10-Q 1 d10q.txt PERIOD: SEPTEMBER 30, 2001 ================================================================================ U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) X Quarterly report under Section 13 or 15(d) of the Securities Exchange Act --- of 1934. For the quarterly period ended September 30, 2001 or __ Transition report under Section 13 or 15(d) of the Exchange Act For the transition period from _________ to _________ Commission file number 000-23713 --------- GULF WEST BANKS, INC. --------------------- (Exact Name of Registrant as Specified in its Charter) Florida 59-3276590 ---------------------------- ---------------- (State or other Jurisdiction (I.R.S. Employer of Incorporation) Identification No.) 425 22nd Avenue, North St. Petersburg, Florida 33704 ------------------------------ (Address of principal executive offices) (727) 894-5696 ----------------------------------------- Registrant's telephone number, including area code Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such quarterly reports), and (2) has been subject to such filing requirements for the past 90 days: YES X NO ___ --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common stock, par value $1 per share 7,470,367 shares ------------------------------------ --------------------------------- (class) Outstanding at September 30, 2001 ================================================================================ GULF WEST BANKS, INC. AND SUBSIDIARIES INDEX PART I. FINANCIAL INFORMATION

1 GULF WEST BANKS, INC. AND SUBSIDIARIES PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets (Dollars in thousands, except per share amounts)

See accompanying Notes to Condensed Consolidated Financial Statements. 2 GULF WEST BANKS, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Earnings (Dollars in thousands, except per share amounts)

See accompanying Notes to Condensed Consolidated Financial Statements. 3 GULF WEST BANKS, INC. AND SUBSIDIARIES Condensed Consolidated Statement of Stockholders' Equity Nine Months Ended September 30, 2001 (Dollars in thousands)

See accompanying Notes to Condensed Consolidated Financial Statements. 4 GULF WEST BANKS, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (In thousands)

See accompanying Notes to Condensed Consolidated Financial Statements. 5 GULF WEST BANKS, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (unaudited) 1. General. In the opinion of the management of Gulf West Banks, Inc. (the "Company" or "Gulf West"), the accompanying condensed consolidated financial statements contain all adjustments (consisting principally of normal recurring accruals) necessary to present fairly the Company's financial position at September 30, 2001, and the results of operations for the three- and nine-month periods ended September 30, 2001 and 2000 and the cash flows for the nine-month periods ended September 30, 2001 and 2000. The results of operations for the three and nine months ended September 30, 2001 are not necessarily indicative of the results to be expected for the full year. 2. Loan Impairment and Losses. The average net investment in collateral dependent impaired loans and interest income recognized and received on these loans is as follows:

During the quarter ended September 30, 2001, a borrower on a hotel loan declared bankruptcy and as a result management identified this loan as impaired. However, management believes based on current circumstances the Company will not sustain a loss related to this loan. The activity in the allowance for loan losses is as follows:

(continued) 6 GULF WEST BANKS, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (unaudited), Continued 3. Earnings Per Share ("EPS"). The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations. All per share amounts reflect the 5% stock dividend declared September 20, 2001 (dollars in thousands, except per share amounts).

Shares not included in the computations of diluted earnings per share because the option exercise price was not less than the average market price are as follows:

7 GULF WEST BANKS, INC. AND SUBSIDIARIES Review by Independent Certified Public Accountants Hacker, Johnson & Smith PA, the Company's independent certified public accountants, have made a limited review of the financial data as of September 30, 2001, and for the three- and nine-month periods ended September 30, 2001 and 2000 presented in this document, in accordance with standards established by the American Institute of Certified Public Accountants. Their report furnished pursuant to Article 10 of Regulation S-X is included herein. 8 Report on Review by Independent Certified Public Accountants The Board of Directors Gulf West Banks, Inc. St. Petersburg, Florida: We have reviewed the condensed consolidated balance sheet of Gulf West Banks, Inc. and Subsidiaries (the "Company") as of September 30, 2001, and the related condensed consolidated statements of earnings for the three- and nine- month periods ended September 30, 2001 and 2000, the condensed consolidated statements of cash flows for the nine-month periods ended September 30, 2001 and 2000 and the condensed consolidated statement of stockholders' equity for the nine-month period ended September 30, 2001. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America. We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of December 31, 2000, and the related consolidated statements of earnings, stockholders' equity and cash flows for the year then ended (not presented herein); and in our report dated January 19, 2001 we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2000, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. HACKER, JOHNSON & SMITH PA Tampa, Florida October 12, 2001 9 GULF WEST BANKS, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General Gulf West Banks, Inc. ("Gulf West" or the "Company") is a financial holding company registered under the Bank Holding Company Act of 1956, as amended, and was incorporated under the laws of the State of Florida effective October 24, 1994. Gulf West's principal asset is all of the issued and outstanding shares of capital stock of Mercantile Bank, a Florida state banking corporation which is headquartered in St. Petersburg, Florida ("Mercantile"). Through its subsidiary, Mercantile, the Company provides a variety of personal and commercial banking services to customers located in the Florida counties of Pinellas, Hillsborough, and Pasco. The Company targets niche markets that are underserved by the larger regional banks. These markets include small to mid- size businesses and professional offices as well as individuals who expect a higher level of personalized attention. The Company has local directorship and management actively involved in its market areas and committed to the economic growth and development of those markets. Local management allows the Company to provide faster, more responsive and flexible decision making which management believes is important to its targeted customer base. Liquidity and Capital Resources During the nine months ended September 30, 2001, the Company's primary sources of funds consisted of loan principal repayments, advances from the Federal Home Loan Bank, other borrowings and proceeds from the maturity, sale and principal repayment of securities available for sale. The Company used its capital resources principally to fund existing and continuing loan commitments, and to purchase available for sale securities. At September 30, 2001, the Company had commitments to originate loans totaling $10.7 million. Management believes the Company has adequate resources to fund all its commitments and that substantially all of its existing commitments will be funded in 2001. Management also believes that, if so desired, it can adjust the rates on time deposits to both attract and/or retain deposits in a changing interest-rate environment. 10 GULF WEST BANKS, INC. AND SUBSIDIARIES As a Florida-chartered commercial bank, Mercantile is required to maintain a liquidity reserve of at least 15% of its total transaction accounts and 8% of its total nontransaction accounts less those deposits of certain public funds. The liquidity reserve may consist of cash on hand, cash on demand with other correspondent banks and other investments and short-term marketable securities as defined, such as federal funds sold and United States securities or securities guaranteed by the United States. As of September 30, 2001, Mercantile had liquidity of approximately $89.0 million, or approximately 23% of total deposits (net of secured deposits). Management believes Mercantile was in compliance with all minimum capital requirements which it was subject to at September 30, 2001. The following ratios and rates are presented for the dates and periods indicated:

(1) Annualized for the nine months ended September 30, 2001 and 2000. (continued) 11 GULF WEST BANKS, INC. AND SUBSIDIARIES Results of Operations 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 yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average cost; (iii) net interest income; (iv) interest-rate spread; (v) net interest margin.

(1) Includes loans on nonaccrual status. (2) Includes federal funds sold, interest-bearing deposits and Federal Home Loan Bank stock dividends. (3) Interest-rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. (4) Net interest margin is net interest income divided by average interest- earning assets. 13 GULF WEST BANKS, INC. AND SUBSIDIARIES Comparison of Three-Month Periods Ended September 30, 2001 and 2000 General. Net earnings for the three months ended September 30, 2001 were $1,407,000 or $.18 per basic and $.17 per diluted share compared to $914,000 or $.12 per basic and $.11 per diluted share for 2000. The increase in earnings was primarily due to an increase in net interest income. Increased net interest income resulted from increases in average earning assets as well as improved interest margins. Decreases in interest rates during 2001 have benefited the Companies interest margins since it has been able to reprice its deposits and borrowing more quickly than loans and investments have repriced. Interest Income and Expense. Interest income increased to $8.6 million for the three-month period ended September 30, 2001 from $7.9 million for the three months ended September 30, 2000. Interest on loans increased to $6.8 million for the three-month period ended September 30, 2001 from $6.4 million for the three-month period ended September 30, 2000 due to a $36.3 million increase in the average loan portfolio balance in 2001 only partially offset by a decrease in the weighted-average yield earned in 2001 to 8.17% from 8.66% in 2000. Interest on securities increased from $1.3 million for the three months ended September 30, 2000 to $1.6 million for the three months ended September 30, 2001 due to a $22.6 million increase in the average investment portfolio balance only partially offset by a decrease in the weighted-average yield earned in 2001 to 6.50% from 6.62% in 2000. Interest on other interest- earning assets decreased from $195,000 for the three months ended September 30, 2000 to $131,000 for the three months ended September 30, 2001 due to a decrease in the average yield earned to 3.79% for 2001 from 6.88% in 2000, partially offset by an increase of $2.5 million in the average balance. Interest expense on deposits decreased to $2.9 million for the three months ended September 30, 2001 from $3.4 million in 2000. The decrease is due to a decrease in the average rate paid to 3.62% for 2001 from 4.60% in 2000, only partially offset by a $23.7 million increase in average deposits. Interest on borrowings increased from $496,000 for the three months ended September 30, 2000 to $546,000 for the three months ended September 30, 2001 due to a $20.6 million increase in the average borrowings balance in 2001 which was partially offset by a decrease in the weighted-average rate paid in 2001 to 4.29% from 6.55% in 2000. Provision for Loan Losses. The provision for loan losses is charged against earnings to bring the total allowance to a level deemed appropriate by management and is based upon historical experience, the volume and type of lending conducted by the Company, industry standards, the amount of nonperforming loans, 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 provision for loan losses was $221,000 for the three-month period ended September 30, 2001 compared to $47,000 for the same period in 2000. Charge-offs, net of recoveries were $253,000 for the three-month period ended September 30, 2001 compared to $22,000 for the same period in 2000. The allowance for loan losses is $3.4 million at September 30, 2001. While management believes its allowance for loan losses is adequate as of September 30, 2001, future adjustments to the Company's allowance for loan losses may be necessary if economic conditions differ substantially from the assumptions used in making the initial determination. 14 GULF WEST BANKS, INC. AND SUBSIDIARIES Noninterest Income. Noninterest income increased to $969,000 in 2001 from $814,000 in 2000. Service charges on deposits increased to $482,000 for the three-months ended September 30, 2001 from $373,000 for the three months ended September 30, 2000. The increase resulted from pricing increases and growth in deposit accounts. Gains on the sale of securities available for sale increased to $156,000 in 2001 with no corresponding amount in 2000. These increases were partially offset by a decrease in leasing fees and commissions from $101,000 for the three months ended September 30, 2000 to no leasing fees and commissions for 2001 due to the cessation of the leasing business in the fourth quarter of 2000. Noninterest Expense. Total noninterest expense increased to $3.7 million for the three months ended September 30, 2001 from $3.4 million for the comparable period ended September 30, 2000. Increases resulted primarily from increases in employee compensation and occupancy expense resulting from the operation of three new offices opened in the fourth quarter of 2000. Income Taxes. The income tax provision for the three months ended September 30, 2001 was $754,000 or 34.9% of earnings before income taxes compared to $463,000 or 33.6% for the three months ended September 30, 2000. Comparison of Nine-Month Periods Ended September 30, 2001 and 2000 General. Net earnings for the nine months ended September 30, 2001 were $3.4 million or $.44 per basic and $.43 per diluted share compared to $2.7 million or $.35 per basic and $.34 per diluted share for 2000. The increase in earnings was primarily due to an increase in net interest income. Increased net interest income resulted from increases in average earning assets as well as improved interest margins. Decreases in interest rates during 2001 have benefited the Companies interest margins since it has been able to reprice its deposits and borrowing more quickly than loans and investments have repriced. Interest Income and Expense. Interest income increased to $25.4 million for the nine-month period ended September 30, 2001 from $23.1 million for the nine months ended September 30, 2000. Interest on loans increased to $20.5 million for the nine months ended September 30, 2001 from $18.8 million for the nine months ended in 2000 due to a $31.6 million increase in the average loan portfolio balance in 2001, partially offset by a decrease in the weighted-average yield earned in 2001 to 8.43% from 8.54% in 2000. Interest on securities increased to $4.3 million for the nine months ended September 30, 2001 from $3.7 million for the nine months ended September 30, 2000 due to a $13.4 million increase in the average securities portfolio in 2001 only partially offset by a decrease in the weighted-average yield earned in 2001 to 6.47% from 6.53% in 2000. Interest on other interest-earning assets decreased from $579,000 for the nine months ended September 30, 2000 to $521,000 for the nine months ended September 30, 2001 due to a decrease in the weighted-average yield earned in 2001 to 4.53% from 6.22% in 2000 only partially offset by a $2.9 million increase in the average balance of other interest-earning assets in 2001. Interest expense on deposits decreased to $9.7 million for the nine months ended September 30, 2001 from $9.8 million in 2000. The decrease was primarily due to a decrease in the average rate paid on deposits in 2001 to 4.06% from 4.33% in 2000 only partially offset by a $16.1 million increase in the average deposits balance. Interest on borrowings increased from $1.2 million for the nine months ended September 30, 2000 to $1.6 million for the nine months ended September 30, 2001 due to a $18.4 million increase in the average borrowings balance in 2001 only partially offset by a decrease in the weighted-average rate paid in 2001 to 4.85% from 6.04% in 2000. 15 GULF WEST BANKS, INC. AND SUBSIDIARIES Provision for Loan Losses. The provision for loan losses is charged against earnings to bring the total allowance to a level deemed appropriate by management and is based upon historical experience, the volume and type of lending conducted by the Company, industry standards, the amount of nonperforming loans, 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 provision for loan losses was $574,000 for the nine-month period ended September 30, 2001 compared to $327,000 for the same period in 2000. Charge-offs, net of recoveries were $417,000 for the nine-month period ended September 30, 2001 compared to $158,000 for the same period in 2000. The allowance for loan losses is $3.4 million at September 30, 2001. While management believes its allowance for loan losses is adequate as of September 30, 2001, future adjustments to the Company's allowance for loan losses may be necessary if economic conditions differ substantially from the assumptions used in making the initial determination. Noninterest Income. Noninterest income increased to $2.7 million in 2001 from $2.6 million in 2000. Service charges on deposits increased to $1.3 million for the nine-months ended September 30, 2001 from $1.1 million for the nine months ended September 30, 2000. The increase resulted from pricing increases and growth in deposit accounts. Gains on the sale of securities available for sale increased to $394,000 in 2001 from $23,000 in 2000. These increases were partially offset by a decrease in leasing fees and commissions from $399,000 for the nine months ended September 30, 2000 to no leasing fees and commissions for 2001 due to the cessation of the leasing business in the fourth quarter of 2000. Noninterest Expense. Total noninterest expense increased to $11.1 million for the nine months ended September 30, 2001 from $10.2 million for the comparable period ended September 30, 2000. Increases resulted primarily from increases in employee compensation and occupancy expense resulting from the opening of three new offices in the fourth quarter of 2000. These increases were partially offset by a decrease in data processing due to moving a majority of this function in-house. Income Taxes. The income tax provision for the nine months ended September 30, 2001 was $1,756,000 or 34.0% of earnings before income taxes compared to $1,374,000 or 33.7% for the period ended September 30, 2000. Item 3. 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. There have been no significant changes in the Company's market risk exposure since December 31, 2000. 16 GULF WEST BANKS, INC. AND SUBSIDIARIES PART II. OTHER INFORMATION Item 1. Legal Proceedings Gulf West and Mercantile are parties to various legal proceedings in the ordinary course of business. Management does not believe that there is any pending or threatened proceeding against Gulf West or Mercantile which, if determined adversely, would have a material adverse effect on the business, results of operations, or financial position of Gulf West or Mercantile. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Number Description of Document -------------- ----------------------- 2/(1)/ Amended and Restated Agreement and Plan of Merger by and among Citizens National Bank and Trust Company, Inc., Gulf West Banks, Inc. and Mercantile Bank 3.1/(1)/ Articles of Incorporation of Gulf West Banks, Inc. 3.2/(1)/ Bylaws of Gulf West Banks, Inc. 3.3/(4)/ Articles of Amendment to Articles of Incorporation of Gulf West Banks, Inc. 10.1/(1)/ Form of Registration Rights Agreement with Gordon W. Campbell and John Wm. Galbraith 10.2/(1)/ Salary Continuation Agreements with Gordon W. Campbell, Barry K. Miller, and Robert A. Blakley 10.3/(5)/ Amended and Restated Contract of Employment with Gordon W. Campbell 10.4/(5)/ 1995 Nonstatutory Stock Option Plan as Amended April 20, 2000 10.5/(3)/ Agreement to transfer fiduciary accounts to SunTrust Bank, Nature Coast 10.6/(6)/ Executive Officer Bonus Program 10.7/(5)/ Mercantile Bank Executive Severance Pay Plan 10.8/(6)/ Executive Vice President Bonus Program 11/(2)/ Statement regarding computation of per share earnings /(1)/ incorporated by reference to the exhibits included in Amendment No. 2 to Gulf West's S-4 Registration Statement, as filed with the Securities and Exchange Commission on December 4, 1997 (Registration No. 333-37307). /(2)/ contained in Note 3 to the condensed consolidated financial statements set forth in this Form 10-Q. /(3)/ incorporated by reference to the exhibits included in Gulf West's Form 10-Q for the quarter ended March 31, 1998, as filed with the Securities and Exchange Commission on May 8, 1998. /(4)/ incorporated by reference to the exhibits included in Gulf West's Form 10-Q for the quarter ended June 30, 1999, as filed with the Securities and Exchange Commission on July 27, 1999. /(5)/ incorporated by reference to the exhibits included in Gulf West's Form 10-Q for the quarter ended June 30, 2000 as filed with the Securities and Exchange Commission on July 26, 2000. /(6)/ incorporated by reference to the exhibits included in Gulf West's Form 10-K for the year ended December 31, 2000 as filed with the Securities and Exchange Commission on March 6, 2001. (b) Reports on Form 8-K No reports on Form 8-K were filed by the Company during the quarter ended September 30, 2001. 17 GULF WEST BANKS, INC. AND SUBSIDIARIES SIGNATURES Under the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GULF WEST BANKS, INC. (Registrant) Date: November 7, 2001 By: /s/Gordon W. Campbell ----------------------- --------------------- Gordon W. Campbell, Chairman of the Board and President Date: November 7, 2001 By: /s/Barry K. Miller ----------------------- ------------------ Barry K. Miller, Secretary (Chief Financial Officer) 18 GULF WEST BANKS, INC. AND SUBSIDIARIES Exhibit Index Exhibit Number Description of Document -------------- ----------------------- 2/(1)/ Amended and Restated Agreement and Plan of Merger by and among Citizens National Bank and Trust Company, Inc., Gulf West Banks, Inc. and Mercantile Bank 3.1/(1)/ Articles of Incorporation of Gulf West Banks, Inc. 3.2/(1)/ Bylaws of Gulf West Banks, Inc. 3.3/(4)/ Articles of Amendment to Articles of Incorporation of Gulf West Banks, Inc. 10.1/(1)/ Form of Registration Rights Agreement with Gordon W. Campbell and John Wm. Galbraith 10.2/(1)/ Salary Continuation Agreements with Gordon W. Campbell, Barry K. Miller, and Robert A. Blakley 10.3/(5)/ Amended and Restated Contract of Employment with Gordon W. Campbell 10.4/(5)/ 1995 Nonstatutory Stock Option Plan as Amended April 20, 2000 10.5/(3)/ Agreement to transfer fiduciary accounts to SunTrust Bank, Nature Coast 10.6/(6)/ Executive Officer Bonus Program 10.7/(5)/ Mercantile Bank Executive Severance Pay Plan 10.8/(6)/ Executive Vice President Bonus Program 11/(2)/ Statement regarding computation of per share earnings /(1)/ incorporated by reference to the exhibits included in Amendment No. 2 to Gulf West's S-4 Registration Statement, as filed with the Securities and Exchange Commission on December 4, 1997 (Registration No. 333-37307). /(2)/ contained in Note 3 to the condensed consolidated financial statements set forth in this Form 10-Q. /(3)/ incorporated by reference to the exhibits included in Gulf West's Form 10-Q for the quarter ended March 31, 1998, as filed with the Securities and Exchange Commission on May 8, 1998. /(4)/ incorporated by reference to the exhibits included in Gulf West's Form 10-Q for the quarter ended June 30, 1999, as filed with the Securities and Exchange Commission on July 27, 1999. /(5)/ incorporated by reference to the exhibits included in Gulf West's Form 10-Q for the quarter ended June 30, 2000 as filed with the Securities and Exchange Commission on July 26, 2000. /(6)/ incorporated by reference to the exhibits included in Gulf West's Form 10-K for the year ended December 31, 2000 as filed with the Securities and Exchange Commission on March 6, 2001. 19

GULF WEST BANKS INC 10-Q