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements--An Amendment of APB Opinion No. 28. SFAS No. 154 changes the requirements for the accounting and reporting of a change in accounting principle. It applies to all voluntary changes in accounting principle as well as to changes required by an accounting pronouncement that does not include specific transition provisions. SFAS No. 154 eliminates the requirement in APB Opinion No. 20 to include the cumulative effect of changes in accounting principle in the income statement in the period of change. Instead, to enhance the comparability of prior period financial statements, SFAS No. 154 requires that changes in accounting principle be retrospectively applied. Under retrospective application, the new accounting principle is applied as of the beginning of the first period presented as if that principle had always been used. The cumulative effect of the change is reflected in the carrying value of assets and liabilities as of the first period presented and the offsetting adjustments are recorded to opening retained earnings. Each period presented is adjusted to reflect the period-specific effects of applying the change. SFAS No. 154 also redefines "restatement" as the revising of previously issued 52 FLORIDA COMMUNITY BANKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005, 2004 and 2003 Note 1 - Summary of Significant Accounting Policies - Continued financial statements to reflect the correction of an error. Only direct effects of the change will be included in the retrospective application; all indirect effects will be recognized in the period of change. If it is impracticable to determine the cumulative effect for all prior periods, the new accounting principle should be applied as if it were adopted prospectively from the earliest date practicable. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. In February 2006, the FASB issued SFAS No. 155 entitled Accounting for Certain Hybrid Financial Instruments. SFAS No. 155 amends SFAS No. 133, entitled Accounting for Derivative Instruments and Hedging Activities, and SFAS No. 140, entitled Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This statement permits fair value remeasurement of certain hybrid financial instruments containing embedded derivatives and requires evaluation of securitized financial assets for purposes of identifying items of a derivative nature. The statement includes further clarification as to the derivative classification of selected financial instruments. The provisions of SFAS No. 155 are effective for all financial instruments acquired or issued after the beginning of the first fiscal year that begins after September 15, 2006. The fair value "election" within the literature may be utilized upon adoption of the guidance related to hybrid financial instruments. Earlier adoption is permitted as of the beginning of a fiscal year, provided that reporting entities have not yet issued financial statements. The provisions within SFAS No. 155 may be applied to instruments "held" at the date of adoption on an instrument-by-instrument basis. At adoption, any difference between the total carrying amount of the individual components of the existing hybrid financial instrument and the fair value of the combined hybrid financial instrument should be recognized as a cumulative-effect adjustment to beginning retained earnings. Reporting entities should separately disclose the gross gains and losses that make up the cumulative-effect adjustment, determined on an instrument-by-instrument basis. Prior periods should not be restated. The Company does not expect the adoption of this statement to have a material effect on the consolidated financial statements. Earnings Per Common Share Basic earnings per common share are computed by dividing earnings available to stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect per share amounts that would have resulted if dilutive potential common stock had been converted to common stock, as prescribed by SFAS No. 128, Earnings per Share. All per share amounts included in these consolidated financial statements have been retroactively adjusted to reflect the effects of the 1.2-for-1.0 stock splits which occurred during 2005, 2004, and 2003. The following reconciles the weighted average number of shares outstanding:
2005 2004 2003 ------------------ ------------------ ------------------ Weighted average of common shares outstanding............................. 5,476,205 5,419,554 5,396,603 Effect of dilutive options........................ 52,972 58,589 41,573 ------------------ ------------------ ------------------ Weighted average of common shares outstanding effected for dilution.............. 5,529,177 5,478,143 5,438,176 ================== ================== ==================
53 FLORIDA COMMUNITY BANKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005, 2004 and 2003 Note 1 - Summary of Significant Accounting Policies - Continued In October 2005, December 2004, and December 2003, the Company issued 1.2-for-1.0 stock splits. All per share amounts included in these consolidated financial statements have been retroactively adjusted to give effect to these splits. Comprehensive Income 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, 2005, 2004 and 2003. Statements of Cash Flows The Company includes cash, due from banks, and certain cash equivalents in preparing the statements of cash flows. The following is supplemental disclosure to the statements of cash flows for the three years ended December 31, 2005.
Years Ended December 31, -------------------------------------------------------------- 2005 2004 2003 ------------------ ------------------ ------------------ Cash paid during the year for interest......... $ 16,393,420 $ 8,650,839 $ 11,088,782 Cash paid during the year for income taxes, net................................... 12,644,132 8,159,604 6,550,908 Non-cash Disclosures: Loans transferred to foreclosed real estate during the year.................. -- 62,346 6,371,833 Proceeds from sale of foreclosed real estate financed through loans................ -- 3,891,469 --
54 FLORIDA COMMUNITY BANKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005, 2004 and 2003 Note 2 - Restrictions on Cash and Due from Bank Accounts The Bank is required by regulatory authorities to maintain average reserve balances either in vault cash or on deposit with the Federal Reserve. The average amount of those reserves required at December 31, 2005 and 2004, were approximately $12,364,000 and $8,879,000, 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, 2005 and 2004 were as follows:
Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------------- --------------- --------------- ---------------- Securities Held-to-Maturity December 31, 2005: U. S. Government and agency securities...................... $ 1,997,481 $ -- $ 58,681 $ 1,938,800 Mortgage-backed securities............... 59,035,690 18,534 1,702,770 57,351,454 --------------- ---------------- --------------- ---------------- $ 61,033,171 $ 18,534 $ 1,761,451 $ 59,290,254 =============== ================ =============== ================ December 31, 2004: U. S. Government and agency securities...................... $ 1,996,586 $ -- $ 9,186 $ 1,987,400 Mortgage-backed securities............... 67,333,574 96,466 425,576 67,004,464 --------------- ---------------- --------------- ---------------- $ 69,330,160 $ 96,466 $ 434,762 $ 68,991,864 =============== ================ =============== ================
The carrying amounts of other investment securities as shown in the consolidated statements of financial condition at December 31, 2005 and 2004 were as follows: Other Investment Securities
2005 2004 ------------------ ------------------ Federal Home Loan Bank stock........................................... $ 4,020,100 $ 3,750,100 Investment in Capital Security Investors, LLC.......................... 500,000 500,000 Independent Bankers Bank of Florida.................................... 308,058 308,058 Investment in FCBI Capital Trust I..................................... 310,000 310,000 The Bankers Bank stock................................................. 71,107 66,919 ------------------ ------------------ $ 5,209,265 $ 4,935,077 ================== ==================
55 FLORIDA COMMUNITY BANKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005, 2004 and 2003 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, 2005.
Less Than 12 Months 12 Months or More Total --------------------------- -------------------------- --------------------------- Fair Unrealized Fair Unrealized Fair Unrealized Description of Securities Value Losses Value Losses Value Losses ----------------------------- ------------- ----------- ------------- ----------- ------------- ----------- U.S. Government and agency securities......... $ -- $ -- $ 1,938,800 $ 58,681 $ 1,938,800 $ 58,681 Mortgage-backed securities................ 9,453,814 253,172 46,543,445 1,449,598 55,997,259 1,702,770 ------------- ----------- ------------- ----------- ------------- ----------- Total................... $ 9,453,814 $ 253,172 $ 48,482,245 $ 1,508,279 $ 57,936,059 $ 1,761,451 ============= =========== ============= =========== ============= ===========
U.S. Government and Agency Securities - The urealized losses on the Company's investments in direct obligations of U.S. government agencies were caused by interest rate increases, 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 this investment until maturity, the Company does not consider this investment to be other-than-temporarily impaired at December 31, 2005 Mortgage-Backed Securities - The unrealized losses on the Company's investment in mortgage-backed securities were caused by interest rate increases. 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 market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent, to hold those investments until maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2005. Other Investment Securities - The aggregate carrying value of the Company's cost-method investments totaled $5,209,265 at December 31, 2005. 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 ($4,020,100), The Bankers Bank ($71,107), and the Independent Bankers Bank of Florida ($308,058). The investment in FCBI Capital Trust I represents the Company's $310,000 capitalization of a newly-formed subsidiary trust created to issue preferred securities. This investment represents 100 percent of the common stock issued by the trust, however, in accordance with the provisions of FIN No. 46(R), this subsidiary has not been consolidated into these consolidated financial statements (see Note 9). 56 FLORIDA COMMUNITY BANKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005, 2004 and 2003 Note 3 - Securities - Continued The remaining $500,000 of cost-method investments consists of a 20% investment in Capital Security Investments, LLC. The investment venture is held with four other financial institutions for the purpose of buying trust preferred securities. The cost method is used because the Company cannot influence the decision making process by virtue of its 20% equal investment and the immaterial nature of the LLC's operations. The contractual maturities of securities held-to-maturity at December 31, 2005, 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.
Securities Held-to-Maturity ---------------------------------------- Amortized Fair Cost Value ------------------ ------------------ Due in one year or less................................................ $ -- $ -- Due after one year through five years.................................. 2,054,667 1,995,823 Due after five years through ten years................................. 3,075,429 3,010,632 Due after ten years.................................................... 55,903,075 54,283,799 ------------------ ------------------ $ 61,033,171 $ 59,290,254 ================== ==================
There were no gross realized gains and losses from the sale of securities for the years ended December 31 2005, 2004, and 2003. Dispositions through calls, maturities, and pay-downs resulted in no net gain or loss during 2005, 2004 and 2003. Investment securities pledged to secure public funds on deposit, FHLB advances and for other purposes as required by law amounted to approximately $59,812,000 and $52,912,000 at December 31, 2005 and 2004, respectively. [The remainder of this page intentionally left blank] 57 FLORIDA COMMUNITY BANKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005, 2004 and 2003 Note 4 - Loans The Company grants loans to customers primarily in Charlotte, Collier, Glades, Hendry and Lee Counties of Southwest Florida. The major classifications of loans as of December 31, 2005 and 2004 are as follows:
2005 2004 ------------------ ------------------ Commercial, financial and agricultural................................. $ 37,308,721 $ 51,378,263 Real estate - construction............................................. 467,853,910 270,016,418 Real estate - mortgage................................................. 280,229,840 222,373,241 Consumer............................................................... 7,501,870 8,086,107 Other.................................................................. 2,356,236 2,180,902 ------------------ ------------------ Total............................................................... 795,250,577 554,034,931 Unearned income........................................................ (3,941,722) (2,101,976) Allowance for loan losses.............................................. (11,522,910) (9,791,269) ------------------ ------------------ Net loans.............................................................. $ 779,785,945 $ 542,141,686 ================== ==================
Deposit overdrafts reclassified as loans and included in the other loan category amounted to $745,439 and $382,482, at December 31, 2005 and 2004, respectively. Information about impaired loans as of and for the years ended December 31 is as follows:
2005 2004 ------------------ ------------------ Impaired loans with a specific valuation allowance..................... $ -- $ -- Impaired loans without a specific valuation allowance.................. 827,553 7,808,893 ------------------ ------------------ Total impaired loans................................................... $ 827,553 $ 7,808,893 ================== ================== Average monthly balance of impaired loans (based on month-end balances)....................................... $ 1,061,913 $ 9,600,345 Related allowance for credit losses.................................... 130,628 1,171,334 Interest income recognized on impaired loans........................... 3,412 464,673
At December 31, 2005 and 2004, the Company had loans past due 90 days or more and still accruing interest of approximately $106,000 and $-0-, respectively. 58 FLORIDA COMMUNITY BANKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005, 2004 and 2003 Note 4 - Loans - Continued Total nonaccrual loans at December 31, 2005 and 2004 consisted of approximately $194,000 and $247,000, respectively. For the years ended December 31, 2005 and 2004, 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 $14,000 and $32,000, respectively. The Bank has no commitments to loan additional funds to the borrowers of nonaccrual loans. 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 $3,941,722 and $2,101,976 as of December 31, 2005 and 2004. Commercial and residential real estate loans pledged to secure Federal Home Loan Bank advances and letters of credit amounted to approximately $40,340,000 and $38,457,000 at December 31, 2005 and 2004, respectively (see Note 9). Commercial and residential real estate loans pledged to secure the Federal Reserve Bank line of credit amounted to approximately $4,170,000 and $9,880,000 at December 31, 2005 and 2004, respectively. Note 5 - Allowance for Loan Losses Changes in the allowance for loan losses for the years ended December 31, 2005, 2004 and 2003 were as follows:
2005 2004 2003 ------------------ ------------------ ------------------ Balance at beginning of year................... $ 9,791,269 $ 8,066,817 $ 6,319,298 Charge-offs.................................... (180,471) (455,318) (222,911) Recoveries..................................... 150,112 209,002 270,430 ------------------ ------------------ ------------------ Net (charge-offs) recoveries................. (30,359) (246,316) 47,519 Provision for loan losses...................... 1,762,000 1,970,768 1,700,000 ------------------ ------------------ ------------------ Balance at end of year......................... $ 11,522,910 $ 9,791,269 $ 8,066,817 ================== ================== ==================
[The remainder of this page intentionally left blank] 59 FLORIDA COMMUNITY BANKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005, 2004 and 2003 Note 6 - Premises and Equipment Premises and equipment as of December 31, 2005 and 2004 is as follows:
2005 2004 ------------------ ------------------ Land............................................................... $ 3,128,438 $ 3,128,438 Land improvements................................................... 567,594 409,011 Building............................................................ 10,788,536 9,974,358 Furniture and equipment............................................. 4,642,568 3,889,338 Automobiles......................................................... 368,519 352,194 Construction in progress............................................ 573,115 1,147,838 ------------------ ------------------ 20,068,770 18,901,177 Accumulated depreciation............................................ (6,292,537) (5,556,106) ------------------ ------------------ $ 13,776,233 $ 13,345,071 ================== ==================
The provision for depreciation charged to occupancy and equipment expense for the years ended December 31, 2005, 2004 and 2003 was $835,001, $711,547, and $669,386, respectively. Note 7 - Deposits The aggregate amounts of time deposits of $100,000 or more, including certificates of deposit of $100,000 or more at December 31, 2005 and 2004 were $341,816,538 and $184,621,865, respectively. Time deposits of less than $100,000 totaled $61,065,664 and $64,417,437 at December 31, 2005 and 2004, respectively. The maturities of time certificates of deposit and other time deposits issued by the Bank at December 31, 2005, are as follows:
Year Ending December 31, 2006...................................................................... $ 280,976,026 2007...................................................................... 98,150,481 2008...................................................................... 16,620,761 2009...................................................................... 3,693,885 2010...................................................................... 3,272,125 2011...................................................................... 168,924 ------------------ $ 402,882,202 ==================
60 FLORIDA COMMUNITY BANKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005, 2004 and 2003 Note 8 - Short-term Borrowings Short-term borrowings at December 31, 2005 and 2004 consist of the following:
2005 2004 ------------------ ------------------ Federal funds purchased................................................ $ 24,988,000 $ 3,851,000 Balance due on investment in limited liability investment company................................................... 100,000 100,000 Securities sold under agreements to repurchase......................... -- 10,106,000 ------------------ ------------------ $ 25,088,000 $ 14,057,000 ================== ==================
Securities sold under agreements to repurchase are reflected at the amount of cash received in connection with the transaction. Information concerning securities sold under agreements to repurchase is summarized as follows:
2005 2004 ------------------ ------------------ Average balance during the year........................................ $ 2,794,421 $ 246,191 Average interest rate during the year.................................. 2.54% 2.44% Maximum month-end balance during the year.............................. $ 10,106,000 $ 10,106,000 U.S. Agency, municipal and mortgage-backed securities underlying the agreements at year end: Carrying value......................................................... $ -- $ 10,302,842 Estimated fair value................................................... -- 10,303,069
[The remainder of this page intentionally left blank] 61 FLORIDA COMMUNITY BANKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005, 2004 and 2003 Note 9 - Long-term Debt At December 31, 2005 and 2004, the Company had long-term debt totaling $70,333,939 and $70,310,000, respectively. Long-term debt consists of the following at December 31:
2005 2004 ------------------ ------------------ Long-term Federal Home Loan Bank advances, with varying maturities from May 2006 through December 2014, the interest rates have a variable base or are at a fixed rate between 3.13% to 6.18%, secured by real estate mortgage loans and pledged securities.................................................. $ 60,000,000 $ 60,000,000 Long-term subordinated debentures; interest rate prime plus 0.5%, the debenture has a 30-year life with a call option of 5 years, subject to regulatory approval............................... 10,310,000 10,310,000 Notes payable to Ford Motor Credit, with an interest rate of 0.90%, interest and principal paid monthly over a 3-year period, secured by a vehicle........................................ 23,939 -- ------------------ ------------------ $ 70,333,939 $ 70,310,000 ================== ==================
In June 2002, the Company formed a wholly-owned Delaware statutory business trust, FCBI Capital Trust I, which issued $10,000,000 of guaranteed preferred securities representing undivided beneficial interests in the assets of the trust ("Trust Preferred Securities"). The common securities of the trust are owned by the Company. The proceeds from the issuance of the Trust Preferred Securities ($10,000,000) and common securities ($310,000) were used by the trust to purchase $10,310,000 of junior subordinated deferrable interest debentures of the Company. The debentures, which bear interest at Prime rate plus 0.5%, represent the sole asset of the trust. The Company has fully and unconditionally guaranteed all obligations of the Trust on a subordinated basis with respect to the Trust Preferred Securities. In accordance with the provisions of Financial Interpretation No. 46R, the Company accounts for the Trust Preferred Securities as a long-term debt liability to the Trust in the amount of $10,310,000. 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. 62 FLORIDA COMMUNITY BANKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005, 2004 and 2003 Note 9 - Long-term Debt - Continued The Trust Preferred Securities mature in September 2032 and may be called by the Company at any time after June 2007. Maturities of long-term debt following December 31, 2005, are as follows:
Year Ending December 31, 2006......................................................................... $ 5,009,906 2007......................................................................... 10,009,906 2008......................................................................... 5,004,127 2009......................................................................... 5,000,000 2010......................................................................... 5,000,000 Thereafter................................................................... 40,310,000 ------------------ $ 70,333,939 ==================
Note 10 - Shareholders' Equity At December 31, 2005 and 2004, shareholders' equity of the Company consisted of the following: Common Stock: 10,000,000 shares authorized with a par value of $0.01 per share. Voting rights equal to one vote per share. Paid-in Capital: Represents the funds received in excess of par value upon the issuance of stock, net of issuance costs and the related effects of the stock dividends and stock splits. Retained Earnings: Represents the accumulated net earnings of the Company as reduced by dividends paid to shareholders and the effect of stock dividends issued in previous periods. Stock Splits: In December 2003, the Company issued a 1.2 for 1.0 common stock split resulting in an increase in the number of outstanding shares by 624,325. In December 2004, the Company issued a 1.2 for 1.0 common stock split resulting in an increase in the number of outstanding shares by 749,528. In October 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. All per share amounts included in these consolidated financial statements have been adjusted to give retroactive effect to the stock splits. 63 FLORIDA COMMUNITY BANKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005, 2004 and 2003 Note 11 - Regulatory Capital Matters The Company and the Bank are subject to various regulatory capital requirements administered by the state and federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators, which if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under regulatory capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and its subsidiary bank must meet specific capital guidelines involving quantitative measures of the Company's and its subsidiary bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification under the prompt corrective guidelines are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of Total capital and Tier I capital to risk-weighted assets (as defined in the regulations), and Tier I capital to adjusted total assets (as defined). Management believes, as of December 31, 2005, that the Company and the Bank meet all capital adequacy requirements to which they are subject. As of December 31, 2005, 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 remainder of this page intentionally left blank] 64 Note 11 - Regulatory Capital Matters - Continued The Company's and the Bank's actual capital amounts and ratios are also presented in the table.
To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ----------------------- ----------------------- ------------------------ Amount Ratio Amount Ratio Amount Ratio ----------- -------- ----------- --------- ----------- --------- (Dollars in thousands) As of December 31, 2005: Total Capital Consolidated.............. $ 91,035 10.39% $ 70,094 8.00% N/A N/A Florida Community Bank.................... 90,415 10.33 70,028 8.00 $ 87,535 10.00% Tier 1 Capital Consolidated.............. 80,076 9.14 35,047 4.00 N/A N/A Florida Community Bank.................... 79,466 9.08 35,014 4.00 52,521 6.00 Tier 1 Leverage Consolidated.............. 80,076 8.96 35,750 4.00 N/A N/A Florida Community Bank.................... 79,466 8.90 35,700 4.00 44,625 5.00 As of December 31, 2004: Total Capital Consolidated.............. $ 70,536 11.63% $ 48,518 8.00% N/A N/A Florida Community Bank.................... 69,844 11.53 48,477 8.00 $ 60,597 10.00% Tier 1 Capital Consolidated.............. 62,928 10.38 24,259 4.00 N/A N/A Florida Community Bank.................... 62,242 10.27 24,239 4.00 36,358 6.00 Tier 1 Leverage Consolidated.............. 62,928 10.14 24,819 4.00 N/A N/A Florida Community Bank.................... 62,242 10.05 24,774 4.00 30,968 5.00
65 FLORIDA COMMUNITY BANKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005, 2004 and 2003 Note 12 - Stock Option Plans Options to purchase Florida Community Banks, Inc. stock have been granted to directors, officers, and employees under the 2002 Key Employee Stock Compensation Program. The Florida Community Banks, Inc. 2002 Key Employee Stock Compensation Program Plan was approved by Florida Community Banks, Inc. shareholders in 2002. Under the 2002 plan, options may be granted to purchase up to a maximum of 269,855 common shares as adjusted for all subsequent stock dividends and splits. Under the plan, 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. The following table presents the activity in the plan for the years ended December 31, 2005, 2004 and 2003:
2005 2004 2003 -------------------------- -------------------------- ---------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------------- ------------ ----------- ------------- -------- ----------- Outstanding at January 1,........ 204,394 $ 13.62 125,914 $ 10.20 95,386 $ 8.68 Granted....................... 19,000 26.00 78,480 19.10 30,528 14.93 Exercised..................... (46,932) 13.98 -- 0.00 -- 0.00 Forfeited..................... (14,988) 16.74 -- 0.00 -- 0.00 Expired....................... -- 1.11 -- 0.00 -- 0.00 -------------- ----------- -------- Outstanding at December 31,...... 161,474 14.68 204,394 13.62 125,914 10.20 ============= =========== ======== Exercisable at December 31,...... 105,120 11.32 88,519 9.54 57,232 8.68 ============= =========== ======== Weighted average fair value of options granted............ $ 5.93 $ 2.58 $ 1.08 ============ ============= ==========
[The remainder of this page intentionally left blank] 66 FLORIDA COMMUNITY BANKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005, 2004 and 2003 Note 12 - Stock Option Plans - Continued Options outstanding at year-end 2005 were as follows:
Outstanding Exercisable ----------------------------- ---------------------------------------------- Weighted Weighted Average Average Remaining Weighted Remaining Contractual Average Contractual Grant Exercise Life Exercise Life Date Prices Number (Years) Number Price (Years) ---------------- ------------- -------------- ------------- ------------- ------------- -------------- 10/25/01 $ 8.68 74,650 5.81 74,650 8.68 5.81 01/17/03 11.58 5,184 7.04 3,110 11.58 7.04 12/22/03 16.67 11,520 7.97 6,912 16.67 7.97 09/16/04 19.10 51,120 8.71 20,448 19.10 8.71 12/15/05 26.00 19,000 9.96 -- 26.00 9.96 -------------- -------------- 161,474 7.41 105,120 11.32 6.55 ============== ==============
As of December 31, 2005, there was $120,227 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. Note 13 - Other Operating Expenses The major components of other operating expenses included in noninterest expenses at December 31, 2005, 2004 and 2003 are as follows (in thousands):
2005 2004 2003 ------------------ ------------------ ------------------ Professional fees.............................. $ 405 $ 249 $ 263 Promotions and public relations................ 288 265 222 Telephone...................................... 264 188 175 Supplies....................................... 224 171 152 Examination and assessment..................... 202 176 154 ATM expense.................................... 188 147 137 Courier........................................ 176 127 113 Software maintenance........................... 141 138 164 Postage........................................ 117 123 136 Bank charges................................... 117 91 74 Director's board and committee fees............ 70 67 67 Employee educational expenses.................. 66 70 68 Dues and subscriptions......................... 57 48 44 Other.......................................... 435 453 322 ------------------ ------------------ ------------------ $ 2,750 $ 2,313 $ 2,091 ================== ================== ==================
67 FLORIDA COMMUNITY BANKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005, 2004 and 2003 Note 14 - Income Taxes Federal and state income taxes (payable) as of December 31, 2005 and 2004 included in other liabilities, respectively, were as follows:
2005 2004 ------------------ ------------------ Current Federal............................................................. $ (549,841) $ (42,924) State............................................................... (76,289) (25,381) The components of the deferred income tax asset included in other assets as of December 31, 2005 and 2004 are as follows: 2005 2004 ------------------ ------------------ Deferred tax asset: Federal............................................................. $ 5,266,822 $ 3,969,027 State............................................................... 877,804 661,505 ------------------ ------------------ Total deferred income tax asset................................... 6,144,626 4,630,532 ------------------ ------------------ Deferred tax liability: Federal............................................................. (269,487) (271,755) State............................................................... (44,914) (45,292) ------------------ ------------------ Total deferred income tax liability............................... (314,401) (317,047) ------------------ ------------------ Net deferred tax asset................................................. $ 5,830,225 $ 4,313,485 ================== ================== The tax effects of each type of income and expense item that gave rise to deferred taxes are: 2005 2004 ------------------ ------------------ Depreciation........................................................ $ (314,401) $ (317,047) Allowance for loan losses........................................... 4,300,107 3,497,212 Directors benefit plan.............................................. 108,428 120,744 Deferred loan fees.................................................. 1,517,455 808,526 Write-down of other real estate owned............................... 204,050 204,050 Issuance of stock options........................................... 14,586 -- ------------------ ------------------- Net deferred tax asset.............................................. $ 5,830,225 $ 4,313,485 ================== ==================
68 FLORIDA COMMUNITY BANKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005, 2004 and 2003 Note 14 - Income Taxes - Continued The components of income tax expense for the years ended December 31, 2005, 2004 and 2003 were as follows:
2005 2004 2003 ------------------ ------------------ ------------------ Current Federal...................................... $ 11,071,080 $ 7,615,497 $ 4,962,156 State........................................ 1,845,519 1,232,895 865,210 Deferred Federal...................................... (1,296,782) (989,535) (631,451) State........................................ (216,090) (164,960) (105,238) ------------------ ------------------ ------------------ $ 11,403,727 $ 7,693,897 $ 5,090,677 ================== ================== ==================
There were no material tax effects of securities transactions for the years ended December 31, 2005, 2004 and 2003. 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, 2005, 2004 and 2003.
2005 2004 2003 ------------------------ ----------------------- ----------------------- Federal income tax at statutory rates................ $ 10,071,398 34.0% $ 6,778,182 34.0% $ 4,585,657 34.0% Add (deduct) State income tax, net of federal tax benefit............. 1,075,423 3.6 704,837 3.5 501,582 3.7 Other............................. 256,906 0.9 210,878 1.1 3,438 0.0 -------------- -------- -------------- ------- ------------- -------- Totals............................... $ 11,403,727 38.5% $ 7,693,897 38.6% $ 5,090,677 37.7% ============== ======== ============== ======= ============= ========
Note 15 - Benefit Plans During the years ended December 31, 2005, 2004 and 2003, the Company had three qualified employee benefit plans: 1) a Pension Plan, 2) a Profit Sharing Plan and 3) an Employee Stock Ownership Plan ("ESOP"). The Plans cover substantially all employees, subject to similar eligibility requirements. The Pension Plan was terminated as of December 31, 2003. 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, 2005, 2004 and 2003, the Company's contributions charged to operations for the Profit Sharing Plan amounted to $511,518, $506,733, and $438,163, respectively. Effective January 1, 2003, the Company adopted the ESOP. 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 2005, 2004, and 2003 was $442,101, $575,626, and $433,523, respectively. 69 FLORIDA COMMUNITY BANKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005, 2004 and 2003 Note 15 - Benefit Plans - Continued The Company also has a Director's Benefit Plan (the "Benefit Plan") covering certain directors and a Salary Continuation Plan (the "Salary Plan") for a former officer. These plans were obtained resulting from a business combination that occurred in 1998. The Benefit Plan provides for the payment of scheduled benefits to the participants or their beneficiaries at age 65 or their normal retirement date, whichever occurs later. If the participant dies prior to receiving 180 monthly payments, the participant's beneficiary shall receive any remaining monthly payments. Payment of benefits under the Benefit Plan requires that the participant fulfill certain conditions related to age and length of service. The Company is accruing the present value of the future benefits to be paid under the Benefit Plan over the term of each participant's service period. The Salary Plan provides for the payment of a retirement benefit of $30,000 per year for a period of ten years. Payment of these benefits commenced on January 1, 1995, and continued throughout the current year according to the terms of the Plan. The Company has accrued the present value of the future benefits to be paid under the Salary Plan. The Company has determined that the following disclosures are relevant to the Benefit Plan and the Salary Plan, however, the plans are non-qualified and unfunded. Payments to retired directors and officers are funded through operations. Net pension cost for the Director's Benefit Plan and the Salary Continuation Plan for 2005, 2004 and 2003 included the following components:
2005 2004 2003 ------------------ ------------------ ------------------ Service cost (benefit)......................... $ (315) $ 29,369 $ 27,952 Interest cost.................................. 26,489 29,233 36,608 ------------------ ------------------ ------------------ Net periodic pension cost.................... $ 26,174 $ 58,602 $ 64,560 ================== ================== ==================
The following table sets forth the accumulated benefit obligation of the Director's Benefit Plan and the Salary Continuation Plan recognized in the Company's statements of financial condition at December 31, 2005 and 2004.
2005 2004 ------------------ ------------------ Present value of benefit obligation: Vested.............................................................. $ 281,629 $ 313,622 Non-vested.......................................................... -- -- ------------------ ------------------ Accumulated benefit obligation/pension liability....................... $ 281,629 $ 313,622 ================== ==================
The weighted average discount rate used in determining present value of the projected benefit obligation for the Director's Benefit Plan and Salary Continuation Plan was nine percent. 70 FLORIDA COMMUNITY BANKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005, 2004 and 2003 Note 15 - Benefit Plans - Continued The aggregate benefit cost expected-to-be accrued for the year ending December 31, 2006, is $-0-. The measurement date for the plans 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 and the Salary Plan following December 31, 2005, are as follows:
Year Ending December 31, 2006....................................................................... $ 58,482 2007....................................................................... 58,482 2008....................................................................... 58,482 2009....................................................................... 58,482 2010....................................................................... 39,351 2011 - 2016................................................................ 108,750 ------------------ Total expected benefit payments............................................ $ 382,029 ==================
Note 16 - Commitments and Contingencies In the normal course of business, the Company offers a variety of financial products to its customers to aid them in meeting their requirements for liquidity, credit enhancement, and interest rate protection. Generally accepted accounting principles recognize these transactions as contingent liabilities and, accordingly, they are not reflected in the accompanying consolidated financial statements. 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, 2005, was approximately $22,750,632. 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, 2005 and 2004 these recorded liabilities amounted to $41,933 and $40,712, respectively. 71 FLORIDA COMMUNITY BANKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005, 2004 and 2003 Note 16 - Commitments and Contingencies - Continued The total amounts of loan commitments and standby letters of credit are summarized as follows at December 31:
Contract or Notional Amount 2005 2004 ------------------ ------------------ Loan commitments....................................................... $ 208,082,000 $ 133,865,000 Standby letters of credit.............................................. 2,771,000 3,715,000 ------------------ ------------------ Total unfunded commitments.......................................... $ 210,853,000 $ 137,580,000 ================== ==================
Management conducts regular reviews of these instruments on an individual customer basis, and the results are considered in assessing the adequacy of the Company's allowance for loan losses. The total reserve allocated for unfunded commitments was approximately $348,000 and $386,000 at December 31, 2005 and 2004, respectively. 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 sales 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, 2005. The unrealized gains/losses of the origination and sales commitments were not material at December 31, 2005. Note 17 - Concentrations of Credit Most of the Company's loans, commitments, and commercial and standby letters of credit have been granted to customers in the Company's market area. Many such customers are depositors of the Company. The concentrations of credit by type of loan are set forth in Note 4. The distribution of commitments to extend credit related primarily to unused real estate draw lines. Commercial and standby letters of credit were granted primarily to commercial borrowers. The Company maintains its cash accounts at various commercial banks in the United States. The balances in commercial banks are insured by the FDIC up to $100,000. Total uninsured balances held at correspondent commercial banks amounted to $10,887,886 and $1,720,085 at December 31, 2005 and 2004, respectively. 72 FLORIDA COMMUNITY BANKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005, 2004 and 2003 Note 18 - Restrictions on Dividends The Bank is subject to the dividend restrictions set forth by the State Banking Department (Florida). Under such restrictions, the Bank may not, without the prior approval of the State Banking Department, declare dividends in excess of the sum of the current year's earnings plus the retained earnings from the prior two years. For the year ending December 31, 2006, the Bank can declare dividends, without prior regulatory approval, of approximately $27,873,000 plus an additional amount equal to its net profits for 2006. Note 19 - Litigation While the Company is party to various legal proceedings arising from the ordinary course of business, management believes after consultation with legal counsel that there are no proceedings threatened or pending against the Company that will, individually or in the aggregate, have a material adverse effect on the business or financial condition of the Company. Note 20 - Leases The Company leased facilities under non-cancelable operating leases during 2005, 2004 and 2003. The leases provided for renewal options and generally required the Company to pay maintenance, insurance, and property taxes. For the years ended December 31, 2005, 2004 and 2003, rental expense for such leases was $184,045, $177,520 and $175,620, respectively. The Company also entered into a sale/leaseback transaction with a related party in January 2001 for a branch facility, future minimum payments under this lease are included in the table below (see also Note 21). Future minimum lease payments under such non-cancelable operating leases at December 31, 2005, are as follows:
Year Ending December 31, 2006....................................................................... $ 184,890 2007....................................................................... 188,792 2008....................................................................... 182,380 2009....................................................................... 183,089 2010....................................................................... 187,413 Thereafter................................................................. 1,854,311 ------------------ Total minimum lease payments............................................................ $ 2,780,875 ==================
73 FLORIDA COMMUNITY BANKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005, 2004 and 2003 Note 21 - Related Party Transactions Loans: Certain directors, executive officers, and principal shareholders, including their immediate families and associates were loan customers of the Company during 2005 and 2004. 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:
2005 2004 ------------------ ------------------ Balance at Beginning of Year........................................... $ 8,132,367 $ 6,254,498 New loans.............................................................. 1,858,748 4,402,105 Repayments............................................................. (6,464,664) (2,524,236) Change in related parties.............................................. -- -- ------------------ ------------------ Balance at End of Year................................................. $ 3,526,451 $ 8,132,367 ================== ==================
Deposits: Deposits held from related parties were $15,200,405 and $14,428,433 at December 31, 2005 and 2004, 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, 2006 through 2010 are $160,275, $164,282, $168,282, $172,599, and $176,914, 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, 2005, 2004, and 2003 were $4,701,415, $2,003,380, and $1,819,055, respectively. Note 22 - Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and Short-Term Investments: For those short-term instruments, the carrying amount is a reasonable estimate of fair value. Securities: For securities held-to-maturity, fair values are based on quoted market prices or dealer quotes. For other securities held as investments, fair value equals quoted market price, if available. If a quoted market price is not available, fair value is estimated to be approximately the carrying amount. 74 FLORIDA COMMUNITY BANKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005, 2004 and 2003 Note 22 - Fair Value of Financial Instruments - Continued 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. 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. Accrued Interest Payable: The carrying amount of accrued interest payable approximates its fair value. 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. [The remainder of this page intentionally left blank.] 75 FLORIDA COMMUNITY BANKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005, 2004 and 2003 Note 22 - Fair Value of Financial Instruments - Continued The estimated fair values of the Company's financial instruments as of December 31, 2005 and 2004 are as follows:
2005 2004 --------------------------------- --------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value --------------- ---------------- --------------- ---------------- (in thousands) (in thousands) Financial Assets Cash and short-term investments.......... $ 32,368 $ 32,368 $ 19,614 $ 19,614 Securities............................... 66,242 64,499 74,265 73,927 Loans.................................... 791,609 795,098 552,509 552,948 Accrued interest receivable.............. 4,941 4,941 3,290 3,290 --------------- ---------------- --------------- ---------------- Total Financial Assets................. $ 895,160 $ 896,906 $ 649,678 $ 649,779 =============== ================ =============== ================ Financial Liabilities Deposits................................. $ 737,256 $ 737,840 $ 520,585 $ 521,618 Short-term borrowings.................... 25,088 25,088 14,057 14,057 Long-term debt........................... 70,334 70,334 70,310 70,310 Accrued interest payable................. 2,399 2,399 1,408 1,408 --------------- ---------------- --------------- ---------------- Total Financial Liabilities............ $ 835,077 $ 835,661 $ 606,360 $ 607,393 =============== ================ =============== ================ Financial Instruments Commitments to extend credit............. $ 208,082 $ 2,081 $ 133,865 $ 1,339 Standby letters of credit................ 2,771 42 3,715 41 --------------- ---------------- --------------- ---------------- Total Unrecognized Financial Instruments.......................... $ 210,853 $ 2,123 $ 137,580 $ 1,380 =============== ================ =============== ================
[The remainder of this page intentionally left blank.] 76 FLORIDA COMMUNITY BANKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005, 2004 and 2003 Note 23 - Condensed Parent Company Information Statements of Financial Condition
2005 2004 ------------------ ------------------ Assets Cash and due from banks............................................. $ 375,320 $ 400,493 Other investment securities......................................... 810,000 810,000 Investment in subsidiaries (equity method) - eliminated upon consolidation..................................... 79,466,176 62,242,329 Other assets........................................................ 107,420 156,422 ------------------ ------------------ Total Assets...................................................... $ 80,758,916 $ 63,609,244 ================== ================== Liabilities and Shareholders' Equity Liabilities Subordinated debentures............................................. $ 10,310,000 $ 10,310,000 Other debt.......................................................... 100,000 100,000 Other liabilities................................................... 273,134 271,545 ------------------ ------------------ Total Liabilities................................................. 10,683,134 10,681,545 Total Shareholders' Equity........................................ 70,075,782 52,927,699 ------------------ ------------------ Total Liabilities and Shareholders' Equity........................ $ 80,758,916 $ 63,609,244 ================== ==================
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2005 2004 ------------------ ------------------ Income Dividends from subsidiaries - eliminated upon consolidation......... $ 1,535,743 $ 2,030,304 Interest and other.................................................. 69,886 34,319 ------------------ ------------------ Total Income...................................................... 1,605,629 2,064,623 ------------------ ------------------ Expenses Interest............................................................ 712,618 531,660 Salaries and employee benefits...................................... 91,954 94,476 Other expenses...................................................... 156,192 120,933 ------------------ ------------------ Total Expenses.................................................... 960,764 747,069 ------------------ ------------------ Income before income taxes and equity in undistributed earnings of subsidiary................................ 644,865 1,317,554 Income tax benefit..................................................... 349,319 274,943 ------------------ ------------------ Income before equity in undistributed earnings of subsidiary.............................................. 994,184 1,592,497 Equity in undistributed earnings of subsidiary......................... 17,223,847 10,649,435 ------------------ ------------------ Net Income........................................................ $ 18,218,031 $ 12,241,932 ================== ==================
[The remainder of this page intentionally left blank.] 78 FLORIDA COMMUNITY BANKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005, 2004 and 2003 Note 23 - Condensed Parent Company Information - Continued Statements of Cash Flows
2005 2004 ------------------ ------------------ Operating Activities Net income.......................................................... $ 18,218,031 $ 12,241,932 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed income of subsidiary...................... (17,223,847) (10,649,435) Other............................................................. 50,591 316,786 ------------------ ------------------ Net Cash Provided By Operating Activities....................... 1,044,775 1,909,283 ------------------ ------------------ Financing Activities Sale of common stock................................................ 1,162,233 465,202 Repayment of short-term debt........................................ -- (400,000) Costs associated with the issuance of options....................... 56,783 17,988 Cash dividends...................................................... (2,288,964) (1,883,192) ------------------ ------------------ Net Cash Used In Financing Activities............................. (1,069,948) (1,800,002) ------------------ ------------------ Net (Decrease) Increase In Cash and Cash Equivalents................... (25,173) 109,281 Cash and Cash Equivalents at Beginning of Year......................... 400,493 291,212 ------------------ ------------------ Cash and Cash Equivalents at End of Year............................... $ 375,320 $ 400,493 ================== ================== Cash Paid During the Year For: Interest............................................................ $ 712,618 $ 531,660
[The remainder of this page intentionally left blank.] 79 FLORIDA COMMUNITY BANKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005, 2004 and 2003 Note 24 - Quarterly Results of Operations (Unaudited) Selected quarterly results of operations for the four quarters ended December 31 are as follows:
First Second Third Fourth Quarter Quarter Quarter Quarter Total ------------- ------------- ------------- ------------- ---------------- (In Thousands) 2005: Total interest income.............. $ 11,734 $ 13,667 $ 15,113 $ 17,344 $ 57,858 Total interest expense............. 3,172 3,821 4,577 5,815 17,385 Provision for loan losses.......... -- -- 32 1,730 1,762 Net interest income after provision for loan losses....... 8,562 9,846 10,504 9,799 38,711 Other noninterest income........... 901 1,023 847 1,073 3,844 Other noninterest expense.......... 2,885 3,162 3,354 3,532 12,933 Income tax expense................. 2,535 2,970 3,080 2,819 11,404 Net income......................... 4,043 4,737 4,917 4,521 18,218 Per common share Basic earnings.................. 0.73 0.87 0.90 0.83 3.33 Diluted earnings................ 0.73 0.86 0.88 0.82 3.29 2004: Total interest income.............. $ 9,058 $ 9,596 $ 10,141 $ 10,789 $ 39,584 Total interest expense............. 2,172 2,245 2,283 2,500 9,200 Provision for loan losses.......... 300 200 750 721 1,971 Net interest income after provision for loan losses....... 6,586 7,151 7,108 7,568 28,413 Other noninterest income........... 727 1,118 659 1,270 3,774 Other noninterest expense.......... 2,848 3,028 2,962 3,413 12,251 Income tax expense................. 1,680 1,975 1,805 2,234 7,694 Net income......................... 2,785 3,266 3,000 3,191 12,242 Per common share Basic earnings.................. 0.52 0.61 0.55 0.58 2.26 Diluted earnings................ 0.51 0.60 0.55 0.57 2.23 2003: Total interest income.............. $ 8,304 $ 8,447 $ 8,502 $ 8,267 $ 33,520 Total interest expense............. 2,818 2,737 2,381 2,145 10,081 Provision for loan losses.......... 300 300 700 400 1,700 Net interest income after provision for loan losses....... 5,186 5,410 5,421 5,722 21,739 Other noninterest income........... 626 666 663 773 2,728 Other noninterest expense.......... 2,557 2,647 2,934 2,842 10,980 Income tax expense................. 1,226 1,302 1,185 1,377 5,090 Net income......................... 2,029 2,127 1,965 2,276 8,397 Per common share Basic earnings.................. 0.38 0.40 0.36 0.42 1.56 Diluted earnings................ 0.38 0.39 0.36 0.41 1.54
80 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 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 Report On Internal Control Over Financial Reporting The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the Company's principal executive and principal financial officers and effected by the Company's board of directors, management and other personnel, 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 and includes those policies and procedures that: o Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; o 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 o 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. 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, 2005. 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 our assessment, management believes that, as of December 31, 2005, the Company's internal control over financial reporting is effective based on those criteria. 81 The Company's independent auditors have issued an audit report on our assessment of the Company's internal control over financial reporting. This report appears in Part II, Item 8 of this report. 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. 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 2005. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT The information appearing under the headings "ELECTION OF DIRECTORS," "BOARD OF DIRECTORS" and "COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934" on pages 3 to 7 and 13 in the Proxy Statement (the "2006 Proxy Statement") relating to the annual meeting of shareholders of the Company, scheduled to be held on April 20, 2006, 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. EXECUTIVE COMPENSATION The information appearing under the headings "EXECUTIVE COMPENSATION" and "EMPLOYEE BENEFITS" on pages 7 to 12 of the 2006 Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information appearing under the heading "ELECTION OF DIRECTORS" on pages 3 to 4 of the 2006 Proxy Statement and from Item 5 above is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information appearing under the heading "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" on pages 12 to 13 of the 2006 Proxy Statement is incorporated herein by reference. 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, 2005 and 2004, were $166,005 and $64,501, respectively. Audit-Related Fees: In 2005 and 2004, Schauer Taylor also billed the Company $135,730 and $92,997, 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 2005 and 2004, Schauer Taylor also billed the Company $17,430 and $11,550, respectively, for tax compliance and advice, including the preparation of the Company's corporate tax returns. In all instances, Schauer Taylor's performance of those services was pre-approved by the Company's Audit Committee. 82 PART IV 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, 2005 and 2004 Consolidated Statements of Income for the Years Ended December 31, 2005, 2004 and 2003 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2005, 2004 and 2003 Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003 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:
Exhibit No. Exhibit Page 3.1 Articles of Incorporation of FCBI (included as Exhibit 3.1 to FCBI's Registration Statement on Form 8-A filed with the SEC on April 15, 2002 and incorporated herein by reference). 3.2 By-laws of FCBI (included as Exhibit 3.2 to FCBI's Registration Statement on Form 8-A filed with the SEC on April 15, 2002 and incorporated herein by reference). 4.1 Subordinated Promissory Note, dated December 24, 2001, between Florida Community Bank and Independent Bankers Bank of Florida (included as Exhibit 4.1 to the Bank's Form 10-KSB for the year ended December 31, 2001, and incorporated herein by reference). 4.2 Specimen Common Stock Certificate of FCBI (included as Exhibit 4.1 to FCBI's Registration Statement on Form 8-A filed with the SEC on April 15, 2002 and incorporated herein by reference). 10.1 Employment agreement with Thomas S. Junker dated December 9, 1997 (included as Exhibit 10.1 to the Bank's Registration Statement on Form 10-SB-A for the year ended December 31, 1998 and incorporated herein by reference). * 10.2 2002 Key Employee Stock Compensation Program of FCBI (included as Appendix D to the Bank's Definitive Schedule 14-A filed with the FDIC on March 22, 2002 and incorporated herein by reference). *
83
Exhibit No. Exhibit Page 10.3 Amended and Restated Trust Agreement among Florida Community Banks, Inc. as depositor, Wilmington Trust Company as property trustee, Wilmington Trust Company, as Delaware trustee, and Stephen L. Price, and Thomas V. Ogletree as administrators, dated as of June 21, 2002 (included as Exhibit 10.3 to the Company's Form 10-Q for the quarter ended June 30, 2002, and incorporated herein by reference). 10.4 Guarantee Agreement between Florida Community Banks, Inc. as guarantor, and Wilmington Trust Company as guarantee trustee, dated as of June 21, 2002 (included as Exhibit 10.4 to the Company's Form 10-Q for the quarter ended June 30, 2002, and incorporated herein by reference). 10.5 Junior Subordinated Indenture between Florida Community Banks, Inc. (as Company) and Wilmington Trust Company (as trustee), dated as of June 21, 2002 (included as Exhibit 10.5 to the Company's Form 10-Q for the quarter ended June 30, 2002, and incorporated herein by reference). 10.6 Term Loan Agreement between Florida Community Banks, Inc. and The Bankers Bank, Atlanta, Georgia, dated June 13, 2002 (included as Exhibit 10.6 to the Company's Form 10-Q for the quarter ended June 30, 2002, and incorporated herein by reference). 10.7 Employee Stock Ownership Plan (included as Exhibit 10.5 to the Company's Form S-8 filed May 6, 2004, and incorporated herein by reference). 11 Statement re: computation of per share earnings 87 12 Statement re: computation of ratios 87 14 Code of Ethics (included as Exhibit 99.1 to the Company's Form 8-K filed on March 3, 2003, and incorporated herein by reference.) 21 Subsidiaries of the Registrant 88 24 Power of Attorney 92 31.1 Chief Executive Officer - Certification of principal executive officer pursuant to the Exchange Act Rule 13(a) - 14(a) or 15(d) - 14(a). 89 31.2 Chief Financial Officer - Certification of principal financial officer pursuant to the Exchange Act Rule 13(a) - 14(a) or 15(d) - 14(a). 90 32.1 Chief Executive Officer - Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 91 32.2 Chief Financial Officer - Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 91
* The referenced exhibit is a compensatory contract, plan or arrangement. 84 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FLORIDA COMMUNITY BANKS, INC. Date: March 14, 2006 By: /s/ Stephen L. Price ------------------------------------- Stephen L. Price Chairman and Chief Executive Officer Date: March 14, 2006 By: /s/ Guy W. Harris ------------------------------------- Guy W. Harris Chief Financial Officer 85 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):
Exhibit Number Description of Exhibit 11 Statement re: Computation of Per Share Earnings 12 Statement re: Computation of Ratios 21 Subsidiaries of the Registrant 24 Power of Attorney 31.1 Certification of President and Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002. 32.1 Certification of President and Chief Executive Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
86 EXHIBIT 11 - STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS Florida Community Banks, Inc. Computation of Net Income Per Common Share The following tabulation presents the calculation of basic and diluted earnings per common share for the years ended December 31, 2005, 2004 and 2003.
2005 2004 2003 ---------------- --------------- --------------- Basic Earnings Per Share: Net income................................................ $ 18,218,031 $ 12,241,932 $ 8,396,549 ================ =============== =============== Earnings on common shares................................. $ 18,218,031 $ 12,241,932 $ 8,396,549 ================ =============== =============== Weighted average common shares outstanding - basic........ 5,476,205 5,419,554 5,396,603 ================ =============== =============== Weighted average common shares outstanding - diluted...... 5,529,177 5,478,143 5,438,176 ================ =============== =============== Basic earnings per common share........................... $ 3.33 $ 2.26 $ 1.56 =============== =============== =============== Diluted earnings per common share......................... $ 3.29 $ 2.23 $ 1.54 =============== =============== ===============
EXHIBIT 12 - STATEMENT RE: COMPUTATION OF RATIOS Florida Community Banks, Inc. Computation of Ratio of Earnings to Fixed Charges
Year Ended December 31, ------------------------------------------------- 2005 2004 2003 -------------- ------------- -------------- (Dollars in thousands) Pretax income................................................. $ 29,622 $ 19,936 $ 13,487 Add fixed charges: Interest on deposits....................................... 13,864 7,109 7,924 Interest on borrowings..................................... 3,521 2,090 2,157 Portion of rental expense representing interest expense.... 61 59 60 -------------- ------------- -------------- Total fixed charges...................................... 17,446 9,258 10,141 -------------- ------------- -------------- Income before fixed charges................................... $ 47,068 $ 29,194 $ 23,628 ============== ============= ============== Pretax income................................................. $ 29,622 $ 19,936 $ 13,487 Add fixed charges (excluding interest on deposits): Interest on borrowings..................................... 3,521 2,090 2,157 Portion of rental expense representing interest expense.... 61 59 60 -------------- ------------- -------------- Total fixed charges...................................... 3,582 2,149 2,217 -------------- ------------- -------------- Income before fixed charges (excluding interest on deposits).................................................. $ 33,204 $ 22,085 $ 15,704 ============== ============= ============== Ratio of Earnings to Fixed Charges Including interest on deposits............................. 3.71 3.15 2.33 Excluding interest on deposits............................. 9.27 10.28 7.08
87 EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT Subsidiaries - Direct/Wholly-owned State of Incorporation Florida Community Bank Florida FCBI Capital Trust I Delaware 88 EXIHIBIT 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, Stephen L. Price, certify that: 1. I have reviewed this annual report on Form 10-K of Florida Community Banks, Inc. 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant, as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth quarter that has materially affected or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 14, 2006 By: /s/ Stephen L. Price ---------------------------------------------- Stephen L. Price, President, Chief Executive Officer and Chairman of the Board of Directors 89 EXIHIBIT 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER I, Guy W. Harris, certify that: 1. I have reviewed this annual report on Form 10-K of Florida Community Banks, Inc. 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant, as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth quarter that has materially affected or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 14, 2006 By: /s/ Guy W. Harris ---------------------------------------------- Guy W. Harris Chief Financial Officer 90 EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with Florida Community Banks, Inc.'s ("Company") Annual Report on Form 10-K for the period ended December 31, 2005 ("Report"), each of the undersigned certify that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 14, 2006 By: /s/ Stephen L. Price ------------------------------------------- Stephen L. Price President and Chief Executive Officer EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with Florida Community Banks, Inc.'s ("Company") Annual Report on Form 10-K for the period ended December 31, 2005 ("Report"), each of the undersigned certify that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 14, 2006 By: /s/ Guy W. Harris ------------------------------------------- Guy W. Harris Chief Financial Officer 91 EXHIBIT 24 - POWER OF ATTORNEY POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Stephen L. Price and Guy W. Harris and each of them, his true and lawful attorney-in-fact, as agent with full power of substitution and re-substitution for him and in his name, place and stead, in any and all capacity, to sign any or all amendments to this Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Federal Deposit Insurance Corporation, granting unto said attorney-in-fact and agents in full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as they might or could be in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, and their substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in capacities and on the dates indicated. Directors Date /s/ Beauford E. Davidson March 14, 2006 ---------------------------------------- Beauford E. Davidson /s/ Patrick B. Langford March 14, 2006 ---------------------------------------- Patrick B. Langford /s/ Lewis J. Nobles, Jr. March 14, 2006 ---------------------------------------- Lewis J. Nobles, Jr. /s/ Jon R. Olliff March 14, 2006 ---------------------------------------- Jon R. Olliff /s/ James O'Quinn March 14, 2006 ---------------------------------------- James O'Quinn /s/ Stephen L. Price March 14, 2006 ---------------------------------------- Stephen L. Price /s/ Bernard T. Rasmussen March 14, 2006 ---------------------------------------- Bernard T. Rasmussen /s/ Daniel G. Rosbough March 14, 2006 ---------------------------------------- Daniel G. Rosbough /s/ James E. Williams, Jr. March 14, 2006 ---------------------------------------- James E. Williams, Jr. 92