Item 1. Description of Business
General
United Heritage Bankshares of Florida, Inc. (the “Company”) was incorporated under the laws of the State of Florida on April 15, 2002. The Company is a registered bank holding company under the Bank Holding Company Act of 1956, as amended (the “BHC Act”) and owns 100% of the common stock of United Heritage Bank (the “Bank”). The Bank commenced operations in March 2001. On January 13, 2003, the Company acquired Community United Bank (“CUB”) in a purchase transaction. CUB commenced operations in August 1999. During 2004, CUB was merged into the Bank, resulting in a one-bank holding company structure.
The accompanying financial information includes the accounts of the Company and the Bank. All significant intercompany accounts have been eliminated in consolidation. The assets and liabilities acquired in the January 13, 2003 purchase of CUB and income and expense of CUB subsequent to January 13, 2003 are included in the accompanying information. The financial information previous to the purchase of CUB includes only the accounts of the Company and the Bank. Accordingly, the overall growth of the Company from December 31, 2002 through December 31, 2004 is due not only to growth of the Bank, but also to the acquisition of CUB.
The Company provides a range of consumer and commercial banking services to individuals, businesses and industries in the Orange and Seminole Counties area of Florida. The basic services offered by the Company include: demand interest-bearing and noninterest-bearing accounts, money-market deposit accounts, NOW accounts, time deposits, safe deposit services, credit cards, cash management, direct deposits, notary services, money orders, night depository, travelers’ checks, cashier’s checks, domestic collections, savings bonds, bank drafts, automated teller services, drive-in tellers, and banking by mail. In addition, the Company primarily makes secured and unsecured commercial and real estate loans and issues stand-by letters of credit. The Company provides automated teller machine (ATM) cards, as a part of the STAR ATM Network, thereby permitting customers to utilize the convenience of larger ATM networks. In addition to the STAR ATM Network, the Bank also provides the Presto system for ATM use. In addition to the foregoing services, the Company provides customers with extended banking hours. The Company does not have trust powers and, accordingly, no trust services are provided.
The revenues of the Company are primarily derived from interest on, and fees received in connection with, real estate and other loans, and from interest and dividends from investment securities and short-term investments. The principal sources of funds for the Company’s lending activities are its deposits, repayment of loans, and the maturity of investment securities. The principal expenses of the Company are the interest paid on deposits, and operating and general administrative expenses.
As is the case with banking institutions generally, the Company’s operations are materially and significantly influenced by general economic conditions and by related monetary and fiscal policies of financial institution regulatory agencies, including the Board of Governors of the Federal Reserve System (the “Federal Reserve”). Deposit flows and costs of funds are influenced by interest rates on competing investments and general market rates of interest. Lending activities are affected by the demand for financing of real estate and other types of loans, which in turn is affected by the interest rates at which such financing may be offered and other factors affecting local demand and availability of funds. The Company faces strong competition in the attraction of deposits (its primary source of lendable funds) and in the origination of loans. See “Competition.”
Special Note Regarding Forward-Looking Statements
This Annual Report contains certain forward-looking statements which represent the Company’s expectations or beliefs, including, but not limited to, statements concerning the banking industry and the Company’s operations, performance, financial condition and growth. For this purpose, any statements contained in this Annual Report that are not statements of historical fact may be deemed forward-looking statements. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “should,” “can,” “estimate,” or “continue” or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, certain of which are beyond the Company’s control, and actual results may differ
materially depending on a variety of important factors, including competition, general economic conditions, changes in interest rates, and changes in the value of real estate and other collateral securing loans, among other things.
Critical Accounting Policies
The Company’s financial condition and results of operations are sensitive to accounting measurements and estimates of matters that are inherently uncertain. When applying accounting policies in areas that are subjective in nature, the Company must use its best judgment to arrive at the carrying value of certain assets. The most critical accounting policy applied is related to the valuation of the loan portfolio.
A variety of estimates impact carrying value of the loan portfolio including the calculation of the allowance for loan losses, valuation of underlying collateral, the timing of loan charge-offs and the amount and amortization of loan fees and deferred origination costs.
The allowance for loan losses is the most difficult and subjective judgment. The allowance is established and maintained at a level that the Company believes is adequate to cover losses resulting from the inability of borrowers to make required payments on loans. Estimates for loan losses are arrived at by analyzing risks associated with specific loans and the loan portfolio, current trends in delinquencies and charge-offs, the views of regulators, changes in the size and composition of the loan portfolio and peer comparisons. The analysis also requires consideration of the economic climate and direction, change in the interest rate environment, which may impact a borrower’s ability to pay, legislation impacting the banking industry and economic conditions specific to its service area. Because the calculation of the allowance for loan losses relies on estimates and judgments relating to inherently uncertain events, results may differ from the Company’s estimates.
The allowance for loan losses is also discussed as part of “Management’s Discussion and Analysis - Financial Condition” and in Note 4 to the consolidated financial statements. The significant accounting policies are discussed in Note 2 to the consolidated financial statements.
Risk Factors
Our future depends on the successful growth of the Bank
Our primary business activity for the foreseeable future will be to continue to act as the holding company of the Bank. Therefore, our future profitability will continue to depend on the success and growth of the Bank. Our growth will depend in large part on our ability to leverage our existing infrastructure. The inability of the Bank to expand its business without substantially increasing the number of branches, or the inability of Bank to grow its commercial banking business, may prevent us from realizing our growth objectives.
A significant amount of our business is concentrated in real estate lending, and most of this lending involves Florida real estate
In addition to the financial strength and cash flow characteristics of the borrower in each case, the Bank often secures its loans with real estate collateral. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. If we are required to liquidate the collateral securing a loan during a period of reduced real estate values to satisfy the debt, our earnings and capital could be adversely affected.
Additionally, with most of our loans concentrated in Orange and Seminole Counties, Florida, a decline in local economic conditions could adversely affect the values of our real estate collateral. Consequently, a decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of larger financial institutions whose real estate loan portfolios are geographically diverse.
An inadequate allowance for loan losses would reduce our earnings
The risk of credit losses on loans varies with, among other things, general economic conditions, the type of loan being made, the creditworthiness of the borrower over the term of the loan and, in the case of a collateralized loan, the value and marketability of the collateral for the loan. Management maintains an allowance for loan losses based upon, among other things, historical experience, an evaluation of economic conditions and regular reviews of delinquencies and loan portfolio quality. Based upon
such factors, management makes various assumptions and judgments about the ultimate collectability of the loan portfolio and provides an allowance for loan losses based upon a percentage of the outstanding balances and for specific loans when their ultimate collectability is considered questionable. If management’s assumptions and judgments prove to be incorrect and the allowance for loan losses is inadequate to absorb future losses, or if the bank regulatory authorities require the Bank to increase the allowance for loan losses as a part of their examination process, the Bank’s earnings and capital could be significantly and adversely affected.
The Bank manages its non-accruing loans in an effort to minimize credit losses. Although management believes that its allowance for loan losses is adequate, there can be no assurance that the allowance will prove sufficient to cover future loan losses. Further, although management uses the best information available to make determinations with respect to the allowance for loan losses, future adjustments may be necessary if economic conditions differ substantially from the assumptions used or adverse developments arise with respect to the Bank’s non-performing or performing loans. Material additions to the Bank’s allowance for loan losses would result in a decrease in the Bank’s net income and capital, and could have a material adverse effect on us.
Changes in interest rates affect our profitability and assets
Changes in prevailing interest rates may hurt our business. We derive our income mainly from the difference or “spread” between the interest earned on loans, securities and other interest-earning assets, and interest paid on deposits, borrowings and other interest-bearing liabilities. In general, the larger the spread, the more we earn. When market rates of interest change, the interest we receive on our assets and the interest we pay on our liabilities will fluctuate. This can cause decreases in our spread and can adversely affect our income. Changes in market interest rates could reduce the value of our financial assets. Fixed-rate investments, mortgage-backed and related securities and mortgage loans generally decrease in value as interest rates rise. In addition, interest rates affect how much money we can lend. For example, when interest rates rise, the cost of borrowing increases and the loan originations tend to decrease. If we are unsuccessful in managing the effects of changes in interest rates, our financial condition and results of operations could suffer.
Regional economic factors may have an adverse impact on our business
Substantially all of our business is with customers in our market areas of Orange and Seminole Counties, Florida. Most of our customers are individuals and medium-sized businesses which are dependent upon the regional economy. Adverse changes in economic and business conditions in our markets could adversely affect our borrowers, their ability to repay their loans and to borrow additional funds or buy financial services and products from us, and consequently our financial condition and performance.
The market value of our investments could decline
Our investment securities portfolio as of December 31, 2005 has been designated as available-for-sale pursuant to Statement of Financial Accounting Standards No. 115 (“SFAS 115”) relating to accounting for investments. SFAS 115 requires that unrealized gains and losses in the estimated value of the available-for-sale portfolio be “marked to market” and reflected as a separate item in stockholders’ equity (net of tax) as accumulated other comprehensive income.
Stockholders’ equity will continue to reflect the unrealized gains and losses (net of tax) of these investments. There can be no assurance that the market value of our investment portfolio will not decline, causing a corresponding decline in stockholders’ equity.
Management believes that several factors will affect the market values of our investment portfolio. These include, but are not limited to, changes in interest rates or expectations of changes, the degree of volatility in the securities markets, inflation rates or expectations of inflation and the slope of the interest rate yield curve (the yield curve refers to the differences between shorter-term and longer-term interest rates; a positively sloped yield curve means shorter-term rates are lower than longer-term rates). These and other factors may impact specific categories of the portfolio differently, and we cannot predict the effect these factors may have on any specific category.
We face strong competition from other banks and financial institutions which can hurt our business
We conduct our banking operations in a number of competitive local markets. In those markets, we compete against commercial banks, savings banks, savings and loan associations, credit unions, mortgage banks, brokerage firms, investment advisory firms,
insurance companies and other financial institutions. Many of these entities are larger organizations with significantly greater financial, management and other resources than we have, and they offer the same or similar banking or financial services that we offer in our markets. Moreover, new and existing competitors may expand their business in or into our markets. Increased competition in our markets may result in a reduction in loans, deposits and other sources of our revenues. Ultimately, we may not be able to compete successfully against current and future competitors.
We do not intend to pay dividends
We do not anticipate paying any cash dividends on our common stock for the foreseeable future. No assurance can be given that our future earnings will be sufficient to permit the legal payment of dividends to shareholders at any time in the future. We are subject to significant regulatory restrictions on the payment of cash dividends. Even if we may legally declare dividends, the amount and timing of such dividends will be at the discretion of the our board of directors. The board may in its sole discretion decide not to declare dividends. In light of the regulatory restrictions and the need for the Bank to retain and build capital for growth and expansion, we intend to reinvest earnings for the foreseeable future. You should not buy our common stock if you require dividend income.
Government regulations and policies impose limitations and may result in higher operating costs and competitive disadvantages
We are subject to extensive federal government supervision and regulation that is intended primarily to protect depositors and the FDIC’s Bank Insurance Fund, rather than our shareholders. Existing banking laws subject us to substantial limitations with respect to loans, the purchase of securities, the payment of dividends and many other aspects of our banking business. Some of the banking laws may increase the cost of doing business or otherwise adversely affect us and create competitive advantages for non-bank competitors. There can be no assurance that future legislation or government policy will not adversely affect the banking industry or our operations. Federal economic and monetary policy may affect our ability to attract deposits, make loans and achieve satisfactory interest spreads.
We cannot predict how changes in technology will impact our business
We use various technologies in our business, including telecommunication, data processing, computers, automation, internet-based banking, and debit cards. Technology changes rapidly. Our ability to compete successfully with other banks and non-banks may depend on whether we can exploit technological changes. We may not be able to exploit technological changes, and any investment we do make may not make us more profitable.
We are dependent upon the services of our management team
Our future success and profitability is substantially dependent upon the management and banking abilities of the Bank’s senior executives. We believe that our future results will also depend in part upon our attracting and retaining highly skilled and qualified management and sales and marketing personnel. Competition for such personnel is intense, and we cannot assure you that the Bank will be successful in retaining such personnel. We also cannot guarantee that members of our executive management team will remain with us. Changes in key personnel and their responsibilities may be disruptive to the Bank’s business and could have a material adverse effect on our business, financial condition and results of operations.
Lending Activities
The Company offers a range of lending services, including real estate, consumer and commercial loans, to individuals and small businesses and other organizations that are located in or conduct a substantial portion of their business in the Company’s market area. The interest rates charged on loans vary with the degree of risk, maturity, and amount of the loan, and are further subject to competitive pressures, money market rates, availability of funds, and government regulations. The Company has no foreign loans or loans for highly leveraged transactions.
The Company’s loans are concentrated in four major areas: commercial, financial and agricultural, real estate mortgage, construction and land development, and installment and consumer loans. A majority of the Company’s loans are made on a secured basis.
The Company’s commercial loan portfolio includes loans to individuals and small-to-medium sized businesses located primarily in Orange and Seminole Counties for working capital, equipment purchases, and various other business purposes. A majority of commercial loans are secured by real estate, equipment or similar assets, but these loans may also be made on an unsecured basis. Commercial loans may be made at variable or fixed rates of interest. Commercial lines of credit are typically granted on a one-year basis, with loan covenants and monetary thresholds. Other commercial loans with terms or amortization schedules of longer than one year will normally carry interest rates which vary with the prime lending rate and will become payable in full and are generally refinanced in three to five years.
The Company’s consumer loan portfolio consists primarily of loans to individuals for various consumer purposes, but includes some business purpose loans which are payable on an installment basis. The majority of these loans are for terms of less than five years and are secured by liens on various personal assets of the borrowers, but consumer loans may also be made on an unsecured basis. Consumer loans are made at fixed and variable interest rates, and are often based on up to a five-year amortization schedule.
For additional information regarding the Company’s loan portfolio, see “Management’s Discussion and Analysis - Financial Condition.”
Loan originations are derived from a number of sources. Loan originations can be attributed to direct solicitation by the Company’s loan officers, existing customers and borrowers, advertising, walk-in customers.
Certain credit risks are inherent in making loans. These include prepayment risks, risks resulting from uncertainties in the future value of collateral, risks resulting from changes in economic and industry conditions, and risks inherent in dealing with individual borrowers. In particular, longer maturities increase the risk that economic conditions will change and adversely affect collectibility. The Company attempts to minimize credit losses through various means. In particular, on larger credits, the Company generally relies on the cash flow of a debtor as the source of repayment and secondarily on the value of the underlying collateral. In addition, the Company attempts to utilize shorter loan terms in order to reduce the risk of a decline in the value of such collateral.
Deposit Activities
Deposits are the major source of the Company’s funds for lending and other investment activities. The Company considers the majority of its regular savings, demand, NOW and money-market deposit accounts to be core deposits. Generally, the Company attempts to maintain the rates paid on its deposits at a competitive level. The majority of the deposits of the Company are generated from the Orange and Seminole Counties area of Florida. The Company does not currently accept brokered deposits. For additional information regarding the Company’s deposit accounts, see “Management’s Discussion and Analysis - Financial Condition.”
Investments
The Company invests a portion of its assets in U.S. Government agency obligations, mortgage-backed securities, tax-exempt municipal bonds and federal funds sold. The Company’s investments are managed in relation to loan demand and deposit growth, and are generally used to provide for the investment of excess funds at minimal risks while providing liquidity to fund increases in loan demand or to offset fluctuations in deposits.
With respect to the Company’s investment portfolio, the Company’s total portfolio may be invested in U.S. Treasury and general obligations of its agencies because such securities generally represent a minimal investment risk. In addition to the investment portfolio, the Company may invest in federal funds sold. Federal funds sold is the excess cash the Company has available over and above daily cash needs. This money is invested on an overnight basis with approved correspondent banks.
The Company monitors changes in financial markets. In addition to investments for its portfolio, the Company monitors its daily cash position to ensure that all available funds earn interest at the earliest possible date. A portion of the investment account is designated as secondary reserves and invested in liquid securities that can be readily converted to cash with minimum risk of market loss. These investments usually consist of U.S. Treasury obligations, U.S. government agencies and federal funds sold. The remainder of the investment account may be placed in investment securities of different type and longer maturity. Daily
surplus funds are sold in the federal funds market for one business day. The Company attempts to stagger the maturities of its securities so as to produce a steady cash-flow in the event the Company needs cash, or economic conditions change to a more favorable rate environment.
Correspondent Banking
Correspondent banking involves one bank providing services to another bank which cannot provide that service for itself from an economic or practical standpoint. The Company is required to purchase correspondent services offered by larger banks, including check collections, purchase of federal funds, security safekeeping, investment services, coin and currency supplies, overline and liquidity loan participations and sales of loans to or participation with correspondent banks.
The Company will sell loan participations to correspondent banks with respect to loans which exceed the Company’s lending limit. Management of the Company has established correspondent relationships with several banks that specialize in these services. The Company pays for such services.
Data Processing
The Company outsources its data processing to a large bank data processor which provides a full range of data processing services, including an automated general ledger, deposit accounting, and commercial, mortgage and installment lending data processing.
Effect of Governmental Policies
The earnings and business of the Company are and will be 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 these 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.
Interest and Usury
The Company is subject to numerous state and federal statutes that affect the interest rates that may be charged on loans. These laws do not, under present market conditions, deter the Company from continuing the process of originating loans.
Supervision and Regulation
Banks and their holding companies, and many of 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 and the Bank. 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 and the Bank. 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 Holding Company is a bank holding company, registered with the Federal Reserve under the BHC Act. 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 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, or (iii) merging or consolidating with any other bank holding company.
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 substantially 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 anticompetitive 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 includes the parties’ performance under the Community Reinvestment Act of 1977 (the “CRA”), both of which are discussed below.
Banks are subject to the provisions of the CRA. Under the terms of the CRA, 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:
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charter a bank,
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obtain deposit insurance coverage for a newly chartered institution,
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establish a new branch office that will accept deposits,
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relocate an office, or
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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 bank holding company, and such records may be the basis for denying the application.
The BHC Act generally prohibits a bank holding company from engaging in activities other than banking, or managing or controlling banks or other permissible subsidiaries, and from acquiring or retaining direct or indirect control of any company engaged in any activities other than those activities determined by the Federal Reserve to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In determining whether a particular activity is permissible, the Federal Reserve must consider whether the performance of such an activity can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition, or gains in efficiency that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practices. For example, factoring accounts receivable, acquiring or servicing loans, leasing personal property, conducting securities brokerage activities, performing certain data processing services, acting as agent or broker in selling credit life insurance and certain other types of insurance in connection with credit transactions, and certain insurance underwriting activities have all been determined by regulations of the Federal Reserve to be permissible activities of bank holding companies. Despite prior approval, the Federal Reserve has the power to order a holding company or its subsidiaries to terminate any activity or terminate its ownership or control of any subsidiary, when it has reasonable cause to believe that continuation of such activity or such ownership or control constitutes a serious risk to the financial safety, soundness, or stability of any bank subsidiary of that bank holding company.
Gramm-Leach-Bliley Act. Enacted in 1999, The Gramm-Leach-Bliley Act reforms and modernizes certain areas of financial services regulation. The law permits the creation of new financial services holding companies that can offer a full range of financial products under a regulatory structure based on the principle of functional regulation. The legislation eliminates the legal barriers to affiliations among banks and securities firms, insurance companies, and other financial services companies. The law also provides financial organizations with the opportunity to structure these financial affiliations through a holding company structure or a financial subsidiary. The law reserves the role of the Federal Reserve Board 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 includes a minimum federal standard of financial privacy. Financial institutions are required to have written privacy policies that must be disclosed to customers. The disclosure of a financial institution’s privacy policy must take place at the time a customer relationship is established and not less than annually during the continuation of the relationship. The act also provides for the functional regulation of bank securities activities. The law repeals the exemption that banks were afforded from the definition of “broker,” and replaces it with a set of limited exemptions that allow the continuation of some historical activities
performed by banks. In addition, the act amends the securities laws to include banks within the general definition of dealer. Regarding bank products, the law provides a procedure for handling products sold by banks that have securities elements. In the area of Community Reinvestment Act activities, the law generally requires that financial institutions address the credit needs of low-to-moderate income individuals and neighborhoods in the communities in which they operate. Bank regulators are required to take the Community Reinvestment Act ratings of a bank or of the bank subsidiaries of a holding company into account when acting upon certain branch and bank merger and acquisition applications filed by the institution. Under the law, financial holding companies and banks that desire to engage in new financial activities are required to have satisfactory or better Community Reinvestment Act ratings when they commence the new activity.
Recent Legislation to Curtail Corporate Accounting Irregularities. On July 30, 2002, the Sarbanes-Oxley Act of 2002 (the “Sarbanes Act”) was enacted. The Securities and Exchange Commission (the “SEC”) has promulgated certain regulations pursuant to the Sarbanes Act and may propose additional regulations as necessary in furtherance of the Sarbanes Act. The passage of the Sarbanes Act and the regulations implemented by the SEC subject publicly-traded companies to additional and more extensive reporting regulations and disclosure. Continued compliance with the Sarbanes Act and corresponding regulations may increase the Company’s expenses.
Bank Regulation. The Bank is chartered under the laws of the State of Florida, and its deposits are insured by the Federal Deposition Insurance Corporation (“FDIC”) to the extent provided by law. The Bank is subject to comprehensive regulation, examination and supervision by the FDIC and the Florida Office of Financial Regulation (the “Florida Department”) and to other laws and regulations applicable to banks. Such regulations include limitations on loans to a single borrower and to its directors, officers and employees; restrictions on the opening and closing of branch offices; the maintenance of required capital ratios; the granting of credit under equal and fair conditions; and the disclosure of the costs and terms of such credit. The Bank is examined periodically by the FDIC and the Florida Department, to whom it submits periodic reports regarding its financial condition and other matters. The FDIC and the Florida Department have a broad range of powers to enforce regulations under their jurisdiction, and to take discretionary actions determined to be for the protection and safety and soundness of banks, including the institution of cease and desist orders and the removal of directors and officers. The FDIC and the Florida Department also have the authority to approve or disapprove mergers, consolidations, and similar corporate actions.
There are various statutory limitations on the ability of the Company to pay dividends. The FDIC and the Florida Department also have the general authority to limit the dividend payment by banks if such payment may be deemed to constitute an unsafe and unsound practice. For information on the restrictions on the right of the Bank to pay dividends to the Company, see Part II - Item 5 “Market for the Registrant’s Common Equity and Related Stockholder Matters.”
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”) imposed major regulatory reforms, stronger capital standards for financial institutions and stronger 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:
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the default of a commonly controlled FDIC insured depository institution; or
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any assistance provided by the FDIC to a commonly controlled FDIC insured institution in danger of default.
The FDIC Improvement Act of 1991 (“FDICIA”) made a number of reforms addressing the safety and soundness of deposit insurance funds, supervision, accounting, and prompt regulatory action, and also implemented other regulatory improvements. Annual full-scope, on-site examinations are required of all insured depository institutions. 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. Insured state banks also are precluded from engaging as principal in any type of activity
that is impermissible for a national bank, including activities relating to insurance and equity investments. The Act also recodified the law restricting extensions of credit to insiders under the Federal Reserve Act.
Capital Requirements. The Federal Reserve Board and bank regulatory agencies require bank holding companies and financial institutions to maintain capital at adequate levels based on a percentage of assets and off balance sheet exposures, adjusted for risk weights ranging from 0% to 100%. Under the risk-based standard, capital is classified into two tiers. Tier 1 capital consists of common shareholders’ equity, excluding the unrealized gain (loss) on available-for-sale securities, minus certain intangible assets. Tier 2 capital consists of the general allowance for credit losses except for certain limitations. An institution’s qualifying capital base for purposes of its risk-based capital ratio consists of the sum of its Tier 1 and Tier 2 capital. The regulatory minimum requirements are 4% for Tier 1 and 8% for total risk-based capital. Bank holding companies and banks are also required to maintain capital at a minimum level based on total assets, which is known as the leverage ratio. The minimum requirement for the leverage ratio is 3%, but all but the highest rated institutions are required to maintain ratios 100 to 200 basis points above the minimum. At December 31, 2005 both the Company and the Bank met all capital requirements to which they were subject.
For additional information regarding the Company’s capital ratios and requirements, see “Management’s Discussion and Analysis - Capital Resources, Commitments and Capital Requirements.”
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.”
The FDIC has issued regulations to implement the “prompt corrective action” provisions of FDICIA. In general, the regulations define the five capital categories as follows:
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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;
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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;
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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%;
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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
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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.
FDICIA also contains a number of consumer banking provisions, including disclosure requirements and substantive contractual limitations with respect to deposit accounts.
As of December 31, 2005, the Bank met the capital requirements of a “well capitalized” institution.
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 Bank 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 state wide. Such branch banking, however, is subject to prior approval by the FDIC and the Florida Department. Any such approval would take into consideration several factors, including the bank’s level of capital, the prospects and economics of the proposed branch office, and other conditions deemed relevant by the FDIC and the Florida Department for purposes of determining whether approval should be granted to open a branch office.
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. Federal law also imposes restrictions on acquisitions of stock in a bank holding company and a state bank. Under the federal 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 state bank’s voting stock, or if one or more other control factors set forth in the Act are present. Florida law also contains comparable provisions requiring persons to obtain Florida Department approval prior to acquiring indirect control of the state bank through the acquisition of control of its bank holding company.
Bank Secrecy Act/ USA Patriot Act. Under the Bank Secrecy Act, financial institutions are obligated to file Suspicious Activity Reports on suspicious activities involving the institution, including certain attempted or actual violations of law as well as certain transactions that do not appear to have a lawful purpose or are not the sort of transaction in which the particular customer would normally be expected to engage. The Bank Secrecy Act was amended by the USA Patriot Act of 2001, expanding the important role the government expects banks to play in detecting and reporting suspicious activity. The USA Patriot Act broadened the application of the anti-money laundering regulations to apply to additional types of financial institutions, such as broker-dealers, and strengthened the ability of the U.S. Government to detect and prosecute international money laundering and the financing of terrorism. Failure of a financial institution to comply with the Bank Secrecy Act, as amended by the USA Patriot Act, could have serious legal and reputational consequences for the institution. The Bank has adopted policies, procedures and controls to address compliance with these regulations and will continue to revise and update its policies, procedures and controls to reflect changes required by the USA Patriot Act and all applicable implementing regulations.
Interstate Banking. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1996, provides for nationwide interstate banking and branching. Under the law, interstate acquisitions of banks or bank holding companies in any state by bank holding companies in any other state is permissible. Interstate branching and consolidation of existing bank subsidiaries in different states is permissible. Florida 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.
Effect of Governmental Policies. The earnings and businesses of the Company and the Bank 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.
Competition
The Company encounters strong competition both in making loans and in attracting deposits. The deregulation of the banking industry and the widespread enactment of state laws which permit multi-bank holding companies as well as an increasing level of
interstate banking have created a highly competitive environment for commercial banking. In one or more aspects of its business, the Company competes with other commercial banks, savings and loan associations, credit unions, finance companies, mutual funds, insurance companies, brokerage and investment banking companies, and other financial intermediaries. Most of these competitors, some of which are affiliated with bank holding companies, have substantially greater resources and lending limits, and may offer certain services that the Company does not currently provide. In addition, many of the Company’s non-bank competitors are not subject to the same extensive federal regulations that govern bank holding companies and federally insured banks. Recent federal and state legislation has heightened the competitive environment in which financial institutions must conduct their business, and the potential for competition among financial institutions of all types has increased significantly.
To compete, the Company relies upon specialized services, responsive handling of customer needs, and personal contacts by its officers, directors, and staff. Large multi-branch banking competitors tend to compete primarily by rate and the number and location of branches while smaller, independent financial institutions tend to compete primarily by rate and personal service.
Employees
As of December 31, 2005, the Company had eighty-three full-time employees (including executive officers) and seven part-time employees. The employees are not represented by a collective bargaining unit. The Company considers relations with employees to be good.
Item 1B.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2.
Item 2. Description of Properties
The main office of the Company is located at 1411 Edgewater Drive, Suite 100, Orlando, Florida 32804. The main office of the Bank is located at 3378 Edgewater Drive, Orlando, Florida 32804. The administrative offices of the Company and the Bank are located 640 East State Road 434, Longwood, Florida 32750. Additional offices are located at 100 East Packwood Avenue, Maitland, Florida 32751; 1211 Orange Avenue, Suite 101, Winter Park, Florida 32789; 21 East Third Street, Apopka, Florida 32703; 3001 West Lake Mary Boulevard, Lake Mary, Florida 32746; 413 West First Street, Sanford, Florida 32771; 640 East State Road 434, Longwood, Florida 32750; 5202 Red Bug Lake Road, Winter Springs, Florida 32708; 129 East Gore Street, Orlando, Florida 32750 and 1002 South Dillard Street, Winter Garden, Florida 32787. The Company and the Bank lease their banking offices.
Item 3.
Item 3. Legal Proceedings
The Company is periodically party to or otherwise involved in legal proceedings arising in the normal course of business, such as claims to enforce liens, claims involving the making and servicing of real property loans, and other issues incident to their respective businesses. Management does not believe that there is any pending or threatened proceeding against the Company which, if determined adversely, would have a material adverse effect on the Company’s consolidated financial position or results of operations.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company’s security holders during the fourth quarter of the year ended December 31, 2005.
PART II
Item 5.
Item 5. Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The shares of the Company’s common stock are not actively traded, and such trading activity, as it occurs, takes place in privately negotiated transactions. There is no established public trading market for the shares of the Company’s common stock. Management of the Company is aware of certain transactions in its shares, although the trading prices of all stock transactions are
not known. The following sets forth the high and low trading prices for certain trades of the Company’s common stock that occurred in transactions known to the Company’s management during 2005 and 2004:
(1)
This trade was not an arm-length transaction.
The Company had approximately 889 shareholders of record as of December 31, 2005.
Private Placement Offering
On March 2, 2005, the Company sold 1,537,222 shares of its common stock in a private placement transaction at $14.00 per share. The Company raised $21.5 million after deducting related offering costs.
Dividends
The Company has not paid any cash dividends in the past. The Company intends that, for the foreseeable future, it will retain earnings to finance continued growth rather than pay cash dividends on the Company’s common stock. If at any time the Company’s Board determines to pay dividends on the Company’s common stock, the timing and the extent to which dividends are paid by the Company will be determined by such Board in light of then-existing circumstances, including the Company’s rate of growth, profitability, financial condition, existing and anticipated capital requirements, the amount of funds legally available for the payment of cash dividends, regulatory constraints and such other factors as the Board determines relevant. The source of funds for payment of dividends by the Company will be dividends received from the Bank. Payments by the Bank to the Company are limited by law and regulations of the bank regulatory authorities. There are various statutory and contractual limitations on the ability of the Bank to pay dividends to the Company. The FDIC and the Florida Department also have the general authority to limit the dividends paid by banks if such payment may be deemed to constitute an unsafe and unsound practice. Under Florida law, after making provisions for a reasonably anticipated future losses on loans and other assets, the board of directors of a bank may declare a dividend of so much of the bank’s aggregate net profits for the current year combined with its retained earnings (if any) for the preceding two years as the board deems appropriate and, with the approval of the Florida Department, may declare a dividend from retained earnings for prior years. No dividends may be paid at a time when a bank’s net earnings from the preceding two years is a loss or which would cause the capital accounts of the bank to fall below the minimum amount required by law, regulation, order or any written agreement with the Florida Department or a federal regulatory agency.
Florida law applicable to companies (including the Company) provides that dividends may be declared and paid only if, after giving it effect, (i) the company is able to pay its debts as they become due in the usual course of business, and (ii) the company’s total assets would be greater than the sum of its total liabilities plus the amount that would be needed if the company were to be dissolved at the time of the dividend to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the dividend.
The Company did not repurchase any shares of its common stock during 2005.
With respect to information regarding the Company’s securities authorized for issuance under equity incentive plans, the information contained in the section entitled “Equity Compensation Plan Information” in the Company’s Definitive Proxy Statement for 2006 Annual Meeting of Shareholders is incorporated herein by reference.
Item 6.
Item 6. Selected Financial Data
Item 7.
Item 7. Management’s Discussion and Analysis
Management’s discussion and analysis of operations and related financial data are presented herein to assist investors in understanding the financial condition and results of operations of the Company. The following disclosures are made in accordance with current Securities and Exchange Commission guidelines that apply to bank holding companies. These guidelines require disclosures for the last three years of operations for most items, except for certain loan portfolio and loan loss experience items, that require five years of financial data disclosures. This discussion should be read in conjunction with the consolidated financial statements and related footnotes of the Company presented elsewhere herein.
General
United Heritage Bankshares of Florida, Inc. (the “Company”) was incorporated under the laws of the State of Florida on April 15, 2002. The Company is a registered bank holding company under the Bank Holding Company Act of 1956, as amended (the “BHC Act”) and owns 100% of the common stock of United Heritage Bank (the “Bank”). The Bank commenced operations in March 2001. On January 13, 2003, the Company acquired Community United Bank (“CUB”) in a purchase transaction. Community United Bank commenced operations in August 1999. During 2004, CUB was merged into the Bank, result in a one-bank holding company structure.
The accompanying financial information includes the accounts of the Company and the Bank. All significant intercompany accounts have been eliminated in consolidation. The assets and liabilities acquired in the January 13, 2003 purchase of CUB and income and expense of CUB subsequent to January 13, 2003 are included in the accompanying information. The financial information previous to the purchase of CUB includes only the accounts of the Company and the Bank. Accordingly, the overall growth of the Company from December 31, 2002 through December 31, 2004 is due not only to growth of the Bank, but also to the acquisition of CUB.
The Company’s principal asset is its ownership of the Bank. Accordingly, the Company’s results of operations are primarily dependent upon the results of operations of the Bank. The Company conducts commercial banking business consisting of attracting deposits from the general public and applying those funds to the origination of commercial, consumer and real estate loans (including commercial loans collateralized by real estate). The Company’s profitability depends primarily on net interest income, which is the difference between interest income generated from interest-earning assets (i.e., loans and investments) less the interest expense incurred on interest-bearing liabilities (i.e., customer deposits and borrowed funds). Net interest income is affected by the relative amounts of interest-earning assets and interest-bearing liabilities, and the interest rate earned and paid on these balances. Net interest income is dependent upon the Company’s interest-rate spread which is the difference between the average yield earned on its interest-earning assets and the average rate paid on its interest-bearing liabilities. When interest-earning assets approximate or exceed interest-bearing liabilities, any positive interest rate spread will generate net interest income. The interest rate spread is impacted by interest rates, deposit flows, and loan demand. Additionally, and to a lesser extent, the Company’s profitability is affected by such factors as the level of noninterest income and expenses, the provision for loan losses, and the effective tax rate. Noninterest income consists primarily of service charges and fees. Noninterest expense consists of salaries and employee benefits, occupancy expenses, deposit insurance premiums paid to the FDIC, and other operating expenses.
Capital Resources, Commitments and Capital Requirements
The Company’s principal sources of funds are those generated by the Bank, including net increases in deposits and borrowings, principal and interest payments on loans, and proceeds from maturities of investment securities.
The Company uses its capital resources principally to fund existing and continuing loan commitments and to purchase investment securities. Off-balance-sheet commitments to extend credit, which amounted to $138.6 million at December 31, 2005, $63.8 million at December 31, 2004 and $60.1 million at December 31, 2003, represent legally binding agreements to lend to customers with fixed expiration dates or other termination clauses. Since many commitments are expected to expire without being funded, committed amounts do not necessarily represent future cash requirements.
The following table summarizes the Company’s contractual obligations, including certain on-balance-sheet and off-balance-sheet obligations, at December 31, 2005 (in thousands):
Management believes that the Company has adequate resources to fund all its commitments, that substantially all of its existing commitments will be funded within 12 months and, if so desired, that the Company can adjust the rates and terms on certificates of deposit and other deposit accounts to retain or obtain new deposits in a changing interest rate environment.
In accordance with risk capital guidelines issued by the FDIC and Federal Reserve, the Bank, CUB (prior to 2004) and the Company are required to maintain a minimum standard of total capital to risk-weighted assets of 8.0%. Additionally, regulatory agencies require banks and holding companies to maintain a minimum leverage-capital ratio of Tier 1 capital (as defined) to average assets. The leverage-capital ratio ranges from 3.0% to 5.0% based on the bank’s and bank holding company’s rating under the regulatory rating system.
The following table summarizes the regulatory capital levels and ratios:
Results of Operations
The following table shows selected ratios for the periods ended or at the dates indicated:
The rates and yields for the dates indicated were as follows:
Net interest income before provision for loan losses, which constitutes the principal source of income for the Company, represents the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities. The principal interest-earning assets are investment securities and loans made to businesses and individuals. Interest-bearing liabilities primarily consist of time deposits, interest-bearing checking accounts (“NOW accounts”), retail savings deposits and money-market accounts. Funds attracted by these interest-bearing liabilities are invested in interest-earning assets. Accordingly, net interest income depends upon the volume of average interest-earning assets and average interest-bearing liabilities and the interest rates earned or paid on them.
Net interest income before provision for loan losses was approximately $17,076,000 for 2005 compared to $10,742,000 for 2004 and $7,964,000 for 2003.
The following table sets forth, for the periods indicated, information regarding (i) the total dollar amount of interest and dividend income of the Company from interest-earning assets and the resultant average yield; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average cost; (iii) net interest/dividend income; (iv) interest-rate spread; and (v) net interest margin. Average balances were based on average daily balances ($ in thousands).
(1)
Includes Federal Home Loan Bank stock, Federal Funds sold and interest-earning demand deposits.
(2)
Includes securities sold under agreement to repurchase and federal funds purchased lines of credit.
(3)
Interest-rate spread represents the difference between the average yield on interest-earning assets and the average rate of interest-bearing liabilities.
(4)
Net interest margin is net interest income divided by average interest-earning assets.
The following tables set forth certain information regarding changes in interest income and interest expense for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in rate (change in rate multiplied by prior volume); (2) changes in volume (change in volume multiplied by prior rate) and (3) changes in rate-volume (change in rate multiplied by change in volume).
Comparison of Results of Operations for 2005 to 2004
General
Net income for the year ended December 31, 2005 was $3.3 million or $.74 basic and $.72 diluted earnings per share compared to $2.0 million or $.63 basic and $.61 diluted earnings per share for the comparable period in 2004. The increase in the Company’s
net income was primarily due to an increase in net interest income, partially offset by increases in provision for loan losses and noninterest expenses.
Interest Income and Expense
Interest income increased to $29.3 million for the year ended December 31, 2005 from $16.7 million for the year ended December 31, 2004. Interest income on loans increased to $21.1 million primarily due to increases in the average loan portfolio balance from $220 million for the year ended December 31, 2004 to $297 million for 2005 and in the average yield from 6.46% to 7.10%. Interest income on securities increased to $4.8 million in 2005 from $1.6 million in 2004 primarily due to a increase in the average balance from $54 million to $129 million.
Interest income on other interest-earning assets increased to $3.4 million in 2005 from $820,000 in 2004 primarily due to a increase in the average balance to $102 million in 2005 from $64 million in 2004 and an increase in the average yield to 3.29% in 2005 from 1.28% in 2004.
Interest expense on interest-bearing liabilities was $12.2 million for the year ended December 31, 2005 compared to $5.9 million for 2004. Interest expense increased due to increases in average interest-bearing liabilities from $280 million in 2004 to $427 million in 2005 and in the average rate paid from 2.11% in 2004 to 2.86% in 2005.
Provision for Loan Losses
The provision for loan losses is charged to earnings to increase the total allowance to a level deemed appropriate by management and is based upon the volume and type of lending conducted by the Company, industry standards, the amount of nonperforming loans and general economic conditions, particularly as they relate to the Company’s market areas, and other factors related to the collectibility of the Company’s loan portfolio. The Company recorded a provision for loan losses for the year ended December 31, 2005 of $1,540,000 compared to $617,000 in 2004. The allowance for loan losses was $4.6 million, or 1.25% of total loans, at December 31, 2005. Management believes the allowance was adequate at December 31, 2005.
Noninterest Income
Noninterest income increased to $801,000 for the year ended December 31, 2005 compared to $547,000 for the year ended December 31, 2004. The increase was primarily due to a $172,000 increase in service charges and fees and increases in residential mortgage fees.
Noninterest Expense
Noninterest expense was $11.1 million for the year ended December 31, 2005 compared to $7.3 million for the year ended December 31, 2004. This increase includes increases of approximately $2.3 million in salary and employee benefits and $770,000 in occupancy and equipment expense associated with the growth of the Company from 2004 to 2005.
Income Taxes
The income tax expense for the year ended December 31, 2005 was $1.9 million (an effective rate of 36.6%, including state income taxes) compared to approximately $1.3 million (an effective rate of 38.6%, including state income taxes) for the 2004 period.
Comparison of Results of Operations for 2004 to 2003
General
Net income for the year ended December 31, 2004 was $2,041,000 or $.63 basic and $.61 diluted earnings per share compared to $881,000 or $.28 basic and $.27 diluted earnings per share for the comparable period in 2003. The increase in the Company’s net income was primarily due to an increase in net interest income, partially offset by an increase in noninterest expenses.
Interest Income and Expense
Interest income increased to $16.7 million for the year ended December 31, 2004 from $13.5 million for the year ended December 31, 2003. Interest income on loans increased to $14.2 million primarily due to an increase in the average loan portfolio
balance from $172 million for the year ended December 31, 2003 to $220 million for 2004 which was partially offset by a decrease in the average yield from 6.77% to 6.46%. Interest income on securities increased to $1.6 million in 2004 from $1.3 million in 2003 primarily due to a increase in the average yield from 2.39% to 3.01%.
Interest income on other interest-earning assets increased to $820,000 in 2004 from $570,000 in 2003 primarily due to a increase in the average balance to $64 million in 2004 from $52 million in 2003 and an increase in the average yield to 1.28% in 2004 from 1.10% in 2003.
Interest expense on interest-bearing liabilities was $5.9 million for the year ended December 31, 2004 compared to $5.6 million for 2003. Interest expense increased due to an increase in average interest-bearing liabilities from $234 million in 2003 to $280 million in 2004, partially offset by a decrease in the average rate paid from 2.39% in 2003 to 2.11% in 2004.
Provision for Loan Losses
The provision for loan losses is charged to earnings to increase the total allowance to a level deemed appropriate by management and is based upon the volume and type of lending conducted by the Company, industry standards, the amount of nonperforming loans and general economic conditions, particularly as they relate to the Company’s market areas, and other factors related to the collectibility of the Company’s loan portfolio. The Company recorded a provision for loan losses for the year ended December 31, 2004 of $617,000 compared to $784,000 in 2003. The allowance for loan losses was $3.1 million at December 31, 2004. Management believes the allowance was adequate at December 31, 2004.
Noninterest Income
Noninterest income increased to $547,000 for the year ended December 31, 2004 compared to $526,000 for the year ended December 31, 2003. The increase was primarily due to a $35,000 increase in service charges and fees.
Noninterest Expense
Noninterest expense was $7.3 million for the year ended December 31, 2004 compared to $6.3 million for the year ended December 31, 2003. This increase includes approximately $503,000 in salary and employee benefits and $273,000 in occupancy and equipment expense associated with the growth of the Company from 2003 to 2004.
Income Taxes
The income tax expense for the year ended December 31, 2004 was $1.3 million (an effective rate of 38.6%, including state income taxes) compared to approximately $568,000 for 2003 (an effective rate of 39.2%, including state income taxes) for the 2003 period.
Asset/ Liability Management
A principal objective of the Company’s asset/liability management strategy is to minimize its exposure to changes in interest rates by matching the maturity and repricing horizons of interest-earning assets and interest-bearing liabilities. This strategy is overseen in part through the direction of the Asset and Liability Committee which establishes policies and monitors results to control interest rate sensitivity.
Management evaluates interest rate risk and then formulates guidelines regarding asset generation and repricing, funding sources and pricing, and off-balance sheet commitments in order to maintain interest rate risk within target levels for the appropriate level of risk which are determined by the Committee. The Committee uses internally generated reports to measure the Bank’s interest rate sensitivity. From these reports, the Committee can estimate the net earnings effect of various interest rate scenarios.
As a part of the Company’s interest rate risk management policy, the Committee examines the extent to which its assets and liabilities are “interest rate sensitive” and monitors the bank’s interest rate sensitivity “gap.” An asset or liability is considered to be interest rate sensitive if it will reprice or mature within the time period analyzed, usually one year or less. The interest rate sensitivity gap is the difference between interest-earning assets and interest-bearing liabilities scheduled to mature or reprice within such time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds interest
rate sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income, while a positive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income, while a positive gap would tend to adversely affect net interest income. If the repricing of each bank’s assets and liabilities were equally flexible and moved concurrently, the impact of any increase or decrease in interest rates on net interest income would be minimal.
A simple interest rate “gap” analysis by itself may not be an accurate indicator of how net interest income will be affected by changes in interest rates. Accordingly, the Committee also evaluates how the repayment of particular assets and liabilities is impacted by changes in interest rates. Income associated with interest-earning assets and costs associated with interest-bearing liabilities may not be affected uniformly by changes in interest rates. In addition, the magnitude and duration of changes in interest rates may have a significant impact on net interest income. For example, although certain assets and liabilities may have similar maturities or period of repricing, they may react in different degrees to changes in market interest rates. Interest rates on certain types of assets and liabilities fluctuate in advance of changes in general market interest rates, while interest rates on other types may lag behind changes in general market rates. In addition, certain assets, such as adjustable rate mortgage loans, have features (generally referred to as “interest rate caps”) which limit changes in interest rates on a short-term basis and over the life of the asset. In the event of a change in interest rates, prepayment (on loans) and early withdrawal (of deposit accounts) levels also could deviate significantly from those assumed in calculating the interest rate gap. The ability of many borrowers to service their debts also may decrease in the event of an interest rate increase.
Management’s strategy is to maintain a balanced interest rate risk position to protect its net interest margin from market fluctuations.
Principal among the Company’s asset/liability management strategies has been the emphasis on managing its interest rate sensitive liabilities in a manner designed to attempt to reduce the Company’s exposure during periods of fluctuating interest rates. Management believes that the type and amount of the Company’s interest rate sensitive liabilities may reduce the potential impact that a rise in interest rates might have on the Company’s net interest income. The Company seeks to maintain a core deposit base by providing quality services to its customers without significantly increasing its cost of funds or operating expenses. Management anticipates that these core accounts will continue to comprise a significant portion of the Company’s total deposit base. The Company also maintains a portfolio of liquid assets in order to reduce its overall exposure to changes in market interest rates. The Company also maintains a “floor,” or minimum rate, on certain of its floating or prime based loans. These floors allow the Company to continue to earn a higher rate when the floating rate falls below the established floor rate.
The following table sets forth certain information relating to the Company’s interest-earning assets and interest-bearing liabilities at December 31, 2005 that are estimated to mature or are scheduled to reprice within the period shown ($ in thousands):
(1)
In preparing the table above, adjustable-rate loans were included in the period in which the interest rates are next scheduled to adjust rather than in the period in which the loans mature. Fixed-rate loans were scheduled according to their contractual maturities.
(2)
Securities were scheduled based on their remaining maturity or repricing frequency. Mortgage-backed securities are scheduled over ratably five years.
(3)
Excludes noninterest-bearing deposit accounts. Money market deposits were regarded as maturing immediately. NOW and savings deposits were regarded as maturing in 1-5 years. All other time deposits were scheduled through the maturity dates.
Financial Condition
Lending Activities
A significant source of income for the Company is the interest earned on loans. The Company’s primary market area consists of Orange and Seminole Counties, Florida, which offer recreational facilities, cultural events, resorts, commercial office parks, residential developments, major transportation routes, shopping centers, and entertainment areas. Business and entertainment service industries, retail trade, government, construction, real estate, finance/insurance, health care and transportation/communication/utility form the basis for the area’s business economy. Although not important as it once was, agricultural remains a part of the area’s industry, with citrus crops, nurseries and vegetables making up the bulk of the agriculture business.
There is no assurance that the Company’s market area will continue to experience economic growth. Adverse conditions in any one or more of the industries operating in such markets or slow-down in general economic conditions could have an adverse effect on the Company.
Lending activities are conducted pursuant to a written policy which has been adopted by the Company. Each loan officer has defined lending authority beyond which loans, depending upon their type and size, must be reviewed and approved by a loan committee comprised of certain directors of the Company.
The following table sets forth information concerning the Company’s loan portfolio by type of loan at the dates indicated ($ in thousands):
The following table reflects the contractual principal repayments by period of the Company’s loan portfolio at December 31, 2005 (in thousands):
Asset Quality
Management seeks to maintain a high quality of assets through conservative underwriting and sound lending practices. The majority of the loans in the Company’s loan portfolio are collateralized by real estate mortgages. The level of delinquent loans and foreclosed assets also is relevant to the credit quality of a loan portfolio.
In an effort to maintain the quality of the loan portfolio, management seeks to minimize higher risk types of lending. In view of the relative significance of real estate related loans, a downturn in the value of the real estate could have an adverse impact on the
Company’s profitability. However, as part of its loan portfolio management strategy, the Company generally limits its loans to a maximum of 80% of the value of the underlying real estate as determined by appraisal. In addition, knowledgeable members of management make physical inspections of properties being considered for mortgage loans.
Commercial loans also entail risks since repayment is usually dependent upon the successful operation of the commercial enterprise. They also are subject to adverse conditions in the economy. Commercial loans are generally riskier than mortgage loans because they are typically underwritten on the basis of the ability to repay from the cash flow of a business rather than on the ability of the borrower or guarantor to repay. Further, the collateral underlying a commercial loan may depreciate over time, cannot be appraised with as much precision as real estate, and may fluctuate in value based on the success of the business.
The repayment of consumer installment loans and other loans to individuals is closely linked to the economic conditions of the communities in which the Company operates. For the most part, these local economies enjoy diverse labor forces. The majority of these consumer installment loans are secured by collateral which limits, to a degree, any loss the Company would suffer upon default.
Management has adopted SFAS No. 114, which considers a loan to be impaired if it is probable that the Company will be unable to collect all amounts due under the contractual terms of the loan agreement. If a loan is considered impaired, its value generally should be measured based on the present value of expected cash flows discounted at the loan’s effective interest rate. As a practical expedient, however, the loan’s value may be based on:
•
the loan’s market price; or
•
the fair value of the loan’s collateral, less discounted estimated costs to sell, if the collateral is expected to be the sole source of repayment.
If the value of the loan is less than the recorded investment in the loan, a loss is recognized by recording a valuation allowance and a corresponding increase to the provision for loan losses charged to operating expenses.
Situations may occur where:
•
The Company receives physical possession of a debtor’s assets regardless of whether formal foreclosure proceedings have been initiated or completed; or
•
the debtor has effectively surrendered control of the underlying collateral in contemplation of foreclosure.
These situations are referred to as “in-substance foreclosures.” SFAS No. 114 recognizes the practical problems of accounting for the operation of an asset the creditor does not possess, and states that a loan for which foreclosure is probable should continue to be accounted for as a loan.
The following summarizes impaired loans (in thousands):
The average net investment in impaired loans and interest income recognized and received on impaired loans (in thousands):
Loans on non-accrual status and foreclosed assets and certain other related information was as follows:
Generally, interest on loans accrues and is credited to income based upon the principal balance outstanding. It is management’s policy to discontinue the accrual of interest income and classify a loan as nonaccrual when principal or interest is past due 90 days or more and the loan is not adequately collateralized, or when in the opinion of management, principal or interest is not likely to be paid in accordance with the terms of the obligation. Consumer installment loans are generally charged-off after 90 days of delinquency unless adequately collateralized and in the process of collection. Loans are not returned to accrual status until principal and interest payments are brought current and future payments appear reasonably certain. Interest accrued and unpaid
at the time a loan is placed on nonaccrual status is charged against interest income. Subsequent payments received are applied to the outstanding principal balance.
Interest income that would have been recorded under the original terms of loans on nonaccrual status at December 31, 2005 and interest income actually recognized during the year ended December 31, 2005 on these loans was as follows:
Loan concentrations are defined as amounts loaned to a number of borrowers engaged in similar activities which would cause them to be similarly impacted by economic or other conditions. The Company, on a routine basis, monitors these concentrations in order to consider adjustments in its lending practices to reflect economic conditions, loan to deposit ratios, and industry trends. The Company does not have any concentrations in a specific industry.
The Company’s Loan Committee concentrates its efforts and resources, and that of its senior management and lending officers, on loan review and underwriting procedures. Internal controls include ongoing reviews of loans made to monitor documentation and the existence and valuations of collateral. In addition, management of the Company has established a review process with the objective of identifying, evaluating, and initiating necessary corrective action for marginal loans. The goal of the loan review process is to address classified and nonperforming loans as early as possible.
Classification of Assets and Potential Problem Loans
Foreclosed Assets. Assets acquired by the Company as a result of foreclosure or by deed in lieu of foreclosure is classified as foreclosed assets. Foreclosed assets are recorded at the lower of cost or fair value less estimated selling costs, and the estimated loss, if any, is charged to the allowance for loan losses at the time it is transferred to foreclosed assets. Further allowances for losses in foreclosed assets are recorded at the time management believes additional deterioration in value has occurred.
Classified Assets. Federal regulations and the Company’s policy require the classification of loans and other assets, such as debt and equity securities, considered to be of lesser quality as “substandard”, “doubtful” or “loss” assets. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full”, on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. In addition, the Company’s policies require that assets which do not currently expose the insured institution to sufficient risk to warrant classification as substandard but possess other weaknesses are designated “special mention” by management.
If an asset is classified, the estimated fair value of the asset is determined and if that value is less than the then carrying value of the asset, the difference is established as a specific reserve. If an asset is classified as loss, the amount of the asset classified as loss is reserved.
The following table sets forth information concerning the number and dollar amount of loans and foreclosed assets classified as “special mention” or “substandard” at December 31, 2005. No loans or foreclosed assets were classified “doubtful” or “loss” at December 31, 2005.
Allowance for Loan Losses
In originating loans, the Company recognizes that credit losses will be experienced and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan and, in the case of a collateralized loan, the quality of the collateral for the loan as well as general economic conditions. It is management’s policy to attempt to maintain an adequate allowance for loan losses. The Company assesses its loan portfolio routinely through its credit administration function. The Company, as part of its ongoing risk management, assigns a risk grade to each loan within the portfolio. The risk grades fall into eight categories based on certain variables, included but not limited to, collateral, loan performance, and financial trends of the borrower. The Company establishes a reserve allocation based upon the assigned risk grade. In addition the Company establishes an aggregate reserve for loan loss threshold based upon the entire portfolio. The amount of the established allowance in excess of the allocation based upon risk grade is considered a secondary reserve to mitigate the concentrations that may exist in the portfolio from time to time. These concentrations include both geographic and collateral. The Company uses various criteria in determining the aggregate reserve including peer group comparison, local economic trends and data provided by the primary regulatory agencies of the Company. Management recognizes the greater inherent risks in connection with commercial and consumer lending. See “Management’s Discussion and Analysis - Provision for Credit Losses.”
Management continues to actively monitor the Company’s asset quality and to charge-off loans against the allowance for loan losses when appropriate or to provide specific loss allowances when necessary. Although management believes it uses the best information available to make determinations with respect to the allowance for loan losses, future adjustments may be necessary if economic conditions differ from the economic conditions in the assumptions used in making the initial determinations. Management believes that the allowance for loan losses was adequate at December 31, 2005 and 2004.
The following table sets forth information with respect to activity in the Company’s allowance for loan losses during the periods indicated:
While no portion of the allowance is in any way restricted to any individual loan or group of loans, and the entire allowance is available to absorb losses from any and all loan, the following table presents information regarding the Company’s total allowance for loan losses as well as the allocation of such amounts to the various categories of loans ($ in thousands):
Investment Securities
The Company’s investment securities portfolio consists of United States Government agency obligations and mortgage-backed securities. The following table sets forth the carrying values of the Company’s investment portfolio at the dates indicated (in thousands):
The following table sets forth, by maturity distribution, certain information pertaining to the debt securities portfolio as follows ($ in thousands):
[Additional columns below]
[Continued from above table, first column(s) repeated]
Statement of Financial Accounting Standards No. 115, which requires companies to classify investments securities, including mortgage-backed securities as either held-to-maturity, available-for-sale, or trading securities. Securities classified as held-to-maturity are carried at amortized cost. Securities classified as available-for-sale are reported at fair value, with unrealized gains and losses, net of tax effect, reported as a separate component of stockholders’ equity. Securities classified as trading securities are recorded at fair value, with unrealized gains and losses included in earnings. The Company has classified all securities as available-for-sale. Typically, an increase in interest rates results in a decrease in underlying market value and a decrease in the level of principal repayments on mortgage-backed securities. As a result of changes in market interest rates, changes in the market value of available-for-sale securities resulted in net unrealized losses of $1,961,000, $267,000 and $289,000 in stockholders’ equity at December 31, 2005, 2004 and 2003, respectively. These fluctuations in stockholders’ equity represent the after-tax impact of changes in interest rates on the value of these investments. Management has determined that these unrealized losses at December 31, 2005 are not considered other than temporary.
Deposit Activities
Deposits are the major source of the Company’s funds for lending and other investment purposes. Deposits are attracted principally from within the Company’s primary market area through the offering of a broad variety of deposit instruments including checking accounts, money-market accounts, regular savings accounts, term certificate accounts (including “jumbo” certificates in denominations of $100,000 or more) and retirement savings plans.
Maturity terms, service fees and withdrawal penalties are established by the Company on a periodic basis. The determination of rates and terms is predicated on funds acquisition and liquidity requirements, rates paid by competitors, growth goals and federal regulations.
FDIC regulations limit the ability of certain insured depository institutions to accept, renew, or rollover deposits by offering rates of interest which are significantly higher than the prevailing rates of interest on deposits offered by other insured depository institutions having the same type of charter in such depository institutions’ normal market area. Under these regulations, “well capitalized” depository institutions may accept, renew, or rollover deposits at such rates without restriction, “adequately capitalized” depository institutions may accept, renew or rollover deposits at such rates with a waiver from the FDIC (subject to certain restrictions on payments of rates), and “undercapitalized” depository institutions may not accept, renew or rollover deposits at such rates. The regulations contemplate that the definitions of “well capitalized,” “adequately capitalized” and “undercapitalized” will be the same as the definitions adopted by the agencies to implement the prompt corrective action provisions of applicable law. See “Business - Supervision and Regulation - Capital Requirements.” As of December 31, 2005, the Bank met the definition of a “well capitalized” depository institution.
The following table shows the distribution of, and certain other information relating to, the Company’s deposit accounts by type ($ in thousands):
(1)
Including individual retirement accounts (“IRAs”) of $10,958, $8,695 and $6,998 at December 31, 2005, 2004 and 2003, respectively.
The following tables show the average amount outstanding and the average rate paid on each of the following deposit account categories during the periods indicated ($ in thousands):
The Company does not have a concentration of deposits from any one source, the loss of which would have a material adverse effect on the Company. Management believes that substantially all of the Company’s depositors are residents in its primary market area. The Company currently does not accept brokered deposits. As shown in the tables below, a significant amount of the Company’s time deposits will mature during the year ending December 31, 2006. The high volume of maturities during this period is primarily due to customer demand for time deposits having original maturities of 12 months or less. Based upon current and anticipated levels of interest rates and past practice, the Company management anticipates that substantially all of the Company’s time deposits maturing during this time period will be renewed or replaced by certificates of deposit issued to other customers at competitive market rates, which may be higher or lower than the rates currently being paid. Consequently, the Company management does not believe that the maturity of the Company’s time deposits during the year ending December 31, 2006, will have a material adverse effect on the Company’s liquidity. However, if the Company is required to pay substantially higher rates to obtain the renewal of these or other time deposits or alternative sources of funds, the higher net interest expense could have a material adverse effect on the Company’s net earnings.
The following tables present by various interest rate categories the amounts of time deposits at December 31, 2005 which mature during the period indicated (in thousands):
Jumbo time deposits ($100,000 and over) mature as follows (in thousands):
Borrowings
The Company has sold securities to certain of its customers under agreements to repurchase. These borrowings are collateralized by certain securities owned by the Company. The following summarizes these borrowings ($ in thousands):
The Company also has unsecured federal funds purchased lines of credit agreements with correspondent banks under which the Company could borrow up to $14.0 million. These lines are used for liquidity needs and generally are repaid within seven to fourteen days. At December 31, 2004, the Company had $4.0 million outstanding at a rate of 2.63%. The Company did not have any borrowings outstanding under these agreements at December 31, 2005 or 2003.
Selected Quarterly Results
Impact of Inflation and Changing Prices
The financial statements and related financial data concerning the Company presented in this document have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on the operations of the Company is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, changes in interest rates have a more significant impact on the performance of a financial institution than do the effects of changes in the general rate of inflation and changes in prices. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of loss from adverse changes in market prices and rates. The Company’s market risk arises primarily from interest-rate risk inherent in its lending and deposit taking activities. The Company has little or no risk related to trading accounts, commodities or foreign exchange.
Management actively monitors and manages its interest rate risk exposure. The primary objective in managing interest-rate risk is to limit, within established guidelines, the adverse impact of changes in interest rates on the Company’s net interest income and capital, while adjusting the Company’s asset-liability structure to obtain the maximum yield-cost spread on that structure. Management relies primarily on its asset-liability structure to control interest rate risk. However, a sudden and substantial increase in interest rates could adversely impact the Company’s earnings, to the extent that the interest rates borne by assets and liabilities do not change at the same speed, to the same extent, or on the same basis.
Disclosure about the fair value of financial instruments, which reflect changes in market prices and rates, can be found in Note 18 of the notes to the consolidated financial statements.
Item 8.
Item 8. Financial Statements
The financial statements of the Company as of and for the years ended December 31, 2005 and 2004 are set forth in this Form 10-K as Exhibit 13.1.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A.
Item 9A. Controls and Procedures
(a)
Evaluation of disclosure controls and procedures. The Company maintains controls and procedures designed to ensure that information required to be disclosed in the reports that the Company 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 their evaluation of those controls and procedures performed within 90 days of the filing date of this report, the Chief Executive and Chief Financial officers of the Company concluded that the Company’s disclosure controls and procedures were adequate.
(b)
Changes in internal controls. The Company made no significant changes in its internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation of those controls by the Chief Executive and Chief Financial officers.
Item 9B.
Item 9B. Other Information
Not Applicable.
PART III
Item 10.
Item 10. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act
The Company has a Code of Ethics that applies to its principal executive officer and principal financial officer (who is also its principal accounting officer), which is included as Exhibit 14.1 to this Form 10-K. The information contained under the sections captioned “Directors” and “Executive Officers” under “Election of Directors” and in the sections captioned “Audit Committee Report” and “Section 16(a) Reporting Requirements,” in the registrant’s definitive Proxy Statement for the Annual Meeting of Shareholders to be held on April 5, 2006, to be filed with the SEC pursuant to Regulation 14A within 120 days of the registrant’s fiscal year end (the “Proxy Statement”), as incorporated herein by reference.
Item 11.
Item 11. Executive Compensation
The information contained in the section captioned “Information About the Board of Directors and Its Committees,” and “Executive Compensation and Benefits” under “Election of Directors” in the Proxy Statement, is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information contained in the section captioned “Directors” and “Management and Principal Stock Ownership” under “Election of Directors,” and under the table captioned “Equity Compensation Plan Information,” in the Proxy Statement, is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions
The information contained in the section captioned “Certain Transactions” under “Election of Directors” in the Proxy Statement, is incorporated herein by reference.
Item 14.
Item 14. Principal Accountant Fees and Services
The information contained in the section captioned “Independent Public Accountants” in the Proxy Statement is incorporated herein by reference.
Item 15.
Item 15. Exhibits
*
Incorporated by reference to the corresponding exhibit number in the Company’s Form 10-KSB filed for the year ended December 31, 2003.
**
Incorporated by reference to the corresponding exhibit number in the Company’s Form 10-QSB filed for the quarter ended March 31, 2003.
***
Incorporated by reference to the corresponding exhibit number in the Company’s Form 10-QSB filed for the quarter ended March 31, 2004.
****
Incorporated by reference to the corresponding exhibit number in the Company’s Form 10-QSB filed for the quarter ended June 30, 2004.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this report to be duly signed on its behalf by the undersigned, thereunto duly authorized, in the City of Orlando, State of Florida, on the 6 day of March, 2006.
UNITED HERITAGE BANKSHARES OF
FLORIDA, INC.
/s/ David G. Powers
President and Chief Executive Officer
/s/ Shirley L. Tyler
Executive Vice President and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on March 6, 2006.
United Heritage Bankshares of Florida, Inc.
Form 10-K
For Fiscal Year Ending December 31, 2005
EXHIBIT INDEX