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Bank of Florida 10-K 2010 Table of Contents
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended December 31, 2009 Commission File Number 000-50091
BANK OF FLORIDA CORPORATION
A Florida Corporation IRS Employer Identification No. 59-3535315 1185 Immokalee Road Naples, Florida 34110 (239) 254-2100
Securities Registered Pursuant to Section 12(b) of the Securities Exchange Act of 1934: NONE Securities Registered Pursuant to Section 12(g) of the Securities Exchange Act of 1934: Common Stock, $0.01 par value
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 15(D) of the Exchange Act. Yes ¨ No x Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ¨ Yes ¨ No 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 (§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 ¨ 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):
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 Registrant’s common stock held by non-affiliates of the Registrant, based upon the closing price of $1.16, as quoted on the Global Market, on February 26, 2010 was approximately $13,110,000. For the purposes of this response, directors and officers of the Registrant are considered the affiliates of the Registrant at that date. The number of shares outstanding of the Registrant’s common stock, as of February 26, 2010: 12,957,898 shares of $.01 par value common stock. Portions of the Proxy Statement of the Registrant for the Annual Meeting of Shareholders to be held in April 2010 are incorporated by reference into Part III of this report.
Table of ContentsBANK OF FLORIDA CORPORATION AND SUBSIDIARIES Table of Contents
Table of ContentsPART I
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Certain statements in this Annual Report on Form 10-K contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, which statements generally can be identified by the use of forward-looking terminology, such as “may,” “will,” “expect,” “estimate,” “anticipate,” “believe,” “target,” “plan,” “project,” or “continue” or the negatives thereof or other variations thereon or similar terminology, and are made on the basis of management’s plans and current analyses of Bank of Florida Corporation, its business and the industry as a whole. These forward-looking statements are subject to risks and uncertainties, including, but not limited to, economic conditions, competition, interest rate sensitivity and exposure to regulatory and legislative changes. The above factors, in some cases, have affected, and in the future could affect Bank of Florida Corporation’s financial performance. It is possible that our actual results could differ, possibly materially, from those expressed or implied in such forward-looking statements. We caution our readers that the assumptions which form the basis for forward-looking statements, with respect to or that may impact earnings in future periods, including those factors listed above, are beyond our ability to control or estimate precisely. While Bank of Florida Corporation periodically reassesses material trends and uncertainties affecting our results of operations and financial condition, the Company does not undertake to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized. BACKGROUND AND PRIOR OPERATING HISTORY Bank of Florida Corporation was incorporated in Florida in September 1998 to serve as a holding company for Bank of Florida – Southwest. On August 24, 1999, Bank of Florida – Southwest commenced operations in Naples, Florida. On July 16, 2002, Bank of Florida – Southeast opened for business in Ft. Lauderdale, Florida and on November 5, 2004, Bank of Florida – Tampa Bay opened for business in Tampa, Florida. Bank of Florida Trust Company (the “Trust Company”) was approved to engage in fiduciary services and estate planning consultation on August 23, 2000. (Bank of Florida – Southwest, Bank of Florida – Southeast and Bank of Florida – Tampa Bay are collectively referred to in this report as the “Banks” and Bank of Florida Corporation and its subsidiaries are collectively referred to in this report as the “Company”). The Banks offer a complete range of interest bearing and non-interest bearing accounts, including commercial and retail checking accounts, money market accounts, individual retirement accounts, regular interest bearing statement savings accounts, and certificates of deposit. Lending products include commercial loans, real estate loans, home equity loans and consumer/installment loans. In addition, they provide such consumer services as U.S. Savings Bonds, traveler’s checks, cashiers checks, safe deposit boxes, bank-by-mail services, direct deposit, on-line banking, and automatic teller services. Specialized services to commercial customers include cash management, expanded on-line banking, remote deposit capture, lock box, and door-to-door banking. The Trust Company offers non-proprietary, third-party investment consulting services and access to an extensive, nationwide network of independent money managers. The holding company structure provides flexibility for expansion of our banking business through possible acquisitions of other financial institutions and provision of additional banking-related services, which the traditional commercial bank may not provide under present laws. For example, banking regulations require that banks maintain a minimum ratio of capital to assets. In the event that Bank of Florida – Southwest, Bank of Florida – Southeast or Bank of Florida – Tampa Bay’s growth is such that this minimum ratio is not maintained, we may borrow funds, subject to the capital adequacy guidelines of the Federal Reserve Board, and contribute them to the capital of the Banks, and otherwise raise capital in a manner that is unavailable to the Banks under existing banking regulations. In addition, the Banks may participate loans with each other such that the excess of an individual Bank’s loan limit may be shared with another Bank, resulting in greater retention within the holding company of the customer relationship, given acceptable credit risk and industry concentration. The Trust Company offers and provides its customers wealth management services, including fiduciary services, as a trustee, personal representative, administrator, guardian, custodian of funds, asset manager (with and without discretion) and investment advisor. It provides all of the Banks with these services, generally having a representative situated in the markets that the Company serves with a link to the centralized administrative and support services in the Trust Company’s home office location in Naples, Florida.
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Table of ContentsThe Company is suffering from the extraordinary effects of what may ultimately be the worst economic downturn since the Great Depression. The effects of the current environment are being felt across many industries, with financial services and residential real estate being particularly hard hit. The Company has seen a rapid and precipitous decline in the value of the collateral securing our loan portfolio. Thus, we are experiencing significant loan quality issues. The net loss of $147.6 million recorded by the Company in 2009 was primarily the result of significant increases in the provision for credit losses, the recognition of goodwill impairment and the establishment of a valuation reserve against the Company’s deferred tax asset. The impact of the current financial crisis in the United States and abroad is having far-reaching consequences and it is difficult to say at this point when the economy will begin to recover. As a result, we cannot assure you that we will be able to resume profitable operations in the near future, or at all. We have determined that significant additional sources of capital will be required for us to continue operations through 2010 and beyond. The Company’s Board of Directors has formed a Strategic Planning Committee. The Committee has hired an investment banking firm to seek all strategic alternatives to enhance the stability of the Company including a capital investment, sale, strategic merger or some form of restructuring. There can be no assurance that the Company will succeed in this endeavor and be able to comply with the new regulatory requirements. In addition, a transaction, which would likely involve equity financing, would result in substantial dilution to our current stockholders and could adversely affect the price of our common stock. If the Company does not comply with the new capital requirements contained in the Order, the regulators may take additional enforcement action against the holding company and the Bank. It remains to be seen if those efforts will be successful, either on a short-term or long-term basis. In addition, it is unclear at this point what impact, if any, the interest rate restrictions included in the Order will have on the Company’s continued ability to maintain adequate liquidity. As a result of our financial condition, our regulators are continually monitoring our liquidity and capital adequacy. Based on their assessment of our ability to continue to operate in a safe and sound manner, our regulators may take other and further actions, including placing the Bank into conservatorship or receivership, to protect the interests of depositors insured by the Federal Deposit Insurance Corporation. The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future, and do not include any adjustments to reflect the possible future effects on the recoverability or classification of assets, and the amounts or classification of liabilities that may result from the outcome of any regulatory action, which would affect our ability to continue as a going concern. MARKET AREA AND COMPETITION The primary market areas of the Company are Collier and southern Lee Counties on the southwest coast of Florida (served by Bank of Florida – Southwest), Broward, Palm Beach, and parts of Miami-Dade Counties on the southeast coast of Florida (served by Bank of Florida – Southeast) and Hillsborough and Pinellas Counties on the west central coast of Florida (served by Bank of Florida – Tampa Bay). Bank of Florida – Southwest has three locations in Naples (Collier County), one in Bonita Springs (southern Lee County) and one in Fort Myers (Lee County). Bank of Florida – Southeast is headquartered in downtown Fort Lauderdale (Broward County) with an additional branch location in Ft. Lauderdale (Broward County), one in Boca Raton (Palm Beach County), one in Aventura (Miami-Dade County) and two locations in Coral Gables (Miami-Dade). Bank of Florida – Tampa Bay has one location in the Harbor Island area of Tampa (Hillsborough County) and one location in Clearwater (Pinellas County). The Trust Company maintains its headquarters in Naples and has offices at all of the affiliate bank locations. In addition to independent investment consulting and wealth management expertise, the Trust Company offers trust and estate planning, full trust powers, custodial services, and private family office fiduciary and advisory services. The deposit information by market is obtained using the Federal Deposit Insurance Corporation (“FDIC”) Summary of Deposits report which is published annually. This report contains deposit data for branches and offices of all FDIC-insured institutions. The FDIC collects deposit balances for commercial and savings banks as of June 30 of each year, and the Office of Thrift Supervision (“OTS”) collects the same data for savings institutions. Collier and Lee Counties have approximately $23.8 billion in deposits as of June 30, 2009. Collier County is the 10th largest deposit market in the State of Florida, with 2.92% of all deposits statewide, while Lee County is the 9th largest with a 3.02% statewide market share. Bank of Florida – Southwest had 3.50% and 1.11% of all deposits in the Naples and Marco Island metropolitan statistical area and the Cape Coral and Fort Myers metropolitan statistical area, respectively, as of June 30, 2009.
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Table of ContentsWith deposits of $153.0 billion as of June 30, 2009, the Miami-Dade/Broward/Palm Beach County markets are much larger than the Collier/Lee County market. Miami-Dade, Palm Beach and Broward Counties are the number one, two and three deposit markets in the State of Florida, respectively, and combined account for 38.15% of Florida’s deposits. Bank of Florida – Southeast had 0.25% of all deposits in the Miami, Ft. Lauderdale and Miami Beach metropolitan statistical area as of June 30, 2009. Hillsborough and Pinellas Counties have approximately $49.0 billion in total deposits as of June 30, 2009. Pinellas County is the 5th largest deposit market in the State of Florida, with 6.94% of all deposits statewide, while Hillsborough County is the 7th largest with a 5.29% statewide market share. Bank of Florida – Tampa Bay had 0.42% of all deposits in the Tampa, St Petersburg, and Clearwater metropolitan statistical area as of June 30, 2009. The demographics of Miami-Dade, Broward and Palm Beach Counties, Collier and Lee Counties, and Hillsborough and Pinellas Counties support our plans to grow assets and deposits with limited, highly selective, full-service locations. The banking locations that we have targeted have been among the fastest growing deposit markets in the state. We face substantial competition in all phases of operations from a variety of different competitors, including: (i) large national and super-regional financial institutions that have well-established branches and significant market share in the communities we serve; (ii) finance companies, investment banking and brokerage firms, and insurance companies that offer bank-like products; (iii) credit unions, which can offer highly competitive rates on loans and deposits as they receive tax advantages not available to commercial banks; (iv) other community banks, including start-up banks, that can compete with us for customers who desire a high degree of personal service; (v) technology-based financial institutions, including large national and super-regional banks offering on-line deposit, bill payment, and mortgage loan application services; and (vi) both local and out-of-state trust companies and trust service offices. Many existing community banks with which we compete directly, as well as several new community bank start-ups, have marketing strategies similar to ours. These community banks may open new branches in the communities we serve and compete directly for customers who want the level of service offered by community banks. In addition, these banks compete directly for the same management personnel in Florida. Various legislative actions in recent years have led to increased competition among financial institutions. With the enactment of laws and regulations affecting interstate bank expansion, it is easier for financial institutions located outside of the State of Florida to enter the Florida market, including our targeted markets. In addition, recent legislative and regulatory changes and technological advances have enabled customers to conduct banking activities without regard to geographic barriers, through computer and telephone-based banking and similar services. There can be no assurance that the United States Congress, the Florida Legislature, or the applicable bank regulatory agencies will not enact legislation or promulgate rules that may further increase competitive pressures on us.
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Table of ContentsDISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS’ EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL The following is a presentation of the average consolidated balance sheets of the Company for the five years ended December 31, 2009. This presentation includes all major categories of interest-earning assets and interest-bearing liabilities (in thousands):
RETURN ON EQUITY AND ASSETS Returns on average consolidated assets and average consolidated equity for the three years ended December 31, 2009 were as follows:
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Table of ContentsCAPITAL LEVELS As of December 31, 2009, Bank of Florida – Southwest was “critically undercapitalized,” Bank of Florida – Southeast was “undercapitalized” and Bank of Florida – Tampa Bay was “significantly undercapitalized,” pursuant to FDIC definitions. Until the Banks become “well capitalized” again, they will be prohibited from accepting, renewing or rolling over brokered deposits, including all CDARs (retail and wholesale). In addition, the Banks may not offer an interest rate on our deposits that is 75 basis points higher than the prevailing effective rates on insured deposits of comparable amounts and maturities in the Banks’ normal market area or the national rates released by the FDIC periodically. The regulatory capital ratios for our subsidiary banks as of December 31, 2009, were:
LENDING ACTIVITIES The Company engages in a large complement of lending activities, including commercial, consumer, installment, and real estate loans. Certain aspects of our lending activities are affected by resolutions adopted by the Banks’ Boards of Directors, which are described under “Supervision and Regulation”. The majority of the Company’s lending activities are conducted principally with customers located in the Naples, Ft. Myers, Ft. Lauderdale, Miami-Dade, Palm Beach and Tampa, Florida areas. Construction loans are comprised of commercial real estate, multifamily and residential one to four family loans. Commercial and industrial loans are primarily extended to small and mid-sized corporate borrowers in service and manufacturing related industries. Collateral held varies but may include compensating balances, accounts receivable, inventory, property, plant and equipment and income producing commercial properties. Although the Banks’ loan portfolio is diversified, a significant portion of its loans are collateralized by real estate. Therefore, the Banks are susceptible to economic downturns and natural disasters. Commercial lending is directed principally towards businesses whose demands for funds fall within the Banks’ legal lending limits and who are potential deposit customers. For presentation purposes, the commercial lending category includes loans made to individual, partnership or corporate borrowers, and obtained for a variety of business purposes. Particular emphasis is placed on loans to small and medium-sized businesses. Real estate loans consist of residential and commercial first mortgage loans, second mortgage financing and construction loans. Lines of credit include home equity, commercial, and consumer lines of credit. Consumer loans consist primarily of installment loans to individuals for personal, family and household purposes.
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Table of ContentsThe following table presents various categories of loans contained in the Company’s loan portfolio and the total amount of all loans as of the dates indicated (in thousands).
The Banks have correspondent relationships with several banks, as well as with each other, whereby they can engage in the sale and purchase of loan participations. Participations purchased, if any, are entered into using the same underwriting criteria that would be applied if we had originated the loan. This includes credit and collateral analyses and maintenance of complete credit files on each participation purchased that is consistent with the credit files that we maintain on our customers. The Company does not presently have, nor intends to implement, a rollover policy with respect to its loan portfolio. At December 31, 2009, approximately 86.0% of the Company’s loan portfolio is concentrated in real estate loans. All loans are recorded according to original terms, and demand loans, overdrafts and loans having no stated repayment terms or maturity are reported as due in one year or less. The following is an analysis of maturities of loans as of December 31, 2009 (in thousands):
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Table of ContentsManagement has established a policy to discontinue accruing interest (non-accrual status) on a loan after it has become 90 days delinquent as to payment of principal or interest unless the loan is considered to be well collateralized and is actively in the process of collection. In addition, a loan will be placed on non-accrual status before it becomes 90 days delinquent if management believes that the borrower’s financial condition is such that collection of interest or principal is doubtful. Interest previously accrued but uncollected on such loans is reversed and charged against current income when the receivable is determined to be uncollectible. Interest income on non-accrual loans is recognized only as received. Information pertaining to our collateral dependent and nonaccrual loans can be found in “Note 7 – Loans” of the “Notes to Consolidated Financial Statements”. The Company had non-accrual loans totaling $164,474,000 and $71,853,000 at December 31, 2009 and 2008, respectively. At December 31, 2009, there was $7,300 in loans that were contractually past due 90 days or more as to principal or interest payments and still accruing interest. At December 31, 2008, there were no loans that were contractually past due 90 days or more as to principal or interest payments and still accruing. The Company had $90,592,000 and $19,372,000 loans that would be defined as troubled debt restructuring at December 31, 2009 and December 31, 2008, respectively. SUMMARY OF LOAN LOSS EXPERIENCE The allowance for loan losses is established and maintained at levels deemed adequate to cover losses inherent in the portfolio as of the balance sheet date. This estimate is based upon management’s evaluation of the risks in the loan portfolio and changes in the nature and volume of loan activity. Estimates for loan losses are derived by analyzing historical loss experience, current trends in delinquencies and charge-offs, historical peer bank experience, changes in the size and composition of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. The allowance for loan losses is comprised of: (1) a component for individual loan impairment, and (2) a measure of collective loan impairment. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. Although the allowance for loan losses was determined by category of loans, the entire allowance is available to absorb losses from any category. The allowance for loan losses was allocated by category for each of the years indicated as follows (in thousands):
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Table of ContentsAn analysis of the Company’s allowance for loan losses and loan loss experience (charge-offs) is furnished in the following table for the most recent five years ended December 31, as indicated (in thousands):
INVESTMENT ACTIVITIES The Company invests primarily in obligations of the United States or obligations guaranteed as to principal and interest by the United States and other taxable securities. The Banks enter into Federal Funds transactions with their principal correspondent banks, and primarily act as net sellers of such funds. The sale of Federal Funds amounts to short-term loans from the Banks to other banks. The Company’s investment activities are governed internally by a written, board-approved policy. The investment policy is carried out by the Corporate Asset/Liability Management Committee (“ALCO”), which meets regularly to review the economic environment and establish investment strategies. The ALCO has much broader responsibilities, which are discussed further in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the captions “Capital Resources and Liquidity” and “Interest Sensitivity”. For further detailed information as to the amortized cost, fair value, respective maturities and weighted average yields of the Company’s investments, please see “Note 6-Securities” of the “Notes to Consolidated Financial Statements”. SOURCES OF FUNDS The Company’s primary funding source for lending, investments and other general business purposes is deposits. The Company offers a wide range of interest bearing and non-interest bearing accounts, including commercial and retail checking accounts, negotiable order of withdrawal (“NOW”) accounts, money market accounts with limited transactions, individual retirement accounts, regular interest-bearing statement savings accounts, certificates of deposit with a range of maturity date options, and accessibility to a customer’s deposit relationship through on-line banking. Certain aspects of our deposit gathering activities, including the use of brokered deposits, are affected by the Resolutions described under “Supervision and Regulation”. Commercial customers additionally have cash management, expanded on-line banking, lock box, remote deposit capture and door-to-door banking depositor services. The sources of deposits are residents, businesses and employees of businesses within the Banks’ market areas, obtained through the personal solicitation of the Banks’ officers and directors, direct mail solicitation and limited advertisements published in the local media. The Banks pay competitive interest rates on time, money market and savings deposits. In addition, the Banks have implemented a service charge fee schedule competitive with other financial institutions in the Company’s market areas, covering such matters as maintenance fees on checking accounts, per item processing fees on checking accounts, returned check charges, and other similar charges.
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Table of ContentsIn addition to deposits, another principal source of funds is loan repayments. The Company’s banking subsidiaries are members of the Federal Home Loan Bank (“FHLB”). At this time, however, the Company does not have any further borrowing capacity. Bank of Florida-Southwest and Bank of Florida – Southeast issued subordinated debt during 2005 and repurchase agreements in 2008 to assist in their capital funding needs. See “Note-10 Deposits”, “Note 11-Subordinated Debt and Other Borrowings” and “Note 12-Federal Home Loan Bank Advances” of the “Notes to Consolidated Financial Statements” for further information. The following table presents, for the three years ended December 31, 2009, the average amount of and average rate paid on each of the following funding categories:
CORRESPONDENT BANKING Correspondent banking involves the provision of services by one bank to another bank that cannot provide that service for itself from an economic or practical standpoint. The Banks purchase correspondent services offered by larger banks, including check collections, purchase of Federal Funds, security safekeeping, investment services, coin and currency supplies, liquidity loan participations and sales of loans to or participations with correspondent banks. The Banks are involved in loan participations to correspondent banks as well as each other with respect to loans that exceed the individual Bank’s respective lending limits. Management of the Banks has established primary correspondent relationships with the Independent Bankers’ Bank of Florida, Pacific Coast Bankers Bank, and Federal Reserve Bank of Atlanta. At December 31, 2009, available lines of credit with correspondent banks amounted to $98,449,000. EMPLOYEES At December 31, 2009, the Company employed 218 full-time-equivalent employees, none of whom were represented by a union or collective bargaining agreement. The Company will hire additional persons as needed on a full-time and part-time basis, including additional tellers and customer service representatives, to support its growth objectives. ACCOUNTING STANDARDS UPDATES In June 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2009-01 (“ASU 2009-01”), Topic 105 – Generally Accepted Accounting Principles amendments based on Statement of Financial Accounting Standards No. 168 – The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles. ASU 2009-01 amends the FASB Accounting Standards Codification for the issuance of FASB Statement No. 168 (“SFAS 168”), The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles. ASU 2009-1 includes SFAS 168 in its entirety, including the accounting standards update instructions contained in Appendix B of the Statement. The FASB Accounting Standards CodificationTM (“Codification”) became the source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this Statement, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification will become non-authoritative. This Statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009.
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Table of ContentsIn August 2009, the FASB issued Accounting Standards Update No. 2009-04 (“ASU 2009-04”), Accounting for Redeemable Equity Instruments – Amendment to Section 480-10-S99. ASU 2009-04 represents an update to Section 480-10-S99, Distinguishing Liabilities from Equity, per Emerging Issues Task Force (“EITF”) Topic D-98, Classification and Measurement of Redeemable Securities. ASU 2009-04 did not have a material effect on the Company’s consolidated financial condition or results of operations. In August 2009, the FASB issued Accounting Standards Update No. 2009-05 (“ASU 2009-05”), Fair Value Measurements and Disclosures (Topic 820) – Measuring Liabilities at Fair Value. ASU 2009-05 applies to all entities that measure liabilities at fair value within the scope of ASC Topic 820. ASU 2009-05 provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the following techniques: 1.) A valuation technique that uses:
2.) Another valuation technique that is consistent with the principles of ASC Topic 820. Two examples would be an income approach, such as a technique that is based on the amount at the measurement date that the reporting entity would pay to transfer the identical liability or would receive to enter into the identical liability. The amendments in ASU 2009-5 also clarify that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. It also clarifies that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. The guidance provided in ASU 2009-5 is effective for the first reporting period beginning after issuance. The adoption of ASU 2009-5 will not have a material effect on the Company’s consolidated financial condition or results of operations. In September 2009, the FASB issued Accounting Standards Update No. 2009-06 (“ASU 2009-06”), Income Taxes (Topic 740) – Implementation Guidance on Accounting for Uncertainty in Income Taxes and Disclosure Amendments for Nonpublic Entities. ASU 2009-06 provides additional implementation guidance on accounting for uncertainty in income taxes by addressing 1.) whether income taxes paid by an entity are attributable to the entity or its owners, 2.) what constitutes a tax position for a pass-through entity or a tax-exempt not-for-profit entity, and 3.) how accounting for uncertainty in income taxes should be applied when a group of related entities comprise both taxable and nontaxable entities. ASU 2009-06 also eliminates certain disclosure requirements for nonpublic entities. The guidance and disclosure amendments are effective for interim and annual periods ending after September 15, 2009. The adoption of this guidance had no impact on the Company’s consolidated financial condition or results of operations. In December 2009, the FASB issued Accounting Standards Update No. 2009-16 (“ASU 2009-16”), Transfers and Servicing. ASU 2009-16 provides amendments to Subtopic 860-10 as a result of FASB Statement No. 166, Accounting for Transfers of Financial Assets. The adoption of this guidance did not have a material effect on the Company’s consolidated financial condition or results of operations. In December 2009, the FASB issued Accounting Standards Update No. 2009-17 (“ASU 2009-17”), Consolidations (Topic 810) – Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. ASU 2009-17 provides amendments to Subtopic 810-10 as a result of FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R). The adoption of this guidance did not have a material effect on the Company’s consolidated financial condition or results of operations. In January 2010, the FASB issued Accounting Standards Update No. 2010-01 (“ASU 2010-01”), Equity (Topic 505) – Accounting for Distributions to Shareholders with Components of Stock and Cash. ASU 2010-01 clarifies that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in aggregate is considered a share issuance that is reflected in EPS prospectively and is not a stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings Per Share). These distributions should be accounted for and included in EPS calculations. The amendments in ASU 2010-01 also provide technical correction to the Accounting Standards Codification. The amendments in this Update are effective for interim and annual periods after December 15, 2009, and should be applied on a retrospective basis. The adoption of this guidance did not have a material effect on the Company’s consolidated financial condition or results of operations.
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Table of ContentsIn January 2010, the FASB issued Accounting Standards Update No. 2010-06 (“ASU 2010-06”), Fair Value Measurements and Disclosures (Topic 820) – Improving Disclosures about Fair Value Measurements. ASU 2010-06 provides amendments to Subtopic 820-10 that require the following new disclosures:
This Update provides amendments to Subtopic 820-10 that clarify existing disclosures as follows:
The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the rollforward activity in Level 3 fair value measurements. Those disclosures are effective for fiscal periods beginning after December 15, 2010 and for interim periods within those fiscal years. The adoption of this guidance did not have a material effect on the Company’s consolidated financial condition or results of operations. In February 2010, the FASB issued Accounting Standards Update No. 2010-08 (“ASU 2010-08”), Technical Corrections to Various Topics. ASU 2010-08 eliminates inconsistencies and outdated provisions and provides the needed clarifications in US generally accepted accounting principles (GAAP). While none of the provisions in this Update fundamentally change US GAAP, certain clarifications made to the guidance on embedded derivatives and hedging may cause a change in the application of the Subtopic and special transition provisions are provided for accounting changes related to that Subtopic. The amendments in this Update are effective for the first reporting period beginning after issuance except for certain amendments made to Topic 815 and the nullification of paragraph 852-740-45-2. The amendments related to the nullification of paragraph 852-740-45-2 should be applied to reorganizations for which the date of reorganization is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. With respect to paragraphs 815-15-25-26, 815-15-25-42 and 815-15-55-13, the amendments in this Update are effective for fiscal years beginning after December 15, 2009. The adoption of this guidance will not have a material effect on the Company’s consolidated financial condition or results of operations. MONETARY POLICIES The results of operations of the Company are affected by credit policies of monetary authorities, particularly the Board of Governors of the Federal Reserve System (“Federal Reserve”). The instruments of monetary policy employed by the Federal Reserve include open market operations in U.S. government securities, changes in the discount rate on member bank borrowings, changes in reserve requirements against member bank deposits, and limitations on interest rates which member banks may pay on time and savings deposits. In view of changing conditions in the national economy and in the money markets, as well as the effect of action by monetary and fiscal authorities, including the Federal Reserve Board, no accurate prediction can be made as to possible future changes in interest rates, deposit levels, loan demand or the business and earnings of the Company.
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Table of ContentsSUPERVISION AND REGULATION Board Resolutions. In October 2009, the Board of Directors of BOFL adopted Resolutions (“Board Resolutions”) proposed by the Federal Reserve Bank of Atlanta (“Reserve Bank”) with the goal of addressing and improving certain matters. With respect to each Board Resolution, BOFL has taken the following actions.
Corrective Resolutions. In August 2009, the Boards of Directors of each of the Bank adopted Resolutions (“Corrective Resolutions”) proposed by the Florida Office of Financial Regulation following issuance of a Report of Examination (“Report”) with the goal of addressing and improving certain matters at each Bank. With respect to each set of Corrective Resolutions, each Bank has taken the following actions. Bank of Florida – Southwest
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Bank of Florida – Southeast
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Bank of Florida – Tampa Bay
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Anticipated FDIC Actions. Based upon the financial condition of the Banks, and subsequent correspondence and discussions with the FDIC, the FDIC has informed us that: (1) each of the Banks must notify the FDIC and the OFR before adding or replacing a member of their respective Boards of Directors or employing any person (including any existing employee) as a senior executive officer, and (2) the Banks may not, except under certain
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Table of Contentscircumstances, enter into any agreements to make severance or indemnification payments or make any such payments to institution-affiliated parties. In addition, based on the Banks’ financial condition, we understand that the FDIC plans to pursue and implement formal enforcement actions with respect to the Banks in the form of consent orders (“FDIC Orders”). We currently expect the FDIC Orders will focus on the areas addressed by our Corrective Resolutions: to raise and maintain certain capital ratios, to improve asset quality, to reduce non-core funding dependence, and to reduce our commercial real estate loan concentrations, although the scope and terms of any FDIC Orders or any other action that the FDIC may take is unknown. The Banks must also obtain prior approval from the FDIC before engaging in any transactions that would materially change the composition of their balance sheets. Such transactions include any transaction or transactions that would increase a Bank’s total assets by 5% or more, or that would significantly change the Bank’s funding resources. In addition, the Banks cannot pay dividends to the Company without prior FDIC approval. General. Banks and their holding companies, and their affiliates, are extensively regulated under both federal and state law. The following is a brief summary of certain statutes, rules, and regulations affecting the Company, the Banks and the Trust Company. This summary is qualified in its entirety by reference to the particular statutory and regulatory provisions referred to below and is not intended to be an exhaustive description of the statutes or regulations applicable to the business of the Company, the Banks or the Trust Company. Any change in the applicable law or regulation may have a material effect on the business and prospects of the Company, the Banks and the Trust Company. Supervision, regulation, and examination of banks by regulatory agencies are intended primarily for the protection of depositors, rather than shareholders. Bank Holding Company Regulation. The Company is a bank holding company and a member of the Federal Reserve System under the Bank Holding Company (“BHC”) Act of 1956. As such, the Company is subject to the supervision, examination and reporting requirements of the BHC Act and the regulations of the Federal Reserve. The Company is required to furnish to the Federal Reserve an annual report of its operations at the end of each fiscal year, and such additional information as the Federal Reserve may require pursuant to the BHC Act. The BHC Act requires that a bank holding company obtain the prior approval of the Federal Reserve before: (i) acquiring direct or indirect ownership or control of more than 5% of the voting shares of any bank; (ii) taking any action that causes a bank to become a subsidiary of the bank holding company; (iii) merging or consolidating with any other bank holding company; or (iv) acquiring most other operating subsidiaries. The BHC Act further provides that the Federal Reserve may not approve any transaction that would result in a monopoly or would be in furtherance of any combination or conspiracy to monopolize or attempt to monopolize the business of banking in any section of the United States, or the effect of which may be to lessen competition or to tend to create a monopoly in any section of the country, or that in any other manner would be in restraint of trade, unless the anti-competitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the convenience and needs of the community to be served. The Federal Reserve is also required to consider the financial and managerial resources and future prospects of the bank holding companies and banks concerned and the convenience and needs of the community to be served. Consideration of financial resources generally focuses on capital adequacy and consideration of convenience and needs issues, including the party’s performance under the Community Reinvestment Act of 1977 (the “CRA”) and anti-money laundering laws, which are both discussed below. Community Reinvestment Act. Banks are subject to the provisions of the Community Reinvestment Act (“CRA”). Under the terms of the Community Reinvestment Act, the appropriate federal bank regulatory agency is required, in connection with its examination of a bank, to assess such bank’s record in meeting the credit needs of the community served by that bank, including low- and moderate-income neighborhoods. The regulatory agency’s assessment of the bank’s record is made available to the public. Further, such assessment is required of any bank which has applied to: (i) charter a national bank; (ii) obtain deposit insurance coverage for a newly chartered institution; (iii) establish a new branch office that will accept deposits; (iv) relocate an office; or (v) merge or consolidate with, or acquire the assets or assume the liabilities of, a federally regulated financial institution. In the case of a bank holding company applying for approval to acquire a bank or other bank holding company, the Federal Reserve will assess the record of each subsidiary bank of the applicant BHC, and such records may be the basis for denying the application. Gramm-Leach-Bliley Act. This act 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 as a financial subsidiary of a national bank. The law reserves the role of the Federal Reserve as the supervisor for bank holding companies. At the same time, the law also provides a system of functional regulation which is designed to utilize the various existing federal and state regulatory bodies. The law also sets up a process for coordination between the Federal Reserve and the Secretary of the Treasury regarding the approval of new financial activities for both bank holding companies and national bank financial subsidiaries.
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Table of ContentsThe law also mandates 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 allows the continuation of some historical 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. 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. Sarbanes-Oxley Act. The purpose of the Sarbanes-Oxley Act is to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other purposes. The Sarbanes-Oxley Act amends the Securities Exchange Act of 1934 to prohibit a registered public accounting firm from performing specified nonaudit services contemporaneously with a mandatory audit. The Sarbanes-Oxley Act also vests the audit committee of an issuer with responsibility for the appointment, compensation, and oversight of any registered public accounting firm employed to perform audit services. It requires each committee member to be a member of the board of directors of the issuer, and to be otherwise independent. The Sarbanes-Oxley Act further requires the chief executive officer and chief financial officer of an issuer to make certain certifications as to each annual or quarterly report. In addition, the Sarbanes-Oxley Act requires officers to forfeit certain bonuses and profits under certain circumstances. Specifically, if an issuer is required to prepare an accounting restatement due to the material noncompliance of the issuer as a result of misconduct with any financial reporting requirement under the securities laws, the chief executive officer and chief financial officer of the issuer shall be required to reimburse the issuer for: (1) any bonus or other incentive-based or equity-based compensation received by that person from the issuer during the 12-month period following the first public issuance or filing with the Securities and Exchange Commission (“SEC”) of the financial document embodying such financial reporting requirement; and (2) any profits realized from the sale of securities of the issuer during that 12-month period. The Sarbanes-Oxley Act also instructs the SEC to require by rule:
The Sarbanes-Oxley Act also prohibits insider transactions in the company’s stock held within its pension plans during lock out periods, and any profits on such insider transactions are to be disgorged. In addition, there is a prohibition of company loans to its executives, except in certain circumstances. The SEC also requires the company to issue a code of ethics for senior financial officers of the company. Further, the Sarbanes-Oxley Act adds a criminal penalty of fines and imprisonment of up to 10 years for securities fraud. Regulation W. Regulation W comprehensively implements Sections 23A and 23B of the Federal Reserve Act. Sections 23A and 23B and Regulation W restrict loans by a depository institution to its affiliates, asset purchases by depository institutions from its affiliates, and other transactions between a depository institution and its affiliates. Regulation W unifies in one public document, the Federal Reserve’s interpretations of sections 23A and 23B. Bank Regulation. Bank of Florida – Southwest, Bank of Florida – Southeast and Bank of Florida – Tampa Bay are state chartered banks, subject to the supervision and regulation of the Florida Department of Financial Services (the “Department”) and the Federal Deposit Insurance Corporation (“FDIC”). The FDIC serves as the primary federal regulator and the administrator of the fund that insures the deposits of the Banks. The Banks are subject to comprehensive regulation, examination and supervision by the Department and the FDIC and are subject to other laws and regulations applicable to banks. Among the statutes and regulations to which the Banks are subject are limitations on loans to a single borrower and to their 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
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Table of Contentsunder equal and fair conditions; and the disclosure of the costs and terms of such credit. The Banks are examined periodically by the FDIC and the Department, to which the Banks submit periodic reports regarding their financial condition and other matters. The FDIC and the Department have a broad range of powers to enforce regulations under their jurisdiction, and to take discretionary actions determined to be for the protection, safety and soundness of banks, including the institution of cease and desist orders and the removal of directors and officers. The FDIC and the Department also have the authority to approve or disapprove mergers, consolidations, and similar corporate actions. Our subsidiary banks are also subject to “cross-guarantee” provisions under federal law that provide if one FDIC-insured depository institution of a multi-bank holding company fails or requires FDIC assistance, the FDIC may assess a “commonly controlled” depository institution for the estimated losses suffered by the FDIC. Such liability could have a material adverse effect on the financial condition of any assessed bank and the holding company. While the FDIC’s claim is junior to the claims of depositors, holders of secured liabilities, general creditors and subordinated creditors, it is superior to the claims of shareholders and affiliates. Under federal law, federally insured banks are subject, with certain exceptions, to certain restrictions on any extension of credit to their parent holding companies or other affiliates, on investment in the stock or other securities of affiliates, and on the taking of such stock or securities as collateral from any borrower. In addition, banks are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit or the providing of any property or service. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”) contains capital standards for bank holding companies and banks and civil and criminal enforcement provisions. FIRREA also provides that a depository institution insured by the FDIC can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with (i) the default of a commonly controlled FDIC insured depository institution, or (ii) any assistance provided by the FDIC to a commonly controlled FDIC insured institution in danger of default. The FDIC Improvement Act of 1991 (“FDICIA”) enacted a number of provisions addressing the safety and soundness of deposit insurance funds, supervision, accounting, prompt regulatory action, and also implemented other regulatory improvements. The cost for conducting an examination of an institution may be assessed to that institution, with special consideration given to affiliates and any penalties imposed for failure to provide information requested. FDICIA also re-codified then current law restricting extensions of credit to insiders under the Federal Reserve Act. USA Patriot Act. The terrorist attacks in September 2001, have impacted the financial services industry and led to federal legislation that attempts to address certain issues involving financial institutions. 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 (“USA Patriot Act”). Part of the USA Patriot Act is the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 (“IMLA”). IMLA authorizes the Secretary of the Treasury, in consultation with the heads of other government agencies, to adopt special measures applicable to banks, bank holding companies, and other financial institutions. These measures may include enhanced recordkeeping and reporting requirements for certain financial transactions that are of primary money laundering concern, due diligence requirements concerning the beneficial ownership of certain types of accounts, and restrictions or prohibitions on certain types of accounts with foreign financial institutions. Among its other provisions, IMLA requires each financial institution to: (i) establish an anti-money laundering program; (ii) establish due diligence policies, procedures and controls with respect to its private banking accounts and correspondent banking accounts involving foreign individuals and certain foreign banks; and (iii) avoid establishing, maintaining, administering, or managing correspondent accounts in the United States for, or on behalf of, a foreign bank that does not have a physical presence in any country. In addition, IMLA contains a provision encouraging cooperation among financial institutions, regulatory authorities and law enforcement authorities with respect to individuals, entities and organizations engaged in, or reasonably suspected of engaging in, terrorist acts or money laundering activities. IMLA expands the circumstances under which funds in a bank account may be forfeited and requires covered financial institutions to respond under certain circumstances to requests for information from federal banking agencies within 120 hours. IMLA also amends the BHC Act and the Bank Merger Act to require the federal banking agencies to consider the effectiveness of a financial institution’s anti-money laundering activities when reviewing an application under these acts. Over the past few years, enforcement, and compliance monitoring, of anti-money laundering laws has dramatically increased. Because of this, the Company and the Banks have increased the attention and resources they dedicate to IMLA compliance, including the retention of specialized IMLA officers, dedicated solely to IMLA compliance.
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Table of ContentsTransactions with Affiliates. In addition to the limitations imposed by Regulation W, there are various legal restrictions on the extent to which the Banks may engage in loan transactions with the Company and its subsidiaries and other affiliates. Subject to certain limited exceptions, the Banks may not extend credit to the Company or any one of the Banks’ affiliates in excess of ten percent of the Bank’s capital stock and surplus, or to all affiliates, in the aggregate, in excess of twenty percent of the Banks’ capital stock and surplus. All extensions of credit by the Banks to an affiliate must be fully collateralized by high quality collateral. Transactions involving extensions of credit to the Banks’ affiliates are subject to further limitations. These additional limitations are also applicable to: (1) transactions involving the purchase of assets or securities from affiliates; (2) extensions of credit and other transactions by the Banks to or with third persons where there is a benefit to an affiliate; (3) contracts in which the Banks provide services to an affiliate; and (4) transactions in which an affiliate receives a brokerage commission in a transaction involving the Banks. All such transactions must be on terms and under circumstances, including credit standards, that are substantially the same, or at least as favorable to the Banks as those prevailing at the time for comparable transactions with or involving other nonaffiliated companies. Dividends. The Company’s ability to pay cash dividends will depend almost entirely upon the amount of dividends that the Banks are permitted to pay by statutes or regulations. Additionally, the Florida Business Corporation Act provides that the Company may only pay dividends if the dividend payment would not render it insolvent, or unable to meet its obligations as they come due. All of the Banks and the Trust Company are Florida state-chartered institutions. The Department limits the Banks’ ability to pay dividends. As state-chartered institutions, the Banks and the Trust Company are subject to regulatory restrictions on the payment of dividends, including a prohibition of payment of dividends from their capital under certain circumstances without the prior approval of the Department. Except with the prior approval of the Department, all dividends of any Florida bank or trust company must be paid out of retained net profits from the current period and the previous two years, after deducting expenses, including losses and bad debts. In addition, state-chartered banks and trust companies in Florida are required to transfer at least 20% of their net income to surplus until their surplus equals the amount of paid-in capital. The Company does not anticipate that the subsidiary banks will pay dividends in the foreseeable future in so that they can maintain their well capitalized status and retain any earnings to support their growth. Capital Requirements. The federal bank regulatory authorities have adopted risk-based capital guidelines for banks and bank holding companies that are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies. The resulting capital ratios represent qualifying capital as a percentage of total risk-weighted assets and off-balance sheet items. The guidelines are minimums, and the federal regulators have noted that banks and bank holding companies contemplating significant expansion programs should not allow expansion to diminish their capital ratios and should maintain all ratios well in excess of the minimums. The current guidelines require all bank holding companies and federally-regulated banks to maintain a minimum risk-based total capital ratio equal to 8%, of which at least 4% must be Tier 1 capital. Tier 1 capital includes common stockholders’ equity, qualifying perpetual preferred stock, and minority interests in equity accounts of consolidated subsidiaries, but excludes goodwill and most other intangibles and excludes the allowance for loan and lease losses. Tier 2 capital includes the excess of any preferred stock not included in Tier 1 capital, mandatory convertible securities, hybrid capital instruments, subordinated debt and intermediate term-preferred stock, and general reserves for loan and lease losses up to 1.25% of risk-weighted assets. FDICIA contains “prompt corrective action” provisions pursuant to which banks are to be classified into one of five categories based upon capital adequacy, ranging from “well capitalized” to “critically undercapitalized” and which require (subject to certain exceptions) the appropriate federal banking agency to take prompt corrective action with respect to an institution which becomes “significantly undercapitalized” or “critically undercapitalized”. In general, the regulations define the five capital categories as follows: (i) an institution is “well capitalized” if it has a total risk-based capital ratio of 10% or greater, has a Tier 1 risk-based capital ratio of 6% or greater, has a leverage ratio of 5% or greater and is not subject to any written capital order or directive to meet and maintain a specific capital level for any capital measures; (ii) an institution is “adequately capitalized” if it has a total risk-based capital ratio of 8% or greater, has a Tier 1 risk-based capital ratio of 4% or greater, and has a leverage ratio of 4% or greater; (iii) an institution is “undercapitalized” if it has a total risk-based capital ratio of less than 8%, has a Tier 1 risk-based capital ratio that is less than 4% or has a leverage ratio that is less than 4%; (iv) an institution is “significantly undercapitalized” if it has a total risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital ratio that is less than 3% or a leverage ratio that is less than 3%; and (v) an institution is “critically undercapitalized” if its “tangible equity” is equal to or less than 2% of its total assets. The FDIC also, after an opportunity for a hearing, has authority to downgrade an institution from “well capitalized” to “adequately capitalized” or to subject an “adequately capitalized” or “undercapitalized” institution to the supervisory actions applicable to the next lower category, for supervisory concerns.
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Table of ContentsThe degree of regulatory scrutiny of a financial institution will increase, and the permissible activities of the institution will decrease, as it moves downward through the capital categories. Institutions that fall into one of the three undercapitalized categories may be required to: (i) submit a capital restoration plan; (ii) raise additional capital; (iii) restrict their growth and other activities; (iv) improve their management; (v) eliminate management fees; or (vi) divest themselves of all or part of their operations. Bank holding companies controlling financial institutions can be called upon to boost the institutions’ capital and to partially guarantee the institutions’ performance under their capital restoration plans. These capital guidelines can affect the Company in several ways. Enforcement Powers. Congress has provided the federal bank regulatory agencies with an array of powers to enforce laws, rules, regulations and orders. Among other things, the agencies may require that institutions cease and desist from certain activities, may preclude persons from participating in the affairs of insured depository institutions, may suspend or remove deposit insurance, and may impose civil money penalties against institution-affiliated parties for certain violations. Maximum Legal Interest Rates. Like the laws of many states, Florida law contains provisions on interest rates that may be charged by banks and other lenders on certain types of loans. Numerous exceptions exist to the general interest limitations imposed by Florida law. The relative importance of these interest limitation laws to the financial operations of the Banks will vary from time to time, depending on a number of factors, including conditions in the money markets, the costs and availability of funds, and prevailing interest rates. Bank Branching. Banks in Florida are permitted to branch statewide. A State bank’s expansion is subject to the Department and FDIC approval. Any such approval would take into consideration several factors, including the banks’ level of capital, the prospects and economics of the proposed branch office, and other conditions deemed relevant for purposes of determining whether approval should be granted to open a branch office. For information regarding legislation on interstate branching in Florida, see “Interstate Banking” below. Change of Control. Federal law restricts the amount of voting stock of a bank holding company and a bank that a person may acquire without the prior approval of banking regulators. The overall effect of such laws is to make it more difficult to acquire a bank holding company and a bank by tender offer or similar means than it might be to acquire control of another type of corporation. Consequently, shareholders of the Company may be less likely to benefit from the rapid increases in stock prices that may result from tender offers or similar efforts to acquire control of other companies. Under the Change in Bank Control Act and the regulations thereunder, a person or group must give advance notice to the Federal Reserve before acquiring control of any bank holding company. Upon receipt of such notice, the Federal Reserve may approve or disapprove the acquisition. The Change in Bank Control Act creates a rebuttable presumption of control if a member or group acquires a certain percentage or more of a bank holding company’s or bank’s voting stock, or if one or more other control factors set forth in the Change in Bank Control Act are present. Interstate Banking. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 provides for nationwide interstate banking and branching. Under this law, interstate acquisitions of banks or bank holding companies in any state by bank holding companies in any other state are permissible subject to certain limitations. Florida also has a law that allows out-of-state bank holding companies (located in states that allow Florida bank holding companies to acquire banks and bank holding companies in that state) to acquire Florida banks and Florida bank holding companies. The law essentially provides for out-of-state entry by acquisition only (and not by interstate branching) and requires the acquired Florida bank to have been in existence for at least three years. Interstate branching and consolidation of existing bank subsidiaries in different states are permissible. A Florida bank may also establish, maintain, and operate one or more branches in a state other than Florida pursuant to an interstate merger transaction in which the Florida bank is the resulting bank. Effect of Governmental Policies. The earnings and businesses of the Company and the Banks are affected by the policies of various regulatory authorities of the United States, especially the Federal Reserve. The Federal Reserve, among other things, regulates the supply of credit and deals with general economic conditions within the United States. The instruments of monetary policy employed by the Federal Reserve for those purposes influence in various ways the overall level of investments, loans, other extensions of credit, and deposits, and the interest rates paid on liabilities and received on assets.
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Risks Related to the Conduct of Our Business Our regulatory capital levels have declined and may continue to do so. At December 31, 2009, our consolidated Tier 1 leverage capital ratio was 2.41%, our consolidated total risk based capital ratio was 5.33% and our consolidated Tier 1 risk based capital ratio was 2.94%. These ratios have caused the Company to be considered “under capitalized.” In addition, each of our subsidiary banks is considered to be “under capitalized” as of December 31, 2009. Continued losses will cause these capital ratios to fall further. Lower capital ratios will impair our ability to compete for loans and deposits, due to regulatory restrictions and public perception. We are required to maintain capital to meet regulatory requirements, and if we fail to maintain sufficient capital, our financial condition, liquidity and results of operations, as well as our ability to maintain regulatory compliance, would be adversely affected. Our subsidiary banks and the trust company must meet regulatory capital requirements and maintain sufficient liquidity. Our ability to achieve these goals depends on conditions in the capital markets, economic conditions and a number of other factors, including investor perceptions regarding the banking industry and market conditions, and governmental activities, many of which are outside our control, and on our financial condition and performance. Accordingly, we cannot assure you that we will be able to raise additional capital if needed or on terms acceptable to us. If we fail to satisfy these capital ratios and other regulatory requirements, our financial condition, liquidity and results of operations would be materially and adversely affected. The board of directors of each of our subsidiary banks has adopted Corrective Resolutions, which commit the respective subsidiary banks to remain “well capitalized” at all times and to reach by December 31, 2009 (and thereafter maintain), a Tier 1 leverage capital ratio of at least 8% and a total risk-based capital ratio of at least 11% and to reach, by June 30, 2010 (and thereafter maintain), a total risk-based capital ratio of at least 12%. As December 31, 2009, however, each of our subsidiary banks was “undercapitalized.” As of that date Bank of Florida – Southwest had a Tier 1 leverage capital ratio of 1.24% and a total risk based capital ratio of 2.99%; Bank of Florida – Southeast had a Tier 1 leverage capital ratio of 3.44% and a total risk based capital ratio of 6.47%; and Bank of Florida – Tampa Bay had a Tier 1 leverage capital ratio of 2.66% and a total risk based capital ratio of 4.37%. Any further enforcement action taken by our regulators, whether pursuant to the pending FDIC Order or otherwise, could require our subsidiary banks and/or the Company to maintain higher levels of capital. Our failure to meet our regulatory capital requirements could result in further formal enforcement actions against us or our subsidiary banks and could further affect customer confidence, our ability to grow, our costs of funds and FDIC insurance costs, our ability to pay dividends, our ability to make acquisitions, and our business, results of operations and financial condition. The real estate market could cause further increases in delinquencies and non-performing assets, including loan charge-offs. Declines in the housing and commercial real estate markets over the past two years have negatively affected credit performance of many financial institutions’ loans, including ours. Many lenders have reduced and, in some cases, ceased providing funding to borrowers, including other financial institutions engaged in financing real estate. This market turmoil and tightening of credit has led to an increased level of commercial and consumer delinquencies, reduced confidence in the financial sector, and increased volatility in the financial markets all of which have adversely affected our business, financial condition and results of operations. A significant portion of our loan portfolio consists of mortgages secured by real estate located in Collier and Lee Counties of Florida. We also have been generating a significant amount of real estate-secured loans in Broward, Palm Beach, Miami-Dade, Pinellas, and Hillsborough Counties. 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. Over the past two years, real estate prices in each of our markets have significantly declined. This has affected our borrowers’ ability, especially in the case of land, construction and development loans to sell properties to realize sufficient proceeds to repay our loans. If real estate prices continue to decline in any of these markets, the value of the real estate collateral securing our loans could be further reduced. This could increase the number of problem loans and the value of our other real estate owned and adversely affect our financial performance and condition.
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Table of ContentsAs of December 31, 2009, our residential real estate secured loans, including lines of credit secured by real estate, and commercial real estate secured loans comprised 20.9% and 68.8% of our loan portfolio, respectively. Continuation of the downturn could further depress our earnings and our financial condition because:
Any of these could cause further increases in delinquencies and non-performing assets or require us to charge off a higher percentage of our loans and/or increase substantially our provision for loan losses, any of which could result in future losses and reductions in our capital. We have incurred cumulative losses since we commenced operations and expect to incur losses in the future. Since commencing operations on August 24, 1999, we have incurred an accumulated deficit of approximately $162.6 million through December 31, 2009. This deficit is due to the goodwill impairment charge, substantial increase in provision for loan losses, the costs of establishing our business strategy, which included establishing our subsidiaries and infrastructure, especially before 2008, and loan losses and the continuing expansion of banking activities in our markets. We expect to incur losses through 2010. We cannot provide any assurances that we will not incur additional losses, especially in light of economic conditions that continue to adversely affect our borrowers and our local markets. Further losses in 2010 could require us to access additional capital, which may or may not be available. Losses subsequent to December 31, 2009, will reduce our capital and may require us to write down or write off our deferred tax assets. There are substantial doubts as to our ability to continue as a going concern and it is possible that our subsidiary banks may fail and be placed into receivership with the FDIC. In its report dated March 5, 2010, our independent registered public accounting firm stated that our net losses raise substantial doubts about our ability to continue as a going concern. In that firm’s opinion, our ability to continue as a going concern is in doubt as a result of the continued deterioration of our loan portfolio and is subject to our ability to service our existing loans in a manner that will return the Company to profitability or to identify and consummate a strategic transaction, including the potential sale of the Company. If we are not able to successfully accomplish such actions, it is possible that our subsidiary banks may fail and be placed into receivership with the FDIC. Our Board of Directors is actively considering strategic alternatives, including a capital infusion. We can give no assurance that we will identify an alternative that allows our stockholders to realize an increase in the value of the Company’s stock. We also can give no assurance that a transaction or other strategic alternative, once identified, evaluated and consummated, will provide greater value to our stockholders than that reflected in the current stock price. In addition, a transaction, which would likely involve equity financing, would result in substantial dilution to our current stockholders and could adversely affect the price of our common stock. If we are unable to return to profitability and if we are unable to identify and execute a viable strategic alternative, we may be unable to continue as a going concern. Although the proceeds from this offering are expected to provide sufficient capital to support our continued operation as a going concern, such capital may prove to be insufficient due to continued degradation of the loan portfolio or other losses. We expect further formal regulatory enforcement actions that could have a material adverse effect on our business, operations, financial condition, results of operations or the value of our common stock. In August 2009, the board of directors of each of our subsidiary banks adopted Corrective Resolutions proposed by the OFR pursuant to which we agreed, among other things, to increase capital levels, decrease commercial real estate loan concentration, improve asset quality by reducing classified assets, and take steps to increase earnings and decrease reliance on brokered deposits and non-core deposits In addition, at the request of the Federal Reserve, our board of directors adopted the Board Resolutions, which prohibit us from incurring debt or reducing our capital through dividends, stock repurchases or other non-routine expenditures (other than redemption of our Series B Preferred Stock in certain offerings) without prior Federal Reserve approval. We expect the FDIC to pursue formal enforcement actions through the FDIC Orders. We currently expect the FDIC Orders will focus on matters contained in the current Corrective Resolutions, such as requirements for our
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Table of Contentssubsidiary banks to raise and maintain certain capital ratios; to increase earnings; and to reduce classified assets, non-core funding and commercial real estate loan concentrations. However, there can be no assurance as to the scope or terms of any particular FDIC Order. The FDIC Orders could require more capital than may be available to our subsidiary banks from proceeds of this offering. Other regulatory authorities could take enforcement actions against the Company or the subsidiary banks. If we are unable to comply with the Corrective Resolutions by raising enough capital, improving our asset quality and commercial real estate loan concentration, reducing core funding usage and increasing earnings, or fail to comply with the Board Resolutions, pending or any other subsequent enforcement actions against us or our subsidiary banks, we could become subject to additional, heightened enforcement actions and orders. The terms of any such enforcement action could have material adverse effects on our business, operations, financial condition, results of operations and the value of our common stock. Liquidity risks could affect operations and jeopardize our financial condition. Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on our liquidity. Our funding sources include federal funds purchased, brokered and other non-core deposits, and short- and long-term debt. As a result of being less than adequately-capitalized as of December 31, 2009, we are not able to accept, renew or rollover brokered deposits (including deposits through the CDARs program). We also are limited in the rates we may pay on any deposits. The FDIC also has restricted us from significantly changing our funding sources by increasing brokered deposits or other potentially volatile funding sources. Our subsidiary banks are also members of the Federal Home Loan Bank of Atlanta, or “FHLB”, and the Reserve Bank, where we can obtain advances collateralized with eligible assets. We also maintain a portfolio of securities that can be used as a secondary source of liquidity. Our access to funding sources, including our ability to acquire additional non-core deposits, the issuance and sale of debt securities, and the issuance and sale of additional preferred or common securities in public or private transactions, may not be available to us when needed as a result of regulatory actions or otherwise, or on reasonably acceptable terms or conditions. Since late 2007, and particularly during the second half of 2008 and through 2009, the financial services industry and the credit markets generally have been materially and adversely affected by reduced availability of liquidity. The liquidity issues have been particularly acute for regional and community banks, as many larger correspondent lenders have significantly curtailed their lending to regional and community banks due to the increased levels of losses that they have suffered on such loans. In addition, many of the larger correspondent lenders have reduced or even eliminated Federal Funds lines for their correspondent customers. Furthermore, regional and community banks generally have less access to the capital markets than do the national and super-regional banks because of their smaller size and limited analyst coverage. Our liquidity, on a parent-only basis, is adversely affected by our current inability to receive dividends from our subsidiary banks. In addition, the Board Resolutions prohibit us from incurring debt at the holding company level, including debt associated with trust preferred securities, without prior approval from the Reserve Bank. Our liquidity, on a consolidated basis, is also adversely affected by our subsidiary banks’ restricted access to additional non-core deposits pursuant to regulatory restrictions. Bank of Florida-Southwest and Bank of Florida-Southeast are required to reduce their respective net non-core funding dependence ratios to 40% by December 31, 2010 while Bank of Florida-Tampa Bay is required to reduce the dependence ratio to 35% by December 31, 2010. At December 31, 2009, the net non-core funding dependence ratios for Bank of Florida-Southwest, Bank of Florida-Southeast and Bank of Florida-Tampa Bay were 41.94%, 39.10% and 25.93%, respectively. There is no guarantee that our subsidiary banks will be able to achieve such ratios timely, or that we will be able to meet our liquidity needs. Our financial flexibility could be severely constrained if we are unable to renew our wholesale funding or if adequate funding is not available in the future at acceptable rates of interest. We may not have sufficient liquidity to continue to fund new loan originations, and we may need to liquidate loans or other assets unexpectedly in order to repay obligations as they mature. Non-performing assets take significant time to resolve and adversely affect our results of operations and financial condition. At December 31, 2009, our non-performing loans were $164.5 million, or 13.56% of our loan portfolio, and our non-performing assets (which include non-performing loans) were $178.8 million, or 12.75% of total assets. In addition, we had approximately $63.8 million in accruing loans that were 30 to 89 days delinquent at December 31, 2009. Our non-performing assets adversely affect our net income in various ways. Until economic and market conditions improve, we expect to continue to incur additional losses relating to an increase in non-performing loans. We do not record interest income on non-accrual loans or other real estate owned, thereby adversely affecting our
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Table of Contentsincome, and increasing our loan administration costs. We do incur the costs of funding problem assets and other real estate owned, however. When we take collateral in foreclosures and similar proceedings, we are required to mark the collateral to its then fair value less expected selling costs, which, when compared to the principal amount of the loan, may result in a loss. These non-performing loans and other real estate owned also increase our risk profile and the capital our regulators believe is appropriate in light of such risks. Pursuant to the Corrective Resolutions, our subsidiary banks have resolved to reduce classified assets according to a bank-specific schedule, and the pending FDIC Orders, could impose additional requirements. There can be no assurance that: (i) we will be able to reduce our non-performing assets timely; (ii) that we will not experience further increases in non-performing loans in the future; or (iii) we can reduce our non-performing assets consistent with the Corrective Resolutions or the FDIC Orders. Any of these actions may result in additional future credit losses and additional regulatory enforcement actions. Losses from loan defaults may exceed the allowance we establish for that purpose, which will have an adverse effect on our business. We maintain an ALLL to provide for anticipated losses inherent in our loan portfolio. The ALLL reflects management’s estimates and judgments of probable losses in the loan portfolio at the relevant balance sheet date. We evaluate the collectability of our loan portfolio and provide an ALLL that we believe is adequate based upon various factors including, but not limited to: the risk characteristics of various classifications of loans; previous loan loss experience; specific loans that have loss potential; delinquency trends; the estimated fair market value of the collateral; current economic conditions; the views of our regulators; and geographic and other loan concentrations, including commercial real estate concentrations. We cannot be certain that our ALLL will be adequate over time to cover credit losses in our portfolio because of unanticipated adverse changes in the economy, market conditions or events adversely affecting specific customers, industries or markets, or borrower behaviors towards repaying their loans. The credit quality of our borrowers and the value of the collateral we hold for loans have deteriorated as a result of the economic downturn in our markets. If the credit quality of our customer base or their debt service behavior materially decreases further, if the risk profile of a market, industry or group of customers declines further or weaknesses in the real estate markets and other markets and the economy persist or worsen, or if our ALLL is not adequate, our business, financial condition, including our liquidity and capital, and results of operations could be materially adversely affected. As a result of the Corrective Resolutions, our subsidiary banks have amended their ALLL methodology and submitted the revised methodology to the OFR and the FDIC for review and comment. Our subsidiary banks also agreed to review the adequacy of the ALLL prior to the end of each calendar quarter. There is no assurance that we will not be required by our regulators to take additional provisions for loan losses in the future to further supplement the ALLL, or make other changes to our ALLL methodology or our loan impairment recognition practices, particularly if market or economic conditions worsen beyond those that we currently expect. Additions to our ALLL will reduce our earnings or increase loan losses and adversely affect our business, financial condition and results of operations. Our exposure to credit and regulatory risk is increased by our commercial real estate and commercial and industrial lending. Commercial real estate and commercial and industrial lending historically have had higher credit risk than single-family residential lending. Such loans typically involve larger loan balances to a single borrower or related borrowers. At December 31, 2009, commercial real estate loans (including loans secured by mortgages on multifamily properties) increased to $661.2 million, and commercial and industrial loans increased to $112.4 million. At December 31, 2009, non-performing commercial real estate (including construction and land development loans and multi-family residential loans) and commercial and industrial loans totaled $136.6 million and represented 11.2% of total loans compared to a balance of $52.6 million at December 31, 2008, which represented 4.1% of total loans. Commercial real estate loans can be affected by adverse conditions in local real estate markets and the economy, generally because commercial real estate borrowers’ ability to repay their loans depends on successful development and the sale or leasing of their properties, or any other factors. These loans also involve greater risk because they generally are not fully amortizing over the loan period, but have a balloon payment due at maturity. A borrower’s ability to make a balloon payment typically will depend on being able to either refinance the loan or timely sell the underlying property. A commercial business loan is typically based on the borrower’s ability to repay the loan from the cash flows of the business. Such loans may involve risk because the availability of funds to repay each loan depends substantially on the success of the business itself. In addition, the collateral securing the loans may depreciate over
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Table of Contentstime, be difficult to appraise and liquidate, or fluctuate in value based on the success of the business. Because commercial real estate, commercial business and construction loans are vulnerable to downturns in the business cycle, further economic weakness could cause more of those loans to become non-performing. The underwriting, review and monitoring performed by our officers and directors cannot eliminate all of the risks related to these loans. Pursuant to the Corrective Resolutions, the board of directors of each of our subsidiary banks adopted a plan to systematically reduce the amount of concentration of high-risk commercial real estate loans and has submitted such plans to the OFR. Each plan includes quarterly targets of high-risk commercial real estate loans as a percentage of capital or adjusted capital to implement such reduction before December 31, 2010. The plans also include procedures for monitoring compliance with the submitted plan and require our subsidiary banks to submit monthly reports to the OFR demonstrating progress. Real estate construction, land acquisition and development loans are based upon estimates of costs and values associated with the completed project. These estimates may be inaccurate, and we may be exposed to significant losses on loans for these projects. At December 31, 2009, we had a balance of $216.6 million or approximately 17.8% of our total loan portfolio in construction, land acquisition and development loans. Such loans involve additional risks because funds are advanced upon the security of the project, which is of uncertain value prior to its completion, and costs may exceed realizable values, especially in declining real estate markets. Because of the uncertainties inherent in estimating construction costs and the realizable market value of the completed project and the effects of governmental regulation of real property, it is relatively difficult to evaluate accurately the total funds required to complete a project and the related loan-to-value ratio. As a result, construction loans often involve the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project and the ability of the borrower to sell or lease the property, rather than the ability of the borrower or guarantor to repay principal and interest. If our appraisal of the value of the completed project proves to be overstated or market values or rental or occupancy rates decline, we may have inadequate security for the repayment of the loan upon completion of construction of the project. If we are forced to foreclose on a project prior to or at completion due to a default, there can be no assurance that we will be able to recover all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure and holding costs. In addition, we may be required to fund additional amounts to complete the project and may have to hold the property for an unspecified period of time while we attempt to dispose of it. We may use a loan-funded interest reserve upon origination of construction, land acquisition and development loans based on the feasibility of the project, the creditworthiness of the borrower and guarantors, and the protection provided by the real estate and other collateral which allows our subsidiary banks to periodically advance loan funds to pay interest charges on the outstanding balance of the loan. However, such practice must comply with relevant FDIC policies and guidance. We are exposed to environmental liabilities with respect to properties we operate to which we take possession. When we foreclose on commercial or industrial property or one deemed to “operate” collateral, we may become exposed to potential liability under applicable environmental laws. If hazardous substances are discovered on such property, we may be liable to governmental agencies or third parties for the costs of remediating the hazard, as well as for personal injury and property damage. Many environmental laws can impose liability regardless of whether we knew of, or were responsible for, the contamination. If we ever become subject to significant environmental liabilities, our financial condition, results of operations and cash flows could be materially and adversely affected. Credit risk cannot be eliminated. There are risks in making any loan, including risks inherent in dealing with individual borrowers, risks of nonpayment, risks resulting from uncertainties as to the future value of collateral and cash flows available to service debt and risks resulting from economic and market conditions. For real estate loans, there are risks that the appraisal we obtain from a third-party appraiser of the value of properties proves to be overstated or market values or rental occupancy rates decline, which may result in inadequate security for the repayment of the loan. We attempt to reduce our credit risk through loan application approval procedures, monitoring the concentration of loans within specific industries and geographic location, the review and monitoring of our third-party appraisers and periodic independent reviews of outstanding loans by our loan review and audit departments as well as external auditors. While these procedures should reduce our risks, such risks can never be eliminated. We are in default under two of our existing repurchase agreements, and our counterparty may exercise its rights under the agreements, which could materially and adversely affect our financial position, liquidity and earnings. Two of our subsidiary banks are parties to similar master repurchase agreements and confirmations, or “Repos,” with Citigroup Global Markets, Inc., or “Citi”. Pursuant to the Repos, each such subsidiary bank sold Citi
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Table of Contents$10.0 million of securities, subject to their obligation to repurchase such securities at a specific price in 2013. The Repos provide that if either of our subsidiary banks fails to remain “well capitalized” for regulatory purposes, an event of default will be deemed to have occurred under each of the Repos. We notified Citi that an event of default has occurred and is continuing under each of the Repos, and Citi has reserved all its rights upon an event of default under each Repo. If Citi exercises its remedies under the Repos, then: (i) our subsidiary Banks would be obligated to immediately repurchase all securities sold to Citi under the Repos; (ii) all income paid after the declaration on the securities sold would be retained by Citi and applied to the aggregate unpaid repurchase prices and any other amounts owing by our subsidiary banks; and (iii) our subsidiary banks would have to immediately deliver to Citi any purchased securities subject to the Repos then in their possession or control. We have been informed that Citi would also charge our subsidiary banks an approximately $1.5 million of total penalty for early termination of these Repos. If Citi exercises its right to declare an event of default and exercises its remedies under the Repos, then our financial position, liquidity and earnings may be materially and adversely affected. Changes in interest rates could continue to have significant adverse effects on our financial condition and results of operations. Our profitability depends upon net interest income, which is the difference between interest earned on assets, such as the loans and investments in our portfolio, and interest expense on interest-bearing liabilities, such as deposits and borrowings. Net interest income will be adversely affected if market interest rates change such that the interest we pay on deposits and borrowings increases faster than the interest we earn on loans and investments. Market interest rates can change as a result of a number of unpredictable factors, including general economic conditions (domestic and foreign) and fiscal and monetary policies. These factors can be influenced, in turn, by events beyond our control, including inflation, recession, unemployment, changes in the money supply and domestic and international developments. Our net interest income is also adversely affected by our levels of non-performing assets which, while those do not generate increased income, require funding from interest-bearing deposits and other liabilities. Interest rates are particularly sensitive to policy decisions of the Federal Reserve. From June 2004 to mid-2006, the Federal Reserve raised the Federal Funds rate from 1.0% to 5.25%. Beginning in September 2007, the Federal Reserve decreased the Federal Funds rates by 100 basis points to 4.25% at December 31, 2007, and has since reduced the target Federal Funds rate to a range between zero and 25 basis points. Decreases in interest rates generally increase the market values of fixed-rate, interest-bearing investments and loans held, and increase the values of loan sales and mortgage loan activities. However, the production of mortgages and other loans and the value of collateral securing our loans are dependent on demand within the markets we serve, as well as interest rates. The levels of sales, as well as the values of real estate in our markets, have declined. Declining interest rates reflect efforts by the Federal Reserve to stimulate the economy, but may not be effective, and thus may negatively affect our results of operations and financial condition, liquidity and earnings. Because we typically rely on short-term deposits to fund long-term loans and other investments, changes in the yield curve or in the maturity profile of our assets and liabilities can also adversely affect our business. When differences between short- and long-term interest rates shrink or disappear, the spread between rates paid on deposits and received on loans could narrow significantly, decreasing our net interest income. Our net interest income may also be reduced if more interest-earning assets than interest-bearing liabilities reprice or mature during a time when interest rates are declining or if more interest-bearing liabilities than interest-earning assets reprice or mature during a time when interest rates are rising. We are also exposed to market risk due to the volatility of interest rates. Market risk is the adverse effect on the value of a financial instrument from a change in interest rates or the implied volatility of or expected changes in interest rates. We manage market risk by establishing and monitoring limits on the types and degree of risk undertaken. Additionally, a substantial and sustained increase in interest rates could harm our ability to originate loans because refinancing an existing loan or taking out a subordinate mortgage would be less attractive, and qualifying for a loan may be more difficult. An increase in interest rates may also affect our customers’ ability to make payments on their existing loans, which could in turn increase loan losses. In addition, higher interest rates could also increase our costs of deposits and borrowed funds. The need to account for assets at market prices may adversely affect our results of operations. We report certain assets, including available-for-sale and trading securities and assets, at their fair values. Generally, assets required to be carried at fair value are valued based on quoted market prices or on valuation models that use market data inputs. Because we carry these assets on our books at their fair values, we may incur losses even if the assets in question present minimal credit risk. Given the continued disruption in the capital markets, we may be required to recognize other than temporary impairments in future periods with respect to
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Table of Contentssecurities in our portfolio. The amount and timing of any impairment recognized will depend on the severity and duration of the decline in fair value of the securities and our estimation of the anticipated recovery period. Other than temporary impairments may adversely affect our results of operations, including our financial condition and capital. Our cost of funds may increase as a result of general economic conditions, interest rates and competitive pressures. We have become subject to restrictions on the amount of interest that we can pay our customers, which could cause our deposits to decrease. Because we depend on deposits as a source of liquidity, a decrease in deposits would adversely affect our ability to continue as a going concern. We have traditionally obtained funds principally through local deposits and we have a base of lower cost transaction deposits. Generally, we believe local deposits are a more stable source of funds than brokered deposits or other borrowings because local accounts typically reflect a mix of transaction and time deposits, whereas brokered deposits typically are higher cost time deposits. Our costs of funds and our profitability and liquidity are likely to be adversely affected, if and to the extent we have to rely upon higher cost borrowings from other institutional lenders or brokers to fund loan demand or liquidity needs, and changes in our deposit mix and growth could adversely affect our profitability and the ability to expand our loan portfolio. As of December 31, 2009, brokered deposits accounted for approximately $153.7 million, or approximately 12.9%, of our total consolidated deposits. Our subsidiary banks, following the filing of their December 31, 2009 call reports, are not be able to accept, renew or roll over brokered deposits, including CDARs, or pay interest rates more than 75 basis points above prevailing market rates in our local markets or national rates released by the FDIC Our subsidiary banks stopped accepting new brokered deposits and are limiting their renewal and roll over activities to reciprocal CDARs deposits as of October 29, 2009. As a result, it is possible that we could experience a decrease in new deposits, and our existing customers may transfer their deposits to other institutions that are able to offer a higher interest rate, which could have a material adverse effect on our ability to continue as a going concern. Current levels of market volatility have been significant, and negative conditions and new developments in the financial services industry and the credit markets have and may continue to adversely affect our operations, financial performance and stock price. The capital and credit markets have been experiencing volatility and disruption for more than a year. The markets have placed downward pressure on stock prices and the availability of capital, credit and liquidity has been adversely affected for many issuers, in some cases, without regard to those issuers’ underlying financial condition or performance. If current levels of market disruption and volatility continue or worsen, we may experience adverse effects, which may be material, on our ability to maintain or access capital and credit, and on our business, financial condition (including liquidity) and results of operations. Uncertainty about the economy and its direction with the expectation for little or no economic growth as well as high unemployment during the next 12-18 months has adversely affected the financial markets. Loan portfolio performances have deteriorated at many financial institutions, including ours, resulting from, among other factors, a weak economy and a decline in the value of the collateral supporting loans. The competition for deposits has increased significantly due to liquidity concerns. Stock prices of bank holding companies, like ours, have been negatively affected by the recent and current conditions in the financial markets, as has our ability, if needed, to raise capital, compared to prior years. Recent legislation and government actions in response to market and economic conditions may significantly affect our operations, financial condition, and earnings. In response to this financial crisis affecting the banking system and financial markets, the United States Congress enacted the Emergency Economic Stabilization Act of 2008 and the American Recovery and Reinvestment Act of 2009. Under these and other laws and government actions:
TARP and the TLG are winding down, and the effects of this wind-down cannot be predicted.
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Table of ContentsIn addition, the federal government is considering various proposals for a comprehensive overhauling reform of the financial services industry and markets and coordinating reforms with other countries. There can be no assurance that these various initiatives or any other future legislative or regulatory initiatives will be successful at improving economic conditions globally, nationally or in our markets, or that the measures adopted will not have adverse consequences. Changes in business and economic conditions, in particular those in the Florida markets in which we operate, could continue to lead to lower revenue, lower asset quality and lower earnings. Unlike larger national or regional banks that are more geographically diversified, our business and earnings are closely tied to economic conditions in Southwest and Southeast Florida and Tampa Bay, Florida. These local economies are heavily affected by population inflows, real estate, tourism and other service-based industries. Factors that could affect these local economies include declines in local population growth and tourism, higher energy costs, higher unemployment rates, reduced consumer or corporate spending, natural disasters or adverse weather, and the recent significant deterioration in general economic conditions. The current economic recession has been exacerbated by the declines in valuations of commercial and residential real estate in our markets after years of growth. Unemployment has also been significant, with an unemployment rate of approximately 11.8% for all of Florida, as of December 31, 2009. A sustained economic downturn could further adversely affect the quality of our assets, credit losses, and the demand for our products and services, which could lead to lower revenue and lower earnings. The Florida economy remains weaker than in recent years. We believe population growth has stabilized for the State of Florida, but at a lower level than recent years. Visitor arrivals remained lower than in previous years and unemployment levels increased with similar trends expected for 2010. We continually monitor changes in the economy, including population growth, levels of visitor arrivals and spending, changes in housing prices, and unemployment rates. These trends have contributed to an increase in our non-performing loans and reduced asset quality. If market conditions remain at current levels or deteriorate, they may lead to additional valuation adjustments on our loan portfolios and real estate owned as we continue to reassess the market value of our collateral supporting loans, the losses associated with loans, and the net realizable value of other real estate owned. The costs of FDIC insurance and the TLG guarantees have increased and are expected to continue to adversely affect our results of operations. FDIC insurance expense has increased substantially, from $748,900 in 2008 to $2.4 million in 2009, which includes a special assessment. We expect to pay significantly higher FDIC premiums in the future, especially until our regulatory capital and risk profile improve. Bank failures have significantly depleted the FDIC’s Deposit Insurance Fund and reduced its ratio of reserves to insured deposits. The FDIC has adopted a revised risk-based deposit insurance assessment schedule which raised deposit insurance premiums, and the FDIC has also implemented a special assessment on all depository institutions. Additional special assessments may be imposed by the FDIC for future periods. We participate in the FDIC’s Temporary Liquidity Guarantee Program, or TLG, for noninterest-bearing transaction deposit accounts guarantee program and debt guarantee program. Banks that participate in the TLG’s noninterest-bearing transaction account guarantee pay the FDIC a fee for such guarantee. These actions have significantly increased our noninterest expense in 2009 and are expected to increase our costs for the foreseeable future. The FDIC has recently proposed actions requiring all FDIC-insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012, to be collected on December 30, 2009, which is expected to further increase our noninterest expense in 2009, unless an exemption is granted by the FDIC. Our subsidiary banks’ insurance premiums will also increase as a result of becoming less than “well capitalized.” TLG’s noninterest-bearing transaction account guarantee program is expiring on December 31, 2009 but will be automatically extended to June 30, 2010 unless we opt out from the extended period of the program. Institutions that participate in the extended program are required to pay 15 to 25 basis points annualized fee in accordance with its risk category rating assigned by the FDIC. Our management is still assessing whether we will participate in the extended program. The Corrective Resolutions and the pending FDIC Orders applicable to us will require a deposit funding subject to higher FDIC insurance costs. We operate in an environment highly regulated by federal and state government; changes in federal and state banking laws and regulations could have a negative impact on our business. As a bank holding company, we are regulated primarily by the Federal Reserve. Our subsidiary banks are regulated primarily by the OFR and the FDIC. Federal and various state laws and regulations govern numerous aspects of our subsidiary banks’ operations, including:
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Federal and state regulatory agencies have extensive discretion and power to prevent or remedy unsafe or unsound practices or violations of law by banks and bank holding companies. We also undergo periodic examinations by one or more bank regulatory agencies. The outcome of each examination depends in part on banking regulators’ judgments, based on information available to them at the time of the examination, and may be beyond our control. In addition, the laws and regulations applicable to the banking industry could change at any time, and we cannot predict the effects of these changes on our business and profitability. Existing, pending and other regulatory enforcement actions upon the Company and our subsidiary banks could also adversely affect our business, results of operations, liquidity, financial condition and capital needs. Our costs of compliance could adversely affect our ability to operate profitably. We are subject to various reporting requirements that increase compliance costs, and failure to comply timely could adversely affect our reputation and the value of our securities. We are required to comply with various corporate governance and financial reporting requirements under the Sarbanes-Oxley Act of 2002, as well as rules and regulations adopted by the Securities and Exchange Commission, the Public Company Accounting Oversight Board and Nasdaq. In particular, we are required to include management and independent auditor reports on internal controls as part of our Annual Report on Form 10-K pursuant to Section 404 of the Sarbanes-Oxley Act. We expect to continue to spend significant amounts of time and money on compliance with these rules. In addition, pursuant to the Corrective Resolutions adopted by our subsidiary banks and the Board Resolutions adopted by our board of directors, we are required to prepare and submit various reports to our regulators, and the pending FDIC Orders may impose further reporting obligations. Compliance with various regulatory reporting requires significant commitments of time from management and our directors, which reduces the time available for the performance of their other responsibilities. Our failure to track and comply with the various rules may materially adversely affect our reputation, ability to obtain the necessary certifications to financial statements, lead to additional regulatory enforcement actions, and could adversely affect the value of our securities. Our trust company subsidiary may be adversely affected by changes in economic and market conditions. Our trust company subsidiary may be negatively impacted by changes in general economic conditions and conditions in the financial and securities markets, including the values of assets under administration and management for its clients. Our management contracts generally provide for fees payable for services based on the market value of assets under administration. Accordingly, decreases in securities prices will have an adverse effect on our results of operations from this business. In addition, decreases in the value of our customers’ trust accounts, such as accompanied the significant decline in the financial and securities markets since the second half of 2008, can cause us to lose trust customers, including those who are also wealth management customers. These events could reduce our non-interest income from our trust company and adversely affect our results of operations and financial condition. Our subsidiary banks face strong competition in their market areas that may limit their asset growth and profitability. Our primary market areas are the urban areas in Southwest and Southeast Florida and in the Tampa Bay area of Florida. The banking and trust businesses in these markets are extremely competitive, which may limit our markets growth and profitability. Each of our subsidiaries competes for loans and deposits with other national, regional and local banks, savings institutions, trust companies and non-bank financial institutions located or doing business within their market area, many of which are significantly larger institutions. Non-bank competitors include mortgage bankers and brokers, finance companies, credit unions, securities firms, money market funds, life insurance companies and the mutual funds industry. Many of our competitors are well-established, and substantially larger financial institutions with greater financial and personnel resources. While we believe we can and do successfully compete with these other financial institutions in our primary markets, we may face a competitive disadvantage as a result of our smaller size, lack of geographic diversification and inability to spread our marketing costs across a broader market. In addition, our ability to compete may be further restricted by the Corrective Resolutions, the Board Resolutions, the expected FDIC Orders, various regulatory rules and restrictions as a result of our subsidiary banks’ current capital levels and any other regulatory restrictions or actions. The soundness of other financial institutions could adversely affect us. Our ability to engage in routine funding and other transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. Defaults by, or even rumors or questions about, one or more financial institutions, or the financial services industry generally, may lead to market-wide liquidity problems and losses of depositor, creditor and counterparty confidence and could lead to losses or defaults by us or by other institutions.
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Table of ContentsOur ability to attract and retain management and key personnel may affect future growth and earnings and may be adversely affected by compensation and employment restrictions to which we may be subject. 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 leave to work for our competitors. Our future success depends on the continued contributions of our existing senior management personnel, including, but not limited to, our Chief Executive Officer and President Michael L. McMullan and the Chief Executive Officers and Presidents of our subsidiaries. Both the Company and our subsidiary banks are currently required to obtain regulatory approval to add new executive officers or directors or to enter into any agreement to provide indemnification or severance payments. The personal and financial disclosures required by the regulators of prospective executives and directors are detailed and invasive. For this reason, we may not be able to attract qualified candidates who are willing to provide the necessary disclosures. The Federal Reserve and the FDIC have indicated they are considering policies to change financial institutions compensation to avoid promoting undue risk taking. The terms of these policies are unknown, and the timing and effects of any such policies on us are unknown, also. Technological changes affect our business, and we may have fewer resources than many competitors to invest in technological improvements. The financial services industry is undergoing rapid technological changes, and new technology-driven products and services are frequently being introduced. In addition to serving clients better, the effective use of technology may increase efficiency and may enable financial institutions to reduce costs. Our future success will depend, in part, upon our ability to use technology to provide products and services that provide convenience to customers and create additional efficiencies in operations. We may need to make significant additional capital investments in technology in the future, and we may not be able to effectively implement new technology-driven products and services. Many competitors have substantially greater resources to invest in technological improvements. Adverse events and severe weather conditions could negatively affect our local economies or disrupt our operations, which would have an adverse effect on our business or results of operations. The Florida economy relies heavily on tourism and seasonal residents. An act of war and acts of terrorism or other conflicts involving national security could affect general economic conditions in Florida, which would also negatively affect the businesses and customers in our markets which rely on tourism and seasonal residents. Our market areas are also susceptible to hurricanes and tropical storms and related flooding and wind damage. Such weather events can disrupt operations, result in damage to properties and negatively affect the local economies in the markets where they operate. We cannot predict whether or to what extent damage that may be caused by future hurricanes will affect our operations or the economies in our current market areas, but such weather events could result in a decline in loan originations, a decline in the value or destruction of properties securing our loans and an increase in delinquencies, foreclosures or loan losses. Our business or results of operations may be adversely affected by these and other negative effects of future hurricanes or tropical storms, including flooding and wind damage. Many of our customers have incurred significantly higher property and casualty insurance premiums on their properties located in our markets, which may adversely affect real estate sales and values in our markets. Risks Related to Our Common Stock. Our stock price can be volatile. Our stock price can fluctuate widely in response to a variety of factors including: variations in our quarterly operating results; changes in the perception of our credit facility; changes in market valuations of companies in the financial services industry; fluctuations in stock market prices and volumes; issuances of shares of common stock or other securities in the future; the addition or departure of key personnel; seasonal fluctuations; changes in financial estimates or recommendations by securities analysts regarding us or shares of our common stock; and announcements by us or our competitors of new services or technology, acquisitions, or joint ventures. Although publicly traded, our common stock has traded in limited volumes which may adversely affect the liquidity of our stock and the volatility of our share price. Although our common stock is listed for trading on the Nasdaq Global Market, the average daily trading volume of our common stock in 2009 was 47,423 shares, which could affect the liquidity of our shares of common stock, and could increase the volatility. The market price of our common stock may fluctuate in the future, and these fluctuations may be unrelated to our performance. General market price declines or overall market volatility in the
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Table of Contentsfuture could adversely affect the price of our common stock, and the current market price may not be indicative of future market prices. The market price of shares of our common stock will fluctuate and may not be lower or higher than the price at which you purchase them at any time. We have not paid dividends in the past and we are restricted in our ability to pay dividends to our shareholders. We have not paid any cash dividends on our common stock to date and do not intend to pay cash dividends on our common stock in the foreseeable future. We intend to retain all earnings to increase and maintain our subsidiary banks’ capital levels and to finance operations and the growth of our business. Therefore, any gains from your investment in our common stock must come from an increase in its market price. In addition, as a bank holding company, our ability to declare and pay dividends is subject to the guidelines of the Federal Reserve regarding capital adequacy and dividends. The Federal Reserve Board guidelines generally require us to review the effects of the payment of cash dividends in light of our earnings, capital adequacy and financial condition. See “Dividend Information.” We adopted Board Resolutions on October 19, 2009, pursuant to which we generally must seek the approval of the Federal Reserve at least 30 days before declaring or paying dividends on any shares of our capital stock, including accrued dividends on our outstanding Series B Preferred Stock. In addition, we are not able to redeem or repurchase any shares of our capital stock, or otherwise reduce our capital position (except for the redemption of outstanding shares of our Series B Preferred Stock in connection with one or more public offerings of securities with an aggregate offering price of no less than $30 million and payment of normal and routine operating expenses), without the Federal Reserve’s consent. We are a holding company with no independent sources of revenue and would likely rely upon cash dividends and other payments from our subsidiaries to fund any cash dividends we decided to pay to our shareholders. Our ability to pay dividends is limited by regulatory restrictions and the need to maintain sufficient consolidated capital. The ability of our subsidiary banks and our trust company subsidiary to pay dividends to us is limited by their obligations to maintain sufficient capital and liquidity and by other general restrictions on dividends that are applicable to them, including the requirement under Florida law that they may not pay dividends if their net income from the current year combined with retained net income from the preceding two years is a loss or which would cause the capital accounts of the bank or trust company to fall below the minimum amount required by law, regulation, order, or any written agreement with the OFR or another federal regulatory agency. Our subsidiary banks are required to achieve and maintain regulatory capitals pursuant to the Corrective Resolutions have had substantial losses and are prohibited to pay any cash dividend to us without FDIC’s prior approval. Our losses including the total impairment of goodwill in 2009 will further decrease funds available for dividends from our banking subsidiaries. Future sales of our common stock or other securities will dilute the ownership interests of our existing shareholders and could depress the market price of our common stock. We may need to issue additional common stock in the near future to fund future growth and meet our capital needs and regulatory requirements. We can issue common stock without shareholder approval, up to the number of authorized shares set forth in our Amended and Restated Articles of Incorporation, as amended (the “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 including securities convertible into or exchangeable for shares of our common stock, subject to limitations imposed by Nasdaq and the Federal Reserve. 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 or convertible or exchangeable securities 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 or convertible or exchangeable securities will reduce the proportionate ownership and voting power of our existing shareholders. In addition, sales of a substantial number of shares of our common stock or convertible or exchangeable securities in the public market by our shareholders, or the perception that such sales are likely to occur, could cause the market price of our common stock to decline. We cannot predict the effect, if any, that future sales of our common stock in the market, or availability of shares of our common stock for sale in the market, will have on the market price of our common stock. We therefore can give no assurance sales of substantial amounts of our common stock in the market, or the potential for large amounts of sales in the market, would not cause the price of our common stock to decline or impair our ability to raise capital through sales of our common stock. We cannot guarantee whether 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 capital and financial resources we require for our business or that are necessary to meet regulatory requirements.
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Table of ContentsShares of our preferred stock may be issued in the future which could materially adversely affect the rights of the holders of our common stock. We have the authority under our Articles of Incorporation 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 our 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. We presently have 172 shares outstanding of Series B Preferred Stock, which, pursuant to its terms, will be redeemed or converted into common stock following certain offerings of our common stock. Offerings of debt, which could be senior to our common stock upon liquidation, or preferred equity securities, which may be senior to our common stock for purposes of dividend distributions or upon liquidation, may adversely affect the market price of our common stock. We may attempt to increase our capital resources or, if the Company’s or our subsidiary banks’ capital ratios fall below regulatory requirements, we could be forced to raise additional capital through other securities offerings, including trust preferred securities, senior or subordinated notes and preferred stock. Holders of our debt securities and other lenders, as well as holders of our preferred securities generally will be entitled to receive distributions of our available assets prior to distributions to the holders of our common stock upon our bankruptcy, dissolution or liquidation. Additional equity offerings may dilute the holdings of our existing stockholders or reduce the market price of our common stock, or both. Holders of our common stock are not entitled to preemptive rights or other protections against dilution. The outstanding shares of our Series B Preferred Stock will be converted or redeemed following any offering of our common stock, which may dilute our existing shareholders in the case of conversion and reduce our capital in the case of redemption. In addition, our ability to pay accrued dividends on those shares is restricted. In the event that a holder of shares of Series B Preferred Stock elects not to convert some or all of such shares into shares of our common stock, we will be obligated to redeem the unconverted shares for $25,000 per share. The maximum amount of cash that we could be required to pay for the redemption of all 172 outstanding shares of our Series B Preferred Stock is $4.3 million. We have received indications from our executive officers and directors, that they, in the aggregate, intend to convert 80 shares of Series B Preferred Stock into shares of our common stock, leaving up to $2.3 million shares of Series B Preferred Stock which may be either converted or redeemed. We can make no assurances, however, as to how many shares will be converted or redeemed. Any amounts expended on redemption of the Series B Preferred Stock will reduce our equity capital, which we currently expect to be less than $2.3 million. We have the obligation to pay accrued dividends on the Series B Preferred Stock to the date set for conversion or redemption of the Series B Preferred Stock to the date set for conversion or redemption of the Series B Preferred Stock. We plan to request the Federal Reserve to allow us to make such dividend payment with respect to any converted or redeemed shares of our Series B Preferred Stock. However, we can offer no assurance that our request will be granted and the timing of such Federal Reserve action. Our Articles of Incorporation and Bylaws contain provisions that may discourage a takeover. Generally, our Articles of Incorporation and Bylaws contain certain provisions designed to enhance the ability of the board of directors to deal with attempts to acquire control of us. These provisions may be deemed to have an anti-takeover effect and may discourage takeover attempts that have not been approved by the board of directors (including takeovers that certain shareholders may deem to be in their best interest). These provisions also could discourage or make more difficult a merger, tender offer or proxy contest, even though such transaction may be favorable to the interests of shareholders, and could potentially adversely affect the market price of our common stock. Risks Related to Our Growth Strategy Our growth strategy may not be feasible or successful. Our strategy through 2008 was to increase the size of our franchise through rapid growth and by aggressively pursuing business development opportunities. Our subsidiary banks are currently subject to restrictions which prohibit them from engaging in any transactions that would materially change the composition of their balance sheets without obtaining the FDIC’s approval. Such transactions include any transaction or transactions that would increase a subsidiary bank’s total assets by 5% or more or that would significantly change the subsidiary bank’s funding resources. Our current capital levels will also restrict our growth. However, subject to regulatory restrictions on growth and adequate capital, when prudent opportunities present themselves, we intend to be in a position to take advantage of the long-term opportunities that we anticipate
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Table of Contentsin our markets and expand our businesses. We can provide no assurance when we will be able to implement this strategy or that we will be successful in increasing the volume of loans, deposits and wealth management business cases at acceptable risk levels and upon acceptable terms and expanding our asset base while managing the costs and risks associated with this growth strategy. There can be no assurance that any further expansion will be feasible, profitable or that we will be able to grow as fast, or sustain, our historical rate of growth, either internally or through other successful expansions of our markets and new business lines, or that we will be able to maintain capital sufficient to support this growth. Regulatory restrictions could severely limit future expansion plans. Applications for the establishment of new branches and the acquisition of existing banks require prior state and federal bank regulatory approvals. Further, we are subject to the review of the FDIC under the Statement of Policy on the Acquisition of Failed Insured Depository Institutions if we plan to acquire a failed depository institution, including being well capitalized. Generally, banks subject to formal enforcement actions experience difficulties in obtaining regulatory approvals to add branches, or engage in business combinations. Our Tampa Bay bank subsidiary is also subject to the “Enhanced Supervisory Procedures for Newly Insured FDIC-Insured Institutions” adopted on August 28, 2009, which extends the enhanced supervision of this bank which was organized in 2004 through November 4, 2011, and requires, among other things, higher FDIC insurance assessments and prior FDIC approval of changes in the business plan, even if the Corrective Resolutions and any pending FDIC Order were not present. Our subsidiary banks’ ability to implement expansion plans is currently restricted by their prohibitions from engaging in any transactions that would materially change the composition of their balance sheets without obtaining an approval from the FDIC. Such transactions include any transaction or transactions that would increase a subsidiary bank’s total assets by 5% or more or that would significantly change the subsidiary bank’s funding resources. Until we regain well capitalized status and have our regulatory enforcement actions lifted, our regulators prevent or significantly restrict expansion plans. Future acquisitions and expansion activities may disrupt our business, dilute existing shareholders and adversely affect our operating results. We may review potential acquisitions and expansion opportunities. To the extent that we are permitted to grow through acquisitions and new branches, we cannot assure you that we will be able to adequately or profitably manage this growth. Acquiring other banks, branches or businesses, as well as other geographic and product expansion activities, involves various risks including: risks of unknown or contingent liabilities; unanticipated costs and delays; risks that acquired new businesses do not perform consistent with our growth and profitability expectations; risks of entering new markets or product areas where we have limited experience; risks that growth will strain our infrastructure, staff, internal controls and management, which may require additional personnel, time and expenditures; exposure to potential asset quality issues with acquired institutions; difficulties, expenses and delays of integrating the operations and personnel of acquired financial institutions, and start-up delays and costs of other expansion activities; potential disruptions to our business; possible loss of key employees and customers of acquired institutions; potential short-term decreases in profitability; and diversion of our management’s time and attention from our existing operations and business. We may encounter unexpected financial and operating problems due to our rapid growth. Until the end of 2008, we grew rapidly. We seek to resume growth as soon as feasible to meet the opportunities we see in our current markets and nearby markets. Growth, especially rapid growth, in the future may result in unexpected financial and operating problems, including problems in new additions to the loan portfolio due to the unseasoned nature of new credits. Acquisitions may add additional pressures to internal controls and financial and operating systems. We may open additional branches in the future. A newly opened branch is typically expected to incur operating losses in its early periods of operations because of an inability to generate sufficient net interest income to cover operating expenses. Those operating losses can be significant and can occur for longer periods than planned, depending on our ability to control operating expenses and generate net interest income. Attractive acquisition opportunities may not be available to us in the future. While we seek continued organic growth, as our earnings and regulatory and capital positions improve, we may consider the acquisition of other businesses. We expect that other banking and financial companies, many of which have significantly greater resources, will compete with us to acquire financial services businesses. This competition could increase prices for potential acquisitions that we believe are attractive. Also, acquisitions are subject to various regulatory approvals. If we fail to receive the appropriate regulatory approvals, we will not be able to consummate an acquisition that we believe is in our best interest. Among other things, our regulators
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Table of Contentsconsider our capital, liquidity, profitability, regulatory compliance and levels of goodwill and intangibles when considering acquisition and expansion proposals. Any acquisition could be dilutive to our earnings and shareholders’ equity per share of our common stock. Our past growth may not be indicative of our future growth. We may not resume our historical rate of growth or may not be able to grow our business at all. In addition, our prior growth may distort some of our historical financial ratios and statistics. Various factors, such as economic conditions, regulatory and legislative limitations and competition, may also impede or prohibit our ability to expand our market presence. Our 401(k) Plan was not properly registered with the Securities and Exchange Commission and we may incur liability to our employees who purchased our common stock in our 401(k) Plan. In 2005, we added shares of our common stock as an investment option to our 401(k) Plan. Therefore, the offer and sale of 401(k) Plan interests and underlying shares of common stock were required to be registered under the Securities Act of 1933, as amended, and certain disclosures were required to be delivered to our 401(k) Plan participants. We discovered that we had inadvertently failed to file the required registration statement with the Securities and Exchange Commission or to deliver the required disclosures to our 401(k) Plan participants. On October 30, 2009, we filed a registration statement covering the 401(k) Plan interests and the underlying shares of common stock. Due to having not timely filed such a registration statement and not delivering the required disclosures, we may incur liability to the 401(k) Plan participants. As a result, we intend to make a rescission offer to our current and former 401(k) Plan participants who purchased our common stock in the 401(k) Plan, pursuant to which we will pay for shares properly delivered for rescission, subject to the approval of the Federal Reserve as required by our Board Resolutions. We will use our best efforts to commence the rescission offer by December 15, 2009. If this rescission offer is accepted by all eligible 401(k) Plan participants, we could be required to make aggregate payments to those individuals of up to approximately $2.2 million plus statutory interest. Federal securities laws do not expressly provide that a rescission offer will terminate a purchaser’s right to rescind a sale of stock that was not registered as required. If any or all of the offerees reject the rescission offer, we may continue to be liable under federal securities laws for up to the aggregate amount of approximately $2.2 million plus statutory interest. See “Item 5. Market for Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities” for additional information. Additionally, we may have been required to file Annual Reports on Form 11-K for the 401(k) Plan for 2005, 2006 and 2007. If we ultimately determine that such filings were required, we will use our best efforts to file such reports. The failure to have filed such reports, if required, may subject us to additional liability.
None.
Bank of Florida Corporation’s corporate headquarters and Bank of Florida - Southwest’s main offices are located at Bank of Florida Center, 1185 Immokalee Road, Naples, Collier County, Florida 34110. Bank of Florida Center is a three-story office building which opened in August, 2002. Bank of Florida – Southwest leases one-half of the first floor, consisting of 12,785 square feet, from Naples 9, LLC. The first floor houses a banking center with a board room, catering kitchen, conference rooms, three (3) drive-through lanes, and ATM/night deposit access. Wealth management and trust offices, and a conference room are also located on the ground floor. Bank of Florida – Southwest also leases 8,430 square feet on the second floor, with offices and work areas for finance, credit administration, and risk management. Bank of Florida Corporation leases 9,698 square feet on the third floor, with offices for marketing, human resources, training and holding company executive and administrative personnel. These leases expire in 2012 with options for two five-year renewals at then market rates. The monthly lease payment as of December 2009 was $99,400. With the acquisition of Old Florida Bank, Bank of Florida Corporation acquired property located at 12298 Matterhorn Road, Ft Myers, Florida, which is now the location of the Company’s Operations Center. The facility consists of 15,000 square feet of space and is owned by the corporation. Bank of Florida – Southwest operates a full-service branch office at 3401 Tamiami Trail North, Naples, Florida. This branch office, which is owned by Bank of Florida - Southwest, is contained in a two-story office building located on approximately one acre of land. The bank also leased a facility in 2006 at 23471 Walden Center, Bonita Springs, Florida, which now serves as the Bank’s third full-service branch office. The monthly lease
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Table of Contentspayment for the Bonita Springs location as of December 31, 2009 was $18,700. In connection with the acquisition of Old Florida Bank in April 2007, Bank of Florida – Southwest acquired a two story building at 2325 Vanderbilt Beach Road, Naples, Florida which serves as the Bank’s fourth full-service branch. The first floor serves as a full-service branch office and the second floor with 4,100 square feet is sub-leased to a third party. The lease was initially entered into on July 1, 2001 for 5 years and subsequently renewed for five years which extends the lease to June 2011. Additionally, Bank of Florida – Southwest acquired property located at 63210 Daniels Parkway, Fort Myers, Florida, which serves as the Bank’s fifth full-service branch. Bank of Florida – Southwest leases a facility at 2301 Del Prado Blvd, Cape Coral, Florida in the Coralwood Shopping Center. This branch was closed in May 2007 and is no longer in use. This 2,688 square foot space is leased from GRE Coralwood, LP beginning May 18, 2005 for a term of 5 years. The monthly lease payment as of December 31, 2009 was $7,200. Bank of Florida – Southwest also acquired a parcel of vacant land located on Santa Barbara Boulevard in Cape Coral, Florida. Bank of Florida – Southeast operates in approximately 20,790 square feet of Suite 1700 and 3000 square feet of Suite 100 of the 200 La Olas Circle office building located at 200 SW First Avenue, in downtown Fort Lauderdale, Florida. This space is leased from 200 Brickell LTD. The space includes executive offices, wealth management offices, 3 conference rooms, board room, catering kitchen and full service branch facilities. The site does not have drive-through facilities, but does offer a walk-up ATM facility. The lease is for 10 years with an option for one ten-year renewal at then market rates. The monthly lease payment as of December 2009 was $73,000. Bank of Florida – Southeast also leases a full-service branch at 19058 NE 19th Ave. in Aventura, Florida. As of December 31, 2009 the monthly lease payment for the Aventura location was $9,700. Approximately 980 rentable square feet of this space is sub-leased to a third party. The lease commenced in October 2009 for a period of two years and terminates October 2011. In June 2008, the Bank leased office space located at 2521 E. Commercial Boulevard in Fort Lauderdale, Florida. The new 2,400 square foot facility provides convenience and visibility with the addition of two (2) drive-through lanes, walk-up ATM and expanded parking. The lease is for fifteen years with options for three five-year renewals at then market rates. The monthly lease payment as of December 2009 was $28,700. Bank of Florida – Southeast also has leased office space in Palm Beach County, located at 595 South Federal Highway, in Boca Raton, Florida. The space consists of 6,460 square feet on the first floor, 2,500 square feet on the second floor, the garage, all common areas located on the property and the exclusive use of two (2) remote drive-through lanes, located on the west side of 555 South Federal Highway. The lease is for fifteen years with options for two five-year renewals at then market rates. The monthly lease payment as of December 2009 was $45,300. Bank of Florida – Southeast operates a full service branch at 1493 Sunset Drive in South Miami, Florida. This facility was leased in 1998 for a ten year term with options for two five-year renewals at then market rates. The monthly lease payment as of December 2009 was $12,500. In July 2008, Bank of Florida – Southeast opened a banking facility in downtown Coral Gables, Florida. The nearly 4,700 square foot facility is located at 20 Giralda Avenue in the 55 Merrick Way Building. The facility is the third Miami-Dade County location and features a full-service banking facility, executive offices, wealth management and trust offices, two (2) drive-through lanes, two (2) ATMs and designated client parking. The lease is for ten years with options for three five-year renewals at then market rates. The monthly lease payment as of December 2009 was $22,400. A portion of the parking lot is sub-leased to a third party. This lease commenced in 2009 for seven months and subsequently terminates March 2010. Bank of Florida – Tampa Bay leases office space located in the Harbour Island area of downtown Tampa, Florida at 777 South Harbour Island Boulevard. The space consists of 2,718 square feet on the ground floor which is operated as the main branch and banking facility. Additional space located on the ground floor serves as the executive, lending, operations and credit offices of the Bank. The monthly lease payment as of December 31, 2009 was $19,000. Bank of Florida – Tampa Bay opened a second banking center in 2007 located at 26417 U.S. Highway 19 North in Clearwater, Florida. The facility is a two story building with approximately 8,700 square feet of space. The facility features a full-service branch, one (1) drive-through lane, one (1) drive-through ATM, a conference room, and designated client parking. The monthly lease payment as of December 31, 2009 was $30,400. The lease is for 15 years with four additional five year renewal options. Bank of Florida Trust Company maintains offices and personnel at each of the Banks’ main offices, referred to as “wealth management and trust offices” above, and also meets with prospective clients at each of the Bank’s banking centers.
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From time-to-time, we are involved in litigation arising in the ordinary course of our business. As of the date of the filing of this Form 10-K, we are of the opinion that the ultimate aggregate liability represented thereby, if any, will not have a material adverse effect on our consolidated financial condition or results of operations.
No matter was submitted to a vote of the Company’s shareholders during the quarter ended December 31, 2009.
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Table of ContentsPART II
The Company’s Common Stock was held by approximately 1,983 holders registered or in street name as of February 3, 2010. The Company is listed on the Nasdaq Global Market under the symbol “BOFL”. These over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, markdown, or commission and may not necessarily reflect actual transactions. The table below shows the high, low and closing bid prices on the NASDAQ National Market for the periods indicated.
The following graph compares Bank of Florida Corporation’s cumulative stockholder return on our common stock with: (i) SNL Financial LC’s index for Florida Banks with $1 - $5 billion in assets; and (ii) the Russell Microcap Index, which is comprised of 1,000 of the smallest securities in the Russell 2000 Index and the next 1,000 securities, which universe includes Bank of Florida. The graph assumes an initial investment of $100 on December 31, 2004.
To date, Bank of Florida Corporation has not paid any dividends on its common stock. There are no current plans to initiate payment of cash dividends, and future dividend policy will depend on the Banks’ earnings, capital requirements, financial condition, and other factors. A description of the regulatory restrictions on Bank of Florida Corporation’s ability to pay dividends is contained under the heading “Dividends” in the section on “Supervision and Regulation”.
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Table of ContentsThe following table sets forth information about the number of shares reserved for issuance under the 1999 Stock Option Plan and the 2006 Stock Compensation Plan as of December 31, 2009.
See “Note 18-Stock-Based Compensation” of the “Notes to Consolidated Financial Statements” for information on stock options and warrants outstanding. Rescission Offer. From March, 2005 through October 2009, participants in our 401(k) Plan purchased shares of our common stock for an aggregate purchase price of approximately $2.2 million. These transactions were not exempt from the registration requirements of federal securities laws and we did not seek to register those transactions under such laws. Accordingly, the shares of our common stock purchased in the 401(k) Plan were likely in violation of federal securities laws, and may be subject to rescission. In order to address this issue, we will use our best efforts to make a rescission offer to the purchasers of those shares by December 15, 2009, subject to the approval of the Federal Reserve as required by our Board Resolutions. If our rescission offer is accepted by all offerees, we could be required to make aggregate payments to those participants of up to approximately $2.2 million, including statutory interest. At this time we are not aware of any claims for rescission against us and we do not expect our aggregate exposure under federal securities laws to exceed approximately $2.2 million. Our making this rescission offer may not terminate a purchaser’s right to rescind a sale of securities that was not properly registered or otherwise exempt from registration. Accordingly, should the rescission offer be rejected by any or all offerees, we may continue to be contingently liable under federal law for the purchase price of these shares up to the aggregate amount of approximately $2.2 million, including statutory interest. Additionally, we may have been required to file Annual Reports on Form 11-K for the 401(k) Plan for 2005, 2006 and 2007. If we ultimately determine that such filings were required, we will use our best efforts to file such reports.
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OVERVIEW Bank of Florida Corporation is a multi-bank holding company with $1.4 billion in assets as of December 31, 2009 and was incorporated in Florida in September 1998. Our subsidiary Banks are separately chartered community banks with local boards that provide full-service commercial banking in a private banking environment. Our Trust Company offers investment management, trust administration, estate planning, and financial planning services largely to the Banks’ commercial borrowers and other high net worth individuals. The Company’s overall focus is to develop a total financial services relationship with its client base, which is primarily businesses, professionals, and entrepreneurs with commercial real estate borrowing needs. The Banks also provide technology-based cash management and other depository services. The holding company structure provides flexibility for expansion of the Company’s banking business, including possible acquisitions of other financial institutions, and provision of support and additional banking-related services to its subsidiary banks. CRITICAL ACCOUNTING POLICIES The Company’s consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. The financial information contained within these statements is, to a significant extent, based on approximate measures of the financial effects of transactions and events that have already occurred. Critical accounting policies are those that involve the most complex and subjective decisions and assessments, and have the greatest potential impact on the Company’s stated results of operations. Management has evaluated subsequent events for potential recognition or disclosure in the financial statements through March 5, 2010, the date upon which the Company’s annual report on Form 10-K was filed with the Securities and Exchange Commission. No subsequent events were identified that would have required a change to the financial statements or disclosure in the notes to the financial statements. The notes to the consolidated financial statements include a summary of the significant accounting policies and methods used in the preparation of our consolidated financial statements. Management believes that, of our significant accounting policies, the following involve a higher degree of judgment and complexity. Our management has discussed these critical accounting assumptions and estimates with the Board of Directors’ Audit Committee. Allowance for Loan Losses: The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to operations. Loan losses are charged against the allowance when management believes the collectability of a loan balance is unlikely. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is comprised of: (1) a component for individual loan impairment, and (2) a measure of collective loan impairment. The allowance for loan losses is established and maintained at levels deemed adequate to cover losses inherent in the portfolio as of the balance sheet date. This estimate is based upon management’s evaluation of the risks in the loan portfolio and changes in the nature and volume of loan activity. Estimates for loan losses are derived by analyzing historical loss experience, current trends in delinquencies and charge-offs, historical bank experience, changes in the size and composition of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that
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Table of Contentsexperience insignificant payment delays and payment shortfalls generally are not classified as impaired. Larger impaired credits that are measured for impairment have been defined to include loans classified as substandard and on nonaccrual or doubtful risk grades where the borrower relationship is greater than $500,000. For such loans that are considered impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. Loans that are not measured individually for impairment are measured collectively and include commercial real estate loans that are performing and large groups of smaller balance homogeneous loans evaluated based on historical loss experience adjusted for qualitative factors. Income Taxes: Provisions for income taxes are based on taxes payable or refundable for the current year and deferred taxes on temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements, as well as net operating loss carryforwards and tax credit carryforwards. Deferred tax assets and liabilities are included in the consolidated financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. In the event of changes in the tax laws, deferred tax assets and liabilities are adjusted in the period of the enactment of those changes, with the cumulative effects included in the current year’s income tax provision. Net deferred tax assets, whose realization is dependent on taxable earnings of future years, are recognized when a more-likely-than-not criterion is met. The Company records a valuation allowance for deferred tax balances when it is unlikely to generate sufficient income to support the deferred tax asset. The Company and its subsidiaries file consolidated tax returns. Acquisitions: The Company accounts for business combinations based on the purchase method of accounting. The purchase method of accounting requires us to fair value the tangible net assets and identifiable intangible assets acquired. The fair values are based on available information and current economic conditions at the date of acquisition. Fair value may be obtained from independent appraisers, discounted cash flow present value techniques, management valuation models, quoted prices on national markets or quoted market prices from brokers. These fair value estimates will affect future earnings through the disposition or amortization of the underlying assets and liabilities. While management believes the sources utilized to arrive at the fair value estimates are reliable, different sources or methods could have yielded different fair value estimates. Such different value estimates could affect future earnings through different values being utilized for the disposition or amortization of the underlying assets and liabilities acquired. Year Ended December 31, 2009 Compared to Year Ended December 31, 2008 FINANCIAL CONDITION The Company’s total assets were $1.4 billion at December 31, 2009, down $146.7 million or 9.5% over the prior year-end. Total earning assets, which the Company defines as any asset that earns interest, declined $36.6 million or 2.6% to $1.4 billion. This compares with $223.3 million or 18.7% growth in 2008. Bank of Florida – Southwest declined $88.0 million in total assets, reaching $659.2 million, while Bank of Florida – Southeast decreased $2.9 million, for a total of $535.7 million in assets. Bank of Florida-Tampa Bay, which has been open for slightly over five years, declined $8.6 million for a total of $247.1 million in total assets.
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Table of ContentsInvestment Securities and Overnight Investments The composition of the investment securities portfolio reflects the Company’s investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source of revenue. The securities portfolio also provides a balance to interest rate risk in other categories of the balance sheet while providing a vehicle for the investment of available funds, furnishing liquidity, and supplying securities to pledge as required collateral for certain deposits. Total investment securities were $98.7 million at December 31, 2009, a decrease of $19.3 million or 16.4% from December 31, 2008. Securities available for sale totaled $98.1 million, a decrease of $16.5 million compared to those held at December 31, 2008. The Company does not currently engage in trading activities and, therefore, did not hold any securities classified as trading at December 31, 2009 or 2008. Federal Funds sold was zero at December 31, 2009, a decrease of $313 thousand from December 31, 2008. This category of earning assets is normally used as a temporary investment vehicle to support the Company’s daily funding requirements and, as a result, fluctuates with loan demand. Loan Portfolio Total gross loans outstanding (excluding deferred fees) were $1.2 billion at December 31, 2009. Loans declined $62.6 million or 4.9% for the year. Bank of Florida – Southwest accounted for $47.0 million (75.1%), Bank of Florida – Southeast accounted for $9.6 million (15.3%) and Bank of Florida – Tampa Bay accounted for the remaining $6.0 million (9.6%) of the decrease in loan balances. Land and real estate construction loans decreased $102.0 million to $216.6 million (17.8% of total loans) at December 31, 2009, while commercial loans secured by real estate increased $49.2 million to $625.7 million (51.5% of total loans). Making up the rest of the loan portfolio were multi-family and residential loans at $202.5 million (16.7% of total loans), down $3.1 million from the end of 2008, followed by commercial business loans at $112.4 million (9.3% of total loans), consumer lines of credit at $45.2 million (3.7% of total loans) and other consumer loans at $11.9 million (1.0% of total loans). Asset Quality The Banks’ loan portfolios are subject to periodic reviews by our internal loan review department, our external loan review consultant and state and federal bank regulators. The Company’s nonperforming loans (nonaccruals and 90+ days past due) totaled $164.5 million at December 31, 2009. Consequently, nonperformers as a percent of loans outstanding increased from 5.63% at December 31, 2008, to 13.56% as of December 31, 2009. Thirty-to-ninety day delinquent loans were $63.8 million or 5.26% of loans outstanding at December 31, 2009. There were $61.1 million in net charge-offs during 2009, resulting in net charge-offs to average loans of 5.37%. The increased level of nonperforming assets in 2009 is a result of a slowing economy and the devaluation of real estate Real estate values in our markets deteriorated at an accelerated pace over recent quarters, resulting in increased credit losses. Our non-performing assets have increased since the beginning of the economic downturn in 2007 as management continues to aggressively recognize impaired loans based on our ongoing process of identifying early signs of stress in our loan portfolio. Additionally, we continue to track every loan from pre-watch identification through disposition, using our history of trend analysis by loan type, industry, market and vintage, which further supports progress in projecting impairment on a loan by loan basis. In the third quarter of 2009, we utilized a third-party loan review firm to review 46% of our loans. Our Special Assets Division, which was established in 2007 in anticipation of elevated stress levels in the Florida economy, continues to monitor and aggressively manage our most problematic loans and other real estate owned. This division has grown to include five professionals with extensive experience in managing non-performing loans. This division reports to our Senior Executive Vice President who has extensive experience in managing special assets divisions, as well as reporting to the Special Assets Committee, a subcommittee of our Board of Directors, which meets monthly and oversees the management, marketing, and overall dissolution of these assets. We had $90.6 million in loans that were defined as troubled debt restructuring as of December 31, 2009. Of those amounts, $48.9 million were accruing as they were performing in accordance with their restructured terms. The majority of the restructurings involve extending the interest-only period, reducing the interest rate to give the borrower relief, or other modifications of terms that deviate from the original contract.
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Table of ContentsDeposits Total deposits increased $21.0 million or 1.8% in 2009 to end the year at $1.2 billion. Deposit growth in the Bank of Florida – Southwest comprised $9.2 million of this increase, up 1.7% to $535.4 million in deposits at December 31, 2009, while deposits at Bank of Florida – Southeast climbed $43.4 million or 10.7% to $448.7 million. Bank of Florida – Tampa Bay ended the year with $194.0 million in deposits, down $31.6 million or 14.0%. Core deposits, which exclude wholesale brokered CDs, wholesale CDAR deposits, and CDs with balances in excess of $100 thousand, increased $74.1 million or 10.4% from December 31, 2008, with the growth in CDs less than $100 thousand (up $202.1 million), NOW accounts (up $4.8 million), and savings accounts (up $73 thousand) more than offsetting the decline in non interest bearing deposits (down $10.9 million), money market deposits (down $24.8 million) and retail CDARs (down $97.2 million). As of the end of 2009, these accounts comprised 26.1%, 4.5%, 0.5% 8.8%, 24.6% and 1.7%, respectively, of total deposits. Non-core deposit accounts decreased $53.1 million or 11.7% during 2009 and accounted for 33.8% of total deposits. The annualized average rate paid on total interest bearing deposits during 2009 was 2.66%, a decrease of 91 basis points compared to 2008. This decrease resulted primarily from the lower interest rate environment under which we currently operate. Due to the Bank’s capital positions and the Resolutions described under “Supervision and Regulation,” we are presently prohibited from accepting, renewing or rolling over brokered depositis, including CDAR’s, and from paying interest rates greater than 0.75% of the prevailing local rate or the national rates published by the FDIC. Borrowings While client deposits remain our primary source of funding for asset growth, management uses other borrowings as a funding source for loan growth, regulatory capital needs, and as a tool to manage the Company’s interest rate risk and margin. At December 31, 2009, borrowings totaled $167.1 million, a decrease of $21.3 million compared to December 31, 2008. Total borrowings at December 31, 2009, consisted of $32.7 million of other borrowings, $16.0 million in subordinated debt and $118.5 million in Federal Home Loan Bank (“FHLB”) Advances compared to $20.0 million of other borrowings, $16.0 million in subordinated debt and $152.5 million in FHLB Advances, respectively, at the end of 2008. The maturities of all borrowings range from March 2010 through July 2017. See “Note 11-Subordinated Debt and Other Borrowings” and “Note 12-Federal Home Loan Bank Advances” of the “Notes to Consolidated Financial Statements” for further information. Stockholders’ equity Total stockholders’ equity was $43.8 million at December 31, 2009, a $146.1 million or 76.9% decrease since December 31, 2008. Book value per share was $3.07 at December 31, 2009 while the tangible book value per common share was $2.88. The Company’s Tier 1 leverage ratio decreased 545 basis points to 2.41% at December 31, 2009 from 7.86% at December 31, 2008. The minimum Tier 1 leverage ratio for bank holding companies is 4.0%; however, regulators can require bank holding companies to satisfy higher capital requirements. At December 31, 2009, the Company was significantly undercapitalized. Note 17 – Stockholder’s Equity provides additional information regarding the Company’s capital position.
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Table of ContentsAggregate Contractual Obligations Contractual obligations for payments under long-term debt and lease obligations are shown as follows, stratified by remaining term to contractual maturity (in thousands):
Further discussion of the nature of each obligation is included in “Note 10-Deposits”, “Note 11-Subordinated Debt and Other Borrowings”, “Note 12-Federal Home Loan Bank Advances” and “Note 14-Commitments and Contingencies” of the “Notes to Consolidated Financial Statements”. Default Upon Senior Securities Two of the Banks are parties to similar master repurchase agreements and confirmations, or “Repos,” with Citigroup Global Markets, Inc., or “Citi”. Pursuant to the Repos, each such subsidiary bank sold Citi $10.0 million of securities, subject to their obligation to repurchase such securities at a specific price in 2013. The Repos provide that if either of our subsidiary Banks fails to remain “well capitalized” for regulatory purposes, the Repos may be called. We notified Citi that an event of default has occurred and is continuing under each of the Repos, and Citi has reserved all its rights upon a default under each Repo. If Citi exercises its remedies under the Repos, then: (i) our subsidiary Banks would be obligated to immediately repurchase all securities sold to Citi under the Repos; (ii) all income paid after the declaration on the securities sold would be retained by Citi and applied to the aggregate unpaid repurchase prices and any other amounts owing by our subsidiary banks; and (iii) our subsidiary banks would have to immediately deliver to Citi any purchased securities subject to the Repos then in their possession or control. We have been informed that Citi would also charge our subsidiary banks an approximately $1.5 million of total penalty for early termination of these Repos. If Citi exercises its right to declare an event of default and exercises its remedies under the Repos, then our financial position, liquidity and earnings may be materially and adversely affected. As part of Bank of Florida Corporation’s (the “Company”) continuing efforts to conserve capital, on February 17, 2010, the Board of Directors of the Company’s wholly-owned subsidiary, Bank of Florida – Southeast adopted a resolution suspending interest and principal payments on its $6 million in subordinated debt. On February 18, 2010, the Board of Directors of the Company’s wholly-owned subsidiary, Bank of Florida – Southwest adopted a resolution suspending interest and principal payments on its $10 million in subordinated debt.
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Table of ContentsRESULTS OF OPERATIONS The Company’s net loss available to common shareholders for 2009 was $147.6 million or ($11.54) per diluted share, which included $106,000 in preferred stock dividends. The Company’s net loss available to common shareholders was $13.2 million or ($1.03) per diluted share, for 2008. Pretax net loss increased $115.6 million to $136.7 million. The primary factors explaining the deterioration were the $62 million goodwill impairment, $49.2 million increase in provision for loan losses, a $38.8 million valuation allowance on the deferred tax asset and a $6.2 million or 13.0% decrease in top-line revenue mostly attributable to the decline in interest rates. Top-line revenue is a non-GAAP measure which the Company defines as net interest income plus noninterest income, excluding net securities gains/losses. Management monitors top-line revenue as we believe it is an indication of core earning capacity. Net Interest Income Net interest income decreased $6.1 million or 14.3% in 2009 to $36.7 million, primarily the result of the reduction in interest rates year over year. Net interest spread, the difference between the yield on interest-earning assets and the rate paid on interest-bearing liabilities, was 2.77% on average in 2009, which was a decrease of 12 basis points when compared to 2008, while, the net interest margin, which is net interest income divided by average interest-earning assets, averaged 2.85% in 2009, a 49 basis points decrease over 2008. The margin continues to be pressured in this low rate environment. Interest income decreased $11.9 million or 14.2% to $71.5 million in 2009, the result of a 95 basis point decrease in the average yield earned on interest earning assets. Total average interest-earning assets increased $5.8 million during the year and resulted in a $856 thousand decrease in interest income. The average yield on interest-earning assets, which was impacted by the increase in nonaccrual loans, decreased to 5.55%, accounting for $10.8 million decline in interest income with the day count difference accounting for the remainder of the decrease. Approximately 63.4% of loans outstanding at December 31, 2009 are variable rate loans compared to 65.2% at December 31, 2008. Interest expense totaled $34.8 million in 2009, a decrease of $5.7 million or 14.1%. The overall cost of interest-bearing liabilities was 2.78% compared to 3.61% one year ago. Noninterest-bearing deposits averaged $107.2 million for 2009 compared to $104.2 million last year. Money market rates were 133 basis points lower on average, while the average cost of time deposits decreased 89 basis points. During the year ended December 31, 2009, the Company decreased its use of FHLB advances as an alternative funding source. The average outstanding amount of FHLB advances for 2009 were $123.1 million at an average cost of 3.89% compared to $147.2 million at an average cost of 3.75% for 2008.
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Table of ContentsThe following table represents, for the years indicated, certain information related to our average balance sheet and average yields on assets and average costs of liabilities (in thousands).
INCREASE (DECREASE) DUE TO CHANGE IN (IN THOUSANDS)
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Table of ContentsNoninterest Income Noninterest income was $8.9 million, an increase of $4.2 million or 88.6% over 2008. Gains on sale of assets, which includes gains on sale of securities, increased $3.6 million (up 5954.3%) as a result of more gains on sales of securities ($4.2 million) and fewer losses on fixed asset dispositions ($167,000), partially offset by losses on loan sales ($240,000) and losses on sale of other real estate owned ($987,000) and lower secondary market fees ($45,000). Trust fees declined $140,000 or 5.1% to $2.6 million over 2008 primarily the result of the distressed equity market conditions that occurred during the first half of 2009. Over the past twelve months, assets under administration have increased $245.9 million, or 49.7%, to $740.5 million at December 31, 2009. Service charges and other income increased approximately $708,000, or 36.8%, over 2008, due to hedge ineffectiveness and the termination of the derivative transaction ($480,000), greater service charge income ($360,000) due to the implementation of a more efficient process for commercial account analysis, partially offset by lower other income ($133,000). Noninterest Expenses Noninterest expenses rose $64.5 million or 146.4% over 2008. The majority of the increase is explained by the $62.0 million goodwill impairment charge that was recorded during the third quarter. Other increases occurred in the areas of regulatory assessments ($1.6 million or 164.1% increase) driven by the increase in FDIC assessments, including a one-time special assessment of $712,000, professional fees ($1.2 million or 68.5% increase) and shareholder relations expense ($221,000 or 132.2% increase) driven by the capital campaign, repossession expenses ($863,000 or 63.6% increase) related to the increase in foreclosed property, other losses ($547,000 or 390.2% increase), occupancy ($198,000 or 2.84% increase) and data processing ($238,000 or 10.3% increase). These increases in expense were partially offset by decreases in salaries and benefits ($1.4 million or 6.4% decrease), office supplies ($245,000 or 29.2% decrease) and travel ($245,000 or 20.5% decrease). Asset Quality and Provision for Loan Losses Nonperforming loans (90+ days past due and non-accruals) totaled $164.5 million, or 13.56% of loans outstanding. The increase from prior year was primarily caused by the downturn in the residential real estate market which negatively impacted the liquidity of a number of borrowers. The ratio of net charge-offs to average loans for 2009 grew 459 basis points to 5.37%. The Company’s asset quality can also be measured by the coverage of the loan loss allowance to nonperforming loans (.26 times). These measures are worse than the Company’s historic norms. The provision for loan losses increased $49.2 million or 200.8%, as a result of loan downgrades and an increased level of net charge-offs due to the continued weakness in real estate values. The allowance for loan losses, which is established through a charge to provision for loan losses as losses are estimated, totaled $42.1 million or 3.47% of loans outstanding at December 31, 2009. In comparison, the allowance for loan losses totaled $29.5 million or 2.32% of loans outstanding at December 31, 2008. Actual loan losses are charged against the allowance when management believes the collectability of a loan balance is unlikely. Subsequent recoveries, if any, are credited to the allowance. The Company recorded net charge-offs during 2009 of $61.1 million, compared to $9.2 million in 2008. The primary factor impacting the amount of these charge-offs is the continued decline in property values across the Florida markets. Income Taxes Income tax expense for 2009 was $10.8 million, as compared with a benefit of $7.8 million for 2008, representing effective tax rates of 7.9% and 37.2%, respectively. The effective tax rate was lower than the statutory tax rate in the current year primarily due to the goodwill impairment charge and the valuation allowance established on the deferred tax asset. Additional information regarding income taxes can be found in “Note 9 – Income Taxes” of the “Notes to Consolidated Financial Statements”. The effective tax rate for 2009 reflects the tax treatment of the $62.0 million goodwill impairment charge. Since the majority of the Company’s goodwill originated from acquisitions that were treated as tax-free exchanges, no goodwill was recognized for tax reporting purposes and therefore no tax deduction is allowed for the impairment charge. Likewise, no tax benefit is recognized in the financial statements relating to the $62.0 million charge.
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Table of ContentsQuarterly Operating Results The following table presents condensed information relating to quarterly periods in the years ended December 31, 2009 and 2008 (in thousands, except per share data).
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Table of ContentsYear Ended December 31, 2008 Compared to Year Ended December 31, 2007 RESULTS OF OPERATIONS The Company’s net loss for 2008 was $13.2 million or ($1.03) per diluted share, $16.0 million less than 2007. Pretax net loss increased $25.6 million to $21.1 million. The primary factors explaining the deterioration were a $20.2 million increase in provision for loan losses in addition to a $1.3 million or 2.8% decrease in top-line revenue mostly attributable to the decline in interest rates. Top-line revenue is a non-GAAP measure which the Company defines as net interest income plus noninterest income, excluding net securities gains/losses. Management monitors top-line revenue as we believe it is an indication of core earning capacity. Net Interest Income Net interest income decreased $432 thousand or 1.0% in 2008 to $42.8 million, the result of a 400 basis point reduction in interest rates during the year. Net interest spread, the difference between the yield on interest-earning assets and the rate paid on interest-bearing liabilities, was 2.89% on average in 2008, which was a decrease of 27 basis points when compared to 2007, while, the net interest margin, which is net interest income divided by average interest-earning assets, averaged 3.34% in 2008, a 64 basis points decrease over 2007. The margin continues to be pressured in this declining rate environment. Interest income decreased $828 thousand or 1.0% to $83.3 million in 2008, the result of a 124 basis point decrease in the average yield earned on interest earning assets that was partially offset by continued loan growth. Total average interest-earning assets increased $194.7 million during the year resulting in a $12.1 million increase in interest income while the average yield on interest-earning assets decreased to 6.50%, accounting for $13.1 million decline in interest income with the day count difference accounting for the remainder of the improvement. Approximately 65.2% of loans outstanding at December 31, 2008 are variable rate loans compared to 73.9% at December 31, 2007. Interest expense totaled $40.5 million in 2008, a decrease of $396 thousand or 1.0%. The overall cost of interest-bearing liabilities was 3.61% compared to 4.58% one year ago. Noninterest-bearing deposits averaged $104.2 million for 2008 compared to $103.1 million last year. Money market rates were 143 basis points lower on average, while the average cost of certificates of deposit decreased 84 basis points. During the year ended December 31, 2008, the Company increased its use of FHLB advances as an alternative funding source. The average outstanding amount of FHLB advances for 2008 were $147.2 million at an average cost of 3.75% compared to $104.8 million at an average cost of 5.02% for 2007.
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Table of ContentsThe following table represents, for the years indicated, certain information related to our average balance sheet and average yields on assets and average costs of liabilities (in thousands).
INCREASE (DECREASE) DUE TO CHANGE IN (IN THOUSANDS)
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