ITEM 1. DESCRIPTION OF BUSINESS
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
On December 20, 2006, the shareholders approved changing the name of the Company from Bancshares of Florida, Inc. to Bank of Florida Corporation to further the Company’s brand strategy and name recognition. Bank of Florida Corporation was incorporated in Florida in September 1998 to serve as a holding company for Bank of Florida - Southwest. (Bank of Florida Corporation and its subsidiaries are collectively referred to in this report as the “Company”).
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 - Southwest, Bank of Florida - Southeast and Bank of Florida - Tampa Bay are collectively referred to in this report as the “Banks”).
On April 18, 2000, Bank of Florida Trust Company (the “Trust Company”), was incorporated under the laws of the State of Florida. Bank of Florida Trust Company was approved to engage in fiduciary services and estate planning consultation on August 23, 2000. As a subsidiary of Bank of Florida Corporation, Bank of Florida Trust Company offers non-proprietary, third-party investment consulting services and access to an extensive, nationwide network of independent money managers.
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, lock box, and Door-to-Door banking.
The holding company structure provides flexibility for expansion of our banking business through possible acquisition 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.
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 two locations in Naples (Collier County) and established a third location in 2006 in Bonita Springs (southern Lee County). Bank of Florida - Southeast is headquartered in downtown Fort Lauderdale (Broward County) with two additional branch locations in Ft. Lauderdale (Broward County), one in Boca Raton (Palm Beach County) and established a fourth location in Aventura (Miami-Dade County) in 2006. With the acquisition of Bristol Bank during 2006, Bank of Florida - Southeast expanded its presence in Miami-Dade County. Bank of Florida - Tampa Bay opened in the Harbor Island area of Tampa (Hillsborough County). Pinellas County is also being served by the Tampa location.
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.
Collier and Lee Counties have approximately $21.5 billion in deposits as of June 30, 2006. Collier County is the 10th largest deposit market in the State of Florida, with 2.9% of all deposits statewide, while Lee County is the 9th largest with a 3.0% statewide market share. Bank of Florida - Southwest had 3.0% of all deposits in the Naples and Marco Island metropolitan statistical area as of June 30, 2006.
With deposits of $145.8 billion as of June 30, 2006, the Miami-Dade/Broward/Palm Beach County markets are much larger than the Collier/Lee County market. Miami-Dade, Broward and Palm Beach Counties are the number one, two and three deposit markets in the State of Florida, respectively, and combined account for 40.1% of Florida’s deposits. Bank of Florida - Southeast, together with the deposits of Bristol Bank, had 0.21% of all deposits in the Miami, Ft. Lauderdale and Miami Beach metropolitan statistical area as of June 30, 2006.
Hillsborough County’s total deposits are $18.1 billion as of June 2006, making it the 7th largest deposit market in Florida with 5.0% of the state’s deposits. Bank of Florida - Tampa Bay has acquired 0.16% of Hillsborough County’s deposits after just two years of operations.
The demographics of Miami-Dade, Broward and Palm Beach Counties, Collier and Lee Counties, and Hillsborough County 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 the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Interstate Banking Act”) and other 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.
DISTRIBUTION 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, 2006. 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, 2006 were as follows:
LE NDING ACTIVITIES
The Company engages in a large complement of lending activities, including commercial, consumer, installment, and real estate loans. The majority of the Company’s lending activities is conducted principally with customers located in the Naples, Ft. Lauderdale, Miami-Dade, Palm Beach and Tampa, Florida areas. Construction loans are comprised of commercial real estate and residential one to four family loans. Commercial 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 could be 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.
The 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, 2006, approximately 85.0% 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, 2006 (In Thousands):
Management 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.
The Company had non-accrual loans totaling $213,000 and $321,000 at December 31, 2006 and 2005, respectively. At December 31, 2006, there were four loans totaling $462,000 that were contractually past due 90 days or more as to principal or interest payments and still accruing. At December 31, 2005, there were no loans outstanding that were contractually 90 days or more and still accruing interest. The Company did not have any loans that would be defined as troubled debt restructuring at December 31, 2006 or 2005.
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 measured according to SFAS No. 114, “Accounting by Creditors for Impairment of a Loan”, and (2) a measure of collective loan impairment according to SFAS No. 5, “Accounting for Contingencies”. 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):
An 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 5-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. Commercial customers additionally have cash management, expanded on-line banking, lock box, 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 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.
In addition to deposits, another principal source of funds is loan repayments. If necessary, additional funding is available to the Banks by borrowing from the Federal Home Loan Bank (“FHLB”). Our FHLB lending capacity provides a line of credit up to 20% of total assets for the Bank of Florida - Southwest and Bank of Florida - Southeast and 10% of total assets for Bank of Florida - Tampa Bay. Bank of Florida - Southwest and Bank of Florida - Southeast also issued subordinated debt during 2005 to assist in their capital funding needs. See “Note-10 Deposits”, “Note 11-Subordinated Debt” 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, 2006, 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 have established primary correspondent relationships with the Independent Bankers’ Bank of Florida, Busey Bank, FSB Florida, Columbus Bank & Trust (a Synovus member bank), and The Bankers Bank (Georgia). At December 31, 2006, available lines of credit with correspondent banks amounted to $29,800,000.
EMPLOYEES
At December 31, 2006, the Company employed 200 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the Financial Accounting Standards Board (the “FASB”) issued Statement No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans (an amendment of FASB Statements No. 87, 88, 106, and 132R”, (“FAS 158”). FAS 158 requires an employer to: (a) recognize in its statement of financial position an asset for a plan’s overfunded status or a liability for a plan’s underfunded status; (b) measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year, and; (c) recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur as a component of comprehensive income. The requirement to recognize the funded status of a benefit plan and the disclosure requirements are effective for the Company’s financial statements as of December 31, 2006. There was no impact on the Company’s financial statements for December 31, 2006. The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for financial statements issued for fiscal years ending after December 15, 2008. Management believes this Statement will not have a material effect on the Company’s consolidated financial statements.
In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements”, (“FAS 157”). FAS 157 provides enhanced guidance for using fair value to measure assets and liabilities. The standard also responds to investors’ request for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurement on earnings and is applicable whenever other standards require (or permit) assets and liabilities to be measured at fair value. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those years. Early adoption is permitted. Management believes this statement will not have a material effect on the Company’s consolidated financial statements.
In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108 (“SAB 108”). SAB 108 expresses the SEC Staff’s views regarding the process of quantifying financial statement misstatements. SAB 108 state that in evaluating the materiality of financial statement misstatements a corporation must quantify the impact of correcting misstatements, including both the carryover and reversing effects of prior year misstatements, on the current year financial statements. SAB 108 is effective for the fiscal years ended after November 15, 2006. Under certain circumstances, prior year financial statements will not have to be restated and the effects of initially applying SAB 108 on prior years will be recorded as a cumulative effect adjustment to beginning Retained Earnings on January 1, 2006, with disclosure of the items included in the cumulative effect. The adoption of SAB 108 did not have a material impact on the Company’s consolidated results of operations and financial condition.
In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109”, (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This statement was effective January 1, 2007 and did not have a material effect on the Company’s financial statements.
In March 2006, the FASB issued Statement No. 156, “Accounting for Servicing of Financial Assets”, (“FAS 156”) which amends FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”. This Statement addresses the recognition and measurement of separately recognized servicing assets and liabilities, such as those common with mortgage securitization activities, and provides an approach to simplify efforts to obtain hedge-like accounting. It also clarifies when an obligation to service financial assets should be separately recognized as a servicing asset or servicing liability and requires that those separately recognized assets or liabilities be initially measured at fair value, if practicable. FAS 156 permits an entity to choose either the amortization method or the fair value method for subsequent measurement and also permits a servicer that uses derivative financial instruments to offset risks on servicing to report both the derivative financial instrument and related servicing asset or liability by using a consistent measurement attribute - fair value. This statement shall be effective for all separately recognized servicing assets and liabilities acquired or issued after January 1, 2007. This Statement did not have a material effect on the Company’s consolidated financial statements.
In February 2006, the FASB issued Statement No. 155, “Accounting for Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140.” This statement amends FASB Statements No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“FAS 133”), and No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (“FAS 140”). This Statement allows financial instruments that have embedded derivatives to be accounted for as a whole (eliminating the need to bifurcate the derivative from its host) if the holder elects to account for the whole instrument on a fair value basis. It also clarifies which interest-only strips and principal-only strips are not subject to the requirements of FAS 133; establishes a requirement to evaluate interests in securitized financial assets to identify interest that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and, amends FAS 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. This statement was effective for all financial instruments acquired or issued as of January 1, 2007. This Statement did not have a material effect on the Company’s consolidated financial statements.
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.
SUPERVISION AND REGULATION
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.
The 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:
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disclosure of all material off-balance sheet transactions and relationships that may have a material effect upon the financial status of an issuer; and
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the presentation of pro-forma financial information in a manner that is not misleading, and which is reconcilable with the financial condition of the issuer under generally accepted accounting principles.
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 under 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.
Transactions 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.
The 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, deposit interest rates, 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.
The Company’s capital levels are in excess of those required to be maintained by a “well capitalized” financial institution. However, rapid growth, poor loan portfolio performance, or poor earnings performance, or a combination of these factors, could change the Company’s capital position in a relatively short period of time, making an additional capital infusion necessary.
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.
ITEM 1A.
ITEM 1A. RISK FACTORS
Investing in our common stock involves risk. In addition to the other information set forth elsewhere in this Report, the following factors relating to us and our common stock should be carefully considered in deciding whether to invest in our common stock.
The Company has incurred cumulative losses since it commenced operations and may incur losses in the future.
Since the Company commenced operations on August 24, 1999, it has incurred an accumulated deficit as of December 31, 2006, of approximately $4.6 million. This deficit is primarily due to the costs of establishing its business strategy, which included opening Bank of Florida - Southwest, Bank of Florida Trust Company, Bank of Florida - Southeast, and Bank of Florida - Tampa Bay, and the continuing expansion of banking activities in its markets, as well as the impact of historically low interest rates and other factors. Bank of Florida Corporation may charter additional banks in the future. A newly formed bank 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 the new bank’s ability to control operating expenses and generate net interest income. There is a risk that losses at any new subsidiaries of Bancshares of Florida may exceed profits at its existing subsidiaries.
The Company may encounter unexpected financial and operating problems due to its rapid growth.
The Company has grown significantly since it opened its first bank subsidiary, Bank of Florida - Southwest, in 1999. Total assets have grown to approximately $883.1 million as of December 31, 2006, including approximately $105.5 million in connection with the Bristol Bank acquisition on August 25, 2006. This rapid growth may result in unexpected financial and operating problems, including problems in the loan portfolio due to its unseasoned nature, and turnover or rapid increases in members of management and staff, which may affect the value of the Company’s common stock. The recent addition of Bristol Bank in August 2006, Bank of Florida - Tampa Bay in November 2004, and the proposed Boca Raton-based de novo bank to replace the current branch office of Bank of Florida - Southeast, may add additional pressures to internal control systems, and financial and operating success will depend in large part on the success in integrating these operations. In addition, if loan and asset growth continues at its current pace, it may be difficult for the Company and its subsidiaries to retain their “well capitalized” designations with the Federal Deposit Insurance Corporation. If the Company or one of its subsidiary banks falls below being “well capitalized” to “adequately capitalized,” we may sell participations in some loans in order to decrease the amount of its assets. This could result in lower earnings due to retaining a lower level of earning assets.
Our growth strategy may not be successful
As a strategy, we have sought to increase the size of our franchise through rapid growth and by aggressively pursuing business development opportunities. We can provide no assurance that we will continue to be successful in increasing the volume of loans and deposits at acceptable risk levels and upon acceptable terms and expanding our asset base while managing the costs and implementation risks associated with this growth strategy. There can be no assurance that any further expansion will be profitable or that we will continue to be able to sustain our historical rate of growth, either through internal growth or through other successful expansions of our banking markets, or that we will be able to maintain capital sufficient to support our continued growth.
Losses from loan defaults may exceed the allowance we establish for that purpose, which will have an adverse effect on our business
If a significant number of loans are not repaid, it would have an adverse effect on our earnings and overall financial condition. Like all financial institutions, we maintain an allowance for loan losses to provide for losses inherent in the loan portfolio. The allowance for loan losses reflects our management’s best estimate of probable losses in the loan portfolio at the relevant balance sheet date. This evaluation is primarily based upon a review of our and the banking industry’s historical loan loss experience, known risks contained in the loan portfolio, composition and growth of the loan portfolio, and economic factors. However, the determination of an appropriate level of loan loss allowance is an inherently difficult process and is based on numerous assumptions. As a result, our allowance for loan losses may not be adequate to cover actual losses, and future provisions for loan losses may adversely affect our earnings.
If real estate values in our target markets decline, our loan portfolio would be impaired
A significant portion of our loan portfolio consists of mortgages secured by real estate located in the Collier/Lee County markets. We have also been generating a significant amount of real estate-secured loans in our Broward/Palm Beach County and Hillsborough County markets. Real estate values and real estate markets are generally affected by, among other things, changes in national, regional or local economic conditions; fluctuations in interest rates and the availability of loans to potential purchasers; changes in the tax laws and other governmental statutes, regulations and policies; and acts of nature. If real estate prices decline in any of these markets, the value of the real estate collateral securing our loans could be reduced. Such a reduction in the value of our collateral could increase the number of non-performing loans and adversely affect our financial performance.
If we lose key employees, our business may suffer
Our success is largely dependent on the personal contacts of our officers and employees in our market areas. If we lose key employees, temporarily or permanently, our business could be hurt. We could be particularly hurt if our key employees went to work for our competitors. Our future success depends on the continued contributions of our existing senior management personnel, including, but not limited to, our President and Chief Executive Officer Michael L. McMullan and the Presidents and Chief Executive Officers of our subsidiaries. We have entered into employment contracts with certain of our key executive officers which contain standard non-competition provisions to help alleviate some of this risk.
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 on the East and West Coasts of South Florida, as well as the Tampa Bay area of Florida. The banking business in these areas is extremely competitive, and the level of competition may increase further, which may limit our asset growth and profitability. Each of our subsidiary banks experiences competition in both lending and attracting funds from other banks, savings institutions, and non-bank financial institutions located within their market area, many of which are significantly larger institutions. Non-bank competitors competing for deposits and deposit type accounts include mortgage bankers and brokers, finance companies, credit unions, securities firms, money market funds, life insurance companies and the mutual funds industry. For loans, we encounter competition from other banks, savings associations, finance companies, mortgage bankers and brokers, insurance companies, small loan and credit card companies, credit unions, pension trusts and securities firms.
If adverse economic conditions in our target markets exist for a prolonged period, our financial results could be adversely affected
Our success will depend in large part on economic conditions in Southeast and Southwest Florida, as well as the Tampa Bay area. A prolonged economic downturn or recession in these markets could increase our nonperforming assets, which would result in operating losses, impaired liquidity and the erosion of capital. A variety of factors could cause such an economic dislocation or recession, including adverse developments in the industries in these areas such as tourism, or natural disasters such as hurricanes, floods or tornadoes, or additional terrorist activities such as those our country experienced in September 2001.
Bank of Florida Corporation and its subsidiaries operate in an environment highly regulated by state and federal government; changes in federal and state banking laws and regulations could have a negative impact on Bank of Florida Corporation’s business.
As a bank holding company, Bank of Florida Corporation is regulated primarily by the Federal Reserve Board. Our current subsidiaries are regulated primarily by the Florida Office of Financial Regulation and the Federal Deposit Insurance Corporation. Federal and various state laws and regulations govern numerous aspects of the banks’ operations, including:
•
Adequate capital and financial condition;
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Permissible types and amounts of extensions of credit and investments;
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Permissible non-banking activities; and
•
Restrictions on dividend payments.
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. Bank of Florida Corporation and its subsidiaries also undergo periodic examinations by one or more regulatory agencies. Following such examinations, Bank of Florida Corporation may be required, among other things, to change its asset valuations or the amounts of required loan loss allowances or to restrict its operations. Those actions would result from the banking regulators’ judgments, based on information available to them at the time of their examination.
Regulatory action could severely limit future expansion plans
To carry out some of our expansion plans, Bank of Florida Corporation is required to obtain permission from the Federal Reserve Board, the FDIC and the Florida Office of Financial Regulation. Applications for the formation of new banks and the acquisition of existing banks are submitted to the state and appropriate federal bank regulatory agencies for their approval. The future climate for regulatory approval is impossible to predict. Regulatory agencies could prohibit or otherwise significantly restrict the expansion plans of the Company, its current subsidiaries and future new start-up banks, which could limit our ability to increase revenue. Furthermore, recent amendments to anti-money laundering laws require the regulatory agencies to evaluate our compliance with such laws when processing certain applications for permission to engage in expansionary activities. In addition, the regulatory agencies have recently increased their monitoring of banks’ compliance with such laws. Therefore, if our anti-money laundering law compliance efforts are not successful, the increased oversight by our regulators in that area could hinder our ability to successfully pursue merger or other expansion activities.
Investors may face dilution resulting from the issuance of common stock in the future
The Company can issue common stock without shareholder approval, up to the number of authorized shares set forth in our Articles of Incorporation. Our Board of Directors may determine from time to time a need to obtain additional capital through the issuance of additional shares of common stock or other securities, subject to limitations imposed by Nasdaq and the Federal Reserve Board. There can be no assurance that such shares can be issued at prices or on terms better than or equal to the terms obtained by our current shareholders. The issuance of any additional shares of common stock by us in the future may result in a reduction of the book value or market price, if any, of the then-outstanding common stock. Issuance of additional shares of common stock will reduce the proportionate ownership and voting power of our existing shareholders.
Shares of our preferred stock may be issued in the future which could materially adversely affect the rights of the holders of our common stock
Pursuant to our Articles of Incorporation, we have the authority to issue additional series of preferred stock and to determine the designations, preferences, rights and qualifications or restrictions of those shares without any further vote or action of the shareholders. The rights of the holders of our common stock will be subject to, and may be materially adversely affected by, the rights of the holders of any preferred stock that may be issued by us in the future.
Our common stock is not an insured bank deposit and is subject to market risk
Our shares of common stock are not deposits, savings accounts or other obligations of us, our subsidiaries or any other depository institution, are not guaranteed by us or any other entity, and are not insured by the Federal Deposit Insurance Corporation or any other governmental agency.
We may need additional capital in the future and this capital may not be available when needed or at all
We may need to incur additional debt or equity financing in the near future to fund future growth and meet our capital needs. We cannot assure you that such financing will be available to us on acceptable terms or at all. If we are unable to obtain future financing, we may not have the resources available to fund our planned growth.
Future sales of our common stock could depress the price of the common stock
Sales of a substantial number of shares of our common stock 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 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 earnings to finance operations and the expansion of our business. Therefore, any gains from your investment in our common stock must come from an increase in its market price.
In addition, 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. Payment of dividends by our subsidiaries may be prohibited by certain regulatory restrictions.
There are substantial regulatory limitations on ownership of our common stock and changes of control
With certain limited exceptions, federal regulations prohibit a person or company or a group of persons deemed to be “acting in concert” from, directly or indirectly, acquiring 10% or more (5% if the acquiror is a bank holding company) of any class of our voting stock or obtaining the ability to control in any manner the election of a majority of our directors or otherwise direct our management or our policies without prior notice or application to and the approval of the Federal Reserve Board.
Although publicly traded, our common stock has substantially less liquidity than the average trading market for a stock quoted on the Nasdaq Global Market, and our price may fluctuate in the future
Although our common stock is listed for trading on the Nasdaq Global Market, the trading market in our common stock has substantially less liquidity than the average trading market for companies quoted on the Nasdaq National Market. The average daily trading volume of Bank of Florida Corporation common stock in 2006 was 20,199 shares. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of our common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control. 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 future could adversely affect the price of our common stock, and the current market price may not be indicative of future market prices.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2. PROPERTIES
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 12,324 square feet, from Citizens Reserve, LLC. The first floor houses a banking center with a Board Room, dining room, conference rooms, a drive-through, and ATM/night deposit access. Private banking offices and a conference room are also located on the ground floor. Bank of Florida Corporation leases 8,246 square feet on the second floor, with offices and work areas for finance, advertising, executive offices, and holding company administrative personnel. The Company leased the third floor of this facility in 2006 to allow for expansion of corporate offices. These leases expire in 2012 with options for two five-year renewals at then market rates. The monthly lease payment as of December 2006 was $92,000.
Bank of Florida Corporation also leases space for its Customer Service Operations (“CSO”) center, including temporary quarters for Executive management, located at 3364 Woods Edge Circle, Bonita Springs, FL 34134. The lease is for a three year period ending in 2007 with an option for two one-year renewals at then market rates. The monthly lease payment as of December 31, 2006 is $16,000.
Bank of Florida - Southwest’s former main office at 3401 Tamiami Trail North, Naples, Florida, now serves as a full-service branch office. This branch office, which is owned by Bank of Florida - Southwest, is contained in a two-story modern office building located on approximately one acre of land. The bank also has leased a facility in 2006 at 23471 Walden Center, Bonita Springs, Florida, which now serves as the Banks’ third full-service branch office. The monthly lease payment for the Bonita Springs location as of December 31, 2006 is $17,000.
Bank of Florida - Southeast operates in approximately 8,100 square feet of first floor space of the Corporate Center office building located at 110 East Broward Boulevard, in downtown Fort Lauderdale. This space is sub-leased from Wachovia Bank, N.A. The space includes executive offices, a conference room, and full service branch facilities. The site does not have drive-in facilities, but does contain an ATM facility. The lease is for eight years with options for two five-year renewals at then market rates. The monthly lease payment as of December 2006 is $23,000. In addition, the Bank leased office space located at 5200 N. Federal Highway, Suite 1 in Ft. Lauderdale to operate as a branch office in the second half of 2004. The monthly lease payment for this facility as of December 2006 is $2,900. Beginning in 2006, another full-service branch was opened in Aventura, Florida. As of December 31, 2006 the monthly lease payment for the Aventura location was $8,200.
Bank of Florida - Southeast has also leased office space in Palm Beach County, located at 595 South Federal Highway, in downtown Boca Raton. 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-thru lanes for banking purposes, 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 2006 is $38,000.
In connection with the acquisition of Bristol Bank in 2006, Bank of Florida - Southeast now operates a fifth-full service branch in Coral Gables, Florida. This facility was leased in 1998 for a three and one-half years term with options for two five-year renewals at then market rates. The monthly lease payment as of December 2006 was $11,000.
Bank of Florida - Tampa Bay leases office space located in the Harbour Island area of downtown Tampa at 777 South Harbour Island Boulevard. The space consists of 2,718 square feet on the ground floor lobby which is operated as the main branch and banking facility. Additional space is located on the ninth floor and serves as the corporate and lending offices of the bank. The monthly lease payment as of December 31, 2006 is $24,000. During 2006, additional space was leased in Winter Park, Florida to serve as a lending production office (“LPO”) for Bank of Florida - Tampa Bay. The lease for the LPO is for a term of three years with a monthly lease payment, as of December 31, 2006, of $5,500. Bank of Florida - Tampa Bay has subleased space located on the first and ninth floors of the downtown Tampa facility, including space to Medi-Weight Loss Clinics, of which Edward Kaloust, a director of Bank of Florida Corporation is a managing member. See “Note 15-Related Party Transactions” of the Notes To Consolidated Financial Statements” for further information.
Bank of Florida Trust Company maintains offices and personnel at each of the Banks’ main offices, and also meets with prospective clients at Bank of Florida - Southwest’s Tamiami Trail North branch office.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
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.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 20, 2006, the Company held a special meeting of shareholders. At the special meeting, the Company received shareholder approval to change its name to Bank of Florida Corporation with 5,927,559 shares voting in favor of the name change, 28,600 shares voting against, and 6,400 share abstaining. Also at the special meeting, Company shareholders approved the issuance of Bank of Florida Corporation common stock in connection with the pending acquisition of Old Florida Bankshares, Inc. with 5,927,127 shares voting in favor of the issuance, 73,832 shares voting against, and 6,600 shares abstaining.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company’s Common Stock was held by approximately 1,390 holders registered or in street name as of December 31, 2006. 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 southeastern banks and bank holding companies; and (ii) the Russell 3000 Index, which pertains to listed companies representing 98% of the U.S. market for the period from February 11, 2003 (the date of our initial public offering) to December 31, 2006, inclusive. The graph assumes an initial investment of $100 on February 11, 2003.
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 on page 13 under the heading “Dividends” in the section on Supervision and Regulation.
See “Note 3-Stock-Based Compensation” of the Notes To Consolidated Financial Statements” for information on stock options and warrants outstanding.
ITEM 6.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Efficiency ratio = Noninterest expense divided by the total of net interest income before provision for loan losses plus noninterest income (excluding net securities gains and losses).
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Bank of Florida Corporation is a multi-bank holding company with $883.1 million in assets as of December 31, 2006 and was incorporated in Florida in September 1998. Our subsidiary banks are separately chartered independent 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.
Our corporate vision is to be recognized as a premier financial services company in our markets, while maintaining a well-controlled environment. Our primary strategy to achieve this vision is to focus on core deposit growth with state-of-the-art products and services and to focus lending on commercial real estate properties in the $1 million to $10 million size range.
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. 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 collectibility 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 measured according to SFAS No. 114, “Accounting by Creditors for Impairment of a Loan” , and (2) a measure of collective loan impairment according to SFAS No. 5, “Accounting for Contingencies”. 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. 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 experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Larger impaired credits that are measured according to SFAS No. 114 have been defined to include loans which are classified as doubtful, substandard or special mention risk grades where the borrower relationship is greater than $250,000. 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 made outside the scope of SFAS No. 114 are measured according to SFAS No. 5 and include commercial and commercial real estate loans that are performing or have not been specifically identified under SFAS No. 114, and large groups of smaller balance homogeneous loans evaluated based on regulatory guidelines and historical peer bank loss experience which are 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 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, 2006 Compared to
Year Ended December 31, 2005
FINANCIAL CONDITION
The Company’s balance sheet continued to grow in 2006 with a strong emphasis on credit quality and loan growth, reaching $883.1 million in total assets, up $313.3 million or 55.0% over the prior year end. Total earning assets, which the Company defines as any asset that earns interest, climbed $300.4 million or 55.8% to $838.6 million. This compares with $149.0 million or 35.4% growth in 2005. Bank of Florida - Southwest contributed $74.8 million of this growth, reaching $378.9 million, while Bank of Florida-Southeast contributed $182.1 million, including the acquisition of Bristol Bank, for a total of $396.2 million in assets. Bank of Florida-Tampa Bay, which has been opened for slightly over two years, contributed $56.4 million for a total of $124.9 million in total assets.
Investment Securities and Overnight Investments
Total investment securities and federal funds sold were $48.2 million at December 31, 2006, an increase of $846,000 over the levels at December 31, 2005. Securities available for sale totaled $41.7 million, an increase of $23.1 million compared to those held at December 31, 2005. The purchase of additional securities during the third quarter of this year was part of an asset and liability strategy to position the balance sheet for volatility in interest rates. The Company holds one bond for $25,000 that was classified as held to maturity at December 31, 2006 and 2005, respectively. The Company does not currently engage in trading activities and, therefore, did not hold any securities classified as trading at December 31, 2006 and 2005.
Federal Funds sold totaled $6.5 million at December 31, 2006, a decrease of $22.3 million from December 31, 2005. 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. The average yield on federal funds for 2006 was 5.06%, up 196 basis points compared to that earned for 2005.
Loan Portfolio
Total gross loans outstanding (including loans held for sale) were $783.6 million at December 31, 2006. Loans climbed $296.9 million or 61.0% for the year. Excluding the Bristol acquisition, loans increased $236.2 million or 48.5%. Bank of Florida - Southwest accounted for $67.0 million (25.3%) of the increase. Bank of Florida - Southeast, excluding the Bristol transaction, accounted for $106.3 million (63.6%) and Bank of Florida - Tampa Bay contributed the remaining $62.9 million (114.7%).
Real estate construction loans increased $162.4 million to $303.9 million (38.8% of total loans) at December 31, 2006, while commercial loans secured by real estate increased $61.9 million to $241.9 million (30.8% of total loans). Making up the rest of the loan portfolio were multi-family and residential loans at $120.9 million (15.4% of total loans), up $29.5 million from the end of 2005, followed by commercial business loans at $66.1 million (8.4% of total loans), consumer lines of credit at $39.1 million (5.0% of total loans) and other consumer loans at $12.8million (1.6% of total loans).
Asset Quality
The Company’s asset quality continues to be strong, with nonperforming loans (nonaccruals and 90+ days past due) totaling $675,000 at December 31, 2006. Of that amount, $450,000 were attributable to two loans acquired in the Bristol Bank transaction. Consequently, nonperformers as a percent of loans outstanding increased from 0.07% at December 31, 2005, to 0.09% as of December 31, 2006. Thirty-to-ninety day delinquent loans were $1.7 million or 0.21% of loans outstanding at December 31st. There were $192,000 in net charge-offs during 2006, resulting in net charge-offs to average loans of 0.03% level with that for 2005.
Deposits
Total deposits increased $196.1 million or 39.6% in 2006 to end the year at $691.2 million. Deposit growth in the Bank of Florida - Southwest comprised $48.9 million of this increase, up 18.0% to $319.2 million in deposits at December 31, 2006, while deposits at Bank of Florida - Southeast climbed $125.3 million (including $74.6 million acquired from Bristol) or 66.6% to $313.3 million. Bank of Florida - Tampa Bay ended the year with $100.7 million in deposits, up $40.7 million or 67.8%.
Deposit growth consisted primarily of increases in money market deposits (up $117.1 million), certificates of deposit (up $77.1 million) and demand deposit (DDA) and low-cost NOW accounts (up $3.0 million). As of year end 2006, these accounts comprised 40.4%, 39.2%, and 19.8/%, respectively, of total deposits.
The average rate paid on total interest bearing deposits 2006 was 3.95%, an increase of 138 basis points compared to 2005. The increase resulted primarily from the higher interest rate environment under which we currently operate and in competition in the pricing of deposit products.
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. At December 31, 2006, borrowings totaled $53.5 million, an increase of $39.5 million compared to December 31, 2005. Total borrowings at December 31, 2006, consisted of $11.0 million in subordinated debt and $42.5 million in Federal Home Loan Bank (“FHLB”) Advances compared to $11.0 million and $3.0 million, respectively, at the end of 2005. During 2006, the Company took down $25.0 million in floating rate FHLB advances with an interest rate floor contract and purchased mortgage-backed securities, as a partial hedge against the potential future impact of falling interest rates. Additionally, there were $8.5 million in FHLB Advances obtained through the Bristol Bank acquisition.
See “Note 11-Subordinated Debt” and “Note 12-Federal Home Loan Bank Advances” of the “Notes to Consolidated Financial Statements” for further information.
Aggregate 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”, Note 12-Federal Home Loan Bank Advances” and “Note 13-Commitments and Contingencies” of the “Notes to Consolidated Financial Statements”.
RESULTS OF OPERATIONS
The Company’s net income for 2006 was $2.3 million or $0.29 per diluted share, $2.6 million less than in 2005 due to the $3.7 million income tax benefit from reversing the valuation allowance on its deferred tax assets at December 31, 2005. Pretax net income climbed $2.8 million to $3.9 million, 2.4 times 2005’s results. The primary factors explaining the improvement was a $12.9 million or 57.8% increase in top-line revenue, which the Company defines as net interest income plus noninterest income (excluding net securities gains/losses).
Net Interest Income
Net interest income increased $12.0 million or 62.5% in 2006 to $31.1 million. Net interest spread, the difference between the yield on interest-earning assets and the rate paid on interest-bearing liabilities, was 3.59% on average in 2006, only slightly above that of the prior year, while, the net interest margin, which is net interest income divided by average interest-earning assets, averaged 4.48% in 2006, a 37 basis points increase over 2005. This improvement was primarily the result of a $15.5 million increase in average outstanding noninterest-bearing deposits.
Interest income increased $23.8 million or 83.7% to $52.3 million in 2006, reflective of continued strong loan growth coupled with the impact of a 142 basis point increase in the average yield earned on interest earning assets. Total average interest-earning assets increased $228.7 million during the year that resulted in $17.8 million of the increase in interest income while the average yield on interest-earning assets increased to 7.54%, accounting for the remainder of the improvement. Approximately 80% of loans outstanding are floating rate loans.
Interest expense totaled $21.2 million in 2006, an increase of $11.9 million or 127.0%. The overall cost on interest-bearing liabilities was 3.95% compared to 2.57% one year ago. Noninterest-bearing deposits averaged $90.3 million for 2006 compared to $74.8 million last year. Money market rates were 149 basis points higher on average, while the average cost of certificates of deposit increased 122 basis points. During the year, the Company increased its use of FHLB advances as an alternative funding source. The average outstanding amount of FHLB advances for 2006 were $23.6 million at an average cost of 5.44% compared to $1.9 million at a cost of 4.25% for 2005.
The 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)
Tax-exempt income, to the extent included in the amounts above, is not reflected on a tax equivalent basis.
For purpose of this analysis, non-accruing loans, if any, are included in the average balances.
Noninterest Income
Noninterest income climbed $983,000 or 30.2% over 2005, primarily due to increases in trust fees of $1.0 million (up 67.5%), and, to a lesser extent, mortgage banking fees of $110,000 (up 33.1%). The increase in fee income earned by the Trust Company, which totaled $2.6 million in 2006, was primarily the result of growth in the average outstanding of assets under advice during the year. The improvement in fees from the origination and sale of mortgages in the secondary market from the prior year were attributable to $87.7 million in residential loan production during 2006.
Noninterest Expenses
Noninterest expenses rose $9.2 million or 47.8% over 2005, $3.7 million less than the increase in top-line revenue, indicating positive operating leverage. Consequently, the efficiency ratio decreased over 5 percentage points to 80.9% on average for the year. Approximately 9.2% or $848,000 of this increase in Noninterest expenses, represents the addition of the former Bristol Bank expenses, which have been significantly reduced from pre-acquisition levels, and branch expansion in Miami-Dade county beginning in August 2006. There are now 19 individuals assigned to this new market. The bulk of the balance of the increase ($8.3 million) is comprised of higher personnel expense ($5.3 million or 50.2%), reflecting 31 net additions to staff, management reorganization expense, and higher benefit costs.
Increased costs in other areas, excluding those in the Miami-Dade market, include additional occupancy and equipment expense ($1.2 million or 28.9%), related to Pinellas county expansion, a facility in Orlando used for mortgage origination for a short time, and additional parent company headquarters space; higher data processing expense ($532,000 or 39.5%), driven by upgrade of the Company’s management information and customer cash management systems; and higher seminar, travel, and entertainment expense ($376,000 or 96.4%), including costs related to the May 2006 2.875 million-share equity capital raise. These costs were partially offset by savings in professional fees, including external auditor expense following the initial-year costs of compliance with the Sarbanes-Oxley Act (a $372,000 reduction or 34.4%).
Asset Quality and Provision for Loan Losses
Asset quality continued to be strong in 2006, with nonperforming loans (90+ days past due and non-accruals) at $675,000, or 0.09% of loans outstanding. The ratio of net charge-offs to average loans for 2006 remained at 0.03%. The Company’s asset quality can be further measured by strong coverage of the loan loss allowance to nonperforming loans (11.6 times). These measures are consistent with the Company’s historic norm and very favorable to national peer bank levels.
The provision for loan losses rose $933,000 or 49.0%, as a result of a 60.7% growth in loans. The allowance for loan losses, which is established through a charge to provision expense as losses are estimated, totaled $7.8 million or 1.0% of loans outstanding at December 31, 2005. In comparison, the allowance for loan losses totaled $4.6 million or 0.94% of loans outstanding at December 31, 2005. Actual loan losses are charged against the allowance when management believes the collectibility of a loan balance is unlikely. Subsequent recoveries, if any, are credited to the allowance. The Company recorded net charge-offs during 2006 of $192,000, compared to $117,000 in 2005.
Quarterly Operating Results
The following table presents condensed information relating to quarterly periods in the years ended December 31, 2006 and 2005 (In Thousands, except per share data).
Year Ended December 31, 2005 Compared to
Year Ended December 31, 2004
FINANCIAL CONDITION
The Company’s growth continued to be very strong in 2005, up $149.0 million in total assets or 35.4% over the last twelve months to $569.8 million. This compares with $198 million or 89% growth in 2004. Bank of Florida - Southwest contributed $57.3 million of this growth, reaching $304.2 million, while Bank of Florida, Ft. Lauderdale contributed $66.7 million for a total of $211.5 million in assets. Bank of Florida - Tampa Bay, which opened in early November 2004, contributed $31.1 million for a total of $68.5 million in total assets.
Loan Portfolio
Total gross loans outstanding (including loans held for sale) were $487.6 million as of year-end 2005, an increase of $161.6 million or 49.6% over the prior year. Bank of Florida - Southwest accounted for $54.8 million (33.9%) of the increase. Bank of Florida, Ft. Lauderdale accounted for $64.0 million (39.6%) and Bank of Florida - Tampa Bay contributed the remaining $42.8 million (26.5%). Loan pipelines at all the bank affiliates remain strong.
Commercial loans, largely secured by real estate, totaled $358.4 million (74% of total loans) at December 31, 2005, up $185.4 million or 107% from a year earlier of which $51.0 million was in construction lending. Making up the rest of the loan portfolio were multi-family and residential loans at $91.4 million (19% of total loans), up $15.3 million from the end of 2004, followed by consumer lines of credit at $26.4 million (5% of total loans) and other consumer loans at $11.4 million (2% of total loans).
Despite the rapid growth in our loan portfolio, asset quality continues to be strong, with nonperforming loans totaling $321,000 or 0.07% of loans outstanding compared to $586,000 or 0.18% of loans outstanding at year-end 2004.
Deposits
Total deposits increased $119.0 million or 31.6% in 2005 to end the year at $495.1 million. Deposit growth in the Bank of Florida - Southwest comprised $45.0 million of this increase, up 20.0% to $270.3 million in deposits at December 31, 2005, while deposits at Bank of Florida, Ft. Lauderdale climbed $54.3 million or 40.6% to $188.0 million. Bank of Florida - Tampa Bay ended the year with $60.0 million in deposits, up $34.5 million or 135.1% .
Deposit growth consisted primarily of increases in demand deposit (DDA) and low-cost NOW accounts (up $39.1 million), money market deposits (up $55.0 million), and certificates of deposit (up $24.9 million). As of year end 2005, these accounts comprised 27.0%, 32.8%, and 39.1%, respectively, of total deposits. Growth in noninterest-bearing DDA accounts totaled $22.7 million or 37.2% during the year, bringing these deposit balances to 16.9% of total deposits, reflective of the Company’s focus to grow this source of funds through expanded services.
The Company’s core deposits, using the industry definition which excludes national market CDs and time deposits of $100,000 or more, ended 2005 at $351.7 million, an increase of $107.7 million or 44.1% from one year earlier. National market CDs were 11.9% of total deposits at December 31, 2005 versus 15.4% a year earlier. Time deposits of $100,000 or more, including national market CDs, were 29.0% of total deposits at the end of 2005, somewhat higher than peer groups primarily due to the Banks depositor base being generally larger commercial or private banking customers with typically higher balances. As such, the Company considers these deposits to be as reliable as core deposits under $100,000.
Subordinated Debt
On October 7, 2005, Bank of Florida, Ft. Lauderdale issued $3.0 million in subordinated debt with a maturity of December 15, 2015. Interest is payable quarterly in arrears, commencing December 15, 2005, at a rate of 1.9% over the quarterly adjustable three-month LIBOR rate. The interest rate at December 31, 2005 was 6.39%. Upon the occurrence and continuation of a Tax Event (a “Special Event”), Bank of Florida may prepay the debt at its option (and with the approval of its regulators, if necessary), in whole or in part, without penalty, at par through December 15, 2010. After that date, Bank of Florida may prepay the debt at its option (and with the approval of its regulators, if necessary), in whole or in part, without penalty, at par, irrespective of the occurrence of a “Special Event”.
On September 30, 2005, Bank of Florida, Ft. Lauderdale issued $3.0 million in subordinated debt with a maturity of December 15, 2011. Interest is payable quarterly in arrears, commencing December 15, 2005, at a rate of two and one-half percent over the quarterly adjustable three-month LIBOR rate. The interest rate at December 31, 2005 was 6.99%. Bank of Florida may prepay the debt at its option (and with the approval of its regulators, if necessary), in whole or in part, without penalty, at par after December 15, 2006.
On August 5, 2005, Bank of Florida - Southwest issued $5.0 million in junior subordinated debt with a maturity of October 7, 2015. Interest is payable quarterly in arrears, commencing October 7, 2005, at a rate of two percent over the quarterly adjustable three-month LIBOR rate. The interest rate at December 31, 2005 was 6.15%. Upon the occurrence and continuation of a Tax Event (a “Special Event”), Bank of Florida - Southwest may prepay the debt at its option (and with the approval of its regulators, if necessary) in whole at a redemption price of 105% of par plus accrued interest during the first five years. The Bank will also have the right to repay this debt security at par, anytime on or after October 7, 2010.
The funds received from the debt issued by Bank of Florida - Southwest were used, in part, to repay $2 million in subordinated debt issued by the Bank in June 2004 to a local community bank. Interest was payable at a rate of Prime less one percent during the first sixty days, Prime plus zero percent for the next sixty days, and Prime plus one percent thereafter. This debenture was redeemable by us at our option, without penalty. Bank of Florida - Southwest repaid the subordinated debt plus accrued interest on August 8, 2005.
The subordinated debt issued qualifies as Tier II capital for regulatory risk-based capital guidelines for the issuing affiliated Bank and for the Company.
RESULTS OF OPERATIONS
The Company’s net income for 2005, including significant items, was $4.9 million or $0.79 per diluted share. The Company reversed the valuation allowance on its deferred tax assets at December 31, 2005, resulting in a $3.7 million income tax benefit. This action was taken following the culmination of three profitable quarters in 2005 and management’s completion of projections for 2006. As a result, the Company determined that it is more likely than not that the deferred tax assets will be realized and, therefore, the valuation allowance was reversed. Before considering the impact of reversing the valuation allowance, pretax net income for 2005 was $1.2 million or $0.15 per diluted share, a $4.0 million or $0.96 per share positive swing from the net loss in 2004.
Top-line revenue climbed $10.4 million, or 87%, on $179 million growth in average earning assets and a 93% or $188 million increase in assets under advice. The Company considers “top-line revenue” to be useful in explaining financial performance, as it combines both the Company’s lending or spread income business (interest income less interest expense) and its fee income business, both of which often pertain to the same customer base and can be matched against the underlying noninterest expense to generate those revenue components. Top-line revenue equals net interest income before provision for loan losses plus noninterest income, exclusive of gain/loss on sale of investment securities. Approximately $9.3 million of the increase in top-line revenue reflects growth in net interest income, of which $1.9 million or 20% was due to a 69 basis point expansion in net interest margin.
Net Interest Income
Net interest income increased $9.3 million or 95% in 2005 to $19.1 million. Net interest spread, the difference between the yield on interest-earning assets and the rate paid on interest-bearing liabilities, was 3.55% on average in 2005, a improvement of 52 basis points over the prior year. In addition, the net interest margin, which is net interest income divided by average interest-earning assets, averaged 4.11% in 2005, a 69 basis points increase over 2004.
Interest income increased $13.7 million or 93% to $28.5 million in 2005, reflective of continued strong loan growth coupled with the impact of a two hundred basis point increase in the prime rate since the end of 2004. Total average interest-earning assets increased $178.3 million during the year that resulted in $10.5 million of the increase in interest income while the average yield on interest-earning assets increased 98 basis points, accounting for the remainder of the improvement. Approximately 49% of loans outstanding immediately adjust to a prime rate change.
Interest expense totaled $9.3 million in 2005, an increase of $4.4 million or 88%. The overall cost on interest-bearing liabilities was 2.57% compared to 2.12% one year ago. Because of the maturity structure of the CDs and the Company’s ability to attract noninterest-bearing deposits during the year, the overall cost of interest-bearing liabilities increased by 45 basis points compared to the 98 basis points increase in average loan yield during the same period as noted above. Noninterest-bearing deposits averaged $74.8 million for 2005, a $33.5 million increase over 2004 levels. Money market rates were 79 basis points higher on average, while the average cost of certificates of deposit increased 56 basis points. The Company’s cost of funds began to rise coincident with the prime rate increases that started in July 2004.
Noninterest Income
Noninterest income (excluding securities transactions) climbed $1.1 million or 50% over 2004, primarily due to increases in service charges and fees of $513,000 (up 59%), trust fees of $483,000 (up 45%), and mortgage banking fees of $91,000 (up 38%). Growth in demand deposit accounts contributed to the increase in service charges and fees on deposit accounts, which totaled $1.4 million for the year. The increase in fee income earned by the Trust Company, which totaled $1.5 million in 2005, was primarily the result of 93% growth in assets under advice. The improvement in fees from the origination and sale of mortgages in the secondary market from the prior year were attributable to $81.0 million in residential loan production during 2005.
The 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)
Tax-exempt income, to the extent included in the amounts above, is not reflected on a tax equivalent basis.
For purpose of this analysis, non-accruing loans, if any, are included in the average balances.
Noninterest Expenses
Noninterest expenses rose $5.8 million or 42% over 2004, of which approximately $2.5 million reflects the incremental cost of a full year of operation in the new Palm Beach County and Tampa Bay locations. Excluding the absence of the $312,000 acquisition write-off in third quarter 2004, the remaining increase in noninterest expense was the result of additional staffing and expenses related to supporting the $149.0 million year-over-year growth in the balance sheet. More specifically, total personnel expense for the year was up $3.8 million or 57%, representing two thirds of the total increase in noninterest expense. The remaining increases were in occupancy expense (up $684,000 or 31%); equipment, depreciation, and maintenance (up $413,000 or 51%); and general operating (up $854,000 or 22%), all indicative of a fast growth company. Despite the increase in expenses, the Company’s efficiency ratio improved 27 basis points to 86% in 2005 from 113% for the previous year.
Asset Quality and Provision for Loan Losses
Asset quality continued to be strong in 2005, with nonperforming loans (90+ days past due and non-accruals) at $321,000, or 0.07% of loans outstanding. In comparison, nonperforming loans totaled $586,000 or 0.18% of loans outstanding at year-end 2004. The ratio of net charge-offs to average loans for 2005 was 0.03% compared to 0.01% for 2004. The Company’s asset quality can be further measured by strong coverage of the loan loss allowance to nonperforming loans (14.4 times) and minimal past due loans (30 - 89 days were 0.09% of loans outstanding). These measures are consistent with the Company’s historic norm and very favorable to national peer bank levels as of September 30, 2005.
The allowance for loan losses, which is established through a charge to provision expense as losses are estimated, totaled $4.6 million or 0.94% of loans outstanding at December 31, 2005. In comparison, the allowance for loan losses totaled $2.8 million or 0.86% of loans outstanding at December 31, 2004. Actual loan losses are charged against the allowance when management believes the collectibility of a loan balance is unlikely. Subsequent recoveries, if any, are credited to the allowance. The Company recorded net charge-offs during 2005 of $117,000, compared to $30,000 in 2004. The loan loss provision was $1.9 million in 2005, 49% higher than the provision in 2004, largely because of strong loan growth, over 50%, during the year.
CAPITAL RESOURCES AND LIQUIDITY
Management of the Company has developed a strategic initiative that provides for the expansion of its banking operations into new primary service areas, as well as continued expansion of its market share in its existing market. As of December 31, 2006, there were no material commitments for capital expenditures, though such expenditures may be incurred in 2007 related to utilization of additional space at the Company’s headquarters location in Naples.
While it is anticipated that interest income will increase commensurate with interest expense upon the attraction of deposits, non-interest expenses will generally be disproportionately higher until such time as the volume of deposits and interest-earning assets generate net interest income and service fees sufficient to cover these costs. Management’s philosophy in each instance of expansion is to attract deposit relationships through the offering of competitive rates, terms and service.
As it is the Company’s philosophy to consider the investment portfolio principally as a source of liquidity, deposit growth, except to the extent necessary to maintain such liquidity, is generally utilized to fund the higher yielding loan portfolio, particularly commercial and, to a lesser degree, consumer mortgage lending. In addition, it is management’s practice to maintain the Company’s well-capitalized status in compliance with regulatory guidelines when planning its expansion activities.
Consistent with the objective of operating a sound financial organization, the Company maintains high capital ratios. Regulatory agencies including the State of Florida Department of Financial Services, the FDIC and the Federal Reserve System have approved guidelines for a risk-based capital framework that makes capital requirements more sensitive to the risks germane to each individual institution. The guidelines require that total capital of 8% be held against total risk-adjusted assets. At December 31, 2006, the Company’s Tier 1 risk-based capital ratio was 13.97 %, total risk-based capital ratio was 16.19%, and the Tier 1 leverage ratio was 13.95%.
The Company’s ability to satisfy demands for credit, deposit withdrawals and other corporate needs depends on its level of liquidity. The Company utilizes several means to manage its liquidity. One of the tools that the Company uses to measure liquidity is a comparison of total liquid assets (cash, due from banks, federal funds sold,
and other investments) to total deposits, calculating it on a daily basis and reviewing it monthly with the subsidiary bank management and board of director Asset/Liability Management Committees (ALCO). As of December 31, 2006, consolidated Company liquid assets were $45.5 million or 6.7% of consolidated deposits. It is the policy of the Banks to manage the latter ratio between 5% and 15%. Traditionally, increases in deposits are sufficient to provide adequate levels of liquidity; however, if needed, the Company has approved extensions of credit available from correspondent banks amounting to $29.8 million, sources for loan sales, and primarily short-term investments that could be liquidated if necessary. In addition, the Company’s banking subsidiaries are members of the Federal Home Loan Bank and, subject to certain collateral verification requirements, Bank of Florida - Southwest, Bank of Florida - Southeast and Bank of Florida - Tampa Bay may borrow up to 20%, 10%+ and 10%, respectively, of their outstanding assets.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss due to adverse changes in market prices and rates. The Companys’ market risk arises primarily from interest-rate risk inherent in its lending and deposit gathering activities. The measure of market risk associated with financial instruments is meaningful only when all related and offsetting on and off balance sheet transactions are aggregated, and the resulting net positions are identified.
The Company does not currently engage in trading or hedging activities and has not invested in interest-rate derivatives or entered into interest rate swaps. However, in support of its asset-liability management process the Company may implement derivatives hedging strategies in the future with the intent of reducing interest rate risk. Bank of Florida Corporation’s primary objective in managing interest-rate risk is to minimize the adverse impact of changes in interest rates on the Company’s net interest income and capital, while adjusting its asset-liability structure to obtain the maximum yield-cost spread on that structure. Disclosures about the fair value of financial instruments, which reflects changes in market prices and rates, can be found in “Note 19 - Fair Values of Financial Instruments” in the “Notes to Consolidated Financial Statements”.
ASSET/LIABILITY MANAGEMENT
It is the objective of the Company to manage assets and liabilities to provide a satisfactory, consistent level of profitability within the framework of established cash, loan, investment, borrowing and capital policies. Certain of the officers of the Banks are responsible for monitoring policies and procedures that are designed to ensure acceptable composition of the asset/liability mix, stability and leverage of all sources of funds while adhering to prudent banking practices. It is the overall philosophy of management to support asset growth primarily through growth of core deposits, which include deposits of all categories made by individuals, partnerships and corporations. Management of the Company seeks to invest the largest portion of its assets in commercial, consumer and real estate loans.
The asset/liability mix is monitored on a monthly basis and a monthly report reflecting interest-sensitive assets and interest-sensitive liabilities is prepared and presented to the respective Banks’ Boards of Directors. The objective of this policy is to control interest-sensitive assets and liabilities to minimize the impact of substantial movements in interest rates on the Banks’ earnings.
INTEREST SENSITIVITY
The objective of interest sensitivity management is to minimize the risk associated with the effect of interest rate changes on net interest margins while maintaining net interest income at acceptable levels. Managing this risk involves monthly monitoring of the interest sensitive assets relative to interest sensitive liabilities over specific time intervals. All assets and liabilities are evaluated as maturing at the earlier of re-pricing date or contractual maturity date. While liabilities without specific terms such as money market, NOW and savings accounts are generally considered core deposits for liquidity purposes, 65% are deemed to re-price for purposes of interest rate sensitivity analysis within the first twelve months. Management subjectively sets rates on all accounts.
The principal measure of our exposure to interest rate risk is the difference between interest sensitive assets and liabilities for the periods being measured, commonly referred to as “gap” for such period. A positive gap position represents a greater amount of interest sensitive assets re-pricing (or maturing). Thus, an increase in rates would positively impact net interest income, as the yield on interest-earning assets would increase prior to the increase in the cost of interest bearing liabilities. Conversely, a negative gap position is indicative of a bank that has a greater amount of interest sensitive liabilities re-pricing (or maturing) than it does interest sensitive assets, in a
given time interval. In this instance, the impact on net interest income would be positive in a declining rate environment and negative if rates were rising. The impact on net interest income described above is general, as other factors would additionally maximize or minimize the effect. For example, a change in the prime interest rate could effect an immediate change to rates on prime related assets, whereas a liability which re-prices according to changes in Treasury rates might (1) lag in the timing of the change and (2) change rates in an amount less than the change in the prime interest rate. It is common to focus on the one year gap, which is the difference between the dollar amount of assets and the dollar amount of liabilities maturing or repricing within the next twelve months.
The following is a consolidated maturity and re-pricing analysis of rate sensitive assets and liabilities as of December 31, 2006 (In Thousands).
At December 31, 2006, the Company had $486.8 million in interest sensitive assets compared to $329.0 million in interest sensitive liabilities that will mature or re-price within a year, resulting in a positive gap position of $157.8 million (or 17.9%, expressed as a percentage of total assets). Management believes that the current balance sheet structure of interest sensitive assets and liabilities does not represent a material risk to earnings or liquidity in the event of a change in market rates.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Certain information required by this item is included in Item 6 of Part II of this report under the heading “Selected Quarterly Financial Data” and is incorporated by reference. All other information required by this item is included in Item 15 of Part IV of this report and is incorporated into this item by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Bank of Florida Corporation did not have any disagreements with accountants on accounting and financial disclosures during 2006.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Bank of Florida Corporation maintains controls and procedures designed to ensure that information required to be disclosed in the reports that Bank of Florida Corporation files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon management’s evaluation of those controls and procedures performed within the 90 days preceding the filing of this Report, the Chief Executive Officer and Chief Financial Officer of Bank of Florida Corporation concluded that, subject to the limitations noted below, Bank of Florida Corporation’s disclosure controls and procedures (as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934) are effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms.
(b) Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Such internal controls over financial reporting were designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006. In making this assessment, the Company used the criteria set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The Company acquired Bristol Bank on August 24, 2006, and excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006, Bristol’s internal control over financial reporting, with associated assets of $92.6 million and total revenue of $1.9 million generated by Bristol that was included in the Company’s consolidated financial statements as of and for the year ended December 31, 2006.
Based upon our evaluation under the framework in Internal Control-Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2006. Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006 has been audited by Hacker, Johnson & Smith PA, an independent registered public accounting firm, as stated in their report which is included herein.
(c) Changes in Internal Controls
Bank of Florida Corporation has made no significant changes in its internal controls over financial reporting during the quarter ended December 31, 2006 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
(d) Limitations on the Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Bank of Florida Corporation have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.
The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all
potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
The Company did not fail to file any Form 8-K or to disclose any information required to be disclosed therein during the fourth quarter of 2006.
PART III
ITEM 10.
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item appears in the Company’s Proxy Statement for the 2007 Annual Meeting of Shareholders under the caption, “Election of Directors”, “Non-Director Executive Officers”, “Report of the Audit Committee” and “Compliance with Section 16(a) of the Securities and Exchange Act of 1934”, and is hereby incorporated by reference.
Bank of Florida Corporation has adopted a Code of Ethics applicable to its Senior Financial Officers. This code is posted on our website at www.bankofflorida.com and a copy will be provided free of charge, upon request to Arlette Yassa, Corporate Secretary, 110 E. Broward Boulevard, Suite 100, Ft. Lauderdale, Florida 33301, (954) 653-2000.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item appears in the Company’s Proxy Statement for the 2007 Annual Meeting of Shareholders under the caption, “Executive Compensation” and “Compensation Committee Report”, and is hereby incorporated by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information required by this item appears in the Company’s Proxy Statement for the 2007 Annual Meeting of Shareholders under the caption, “Beneficial Stock Ownership of Directors and Executive Officers”, and is hereby incorporated by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item appears in the Company’s Proxy Statement for the 2007 Annual Meeting of Shareholders under the caption, “Certain Transactions”, and is hereby incorporated by reference.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees. The aggregate fees which will be billed for professional services by Hacker Johnson & Smith P.A. in connection with the audit of the annual financial statements and internal controls over financial reporting for the fiscal years ended December 31, 2006 and 2005 and the reviews of the financial statements included in the Company’s 2006 quarterly filings and the September 2005 and December 2005 quarterly filings with the Securities and Exchange Commission was $196,000 and $173,000, respectively. Hacker, Johnson & Smith P.A. also billed the Company $7,500 in connection with the annual audit of the Company’s 401K plan in 2006. The aggregate fees billed for professional services by KPMG LLP in 2005 and 2004 in connection with the audit of the 2004 annual financial statements and the reviews of the financial statements related to the quarterly filings ended March 31, 2005 and June 30, 2005 and all of 2004 quarterly filings with the Securities and Exchange Commission for the fiscal years ended December 31, 2005 and 2004 were $136,000 and $95,000, respectively.
Audit-Related and Other Fees: In 2006, Hacker, Johnson & Smith P. A. and KPMG LLP also billed Bank of Florida Corporation approximately $100,000 and $57,500, respectively in connection with the common stock
offering and Proxies in connection with the acquisition of Bristol Bank and planned acquisition of Old Florida Bank Corporation. In 2005, KPMG LLP also billed Bank of Florida Corporation approximately $9,000, and Hill, Barth & King, LLC billed $9,800, for fees related to the common stock offering and conversion of preferred stock into common stock in the quarter ended June 30, 2005. In 2004, KPMG LLP also billed Bank of Florida Corporation approximately $5,077 for fees reasonably related to the performance of its audit and reviews of financial statements. Such fees included travel and miscellaneous related fees. In 2004, KPMG LLP also billed Bank of Florida Corporation approximately $85,325, and Hill, Barth & King, LLC billed $18,758, for fees related to the common stock offering in the quarter ended September 30, 2004.
Tax Fees: The fees billed by Hacker, Johnson & Smith P.A. for tax compliance and advice, including the preparation of Bank of Florida Corporation’s 2006 and 2005 corporate consolidated tax returns is $16,000 and $14,000, respectively. Hacker, Johnson & Smith P.A. will also be paid $8,500 for preparation of the final 2006 corporate tax return for Bristol Bank. In 2005, KPMG LLP also billed Bank of Florida Corporation $15,450 for tax compliance and advice, including the preparation of Bank of Florida Corporation’s corporate tax returns. In 2004, KPMG LLP also billed Bank of Florida Corporation $14,000 for tax compliance and advice, including the preparation of Bank of Florida Corporation’s corporate tax returns.
In all instances, Hacker, Johnson, & Smith P.A.’s, KPMG LLP’s or Hill, Barth & King, LLC’s performance of those services was pre-approved by Bank of Florida Corporation’s Audit Committee.
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this report at pages 43 through 81.
•
Consolidated Financial Statements of Bank of Florida Corporation (including all required schedules):
1. Independent Auditor’s Report;
2. Consolidated Balance Sheets at December 31, 2006 and 2005;
3. Consolidated Statements of Operations, Stockholders’ Equity, Comprehensive Income (Loss), and Statements of Cash Flows for years ended December 31, 2006, 2005 and 2004.
4. Notes to Consolidated Financial Statements
•
Exhibits
The following exhibits are filed with the Securities and Exchange Commission and are incorporated by reference into this Form 10-K. The exhibits which are denominated by an (a.) were previously filed as a part of a Registration Statement on Form SB-2 for Bancshares of Florida with the SEC on March 24, 1999, File No. 333-74997. The exhibits which are denominated by a (b.) were previously filed as a part of Amendment No. 1 to Form SB-2, filed with the SEC on May 7, 1999. The exhibits which are denominated by a (c.) were previously filed as a part of Form 10-KSB filed with the SEC on March 30, 2000. The exhibits which are denominated by a (d.) were previously filed as a part of Form S-4 filed with the SEC on October 3, 2006. The exhibits which are denominated by an (e.) were previously filed as a part of a Registration Statement on Form SB-2 for Bancshares of Florida with the SEC on December 28, 2001, File No. 333-76094. The exhibits which are denominated by an (f.) were previously filed as part of a Form 10-QSB/A filed on September 10, 2002. The exhibits which are denominated by a (g) were previously filed as part of a Form 10-Q filed on November 1, 2006. The exhibits which are denominated by an (i.) were previously filed as part of a Registration Statement on Form SB-2 filed with the SEC on June 24, 2004, File No. 333-116833. The exhibits which are denominated by an (j.) were previously filed as part of a Form 10-KSB filed with the SEC on March 30, 2005. The exhibits that are denominated by an (l.) were previously filed as part of Form 10-Q filed with the SEC on November 3, 2005. The exhibits that are denominated by a (m.) were previously filed as part of Form 8-K filed with the SEC on August 29, 2006. The exhibits that are denominated by a (n.) were previously filed as part of Schedule DEF 14A filed with the SEC on April 21, 2006. The exhibits that are denominated by a (o.) were previously filed as part of Form 10-Q filed with the SEC on May 4, 2006. The exhibits that are denominated by a (p.) were previously filed as part of Form 10-Q filed with the SEC on August 7, 2006. The exhibit numbers correspond to the exhibit numbers in the referenced document.
Reports of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Bank of Florida Corporation:
We have audited management’s assessment, included in the accompanying Management’s Assessment as to the Effectiveness of Internal Control over Financial Reporting, that Bank of Florida Corporation and Subsidiaries (the “Company”) maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting, may not prevent or detect misstatements. Also, projections of any evaluation effectiveness to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The Company acquired Bristol Bank (“Bristol”) on August 25, 2006, and management excluded from its assessment of the Company’s internal control over financial reporting as of December 31, 2006, Bristol’s internal control over financial reporting, with associated assets of $92.6 million and total revenue of $1.9 million generated by Bristol that was included in the Company’s consolidated financial statements as of and for the year ended December 31, 2006.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the years ended December 31, 2006 and 2005 of the Company and our report dated February 28, 2007 expressed an unqualified opinion on those financial statements.
HACKER, JOHNSON & SMITH PA
Fort Lauderdale, Florida
February 28, 2007
The Board of Directors and Stockholders
Bank of Florida Corporation
Naples, Florida:
We have audited the accompanying consolidated balance sheets of Bank of Florida Corporation and Subsidiaries (the “Company”) as of December 31, 2006 and 2005, and the related consolidated statements of operations, stockholders’ equity, comprehensive income (loss) and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company at December 31, 2006 and 2005, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2007 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
HACKER, JOHNSON & SMITH PA
Fort Lauderdale, Florida
February 28, 2007
Report of Independent Registered Public Accounting Firm
The Board of Directors
Bank of Florida Corporation:
We have audited the accompanying consolidated statements of operations, stockholders’ equity, comprehensive income (loss), and cash flows of Bank of Florida Corporation and subsidiaries (formerly known as Bancshares of Florida, Inc.) for the year ended December 31, 2004. These consolidated financial statements are the responsibility of the Bank of Florida Corporation’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and the cash flows of Bank of Florida Corporation and subsidiaries for the year ended December 31, 2004, in conformity with U. S. generally accepted accounting principles.
March 8, 2005
KPMG LLP
Fort Lauderdale, Florida
Certified Public Accountants
BANK OF FLORIDA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2006 and 2005
(In Thousands, except share and per share data)
See accompanying notes to consolidated financial statements
BANK OF FLORIDA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2006, 2005 and 2004
(In Thousands, except share and per share data)
See accompanying notes to consolidated financial statements
BANK OF FLORIDA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Years Ended December 31, 2006, 2005 and 2004
(In Thousands, except share and per share data)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
See accompanying notes to condensed consolidated financial statements.
BANK OF FLORIDA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2006, 2005 and 2004
(In Thousands)
BANK OF FLORIDA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont’d)
Years ended December 31, 2006, 2005 and 2004
(In Thousands)
See accompanying notes to consolidated financial statements
BANK OF FLORIDA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Consolidation:
On December 20, 2006, the shareholders approved changing the name of the Company from Bancshares of Florida, Inc. to Bank of Florida Corporation to further the Company’s brand strategy and name recognition. The consolidated financial statements of Bank of Florida Corporation (the “Company”) include the accounts of the Company and its wholly-owned subsidiaries, Bank of Florida - Southwest, Bank of Florida - Southeast, and Bank of Florida - Tampa Bay (collectively, the Banks), and Bank of Florida Trust Company. All significant intercompany balances and transactions have been eliminated.
The assets under advice by Bank of Florida Trust Company, as well as the obligations associated with those assets, are not included as part of the consolidated financial statements of the Company.
Nature of Operations:
The Company’s primary source of income is from the Banks, which provide a full range of commercial and consumer banking services primarily within the Naples, Ft. Lauderdale, Palm Beach and Tampa Bay areas of Florida. The Banks are subject to regulation of both the Florida Department of Financial Services and the Federal Deposit Insurance Corporation.
Bank of Florida Trust Company (the “Trust Company”) was incorporated under the laws of the State of Florida as a wholly-owned subsidiary of Bank of Florida - Southwest. Bank of Florida Trust Company offers investment management, trust administration, estate planning, and financial planning services.
Use of Estimates:
The accompanying consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Changes in such estimates and assumptions might be required because of rapidly changing economic conditions, changing economic prospects of borrowers and other factors. Material estimates that are particularly susceptible to significant changes in the near term are related to the determination of the allowance for loan losses and the deferred tax asset. Actual results could differ from those estimates.
Cash and Cash Equivalents:
Cash and cash equivalents include cash, demand balances due from banks, interest-bearing deposits due from other banks, and federal funds sold. These assets have original maturities of three months or less and their carrying amount is considered a reasonable estimate of their fair value.
BANK OF FLORIDA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2006, 2005 and 2004
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans held for sale:
Loans held for sale, which are composed of residential mortgage loans, are reported at the lower of cost or fair value on an aggregate loan portfolio basis. Gains or losses realized on the sale of loans held for sale are recognized at the time of sale and are determined by the difference between the net sales proceeds and the carrying value of the loans sold including any deferred origination fees and costs, adjusted for any servicing asset or liability retained. Net unrealized losses, if any, are recognized through a market adjustment by charges to operations. Gains and losses on sales of residential mortgage loans are included in gain on sale of loans in the consolidated statements of operations.
Loans held for investment:
Loans held for investment are stated at the principal amount outstanding, net of unearned income, any net deferred fees and costs on originated loans, and an allowance for loan losses. Loan origination and commitment fees and certain direct costs associated with originating or acquiring loans are deferred and amortized as an adjustment to interest income using a method that approximates the interest method, generally over the contractual life of the loan. Interest income on all loans is accrued based on the outstanding daily balances.
Management has established a policy to discontinue accruing interest (nonaccrual 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 the Company 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 estimated to be uncollectible. Interest income on nonaccrual loans is recognized only as received.
Accounting for Certain Loans or Debt Securities Acquired in a Transfer:
On January 1, 2005, Statement of Position (SOP) 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer, was adopted for loan acquisitions. SOP 03-3 requires acquired loans to be recorded at fair value and prohibits carrying over valuation allowances in the initial accounting for acquired impaired loans. Loans carried at fair value, mortgage loans held for sale, and loans to borrowers in good standing under revolving credit agreements are excluded from the scope of SOP 03-3. SOP 03-3 limits the yield that may be accreted to the excess of the undiscounted expected cash flows over the investor’s initial investment in the loan. The excess of the contractual cash flows over the expected cash flows may not be recognized as an adjustment of yield. Subsequent increases in cash flows expected to be collected are recognized prospectively through an adjustment of the loan’s yield over its remaining life. Decreases in expected cash flows are recognized as impairments.
BANK OF FLORIDA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2006, 2005 and 2004
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 collectibility 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 measured according to Statement of Financial Accounting Standards (“SFAS”) No. 114, “Accounting by Creditors for Impairment of a Loan” , and (2) a measure of collective loan impairment according to SFAS No. 5, “Accounting for Contingencies”. 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. 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 experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Larger impaired credits that are measured according to SFAS No. 114 have been defined to include loans which are classified as doubtful, substandard or special mention risk grades where the borrower relationship is greater than $250,000. 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 made outside the scope of SFAS No. 114 are measured according to SFAS No. 5 and include commercial and commercial real estate loans that are performing or have not been specifically identified under SFAS No. 114 and large groups of smaller balance homogeneous loans evaluated based on regulatory guidelines and historical peer bank loss experience which are adjusted for qualitative factors.
Premises and Equipment:
Premises and equipment are stated at cost, less accumulated depreciation and amortization. Gains and losses on routine dispositions, if any, are reflected in current operations. Depreciation is computed on the straight-line method over the estimated useful lives of the depreciable assets, ranging from three to thirty years. Leasehold improvements are amortized over the lives of the respective leases or the service lives of the improvements, whichever is less. The useful lives used in computing depreciation and amortizations are as follows:
Transfers of Financial Assets:
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
BANK OF FLORIDA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2006, 2005 and 2004
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Valuation of Long-Lived Assets:
The Company periodically evaluates the carrying value of long-lived assets to be held and used, including intangible assets, when events or circumstances warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated separately identifiable undiscounted cash flows from such asset are less than the carrying value of the asset. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Impairment losses on long-lived assets held for sale are determined in a similar manner, except that fair values are reduced for the cost to dispose of the assets.
Stock-Based Compensation:
Prior to January 1, 2006, the Company’s stock option plans were accounted for under the recognition and measurement provisions of APB Opinion No. 25 (Opinion 25), Accounting for Stock Issued to Employees, and related interpretations, as permitted by FASB Statement No. 123, Accounting for Stock-Based Compensation (as amended by SFAS No. 148, Accounting for Stock-Based Compensation Transition and Disclosure) (collectively SFAS 123). No stock-based employee compensation cost was recognized in the Company’s Statements of Operations through December 31, 2005, as all options granted to employees under the plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Effective January 1, 2006, the Company adopted the fair value recognition provisions of FASB Statement No. 123R Share-Based Payment (SFAS 123R), using the modified-prospective-transition method. Under that transition method, compensation cost recognized in 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and (b) compensation cost for all share-based payments granted subsequent to December 31, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. The Company recognizes stock-based compensation in salaries and employee benefits in the accompanying consolidated statements of operations on a straight-line basis over the vesting periods.
In addition, prior to the adoption of SFAS 123R, the tax benefits of stock option exercises were classified as operating cash flows. Since the adoption of SFAS 123R, tax benefits resulting from tax deductions in excess of the compensation cost recognized for options are classified as financing cash flows. As the Company adopted the modified prospective transition method, the prior period cash flow statement was not adjusted to reflect current period presentation.
Advertising Costs:
Advertising costs are expensed as incurred.
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 and its subsidiaries file consolidated tax returns.
BANK OF FLORIDA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2006, 2005 and 2004
NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income (Loss) Per Common and Common Equivalent Share:
Basic income (loss) per share represents net income (loss) available to common shareholders minus preferred stock dividends divided by the weighted-average number of common shares outstanding during the year. Dilutive income per share is computed based on the weighted-average number of common shares outstanding plus the effect of stock options and warrants outstanding computed using the treasury stock method. Because the Company reported net losses in 2004, all common stock equivalents were anti-dilutive, diluted loss per share was the same as basic in those periods.
Goodwill and Intangible Assets:
The Company tests goodwill for impairment annually. The test requires us to determine the fair value of our reporting unit and compare the reporting unit’s fair value to its carrying value. The fair value of the reporting unit is estimated using management valuation models. 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. These fair value estimates require a significant amount of judgment. Changes in management’s valuation of its reporting unit may affect future earnings through the recognition of a goodwill impairment charge. At December 31, 2006, (the goodwill impairment testing date) the fair value of our reporting unit was greater than its carrying value. Therefore, goodwill was not impaired. If the fair value of the reporting unit declines below the carrying amount, the Company would have to perform the second step of the impairment test. This step requires the Company to fair value all assets (recognized and unrecognized) and liabilities in a manner similar to purchase price allocation.
The Company reviews core deposit and other intangible assets for possible impairment whenever events or changes in circumstances indicate that carrying amounts may not be recoverable.
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.
Off-Balance-Sheet Financial instruments:
In the ordinary course of business the Company has entered into off-balance sheet financial instruments consisting of commitments to extend credit, standby letters of credit and unfunded commitments under lines of credit. Such financial instruments are recorded in the consolidated financial statements when they are funded.
Reclassifications:
Certain reclassifications have been made to prior period financial statements to conform to the 2006 financial statements presentation. These reclassifications only changed the reporting categories but did not affect our results of operations or financial position.
BANK OF FLORIDA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2006, 2005 and 2004
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements:
In September 2006, the Financial Accounting Standards Board (the “FASB”) issued Statement No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans (an amendment of FASB Statements No. 87, 88, 106, and 132R”, (“FAS 158”). FAS 158 requires an employer to: (a) recognize in its statement of financial position an asset for a plan’s overfunded status or a liability for a plan’s underfunded status; (b) measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year, and; (c) recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur as a component of comprehensive income. The requirement to recognize the funded status of a benefit plan and the disclosure requirements are effective for the Company’s financial statements as of December 31, 2006. There was no impact on the Company’s financial statements for December 31, 2006. The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for financial statements issued for fiscal years ending after December 15, 2008. Management believes this Statement will not have a material effect on the Company’s consolidated financial statements.
In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements”, (“FAS 157”). FAS 157 provides enhanced guidance for using fair value to measure assets and liabilities. The standard also responds to investors’ request for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurement on earnings and is applicable whenever other standards require (or permit) assets and liabilities to be measured at fair value. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those years. Early adoption is permitted. Management believes this statement will not have a material effect on the Company’s consolidated financial statements.
In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108 (“SAB 108”). SAB 108 expresses the SEC Staff’s views regarding the process of quantifying financial statement misstatements. SAB 108 states that in evaluating the materiality of financial statement misstatements a corporation must quantify the impact of correcting misstatements, including both the carryover and reversing effects of prior year misstatements, on the current year financial statements. SAB 108 is effective for the fiscal years ended after November 15, 2006. Under certain circumstances, prior year financial statements will not have to be restated and the effects of initially applying SAB 108 on prior years will be recorded as a cumulative effect adjustment to beginning Retained Earnings on January 1, 2006, with disclosure of the items included in the cumulative effect. The adoption of SAB 108 did not have a material impact on the Company’s consolidated results of operations and financial condition.
In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109”, (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This statement was effective January 1, 2007 and did not have a material effect on the Company’s financial statements.
In March 2006, the FASB issued Statement No. 156, “Accounting for Servicing of Financial Assets”, (“FAS 156”) which amends FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”. This Statement addresses the recognition and measurement of separately recognized servicing assets and liabilities, such as those common with mortgage securitization activities, and provides an approach to simplify efforts to obtain hedge-like accounting. It also clarifies when an obligation to service financial assets should be separately recognized as a servicing asset or servicing liability and requires that those separately recognized assets or liabilities be initially measured at fair value, if practicable. FAS 156 permits an entity to choose either the amortization method or the fair value method for subsequent measurement and also permits a servicer that uses derivative financial instruments to offset risks on servicing to report both the derivative
BANK OF FLORIDA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2006, 2005 and 2004
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (continued):
financial instrument and related servicing asset or liability by using a consistent measurement attribute - fair value. This statement shall be effective for all separately recognized servicing assets and liabilities acquired or issued after January 1, 2007. This Statement did not have a material effect on the Company’s consolidated financial statements.
In February 2006, the FASB issued Statement No. 155, “Accounting for Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140.” This statement amends FASB Statements No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“FAS 133”), and No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (“FAS 140”). This Statement allows financial instruments that have embedded derivatives to be accounted for as a whole (eliminating the need to bifurcate the derivative from its host) if the holder elects to account for the whole instrument on a fair value basis. It also clarifies which interest-only strips and principal-only strips are not subject to the requirements of FAS 133; establishes a requirement to evaluate interests in securitized financial assets to identify interest that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and, amends FAS 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. This statement was effective for all financial instruments acquired or issued as of January 1, 2007. This Statement did not have a material effect on the Company’s consolidated financial statements.
NOTE 2-INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
Components used in computing income (loss) per share are summarized as follows (In Thousands, except share data):
At December 31, 2004, there were 446,949 common stock options and 303,856 warrants, respectively, that were anti-dilutive and therefore not included in the above calculation.
BANK OF FLORIDA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2006, 2005 and 2004
NOTE 3-STOCK-BASED COMPENSATION
In 2000, the Company adopted the 1999 Stock Option Plan pursuant to which the Company’s Board of Directors may grant stock options to officers and key employees. The Plan, as amended at the 2005 Annual Shareholders meeting, authorized grants of options to purchase no less than 11.5% of outstanding shares. The 2006 Stock Compensation Plan (the Plan) authorized 12% of common shares issued after April 3, 2006 plus 58,154 shares which were available for grant under the prior plan and was approved by shareholders on June 8, 2006.
This Plan provides for the grant of the following: options to purchase common stock; restricted shares of common stock (which may be subject to both grant and forfeiture conditions) (“Restricted Stock”); units (which are a contractual right for a recipient to receive shares of Restricted Stock at a certain date or upon the occurrence of a certain event); and stock appreciation rights (entitling the grantee to receive the difference in value between the underlying common stock on the date of exercise and the value of such stock on the date of grant) (“SARS”), which may be either freestanding or granted in tandem with an option. Options to purchase common stock may be either incentive stock options (“ISOs”), which are intended to satisfy the requirements of Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), or non-qualified stock options (“NQOs”) which are not intended to satisfy the requirements of Section 422 of the Code.
The exercise price of the stock options may not be less than the fair market value of common stock on the date the option is granted. The Plan provides for the grant of options at the discretion of the Board of Directors or a committee designated by the Board of Directors to administer the Plan. Each stock option granted under the Plan has a maximum term of ten years subject to earlier termination in the event the participant ceases to be an employee. The committee shall determine the period during which stock options vest at the date of grant. The Plan will terminate on June 8, 2016. At December 31, 2006, there were 454,329 shares available for grant under the Plan.
In 2005, the Company’s Board of Directors approved the acceleration of vesting of virtually all outstanding stock options that existed as of December 14, 2005 (the “Acceleration”). Stock options’ totaling 222,064 and stock warrants totaling 83,010, which would otherwise have vested from time to time over the next five years, became immediately exercisable as a result of this action. As of December 31, 2005, only 10,551 stock options were not fully vested. The number of shares, exercise prices and remaining terms of the options and warrants remain unchanged. In accordance with SFAS 123, in 2005 the Company expensed the remaining unrecognized compensation cost associated with the options with accelerated vesting in the pro forma disclosure. These actions were taken in order to avoid expense recognition in future financial statements upon adoption of SFAS 123R.
The total fair value of shares vested and recognized as compensation expense was approximately $165,000 for the year ended December 31, 2006. There was no associated tax benefit recognized in connection with these incentive stock options. The effect of applying FAS 123R was to reduce 2006 income before taxes and net income by $165,000 or $0.02 per basic and diluted share. The total intrinsic value of options exercised during the year ended December 31, 2006 was $171,000. As of December 31, 2006, the Company had 47,100 nonvested options outstanding and there was $498,000 of total unrecognized compensation cost related to these nonvested options. This cost is expected to be recognized monthly on a straight-line basis, over the vesting periods, through June 30, 2011.
BANK OF FLORIDA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2006, 2005 and 2004
NOTE 3-STOCK-BASED COMPENSATION (Continued)
The Company examined its historical pattern of option exercises in an effort to determine if there were any patterns based on certain employee populations. From this analysis, the Company could not identify any patterns in the exercise of options. As such, the Company used the guidance in Staff Accounting Bulletin No. 107 to determine the estimated life of options issued subsequent to the adoption of SFAS 123R. Based on this guidance, the estimated term was deemed to be the midpoint of the vesting term and the contractual term ((vesting term and original contractual term)/2). Expected volatility is based on historical volatility of the Company’s stock. The risk-free interest rates are based on U. S. Treasury notes in effect at the time of the grant. The dividend yield assumption is based on the Company’s history and expectation of dividends payments.
The per share weighted-average fair value of stock options granted during 2006, 2005 and 2004 was $11.76, $10.19 and $6.30, respectively, on the date of grant using the Black Scholes option-pricing model with the following weighted average assumptions:
The following table illustrates the effect on net earnings (loss) and earnings (loss) per share if the Company had applied the fair value recognition provisions of SFAS 123 to options granted under the Company’s stock option plan for the fiscal years ending December 31, 2005 and 2004. For purposes of this pro forma disclosure, the value of the options is estimated using the Black-Scholes option pricing model and is being amortized to expense over the options’ vesting periods (Dollars In Thousands, except per share data):
BANK OF FLORIDA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2006, 2005 and 2004
NOTE 3-STOCK-BASED COMPENSATION (Continued)
Stock option activity during the periods indicated was as follows (Dollars in Thousands, except per share data):
In connection with its initial offering of common stock, the Company granted to certain organizers of the Company warrants to purchase 113,330 shares of common stock at an exercise price of $10 per share. These warrants were fully vested as of December 31, 2005 and will expire on August 24, 2009.
In connection with the opening of Bank of Florida - Southeast, the Company granted to certain organizers warrants to purchase 78,526 shares of common stock at an exercise price of $10 per share. The warrants were vesting in equal increments of 20% commencing on the first anniversary of the date of grant (July 31, 2002) and on each anniversary date thereafter until fully vested. The vesting period on these warrants was accelerated in December 2005. Warrants may be exercised in whole or in part for $10 per share beginning on the one year anniversary of the date of grant and expiring on July 31, 2007.
In connection with the opening of a branch of the Bank of Florida - Southeast, in the Palm Beach area of Florida, the Company granted to Advisory Board members warrants to purchase 40,000 shares of common stock at an exercise price of $12.50 per share. The warrants vest in equal increments of 20% commencing on the date operations commenced (October 4, 2004) and on each anniversary date thereafter until fully vested. Warrants may be exercised in whole or in part for $12.50 per share beginning on the commencement date and expiring October 4, 2009. Compensation expense totaling $86,000, $115,000 and $57,000 was recognized during 2006, 2005 and 2004, respectively, in connection with these warrants. In addition, compensation expense totaling $40,000, $51,000 and $6,000 was recognized during 2006, 2005 and 2004, respectively, in connection with certain stock options which were also granted to these Advisory Board members during 2004.
BANK OF FLORIDA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2006, 2005 and 2004
NOTE 3-STOCK-BASED COMPENSATION (Continued)
As a result of the acquisition of Bank of Florida - Tampa Bay, the Company named certain individuals of the investor group as directors of Bank of Florida - Tampa Bay. These directors were awarded warrants to purchase 85,333 shares of common stock at an exercise price of $12.50. Twenty percent of the warrants became exercisable on the date that the bank opened for business (November 5, 2004), and twenty percent was scheduled to become exercisable on each of the four succeeding anniversaries of that date. The vesting period on these warrants was accelerated in December 2005. All of the warrants will expire on November 5, 2009. The Company may call the warrants if it or any of its subsidiaries is the subject of a formal capital call by a governmental agency.
Compensation expense totaling $114,000 and $56,000 was recognized during 2005 and 2004, respectively, in connection with these warrants. No compensation expense was incurred on these warrants in 2006.
At December 31, 2006 and December 31, 2005 warrants to purchase 241,879 and 288,190 common shares, respectively, at an average exercise price of $11.06 and $11.09, respectively, were outstanding. Of that amount, 226,679 and 265,390, respectively, were fully vested. If, at any time, the holders of these warrants cease to serve as a director of the Company or a Company subsidiary, or an Advisory Board member, the warrants shall immediately expire. The following table summarizes information about the stock warrants outstanding for the periods indicated:
BANK OF FLORIDA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2006, 2005 and 2004
NOTE 4-BUSINESS COMBINATIONS
On August 25, 2006, the Company completed the acquisition of Bristol Bank (“Bristol”) in Coral Gables, Florida, by merging Bristol into the Company’s wholly-owned subsidiary, Bank of Florida - Southeast. The acquisition of Bristol Bank provides the Company entry into the dynamic Coral Gables market. The Coral Gables/Miami-Dade County demographics are expected to compliment the Company’s premium private-banking brand and entrepreneurial business model. The Company issued a total of 688,218 shares of common stock and cash consideration of approximately $6.3 million representing total consideration of $21.5 million.
The Company recorded $13.1 million in intangible assets, of which $1.7 million was allocated to the core deposit intangible. The principal factors considered when valuing the core deposit intangible consist of the following: (1) the rate and maturity structure of the interest bearing liabilities, (2) estimated retention rates for each deposit liability category, (3) the current interest rate environment and (4) estimated noninterest income potential of the acquired relationship. The core deposit intangible created is being amortized on a double declining balance basis over ten years. The remaining intangible of $11.3 million, was allocated to goodwill.
The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition (In Thousands):
The Company’s results of operations include the operations of Bristol since the acquisition date. The following table presents unaudited proforma results for the years ended December 31, 2006, 2005 and 2004. Since no consideration is given to operational efficiencies and expanded products and services, the proforma summary information does not necessarily reflect the results of operations as they would have been, if the acquisition had occurred on January 1, for the periods presented (In Thousands, except per share amount).
BANK OF FLORIDA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2006, 2005 and 2004
NOTE 5-SECURITIES
The amortized cost, gross unrealized gains and losses and estimated fair value of securities available for sale shown in the consolidated balance sheets are as follows (In Thousands):
Proceeds from sales of securities available for sale for the year ended December 31, 2006 totaled $22,299,000. There were no sales of securities available for sale in 2005. Proceeds from sales of securities available for sale for the year ended December 31, 2004 totaled $504,000. Gross gains recorded on sales of securities available for sale for the years ended December 31, 2006 and 2004 totaled $0 and $4,000, respectively. There were securities pledged with a market value of $22,193,000 as collateral to the Federal Home Loan Bank as of December 31, 2006. There were no securities pledged as of December 31, 2005. The Company did not hold any tax exempt securities and there were no investments in securities from a single issuer which exceeded ten percent of stockholders’ equity as of December 31, 2006 and 2005, respectively.
Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
The unrealized losses on investment securities available for sale were caused by interest rate changes. It is expected that the securities would not be settled at a price less than the par value of the investments. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired.
BANK OF FLORIDA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2006, 2005 and 2004
NOTE 5-SECURITIES (Continued)
Information pertaining to securities with gross unrealized losses at December 31, 2006, aggregated by investment category and length of time that individual securities have been in a continuous loss position, is as follows (In Thousand):
Expected maturities of investment securities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Periodic payments are received of mortgage-backed securities based on the payment patterns of the underlying collateral. Maturities of mortgage-based securities are included below based on their expected average life of similar investments as determined by the portfolios and analysis servicer. As of December 31, 2006, the amortized cost and estimated fair value of investment securities, by contractual maturities, are as follows (In Thousands):
BANK OF FLORIDA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2006, 2005 and 2004
NOTE 6-LOANS HELD FOR INVESTMENT
The composition of the loan portfolio at December 31 is as follows (In Thousands):
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Specific impairment on loans in this category is calculated based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or for collateral-dependent loans, at the fair value of the collateral. The following is a summary of information pertaining to impaired and non-accrual loans (In Thousands):
There were no outstanding commitments to extend credit related to those loans in nonaccrual status or 90 days or more past due.
BANK OF FLORIDA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2006, 2005 and 2004
NOTE 6-LOANS HELD FOR INVESTMENT (Continued)
The activity in the allowance for loan losses for the years ended December 31 is as follows (In Thousands):
NOTE 7-PREMISES AND EQUIPMENT
Premises and equipment at December 31 consisted of the following (In Thousands):
NOTE 8-INCOME TAXES
The allocation of federal and state income taxes between current and deferred for the years ending December 31, 2006, 2005 and 2004 are as follows (In Thousands):
BANK OF FLORIDA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2006, 2005, and 2004
NOTE 8-INCOME TAXES (continued)
At December 31, 2005, the Company assessed its earnings history and trend over the past year, its estimate of future earnings, and the expiration dates of the net operating loss carryforwards. Based upon that assessment, the Company reversed its valuation allowance on its deferred tax assets at December 31, 2005. No income tax provision was recorded for the year ended December 31, 2004.
Income taxes (benefit) differs from the amount of income tax determined by applying the US federal income tax rate to pretax income for the years ended December 31, 2006, 2005 and 2004 due to the following (In Thousand):
The components of deferred tax assets and deferred tax liabilities at December 31 are as follows (In Thousands):
At December 31, 2006, the Company had Federal and State tax net operating loss carryforwards of approximately $2,921,000, which was obtained through the Bristol Bank acquisition, expiring during 2020 through 2026. These net operating loss carryforwards have an annual limitation of $948,000 and it is anticipated that they will be utilized in their entirety.
BANK OF FLORIDA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2006, 2005, and 2004
NOTE 9-GOODWILL AND OTHER INTANGIBLE ASSETS
At December 31, 2006, the Company has intangible assets totaling $13.8 million. Of that amount, $12.9 million was acquired through the purchase of Bristol Bank in August 2006 as discussed in Note 2 - Business Combinations. The remaining $886,000 resulted from the purchase of Bank of Florida - Tampa Bay (see below).
In connection with the acquisition of Bristol Bank, the Company recorded $11.3 million in goodwill and $1.7 million of core deposit intangible. The core deposit intangible has a balance of $1.6 million ( $1.7 million gross carrying amount less $113,000 accumulated amortization) at December 31, 2006 and is being amortized on a double declining balance basis over ten years. The estimated amortization expense for each of the five succeeding years ending December 31st is $296,000, $242,000, $198,000, $162,000 and $133,000, respectively.
Bank of Florida - Tampa Bay
On July 27, 2004, the Company acquired 100% ownership of Bank of Florida - Tampa Bay that had not yet been incorporated or commenced its planned principal operations. For this acquisition the Company paid $300,000 in cash to an investor group. The acquisition was consummated as a means for Bank of Florida Corporation to expand its business in Florida and provide traditional banking services in the Tampa Bay area.
The Company does not believe this acquisition was a business combination pursuant to the provisions of SFAS No. 141, “Accounting for Business Combinations,” but rather an acquisition of net assets. Accordingly, the excess of fair value of the liabilities assumed over the fair value of the assets acquired of $974,000 was allocated to an amortizable identifiable intangible. The following table sets forth the assets acquired and liabilities assumed in the acquisition (In Thousands):
The balance of the intangible asset was $886,000 ($974,000 gross carrying amount less $88,000 accumulated amortization) and $925,000 ($974,000 gross carrying amount less $49,000 accumulated amortization) at December 31, 2006 and 2005, respectively. This intangible is being amortized on a straight-line basis over 25 years. The estimated amortization expense for each of the five succeeding years ending December 31st is $38,955 per year.
BANK OF FLORIDA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2006, 2005 and 2004
NOTE 10-DEPOSITS
Deposits at December 31 are comprised of the following (In Thousands):
The maturities on all certificates of deposit as of December 31, 2006 for each of the five successive years are as follows (In Thousands):
The following table indicates amounts outstanding of time certificates of deposit of $100,000 or more and their respective maturities as of December 31, 2006 (In Thousands):
Included in interest expense was $3,689,000, $1,927,000, and $1,477,000, which relates to interest on certificates of deposit of $100,000 or more for 2006, 2005 and 2004, respectively.
BANK OF FLORIDA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2006, 2005 and 2004
NOTE 11-SUBORDINATED DEBT
On October 7, 2005, Bank of Florida - Southeast, issued $3.0 million in subordinated debt with a maturity of December 15, 2015. Interest is payable quarterly in arrears, commencing December 15, 2005, at a rate of 1.9% over the quarterly adjustable three-month LIBOR rate. The interest rate at December 31, 2006 was 7.27%. Upon the occurrence and continuation of a Tax Event (a “Special Event”), Bank of Florida - Southeast may prepay the debt at its option (and with the approval of its regulators, if necessary), in whole or in part, without penalty, at par through December 15, 2010. After that date, Bank of Florida - Southeast may prepay the debt at its option (and with the approval of its regulators, if necessary), in whole or in part, without penalty, at par, irrespective of the occurrence of a “Special Event”. The subordinated debt issued qualifies as Tier II capital for regulatory risk-based capital guidelines for the Company and its Bank of Florida - Southeast subsidiary.
On September 30, 2005, Bank of Florida - Southeast, issued $3.0 million in subordinated debt with a maturity of December 15, 2011. Interest is payable quarterly in arrears, commencing December 15, 2005, at a rate of two and one-half percent over the quarterly adjustable three-month LIBOR rate. The interest rate at December 31, 2006 was 7.87%. Bank of Florida - Southeast may prepay the debt at its option (and with the approval of its regulators, if necessary), in whole or in part, without penalty, at par after December 15, 2006. The subordinated debt issued qualifies as Tier II capital for regulatory risk-based capital guidelines for the Company and its Bank of Florida - Southeast subsidiary.
On August 5, 2005, Bank of Florida - Southwest issued $5.0 million in junior subordinated debt with a maturity of October 7, 2015. Interest is payable quarterly in arrears, commencing October 7, 2005, at a rate of two percent over the quarterly adjustable three-month LIBOR rate. The interest rate at December 31, 2006 was 7.37%. Upon the occurrence and continuation of a Tax Event (a “Special Event”), Bank of Florida - Southwest may prepay the debt at its option (and with the approval of its regulators, if necessary) in whole at a redemption price of 105% of par plus accrued interest during the first five years. The Bank will also have the right to repay this debt security at par, anytime on or after October 7, 2010. The subordinated debt issued qualifies as Tier II capital for regulatory risk-based capital guidelines for the Company and its Bank of Florida - Southwest subsidiary.
NOTE 12-FEDERAL HOME LOAN BANK ADVANCES
Borrowings from the FHLB may be either on a fixed or variable rate basis. These borrowings are collateralized by $101.9 million in assets consisting of $3.3 million of the Company’s FHLB stock, $22.2 million of investment securities and a blanket lien on one-to-four family residential loans and certain loans secured by multifamily dwellings as of December 31, 2006. At December 31, 2006 and 2005, the Company had an unused credit line with the FHLB of $59.4 million and $32.1 million, respectively. The following table provides the amount, interest rate and maturity of outstanding FHLB advances at December 31, 2006 and 2005, respectively (in thousands):
Advance includes a one time call option on July 23, 2007.
Advance includes a one time call option on July 21, 2010.
BANK OF FLORIDA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2006, 2005 and 2004
NOTE 13-COMMITMENTS AND CONTINGENCIES
The Company has entered into operating lease agreements for certain bank offices, which expire on various dates through 2021. In addition, the Company has operating leases for office equipment, which expire on various dates through 2011. Certain of these leases require the payment of common area maintenance expenses and may also include renewal options. Rent expense was $2,743,000, $2,005,000 and $1,423,000 for 2006, 2005 and 2004, respectively.
Future minimum lease commitments, net of subleased commitments, as of December 31, 2006 are as follows (In Thousands):
The Company entered into a multi-bank service agreement with Computer Services, Inc. (“CSI”) for data processing services on October 15, 2004. This agreement has a five year expiration term with an automatic five year renewal options. Data processing expense paid to CSI was $475,000, $345,000 and $126,000 for 2006, 2005 and 2004, respectively.
As of December 31, 2006, the Company had available $29.8 million in lines of credit with financial institutions, all of which are for variable rate borrowing. In addition, the Company’s banking subsidiaries are members of the Federal Home Loan Bank and, subject to certain collateral verification requirements, the Bank of Florida - Southwest may borrow up to 20%, while the Bank of Florida - Southeast and Bank of Florida - Tampa Bay each may borrow up to 10%, of their outstanding assets. Please refer to “Note-12 Federal Home Loan Bank Advances” of the “Notes to the Consolidated Financial Statements” for further information on these borrowings.
From time-to-time, we are involved in litigation arising in the ordinary course of our business. The Company believes 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.
NOTE 14-RETIREMENT PLAN
The Company maintains a 401(k) Retirement Plan (the Plan) to which eligible employees may contribute a percentage of their pay. Currently the Company makes matching contributions to the Plan on behalf of eligible employees equal to 50% of the first 8% of the employees’ contributions. The Company contributed to the Plan in the amounts of $349,000, $225,000 and $98,000 during 2006, 2005 and 2004, respectively. Employees who have completed at least three months of service and have attained age 21 are generally eligible to participate. Employee contributions are 100% vested as amounts are credited to the employee’s account. Company contributions, if made, become 20% vested when an employee has completed 1 year of service, and vest at a rate of 20% per year thereafter, fully vesting when an employee has completed 5 years of service.
During 2004, the Company implemented a supplemental executive retirement plan (the “Plan”) to provide supplemental income for certain key executives after their retirement. The Plan, which is unfunded, is structured such that each participant is scheduled to receive specified levels of salary continuation income after the retirement age of 65 for a certain number of years. In the event a participant leaves the employment of the Company before retirement, only the benefits vested through that date would be paid to the employee. The Plan also provides for 100% vesting in the event of a change in Company ownership. The Company has approximately $175,500 and $121,300 accrued at December 31, 2006 and 2005, respectively, towards this plan, which is included in other liabilities in the accompanying consolidated balance sheets.
BANK OF FLORIDA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2006, 2005 and 2004
NOTE 14-RETIREMENT PLAN (Continued)
The Company also purchased bank-life insurance (“BOLI”) policies on these plan participants. The BOLI is recorded at the amounts to be realized under the insurance contract, which represents the amounts contributed to the cash surrender value of the policies. The Company recognizes revenue from the investment returns from the BOLI and compensation expense for the amounts accrued toward the participants’ retirement fund. Revenue earned from the BOLI amounted to $121,000 and $107,000 during the years ended December 31, 2006 and 2005, respectively. Such revenue is included in other income in the accompanying consolidated statements of operations. The Company recognized net earnings of $67,000, $8,400 and $2,300, consisting of earnings on bank-owned life insurance policies, net of compensation expenses accrued in connection with the Plan during 2006, 2005 and 2004, respectively.
NOTE 15-RELATED PARTY TRANSACTIONS
The Banks have granted loans to executive officers and directors of the Banks, Bank of Florida Trust Company, and the Company and to associates of such executive officers and directors. Such loans were made in the ordinary course of business under normal credit terms and do not represent more than the normal risk of collection. The activity for these loans is as follows (In Thousands):
The Banks also accept deposits from employees, officers and directors of the Banks and the Company and from affiliates of such officers and directors. The deposits are accepted on substantially the same terms as those of other depositors.
The Company engaged Centuric, LLC of Ft. Lauderdale, Florida, to manage the Information Technology functions of the Company and the Banks. This service primarily includes the purchase of computer hardware and software, telephones, network management services and disaster recovery. Ramon A. Rodriguez, a director of Bank of Florida Corporation, is a member of Centuric Group, LLC, the parent company of Centuric, LLC. Centuric, LLC is a consulting and outsourcing firm specializing in system integration, network management and security, disaster recovery and business contingency planning. The Company paid Centuric, LLC approximately $1,077,000, $632,000 and $690,000 in 2006, 2005, and 2004, respectively. Of the $1,077,000 and $632,000 paid to Centuric, LLC in 2006 and 2005, respectively, $549,000 and $251,000 was for the purchase of computer equipment and software, including set-up fees.
In 2002, the Company entered into a lease for a banking facility and office space located at 1185 Immokalee Road, Naples, Florida owned by Citizens Reserve, LLC. Citizens Reserve, LLC is principally owned by several directors of the Company. Monthly lease payments as of December 31, 2006 were $94,500. Total rent charged to operations under this lease was $1,100,000, $720,000 and $734,000 in 2006, 2005 and 2004, respectively. The lease term expires in 2012. Commitments under this lease agreement are included in NOTE 13.
On August 11, 2005, Bank of Florida, Ft. Lauderdale signed a letter of intent for a nonbinding ten year lease of a new office facility in downtown Ft. Lauderdale. A binding lease agreement was signed in September 2006. The lease will commence on or about November 2007 with 200 Brickell Associates, Ltd., of which Terry W. Stiles, a director of Bank of Florida Corporation, is a limited partner. The Company did not incur any cost in connection with this agreement in 2006 and 2005.
BANK OF FLORIDA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2006, 2005 and 2004
NOTE 15-RELATED PARTY TRANSACTIONS (Continued)
On June 29, 2005, Bank of Florida - Tampa Bay signed a sublease agreement with Florida Financial Advisors, Inc. (“Florida Financial”), whereby Florida Financial would sublease space from Bank of Florida - Tampa Bay for a period of one year. The lease commenced on July 1, 2005 and was terminated in January 2006. Edward Kaloust, a director of Bank of Florida Corporation, is a managing member of Florida Financial Advisors. The Company received $2,600 and $18,000 in sublease income during 2006 and 2005, respectively.
On June 1, 2006, Bank of Florida - Tampa Bay signed a sublease agreement with Medi-Weight Loss Clinics, whereby they would sublease space from Bank of Florida - Tampa Bay for a period of three years. The lease commenced on June 1, 2006. Edward Kaloust, a director of Bank of Florida Corporation, is a managing member of Medi-Weight Loss Clinics. The Company received $26,200 in sublease income during 2006.
NOTE 16-STOCKHOLDERS’ EQUITY
On April 26, 2005, the Company completed a private placement offering through Allen & Company LLC, selling 915,000 shares of common stock at $15.00 a share to accredited investors. The shares of the Company’s common stock issued in conjunction with the private placement offering were issued pursuant to exemptions from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), and are “restricted securities”. Such shares may not be offered or sold in the United States absent registration with the Securities and Exchange Commission under the Securities Act or an applicable exception therefrom. The Company agreed to file a registration statement covering the resale of the Company’s common stock within 60 days from the date of the closing, with the registration statement being declared effective no later than 210 days after the closing date. The Company received approximately $13.0 million in net proceeds. The registration was declared effective on September 13, 2005.
On May 23, 2005, certain holders of preferred stock, issued in March of 2004, elected to exchange the redemption value of their shares for common stock. The Company paid a premium on 25,090 shares of Series A Preferred Stock equal to $4 per share or $100,000. The resulting value, after payment of the premium, was exchanged for 165,354 shares of the Company’s common stock at $15.78 per share.
On June 30, 2005, the Company elected to redeem the remaining 12,258 shares of Series A Preferred Stock. The redemption price for the shares of Series A Preferred Stock was based on a declining premium scale. The redemption price at June 30th was $104 per share, which included a premium of $49,000.
In May 2006, the Company completed its fifth and largest common stock raise, issuing 2.875 million shares at $21.50 per share, with net proceeds totaling $57.8 million. The Company used the proceeds from the secondary offering to finance the cash portion of our purchase of $93.0 million-asset Bristol Bank in August 2006 and support our continued rapid earning asset growth throughout South Florida and Tampa Bay.
NOTE 17-REGULATORY MATTERS
Effective January 1, 2005, all of the Banks are Florida-chartered banks and are regulated and supervised by the Florida Department of Financial Services (the “Department”). As Florida-chartered banks, they are also subject to Florida statutes regarding payment of dividends. Under the Florida Financial Institutions Code, the prior approval of the Department is required for dividend payments if the total of all dividends declared by a bank in any calendar year will exceed the sum of a bank’s net retained income (net income less any dividends paid) for that year and its retained income for the preceding two years.
The Company is subject to regulatory capital requirements administered by federal and state banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors, and the regulator can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements.
BANK OF FLORIDA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2006, 2005 and 2004
NOTE 17-REGULATORY MATTERS (continued)
At December 31 actual capital levels and minimum required levels were as follows (In Thousands):
The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required.
The Company was considered well capitalized as of December 31, 2006 and 2005. Management is not aware of any events or circumstances that have occurred since December 31, 2006 that would change the Company’s capital category.
BANK OF FLORIDA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2006, 2005 and 2004
NOTE 18-OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
In the normal course of business, the Company uses various financial instruments with off-balance sheet risk to meet the financing needs of its customers. These instruments include commitments to extend credit through loans approved but not yet funded, lines of credit and standby letters of credit. The credit risks associated with financial instruments are generally managed in conjunction with the Companys’ balance sheet activities and are subject to normal credit policies, financial controls and risk limiting and monitoring procedures.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. In addition, large portions of the commitments are scheduled to be participated to other financial institutions. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include compensating balances, accounts receivable, inventory, property, plant and equipment and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. Most guarantees expire within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Credit losses are incurred when one of the parties fails to perform in accordance with the terms of the contract. These standby letters of credit are secured by real estate with a fair value of $1,088,000, Lines of Credit totaling $759,000 million and $1,260,000 in DDA and Certificates of Deposits maintained by the Company.
The Companys’ exposure to off-balance sheet financial risk is represented by the contractual amount of the commitments to extend credit and standby letters of credit. At December 31, 2006 and 2005, the following financial instruments were outstanding whose contract amounts represent credit risk (In Thousands):
The Company does not currently have any financial guarantees which must be disclosed pursuant to the requirements of FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.
BANK OF FLORIDA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2006, 2005 and 2004
NOTE 19-FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair value estimates are presented for financial instruments without attempting to estimate the value of the Banks’ long-term relationships with depositors and the benefit that results from low cost funding provided by deposit liabilities. In addition, significant assets which are not considered financial instruments and are, therefore, not a part of the fair value estimates include office properties and equipment.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Cash and cash equivalents: For these short-term instruments, the carrying amount is a reasonable estimate of fair value.
Securities: For securities held to maturity, fair value equals the carrying amount. For securities available for sale, fair value equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.
Restricted securities: The carrying value of Federal Home Loan Bank and Federal Reserve Bank Stock approximates its fair value since it is restricted stock and would only be sold to the Federal Home Loan Bank at cost.
Deposits: The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity deposits is estimated by discounting future cash flows using rates currently offered for deposits of similar remaining maturities. The fair value estimates do not include the benefits that result from low-cost funding provided by the deposit liabilities compared to the cost of alternate sources of funds.
Subordinated debt: The fair value of this variable rate subordinated debt is estimated by discounting future cash flows using rates currently offered for instruments of similar remaining maturities.
Federal Home Loan Bank Advances: The fair value for Federal Home Loan Bank Advances are estimated by discounting future cash flows using rates currently offered for instruments of similar remaining maturities.
Accrued interest: The carrying amounts of accrued interest receivable and accrued interest payable approximate their fair values.
Off-balance sheet instruments: The fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of these financial instruments is not significant.
BANK OF FLORIDA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2006, 2005 and 2004
NOTE 19-FAIR VALUES OF FINANCIAL INSTRUMENTS (Cont’d)
The following tables present the estimates of fair value of financial instruments as of December 31 (In Thousands):
BANK OF FLORIDA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2006, 2005 and 2004
NOTE 20-CONDENSED FINANCIAL INFORMATION
The condensed financial information of Bank of Florida Corporation (parent company only) as of December 31, 2006 and 2005, and for the years ended December 31, 2006, 2005 and 2004, is as follows (In Thousands):
BALANCE SHEETS
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
BANK OF FLORIDA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2006, 2005 and 2004
NOTE 20-CONDENSED FINANCIAL INFORMATION (continued)
STATEMENTS OF CASH FLOWS
NOTE 21-PROPOSED ACQUISITION
On August 29, 2006 the Company announced the execution of a definitive agreement with Old Florida Bankshares, Inc., a $287.9 million-asset bank holding company based in Fort Myers, Florida (“Old Florida”), by which Bank of Florida Corporation will acquire Old Florida by merging it into Bank of Florida Corporation’s and Old Florida’s subsidiary, Old Florida Bank, will be combined with those of Bank of Florida Corporation wholly-owned subsidiary Bank of Florida - Southwest. Under the terms of the definitive agreement, Old Florida’s shareholders may elect to receive either 1.7915 shares of the Company’s common stock, $38.50 per share in cash, or a combination of stock and cash. The value of the merger consideration will be approximately $82.6 million, consisting of approximately 3.1 million shares of the Company’s common stock and $16.5 million in cash, reflecting a mix of consideration of 80% common stock and 20% in cash. The pending acquisition of Old Florida Bank by Bank of Florida Corporation was approved at the December 18, 2006 Old Florida Bankshares, Inc. and the December 20, 2006 Bank of Florida Corporation shareholder meetings. Approval from the banking regulators is still pending. The transaction is expected to close in the Spring of 2007.
BANK OF FLORIDA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 2006, 2005 and 2004
NOTE 22-SEGMENT INFORMATION
Segment information for the Company as of and for the years ended December 31, 2006, 2005 and 2004 is as shown below. Other (*) includes consolidating eliminating entries and activity at the holding company level. Segment information is as follows (In Thousands):
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Form 10-K has been signed by the following persons in the capacities and as of the dates indicated: