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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
FORM 10-K
_____________________
Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Fiscal Year Ended December 31, 2001
______________________________
Commission File No. 0-24683
FLORIDA BANKS, INC.
A Florida corporation
(IRS Employer Identification No. 58-2364573)
5210 Belfort Road
Suite 310, Concourse II
Jacksonville, Florida 32256
(904) 332-7770
Securities Registered Pursuant to Section 12(b)
of the Securities Exchange Act of 1934:
None
Securities Registered Pursuant to Section 12(g)
of the Securities Exchange Act of 1934:
Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[X]
The aggregate market value of the common stock of the registrant held by
nonaffiliates of the registrant (4,961,979 shares) on March 14, 2002 was
approximately $39,199,634 based on the closing price of the registrant's common
stock as reported on the NASDAQ National Market on March 14, 2002. For the
purposes of this response, officers, directors and holders of 5% or more of the
registrant's common stock are considered the affiliates of the registrant at
that date.
As of March 14, 2002, there were 5,694,531 shares of $.01 par value common stock
issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of the registrant's definitive proxy statement to be delivered to
shareholders in connection with the 2002 Annual Meeting of Shareholders
scheduled to be held on May 31, 2002 are incorporated by reference in response
to Part III of this Report.
PART I
Item 1. Business.
General
Florida Banks, Inc. (the "Company") was formed on October 15, 1997 to
create a statewide community banking system focusing on the largest and fastest
growing markets in Florida. The Company operates through its wholly owned
banking subsidiary, Florida Bank, N.A. (the "Bank"). The Company currently
operates community banking offices in the Tampa, Jacksonville, Alachua County
(Gainesville), Broward County (Ft. Lauderdale), Pinellas County (St Petersburg -
Clearwater) and Marion County (Ocala) markets. Future business plans include
entry into the markets of Orlando and the greater Palm Beach area (collectively,
the "Identified Markets"). As opportunities arise, the Company may also expand
into other Florida market areas with demographic characteristics similar to the
Identified Markets. Within each of the Identified Markets, the Company expects
to offer a broad range of traditional banking products and services, focusing
primarily on small and medium-sized businesses. See "--Strategy of the
Company--Market Expansion" and "--Products and Services."
The Company has a community banking approach that emphasizes responsive and
personalized service to its customers. Management's expansion strategy includes
attracting strong local management teams who have significant banking
experience, strong community contacts and strong business development potential
in the Identified Markets. Once local management teams are identified, the
Company intends to establish community banking offices in each of the remaining
Identified Markets. Each management team will operate one or more community
banking offices within its particular market area, will have a high degree of
local decision-making authority and will operate in a manner that provides
responsive, personalized services similar to an independent community bank. The
Company maintains centralized credit policies and procedures as well as
centralized back office functions from its operations center in Tampa to support
the community banking offices. Upon the Company's entry into a new market area,
it undertakes a marketing campaign utilizing an officer calling program and
community-based promotions. In addition, management is compensated based on
profitability, growth and loan production goals, and each market area is
supported by a local board of advisory directors, which is provided with
financial incentives to assist in the development of banking relationships
throughout the community. See "--Model `Local Community Bank.'"
Management of the Company believes that the significant consolidation in
the banking industry in Florida has disrupted customer relationships as the
larger regional financial institutions increasingly focus on larger corporate
customers, standardized loan and deposit products and other services. Generally,
these products and services are offered through less personalized delivery
systems which has created a need for higher quality services to small and
medium-sized businesses. In addition, consolidation of the Florida banking
market has dislocated experienced and talented management personnel due to the
elimination of redundant functions and the need to achieve cost savings. As a
result of these factors, management believes the Company has a unique
opportunity to attract and maintain its targeted banking customers and
experienced management personnel within the Identified Markets.
The community banking offices within each market area are supported by
centralized back office operations. From the Company's main offices located in
Jacksonville and its operations center in Tampa, the Company provides a variety
of support services to each of the community banking offices, including back
office operations, investment portfolio management, credit administration and
review, human resources, compliance, internal audit, administration, training
and strategic planning. Core processing, check clearing and other similar
functions are currently outsourced to major vendors. As a result, these
operating strategies enable the Company to achieve cost efficiencies and to
maintain consistency in policies and procedures and allow the local management
teams to concentrate on developing and enhancing customer relationships.
The Company expects to establish community banking offices in new market
areas, primarily by opening new branch offices of the Bank. Management will
also, however, evaluate opportunities for strategic acquisitions of financial
institutions in markets that are consistent with its business plan.
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Strategy of the Company
General
The Company's business strategy is to create a statewide community banking
system in Florida. The major elements of this strategy are to:
o Establish community banking offices in additional markets including the
remaining Identified Markets as soon as local management teams are
identified;
o Establish community banking offices with locally responsive management
teams emphasizing a high level of personalized customer service;
o Target small and medium-sized business customers that require the
attention and service that a community-oriented bank is well suited to
provide;
o Provide a broad array of traditional banking products and services;
o Provide non-traditional products and services through strategic
partnerships with third party vendors;
o Utilize technology to provide a higher level of customer service and
enhance deposit growth;
o Maintain centralized support functions, including back office
operations, credit policies and procedures, investment portfolio
management, administration, compliance, internal audit, human resources
and training, to maximize operating efficiencies and facilitate
responsiveness to customers; and
o Outsource core processing and back room operations to increase
efficiencies.
Model "Local Community Bank"
In order to achieve its expansion strategy, the Company intends to
establish community banking offices in the remaining Identified Markets by
opening new branch offices of the Bank. The Company may, however, accomplish its
expansion strategy by acquiring existing banks within an Identified Market if an
opportunity for such an acquisition becomes available. Although each community
banking office is legally a branch of the Bank, the Company's business strategy
envisions that community banking office(s) located within each market will
operate as if it were an independent community bank.
Prior to expanding into a new market area, management of the Company first
identifies an individual who will serve as the president of that particular
market area, as well as those individuals who will serve on the local board of
directors. The Company believes that a management team that is familiar with the
needs of its community can provide higher quality personalized service to their
customers. The local management teams have a significant amount of
decision-making authority and are accessible to their customers. As a result of
the consolidation trend in Florida, management of the Company believes there are
significant opportunities to attract experienced bank managers who would like to
join an institution promoting a community banking concept.
Within each market area, the community banking offices have a local board
of directors that are comprised of prominent members of the community, including
business leaders and professionals. It is anticipated that certain members of
the local boards may serve as members of the Board of Directors of the Bank and
of the Company. These directors act as representatives of the Bank within the
community and are expected to promote the business development of each community
banking office.
The Company encourages both the members of its local boards of directors as
well as its lending officers to be active in the civic, charitable and social
organizations located in the local communities. Many members of the local
management team hold leadership positions in a number of community
organizations, and will continue to volunteer for other positions in the future.
Upon the Company's entry into a new market area, it undertakes a marketing
campaign utilizing an officer calling program, and community-based promotions
and media advertising. A primary component of management compensation is based
3
on loan production goals. Such campaigns emphasize each community banking
office's local responsiveness, local management team and special focus on
personalized service.
The community banking office established in a market will typically have
the following banking personnel: a President, a Senior Lender, an Associate
Lending Officer, a Credit Analyst, a Branch/Operations Manager and an
appropriate number of financial service managers and tellers. The number of
financial service managers and tellers necessary will be dependent upon the
volume of business generated by that particular community banking office. Each
community banking office will also be staffed with enough administrative
assistants to assist the officers effectively in their duties and to enable them
to market products and services actively outside of the office.
The lending officers are primarily responsible for the sales and marketing
efforts of the community banking offices. Management emphasizes relationship
banking whereby each customer will be assigned to a specific officer, with other
local officers serving as backup or in supporting roles. Through its experience
in the Florida banking industry, management believes that the most frequent
customer complaints pertain to a lack of personalized service and turnover in
lending personnel, which limits the customer's ability to develop a relationship
with his or her lending officer. The Company has and will continue to hire an
appropriate number of lending officers necessary to facilitate the development
of strong customer relationships.
Management has and will continue to offer salaries to the lending officers
that are competitive with other financial institutions in each market area. The
salaries of the lending officers are comprised of base compensation plus an
incentive payment structure that is based upon the achievement of Bank income
and certain loan production goals. Those goals will be reevaluated on an annual
basis and paid annually as a percentage of base salary. Management of the
Company believes that such a compensation structure provides greater motivation
for participating officers.
The community banking offices are located in commercial areas in each
market where the local management team determines there is the greatest
potential to reach the maximum number of small and medium-sized businesses. It
is expected that these community banking offices will develop in the areas
surrounding office complexes and other commercial areas, but not necessarily in
a market's downtown area. Such determinations will depend upon the customer
demographics of a particular market area and the accessibility of a particular
location to its customers. Management of the Company expects to lease facilities
of approximately 4,000 to 7,000 square feet at market rates for each community
banking office. The Company currently leases its facilities in the Tampa,
Jacksonville, Ft. Lauderdale, St. Petersburg-Clearwater and Ocala/Marion County
markets. To better serve the Alachua County (Gainesville) market, the Company
has built and owns a free-standing office with traditional drive-in and lobby
banking facilities. The Company plans to lease facilities in the other
Identified Markets to avoid investing significant amounts of capital in property
and facilities.
Loan Production Offices
In order to achieve its expansion strategy in a timely manner, the Company
may establish loan production offices ("LPO") as a prelude to establishing full
service community banking offices in the remaining Identified Markets and other
locations. Loan production offices would provide the same lending products and
services to the local market as the community banking office with substantially
less overhead expense. These offices would typically be staffed with the
President, Senior Lender and one administrative assistant.
By opening loan production offices, the Company can begin to generate loans
during the period it is preparing to open, staff the banking office and reduce
the overall cost of expansion into a new market. The same philosophy of
marketing, growth, customer service and incentive based compensation would be
followed in a loan production office. These offices would also establish local
boards which would be responsible for promoting the growth of the office.
Market Expansion
The Company intends to expand into the largest and fastest growing
communities in Florida as well as other markets within the state which offer
strategic opportunities. In order to achieve its expansion strategy, the Company
intends to establish community banking offices through the de novo branching of
the Bank. The Company may, however, accomplish its expansion strategy by
acquiring existing banks if an opportunity for such an acquisition becomes
available. Once the Company has assembled a local management team and local
4
advisory board of directors for a particular market area, the Company intends to
establish a community banking office in that market either through the opening
of an LPO or a full service bank. The Company has established community banking
offices in the Tampa, Jacksonville, Alachua County (Gainesville), Broward County
(Ft. Lauderdale), Pinellas County (St. Petersburg - Clearwater) and Marion
County (Ocala) markets. The other markets into which the Company presently
intends to expand are Orlando and the greater Palm Beach area. Management has
identified these markets as providing the most favorable opportunities for
growth and intends to establish community banking offices within these markets
as soon as practicable. Management is also considering expansion into other
selected Florida metropolitan areas.
Customers
Management believes that the ongoing bank consolidation within Florida
provides a community-oriented bank significant opportunities to build a
successful, locally-oriented franchise. Management of the Company further
believes that many of the larger financial institutions do not emphasize a high
level of personalized service to the smaller commercial or individual retail
customers. The Company focuses its marketing efforts on attracting small and
medium-sized businesses which include: professionals, such as physicians and
attorneys, service companies, manufacturing companies and commercial real estate
developers. Because the Company focuses on small and medium-sized businesses,
the majority of its loan portfolio is in the commercial area with an emphasis
placed on commercial and industrial loans secured by real estate, accounts
receivable, inventory, property, plant and equipment. However, in an effort to
maintain a high level of credit quality, the Company attempts to ensure that the
commercial real estate loans are made to borrowers who occupy the real estate
securing the loans or where a creditworthy tenant is involved.
Although the Company has concentrated on lending to commercial businesses,
management has attracted and will continue to attract consumer business. Many of
its retail customers are the principals of the small and medium-sized businesses
for whom a community banking office provides banking services. Management
emphasizes "relationship banking" in order that each customer can identify and
establish a comfort level with the bank officers within a community banking
office. Management intends to further develop its retail business with
individuals who appreciate a higher level of personal service, contact with
their lending officer and responsive decision-making. It is expected that most
of the Company's business will be developed through its lending officers and
local advisory boards of directors and by pursuing an aggressive strategy of
making calls on customers throughout the market area.
Products and Services
The Company currently offers a broad array of traditional banking products
and services to its customers through the Bank. The Bank currently provides
products and services that are substantially similar to those set forth below.
For additional information with respect to the Bank's current operations, see
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations."
Loans. The Bank offers a wide range of short to long-term commercial and
-----
consumer loans. As of December 31, 2001, the Bank has established an internal
limit for loans of up to $5.7 million to any one borrower.
Commercial. The Bank's commercial lending consists primarily of commercial
and industrial loans for the financing of accounts receivable, inventory,
property, plant and equipment, and other commercial assets. In making these
loans, the Bank manages its credit risk by actively monitoring such measures as
advance rate, cash flow, collateral value and other appropriate credit factors.
Commercial Real Estate. The Bank offers commercial real estate loans to
developers of both commercial and residential properties. In making these loans,
the Bank manages its credit risk by actively monitoring such measures as advance
rate, cash flow, collateral value and other appropriate credit factors. See
"--Operations of the Holding Company--Credit Administration."
5
Residential Mortgage. The Bank's real estate loans consist of residential
first and second mortgage loans, residential construction loans and home equity
lines of credit and term loans secured by first and second mortgages on the
residences of borrowers for home improvements, education and other personal
expenditures. The Bank makes mortgage loans with a variety of terms, including
fixed and floating to variable rates and a variety of maturities. These loans
are made consistent with the Bank's appraisal policy and real estate lending
policy which detail maximum loan-to-value ratios and maturities. Management
believes that these loan-to-value ratios are sufficient to compensate for
fluctuations in the real estate market to minimize the risk of loss. Mortgage
loans that do not conform to the Bank's asset/liability mix policies are sold in
the secondary markets.
Consumer Loans. The Bank's consumer loans consist primarily of installment
loans to individuals for personal, family and household purposes. In evaluating
these loans, the Bank requires its lending officers to review the borrower's
level and stability of income, past credit history and the impact of these
factors on the ability of the borrower to repay the loan in a timely manner. In
addition, the Bank requires that its banking officers maintain an appropriate
margin between the loan amount and collateral value. Many of the Bank's consumer
loans are made to the principals of the small and medium-sized businesses for
whom the community banking offices provide banking services.
Credit Card and Other Loans. The Bank has issued credit cards to certain of
its customers. In determining to whom it will issue credit cards, the Bank
evaluates the borrower's level and stability of income, past credit history and
other factors. Finally, the Bank makes additional loans which may not be
classified in one of the above categories. In making such loans, the Bank
attempts to ensure that the borrower meets its credit quality standards.
Deposits. The Bank offers a broad range of interest-bearing and
--------
non-interest-bearing deposit accounts, including commercial and retail checking
accounts, money market accounts, individual retirement accounts, regular and
premium rate interest-bearing savings accounts and certificates of deposit with
a range of maturity date options. The primary sources of deposits are small and
medium-sized businesses and individuals. In each market, senior management has
the authority to set rates within specified parameters in order to remain
competitive with other financial institutions located in the identified market.
In additional to deposits within the local markets, the Bank utilizes brokered
certificates of deposits to supplement its funding needs. Brokered CDs are sold
by various investment firms which are paid a fee by the Bank for placing the
deposit. Depending on current market conditions, the cost of brokered deposits
may be slightly lower than the cost of the same deposits in the local markets.
All deposits are insured by the FDIC up to the maximum amount permitted by law.
In addition, the Bank has implemented a service charge fee schedule, which is
competitive with other financial institutions in the community banking offices'
market areas, covering such matters as maintenance fees on checking accounts,
per item processing fees on checking accounts, returned check charges and other
similar fees.
Specialized Consumer Services. The Bank offers specialized products and
------------------------------
services to its customers, such as lock boxes, traveler's checks and safe
deposit services.
Courier Services. The Bank offers courier services to its customers.
-----------------
Courier services, which the Bank may either provide directly or through a third
party, permit the Bank to provide the convenience and personalized service its
customers require by scheduling pick-ups of deposits. The Bank currently offers
courier services only to its business customers. The Bank has received
regulatory approval for and is currently offering courier services in all of its
existing markets and expects to apply for approval in other market areas.
Telephone Banking. The Bank believes that there is a need within its market
-----------------
niche for consumer and commercial telephone banking. These services allow
customers to access detailed account information, via a toll free number 24
hours a day. Management believes that telephone banking services assist their
community banking offices in retaining customers and also encourages its
customers to maintain their total banking relationships with the community
banking offices. This service is provided through the Bank's third-party data
processor.
Internet Banking. In the fourth quarter of 1999, the Bank began offering
-----------------
its "DirectNet" Internet banking product. This service allows customers to
access detailed account information, execute transactions, download account
information, and pay bills electronically. Management believes that this service
is particularly attractive for its commercial customers since most transactions
can be handled over the Internet rather than over the phone or in person. In
addition, DirectNet offers the opportunity of opening deposit accounts both
within and outside of the local markets. The Bank intends to expand its Internet
6
banking services in the future to offer additional bank services as well as
non-traditional products and services. The DirectNet banking service is provided
by the Bank's third-party data processor.
ACH EFT Services. The Bank offers various Automated Clearing House and
----------------
Electronic Funds Transfer services to its commercial customers. These services
include payroll direct deposits, payroll tax payments, electronic payments and
other funds transfers. The services are customized to meet the needs of the
customer and offer an economical alternative to paper checks and drafts.
Stored Value Cards. The Bank offers stored value (prepaid debit) cards to
------------------
its commercial customers. These cards are issued primarily to facilitate
incentive payments, payroll disbursements, customer loyalty programs, and as
gift cards. The Bank derives income from use of the prepaid funds and fee income
from issuing and servicing the cards.
Automatic Teller Machines ("ATMs"). Presently, management does not expect
----------------------------------
to establish an ATM network although certain banking offices may provide one or
more ATMs in the local market. As an alternative, management has made other
financial institutions' ATMs available to its customers and offers customers up
to ten free ATM transactions per month.
Other Products and Services. The Bank intends to evaluate other services
----------------------------
such as trust services, brokerage and investment services, insurance, and other
permissible activities. Management expects to introduce these services in the
future as they become economically viable.
Operations of the Holding Company
From its main offices in Jacksonville and its operations center in Tampa,
the Company provides a variety of support services for each of the community
banking offices. These services include back office operations, investment
portfolio management, credit administration and review, human resources,
compliance, internal audit, administration, training and strategic planning.
The Company uses the Bank's facilities for its data processing, operational
and back office support activities. The community banking offices utilize the
operational support provided by the Bank to perform account processing, loan
accounting, loan support, network administration and other functions. The Bank
has developed extensive procedures for many aspects of its operations, including
operating procedure manuals and audit and compliance procedures. Management
believes that the Bank's existing operations and support management are capable
of providing continuing operational support for all of the community banking
offices.
Outsourcing. Management of the Company believes that by outsourcing certain
-----------
functions of its back room operations, it can realize greater efficiencies and
economies of scale. In addition, various products and services, especially
technology-related services, can be offered through third-party vendors at a
substantially lower cost than the costs of developing these products internally.
The Bank is currently utilizing Metavante, (formerly M&I Data Services, Inc.) to
provide its core data processing and certain customer products. The Company and
the Bank also utilize a qualified consulting firm to perform most internal audit
tasks.
Credit Administration. The Company oversees all credit operations while
----------------------
still granting local authority to each community banking office. The Company's
Chief Credit Officer is primarily responsible for maintaining a quality loan
portfolio and developing a strong credit culture throughout the entire
organization. The Chief Credit Officer is also responsible for developing and
updating the credit policy and procedures for the organization. In addition, he
works closely with each lending officer at the community banking offices to
ensure that the business being solicited is of the quality and structure that
fits the Company's desired risk profile. Credit quality is controlled through
uniform compliance to credit policy. The Company's risk-decision process is
actively managed in a disciplined fashion to maintain an acceptable risk profile
characterized by soundness, diversity, quality, prudence, balance and
accountability.
The Company's credit approval process consists of specific authorities
granted to the lending officers. Loans exceeding a particular lending officer's
level of authority are reviewed and considered for approval by the next level of
authority. The Chief Credit Officer has ultimate credit decision-making
7
authority, subject to review by the Chief Executive Officer and the Board of
Directors. Risk management requires active involvement with the Company's
customers and active management of the Company's portfolio. The Chief Credit
Officer reviews the Company's credit policy with the local management teams at
least annually but will review it more frequently if necessary. The results of
these reviews are then presented to the Board of Directors. The purpose of these
reviews is to attempt to ensure that the credit policy remains compatible with
the short and long-term business strategies of the Company. The Chief Credit
Officer will also generally require all individuals charged with risk management
to reaffirm their familiarity with the credit policy annually.
Asset/Liability Management
The objective of the Bank is to manage assets and liabilities to provide a
satisfactory level of consistent operating profitability within the framework of
established liquidity, loan, investment, borrowing and capital policies. The
Chief Financial Officer of the Company is primarily responsible for monitoring
policies and procedures that are designed to maintain an acceptable composition
of the asset/liability mix while adhering to prudent banking practices. The
overall philosophy of management is to support asset growth primarily through
growth of core deposits. Management intends to continue to invest the largest
portion of the Bank's earning assets in commercial, industrial and commercial
real estate loans.
The Bank's asset/liability mix is monitored on a daily basis, with monthly
reports presented to the Bank's Board of Directors. The objective of this policy
is to control interest-sensitive assets and liabilities so as to minimize the
impact of substantial movements in interest rates on the Bank's earnings. See
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations--Financial Condition--Interest Rate Sensitivity and Liquidity
Management."
Competition
Competition among financial institutions in Florida and the markets into
which the Company may expand is intense. The Company and the Bank compete with
other bank holding companies, state and national commercial banks, savings and
loan associations, consumer finance companies, credit unions, securities
brokerages, insurance companies, mortgage banking companies, money market mutual
funds, asset-based non-bank lenders and other financial institutions. Many of
these competitors have substantially greater resources and lending limits,
larger branch networks, and are able to offer a broader range of products and
services than the Company and the Bank.
Various legislative actions in recent years have led to increased
competition among financial institutions. As a result of such actions, most
barriers to entry to the Florida market by out-of-state financial institutions
have been eliminated. Recent legislative and regulatory changes and
technological advances have enabled customers to conduct banking activities
without regard to geographic barriers through computer and telephone-based
banking and similar services. With the enactment of the Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994 and other laws and regulations
affecting interstate bank expansion, financial institutions located outside of
the State of Florida may now more easily enter the markets currently and
proposed to be served by the Company and the Bank. In addition, the
Gramm-Leach-Bliley Act repeals certain sections of the Glass-Steagall Act and
amends sections of the Bank Holding Company Act. See "---Supervision and
Regulation". The future effect of these changes in regulations could be far
ranging in their impact on traditional banking activities. Mergers, partnerships
and acquisitions between banks and other financial and service companies could
dramatically affect competition within the Bank's markets.
There can be no assurance that the United States Congress, the Florida
Legislature or the applicable bank regulatory agencies will not enact
legislation or promulgate rules that may further increase competitive pressures
on the Company. The Company's failure to compete effectively for deposit, loan
and other banking customers in its market areas could have a material adverse
effect on the Company's business, future prospects, financial condition or
results of operations. See "--Strategy of the Company--Market Expansion."
Data Processing
The Bank currently has an agreement with Metavante (formerly M&I) to
provide its core processing and certain customer products. The Company believes
that Metavante will be able to provide state-of-the-art data processing and
customer service-related processing at a competitive price to support the
Company's future growth. The Company believes the Metavante contract to be
8
adequate for its business expansion plans. See "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Employees
The Company presently employs 12 persons on a full-time basis and 3 persons
on a part-time basis. The Company will hire additional persons as needed to
support its growth.
The Bank presently employs 108 persons on a full-time basis and 9 persons
on a part-time basis, including 45 officers. The Bank will hire additional
persons as needed, including additional tellers and financial service
representatives. Management believes the relations with employees are generally
satisfactory.
Supervision and Regulation
The Company and the Bank operate in a highly regulated environment, and
their business activities will be governed by statute, regulation, and
administrative policies. The business activities of the Company and the Bank are
closely supervised by a number of regulatory agencies, including the Federal
Reserve Board, the Office of the Comptroller of the Currency (the "OCC"), the
Florida Department of Banking and Finance (the "Florida Banking Department") (to
a limited extent) and the FDIC.
The Company is regulated by the Federal Reserve Board under the Federal
Bank Holding Company Act, which requires every bank holding company to obtain
the prior approval of the Federal Reserve Board before acquiring more than 5% of
the voting shares of any bank or all or substantially all of the assets of a
bank, and before merging or consolidating with another bank holding company. The
Federal Reserve Board (pursuant to regulation and published policy statements)
has maintained that a bank holding company must serve as a source of financial
strength to its subsidiary banks. In adhering to the Federal Reserve Board
policy, the Company may be required to provide financial support to a subsidiary
bank at a time when, absent such Federal Reserve Board policy, the Company may
not deem it advisable to provide such assistance.
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994, the Company and any other bank holding company located in Florida is able
to acquire a bank located in any other state, and a bank holding company located
outside Florida can acquire any Florida-based bank, in either case subject to
certain other restrictions. In addition, adequately capitalized and managed bank
holding companies may consolidate their multi-state bank operations into a
single bank subsidiary and may branch interstate through acquisitions unless an
individual state has elected to prohibit out-of-state banks from operating
interstate branches within its territory. De novo branching by an out-of-state
bank is lawful only if it is expressly permitted by the laws of the host state.
Entry into Florida by out-of-state financial institutions is permitted only by
acquisition of existing banks. The authority of a bank to establish and operate
branches within a state remains subject to applicable state branching laws.
Until March 2000, a bank holding company was generally prohibited from
acquiring control of any company which was not a bank and from engaging in any
business other than the business of banking or managing and controlling banks.
In April 1997, the Federal Reserve Board revised and expanded the list of
permissible non-banking activities in which a bank holding company could engage,
however limitations continued to exist under certain laws and regulations. The
Gramm-Leach-Bliley Act repeals certain regulations pertaining to Bank Holding
Companies and eliminates many of the previous prohibitions. Specifically, Title
I of the Gramm-Leach-Bliley Act repeals sections 20 and 32 of the Glass-Steagall
Act (12 U.S.C. ss.ss. 377 and 78, respectively) and is intended to facilitate
affiliations among banks, securities firms, insurance firms, and other financial
companies. To further this goal, the Gramm-Leach-Bliley Act amends section 4 of
the Bank Holding Company Act (12 U.S.C.ss. 1843) ("BHC Act") to authorize bank
holding companies and foreign banks that qualify as "financial holding
companies" to engage in securities, insurance and other activities that are
financial in nature or incidental to a financial activity. The activities of
bank holding companies that are not financial holding companies would continue
to be limited to activities authorized currently under the BHC Act, such as
activities that the Federal Reserve Board previously has determined in
regulations and orders issued under section 4(c)(8) of the BHC Act to be closely
related to banking and permissible for bank holding companies.
The Gramm-Leach-Bliley Act defines a financial holding company as a bank
holding company that meets certain eligibility requirements. In order for a bank
holding company to become a financial holding company and be eligible to engage
9
in the new activities authorized under the Gramm-Leach-Bliley Act, the Act
requires that all depository institutions controlled by the bank holding company
be well capitalized and well managed.
To become a financial holding company, the Gramm-Leach-Bliley Act requires
a bank holding company to submit to the Federal Reserve Board a declaration that
the company elects to be a financial holding company and a certification that
all of the depository institutions controlled by the company are well
capitalized and well managed. The Act also provides that a Bank holding
company's election to become a financial holding company will not be effective
if the Board finds that, as of the date the company submits its election to the
Board, not all of the insured depository institutions controlled by the company
have achieved at least a "satisfactory" rating at the most recent examination of
the institution under the Community Reinvestment Act (12 U.S.C.ss. 2903 et seq.)
The Gramm-Leach-Bliley Act grants the Federal Reserve Board discretion to
impose limitations on the conduct or activities of any financial holding company
that controls a depository institution that does not remain both well
capitalized and well managed following the company's elections to be a financial
holding company.
New rules by the Federal Reserve Board and the Office of the Comptroller of
the Currency under the Gramm-Leach-Bliley Act could substantially affect the
Company's future business strategies, including its products and services. On
June 22, 2000, the Federal Reserve Bank of Atlanta approved the Company's
application to become a Financial Holding Company. The Company currently meets
the requirements of the rules, however, there can be no assurance that it will
continue to meet these requirements on an ongoing basis.
The State of Florida has adopted an interstate banking statute that allows
banks to branch interstate through mergers, consolidations and acquisitions.
Establishment of de novo bank branches in Florida by out-of-state financial
institutions is not permitted under Florida law.
The Company is also regulated by the Florida Banking Department under the
Florida Banking Code, which requires every bank holding company to obtain the
prior approval of the Florida Commissioner of Banking before acquiring more than
5% of the voting shares of any Florida bank or all or substantially all of the
assets of a Florida bank, or before merging or consolidating with any Florida
bank holding company. A bank holding company is generally prohibited from
acquiring ownership or control of 5% or more of the voting shares of any Florida
bank or Florida bank holding company unless the Florida bank or all Florida bank
subsidiaries of the bank holding company to be acquired have been in existence
and continuously operating, on the date of the acquisition, for a period of
three years or more. However, approval of the Florida Banking Department is not
required if the bank to be acquired or all bank subsidiaries of the Florida bank
holding company to be acquired are national banks.
The Bank is also subject to the Florida banking and usury laws restricting
the amount of interest which it may charge in making loans or other extensions
of credit. In addition, the Bank, as a subsidiary of the Company, is subject to
restrictions under federal law in dealing with the Company and other affiliates.
These restrictions apply to extensions of credit to an affiliate, investments in
the securities of an affiliate and the purchase of assets from an affiliate.
Loans and extensions of credit by national banks are subject to legal
lending limitations. Under federal law, a national bank may grant unsecured
loans and extensions of credit in an amount up to 15% of its unimpaired capital
and surplus to any person if the loans and extensions of credit are not fully
secured by collateral having a market value at least equal to their face amount.
A national bank may grant loans and extensions of credit to such person up to an
additional 10% of its unimpaired capital and surplus, provided that the
transactions are fully secured by readily marketable collateral having a market
value determined by reliable and continuously available price quotations, at
least equal to the amount of funds outstanding. This 10% limitation is separate
from, and in addition to, the 15% limitation for unsecured loans. Loans and
extensions of credit may exceed the general lending limit if they qualify under
one of several exceptions. Such exceptions include certain loans or extensions
of credit arising from the discount of commercial or business paper, the
purchase of bankers' acceptances, loans secured by documents of title, loans
secured by U.S. obligations and loans to or guaranteed by the federal
government. In addition, national banks with the highest supervisory ratings are
currently permitted to lend up to 25 percent of capital to single borrowers for
certain small business loans and for loans secured by a perfected first-lien
security interest in 1 to 4 family real estate, limited to 80% of the property's
appraised value.
10
Both the Company and the Bank are subject to regulatory capital
requirements imposed by the Federal Reserve Board and the OCC. The Federal
Reserve Board and the OCC have issued risk-based capital guidelines for bank
holding companies and banks which make regulatory capital requirements more
sensitive to differences in risk profiles of various banking organizations. The
capital adequacy guidelines issued by the Federal Reserve Board are applied to
bank holding companies on a consolidated basis with the banks owned by the
holding company. The OCC's risk capital guidelines apply directly to national
banks regardless of whether they are a subsidiary of a bank holding company.
Both agencies' requirements (which are substantially similar) provide that
banking organizations must have capital equivalent to at least 8% of
risk-weighted assets. The risk weights assigned to assets are based primarily on
credit risks. Depending upon the risk of a particular asset, it is assigned to a
risk category. For example, securities with an unconditional guarantee by the
United States government are assigned to the lowest risk category, while a risk
weight of 50% is assigned to loans secured by owner-occupied one to four family
residential mortgages, provided that certain conditions are met. The aggregate
amount of assets assigned to each risk category is multiplied by the risk weight
assigned to that category to determine the weighted values, which are added
together to determine total risk-weighted assets. Both the Federal Reserve Board
and the OCC have also implemented new minimum capital leverage ratios to be used
in tandem with the risk-based guidelines in assessing the overall capital
adequacy of banks and bank holding companies. Under these rules, banking
institutions are required to maintain a ratio of at least 3% "Tier 1" capital to
total weighted risk assets (net of goodwill). Tier 1 capital includes common
shareholders equity, non-cumulative perpetual preferred stock and related
surplus, and minority interests in the equity accounts of consolidated
subsidiaries. Tier 2 capital includes Tier 1 capital plus certain categories of
subordinated debt and intermediate-term preferred stock not included in Tier 1
capital, together with a portion of the Bank's allowance for loan losses, not to
exceed 1.25% of gross risk-weighted assets.
12
Both the risk-based capital guidelines and the leverage ratio are minimum
requirements, applicable only to top-rated banking institutions. Institutions
operating at or near these levels are expected to have well-diversified risks,
excellent control systems high asset quality, high liquidity, good earnings and
in general, must be considered strong banking organizations, rated composite 1
under the CAMELS rating system for banks. Institutions with lower ratings and
institutions with high levels of risk or experiencing or anticipating
significant growth would be expected to maintain ratios 100 to 200 basis points
above the stated minimums.
The OCC's guidelines provide that intangible assets are generally deducted
from Tier 1 capital in calculating a bank's risk-based capital ratio. However,
certain intangible assets which meet specified criteria ("qualifying
intangibles") are retained as a part of Tier 1 capital. The OCC has modified the
list of qualifying intangibles, currently including only purchased credit card
relationships and mortgage and non-mortgage servicing assets. The OCC's
guidelines formerly provided that the amount of such qualifying intangibles that
may be included in Tier 1 capital was strictly limited to a maximum of 50% of
total Tier 1 capital. The OCC has amended its guidelines to increase the
limitation on such qualifying intangibles from 50% to 100% of Tier 1 capital, of
which no more than 25% may consist of purchased credit card relationships and
non-mortgage servicing assets.
In addition, the OCC has adopted rules which clarify treatment of asset
sales with recourse not reported on a bank's balance sheet. Among assets
affected are mortgages sold with recourse under Fannie Mae, Freddie Mac and
Farmer Mac programs. The rules clarify that even though those transactions are
treated as asset sales for bank Call Report purposes, those assets will still be
subject to a capital charge under the risk-based capital guidelines.
The risk-based capital guidelines of the OCC, the Federal Reserve Board and
the FDIC explicitly include provisions to limit a bank's exposure to declines in
the economic value of its capital due to changes in interest rates to ensure
that the guidelines take adequate account of interest rate risk. Interest rate
risk is the adverse effect that changes in market interest rates may have on a
bank's financial condition and is inherent to the business of banking. The
exposure of a bank's economic value generally represents the change in the
present value of its assets, less the change in the value of its liabilities,
plus the change in the value of its interest rate off-balance sheet contracts.
Concurrently, the agencies issued a joint policy statement to bankers, effective
June 26, 1996, to provide guidance on sound practices for managing interest rate
risk. In the policy statement, the agencies emphasize the necessity of adequate
oversight by a bank's board of directors and senior management and of a
comprehensive risk management process. The policy statement also describes the
critical factors affecting the agencies' evaluations of a bank's interest rate
risk when making a determination of capital adequacy. The agencies' risk
assessment approach used to evaluate a bank's capital adequacy for interest rate
risk relies on a combination of quantitative and qualitative factors. Banks that
are found to have high levels of exposure and/or weak management practices will
be directed by the agencies to take corrective action.
11
The Comptroller, the Federal Reserve Board and the FDIC recently added a
provision to the risk-based capital guidelines that supplements and modifies the
usual risk-based capital calculations to ensure that institutions with
significant exposure to market risk maintain adequate capital to support that
exposure. Market risk is the potential loss to an institution resulting from
changes in market prices. The modifications are intended to address two types of
market risk: general market risk, which includes changes in general interest
rates, equity prices, exchange rates, or commodity prices, and specific market
risk, which includes particular risks faced by the individual institution, such
as event and default risks. The provision defines a new category of capital,
Tier 3, which includes certain types of subordinated debt. The provision
automatically applies only to those institutions whose trading activity, on a
worldwide consolidated basis, equals either (i) 10% or more of total assets or
(ii) $1 billion or more, although the agencies may apply the provision's
requirements to any institution for which application of the new standard is
deemed necessary or appropriate for safe banking practices. For institutions to
which the modifications apply, Tier 3 capital may not be included in the
calculation rendering the 8% credit risk ratio; the sum of Tier 2 and Tier 3
capital may not exceed 100% of Tier 1 capital; and Tier 3 capital is used in
both the numerator and denominator of the normal risk-based capital ratio
calculation to account for the estimated maximum amount that the value of all
positions in the institution's trading account, as well as all foreign exchange
and commodity positions, could decline within certain parameters set forth in a
model defined by the statute. Furthermore, beginning no later than January 1,
1999, covered institutions must "backtest," comparing the actual net trading
profit or loss for each of its most recent 250 days against the corresponding
measures generated by the statutory model. Once per quarter, the institution
must identify the number of times the actual net trading loss exceeded the
corresponding measure and must then apply a statutory multiplication factor
based on that number for the next quarter's capital charge for market risk.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (the
"FDICIA"), enacted on December 19, 1991, provides for a number of reforms
relating to the safety and soundness of the deposit insurance system,
supervision of domestic and foreign depository institutions and improvement of
accounting standards. One aspect of the FDICIA involves the development of a
regulatory monitoring system requiring prompt action on the part of banking
regulators with regard to certain classes of undercapitalized institutions.
While the FDICIA does not change any of the minimum capital requirements, it
directs each of the federal banking agencies to issue regulations putting the
monitoring plan into effect. The FDICIA creates five "capital categories" ("well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized") which are defined in the
FDICIA and which will be used to determine the severity of corrective action the
appropriate regulator may take in the event an institution reaches a given level
of undercapitalization. For example, an institution which becomes
"undercapitalized" must submit a capital restoration plan to the appropriate
regulator outlining the steps it will take to become adequately capitalized.
Upon approving the plan, the regulator will monitor the institution's
compliance. Before a capital restoration plan will be approved, any entity
controlling a bank (i.e., holding companies) must guarantee compliance with the
plan until the institution has been adequately capitalized for four consecutive
calendar quarters. The liability of the holding company is limited to the lesser
of five percent of the institution's total assets or the amount which is
necessary to bring the institution into compliance with all capital standards.
In addition, "undercapitalized" institutions will be restricted from paying
management fees, dividends and other capital distributions, will be subject to
certain asset growth restrictions and will be required to obtain prior approval
from the appropriate regulator to open new branches or expand into new lines of
business.
As an institution's capital levels decline, the extent of action to be
taken by the appropriate regulator increases, restricting the types of
transactions in which the institution may engage and ultimately providing for
the appointment of a receiver for certain institutions deemed to be critically
undercapitalized.
The FDICIA also provides that banks have to meet new safety and soundness
standards. In order to comply with the FDICIA, the Federal Reserve Board, the
OCC and the FDIC have adopted regulations defining operational and managerial
standards relating to internal controls, loan documentation, credit
underwriting, interest rate exposure, asset growth, and compensation, fees and
benefits.
Both the capital standards and the safety and soundness standards which the
FDICIA seeks to implement are designed to bolster and protect the deposit
insurance fund.
12
In response to the directive issued under the FDICIA, the regulators have
established regulations which, among other things, prescribe the capital
thresholds for each of the five capital categories established by the FDICIA.
The following table reflects the capital thresholds:
Total Risk-Based Tier 1 Risk-Based Tier 1
Capital Ratio Capital Ratio Leverage Ratio
---------------- ----------------- --------------
Well Capitalized(1)...................... 10.0% 6.0% 5.0%
Adequately Capitalized(1)................ 8.0% 4.0% 4.0%(2)
Undercapitalized(3)...................... < 8.0% < 4.0% < 4.0%(4)
Significantly Undercapitalized(3)........ < 6.0% < 3.0% < 3.0%
Critically Undercapitalized.............. - - < 2.0%(5)
___________________________
(1) An institution must meet all three minimums.
(2) 3.0% for composite 1-rated institutions subject to appropriate federal
banking agency guidelines.
(3) An institution falls into this category if it is below the specified
capital level for any of the three capital measures.
(4) Less than 3.0% for composite 1-rated institutions, subject to appropriate
federal banking agency guidelines.
(5) Ratio of tangible equity to total assets.
As a national bank, the Bank is subject to examination and review by the
OCC. This examination is typically completed on-site at least every twelve
months and is subject to off-site review at call. The OCC, at will, can access
quarterly reports of condition, as well as such additional reports as may be
required by the national banking laws.
As a bank holding company, the Company is required to file with the Federal
Reserve Board an annual report of its operations at the end of each fiscal year
and such additional information as the Federal Reserve Board may require
pursuant to the Act. The Federal Reserve Board may also make examinations of the
Company and each of its subsidiaries.
The scope of regulation and permissible activities of the Company and the
Bank is subject to change by future federal and state legislation. In addition,
regulators sometimes require higher capital levels on a case-by-case basis based
on such factors as the risk characteristics or management of a particular
institution. The Company and the Bank are not aware of any attributes of their
operating plan that would cause regulators to impose higher requirements.
CERTAIN EVENTS THAT MAY AFFECT FUTURE RESULTS
Our business may be affected by a number of events, including the events
discussed below. You should consider the events described below, together with
all other information in this Annual Report on Form 10-K.
Expansion and Management of Growth
The Company intends to pursue an aggressive growth strategy for the
foreseeable future, and future results of operations will be affected by its
ability to, among other things, identify suitable markets and sites for new
community banking offices, build its customer base, attract qualified bank
management, negotiate agreements with acceptable terms in connection with the
acquisition of existing banks and maintain adequate working capital. Failure to
manage growth effectively or to attract and retain qualified personnel could
have a material adverse effect on the Company's business, future prospects,
financial condition or results of operations, and could adversely affect the
Company's ability to implement its business strategy successfully. There can
also be no assurance that the Company will be able to expand its market presence
in the Bank's existing markets or successfully enter new markets or that any
such expansion will not adversely affect the Company. In entering new markets,
the Company will encounter competitors with greater knowledge of such local
markets and greater financial and operational resources. In addition, although
the Company intends to expand primarily through selective new Bank branch
openings, the Company intends to regularly evaluate potential acquisition
transactions that would complement or expand the Company's business. In doing
so, the Company expects to compete with other potential bidders, many of which
have greater financial resources than the Company.
13
When entering new geographic markets, the Company will need to establish
relationships with additional well-trained local senior management and other
employees. In order to effect the Company's business strategy, the Company will
be substantially reliant upon local management, and accordingly, it will be
necessary for the Company to give significant local decision-making authority to
its senior officers and managers in any new bank office location. There can be
no assurance that the Company will be able to establish such local affiliations
and attract qualified management personnel. The process of opening new bank
locations and evaluating, negotiating and integrating acquisition transactions
may divert management time and resources. There can be no assurance that the
Company will be able to establish any future new branch office or acquire any
additional financial institutions. Moreover, there can be no assurance that the
Company will be able to integrate successfully or operate profitably any newly
established branch office or acquired financial institution. There can be no
assurance that the Company will not incur disruption and unexpected expenses in
integrating newly established operations. The Company's ability to manage growth
as it pursues its expansion strategy will also be dependent upon, among other
factors, its ability to (i) maintain appropriate policies, procedures and
systems to ensure that the Company's loan portfolio maintains an acceptable
level of credit risk and loss and (ii) manage the costs associated with
expanding its infrastructure, including systems, personnel and facilities. The
Company's inability to manage growth as it pursues its expansion strategy could
have a material adverse effect on the Company's business, future prospects,
financial condition or results of operations.
Intense Competition in the Market Areas of the Bank
Vigorous competition exists in all areas where the Bank presently engages
in business. The Bank faces intense competition in its market areas from major
banking and financial institutions, including many which have substantially
greater resources, name recognition and market presence than the Bank. Other
banks, many of which have higher legal lending limits, actively compete for
loans, deposits and other services which the Bank offers. Competitors of the
Bank include commercial banks, savings banks, savings and loan associations,
insurance companies, asset-based non-bank lenders, finance companies, credit
unions, mortgage companies and other financial institutions. Trends toward the
consolidation of the banking industry may make it more difficult for smaller
banks, such as the Bank, to compete with large national and regional banking
institutions. The Company's failure to compete effectively for deposit, loan and
other banking customers in its market areas could have a material adverse effect
on the Company's business, future prospects, financial condition or results of
operations.
Credit Risk
There are risks inherent in making any loan, including risks with respect
to the period of time over which the loan may be repaid, risks resulting from
changes in economic and industry conditions risks inherent in dealing with
individual borrowers and risks resulting from uncertainties as to the future
value of collateral. The risk of nonpayment of loans is inherent in commercial
banking. Moreover, the Bank expects to focus on loans to small and medium-sized
businesses, which may result in a large concentration by the Bank of loans to
such businesses. Management will attempt to minimize the Bank's credit exposure
by carefully monitoring the concentration of its loans within specific
industries and through prudent loan application approval procedures, but there
can be no assurance that such monitoring and procedures will reduce such lending
risks. Moreover, as the Company expands into new geographic markets, the
Company's credit administration and loan underwriting policies will be required
to adapt to the local lending and economic environments of these new markets.
There is no assurance that the Company's credit administration personnel,
policies and procedures will adequately adapt to such new geographic markets. At
December 31, 2001, real estate loans, which included construction and commercial
loans secured by real estate and residential mortgages, comprised 58.0% of the
Bank's total loan portfolio, net of deferred loan fees. The Bank presently
generates all of its real estate mortgage loans in Florida. Therefore,
conditions of the Florida real estate market could strongly influence the level
of the Bank's non-performing mortgage loans and the results of operations and
financial condition of the Company and the Bank. Real estate values and the
demand for mortgages and construction loans are affected by, among other things,
changes in general or local economic conditions, changes in governmental rules
or policies, and the availability of loans to potential purchasers. In addition,
Florida historically has been vulnerable to certain natural disaster risks, such
as floods, hurricanes and tornadoes, which are not typically covered by the
standard hazard insurance policies maintained by borrowers. Uninsured disasters
may adversely impact the ability of borrowers to repay loans made by the Bank.
The existence of adverse economic conditions, declines in real estate values or
the occurrence of such natural disasters in Florida could have a material
adverse effect on the Company's business, future prospects, financial condition
or results of operations. The failure by the Company to adapt its credit
policies and procedures on an adequate and timely basis to new markets or to
provide sufficient oversight to its lending activities could result in an
14
increase in nonperforming assets, thereby causing operating losses, impairing
liquidity and eroding capital, and could have a material adverse effect on the
Company's business, future prospects, financial condition or results of
operations.
Allowance for Loan Losses
Industry experience indicates that a portion of the loans of the Bank will
become delinquent and a portion of the loans will require partial or entire
charge off. Regardless of the underwriting criteria utilized by the Bank or its
predecessors, losses may be experienced as a result of various factors beyond
the Bank's control, including, among others, changes in market conditions
affecting the value of collateral and problems affecting the credit of the
borrower. Due to the concentration of loans in Florida, adverse economic
conditions in that area could result in a decrease in the value of a significant
portion of the Bank's collateral. Although management of the Bank believes that
the allowance for loan losses is currently adequate to absorb losses on any
existing loans that may become uncollectible, there can be no assurance that the
Bank will not experience significant losses in its loan portfolios which may
require significant additions to the loan loss allowance.
Effect of Interest Rates
The operations of the Bank, and of commercial banks in general, are
significantly influenced by general economic conditions, by the related monetary
and fiscal policies of the federal government and, in particular, the FDIC and
the FRB. Deposit flows and the cost of funds are influenced by interest rates of
competing investments and general market rates of interest. Lending activities
are affected by the demand for commercial and residential mortgage financing and
for other types of loans, which in turn is affected by the interest rates at
which such financing may be offered and by other factors affecting the supply of
office space and housing and the availability of funds.
At December 31, 2001, the Bank's liabilities which would reprice within the
next twelve months exceeded the assets (which would re-price during that time)
by approximately $7.2 million, or 1.5% of total earning assets. As a result of
this difference, an increase in market interest rates is likely to result in a
decrease in net interest income for the Bank because the level of interest paid
on interest-bearing liabilities is likely to increase more rapidly than the
level of interest earned on interest-earning assets over the coming year.
Increases in the level of interest rates may reduce loan demand, and thereby the
amount of loans that can be originated by the Bank and, similarly, the amount of
loan and commitment fees, as well as the value of the investment securities and
other interest-earning assets of the Bank. Moreover, volatility in interest
rates can result in disintermediation, which is the flow of funds away from
banks into direct investments, such as corporate securities and other investment
vehicles which, because of the absence of federal deposit insurance, generally
pay higher rates of return than bank deposits, or the transfer of funds within
the bank from a lower yielding savings accounts to higher yielding certificates
of deposit.
Unpredictable Economic Conditions
Commercial banks and other financial institutions are affected by economic
and political conditions, both domestic and international, and by governmental
monetary policies. Conditions such as inflation, recession, unemployment, high
interest rates, restricted money supply, scarce natural resources, international
disorders and other factors beyond the control of the Company and the Bank may
adversely affect their profitability. The Company's success will significantly
depend upon general economic conditions in Florida, the Bank's individual
markets, and the other market areas into which the Company may expand. A
prolonged economic dislocation or recession, whether in Florida generally or in
any or all of the Bank's markets, could cause the Company's non-performing
assets to increase, thereby causing operating losses, impaired liquidity and the
erosion of capital. Such an economic dislocation or recession could result from
a variety of causes, including natural disasters such as hurricanes, floods or
tornadoes, or a prolonged downturn in various industries upon which the
economies of Florida and/or particular markets of the Bank depend. Future
adverse changes in the Florida economy or the local economies of the Identified
Markets could have a material adverse effect on the Company's business, future
prospects, financial condition or results of operations.
15
Limitation on Dividends; Reliance on the Bank
The Company has never declared or issued a dividend on its common stock.
The Company has no current plans to distribute any cash dividends to its common
shareholders. Earnings of the Bank, if any, are expected to be retained by the
Bank to enhance its capital structure or distributed to the Company to pay its
operating costs. As the Company has no independent sources of revenue, the
Company's principal source of funds to pay dividends on the common stock and its
other securities, to service indebtedness and to fund operations will be cash
dividends and other payments that the Company receives from the Bank. The
payment of dividends by the Bank to the Company is subject to certain
restrictions imposed by federal banking laws, regulations and authorities.
Impact of Technological Advances; Upgrade to Company's Internal Systems
The banking industry is undergoing, and management believes will continue
to undergo, technological changes with frequent introductions of new
technology-driven products and services. In addition to improving customer
services, the effective use of technology increases efficiency and enables
financial institutions to reduce costs. The Company's future success will
depend, in part, on its ability to address the needs of its customers by using
technology to provide products and services that will satisfy customer demands
for convenience as well as to enhance efficiencies in the Company's operations.
Management believes that keeping pace with technological advances is important
for the Company, as long as its emphasis on personalized services is not
adversely impacted. Many of the Company's competitors will have substantially
greater resources than the Company to invest in technological and infrastructure
improvements. There can be no assurance that the Bank will be able to implement
new technology-driven products and services effectively or to market
successfully such products and services to its clients. Furthermore, the Company
and the Bank outsource many of their core technology-related systems. The Bank's
failure to acquire, implement or market new technology could have a material
adverse effect on the Company's business, future prospects, financial condition
or results of operations. The Company, therefore, is dependent upon these
outside vendors to provide many of its technology-related products and services.
Anti-takeover Provisions
The Company's Second Amended and Restated Articles of Incorporation (the
"Articles of Incorporation") contain provisions requiring supermajority
shareholder approval to effect certain extraordinary corporate transactions with
Interested Persons, which are defined in the Articles of Incorporation as those
persons who own greater than 5% or more of the shares of the Company's stock
entitled to vote in election of directors, unless that transaction is approved
by three quarters of the Company's Board of Directors. This approval is in
addition to any other required approval of the Board of Directors or
shareholders. In addition, the Articles of Incorporation provide for the Board
of Directors to be classified into three staggered classes, as nearly equal in
number as possible. Directors are elected to serve for three-year terms. The
Company's Amended and Restated By-Laws (the "By-Laws") also contain provisions
which (i) authorize the Board to determine the precise number of members of the
Board and authorize either the Board or the shareholders to fill vacancies on
the Board, (ii) authorize any action required or permitted to be taken by the
Company's shareholders to be effected by consent in writing; and (iii) establish
certain advance notice procedures for nomination of candidates for election as
directors and for shareholder proposals to be considered at an annual or special
meeting of shareholders. The issuance of preferred stock by the Company could
also have the effect of making it more difficult for a third party to acquire,
or of discouraging a third party from acquiring, a controlling interest in the
Company and could adversely affect the voting power or other rights of holders
of the common stock. These provisions may have the effect of impeding the
acquisition of control of the Company by means of a tender offer, a proxy fight,
open-market purchases or otherwise, without approval of such acquisition by the
Board of Directors. Certain of these provisions also make it more difficult to
remove the Company's current Board of Directors and management.
Future Capital Needs
The Board of Directors may determine from time to time a need to obtain
additional capital through the issuance of additional shares of common stock or
other securities. Such issuance may dilute the ownership interests in the
Company of the investors in the offering.
16
Government Regulation
The Company and the Bank operate in a highly regulated environment and are
subject to supervision and regulation by several governmental regulatory
agencies, including the Board of Governors of the Federal Reserve System, the
OCC, the Federal Deposit Insurance Corporation, the Florida Department of
Banking and Finance and the Securities and Exchange Commission (SEC). These
regulatory agencies, with the exception of the SEC, are generally intended to
provide protection for depositors and customers rather than for the benefit of
shareholders. The Company and the Bank are subject to future legislation and
government policy, including bank deregulation and interstate expansion, which
could materially adversely affect the banking industry as a whole, including the
operations of the Company and the Bank. The establishment of branches or the
acquisitions of banks in Identified Markets and other market areas is subject to
the prior receipt of certain regulatory approvals. Failure to obtain such
regulatory approvals could have a material adverse effect on the Company's
business, future prospects, financial condition or results of operations.
Dependence on Key Personnel
The success of the Bank depends to a significant extent upon the
performance of its respective Chairmen, President and Executive Vice Presidents,
the loss of any of whom could have a materially adverse effect on the Bank. The
Bank believes that its future success will depend in large part upon its ability
to retain such personnel. There can be no assurance that the Bank will be
successful in retaining such personnel.
Item 2. Properties.
- -------------------
The Company's occupies 5,113 sq. ft. of leased space for its main offices
located at 5210 Belfort Road, Suite 310, Concourse II, Jacksonville, Florida
32256. The Bank operates six banking offices and an operations center in the
following locations:
Florida Bank, N.A. - Alachua County (1)
600 N.W. 43rd Street, Suite A
Gainesville, Florida 32607
Facilities: Owned by the Bank - 7,581 sq. ft.
Florida Bank, N.A. - Jacksonville
5210 Belfort Road, Suite 140
Jacksonville, Florida 32256
Facilities: Leased 6001 sq. ft.
Florida Bank, N.A. - Tampa (2)
100 West Kennedy Boulevard
Tampa, Florida 33602
Facilities: Leased 12,573 sq. ft.
Florida Bank, N.A. - Broward County
600 North Pine Island Rd., Suite 350
Plantation, Florida 33324
Facilities: Leased 4,893 sq. ft.
Florida Bank, N.A. - Pinellas County
8250 Bryan Dairy Road
Suite 150
Largo, Florida 33777
Facilities: Leased 5,428 sq. ft.
17
Florida Bank, N.A. - Marion County
2437 SE 17th Street
Suite 101
Ocala, Florida 34471
Facilities: Leased 5,485 sq. ft.
Florida Bank, N.A. - Operations Center
6301 Benjamin Road
Suite 105
Tampa, Florida 33634
Facilities: Leased 5,056 sq. ft.
(1) The Alachua County Bank leased approximately 1,600 square feet of its
facility to a local health and fitness center until needed for future
expansion by the Bank.
(2) Approximately 5,546 sq. ft. of the Tampa Bank facility has been subleased
to a local law firm. The term of the sublease expires on June 30, 2003 in
conjunction with the expiration of Bank's lease.
Item 3. Legal Proceedings.
- ------- ------------------
On November 6, 2001, a company and its owners filed a suit in the Circuit
Court of Hillsborough County against the Company and two of its officers. The
plaintiffs sought damages, fees and expenses purported to have been caused by
the failure to consummate the Company's proposed acquisition of their business.
On February 4, 2002, the plaintiffs dismissed this action in exchange for a
payment of $35,000.
There are no material pending legal proceedings to which the Company or the
Bank is a party or of which any of their properties are subject, nor are there
material proceedings known to the Company or the Bank to be threatened or
pending by any governmental authority.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------- ----------------------------------------------------
No matter was submitted during the fourth quarter ended December 31, 2001
to a vote of security holders of the Company.
18
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
- ------- ----------------------------------------------------------------------
The Company's common stock is traded on the NASDAQ National Market under
the symbol "FLBK." The common stock began trading on the NASDAQ National Market
on July 30, 1998. The following table sets forth for the periods indicated the
quarterly high and low sale prices per share as reported by the NASDAQ National
Market. These quotations also reflect inter-dealer prices without retail
mark-ups, mark-downs, or commissions.
High Low
---- ---
Fiscal year ended December 31, 2000
First Quarter $7.500 $4.875
Second Quarter 6.000 4.875
Third Quarter 6.000 5.000
Fourth Quarter 6.938 5.063
Fiscal year ended December 31, 2001
First Quarter $7.188 $5.250
Second Quarter 6.500 5.290
Third Quarter 6.400 5.550
Fourth Quarter 6.250 5.510
As of February 13, 2002, there were approximately 168 holders of record of
the Common Stock. Management of the Company believes that there are in excess of
2,500 beneficial holders of its Common Stock.
The Company has never declared or paid any dividends on its common stock.
The Company currently anticipates that all of its earnings will be retained for
development of the Company's business, and does not anticipate paying any cash
dividends in the foreseeable future. Future cash dividends on common stock, if
any, will be at the discretion of the Company's Board of Directors and will
depend upon, among other things, the Company's future earnings, operations,
capital requirements and surplus, general financial condition, contractual
restrictions, and such other factors as the Board of Directors may deem
relevant.
In September of 1999, the Company's Board of Directors authorized a stock
repurchase plan covering up to ten percent (10%) of the outstanding shares of
common stock (approximately 585,000 shares). The share repurchase plan
authorizes the purchase of common shares at any price below the then current
book value per share. As of March 14, 2002, the Company has repurchased 302,200
shares for a total cost of $1,866,197 or an average cost of $6.18 per share.
Pursuant to the stock repurchase plan, on December 10, 2001, the Company's Board
of Directors authorized a pre-programmed stock repurchase program pursuant to
the `safe harbor' guidelines of Rule 10b-18 of the Securities Exchange Act of
1934. This program provides for repurchase of up to 250,000 shares in the open
market when the trading price of the Company's common stock falls to $5.75 per
share or less. As of March 14, 2002, no shares had been repurchased under the
Rule 10b-18 program.
Item 6. Selected Financial Data.
- ------- ------------------------
SELECTED FINANCIAL DATA
The following tables set forth selected financial data of the Company for
the periods indicated. Florida Banks, Inc. was incorporated on October 15, 1997
for the purpose of becoming a bank holding company and acquiring First National
Bank of Tampa. On August 4, 1998, the Company completed its initial public
offering and its merger (the "Merger") with the Bank pursuant to which the Bank
was merged with and into Florida Bank No. 1, N.A., a wholly-owned subsidiary of
the Company, and renamed Florida Bank, N.A. Shareholders of the Bank received
19
1,375,000 shares of common stock of the Company valued at $13,750,000. The
Merger was considered a reverse acquisition for accounting purposes, with the
Bank identified as the accounting acquiror. The Merger has been accounted for as
a purchase, but no goodwill has been recorded in the Merger and the financial
statements of the Bank have become the historical financial statements of the
Company.
The number of shares of common stock, the par value of common stock and per
share amounts have been restated to reflect the shares exchanged in the Merger.
The selected financial data of the Company as of December 31, 2001, 2000,
1999, 1998 and 1997 and for each of the years then ended are derived from the
financial statements of the Company, which have been audited by Deloitte &
Touche LLP, independent auditors. These selected financial data should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the Company's financial statements and notes
thereto, and financial and other information included elsewhere herein.
Year Ended December 31,
------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
(Dollars in thousands except per share amounts)
Summary Income Statement:
Interest income $31,380 $ 23,766 $ 11,142 $ 5,413 $4,302
Interest expense 16,548 13,711 4,696 2,436 2,296
------ -------- --------- ------- ------
Net interest income 14,832 10,055 6,446 2,977 2,006
Provision for loan losses 1,889 1,912 1,610 629 60
------ -------- --------- ------- ------
Net interest income after
provision for loan losses 12,943 8,143 4,836 2,348 1,946
Noninterest income 2,048 1,011 583 613 504
Noninterest expense (1) 13,693 10,886 8,342 7,903 1,842
------ -------- --------- ------- ------
Income (loss) before provision for
income taxes 1,298 (1,732) (2,923) (4,943) 608
Provision (benefit) for income taxes (2) 490 (652) (1,076) (350) 232
------ -------- --------- ------- ------
Net income (loss) 808 (1,080) (1,847) (4,593) 376
------ -------- --------- ------- ------
Preferred stock dividends 250 - - - -
------ -------- --------- ------- ------
Net income (loss) applicable to common
shares $ 558 $ (1,080) $ (1,847) $(4,593) $ 376
====== ========== ========= ======= ======
Earnings (loss) per common share (3):
Basic $ 0.10 $ (0.19) $ (0.32) $ (1.46) $ 0.31
Diluted 0.10 (0.19) (0.32) (1.46) 0.29
- ----------
(1) Noninterest expense for the Company for 1998 includes a nonrecurring,
noncash charge of $3,939,000, relating to the February 3, 1998 sale of
Common Stock and Warrants included in the Units sold to accredited foreign
investors and the February 11, 1998 sale of 297,000 shares of common stock
to 14 officers, directors and consultants.
(2) The provision for income taxes for 1997 is comprised solely of deferred
income taxes. The benefit of the utilization of net operating loss
carryforwards for 1997 (periods subsequent to the effective date of the
Company's quasi-reorganization) have been reflected as increases to
additional paid-in capital.
(3) The earnings per common share amounts for 1997 have been restated to
reflect the shares exchanged in the Merger.
20
At December 31,
------------------------------------------------------------------
2001 2000 1999 1998 1997
------------- -------------------------- ------------ ------------
(Dollars in Thousands)
Summary Balance Sheet Data:
Investment securities $ 38,886 $ 36,756 $ 28,511 $ 22,242 $ 10,765
Loans, net of deferred loan fees 401,444 285,526 157,517 67,131 33,720
Earning assets 494,987 353,239 205,898 106,022 54,731
Total assets 522,323 372,797 218,163 113,566 60,396
Noninterest-bearing deposits 99,899 41,965 22,036 11,840 6,442
Total deposits 451,249 305,239 159,106 64,621 45,460
Other borrowed funds 14,210 26,035 18,279 5,718 8,317
Total shareholders' equity 46,142 38,556 39,235 42,588 6,314
Performance Ratios:
Net interest margin (1) 3.62 % 3.58 % 4.57 % 4.28 % 3.89 %
Efficiency ratio (2) 81.12 98.37 118.68 220.18 73.39
Return on average assets 0.13 (0.36) (1.07) (5.42) 0.70
Return on average equity 1.30 (2.83) (3.12) (16.54) 10.62
Asset Quality Ratios:
Allowance for loan losses to total loans 1.17 % 1.23 % 1.18 % 1.60 % 1.42 %
Non-performing loans to total loans (3) 0.36 1.44 1.46 2.80 -
Net charge-offs to average loans 0.21 0.12 0.80 0.09 0.03
Capital and Liquidity Ratios:
Total capital to risk-weighted assets 12.70 % 12.73 % 18.19 % 63.25 % 14.29 %
Tier 1 capital to risk-weighted assets 11.63 11.58 17.29 61.59 13.00
Tier 1 capital to average assets 10.64 10.28 20.01 36.44 7.42
Average loans to average deposits 99.03 94.90 101.53 81.04 75.77
Average equity to average total assets 9.96 12.80 34.30 32.80 6.54
- ------------
(1) Computed by dividing net interest income by average earning assets.
(2) Computed by dividing noninterest expense by the sum of net interest income
and noninterest income.
(3) The Bank had no non-performing loans at December 31, 1997.
21
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- ------- -----------------------------------------------------------------------
of Operations.
--------------
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This Report contains statements that constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These statements appear in a
number of places in this Report and include statements regarding the intent,
belief or current expectations of the Company, its directors or its officers
with respect to, among other things: (i) potential acquisitions by the Company;
(ii) trends affecting the Company's financial condition or results of
operations; and (iii) the Company's business and growth strategies. Investors
are cautioned that any such forward-looking statements are not guarantees of
future performance and involve risks and uncertainties, and that actual results
may differ materially from those projected in the forward-looking statements as
a result of various factors. These factors include, but are not limited to the
following: (a) competitive pressure in the banking industry; (b) changes in the
interest rate environment; (c) the fact that general economic conditions may be
less favorable than the Company expects; and (d) changes in The Company's
regulatory environment. The accompanying information contained in this Report,
including, without limitation, the information set forth under the headings
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business," as well as in the Company's Securities Act filings,
identifies important additional factors that could adversely affect actual
results and performance. Prospective investors are urged to carefully consider
such factors.
All forward-looking statements attributable to the Company are expressly
qualified in their entirety by the foregoing cautionary statements.
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Company (including the notes thereto)
contained elsewhere in this Report. The following discussion compares results of
operations for the years ended December 31, 2001, 2000 and 1999.
The Company
The Company was incorporated on October 15, 1997 to acquire or establish a
bank in Florida. Prior to the consummation of the merger with First National
Bank of Tampa (the "Merger"), the Company had no operating activities. The
Merger was consummated immediately prior to the closing of the Company's initial
public offering (the "Offering") on August 4, 1998. After the consummation of
the Merger, the Bank's shareholders owned greater than 50% of the outstanding
Common Stock of the Company, excluding the issuance of the shares in connection
with the Offering. Accordingly, the Merger was accounted for as if the Bank had
acquired the Company, the financial statements of the Bank have become the
historical financial statements of the Company and no goodwill was recorded as a
result of the Merger. In addition, the operating results of the Company incurred
prior to the Merger, which consisted of organizational and start-up costs, are
not included in the consolidated operating results.
The Company funded its start-up and organization costs through the sale of
units, consisting of Common Stock, Preferred Stock and warrants to purchase
shares of Common Stock. As the Company was not formed until 1997, the term
"Company" used throughout "Management's Discussion and Analysis of Financial
Condition and Results of Operations" refers to the Company and the Bank for the
periods ended December 31, 2001, 2000, 1999 and 1998, and for the Bank only for
the period ended December 31, 1997 and prior periods. Unless otherwise
indicated, the "Bank" refers to Florida Bank, N.A., formerly First National Bank
of Tampa.
Summary
The Company reported net income of $808,000 and net income applicable to
common shareholders of $558,000 for fiscal 2001, compared to a loss of $1.08
million in 2000. The Company had no preferred stock issued or outstanding prior
to 2001. The Company's net loss for fiscal 2000 decreased $767,000 to a loss of
$1.08 million or 49.6% from $1.8 million in 1999. Basic and diluted earnings
(loss) per common share were $.10, ($.19), and ($.32) for the years ended
December 31, 2001, 2000 and 1999. Diluted earnings per common share reflects the
dilutive effect of outstanding options.
22
The improvement in the Company's performance to net income in 2001,
compared to a net loss in 2000, was primarily attributable to an increase in net
interest income and an increase in noninterest income, partially offset by an
increase in noninterest expenses. Net interest income increased to $14.8 million
in 2001 from $10.0 million in 2000, an increase of 47.5%. The provision for loan
losses decreased by 1.2% to $1.89 million in 2001, from $1.91 million in 2000.
Noninterest income increased 102.5% to $2.05 million in 2001 from $1.01 million
in 2000. Noninterest expense increased to $13.7 million in 2001 from $10.9
million in 2000, an increase of 25.9%. The Company recorded a provision for
income taxes in 2001 of $489,000, compared to a benefit for income taxes of
($652,000) in 2000.
The decrease in net losses from 1999 to 2000 was primarily attributable to
an increase in net interest income and an increase in noninterest income,
partially offset by increases in the provision for loan losses and noninterest
expenses. Net interest income increased to $10.1 million in 2000 from $6.5
million in 1999, an increase of 56.0%. The provision for loan losses increased
by 18.8% to $1.9 million in 2000 from $1.6 million in 1999. Noninterest income
increased 73.6% to $1.01 million in 2000 from $543,000 in 1999. Noninterest
expense increased to $10.9 million in 2000 from $8.3 million in 1999, an
increase of 30.5%. The benefit for income taxes decreased to $652,000 in 2000
from $1.1 million in 1999, a decrease of 39.4%.
Total assets at December 31, 2001 were $522.3 million, an increase of
$149.5 million, or 40.11%, over the prior year. Total loans increased 40.6% to
$401.7 million at December 31, 2001, from $285.6 million at December 31, 2000.
Total deposits increased $146.0 million, or 47.8%, to $451.2 million at December
31, 2001 from $305.2 million at December 31, 2000. Shareholders' equity
increased to $46.1 million at December 31, 2001 from $38.6 million at December
31, 2000, an increase of 19.7%. These increases were primarily attributable to
the conversion of the Marion County office to a full service branch in its first
full year of operations, together with maturity of the Company's locations in
its other markets and continued successful implementation of its long-term
strategies, more fully discussed in Part 1, Item 1 above.
The earnings performance of the Company is reflected in the calculations of
net income (loss) as a percentage of average total assets ("Return on Average
Assets") and net income (loss) as a percentage of average shareholders' equity
("Return on Average Equity"). Return on Average Assets and Return on Average
Equity are computed using Net Income Applicable to Common Shares. During 2001,
the Return on Average Assets and Return on Average Equity were 0.13% and 1.30%
respectively, compared to (0.36%) and (2.83%), respectively, for 2000. The
Company's ratio of total equity to total assets decreased to 8.83% at December
31, 2001 from 10.3% at December 31, 2000, primarily as a result of growth from
branch operations.
Total assets at December 31, 2000 were $372.8 million, an increase of
$154.7 million, or 70.9%, over the prior year. Total loans increased 81.2% to
$285.6 million at December 31, 2000, from $157.6 million at December 31, 1999.
Total deposits increased $146.1 million, or 91.8%, to $305.2 million at December
31, 2000 from $159.1 million at December 31, 1999. Shareholders' equity
decreased to $38.6 million at December 31, 2000 from $39.2 million at December
31, 1999, a decrease of 1.7%. These increases and decrease were primarily
attributable to the opening of the Marion County branch and a full year of
start-up operations for the Pinellas and Broward County branches.
The earnings performance of the Company is reflected in the calculations of
net loss as a percentage of average total assets ("Return on Average Assets")
and net loss as a percentage of average shareholders' equity ("Return on Average
Equity"). During 2000, the Return on Average Assets and Return on Average Equity
were (0.36%) and (2.83%) respectively, compared to (1.07%) and (3.12%),
respectively, for 1999. The Company's ratio of total equity to total assets
decreased to 10.3% at December 31, 2000 from 18.0% at December 31, 1999,
primarily as a result of growth from the new branch operations.
Results of Operations
Net Interest Income
The following three tables set forth, for the periods indicated, certain
information related to the Company's average balance sheet, its yields on
average earning assets and its average rates on interest-bearing liabilities.
Such yields and rates are derived by dividing income or expense by the average
balance of the corresponding assets or liabilities. Average balances have been
derived from the daily balances throughout the periods indicated.
23
Year Ended
December 31, 2001 Income /
Average Balance Expense Yield / Cost
(Dollars in thousands)
ASSETS:
Total loans (1) $340,778 $27,692 8.13%
Investment securities (2) 39,297 2,653 6.75%
Federal funds sold & other investments 29,746 1,035 3.48%
------ -----
Total earning assets 409,821 31,380 7.66%
Cash and due from banks 12,598
Premises and equipment, net 3,355
Other assets, net 7,833
Allowance for loan losses (4,046)
------
Total Assets (3) $429,561
========
LIABILITIES:
Interest-bearing liabilities:
Interest-bearing transaction accounts $19,439 366 1.89%
Savings deposits 54,602 2,034 3.72%
Time deposits 223,905 12,548 5.60%
Repurchase agreements sold 33,568 1,205 3.59%
Other borrowed funds 7,585 395 5.21%
----- ---
Total interest bearing liabilities 339,099 16,548 4.87%
Demand deposits 44,038
Accrued interest and other liabilities 3,415
Shareholders' equity 43,009
------
Total liabilities and shareholders' $429,561
========
Net interest income $14,832
=======
Net interest spread 2.79%
Net interest margin 3.62%
Non-interest expense 13,693
Overhead ratio 3.19%
Non-interest income 2,048
Non-interest income ratio 0.48%
(1) - Average loans include nonaccrual loans. At December 31, 2001, $1.1
million of loans were accounted for on a non-accrual basis. All
loans and deposits are domestic.
(2) - Stated at amortized cost. Does not reflect unrealized gains or
losses. All securities are taxable. The Company has no trading
account securities
(3) - All yields are considered taxable equivalent because the Company
has no tax exempt assets.
24
Year Ended
December 31, 2000 Income /
Average Balance Expense Yield / Cost
(Dollars in thousands)
ASSETS:
Total loans (1) $224,317 $20,073 8.95%
Investment securities (2) 37,416 2,477 6.62%
Federal funds sold & other investments 19,084 1,216 5.53%
------ -----
Total earning assets 280,817 23,766 8.46%
Cash and due from banks 9,311
Premises and equipment, net 2,805
Other assets, net 5,675
Allowance for loan losses (2,676)
------
Total Assets (3) $295,932
========
LIABILITIES:
Interest-bearing liabilities:
Interest-bearing transaction accounts $11,641 219 1.58%
Savings deposits 38,101 2,092 5.49%
Time deposits 156,150 10,083 6.46%
Repurchase agreements sold 14,956 903 6.04%
Other borrowed funds 6,824 414 6.07%
----- ---
Total interest bearing liabilities 227,672 13,711 6.02%
Demand deposits 27,677
Accrued interest and other liabilities 2,343
Shareholders' equity 38,240
------
Total liabilities and shareholders'
equity $295,932
========
Net interest income $10,055
=======
Net interest spread 2.44%
Net interest margin 3.58%
Non-interest expense 10,856
Overhead ratio 3.67%
Non-interest income 1,011
Non-interest income ratio 0.34%
(1) - Average loans include nonaccrual loans. At December 31, 2000, $1.5 million
of loans were accounted for on a non-accrual basis. All
loans and deposits are domestic.
(2) - Stated at amortized cost. Does not reflect unrealized gains or losses.
All securities are taxable. The Company has no trading
account securities.
(3) - All yields are considered taxable equivalent because the Company has no
tax exempt assets.
25
Year
December 31, 1999 Income /
Average Balance Expense Yield / Cost
(Dollars in thousands)
ASSETS:
Total loans (1) $103,492 $9,034 8.77%
Investment securities (2) 26,670 1,518 5.69%
Federal funds sold & other investments 11,932 590 4.94%
------ ---
Total earning assets 142,094 11,142 7.87%
Cash and due from banks 5,448
Premises and equipment, net 1,428
Other assets, net 4,268
Allowance for loan losses (1,197)
------
Total Assets (3) $152,041
== ========
LIABILITIES:
Interest-bearing liabilities:
Interest-bearing transaction accounts $6,586 137 2.06%
Savings deposits 24,427 1,153 4.72%
Time deposits 49,888 2,764 5.54%
Repurchase agreements sold 12,510 554 4.42%
Other borrowed funds 1,657 88 5.43%
----- --
Total interest bearing liabilities 95,068 4,696 4.94%
Demand deposits 14,727
Accrued interest and other liabilities 888
Shareholders' equity 41,358
------
Total liabilities and shareholders'
equity $152,041
========
Net interest income $6,446
======
Net interest spread 2.93%
Net interest margin 4.57%
Non-interest expense 8,342
Overhead ratio 5.26%
Non-interest income 583
Non-interest income ratio 0.37%
(1) - Average loans include nonaccrual loans. At December 31, 1999, $1.1
million of loans were accounted for on a non-accrual basis. All loans
and deposits are domestic.
(2) - Stated at amortized cost. Does not reflect unrealized gains or losses.
All securities are taxable. The Company has no trading account
securities.
(3) - All yields are considered taxable equivalent because the Company has no
tax exempt assets.
26
Net interest income is the principal component of a commercial bank's
income stream and represents the difference or spread between interest and
certain fee income generated from earning assets and the interest expense paid
on deposits and other borrowed funds. Fluctuations in interest rates, as well as
volume and mix changes in earning assets and interest-bearing liabilities, can
materially impact net interest income. The Company had no investments in
tax-exempt securities during 2001, 2000 and 1999. Accordingly, no adjustment is
necessary to facilitate comparisons on a taxable equivalent basis.
Net interest income increased 47.5% to $14.8 million in 2001 from $10.1
million in 2000. This increase is attributable to growth in loan volume due to
new branch operations, and is partially offset by the growth in time deposits,
repurchase agreements and other borrowed funds. The trend in net interest income
is commonly evaluated using net interest margin and net interest spread. The net
interest margin, or net yield on average earning assets, is computed by dividing
fully taxable equivalent net interest income by average earning assets. The net
interest margin increased 4 basis points to 3.62% in 2001 on average earning
assets of $409.8 million from 3.58% in 2000 on average earning assets of $280.8
million. This increase is primarily due to the fact that the average rates paid
on interest bearing liabilities decreased more than the average yield on earning
assets decreased. There was an 80 basis point decrease in the average yield on
earning assets to 7.66% in 2001 from 8.46% in 2000 and a 115 basis point
decrease in the average rate paid on interest-bearing liabilities to 4.87% in
2001 from 6.02% in 2000. The decreased yield on earning assets was primarily the
result of lower market rates on loans and investment securities, prompted by
eleven decreases in the Prime Rate during 2001, from 9.5% to 4.75%. The decrease
in the average cost of interest-bearing liabilities is attributable to decreases
in market rates on interest-bearing demand deposits, savings and time deposits,
money market accounts and other borrowed funds.
Net interest income increased 55.0% to $10.1 million in 2000 from $6.5
million in 1999. This increase is attributable to growth in loan volume due to
new branch operations, and is partially offset by the growth in time deposits
and repurchase agreements. The trend in net interest income is commonly
evaluated using net interest margin and net interest spread. The net interest
margin, or net yield on average earning assets, is computed by dividing fully
taxable equivalent net interest income by average earning assets. The net
interest margin decreased 99 basis points to 3.58% in 2000 on average earning
assets of $280.8 million from 4.57% in 1999 on average earning assets of $142.1
million. This decrease is primarily due to the fact that the average rates paid
on interest bearing liabilities increased more than the average yield on earning
assets increased. There was a 59 basis point increase in the average yield on
earning assets to 8.46% in 2000 from 7.87% in 1999 and a 108 basis point
increase in the average rate paid on interest-bearing liabilities to 6.02% in
2000 from 4.94% in 1999. The increased yield on earning assets was primarily the
result of higher market rates on loans and investment securities. The increase
in the cost of interest-bearing liabilities is attributable to increases in
rates on interest-bearing demand deposits, other time deposits, money market
accounts and other borrowed funds.
The net interest spread increased 35 basis points to 2.79% in 2001 from
2.44% in 2000, as the yield on average earning assets decreased 80 basis points
while the cost of interest-bearing liabilities decreased 115 basis points. The
net interest spread measures the absolute difference between the yield on
average earning assets and the rate paid on average interest-bearing sources of
funds. The net interest spread eliminates the impact of noninterest-bearing
funds and gives a direct perspective on the effect of market interest rate
movements. This measurement allows management to evaluate the variance in market
rates and adjust rates or terms as needed to maximize spreads.
The net interest spread decreased 49 basis points to 2.44% in 2000 from
2.93% in 1999, as the yield on average earning assets increased 59 basis points
while the cost of interest-bearing liabilities increased 108 basis points.
During recent years, the net interest margins and net interest spreads have
been under pressure, due in part to intense competition for funds with non-bank
institutions and changing regulatory supervision for some financial
intermediaries. The pressure was not unique to the Company and was experienced
by the banking industry nationwide.
To counter potential declines in the net interest margin and the interest
rate risk inherent in the balance sheet, the Company adjusts the rates and terms
of its interest-bearing liabilities in response to general market rate changes
and the competitive environment. The Company monitors Federal funds sold levels
throughout the year, investing any funds not necessary to maintain appropriate
liquidity in higher yielding investments such as short-term U.S. government and
27
agency securities. The Company will continue to manage its balance sheet and its
interest rate risk based on changing market interest rate conditions.
Rate/Volume Analysis of Net Interest Income
The table below presents the changes in interest income and interest
expense attributable to volume and rate changes between 2000 and 2001, between
1999 and 2000 and between 1998 and 1999. The effect of a change in average
balance has been determined by applying the average rate in 2000, 1999 and 1998
to the change in average balance from 1999 to 2000 to 2001 and from 1998 to 1999
to 2000, respectively. The effect of change in rate has been determined by
applying the average balance in 2000, 1999 and 1998 to the change in the average
rate from 1999 to 2000 to 2001 and from 1998 to 1999 to 2000, respectively.
The net change attributable to the combined impact of the volume and rate
has been allocated to both components in proportion to the relationship of the
absolute dollar amounts of the change in each.
Year Ended Year Ended Year Ended
December 31,2001 December 31,2000 December 31,1999
Compared With Compared With Compared With
December 31,2000 December 31,1999 December 31,1998
--------------------------------------------------------------------------------------------------
(Dollars in Thousands) (Dollars in Thousands) (Dollars in Thousands)
Increase / Decrease Due To: Increase / Decrease Due To: Increase / Decrease Due To:
--------------------------- --------------------------- ---------------------------
Volume Yield/Rate Total Volume Yield/Rate Total Volume Yield/Rate Total
--------------------------------------------------------------------------------------------------
Interest earned on:
Taxable securities $ 281 $ (105) $ 176 $ 611 $ 348 $ 959 $ 623 $ 21 $ 644
Federal funds sold 65 (461) (396) 767 192 959 (197) (197)
Net loans 10,416 (2,797) 7,619 10,596 442 11,038 5,521 (294) 5,227
Repurchase agreements 215 215 (333) (333) 89 (33) 56
--- ---- --- ---- --- ---- -- --- --
Total earning assets 10,977 (3,363) 7,614 11,641 982 12,623 6,036 (306) 5,730
------ ------ ----- ------ --- ------ ----- ---- -----
Interest paid on:
Money-market and interest-
bearing demand deposits 147 1 148 104 (21) 83 32 (5) 27
Savings deposits 859 (985) (126) 634 305 939 806 806
Time deposits 4,392 (1,859) 2,533 5,887 1,431 7,318 1,171 (58) 1,113
Repurchase agreements 1,124 (823) 301 108 243 351 320 2 322
Other borrowed funds 46 (65) (19) 280 44 324 1 (9) (8)
-- --- --- --- -- --- - -- --
Total interest-bearing
Liabilities 6,568 (3,731) 2,837 7,013 2,002 9,015 2,330 (70) 2,260
----- ------ ----- ----- ----- ----- ----- --- -----
Net interest income $ 4,409 $ 368 $ 4,777 $ 4,628 ($ 1,020) $ 3,608 $ 3,706 $ (236) $ 3,470
======== ======== ======== ======== ======== ======== ======== ======== ========
Provision for Loan Losses
The provision for loan losses is the expense of providing an allowance or
reserve for anticipated future losses on loans. The amount of the provision for
each period is dependent upon many factors, including loan growth, net
charge-offs, changes in the composition of the loan portfolio, delinquencies,
management's assessment of loan portfolio quality, the value of loan collateral
and general business and economic conditions.
28
The provision for loan losses charged to operations in 2001 was $1.9
million, approximately the same amount as 2000. The provision for loan losses
charged to operations in 1999 was $1.6 million. The increase in the provision
from 1999 to 2000 was generally due to the increase in the amount of loans
outstanding.
For additional information regarding provision for loan losses, charge-offs
and allowance for loan losses, see "-- Financial Condition--Asset Quality."
Noninterest Income
Noninterest income consists of revenues generated from a broad range of
financial services, products and activities, including fee-based services,
service fees on deposit accounts and other activities. In addition, gains
realized from the sale of the guaranteed portion of SBA loans, other real estate
owned, and available for sale investments are included in noninterest income.
Noninterest income increased 102.5% to $2.05 million in 2001 from $1.01
million in 2000. This change resulted from an increase in the amount of service
fees on deposit accounts, a gain from the sale of loans, an increase in the net
gain from the sale of available for sale securities, and an increase in other
noninterest income. Service fees on deposit accounts increased 73.5% to $1.2
million in 2001 from $706,000 in 2000 due to an increase in the volume of
business and personal transaction accounts and increased volume in the number of
services transacted for customers subject to service charges. Sale of available
for sale securities resulted in a net gain of $74,000 in 2001, compared to
$10,000 in 2000, an increase of 649.9%. Sale of loans resulted in a gain of
$104,000 in 2001, compared to zero in 2000. Other income, which includes various
recurring noninterest income items such as residential mortgage loan origination
fees (broker fees) and debit card fees, increased 118.4% to $646,000 in 2001
from $296,000 in 2000.
Noninterest income increased 73.6% to $1.0 million in 2000 from $583,000 in
1999. This change resulted from an increase in the amount of service fees on
deposit accounts and a net gain from the sale of available for sale securities.
Service fees on deposit accounts increased 55.2% to $706,000 in 2000 from
$455,000 in 1999 due to an increase in the volume of business and personal
transaction accounts and increased volume in the number of services transacted
for customers which are subject to service charges. Sale of available for sale
securities resulted in a net gain of $10,000 in 2000, compared to a net loss of
$4,000 in 1999. Other income, which includes various recurring noninterest
income items such as service fee income on SBA (Small Business Administration)
loans originated by the Bank, and residential mortgage loan origination fees,
increased 125.6% to $296,000 in 2000 from $131,000 in 1999.
The following table presents an analysis of the noninterest income for the
periods indicated with respect to each major category of noninterest income:
% Change % Change
2001 2000 1999 2001-2000 2000-1999
---- ---- ---- --------- ---------
(Dollars in thousands)
Service fees................................ $1,224 $705 $455 73.5% 55.2%
Gain on sale of loans....................... 104 0 1 100.0 (100.0)
(Loss) gain on sale of available for sale (4)
investment securities, net............... 74 10 649.9% N/A
Other....................................... 646 296 131 118.4 125.6
--- --- ---
Total................................... $2,048 $1,011 $583 102.5% 73.6%
====== ====== ====
Noninterest Expense
Noninterest expense increased 25.8% to $13.7 million in 2001 from $10.9
million in 2000. These increases are primarily attributable to increases in
personnel, occupancy, data processing and other expenses relating to conversion
of the Marion County office to a full-service branch, the first full year of
operation of the Marion County banking office, together with increases in
29
personnel and expenses related to the overall growth of the Company. Salaries
and benefits increased 28.6% to $8.8 million in 2001 from $6.8 million in 2000.
This increase is primarily attributable increases in the overall number of
personnel, and additional employees related to the Marion County office.
Occupancy and equipment expense increased 16.9% to $1.8 million in 2001 from
$1.5 million in 2000, primarily as a result of the addition of the Marion County
full-service branch, together with an increase in space for the Holding Company.
Data processing expense increased 48.4% to $678,000 in 2001 from $457,000 in
2000, which is primarily attributable to the growth in loan and deposit
transactions and the addition of new services. Other operating expenses
increased 17.6% to $2.5 million in 2001 from $2.1 million in 2000. This increase
is attributable primarily to an increase of $104,000 in postage and courier
expenses, an increase of $37,000 in communications expense and an increase of
$45,000 in legal fees. These expenses are primarily attributable to opening of
new banking offices and an overall increase in the size and volume of business
conducted by the Bank.
Noninterest expense increased 30.5% to $10.9 million in 2000 from $8.3
million in 1999. These increases are primarily attributable to increases in
personnel, occupancy, data processing and other expenses relating to opening of
the Marion County banking office, and the first full year of operation of the
Broward County and Pinellas County banking offices. Salaries and benefits
increased 23.8% to $6.8 million in 2000 from $5.5 million in 1999. This increase
is primarily attributable increases in the overall number of personnel, and for
the Marion County office. Occupancy and equipment expense increased 60.6% to
$1.5 million in 2000 from $951,000 in 1999, primarily as a result of the
addition of the Marion County banking office, and the first full year of
operation of the Broward and Pinellas County banking offices. Data processing
expense increased 72.1% to $457,000 in 2000 from $265,000 in 1999, which is
primarily attributable to the growth in loan and deposit transactions and the
addition of new services. Other operating expenses increased 28.6% to $2.1
million in 2000 from $1.6 million in 1999. This increase is attributable
primarily to an increase of $118,000 in postage and courier expenses, an
increase of $114,000 in loan closing expenses, an increase of $95,000 in
communications expense and an increase of $60,000 in legal fees. These expenses
are primarily attributable to opening of new banking offices and an overall
increase in the size and volume of business conducted by the Bank.
The following table presents an analysis of the noninterest expense for the
periods indicated with respect to each major category of noninterest expense:
% Change % Change
2001 2000 1999 2001-2000 2000-1999
---- ---- ---- --------- ---------
(Dollars in thousands)
Salaries and benefits.................... $8,761 $6,813 $5,501 28.6% 23.8%
Occupancy and equipment.................. 1,786 1,528 951 16.9 60.6
Data processing.......................... 678 457 265 48.4 72.1
Dividends on preferred securities of
subsidiary trust............... 13 0 0 100.0 N/A
Other.................................... 2,455 2,088 923 17.6 28.6
----- ----- --- ---- ----
Total................................ $13,693 $10,886 $7,903 25.8% 30.5%
======= ======= ====== ==== ====
Provision for Income Taxes
The provision for income taxes was $489,000 for 2001, compared to a benefit
for income taxes of ($652,000) for 2000. The effective tax rate for 2001 and
2000 was 37.6%. The Company paid no income taxes during 2001 and 2000 due to the
availability of net operating loss carryforwards.
30
The benefit for income taxes was $652,000 for 2000 compared to $1.1 million
for 1999. The effective tax rate for 2000 was a benefit of 37.6% as compared to
1999, which was a benefit of 36.8%. The increase in the effective tax rate is
due to the effect of a slightly higher level of nondeductible expenses in 1999
as compared to 2000. The Company paid no income taxes during 2000 and 1999 due
to the availability of net operating loss carryforwards.
Certain income and expense items are recognized in different periods for
financial reporting purposes and for income tax return purposes. Deferred income
tax assets and liabilities reflect the differences between the values of certain
assets and liabilities for financial reporting purposes and for income tax
purposes, computed at the current tax rates. Deferred income tax expense is
computed as the change in the Company's deferred tax assets, net of deferred tax
liabilities and the valuation allowance. The Company's deferred income tax
assets consist principally of net operating loss carryforwards. A deferred tax
valuation allowance is established if it is more likely than not that all or a
portion of the deferred tax assets will not be realized.
First National Bank of Tampa reported losses from operations each year from
its inception in 1988 through 1994. These losses primarily resulted from loan
losses and high overhead costs. Management of First National Bank of Tampa was
replaced during 1992 and additional capital of $1.6 million was raised through a
private placement of common stock during 1993. Largely as a result of these
changes, the Company became profitable in 1995. In order to reflect this fresh
start, the Bank elected to restructure its capital accounts through a
quasi-reorganization. A quasi-reorganization is an accounting procedure that
allows a company to restructure its capital accounts to remove an accumulated
deficit without undergoing a legal reorganization. Accordingly, the Bank charged
against additional paid-in capital its accumulated deficit of $8.1 million at
December 31, 1995. As a result of the quasi-reorganization, the future benefit
from the utilization of the net operating loss carryforwards generated prior to
the date of the quasi-reorganization was required to be accounted for as an
increase to additional paid-in capital. Such benefits are not considered to have
resulted from the Bank's results of operations subsequent to the
quasi-reorganization.
As of December 31, 2001, the Company had approximately $7.1 million in net
operating loss carryforwards available to reduce future taxable earnings, which
resulted in net deferred tax assets of $4.0 million. These net operating loss
carryforwards will expire in varying amounts in the years 2006 through 2020
unless fully utilized by the Company. Based on management's estimate of future
earnings and the expiration dates of the net operating loss carry forwards as of
December 31, 2001 and 2000, it was determined that it is more likely than not
that the benefit of the deferred tax assets will be realized.
The following table presents the components of net deferred tax assets:
As of December 31,
2001 2000 1999
---- ---- ----
(Dollars in thousands)
Deferred tax assets............................. $4,365 $4,779 $4,426
Deferred tax liabilities........................ 348 174 61
Valuation allowance............................. --- --- ---
----- ----- -----
Net deferred tax assets......................... $4,017 $4,605 $4,365
====== ====== ======
The utilization of the net operating loss carryforwards reduces the amount
of the related deferred tax asset by the amount of such utilization at the
current enacted tax rates. Other deferred tax items resulting in temporary
differences in the recognition of income and expenses such as the allowance for
loan losses, loan fees, accumulated depreciation and cash to accrual adjustments
will fluctuate from year-to-year.
As a result of the Merger, the Company has the use of the Bank's net
operating loss carryforwards. However, the portion of the Company's net
operating loss carryforwards which become usable each year is limited under
provisions of Section 382 of the Internal Revenue Code relating to the change in
control. The annual limitation is based upon the purchase price of the Company
multiplied by the applicable Long-Term Tax-Exempt Rate (as defined in the
31
Internal Revenue Code) at the date of acquisition. Based upon the applicable
Long-Term Tax-Exempt Rate for December 1998 acquisitions, this annual limitation
is approximately $700,000. Management believes it is more likely than not that
the Company will produce sufficient taxable income to allow the Company to fully
utilize its net operating loss carryforwards prior to their expiration.
Net Income
The Company reported net income of $808,000 and net income applicable to
common shares of $558,000 in 2001, compared to a net loss of $1.08 million in
2000. The Company had no preferred stock issued or outstanding prior to 2001.
The improvement in profitability was primarily attributable to an increase in
net interest income and an increase in noninterest income, partially offset by
an increase in noninterest expenses. Basic income (loss) per common share was
$.10 for 2001 and ($.19) for 2000.
The Company reported a net loss of $1.1 million in 2000 compared to a net
loss of $1.8 million in 1999. The net loss for 2000 resulted primarily from the
opening of the Marion County banking office, and the first full year of
operation of Broward and Pinellas County Banking offices. Basic loss per common
share was $.19 for 2000 and $.32 for 1999.
Return on Average Assets and Return on Average Equity are computed using
Net Income Applicable to Common Shares. Return on Average Assets for 2001
increased 49 basis points to 0.13%, compared to a deficit of (0.36%) in 2000.
Return on Average Assets increased 71 basis points to a deficit of (0.36%) in
2000 from a deficit of (1.07%) in 1999. Return on Average Equity increased 413
basis points to 1.30% in 2001, compared to a deficit of (2.83%) in 2000. Return
on Average Equity increased 29 basis points to a deficit of (2.83%) in 2000,
compared to a deficit of (3.12%) in 1999.
Financial Condition
Earning Assets
Average earning assets increased 45.9% to $409.8 million in 2001 from
$280.8 million in 2000. During 2001, loans, net of deferred loan fees,
represented 83.3% of average earning assets, investment securities comprised
9.5%, and Federal funds sold and other investments comprised 7.2%. In 2000,
loans, net of deferred loan fees, comprised 79.9% of average earning assets,
investment securities comprised 13.3%, and Federal funds sold and other
investments comprised 6.8%. The change in the mix of earning assets is primarily
attributable to the growth in the Company's loan portfolio. The Company manages
its securities portfolio and additional funds to minimize the effects of
interest rate fluctuation risk and to provide liquidity.
In 2001, growth in earning assets was funded primarily through an increase
in total deposits due to expanded branch operations.
Loan Portfolio
The Company's total loans outstanding increased 40.6% to $401.7 million as
of December 31, 2001 from $285.6 million as of December 31, 2000. Loan growth
for 2001 was funded primarily through growth in average deposits. The growth in
the loan portfolio primarily was a result of an increase in commercial and
commercial real estate loans of $92.2 million, or 35.3%, from December 31, 2000
to December 31, 2001. Average total loans in 2001 were $340.8 million, $60.9
million less than the year end balance of $401.7 million due to the increase in
loan production for the third and fourth quarters of 2001. The Company engages
in a full complement of lending activities, including commercial, real estate
construction, real estate mortgage, home equity, installment, SBA and USDA
guaranteed loans and credit card loans.
The following table presents various categories of loans contained in the
Company's loan portfolio for the periods indicated, the total amount of all
loans for such periods, and the percentage of total loans represented by each
category for such periods:
32
As of December 31,
----------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
% of % of % of % of % of
Balance Total Balance Total Balance Total Balance Total Balance Total
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Type of Loan
- ------------
Commercial real estate $210,373 52.4% $158,654 55.6% $ 69,261 43.9% $25,326 37.6% $15,281 45.2%
Commercial 142,911 35.6% 102,391 35.8% 68,991 43.8% 33,103 49.2% 13,158 38.9%
Residential mortgage 22,309 5.6% 9,796 3.4% 10,846 6.9% 6,047 9.0% 3,269 9.7%
Consumer 23,158 5.7% 13,036 4.6% 7,246 4.6% 2,021 3.0% 1,222 3.6%
Credit cards and other 2,912 0.7% 1,747 0.6% 1,244 0.8% 796 1.2% 869 2.6%
----------------------------------------------------------------------------------------------
Total loans 401,663 100.0% 285,624 100.0% 157,588 100.0% 67,293 100.0% 33,799 100.0%
===== ===== ===== ===== =====
Net deferred loan fees (219) (98) (71) (162) (79)
------------ ----------- ----------- ---------- ----------
Loans, net of deferred fees 401,444 285,526 157,517 67,131 33,720
Allowance for loan losses (4,692) (3,511) (1,858) (1,074) (481)
------------ ----------- ----------- ---------- ----------
Net loans $396,752 $282,015 $155,659 $66,057 $33,239
============ =========== =========== ========== ==========
Commercial Real Estate. Commercial real estate loans consist of loans
secured by owner-occupied commercial properties, income-producing properties and
construction and land development. At December 31, 2001, commercial real estate
loans represented 52.4% of outstanding loan balances, compared to 55.6% at
December 31, 2000. The decrease in commercial real estate loans corresponds with
management's strategy to diversify risk.
Commercial. This category of loans includes loans made to individual,
partnership or corporate borrowers, and obtained for a variety of business
purposes. Beginning in 2001, the Company also offers insurance premium financing
to commercial and professional customers. At December 31, 2001, commercial loans
represented 35.6% of outstanding loan balances, compared to 35.8% at December
31, 2000. The decrease in commercial loans corresponds with management's
strategy to diversify risk.
Residential Mortgage. The Company's residential mortgage loans consist of
first and second mortgage loans and construction loans. At December 31, 2001,
residential mortgage loans represented 5.6% of outstanding loan balances,
compared to 3.4% at December 31, 2000. The Company does not actively market
residential mortgages and its portfolio primarily consists of loans to the
principals of other commercial relationships. Growth in this category during
2001 is primarily attributable to the large number of home mortgages driven by
significant reductions in market interest rates.
Consumer. The Company's consumer loans consist primarily of installment
loans to individuals for personal, family and household purposes, education and
other personal expenditures. At December 31, 2001, consumer loans represented
5.7% of outstanding loan balances, compared to 4.6% at December 31, 2000. The
Company does not actively market consumer loans and its portfolio primarily
consists of loans to the principals of other commercial relationships. Growth in
this category during 2001 is primarily attributable to maturing relationships
with commercial customers, which lead to meeting of additional, non-commercial
credit needs for these customers, together with the growing operations of the
full-service banking facilities in Marion and Alachua Counties.
Credit Card and Other Loans. This category of loans consists of borrowings
by customers using credit cards, overdrafts and overdraft protection lines. At
December 31, 2001, credit card and other loans represented 0.7% of outstanding
loan balances as compared to 0.6% at December 31, 2000. These credits are
primarily extended to the principals of commercial customers.
The Company's only area of credit concentration is commercial and
commercial real estate loans. The Company has not invested in loans to finance
highly-leveraged transactions, such as leveraged buy-out transactions, as
defined by the Federal Reserve Board and other regulatory agencies. In addition,
the Company had no foreign loans or loans to lesser developed countries as of
December 31, 2001.
While risk of loss in the Company's loan portfolio is primarily tied to the
credit quality of the borrowers, risk of loss may also increase due to factors
beyond the Company's control, such as local, regional and/or national economic
downturns. General conditions in the real estate market may also impact the
relative risk in the Company's real estate portfolio. Of the Company's target
areas of lending activities, commercial loans are generally considered to have
33
greater risk than real estate loans or consumer loans. For this reason the
Company seeks to diversify its commercial loan portfolio by industry, geographic
distribution and size of credits.
From time to time, management of the Company has originated certain loans
which, because they exceeded the Company's legal lending limit, were sold to
other institutions. As a result of growth, the Company has an increased lending
limit and has repurchased certain loan participations, thereby increasing
earning assets.
The Company also purchases participations from other institutions. When the
Company purchases these participations, such loans are subjected to the
Company's underwriting standards as if the loan was originated by the Company.
Accordingly, management of the Company does not believe that loan participations
purchased from other institutions pose any greater risk of loss than loans that
the Company originates.
The repayment of loans in the loan portfolio as they mature is a source of
liquidity for the Company. The following table sets forth the maturity of the
Company's loan portfolio within specified intervals as of December 31, 2001:
Due
Due in 1 Due after 1 to After
Year or Less 5 years 5 years Total
------------------ ---------------- -------------- -----------------
Type of Loan (Dollars in thousands)
- ------------
Commercial real estate...................... $30,161 $86,081 $94,131 $210,373
Commercial.................................. 55,427 79,494 7,990 142,911
Residential mortgage........................ 5,832 11,713 4,764 22,309
Consumer ................................... 7,172 14,432 1,554 23,158
Credit card and other loans................. 2,912 0 0 2,912
----- -------- -------- -----
Total..................................... $101,504 $191,720 $108,439 $401,663
======== ======== ======== ========
The following table presents the maturity distribution as of December 31,
2001 for loans with predetermined fixed interest rates and floating interest
rates by various maturity periods:
Due
Due in 1 after 1 to Due After
Year or Less 5 years 5 years Total
------------ ------- ------- -----
Interest Category (Dollars in thousands)
- -----------------
Predetermined rate $38,982 $97,208 $83,478 $219,668
Variable rate 110,744 51,615 19,636 181,995
------- ------ ------ -------
Total.................................... $149,726 $148,823 $103,114 $401,663
======== ======== ======== ========
Asset Quality
At December 31, 2001, $1.09 million of loans were accounted for on a
non-accrual basis as compared to $1.5 million at December 31, 2000. Included in
the non-accrual loans as of December 31, 2001 were $681,000 of SBA guaranteed
loans compared to $872,000 at December 31, 2000. The SBA loans consist of the
remaining balance of liquidated loans pending payment of the SBA guarantee. At
December 31, 2001, no loans past due 90 days or more were still accruing
interest, compared to $2.6 million at December 31, 2000. No SBA loans were past
due 90 days at December 31, 2001 or December 31, 2000. At December 31, 2001,
loans totaling $1.1 million were considered troubled debt restructurings,
compared to zero at December 31, 2000. See "Non-performing Assets" below.
First National Bank of Tampa started its SBA lending program in August
1994. Under this program, the Company originates commercial and commercial real
estate loans to borrowers that qualify for various SBA guaranteed loan products.
The guaranteed portion of such loans generally ranges from 75% to 85% of the
principal balance, the majority of which the Company sells in the secondary
market. The majority of the Company's SBA loans provide a servicing fee of 1.00%
34
of the outstanding principal balance. Certain SBA loans provide servicing fees
of up to 2.32% of the outstanding principal balance. The Company records the
premium received upon the sale of the guaranteed portion of SBA loans as gain on
sale of loans. The Company does not defer a portion of the gain on sale of such
loans as a yield adjustment on the portion retained, nor does it record a
retained interest, as such amounts are not considered significant. The principal
balance of internally originated SBA loans in the Company's loan portfolio at
December 31, 2000 totaled $2.9 million, including the SBA guaranteed portion of
$2.2 million, compared to an outstanding balance of $3.2 million at December 31,
2000, including the SBA guaranteed portion of $3.0 million. At December 31,
2001, the principal balance of the guaranteed portion of SBA loans cumulatively
sold in the secondary market since the commencement of the SBA program totaled
$4.0 million.
The Company generally repurchases the SBA guaranteed portion of loans in
default to fulfill the requirements of the SBA guarantee or in certain cases,
when it is determined to be in the Company's best interest, to facilitate the
liquidation of the loans. The guaranteed portion of the SBA loans are
repurchased at the current principal balance plus accrued interest through the
date of repurchase. Upon liquidation, in most cases, the Company is entitled to
recover up to 120 days of accrued interest from the SBA on the guaranteed
portion of the loan paid. In certain cases, the Company has the option of
charging-off the non-SBA guaranteed portion of the loan retained by the Company
and requesting payment of the SBA guaranteed portion. In such cases, the Company
will have determined that insufficient collateral exists, or the cost of
liquidating the business exceeds the anticipated proceeds to the Company. In all
liquidations, the Company seeks the advice of the SBA and submits a liquidation
plan for approval prior to the commencement of liquidation proceedings. The
payment of any guarantee by the SBA is dependent upon the Company following the
prescribed SBA procedures and maintaining complete documentation on the loan and
any liquidation services. The Company did not repurchase any guaranteed portion
of SBA loans repurchased during 2001 and 2000.
The Company substantially reduced SBA lending operations in 1998 due to the
cost of maintaining this specialized lending practice and due to recent
charge-offs in the unguaranteed portion of the SBA loans that were retained by
the Bank.
As of December 31, 2001, there were no loans other than those disclosed
above that were classified for regulatory purposes as doubtful or substandard
which (i) represented or resulted from trends or uncertainties which management
reasonably expects will materially impact future operating results, liquidity,
or capital resources, or (ii) represented material credits about which
management is aware of any information which causes management to have serious
doubts as to the ability of such borrowers to comply with the loan repayment
terms. There are no loans other than those disclosed above where known
information about possible credit problems of borrowers causes management to
have serious doubts as to the ability of such borrowers to comply with loan
repayment terms.
Allowance for Loan Losses and Net Charge-Offs
The allowance for loan losses represents management's estimate of an amount
adequate to provide for potential losses inherent in the loan portfolio. In its
evaluation of the allowance and its adequacy, management considers loan growth,
changes in the composition of the loan portfolio, the loan charge-off
experience, the amount of past due and non-performing loans, current and
anticipated economic conditions, underlying collateral values securing loans and
other factors. While it is the Company's policy to provide for a full reserve or
charge-off for loans in the period in which a loss is considered probable, there
are additional risks of future losses which cannot be quantified precisely or
attributed to particular loans or classes of loans. Because these risks include
the state of the economy, management's judgment as to the adequacy of the
allowance is necessarily approximate and imprecise.
35
An analysis of the Company's loss experience is furnished in the following
table for the periods indicated, as well as a detail of the allowance for loan
losses:
Years Ended December 31,
------------------------------------------------------------
2001 2000 1999 1998 1997
(Dollars In Thousands)
Balance at beginning of period $3,511 $1,858 $1,073 $481 $432
Charge-offs:
Commercial real estate (400) (4) 0 (39) (24)
Commercial (362) (388) (819) (16) (19)
Residential mortgage 0 0 (5) 0 0
Consumer (66) 0 (19) 0 0
Credit cards and other 0 (9) (14) (10) 0
------------------------------------------------------------
Total charge-offs: (828) (401) (857) (65) (43)
Recoveries:
Commercial real estate 12 18 15 28 32
Commercial 105 74 14 0 0
Residential mortgage 0 50 2 0 0
Consumer 3 0 0 0 0
Credit cards and other 0 0 1 0 0
------------------------------------------------------------
Total recoveries: 120 142 32 28 32
Net charge-offs (708) (259) (825) (37) (11)
Provision for loan losses 1,889 1,912 1,610 629 60
------------------------------------------------------------
Balance at end of period $4,692 $3,511 $1,858 $1,073 $481
============================================================
Net charge-offs as a percentage
Of average loans 0.21% 0.12% 0.80% 0.09% 0.02%
Allowance for loan losses as a
percentage of total loans 1.17% 1.23% 1.18% 1.60% 1.42%
Net charge-offs were $708,000, or .21% of average loans outstanding in 2001
as compared to net charge-offs of $259,000 or .12% of average loans outstanding
in 2000. The allowance for loan losses increased 33.7% to $4.7 million or 1.17%
of loans outstanding at December 31, 2001 from $3.5 million or 1.23% of loans
outstanding at December 31, 2001. The allowance for loan losses as a multiple of
net loans charged-off was 6.62x for the year ended December 31, 2001 as compared
to 13.6x for the year ended December 31, 2001. The decrease in the provision
from 2000 to 2001 was generally due to the mix and performance of loans
outstanding. Also, the balance of the allowance for loan losses at December 31,
2000 contained a provision for certain loans charged off in 2001. See "Asset
Quality" below.
Net charge-offs were $259,000, or .12% of average loans outstanding in 2000
as compared to net charge-offs of $825,000 or .80% of average loans outstanding
in 1999. The allowance for loan losses increased 89.0% to $3.5 million or 1.23%
of loans outstanding at December 31, 2000 from $1.9 million or 1.18% of loans
outstanding at December 31, 1999. The allowance for loan losses as a multiple of
net loans charged-off was 13.6x for the year ended December 31, 2000 as compared
to 2.3x for the year ended December 31, 1999. The increase in the provision from
1999 to 2000 was generally due to increases in the amount of loans outstanding.
In assessing the adequacy of the allowance, management relies predominantly
on its ongoing review of the loan portfolio, which is undertaken to ascertain
whether there are probable losses which must be charged off and to assess the
36
risk characteristics of the portfolio in the aggregate. This review encompasses
the judgment of management, utilizing internal loan rating standards, guidelines
provided by the banking regulatory authorities governing the Company, and their
loan portfolio reviews as part of the company examination process.
Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan" ("SFAS 114") requires that impaired loans be
measured based on the present value of expected future cash flows discounted at
the loan's effective interest rate or the fair value of the collateral if the
loan is collateral dependent. The Company adopted SFAS 114 on January 1, 1995.
At December 31, 2001, the Company held impaired loans as defined by SFAS 114 of
$1.2 million (none of such balance is guaranteed by the SBA) for which specific
allocations of $295,000 have been established within the allowance for loan
losses which have been measured based upon the fair value of the collateral.
Such reserve is allocated between commercial and commercial real estate. A
portion of these impaired loans have also been classified by the Company as
loans past due over 90 days ($65,000) and $1.1 million have been classified as
troubled debt restructurings. At December 31, 2000, the Company held impaired
loans as defined by SFAS 114 of $946,000 ($147,000 of such balance is guaranteed
by the SBA) for which specific allocations of $329,000 have been established
within the allowance for loan losses which have been measured based upon the
fair value of the collateral. Such reserve is allocated between commercial and
commercial real estate. A portion of these impaired loans have also been
classified by the Company as loans past due over 90 days ($603,000) and none
have been classified as troubled debt restructurings. Interest income on such
impaired loans during 2000 and 1999 was not significant.
As shown in the table below, management determined that as of December 31,
2001, 50.0% of the allowance for loan losses was related to commercial real
estate loans, 38.6% was related to commercial loans, 5.1% was related to
residential mortgage loans, 5.6% was related to consumer loans, 0.6% to credit
card and other loans and 0.0% was unallocated. As shown in the table below,
management determined that as of December 31, 2000, 55.6% of the allowance for
loan losses was related to commercial real estate loans, 50.6% was related to
commercial loans, 9.0% was related to residential mortgage loans, 2.0% was
related to consumer loans, 1.4% to credit card and other loans and 0.0% was
unallocated. The fluctuations in the allocation of the allowance for loan losses
between 2001 and 2000 is attributed to the establishment of specific allowances
totaling $295,000 at December 31,2001, and the changing mix of the loan
portfolio as previously discussed.
For the periods indicated, the allowance was allocated as follows:
As of December 31,
------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
% of % of % of % of % of
Total Total Total Total Total
----- ----- ----- ----- -----
Balance loans Balance loans Balance loans Balance loans Balance loans
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Commercial real estate $2,348 52.4% $1,300 55.6% $636 43.9% $229 37.6% $110 45.2%
Commercial 1,814 35.6% 1,775 35.8% 1,027 43.8% 687 49.2% 178 38.9%
Residential mortgage 240 5.6% 317 3.4% 89 6.9% 91 9.0% 35 9.7%
Consumer 261 5.7% 69 4.6% 77 4.6% 16 3.0% 9 3.6%
Credit cards and other 29 0.7% 50 .6% 29 .8% 47 1.2% 23 2.6%
Unallocated 0 0.0% 0 0.0% 0 0.0% 3 0.0% 126 0.0%
------------------------------------------------------------------------------------------------
Total loans $4,692 $3,511 $1,858 $1,073 $481
================================================================================================
In considering the adequacy of the Company's allowance for loan losses,
management has focused on the fact that as of December 31, 2001, 52.4% of
outstanding loans are in the category of commercial real estate and 35.6% are in
commercial loans. Commercial loans are generally considered by management to
have greater risk than other categories of loans in the Company's loan
portfolio. Generally, such loans are secured by accounts receivable, marketable
securities, deposit accounts, equipment and other fixed assets which reduces the
risk of loss present in commercial loans. Commercial real estate loans
inherently have a higher risk due to depreciation of the facilities, limited
purposes of the facilities and the effect of general economic conditions. The
Company attempts to limit this risk by generally lending no more than 75% of the
appraised value of the property held as collateral.
37
Residential mortgage loans constituted 5.6% of outstanding loans at
December 31, 2001. The majority of the loans in this category represent
residential real estate mortgages where the amount of the original loan
generally does not exceed 80% of the appraised value of the collateral. These
loans are considered by management to be well secured with a low risk of loss.
At December 31, 2001, the majority of the Company's consumer loans were
secured by collateral, primarily consisting of automobiles, boats and other
personal property. Management believes that these loans involve less risk than
commercial loans, due to the marketability and nature of the underlying
collateral.
An internal credit review of the loan portfolio is conducted on an ongoing
basis. The purpose of this review is to assess the risk in the loan portfolio
and to determine the adequacy of the allowance for loan losses. The review
includes analyses of historical performance, the level of nonconforming and
rated loans, loan volume and activity, review of loan files and consideration of
economic conditions and other pertinent information. In addition to the above
credit review, the Company's primary regulator, the OCC, also conducts a
periodic examination of the loan portfolio. Upon completion, the OCC presents
its report of examination to the Board and management of the Company.
Information provided from these reviews, together with other information
provided by the management of the Company and other information known to members
of the Board, are utilized by the Board to monitor the loan portfolio and the
allowance for loan losses. Specifically, the Board attempts to identify risks
inherent in the loan portfolio (e.g., problem loans, probable problem loans and
loans to be charged off), assess the overall quality and collectability of the
loan portfolio, and determine amounts of the allowance for loan losses and the
provision for loan losses to be reported based on the results of their review.
The Credit Policy Committee of the Board must approve all loans in excess of the
matrix levels established by the Bank's credit policy, and any exceptions to the
credit policy. This committee also reviews all criticized or classified assets
in excess of $100,000, reviews trends in the Bank's loan portfolio, and reviews
all reports on credit quality prepared by Bank personnel or the OCC.
Non-performing Assets
At December 31, 2001, $1.09 million of loans were accounted for on a
nonaccrual basis as compared to $1.5 million at December 31, 2000. The remaining
balance of non-accrual loans which is guaranteed by the SBA was $655,000 at
December 31, 2001 compared to $872,000 at December 31, 2000. At December 31,
2000, no loans were accruing interest and were contractually past due 90 days or
more as to principal and interest payments, compared to six loans totaling $2.6
million which were accruing interest and were contractually past due 90 days or
more at December 31, 2000. No loans past due 90 days at December 31, 2001 or
December 31, 2000 were guaranteed by the SBA.
At December 31, 2001, loans totaling $1.1 million were considered troubled
debt restructurings. At December 31, 2000, no loans were considered troubled
debt restructurings.
At December 31, 2001, the Company held one item categorized as Other Real
Estate Owned, with a carrying value of $2.8 million, compared to no Other Real
Estate Owned at December 31, 2000.
The Company has policies, procedures and underwriting guidelines intended
to assist in maintaining the overall quality of its loan portfolio. The Company
monitors its delinquency levels for any adverse trends. Non-performing assets
consist of loans on non-accrual status, real estate and other assets acquired in
partial or full satisfaction of loan obligations and loans that are past due 90
days or more.
The Company's policy generally is to place a loan on nonaccrual status when
it is contractually past due 90 days or more as to payment of principal or
interest. A loan may be placed on nonaccrual status at an earlier date when
concerns exist as to the ultimate collections of principal or interest. At the
time a loan is placed on nonaccrual status, interest previously accrued but not
collected is reversed and charged against current earnings. Recognition of any
interest after a loan has been placed on nonaccrual is accounted for on a cash
basis. Loans that are contractually past due 90 days or more which are well
secured or guaranteed by financially responsible third parties and are in the
process of collection generally are not placed on nonaccrual status.
38
The following table presents components of non-performing assets:
As of December 31,
----------------------------------------------------------------
2001 2000 1999 1998 1997
(Dollars In Thousands)
Non-accrual loans $1,090 $1,547 $1,100 $725 $0
Accruing loans past due 90
days or more 0 2,555 293 315 774(1)
Troubled debt restructurings 1,095 0 0 35 265
Other real estate owned 2,778 0 0 0 0
(1) $219,000 of the $774,000 in 'accruing loans 90 days or more past due' is
also included in 'troubled debt restructurings'.
Investment Portfolio
Total investment securities increased $2.1 million, or 5.8% to $38.9
million in 2001 from $36.8 million in 2000. At December 31, 2001, investment
securities available for sale totaled $34.0 million compared to $32.1 million at
December 31, 2000. At December 31, 2001, investment securities available for
sale had net unrealized gains of $392,000, comprised of gross unrealized losses
of $135,000 and gross unrealized gains of $526,000. At December 31, 2000,
investment securities available for sale had net unrealized gains of $22,000,
comprised of gross unrealized losses of $249,000 and gross unrealized gains of
$271,000. Investment securities held to maturity at December 31, 2001 were $2.9
million, compared to $3.5 million at December 31, 2000. The carrying value of
held to maturity securities represents cost. Average investment securities as a
percentage of average earning assets decreased to 9.6% in 2000 from 13.2% in
2000.
The Company invests primarily in direct obligations of the United States,
obligations guaranteed as to principal and interest by the United States,
obligations of agencies of the United States and mortgage-backed securities. In
addition, the Company enters into Federal funds transactions with its principal
correspondent banks, and acts as a net seller of such funds. The sale of Federal
funds amounts to a short-term loan from the Company to another company.
Proceeds from sales, paydowns and maturities of available for sale and held
to maturity investment securities increased 49.6% to $20.0 million in 2001 from
$13.3 million in 2000, with a resulting net gain on sales of $74,000 in 2001 and
$10,000 in 2000. Such proceeds are generally used to reinvest in additional
investment securities.
Other investments include Independent Bankers Bank stock, Federal Reserve
Bank stock and Federal Home Loan Bank stock that are required for the Company to
be a member of and to conduct business with such institutions. Dividends on such
investments are determined by the institutions and is payable semi-annually or
quarterly. Other investments increased 63.1% to $2.1 million at December 31,
2001 from $1.3 million at December 31, 2000. Other investments are carried at
cost as such investments do not have readily determinable fair values.
At December 31, 2001, the investment portfolio included $18.7 million in
CMOs compared to $12.7 million at December 31, 2000. At December 31, 2001, the
investment portfolio included $10.0 million in other mortgage-backed securities
compared to $16.1 million at December 31, 2000. The following table presents,
for the periods indicated, the carrying amount of the Company's investment
securities, including mortgage-backed securities.
39
As of December 31,
------------------------------------------------------------------
2001 2000 1999
% of % of % of
Balance total Balance total Balance total
------- ----- ------- ----- ------- -----
Investment Category
- -------------------
Available for sale:
U. S. Treasury and other U.S.
agency obligations $858 2.2% $1,746 4.8% $2,965 10.4%
State & Municipal securities 1,348 3.5 1,458 4.0 481 1.7
Mortgage-backed securities 28,720 73.8 28,858 78.5 23,975 84.1
Marketable equity securities 3,028 7.8 0 0.0 189 0.7
------------ ------------- ------------
33,954 32,062 27,610
Other investments 2,065 5.3 1,266 3.4 902 3.1
Held to maturity:
U. S. Treasury and other U.S.
agency obligations 1,862 4.8 3,429 9.3 0 0.0
Mortgage-backed securities 1005 2.6 0 0.0 0 0.0
------------ ------------- ------------
2,867 3,429 0
-----------------------------------------------------------------
Total $38,886 100.0% $36,757 100.0% $28,512 100.0%
==================================================================
The Company utilizes its available for sale investment securities, along
with cash and Federal funds sold, to meet its liquidity needs.
As of December 31, 2000, $28.7 million, or 73.8%, of the investment
securities portfolio consisted of mortgage-backed securities compared to $28.9
million, or 78.5%, of the investment securities portfolio as of December 31,
2000. During 2002, approximately $817,000 of mortgage-backed securities will
mature.
In accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"),
the Company has segregated its investment securities portfolio into securities
held to maturity and those available for sale. Investments held to maturity are
those for which management has both the ability and intent to hold to maturity
and are carried at amortized cost. At December 31, 2001, investments classified
as held to maturity totaled $2.87 million at amortized cost and $2.93 million at
fair value. At December 31, 2000, investments classified as held to maturity
totaled $3.4 million at amortized cost and $3.5 million at fair value.
Investments available for sale are securities identified by management as
securities which may be sold prior to maturity in response to various factors
including liquidity needs, capital compliance, changes in interest rates or
portfolio risk management. The available for sale investment securities provide
interest income and serve as a source of liquidity for the Company. These
securities are carried at fair market value, with unrealized gains and losses,
net of taxes, reported as other comprehensive income, a separate component of
shareholders' equity.
Investment securities with a carrying value of approximately $27.3 million
and $21.0 million at December 31, 2001 and 2000, respectively, were pledged to
secure deposits of public funds, repurchase agreements and certain other
deposits as provided by law.
The maturities and weighted average yields of debt securities at December
31, 2001 are presented in the following table using primarily the stated
maturities, excluding the effects of prepayments.
40
Weighted
Average
Amount Yield (1)
------ ---------
Available for Sale: (Dollars in thousands)
U.S. Treasury and other U.S. agency obligations:
0 - 1 year...................................................................... $
Over 1 through 5 years.......................................................... 514 5.71%
344 7.99%
---
Over 5 years ...................................................................
Total........................................................................... 858
---
State and municipal:
0-1 year........................................................................ --- N/A
Over 1 through 5 years.......................................................... --- N/A
Over 5 years.................................................................... 1,348 7.25%
- -----
Total........................................................................... 1,348
-----
Mortgage-backed securities:
0-1 year........................................................................ 996 6.05%
Over 1 through 5 years.......................................................... 19,973 6.45
Over 5 years.................................................................... 6,653 6.57
Over 10 years...................................................................
1,098 7.57
-----
Total........................................................................... 28,720
------
Total available for sale debt securities.............................. $30,926
=======
Held to maturity:
U.S. Treasury and other U.S. agency obligations:
0 - 1 year...................................................................... $ --- N/A
Over 1 through 5 years.......................................................... 1,013 6.63%
849 7.41%
---
Over 5 years ...................................................................
Total........................................................................... 1,862
-----
State and municipal:
0-1 year........................................................................ --- N/A
Over 1 through 5 years.......................................................... --- N/A
Over 5 years.................................................................... --- N/A
Total........................................................................... ---
Mortgage-backed securities:
0-1 year........................................................................ --- N/A
Over 1 through 5 years.......................................................... 1,005 5.37%
Over 5 years.................................................................... --- N/A
Over 10 years................................................................... --- N/A
-----
Total........................................................................... 1,005
-----
Total held to maturity debt securities................................ $2,867
======
(1) The Company has not invested in any tax-exempt obligations.
As of December 31, 2001, except for the U.S. Government and its agencies,
there was not any issuer within the investment portfolio who represented 10% or
more of the shareholders' equity.
41
Deposits and Short-Term Borrowings
The Company's average deposits increased 46.8%, or $109.4 million, to
$343.0 million during 2001 from $236.5 million during 2000. This growth is
attributed to a 59.1% increase in average noninterest-bearing demand deposits, a
67.0% increase in average interest-bearing transaction account deposits, a 43.3%
increase in average savings deposits, a 43.1% increase in average certificates
of deposits of $100,000 or more and a 43.8% increase in other time deposits.
Average noninterest-bearing demand deposits increased 59.1% to $44.0
million in 2001 from $27.7 million in 2000. As a percentage of average total
deposits, these deposits increased to 12.9% in 2001 from 11.7% in 2000. This
increase is primarily attributable to large business deposits retained by the
Company during 2001. The year-end balance of noninterest-bearing demand deposits
increased 138.1 % to $99.9 million at December 31, 2001, from $42.0 million at
December 31, 2000. This increase is primarily attributable to the movement of
large business deposits from customer repurchase agreements to demand deposits
on the last day of the year as part of their intangible tax strategy.
Average interest-bearing demand deposits increased 67.0% to $19.4 million
in 2001 from $11.6 million in 2000. Average savings deposits increased 43.3% to
$54.6 million in 2001, from $41.0 million in 2000. The increase in average
savings deposits is primarily attributable to an increase in the Company's prime
investments account, which is a specialized savings account featuring rates that
are tiered according to account balance. This account pays interest at rates
above those paid on interest-bearing demand deposits and regular savings
deposits. Average money market deposits increased 236.8% to $4.5 million for
2001 from $1.8 million in 2000. The year-end balance of money market deposits
increased 126.9% to $6.3 million at December 31, 2001 from $2.8 million at
December 31, 2000. This increase is attributable primarily to increases in
commercial deposit balances. Average balances of certificates of deposit of
$100,000 or more increased 43.1% to $134.6 million for 2001 from $94.0 million
in 2000. The year-end balance of certificates of deposit of $100,000 or more
increased 66.1% to $194.0 million at December 31, 2001 from $116.8 million at
December 31, 2000. The average balance for other time deposits increased 43.8%
to $89.3 million for 2001 from $62.1 million in 2000. The year-end balance of
other time deposits decreased 20.9% to $67.5 million at December 31, 2001
compared to $85.3 million at December 31, 2000. The increases in overall deposit
balances results primarily from new deposits obtained as a result of growth in
existing markets.
The following table presents, for the periods indicated, the average amount
of and average rate paid on each of the following deposit categories:
Years Ending December 31,
----------------------------------------------------------------------------
2001 2000 1999
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ----
(Dollars in Thousands)
Deposit Category
Noninterest-bearing demand $44,038 0% $27,677 0% $14,727 0%
Interest-bearing demand 14,897 1.50% 9,879 1.58% 4,912 2.02%
Money market 4,542 3.12% 1,762 3.58% 1,674 2.21%
Savings 54,602 3.72% 38,101 5.49% 24,427 4.72%
Certificates of deposit of
$100,000 or more 134,576 5.46% 94,035 6.53% 21,165 5.51%
Other time 89,329 5.82% 62,112 6.03% 28,723 5.56%
------------- ---------------- -------------
Total $341,984 4.37% $233,566 5.30% $95,628 4.24%
============= ================ =============
Interest-bearing deposits, including certificates of deposit, will continue
to be a major source of funding for the Company. During 2001, aggregate average
balances of time deposits of $100,000 and over comprised 39.1% of total deposits
42
compared to 40.3% for the prior year. The average rate on certificates of
deposit of $100,000 or more decreased to 5.46% in 2001, compared to 6.53% in
2000.
The following table indicates amounts outstanding of time certificates of
deposit of $100,000 or more and their respective contractual maturities:
December 31,
--------------------------------------------------------------------------
2001 2000 1999
Amount Average Amount Average Amount Average
------ ------ ------
Rate Rate Rate
---- ---- ----
(Dollars in Thousands)
3 months or less $63,356 4.29% $32,205 6.53% $13,475 5.20%
3 - 6 months 49,330 4.57 28,231 6.96 15,191 5.90
6 - 12 months 25,649 4.53 27,585 6.80 17,180 6.02
Over 12 months 55,681 4.78 28,803 7.11 5,693 5.91
----------- ------------ --------
Total $194,016 4.37 $116,824 6.84 $51,539 5.84
=========== ============ ========
Average short-term borrowings increased 88.5% to $41.2 million in 2001 from
$21.8 million in 2000. Short-term borrowings consist of treasury tax and loan
deposits, Federal Home Loan Bank borrowings, and repurchase agreements with
certain customers. In addition, the Company has securities sold under agreements
to repurchase, which are classified as secured borrowings. Average treasury tax
and loan deposits decreased 5.6% to $1.7 million in 2001 from $1.8 million in
2000. Average Federal Home Loan Bank borrowings increased 18.0% to $5.9 million
in 2001 compared with $5.0 million during 2000. Average repurchase agreements
with customers increased 124.0% to $33.6 million in 2001 from $15.0 million in
2000. The treasury tax and loan deposits provide an additional liquidity
resource to the Company as such funds are invested in Federal funds sold. The
repurchase agreements represent an accommodation to certain customers that seek
to maximize their return on liquid assets. The Company invests these funds
primarily in securities purchased under agreements to resell at the nationally
quoted rate for such investments. The year-end balance of repurchase agreements
decreased 81.4% to $4.5 million at December 31, 2001 from $18.8 million at
December 31, 2000.
43
The following table presents the components of short-term borrowings and average
rates for such borrowing for the years ended December 31, 2001, 2000 and 1999:
Maximum
Amount
Outstanding Average
at Any Average Average Ending Rate at
Year Ended December 31, Month End Balance Rate Balance Year End
- ---------- -------- --- --------- ------- ---- ------- --------
(Dollars in Thousands)
2001
- ----------------
Treasury tax and loan deposits $2,285 $1,704 3.61% $2,215 2.10%
Repurchase Agreements 44,577 33,568 5.21% 4,496 1.65%
Federal Home Loan Bank Borrowings 7,500 5,881 5.67% 7,500 5.53%
---------- ----------
Total $41,153 $14,211
========== ==========
2000
- ----------------
Treasury tax and loan deposits $2,299 $1,824 6.32% $2,223 6.36%
Repurchase Agreements 21,240 14,956 6.04% 18,812 6.47%
Federal Home Loan Bank Borrowings 5,000 5,000 5.97% 5,000 5.90%
---------- ----------
Total $21,780 $26,035
========== ==========
1999
- ----------------
Treasury tax and loan deposits $2,473 $1,510 5.39% $2,242 4.78%
Repurchase Agreements 19,293 12,510 4.42% 11,037 5.95%
Federal Home Loan Bank Borrowings 5,000 147 5.98% 5,000 5.48%
---------- ----------
Total $14,167 $18,279
========== ==========
Capital Resources
Shareholders' equity increased 19.7% to $46.1 million in 2001 from $38.6
million in 2000. This increase results primarily from proceeds of $6.96 million
from issuance of Series B Preferred Stock, net income for the year of $808,000,
and an increase in accumulated other comprehensive income to $244,000 at
December 31, 2001 from $14,000 at December 31, 2000, representing a change in
the unrealized gain/loss (after tax effect) on available for sale securities,
partially offset by the repurchase of 61,100 shares of its stock totaling
$359,000, and preferred stock dividends declared in the amount of $127,000 . The
Company's income from operations is sufficient to meet its capital commitments.
Average shareholders' equity as a percentage of total average assets is one
measure used to determine capital strength. The ratio of average shareholders'
equity to average assets decreased to 10.0% in 2001 from 12.8% in 2000.
In 2001, the Company issued 102,283 shares of Series B Preferred stock for
$68.00 per share through a private placement. Each share of preferred stock is
convertible into ten shares of the Company's common stock at a price of $6.80
per share (subject to adjustment for stock splits, stock dividends, etc.). The
preferred stock will be automatically converted to common stock upon the
following events: 1) change in control; 2) if the average closing price of the
Company's common stock for any 30 consecutive trading day period is at or above
$8.00 per share; or 3) the consummation of an underwritten public offering at a
price of $8.00 per share or greater of the Company's common stock. Cumulative
cash dividends accrue at seven percent annually and are payable quarterly in
arrears.
44
In the event of any liquidation, dissolution or winding up of the affairs
of the Company, the holders of Series B preferred stock at that time shall
receive $68.00 per share plus an amount equal to accrued and unpaid dividends
thereon through and including the date of distribution prior to any distribution
to holders of common stock. The liquidation preference at December 31, 2001 was
$7,077,962.
On December 18, 2001, the Company participated in pooled trust preferred
offering. By issuing trust preferred securities, the Company is able to increase
its Tier 1 capital for regulatory purposes without diluting the ownership
interests of its common stockholders. Also, dividends paid on trust preferred
securities are deductible as interest expense for income tax purposes. In
connection with this transaction, the Company, through its wholly-owned
subsidiary trust, Florida Banks Statutory Trust I (the "Trust"), issued
$6,000,000 in trust preferred securities. The Trust also issued $186,000 of
common securities to the Company and used the total proceeds to purchase
$6,186,000 in 30-year subordinated debentures of the Company. The preferred
securities pay dividends at an initial rate of 5.60% through March 17, 2002. The
rate then becomes a floating rate based on 3-month LIBOR plus 3.60%, adjusted
quarterly after each dividend payment date. Dividend payment dates are March 18,
June 18, September 18 and December 18 of each year. These preferred securities
include a par call option beginning December 18, 2006. The subordinated
debentures are the sole asset of the Trust and are eliminated, along with the
related income statement effects, in the Company's consolidated financial
statements. The net proceeds from the pooled trust preferred offering included
in the calculation of Tier 1 capital for regulatory purposes are $5,819,000.
Regulatory Capital Calculation
-----------------------------------------------------------------------------
2001 2000 1999
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Tier 1 Risk Based:
Actual $51,108 11.63% $35,529 11.58% $35,778 17.29%
Minimum required 17,576 4.00% 12,271 4.00% 8,278 4.00%
-------------- ----------- ---------
Excess above minimum $33,532 7.63% $23,258 7.58% $27,500 13.29%
============== =========== =========
Total Risk Based:
Actual $55,800 12.70% $39,050 12.73% $37,636 18.19%
Minimum required 35,152 8.00% 24,542 8.00% 16,567 8.00%
-------------- ----------- ---------
Excess above minimum $20,648 4.70% $14,508 4.73% $21,069 10.19%
============== =========== =========
Leverage:
Actual $51,108 10.64% $35,529 10.28% $35,778 20.01%
Minimum required 19,216 4.00% 13,828 4.00% 6,915 4.00%
-------------- ----------- ---------
Excess above minimum $31,892 6.64% $21,701 6.28% $28,863 16.10%
============== =========== =========
Total Risk Based Assets: $439,405 $306,771 $206,957
Total Average Assets $480,403 $345,707 $172,364
The various federal bank regulators, including the Federal Reserve and the
FDIC, have risk-based capital requirements for assessing bank capital adequacy.
These standards define capital and establish minimum capital standards in
relation to assets and off-balance sheet exposures, as adjusted for credit
risks. Capital is classified into two tiers. For banks, Tier 1 or "core" capital
consists of common shareholders' equity, qualifying perpetual preferred stock
and minority interests in the common equity accounts of consolidated
subsidiaries, reduced by goodwill, other intangible assets and certain
investments in other corporations ("Tier 1 Capital"). Tier 2 Capital consists of
Tier 1 Capital, as well as a limited amount of the allowance for possible loan
losses, certain hybrid capital instruments (such as mandatory convertible debt),
subordinated and perpetual debt and preferred stock which does not qualify for
inclusion in Tier 1 capital ("Tier 2 Capital").
45
At December 31, 1994, a risk-based capital measure and a minimum ratio
standard was fully phased in, with a minimum total capital ratio of 8.00% and
Tier 1 Capital equal to at least 50% of total capital. The Federal Reserve also
has a minimum leverage ratio of Tier 1 Capital to total assets of 3.00%. The
3.00% Tier 1 Capital to total assets ratio constitutes the leverage standard for
bank holding companies and BIF(Bank Insurance Fund)-insured state-chartered
non-member banks, and will be used in conjunction with the risk-based ratio in
determining the overall capital adequacy of banking organizations. The FDIC has
similar capital requirements for BIF-insured state-chartered non-member banks.
The Federal Reserve and the FDIC have emphasized that the foregoing
standards are supervisory minimums and that an institution would be permitted to
maintain such minimum levels of capital only if it were rated a composite "one"
under the regulatory rating systems for bank holding companies and banks. All
other bank holding companies are required to maintain a leverage ratio of 3.00%
plus at least 1.00% to 2.00% of additional capital. These rules further provide
that banking organizations experiencing internal growth or making acquisitions
will be expected to maintain capital positions substantially above the minimum
supervisory levels and comparable to peer group averages, without significant
reliance on intangible assets. The Federal Reserve continues to consider a
"tangible Tier 1 leverage ratio" in evaluation proposals for expansion or new
activities. The tangible Tier 1 leverage ratio is the ratio of a banking
organization's Tier 1 Capital less all intangibles, to total average assets less
all intangibles.
The Company's Tier 1 (to risk-weighted assets) capital ratio decreased to
11.63% in 2001 from 11.58% in 2000. The Company's total risk based capital ratio
decreased to 12.70% in 2001 from 12.73% in 2000. These ratios exceed the minimum
capital adequacy guidelines imposed by regulatory authorities on banks and bank
holding companies, which are 4.00% for Tier 1 capital and 8.00% for total risk
based capital. The ratios also exceed the minimum guidelines imposed by the same
regulatory authorities to be considered "well-capitalized," which are 6.00% of
Tier 1 capital and 10.00% for total risk based capital.
The Company does not have any commitments which it believes would reduce
its capital to levels inconsistent with the regulatory definition of a "well
capitalized" financial institution. See "Business--Supervision and Regulation."
Liquidity Management and Interest Rate Sensitivity
Liquidity is the ability of a company to convert assets into cash or cash
equivalents without significant loss and to raise additional funds by increasing
liabilities. Liquidity management involves maintaining the Company's ability to
meet the day-to-day cash flow requirements of its customers, whether they are
depositors wishing to withdraw funds or borrowers requiring funds to meet their
credit needs. We know of no reason why liquidity will be a problem.
The primary function of asset/liability management is not only to assure
adequate liquidity in order for the Company to meet the needs of its customer
base, but to maintain an appropriate balance between interest-sensitive assets
and interest-sensitive liabilities so that the Company can profitably deploy its
assets. Both assets and liabilities are considered sources of liquidity funding
and both are, therefore, monitored on a daily basis.
46
The following table presents, as of December 31, 2001, a summary of the
Company's future contractual obligations. Each of these categories is further
described in the Company's consolidated financial statements, which are
incorporated herein by reference.
Payments Due By Period
---------------------------------------------------------------
Less One to Four After
than Three to Five Five
Contractual obligations Total One Year Years Years Years
- ----------------------- ----- -------- ----- ----- -----
(Dollars in Thousands)
Time deposits $261,506 $191,988 $44,621 $24,897 $0
Federal Home Loan Bank advances 7,500 0 0 0 7,500
Operating leases 4,276 804 1,423 594 1,455
Treasury tax and loan deposits 2,215 2,215 0 0 0
---------------------------------------------------------------
Total contractual obligations $275,497 $195,007 $46,044 $25,491 $8,955
===============================================================
The following table presents, as of December 31, 2001, a summary of the
Company's commercial commitments. These categories are further described in the
Company's consolidated financial statements, which are incorporated herein by
reference.
Commitment Expirations By Period
-------------------------------------------------------------
Less One to Four After
than Three to Five Five
Other commitments Total One Year Years Years Years
- ----------------- ----- -------- ----- ----- -----
(Dollars In Thousands)
Commitments to fund loans $11,226 $11,226 $0 $0 $0
Lines of credit 144,269 85,969 58,300 0 0
Standby letters of credit 7,188 7,188 0 0 0
-----------------------------------------------------------
Total other commitments $162,683 $104,383 $58,300 $0 $0
===========================================================
Interest rate sensitivity is a function of the repricing characteristics of
the Company's portfolio of assets and liabilities. These repricing
characteristics are the time frames within which the interest-bearing assets and
liabilities are subject to change in interest rates either at replacement,
repricing or maturity during the life of the instruments. Interest rate
sensitivity management focuses on repricing relationships of assets and
liabilities during periods of changes in market interest rates. Interest rate
sensitivity is managed with a view to maintaining a mix of assets and
liabilities that respond to changes in interest rates within an acceptable time
frame, thereby managing the effect of interest rate movements on net interest
income. Interest rate sensitivity is measured as the difference between the
volume of assets and liabilities that are subject to repricing at various time
horizons. The differences are interest sensitivity gaps: less than one month,
one to three months, four to twelve months, one to five years, over five years
and on a cumulative basis.
The following table shows interest sensitivity gaps for these different
intervals as of December 31, 2001. The effects of derivative instruments
(foreign currency swap and interest rate swaps) have been incorporated into this
table by revising the repricing intervals of the underlying assets and
liabilities so they are shown repricing at the next strike date, where that
differed from their contractual repricing interval.
47
One One Four to One Over Non -
Month to Three Twelve to Five Five Interest
December 31, 2001 or Less Months Months Years Years Sensitive Total
- ----------------- ------- ------ ------ ----- ----- --------- -----
ASSETS (Dollars in Thousands)
Interest Sensitive Assets:
Availble for sale investment
securities $0 $175 $821 $20,493 $9,437 $0 $30,926
Held to maturity investment
securities and other investments 0 0 0 2,018 849 0 2,867
Federal funds sold and
repurchase agreements 54,657 0 0 0 0 0 54,657
Loans 153,342 47,348 19,827 97,208 83,938 0 401,663
------------------------------------------------------------------------------
Total earning assets $207,999 $47,523 $20,648 $119,719 $94,224 $0 $490,113
------------------------------------------------------------------------------
LIABILITIES
Interest Sensitive Liabilities:
Interest-bearing demand deposits 19,164 0 0 0 0 0 19,164
Savings deposits 62,550 0 0 0 0 1,788 64,338
Money market deposits 0 0 0 0 0 6,342 6,342
Certificates of deposit of
$100,000 or more 9,140 54,238 80,138 50,500 0 0 194,016
Other time deposits 5,361 17,617 30,355 14,157 0 0 67,490
Repurchase agreements 4,496 4,496
Other borrowed funds 9,715 0 0 0 0 0 9,715
------------------------------------------------------------------------------
Total interest-bearing
liabilities $105,930 $71,855 $110,493 $64,657 $0 $12,626 $365,561
------------------------------------------------------------------------------
Interest sensitivity gap:
Amount $102,069 ($24,332) ($89,845) $55,062 $94,224 ($12,626) $124,552
------------------------------------------------------------------------------
Cumulative amount 102,069 77,737 (12,108) 42,954 137,178 124,552 0
Percent of total earning assets 20.83% -4.96% -18.33% 11.23% 19.22% -2.58% -25.41%
Cumulative percent of total earning assets 20.83% 15.86% -2.47% 8.76% 27.98% 25.41% 0.00%
Ratio of rate sensitive assets to rate
sensitive liabilities 1.96 x .66 x .19 x 1.85 x N/A
Cumulative ratio of rate sensitive assets
to rate sensitive
liabilities 1.96 x 1.44 x .96 x 1.12 x 1.34 x
In the current interest rate environment, the liquidity and maturity
structure of the Company's assets and liabilities are important to the
maintenance of acceptable performance levels. A decreasing rate environment
negatively impacts earnings as the Company's rate-sensitive assets generally
reprice faster than its rate-sensitive liabilities. Conversely, in an increasing
rate environment, earnings are positively impacted. This asset/liability
mismatch in pricing is referred to as gap ratio and is measured as rate
sensitive assets divided by rate sensitive liabilities for a defined time
period. A gap ratio of 1.00 means that assets and liabilities are perfectly
matched as to repricing. Management has specified gap ratio guidelines for a one
year time horizon of between .60 and 1.20 years for the Company. At December 31,
2001, the Company had cumulative gap ratios of approximately 1.44 for the three
month time period and .96 for the one year period ending December 31, 2002.
Thus, over the next twelve months, rate-sensitive liabilities will reprice
slightly faster than rate-sensitive assets. However, relative repricing
frequency of rate-sensitive assets vs. rate-sensitive liabilities is not the
sole indicator of changes in net interest income in a fluctuating interest rate
environment, as further discussed below.
48
The allocations used for the interest rate sensitivity report above were
based on the contractual maturity (or next repricing opportunity, whichever
comes sooner) for the loans and deposits and the duration schedules for the
investment securities. All interest-bearing demand deposits were allocated to
the one month or less category with the exception of personal savings deposit
accounts which were allocated to the noninterest sensitive category because the
rate paid on these accounts typically is not sensitive to movements in market
interest rates. Changes in the mix of earning assets or supporting liabilities
can either increase or decrease the net interest margin without affecting
interest rate sensitivity. In addition, the net interest spread between an asset
and its supporting liability can vary significantly while the timing of
repricing for both the asset and the liability remain the same, thus impacting
net interest income. This is referred to as basis risk and, generally, relates
to the possibility that the repricing characteristics of short-term assets tied
to the Company's prime lending rate are different from those of short-term
funding sources such as certificates of deposit.
Varying interest rate environments can create unexpected changes in
prepayment levels of assets and liabilities which are not reflected in the
interest sensitivity analysis report. Prepayments may have significant effects
on the Company's net interest margin. Because of these factors and in a static
test, interest sensitivity gap reports may not provide a complete assessment of
the Company's exposure to changes in interest rates. Management utilizes
computerized interest rate simulation analysis to determine the Company's
interest rate sensitivity. The table above indicates the Company is in a
liability sensitive gap position for the first year, then moves into a matched
position through the five year period. Overall, due to the factors cited,
current simulations results indicate a relatively low sensitivity to parallel
shifts in interest rates. A liability sensitive company will generally benefit
from a falling interest rate environment as the cost of interest-bearing
liabilities falls faster than the yields on interest-bearing assets, thus
creating a widening of the net interest margin. Conversely, an asset sensitive
company will benefit from a rising interest rate environment as the yields on
earning assets rise faster than the costs of interest-bearing liabilities.
Management also evaluates economic conditions, the pattern of market interest
rates and competition to determine the appropriate mix and repricing
characteristics of assets and liabilities required to produce a targeted net
interest margin.
In addition to the gap analysis, management uses rate shock simulation to
measure the rate sensitivity of its balance sheet. Rate shock simulation is a
modeling technique used to estimate the impact of changes in rates on the
Company's net interest margin. The Company measures its interest rate risk by
estimating the changes in net interest income resulting from instantaneous and
sustained parallel shifts in interest rates of plus or minus 200 basis points
over a period of twelve months. The Company's most recent rate shock simulation
analysis, which was performed as of December 31, 2001, indicates that a 200
basis point decrease in rates would cause a decrease in net interest income of
$1.2 million over the next twelve-month period. Conversely, a 200 basis point
increase in rates would cause an increase in net interest income of $1.0 million
over a twelve-month period.
This simulation is based on management's assumption as to the effect of
interest rate changes on assets and liabilities and assumes a parallel shift of
the yield curve. It also includes certain assumptions about the future pricing
of loans and deposits in response to changes in interest rates. Further, it
assumes that delinquency rates would not change as a result of changes in
interest rates although there can be no assurance that this will be the case.
While this simulation is a useful measure of the Company's sensitivity to
changing rates, it is not a forecast of the future results and is based on many
assumptions that, if changed, could cause a different outcome. In addition, a
change in U.S. Treasury rates in the designated amounts accompanied by a change
in the shape of the Treasury yield curve would cause significantly different
changes to net interest income than indicated above.
Generally, the Company's commercial and commercial real estate loans are
indexed to the prime rate. A portion of the Company's investments in
mortgage-backed securities are indexed to U.S. Treasury rates. Accordingly, any
changes in these indices will have a direct impact on the Company's interest
income. Certificates of deposit are generally priced based upon current market
conditions which include changes in the overall interest rate environment and
pricing of such deposits by competitors. Other interest-bearing deposits are not
priced against any particular index, but rather, reflect changes in the overall
interest rate environment. Repurchase agreements are indexed to the nationally
quoted repurchase agreement rate and other borrowed funds are indexed to U.S.
Treasury rates. The Company adjusts the rates and terms of its loans and
interest-bearing liabilities in response to changes in the interest rate
environment.
The Company does not currently engage in trading activities.
49
The Company adopted Statement of Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended, on
January 1, 2001. This statement requires all derivative instruments to be
recorded on the balance sheet at fair value.
The following instruments qualify as derivatives as defined by SFAS No.
133:
December 31, 2001
-------------------------------------
Contract/Notional Fair Weighted Average Weighted Average
Amount Value Paying Rates Receiving Rates
Interest rate swap agreements $ 8,870,000 $241,000 3.70% 6.67%
Foreign currency swap agreements $ 2,000,000 $ 39,000 4.99% 5.44%
Interest rate swap agreements consist of an agreement which qualifies for
the fair value method of hedge accounting under the "short-cut method" based on
the guidelines established by SFAS No. 133, and several loan participation
agreements accounted for as derivatives which do not qualify for hedge
accounting. The Company recognized a gain of approximately $50,000 during the
year ended December 31, 2001 as a result of changes in the fair value of those
loan participation agreements. Additionally, the Company entered into a foreign
currency swap agreement during the first quarter of 2001. This swap agreement
does not qualify for hedge accounting under SFAS No. 133. Accordingly, all
changes in the fair value of the foreign currency swap agreement will be
reflected in the earnings of the Company. The Company recognized a gain of
approximately $6,000 during the year ended December 31, 2001, as a result of
changes in the fair value of the foreign currency agreement.
At December 31, 2000, the estimated net fair value of the Company's
outstanding interest rate swaps was $794,000. For the year ended December 31,
2001, there were no realized gains or losses on terminated interest rate swaps.
At December 31, 2001, available for sale debt securities with a carrying
value of approximately $21.5 million are scheduled to mature within the next
five years. Of this amount, $996,000 is scheduled to mature within one year. The
Company's main source of liquidity is Federal funds sold and repurchase
agreements. Average Federal funds sold and repurchase agreements were $29.7
million in 2001, or 7.3% of average earning assets, compared to $11.9 million in
2000, or 7.8% of average earning assets. Federal funds sold and repurchase
agreements totaled $54.7 million at December 31, 2001, or 11.0% of earning
assets, compared to $31.0 million at December 31, 2000, or 8.8% of earning
assets.
At December 31, 2001, loans with a carrying value of approximately $293.2
million are scheduled to mature within the next five years. Of this amount,
$101.5 million is scheduled to mature within one year.
The Company's average loan-to-deposit ratio increased 41 basis points to
99.0% for 2001 from 94.9% for 2000. The Company's total loan-to-deposit ratio
decreased 46 basis points to 89.0% at December 31, 2001 from 93.6% at December
31, 2000.
The Company has short-term funding available through various Federal Funds
lines of credit with other financial institutions and its membership in the
Federal Home Loan Bank of Atlanta ("FHLBA"). Further, the FHLBA membership
provides the availability of participation in loan programs with varying
maturities and terms. At December 31, 2001, the Company had borrowings from the
FHLBA in the amount of $7.5 million.
There are no known trends, demands, commitments, events or uncertainties
that will result in or that are reasonably likely to result in liquidity
increasing or decreasing in any material way.
The Company has no off-balance sheet activities with unconsolidated or
limited purpose entities.
It is anticipated that the Company will find it necessary to raise
additional capital during 2002 to maintain its classification by regulatory
authorities as "well capitalized". This results from the rate of growth of the
Company. Management and the Board of Directors are currently evaluating several
alternatives for raising capital.
50
Critical Accounting Policies
The preparation of the financial statements, on which this Management's
Discussion and Analysis is bases, requires Management to make estimates, which
impact these financial statements. The most critical of these estimates and
accounting policies relate to the allowance for loan losses, other real estate
owned, and derivative financial instruments. For a more complete discussion of
these and other accounting policies, see Note 1 to the Company's consolidated
financial statements.
Allowance for Loan Losses - The Company carefully monitors the credit
quality of loan portfolios and makes estimates about the amount of credit losses
that have been incurred at each financial statement reporting date. This process
significantly impacts the financial statements and involves complex, subjective
judgments. The allowance is largely determined based upon the market value of
the underlying collateral. Market values of collateral are generally based upon
appraisals obtained from independent appraisers. If market conditions decline,
the allowance for loan losses would be negatively impacted resulting in a
negative impact on the Company's earnings. The allowance for loan losses is a
significant estimate that can and does change based on management's assumptions
about specific borrowers and applicable economic and environmental conditions,
among other factors.
Other Real Estate Owned - At December 31, 2001, the Company had one piece
of real estate that was obtained through a foreclosure. The property has been
recorded based upon the market value determined by an independent appraisal less
estimated selling cost. If market conditions decline in the area in which the
property is located (Hillsborough County, Florida), then the value of other real
estate owned will be negatively impacted, resulting in a negative impact to the
Company's earnings.
Derivative Instruments - The Company has entered into several interest
swaps, a foreign currency swap and has provided interest rate swaps to loan
participants. As a result of these activities the Company recognized a net gain
on derivative instruments of $84,000 for the year ended December 31, 2001
determined by the change in the fair market value of these derivative
instruments. The fair market value of these instruments is determined by quotes
obtained from the related counter parties in combination with a valuation model
utilizing discounted cash flows. The valuation of these derivative instruments
is a significant estimate that is largely affected by changes in interest rates.
If interest rates significantly increase or decrease, the value of these
instruments will significantly change, resulting in an impact on the earnings of
the Company.
Recent Accounting Pronouncements
In July of 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No.
141 establishes accounting and reporting standards for business combinations.
This Statement eliminates the use of the pooling-of-interests method of
accounting for business combinations, requiring future business combinations to
be accounted for using the purchase method of accounting. The provisions of this
Statement apply to all business combinations initiated after June 30, 2001. This
Statement also applies to all business combinations accounted for using the
purchase method of accounting for which the date of acquisition is July 1, 2001
or later. The Statement will not have an impact on the Company's consolidated
financial position and results of operations.
SFAS No. 142 establishes accounting and reporting standards for goodwill
and other intangible assets. With the adoption of this Statement, goodwill is no
longer subject to amortization over its estimated useful life. Rather, goodwill
will be subject to at least an annual assessment for impairment by applying a
fair-value based test. SFAS No. 142 is required to be adopted for fiscal years
beginning after December 15, 2001. As the Company currently has no goodwill or
intangible assets, the adoption of the Statement will not have an impact on the
Company's consolidated financial position and results of operations.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 requires entities to record the fair value
of a liability for an asset retirement obligation in the period in which it is
incurred and requires that the amount recorded as a liability be capitalized by
increasing the carrying amount of the related long-lived assets. Subsequent to
initial measurement, the liability is accreted to the ultimate amount
anticipated to be paid, and is also adjusted for revisions to the timing or
amount of estimated cash flows. The capitalized cost is depreciated over the
useful life of the related asset. Upon settlement of the liability, an entity
51
either settles the obligation for its recorded amount or incurs a gain or loss
upon settlement. SFAS No. 143 is required to be adopted for fiscal years
beginning after June 15, 2002, with earlier application encouraged. The
Statement will not have an impact on the Company's consolidated financial
position and results of operations.
In August 2001, the FASB issued SFAS No.144, "Accounting for the Impairment
or Disposal of Long-Lived Assets". This statement supersedes SFAS No. 121,
"Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of". SFAS No. 144 retains the fundamental provisions of SFAS No. 121
for (a) recognition and measurement of the impairment of long-lived assets to be
held and used and (b) measurement of long-lived assets to be disposed of by
sale. SFAS No. 144 is effective for fiscal years beginning after December 15,
2001. It does not appear the Statement will have a material impact on the
Company's consolidated financial position and results of operations.
In July 2001, the SEC released Staff Accounting Bulletin ("SAB") No. 102,
"Selected Loan Loss Allowance Methodology and Documentation Issues". SAB No. 102
expresses the SEC Staff's views on the development, documentation and
application of a systematic methodology in determining a GAAP allowance for loan
losses. The SAB stresses that the methodology for computing the allowance be
both disciplined and consistent, and emphasizes that the documentation
supporting the allowance and provision must be sufficient. SAB No. 102 provides
guidance that is consistent with the Federal Financial Institutions Examination
Council's (FFIEC") Policy Statement on Allowance for Loan and Lease Losses
Methodologies and Documentation for Banks and Savings Institutions, which was
also issued in July 2001. SAB No. 102 is applicable to all registrants with
material loan portfolios while the parallel guidance of the FFIEC is applicable
only to banks and savings institutions. The adoption of this bulletin did not
have a material impact on the reported consolidated financial position or
results of operations of the Company.
Effects of Inflation and Changing Prices
Inflation generally increases the cost of funds and operating overhead, and
to the extent loans and other assets bear variable rates, the yields on such
assets. Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on the performance of a
financial institution than the effects of general levels of inflation. Although
interest rates do not necessarily move in the same direction or to the same
extent as the prices of goods and services, increases in inflation generally
have resulted in increased interest rates. In addition, inflation affects
financial institutions' increased cost of goods and services purchased, the cost
of salaries and benefits, occupancy expense, and similar items. Inflation and
related increases in interest rates generally decrease the market value of
investments and loans held and may adversely effect liquidity, earnings, and
shareholders' equity. Mortgage originations and refinancings tend to slow as
interest rates increase, and can reduce the Company's earnings from such
activities and the income from the sale of residential mortgage loans in the
secondary market.
Monetary Policies
The results of operations of the Company will be affected by credit
policies of monetary authorities, particularly the Federal Reserve Board. The
instruments of monetary policy employed by the Federal Reserve Board include
open market operations in U.S. Government securities, changes in the discount
rate on member Company borrowings, changes in reserve requirements against
member Company deposits and limitations on interest rates which member Company
may pay on time and savings deposits. In view of changing conditions in the
national economy and in the money markets, as well as the effect of action by
monetary and fiscal authorities, including the Federal Reserve Board, no
prediction can be made as to possible future changes in interest rates, deposit
levels, loan demand or the business and earnings of the Company or the Company.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
--------------------------------------------------------------------
Refer to "Liquidity Management and Interest Rate Sensitivity" in Item 7.
Management Discussion and Analysis for discussion of interest rate fluctuations.
Derivative Financial Instruments
The Company is exposed to market risks, including fluctuations in interest
rates, variability in spread relationships (Prime to LIBOR spreads), mismatches
of repricing intervals between finance receivables and related funding
52
obligations, and variability in currency exchange rates. The Company has
established policies, procedures and internal processes governing its management
of market risks and the use of financial instruments to manage its exposure to
such risks. Sensitivity of earnings to these risks are managed by entering into
securitization transactions, issuing debt obligations with appropriate price and
term characteristics, and utilizing derivative financial instruments. These
derivative financial instruments consist primarily of interest rate swaps and
foreign currency swaps. The Company does not use derivative financial
instruments for trading purposes.
The Company uses interest rate swap agreements to change the
characteristics of its fixed and variable rate exposures and to manage the
Company's asset/liability match. The Company's interest rate swap portfolio is
an integral element of its risk management policy, and as such, all swaps are
linked to an underlying debt. The Company entered into a foreign currency swap
agreement during the first quarter of 2001. The purpose of this transaction is
to mitigate fluctuations in the exchange rate of the dollar and the Japanese
yen, which might otherwise adversely affect the interest income on a loan
denominated in Japanese Yen and tied to Japanese interest rates. This swap
agreement does not qualify for hedge accounting under SFAS No. 133. Accordingly,
all changes in the fair value of the foreign currency swap agreement will be
reflected in the earnings of the Company.
Refer to "Interest Rate Sensitivity and Liquidity Management" in Item 7.,
Management Discussion and Analysis for discussion of derivative instruments.
Item 8. Financial Statements and Supplementary Data.
- ------- --------------------------------------------
The following financial statements are filed with this report:
Consolidated Balance Sheets - December 31, 2001 and 2000
Consolidated Statements of Operations - Years ended December 31, 2001, 2000
and 1999
Consolidated Statements of Shareholders' Equity - Years ended December 31,
2001, 2000 and 1999
Consolidated Statements of Cash Flows - Years ended December 31, 2001, 2000
and 1999
Notes to Consolidated Financial Statements
53
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders of
Florida Banks, Inc.
Jacksonville, Florida
We have audited the accompanying consolidated balance sheets of Florida Banks,
Inc. and subsidiaries as of December 31, 2001 and 2000, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the companies as of December 31,
2001 and 2000, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States of America.
February 8, 2002
54
2001 2000
ASSETS
CASH AND CASH EQUIVALENTS:
Cash and due from banks $19,332,159 $12,730,964
Federal funds sold and repurchase agreements 54,657,000 30,957,000
----------- -----------
Total cash and cash equivalents 73,989,159 43,687,964
INVESTMENT SECURITIES:
Available for sale, at fair value (cost $33,562,507 and
$32,039,307 at December 31, 2001 and 2000) 33,954,045 32,061,545
Held to maturity (fair value $2,934,245 and $3,486,595
at December 31, 2001 and 2000) 2,867,163 3,428,558
Other investments 2,064,550 1,266,000
----------- -----------
Total investment securities 38,885,758 36,756,103
LOANS, net of allowance for loan losses of $4,692,216
and $3,510,677 at December 31, 2001 and 2000 396,751,695 282,014,943
PREMISES AND EQUIPMENT, NET 3,361,882 3,300,170
ACCRUED INTEREST RECEIVABLE 1,722,746 1,897,303
DEFERRED INCOME TAXES, NET 4,016,786 4,605,153
DERIVATIVE INSTRUMENTS 279,784
OTHER REAL ESTATE OWNED 2,777,827
OTHER ASSETS 537,588 535,408
----------- -----------
TOTAL ASSETS $522,323,225 $372,797,044
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS:
Noninterest-bearing $99,899,425 $41,965,131
Interest-bearing 351,349,850 263,274,321
----------- -----------
Total deposits 451,249,275 305,239,452
REPURCHASE AGREEMENTS 4,495,547 18,812,378
OTHER BORROWED FUNDS 9,714,692 7,223,402
ACCRUED INTEREST PAYABLE 2,863,882 2,206,379
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 2,038,795 758,994
----------- -------
Total liabilities 470,362,191 334,240,605
----------- -----------
COMPANY OBLIGATED MANDITORILY REDEEMABLE
PREFERRED SECURITIES OF SUBSIDIARY TRUST 5,819,000
-----------
COMMITMENTS (NOTE 9)
SHAREHOLDERS' EQUITY:
Series B preferred stock, $68.00 par value, 1,000,000 shares authorized,
102,283 shares issued and outstanding 6,955,244
Common stock, $.01 par value; 30,000,000 shares authorized
5,979,860 and 5,929,751 shares issued, respectively 59,799 59,298
Additional paid-in capital 46,828,142 46,750,329
Accumulated deficit (deficit of $8,134,037
eliminated upon quasi-reorganization on December 31, 1995) (6,079,156) (6,760,222)
Treasury stock, 302,200 and 241,100 shares at cost, respectively (1,866,197) (1,506,836)
Accumulated other comprehensive income, net of tax 244,202 13,870
----------- -----------
Total shareholders' equity 46,142,034 38,556,439
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $522,323,225 $372,797,044
=========== ===========
See notes to consolidated financial statements.
55
2001 2000 1999
---------------- ----------------- ----------------
INTEREST INCOME:
Loans, including fees $ 27,692,486 $20,072,894 $ 9,034,939
Investment securities 2,653,164 2,477,179 1,518,052
Federal funds sold 819,741 1,215,804 257,042
Repurchase agreements 214,787 219 332,871
------------ ------------ -----------
Total interest income 31,380,178 23,766,096 11,142,904
------------ ------------ -----------
INTEREST EXPENSE:
Deposits 14,948,191 12,393,304 4,053,353
Repurchase agreements 1,204,752 903,794 552,499
Borrowed funds 395,131 413,938 90,442
------------ ------------ -----------
Total interest expense 16,548,074 13,711,036 4,696,294
------------ ------------ -----------
NET INTEREST INCOME 14,832,104 10,055,060 6,446,610
PROVISION FOR LOAN LOSSES 1,889,079 1,912,380 1,610,091
------------ ------------ -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 12,943,025 8,142,680 4,836,519
------------ ------------ -----------
NONINTEREST INCOME:
Service fees 1,224,020 705,584 454,660
Gain on sale of loans 104,151 1,135
Gain (loss) on sale of available for sale investment securities 73,976 9,864 (4,274)
Other noninterest income 645,856 295,735 131,110
------------ ------------ -----------
2,048,003 1,011,183 582,631
------------ ------------ -----------
NONINTEREST EXPENSES:
Salaries and benefits 8,761,416 6,813,011 5,501,251
Occupancy and equipment 1,785,996 1,527,775 951,155
Data processing 677,963 456,972 265,499
Dividends on preferred security of subsidiary trust 12,995
Other 2,454,819 2,087,962 1,624,186
------------ ------------ -----------
13,693,189 10,885,720 8,342,091
------------ ------------ -----------
INCOME (LOSS) BEFORE PROVISION (BENEFIT)
FOR INCOME TAXES 1,297,839 (1,731,857) (2,922,941)
PROVISION (BENEFIT) FOR INCOME TAXES 489,400 (651,704) (1,075,781)
------------ ------------ -----------
NET INCOME (LOSS) 808,439 (1,080,153) (1,847,160)
PREFERRED STOCK DIVIDENDS (250,091)
-----------
NET INCOME (LOSS) APPLICABLE TO COMMON SHARES $ 558,348 $(1,080,153) $(1,847,160)
============ =========== ===========
EARNINGS (LOSS) PER COMMON SHARE:
Basic $ 0.10 $ (0.19) $ (0.32)
============ =========== ===========
Diluted $ 0.10 $ (0.19) $ (0.32)
============ =========== ===========
See notes to consolidated financial statements.
56
Preferred Stock Common Stock Additional
---------------------------- -------------------------- Paid-In
Shares Par Value Shares Par Value Capital
BALANCE, JANUARY 1, 1999 5,852,756 $ 58,528 $ 46,373,946
Comprehensive loss:
Net loss
Unrealized loss on available for sale
investment securities, net of tax of $396,270
Comprehensive loss
Exercise of stock options 1,000 10 9,990
Purchase of treasury stock
------------ ------------ ---------- -------- ------------
BALANCE, DECEMBER 31, 1999 5,853,756 58,538 46,383,936
Comprehensive loss:
Net loss
Unrealized gain on available for sale investment
securities, net of tax of $411,821
Comprehensive loss
Issuance of common stock under employee
stock purchase plan 75,995 760 366,393
Purchase of treasury stock
------------ ------------ ---------- -------- ------------
BALANCE, DECEMBER 31, 2000 5,929,751 59,298 46,750,329
Comprehensive income:
Net income
Unrealized gain on available for sale investment
securities, net of tax of $138,968
Comprehensive income
Issuance of common stock under
employee stock purchase plan 50,109 501 226,587
Issuance of Series B preferred stock, net 102,283 6,955,244 (148,774)
Series B preferred stock cash dividend declared
Purchase of treasury stock
BALANCE, DECEMBER 31, 2001 102,283 $ 6,955,244 5,979,860 $ 59,799 $ 46,828,142
============ ============ ========== ======== ============
See notes to consolidated financial statements.
57
Preferred Stock Common Stock Additional
---------------------------- -------------------------- Paid-In
Shares Par Value Shares Par Value Capital
BALANCE, JANUARY 1, 1999 5,852,756 $ 58,528 $ 46,373,946
Comprehensive loss:
Net loss
Unrealized loss on available for sale
investment securities, net of tax of $396,270
Comprehensive loss
Exercise of stock options 1,000 10 9,990
Purchase of treasury stock
------------ ------------ ---------- -------- ------------
BALANCE, DECEMBER 31, 1999 5,853,756 58,538 46,383,936
Comprehensive loss:
Net loss
Unrealized gain on available for sale investment
securities, net of tax of $411,821
Comprehensive loss
Issuance of common stock under employee
stock purchase plan 75,995 760 366,393
Purchase of treasury stock
------------ ------------ ---------- -------- ------------
BALANCE, DECEMBER 31, 2000 5,929,751 59,298 46,750,329
Comprehensive income:
Net income
Unrealized gain on available for sale investment
securities, net of tax of $138,968
Comprehensive income
Issuance of common stock under
employee stock purchase plan 50,109 501 226,587
Issuance of Series B preferred stock, net 102,283 6,955,244 (148,774)
Series B preferred stock cash dividend declared
Purchase of treasury stock
BALANCE, DECEMBER 31, 2001 102,283 $ 6,955,244 5,979,860 $ 59,799 $ 46,828,142
============ ============ ========== ======== ============
Accumulated
Other
Comprehensive
Accumulated Treasury Income (Loss),
Deficit Stock Net of Tax Total
BALANCE, JANUARY 1, 1999 $ (3,832,909) $ (11,716) $ 42,587,849
Comprehensive loss:
Net loss (1,847,160) (1,847,160)
Unrealized loss on available for sale
investment securities, net of tax of $396,270 (656,990) (656,990)
Comprehensive loss ------------
(2,504,150)
Exercise of stock options
10,000
Purchase of treasury stock
$ (858,844) (858,844)
BALANCE, DECEMBER 31, 1999 ------------ ------------ --------- ------------
Comprehensive loss: (5,680,069) (858,844) (668,706) 39,234,855
Net loss
Unrealized gain on available for sale investment
securities, net of tax of $411,821 (1,080,153) (1,080,153)
Comprehensive loss
682,576 682,576
Issuance of common stock under employee ------------
stock purchase plan (397,577)
Purchase of treasury stock
367,153
BALANCE, DECEMBER 31, 2000
(647,992) (647,992)
Comprehensive income: ------------ ------------ --------- ------------
Net income (6,760,222) (1,506,836) 13,870 38,556,439
Unrealized gain on available for sale investment
securities, net of tax of $138,968
Comprehensive income 808,439 808,439
Issuance of common stock under 230,332 230,332
employee stock purchase plan ------------
Issuance of Series B preferred stock, net 1,038,771
Series B preferred stock cash dividend declared
227,088
Purchase of treasury stock
6,806,470
BALANCE, DECEMBER 31, 2001
(127,373) (127,373)
(359,361) (359,361)
See notes to consolidated financial statements. ------------ ------------ --------- ------------
$ (6,079,156) $ (1,866,197) $ 244,202 $ 46,142,034
============ ============ ========= ============
58
2001 2000 1999
------------- ------------- -------------
OPERATING ACTIVITIES:
Net income (loss) $ 808,439 $ (1,080,153) $ (1,847,160)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 756,426 647,891 350,204
Loss on disposition of furniture and equipment 17,628 15,468 450
Deferred income tax expense (benefit) 449,400 (651,704) (1,075,781)
(Gain) loss on sale of securities (73,976) (9,864) 4,274
Gain on sale of real estate owned (24,928) (18,263)
Loss on foreign currency translation 206,151
Gain on derivative instruments (262,008)
(Accretion) amortization of (discount) premiums on investments, net (295,582) (196,934) 41,064
Amortization of premiums on loans 196,651 112,308 3,043
Provision for loan losses 1,889,079 1,912,380 1,610,091
Decrease (increase) in accrued interest receivable 174,557 (876,128) (542,475)
Increase in other assets (2,180) (328,023) (79,299)
Increase in accrued interest payable 657,503 1,589,830 397,652
Increase (decrease) in accounts payable and accrued expenses 1,279,801 (167,948) 506,602
------------- ------------- -------------
Net cash provided by (used in) operating activities 5,776,961 948,860 (631,335)
------------- ------------- -------------
INVESTING ACTIVITIES:
Proceeds from sales, paydowns and maturities of investment securities:
Available for sale 15,808,333 12,261,314 28,974,876
Held to maturity 4,154,215 1,082,529
Purchases of investment securities:
Available for sale (17,193,780) (15,560,354) (35,733,287)
Held to maturity (3,361,015) (4,362,796)
Other (798,550) (364,200) (609,950)
Net increase in loans (119,896,460) (129,226,819) (91,214,841)
Purchases of premises and equipment (839,608) (1,522,711) (1,969,539)
Proceeds from the sale of premises and equipment 3,841 350
Proceeds from the sale of real estate owned 114,928 864,263
------------- ------------- -------------
Net cash used in investing activities (122,008,096) (136,828,774) (100,552,391)
------------- ------------- -------------
FINANCING ACTIVITIES:
Net increase in demand deposits,
money market accounts and savings accounts 86,829,039 29,713,892 38,789,882
Net increase in time deposits 59,390,096 116,787,033 55,695,191
Proceeds from issuance of preferred stock, net 6,806,470
Proceeds from issuance of trust preferred securities, net 5,819,000
Exercise of stock options 10,000
Purchase of treasury stock (359,361) (647,992) (858,844)
Preferred dividends paid (127,373)
Proceeds from FHLB advances 9,500,000 5,000,000 5,000,000
Repayment of FHLB advances (7,000,000) (5,000,000)
(Decrease) increase in repurchase agreements (14,316,831) 7,775,267 5,368,447
(Decrease) increase in other borrowed funds (8,710) (18,950) 2,192,539
------------- ------------- -------------
Net cash provided by financing activities 146,532,330 153,609,250 106,197,215
------------- ------------- -------------
NET INCREASE IN CASH
AND CASH EQUIVALENTS 30,301,195 17,729,336 5,013,489
CASH AND CASH EQUIVALENTS:
Beginning of year 43,687,964 25,958,628 20,945,139
------------- ------------- -------------
End of year $ 73,989,159 $ 43,687,964 $ 25,958,628
============= ============= =============
See notes to consolidated financial statements.
59
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
l. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Florida Banks, Inc. (the "Company") was incorporated on October 15, 1997
for the purpose of becoming a bank holding company and acquiring First
National Bank of Tampa (the "Bank"). On August 4, 1998, the Company
completed its initial public offering and its merger (the "Merger") with
the Bank pursuant to which the Bank was merged with and into Florida Bank
No. 1, N.A., a wholly-owned subsidiary of the Company, and renamed Florida
Bank, N.A.
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
The accounting and reporting policies of the Company conform to accounting
principles generally accepted in the United States of America and to
general practices within the banking industry. The following summarizes
these policies and practices:
Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to significant change in the
near term relate to the allowance for loan losses and the valuation of
other real estate owned, deferred tax assets and embedded derivative
instruments.
Cash and Cash Equivalents - Cash and cash equivalents include cash and due
from banks, Federal funds sold and repurchase agreements all of which
mature within ninety days. Generally, Federal funds and repurchase
agreements are sold for one day periods.
Investment Securities - Debt securities for which the Company has the
positive intent and ability to hold to maturity are classified as held to
maturity and reported at amortized cost. Securities are classified as
trading securities if bought and held principally for the purpose of
selling them in the near future. No investments are held for trading
purposes. Securities not classified as held to maturity are classified as
available for sale, and reported at fair value with unrealized gains and
losses excluded from earnings and reported net of tax as a separate
component of other comprehensive income or loss until realized. Other
investments, which include Federal Reserve Bank stock and Federal Home
Loan Bank stock, are carried at cost as such investments are not readily
marketable.
Realized gains and losses on sales of investment securities are recognized
in the statements of operations upon disposition based upon the adjusted
cost of the specific security. Declines in value of investment securities
judged to be other than temporary are recognized as losses in the
statement of operations.
Loans - Loans are stated at the principal amount outstanding, net of
unearned income and an allowance for loan losses. Interest income on all
loans is accrued based on the outstanding daily balances.
60
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Continued)
- --------------------------------------------------------------------------------
Management has established a policy to discontinue accruing interest
(nonaccrual status) on a loan after it has become 90 days delinquent as to
payment of principal or interest unless the loan is considered to be well
collateralized and the Company is actively in the process of collection.
In addition, a loan will be placed on nonaccrual status before it becomes
90 days delinquent if management believes that the borrower's financial
condition is such that collection of interest or principal is doubtful.
Interest previously accrued but uncollected on such loans is reversed and
charged against current income when the receivable is estimated to be
uncollectible. Interest income on nonaccrual loans is recognized only as
received.
Nonrefundable fees and certain direct costs associated with originating or
acquiring loans are recognized over the life of the related loans on the
interest method.
Allowance for Loan Losses - The determination of the balance in the
allowance for loan losses is based on an analysis of the loan portfolio
and reflects an amount which, in management's judgment, is adequate to
provide for probable loan losses after giving consideration to the growth
and composition of the loan portfolio, current economic conditions, past
loss experience, evaluation of probable losses in the current loan
portfolio and such other factors that warrant current recognition in
estimating loan losses.
Loans which are considered to be uncollectible are charged-off against the
allowance. Recoveries on loans previously charged-off are added to the
allowance.
Impaired loans are loans for which it is probable that the Company will be
unable to collect all amounts due according to the contractual terms of
the loan agreement. Impairment losses are included in the allowance for
loan losses through a charge to the provision for loan losses. Impairment
losses are measured by the present value of expected future cash flows
discounted at the loan's effective interest rate, or, as a practical
expedient, at either the loan's observable market price or the fair value
of the collateral. Interest income on impaired loans is recognized only as
received.
Large groups of smaller balance homogeneous loans (consumer loans) are
collectively evaluated for impairment. Commercial loans and larger balance
real estate and other loans are individually evaluated for impairment.
Premises and Equipment - Premises and equipment are stated at cost less
accumulated depreciation computed on the straight-line method over the
estimated useful lives of 3 to 20 years. Leasehold improvements are
amortized on the straight-line method over the shorter of their estimated
useful life or the period the Company expects to occupy the related leased
space. Maintenance and repairs are charged to operations as incurred.
Income Taxes - Deferred tax liabilities are recognized for temporary
differences that will result in amounts taxable in the future and deferred
tax assets are recognized for temporary differences and tax benefit
carryforwards that will result in amounts deductible or creditable in the
future. Net deferred tax liabilities or assets are recognized through
charges or credits to the deferred tax provision. A deferred tax valuation
61
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Continued)
- --------------------------------------------------------------------------------
allowance is established if it is more likely than not that all or a
portion of the deferred tax assets will not be realized. Subsequent to the
Company's quasi-reorganization (see note 18) reductions in the deferred
tax valuation allowance are credited to additional paid-in capital.
Derivative Instruments - As part of the its asset/liability management
policy, the Company uses derivatives to manage interest and foreign
currency exchange rate exposures by modifying the characteristics of the
related balance sheet instruments. In accordance with Statement of
Financial Accounting Standard ("SFAS") 133, Accounting for Derivative
Instruments and Hedging Activities, as amended by SFAS 138, derivatives
are carried at fair value. The accounting for changes in the fair value
(that is, gains or losses) of a derivative depends on whether it has been
designated and qualifies as part of a hedging relationship and, if so, on
the reason for holding it. If the derivative is designated as a fair-value
hedge, the changes in the fair value of the derivative and the hedged
items are recognized in earnings. If the derivative is designated as a
cash flow hedge, changes in the fair value of the derivative are recorded
to other comprehensive income and are recognized in the statement of
operations when the hedged item affects earnings. See Note 5 for
additional information regarding derivative instruments.
Other Real Estate Owned - Assets acquired through, or in lieu of, loan
foreclosure are held for sale and are initially recorded at fair value at
the date of foreclosure, establishing a new cost basis. Subsequent to
foreclosure, valuations are periodically performed by management and the
assets are carried at the lower of carrying amount or fair value less cost
to sell. Revenue and expenses from operations and changes in the valuation
allowance are included in net expenses from foreclosed assets.
Repurchase Agreements - Repurchase agreements consist of agreements with
customers to pay interest daily on funds swept into a repo account based
on a rate of .75% to 1.00% below the Federal funds rate. Such agreements
generally mature within one to four days from the transaction date. In
addition, the Company has securities sold under agreements to repurchase,
which are classified as secured borrowings. Such borrowings generally
mature within one to thirty days from the transaction date. Securities
sold under agreements to repurchase are reflected at the amount of cash
received in connection with the transaction. Information concerning
repurchase agreements for the years ended December 31, 2001 and 2000 is
summarized as follows:
2001 2000
Average balance during the year $ 33,568,040 $ 14,955,704
Average interest rate during the year 3.59% 6.04%
Maximum month-end balance during the year $ 44,576,894 $ 21,240,341
Other Borrowed Funds - Other borrowed funds consist of Federal Home Loan
Bank borrowings and treasury tax and loan deposits. Treasury tax and loan
deposits generally are repaid within one to 120 days from the transaction
date.
62
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Continued)
- --------------------------------------------------------------------------------
Stock Options - The Company has elected to account for its stock options
under the intrinsic value based method with pro forma disclosures of net
earnings and earnings per share, as if the fair value based method of
accounting defined in SFAS No. 123 Accounting for Stock Based
Compensation, had been applied. Under the intrinsic value based method,
compensation cost is the excess, if any, of the quoted market price of the
stock at the grant date or other measurement date over the amount an
employee must pay to acquire the stock. Under the fair value based method,
compensation cost is measured at the grant date based on the fair value of
the award and is recognized over the service period, which is usually the
vesting period.
Comprehensive Income - Accounting principles generally require that
recognized revenue, expenses, gains and losses be included in net income.
Although certain changes in assets and liabilities, such as unrealized
gains and losses on available for sale securities, are reported as a
separate component of the equity section of the balance sheet, such items
along with net income, are components of comprehensive income. The
components of other comprehensive income and related tax effects are
presented in the consolidated statements of shareholders' equity.
Transfers of Financial Assets - Transfers of financial assets are
accounted for as sales, when control over the assets has been surrendered.
Control over transferred assets is deemed to be surrendered when (1) the
assets have been isolated from the Company, (2) the transferee obtains the
right (free of conditions that constrain it from taking advantage of that
right) to pledge or exchange the transferred assets, and (3) the Company
does not maintain effective control over the transferred assets through an
agreement to repurchase them before their maturity.
Earnings Per Common Share - Basic earnings per common share ("EPS")
excludes dilution and is computed by dividing earnings applicable to
common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects additional common shares
that would have been issued, as well as any adjustment to income that
would result form the assumed issuance. Potential common shares that may
be issued by the Company relate solely to outstanding stock options and
convertible preferred stock and are determined using the treasury stock
method.
Recent Accounting Pronouncements - In July of 2001, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 141 Business
Combinations and SFAS No. 142 Goodwill and Other Intangible Assets. SFAS
No. 141 establishes accounting and reporting standards for business
combinations. This Statement eliminates the use of the
pooling-of-interests method of accounting for business combinations,
requiring future business combinations to be accounted for using the
purchase method of accounting. The provisions of this Statement apply to
all business combinations initiated after June 30, 2001. This Statement
also applies to all business combinations accounted for using the purchase
method of accounting for which the date of acquisition is July 1, 2001 or
later. The Statement did not have an impact on the Company's consolidated
financial position and consolidated results of operations in 2001.
63
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Continued)
- --------------------------------------------------------------------------------
SFAS No. 142 establishes accounting and reporting standards for goodwill
and other intangible assets. With the adoption of this Statement, goodwill
is no longer subject to amortization over its estimated useful life.
Rather, goodwill will be subject to at least an annual assessment for
impairment by applying a fair-value based test. SFAS No. 142 is required
to be adopted for fiscal years beginning after December 15, 2001. As the
Company currently has no goodwill or intangible assets, the adoption of
the Statement will not have an impact on the Company's consolidated
financial position and consolidated results of operations.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS No. 143 requires entities to record the fair
value of a liability for an asset retirement obligation in the period in
which it is incurred and requires that the amount recorded as a liability
be capitalized by increasing the carrying amount of the related long-lived
assets. Subsequent to initial measurement, the liability is accreted to
the ultimate amount anticipated to be paid, and is also adjusted for
revisions to the timing or amount of estimated cash flows. The capitalized
cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, an entity either settles the obligation for
its recorded amount or incurs a gain or loss upon settlement. SFAS No. 143
is required to be adopted for fiscal years beginning after June 15, 2002,
with earlier application encouraged. The Statement will not have an impact
on the Company's consolidated financial position and results of
operations.
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. This statement supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of". SFAS No. 144 retains the fundamental
provisions of SFAS No. 121 for (a) recognition and measurement of the
impairment of long-lived assets to be held and used and (b) measurement of
long-lived assets to be disposed of by sale. SFAS No. 144 is effective for
fiscal years beginning after December 15, 2001. It does not appear the
Statement will have a material impact on the Company's consolidated
financial position and results of operations.
In July 2001, the SEC released Staff Accounting Bulletin ("SAB") No. 102,
Selected Loan Loss Allowance Methodology and Documentation Issues. SAB No.
102 expresses the SEC Staff's views on the development, documentation and
application of a systematic methodology in determining a generally
accepted accounting policies ("GAAP") allowance for loan losses. The SAB
stresses that the methodology for computing the allowance be both
disciplined and consistent, and emphasizes that the documentation
supporting the allowance and provision must be sufficient. SAB No. 102
provides guidance that is consistent with the Federal Financial
Institutions Examination Council's ("FFIEC") Policy Statement on Allowance
for Loan and Lease Losses Methodologies and Documentation for Banks and
Saving Institutions, which was also issued in July 2001. SAB No. 102 is
applicable to all registrants with material loan portfolios while the
parallel guidance of the FFIEC is applicable only to banks and savings
institution. The adoption of this bulletin did not have a material impact
on reported results of operations of the Company.
Reclassifications - Certain reclassifications have been made to the 2000
and 1999 consolidated financial statements to conform with the
presentation adopted in 2001.
64
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Continued)
- --------------------------------------------------------------------------------
2. INVESTMENT SECURITIES
The amortized cost and estimated fair value of available for sale and held
to maturity investment securities as of December 31, 2001 and 2000 are as
follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 2001 Available for sale:
U.S. Treasury securities and
other U.S. agency obligations $ 840,341 $ 17,615 $ 857,956
State and municipal 1,285,000 63,230 1,348,230
Mortgage-backed securities 28,409,558 445,563 $ (134,870) 28,720,251
------------ --------- ----------- -----------
Total debt securities 30,534,899 526,408 (134,870) 30,926,437
Mutual Fund 3,027,608 3,027,608
------------ -----------
Total securities available 33,562,507 526,408 (134,870) 33,954,045
for sale
Held to maturity:
U.S. Treasury securities and
other U.S. agency obligations 1,861,974 35,991 (1,320) 1,896,645
Mortgage-backed securities 1,005,189 32,411 1,037,600
------------ --------- -----------
$ 2,867,163 $ 68,402 $ (1,320) $ 2,934,245
============ ========= ========== ===========
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 2000 Available for sale:
U.S. Treasury securities and
other U.S. agency obligations $ 1,748,054 $ 250 $ (2,694) $ 1,745,610
State and municipal 1,435,000 22,893 1,457,893
Mortgage-backed securities 28,856,253 247,894 (246,105) 28,858,042
----------- -------- --------- -----------
32,039,307 271,037 (248,799) 32,061,545
Held to maturity:
U.S. Treasury securities and
other U.S. agency obligations 3,428,558 66,906 (8,869) 3,486,595
---------- -------- --------- -----------
$35,467,865 $337,943 $(257,668) $35,548,140
=========== ========= ========= ===========
Expected maturities of debt securities will differ from contractual
maturities because borrowers may have the right to call or prepay
obligations with or without prepayment penalties. The amortized cost and
65
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Continued)
- --------------------------------------------------------------------------------
estimated fair value of debt securities available for sale, at December
31, 2001, by contractual maturity, are shown below:
Available for Sale Held to Maturity
------------------------------------------ ------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
Due before one year
Due after one year through five years $ 885,000 $ 921,988
Due after five years through ten years 440,000 465,661 $ 992,462 $ 1,015,000
Due after ten years 800,341 818,537 869,512 881,645
------------ ------------ ----------- -----------
2,125,341 2,206,186 1,861,974 1,896,645
Mortgage-backed securities 28,409,558 28,720,251 1,005,189 1,037,600
------------ ------------ ----------- -----------
Total $ 30,534,899 $ 30,926,437 $ 2,867,163 $ 2,934,245
============ ============ =========== ===========
Investment securities with a carrying value of $27,335,655 and $21,032,693
were pledged as security for certain borrowed funds and public deposits
held by the Company at December 31, 2001 and 2000, respectively.
3. LOANS
Loans at December 31, are summarized as follows:
2001 2000
Commercial real estate $ 210,373,284 $ 158,653,667
Commercial 142,910,691 102,391,117
Residential mortgage 22,308,820 9,795,665
Consumer 23,158,053 13,036,447
Credit card and other loans 2,911,884 1,747,145
------------- ---------
Total loans 401,662,732 285,624,041
Allowance for loan losses (4,692,216) (3,510,677)
Net deferred loan fees (218,821) (98,421)
------------- --------
Net loans $ 396,751,695 $ 282,014,943
============= =============
Changes in the allowance for loan losses are summarized as follows:
2001 2000
Balance, beginning of year $ 3,510,677 $ 1,858,040
Provision for loan losses 1,889,079 1,912,380
Charge-offs (827,784) (401,329)
Recoveries 120,244 141,586
----------- -----------
Balance, end of year $ 4,692,216 $ 3,510,677
=========== ===========
66
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Continued)
- --------------------------------------------------------------------------------
The Company's primary lending area is the state of Florida. Although the
Company's loan portfolio is diversified, a significant portion of its
loans are collateralized by real estate. Therefore the Company could be
susceptible to economic downturns and natural disasters. It is the
Company's lending policy to collateralize real estate loans based upon
certain loan to appraised value ratios.
Nonaccrual loans totaled approximately $1,090,000 and $1,547,000 of which
approximately $681,000 and $872,000 is guaranteed by the SBA at December
31, 2001 and 2000, respectively. The effects of carrying nonaccrual loans
during 2001, 2000, and 1999 resulted in a reduction of interest income of
approximately $147,000, $151,000 and $76,000, respectively.
The following is a summary of information pertaining to impaired loans:
December 31,
2001 2000
----------- ---------
(approximately)
Impaired loans with a valuation allowance $ 1,184,000 $ 946,000
Impaired loans without a valuation allowance
Total impaired loans $ 1,184,000 $ 946,000
=========== =========
Impaired loans guaranteed by the SBA $ 147,000
Valuation allowance related to impaired loans $ 295,000 $ 329,000
Years ended December 31,
2001 2000 1999
----------- ----------- -----------
(approximately)
Average investment in impaired loans $ 1,065,000 $ 3,230,000 $ 2,077,000
The interest income recognized on impaired loans for the years ended
December 31, 2001, 2000 and 1999 was not significant.
No additional funds are committed to be advanced in connection with
impaired loans.
At December 31, 2001, restructured loans amounted to approximately
$1,095,000. There were no restructured loans at December 31, 2000. No
additional funds are committed to be advanced in connection with
restructured loans.
67
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Continued)
- --------------------------------------------------------------------------------
4. PREMISES AND EQUIPMENT
Major classifications of these assets are as follows:
2001 2000
Land $ 95,000 $ 95,000
Buildings 660,315 660,315
Leasehold improvements 956,465 787,985
Furniture, fixtures and equipment 3,756,657 3,145,737
5,468,437 4,689,037
Accumulated depreciation and
amortization (2,106,555) (1,388,867)
$ 3,361,882 $ 3,300,170
Depreciation and amortization amounted to $756,426, $647,891 and $350,204
for the years ended December 31, 2001, 2000 and 1999, respectively.
5. DERIVATIVE INSTRUMENTS
The Company adopted SFAS No. 133, as amended by SFAS 138, on January 1,
2001. This statement requires all derivative instruments to be recorded on
the balance sheet at fair value.
The following instruments qualify as derivatives as defined by SFAS No.
133:
December 31, 2001
--------------------------------------
Contract/National Fair
Amount Value
Interest rate swap agreements $ 11,370,000 $ 67,419
Foreign currency swap agreements 2,000,000 212,365
Interest rate swap agreements consist of one agreement which qualifies for
the fair value method of hedge accounting under the "short-cut method"
based on the guidelines established by SFAS No. 133, and several embedded
swap arrangements contained in loan participation agreements accounted for
as derivatives which do not qualify for hedge accounting. The Company
recognized a gain of approximately $50,000 for the year ended December 31,
2001 as a result of changes in the fair value of the embedded derivatives
contained in the loan participation agreements. Additionally, the Company
entered into a foreign currency swap agreement during the first quarter of
2001. This swap agreement does not qualify for hedge accounting under SFAS
No. 133. Accordingly, all changes in the fair value of the foreign
currency swap agreement are reflected in the earnings of the Company. The
Company recognized a gain of approximately $6,000 for the year ended
December 31, 2001 as a result of changes in the fair value of the foreign
currency agreement.
68
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Continued)
- --------------------------------------------------------------------------------
6. INCOME TAXES
The components of the provision (benefit) for income tax expenses for the
years ended December 31, 2001, 2000 and 1999 are as follows:
2001 2000 1999
Current tax expense $ 40,000
Deferred tax provision (benefit) 449,400 $(651,704) $ (1,075,781)
------- --------- ------------
$ 489,400 $(651,704) $ (1,075,781)
========= ========= ============
Income taxes for the years ended December 31, 2001, 2000 and 1999, differ
from the amount computed by applying the federal statutory corporate rate
to earnings before income taxes as summarized below:
2001 2000 1999
Provision (benefit) based on federal income
tax rate $ 441,265 $(588,831) $ (993,800)
State income taxes net of federal benefit 49,731 (66,362) (113,784)
Other (1,596) 3,489 31,803
------ ----- ------
$ 489,400 $(651,704) $ (1,075,781)
========= ========= ============
The components of net deferred income taxes at December 31, 2001 and 2000
are as follows:
2001 2000
Deferred income tax assets:
Net operating loss carryforwards $ 2,672,891 $ 3,436,983
Allowance for loan losses 1,477,424 1,166,025
Loan fees 84,549 40,988
AMT credits 52,530
Cash to accrual adjustment 77,950 112,757
Other 22,077
4,365,344 4,778,830
Deferred income tax liabilities:
Accumulated depreciation 116,121 165,309
Unrealized gain on investment securities 147,335 8,368
Other 85,102
348,558 173,677
Deferred income tax assets, net $ 4,016,786 $ 4,605,153
At December 31, 2001 and 2000, the Bank had tax net operating loss
carryforwards of approximately $7,098,000 and $9,429,000, respectively.
Such carryforwards expire as follows: $1,039,000 in 2006, $1,919,000 in
2007, $1,620,000 in 2008, $92,000 in 2009, $643,000 in 2018, $1,619,000 in
2019, and $167,000 in 2020. A change in ownership on August 4, 1998, as
defined in section 382 of the Internal
69
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Continued)
- --------------------------------------------------------------------------------
Revenue Code, limits the amount of net operating loss carryforwards
utilized each year to approximately $700,000. Unused limitations from each
year accumulate in successive years.
At December 31, 2001 and 2000, the Bank assessed its earnings history and
trends over the past three years, its estimate of future earnings, and the
expiration dates of the loss carryforwards and has determined that it is
more likely than not that the deferred tax assets will be realized.
Accordingly, no valuation allowance is recorded at December 31, 2001 and
2000.
7. DEPOSITS
Interest-bearing deposits at December 31 are summarized as follows:
2001 2000
Interest-bearing demand $ 19,164,133 $ 12,259,897
Regular savings 64,338,080 46,121,007
Money market accounts 6,342,009 2,795,661
Time $100,000 and over 194,016,109 116,824,179
Other time 67,489,519 85,273,577
---------- ----------
$ 351,349,850 $ 263,274,321
============= =============
At December 31, 2001, the scheduled maturities of time deposits are as
follows:
2002 $ 191,988,130
2003 28,430,179
2004 16,191,465
2005 7,604,292
2006 17,291,562
----------
Total $ 261,505,628
=============
8. OTHER BORROWED FUNDS
Other borrowed funds at December 31, 2001 and 2000 are summarized as
follows:
2001 2000
Treasury tax and loan deposits $ 2,214,692 $ 2,223,402
Federal Home Loan Bank advance, principal due upon
maturity on July 6, 2010, subject to early termination;
interest, due quarterly, is fixed at 5.90% 5,000,000 5,000,000
Federal Home Loan Bank advance, principal due upon
maturity on September 14, 2011, subject to early
termination; interest, due quarterly, is fixed at 4.80% 2,500,000
--------- ---------
$ 9,714,692 $ 7,223,402
=========== ===========
Treasury tax and loan deposits are generally repaid within one to 120 days
from the transaction date.
70
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Continued)
- --------------------------------------------------------------------------------
The Federal Home Loan Bank of Atlanta has the option to convert the
$2,500,000 advance outstanding at December 31, 2001 into a three-month
LIBOR-based floating rate advance September 14, 2006, and any payment date
thereafter with at least two business days prior notice to the Company.
If the Federal Home Loan Bank elects to convert the advance, then the
Company may elect, with at least two business days prior written notice,
to terminate in whole or part the transaction without payment of a
termination amount on any subsequent payment date. The Company may elect
to terminate the advance and pay a prepayment penalty, with two days prior
written notice, if the Federal Home Loan Bank does not elect to convert
this advance.
The Federal Home Loan Bank advances are secured by certain mortgage loans
receivable of approximately $25,182,000 at December 31, 2001.
9. COMMITMENTS
Leases - The Company has entered into certain noncancellable operating
leases and subleases for office space and office property. Lease terms are
generally for five to twenty years, and in many cases, provide for renewal
options. Rental expense for 2001, 2000 and 1999 was approximately
$705,000, $659,000 and $455,000, respectively. Rental income for 2001 and
2000 was approximately $45,000 and $55,000, respectively. There was no
rental income in 1999. Both rental expense and rental income are included
in net occupancy and equipment expense in the accompanying consolidated
statements of operations. The following is a schedule of future minimum
lease payments and future minimum lease revenues under the sublease at
December 31, 2001.
Payments for Revenue Under
Operating Leases Subleases
2002 $ 803,572 $ 45,300
2003 822,428 22,650
2004 600,782
2005 294,063
2006 299,748
Later years 1,455,186
------------ --------
$ 4,275,779 $ 67,950
============ ========
Federal Reserve Requirement - The Federal Reserve Board requires that
certain banks maintain reserves, based on their average deposits, in the
form of vault cash and average deposit balances at a Federal Reserve Bank.
The requirement as of December 31, 2001 and 2000 was approximately
$2,750,000 and $416,000, respectively.
Litigation - Various legal claims also arise from time to time in the
normal course of business which, in the opinion of management, will not
have a material effect on the Company's consolidated financial statements.
71
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Continued)
- --------------------------------------------------------------------------------
10. SHAREHOLDERS' EQUITY
Preferred Stock
On June 29, 2001 the Company issued 100,401 shares of Series B preferred
stock. On July 24, 2001, the Company issued an additional 1,882 shares of
Series B preferred stock. All Series B preferred shares were issued for
$68.00 per share through a private placement.
Conversion Rights - Each share of preferred stock is convertible into ten
shares of the Company's common stock at a price of $6.80 per share
(subject to adjustment for stock splits, stock dividends, etc.). The
preferred stock will be automatically converted to common stock upon the
following events:
1) change in control; 2) if the average closing price of the Company's
common stock for any 30 consecutive trading day period is at or above
$8.00 per share; or 3) the consummation of an underwritten public offering
at a price of $8.00 per share or greater of the Company's common stock.
Dividends - Cumulative cash dividends accrue at seven percent annually and
are payable quarterly in arrears.
Liquidation Preference - In the event of any liquidation, dissolution or
winding up of the affairs of the Company, the holders of Series B
preferred stock at that time shall receive $68.00 per share plus an amount
equal to accrued and unpaid dividends thereon through and including the
date of distribution prior to any distribution to holders of common stock.
The liquidation preference at December 31, 2001 was $7,077,962.
Warrants
In 1998, as part of a sale of 101 units to accredited foreign investors,
warrants to purchase 80,800 shares of Common Stock at $10.00 per share
were issued. Such warrants have been valued at an aggregate price of
approximately $165,000, or $2.04 per share, as determined by an
independent appraisal and have been recorded as additional paid-in
capital. The warrants are exercisable through February 3, 2008.
Stock Options
During 1994, the Bank's Board of Directors approved a Stock Option Plan
(the "Plan") for certain key officers, employees and directors whereby
300,000 shares of the Bank's common stock were made available through
qualified incentive stock options and non-qualified stock options. The
Plan specifies that the exercise price per share of common stock under
each option shall not be less than the fair market value of the common
stock on the date of the grant, except for qualified stock options granted
to individuals who own either directly or indirectly more than 10% of the
outstanding stock of the Bank. For qualified stock options granted to
those individuals owning more than 10% of the Bank's outstanding stock,
the exercise price shall not be less than 110% of the fair market value of
the common stock on the date of grant. Options issued under the Plan
expire ten years after the date of grant, except for qualified stock
options granted to more than 10% shareholders as defined above. For
qualified stock options granted to more than 10% shareholders, the
expiration date shall be five years from the date of grant or earlier if
specified in the option agreement.
72
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Continued)
- --------------------------------------------------------------------------------
On June 4, 1998, the Company adopted the 1998 Stock Option Plan (the "1998
Plan"), effective March 31, 1998, which provides for the grant of
incentive or non-qualified stock options to certain directors, officers
and key employees who participate in the plan. An aggregate of 900,000
shares of common stock are reserved for issuance pursuant to the 1998
Plan. During 1999, the Company granted stock options to purchase 98,350
shares of the Company's common stock at an exercise price of $10.00 per
share. During 2001 and 2000, the Company granted 62,650 and 277,900
options, respectively, at various exercise prices based on the fair value
of the stock at the time of grant.
If compensation cost for stock options granted in 2001, 2000 and 1999 was
determined based on the fair value at the grant date consistent with the
method prescribed by SFAS No. 123, the Company's net loss and loss per
share would have been adjusted to the pro forma amounts indicated below:
2001 2000 1999
Net income (loss)
As reported $558,348 $(1,080,153) $(1,847,160)
Pro forma 315,001 (1,361,588) (1,969,054)
Earnings (loss) per share - Basic
As reported 0.10 (0.19) (0.32)
Pro forma 0.06 (0.24) (0.34)
Earnings (loss) per share - Dilutive
As reported 0.10 (0.19) (0.32)
Pro forma 0.06 (0.24) (0.34)
Under SFAS No. 123, the fair value of each option is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for options granted in 2001, 2000 and
1999, respectively: dividend yield of 0%, expected volatility of 32.27%,
32.64% and 27.50%, risk-free interest rate of 4.57%, 6.44% and 4.30%, and
an expected life of 10 years.
A summary of the status of fixed stock option grants under the Company's
stock-based compensation plans as of December 31, 2001, 2000 and 1999, and
changes during the years ending on those dates is presented below:
2001 2000 1999
Weighted Average Weighted Average Weighted Average
Options Exercise Price Options Exercise Price Options Exercise Price
Outstanding -
Beginning of year 816,948 $ 8.76 561,848 $ 10.00 524,498 $ 10.00
Granted 62,650 6.52 277,900 6.37 98,350 10.00
Cancelled (29,250) 7.73 (22,800) 10.00 (60,000) 10.00
Exercised (1,000) 10.00
------- ------ ------- ------ ------- -------
Outstanding -
End of year 850,348 $ 8.63 816,948 $ 8.76 561,848 $ 10.00
======= ====== ======= ====== ======= =======
Options exercisable
at year end 652,291 $ 9.04 465,206 $ 9.39 387,491 $ 10.00
Weighted average fair
value of options
granted during the year $ 1.80 $ 1.94 $ 3.19
73
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Continued)
- --------------------------------------------------------------------------------
The following table summarizes information related to stock options
outstanding at December 31, 2001:
Weighted Weighted Weighted
Average Average Average
Exercise Options Remaining Exercise Options Exercise
Price Outstanding Life Price Exercisable Price
- --------------------- ----------------- --------------- --------------- ---------------- ---------------
$5.25 - 6.75 322,550 8.41 $ 6.40 174,713 $ 6.41
$ 10.00 527,798 6.70 $ 10.00 477,578 $ 10.00
11. RESTRICTION ON DIVIDENDS, LOANS AND ADVANCES
Federal and State bank regulations place certain restrictions on dividends
paid and loans or advances made by the Bank to the Company. The total
amount of dividends which may be paid at any date is generally limited to
the retained earnings of the Bank, and loans or advances are limited to 10
percent of the Bank's capital stock and surplus on a secured basis.
At December 31, 2001, the Bank's retained earnings available for the
payment of dividends was approximately $172,000. Accordingly,
approximately $43,838,000 of the Company's equity in the net assets of the
Bank was restricted at December 31, 2001. Funds available for loans or
advances by the Bank to the Company amounted to approximately $4,371,000.
In addition, dividends paid by the Bank to the Company would be prohibited
if the effect thereof would cause the Bank's capital to be reduced below
applicable minimum capital requirements.
12. FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK
The Company originates financial instruments with off-balance sheet risk
in the normal course of business, usually for a fee, primarily to meet the
financing needs of its customers. The financial instruments include
commitments to fund loans, letters of credit and unused lines of credit.
These commitments involve varying degrees of credit risk, however,
management does not anticipate losses upon the fulfillment of these
commitments.
At December 31, 2001, financial instruments having credit risk in excess
of that reported in the balance sheet totaled approximately $162,683,000.
13. TRUST PREFERRED SECURITIES
On December 18, 2001, the Company participated in a pooled trust preferred
offering. In connection with the transaction, the Company, through its
subsidiary trust, Florida Banks Statutory Trust I (the "Trust"), issued
$6,000,000 in trust preferred securities. The Trust also issued $186,000
of common securities to the Company and used the total proceeds to
purchase $6,186,000 in 30-year subordinated debentures of the Company. The
preferred securities pay dividends at an initial rate of 5.60% through
March 17, 2002. The rate then becomes a floating rate based on 3-month
LIBOR plus 3.60%, adjusted quarterly after each dividend payment date.
74
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Continued)
- --------------------------------------------------------------------------------
Dividend payment dates are March 18, June 18, September 18 and December 18
of each year. There is a par call option beginning December 18, 2006. The
subordinated debentures are the sole assets of the Trust and are
eliminated, along with the related income statement effects, in the
Company's consolidated financial statements.
14. SUPPLEMENTAL STATEMENTS OF CASH FLOWS INFORMATION
Supplemental disclosure of cash flow information:
2001 2000 1999
Cash paid during the year for interest
on deposits and borrowed funds $ 15,890,571 $ 12,121,206 $ 4,298,642
Supplemental schedule of noncash investing and financing activities:
2001 2000 1999
Proceeds from demand deposits used to
purchase shares of common stock under
the employee stock purchase plan $ 227,088 $ 367,153
Loans transferred to real estate owned $ 2,867,827 $ 846,000
Increase in fair market value of derivative
instruments used to hedge interest rate
exposure on time deposits $ 17,776
75
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Continued)
- --------------------------------------------------------------------------------
15. CONDENSED FINANCIAL INFORMATION OF FLORIDA BANKS, INC. (PARENT ONLY)
The following represents the parent only condensed balance sheets as of
December 31, 2001 and 2000 and the related condensed statements of
operations and cash flows for the years ending December 31, 2001, 2000 and
1999.
Condensed Balance Sheets 2001 2000
Assets
Cash and repurchase agreements $ 1,315,647 $ 2,005,965
Available for sale investment securities, at
fair value (cost $6,204,759 and $11,979,600, respectively) 6,386,271 12,091,155
Loans
Commercial 976,047
Commercial real estate 98,713
------------ -----------
Total loans 1,074,760
Allowance for loan losses (10,000)
------------ -----------
Net loans 1,064,760
Premises and equipment, net 221,220 224,220
Accrued interest receivable 38,903 80,053
Deferred income taxes, net 1,105,521 583,115
Prepaid and other assets 225,578 132,803
Investment in bank subsidiary 43,931,579 32,590,327
Investment in other subsidiaries 195,366 9,521
------------ -----------
Total Assets $ 53,420,085 $ 48,781,919
============ ============
Liabilities and Shareholders' Equity
Subordinated debentures payable to subsidiary trust $ 6,005,000
Repurchase agreements 1,000,000 $ 10,143,000
Due to Florida Bank N.A. 92,318
Accounts payable and accrued expenses 180,733 82,480
Shareholders' Equity
Preferred stock 6,955,244
Common stock 59,799 59,298
Additional paid-in capital 46,828,142 46,750,329
Treasury stock (1,866,197) (1,506,836)
Accumulated deficit (6,079,156) (6,760,222)
Accumulated other comprehensive income,
net of tax 244,202 13,870
------------ -----------
Total Liabilities and Shareholders' Equity $ 53,420,085 $ 48,781,919
============ ============
76
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Continued)
- --------------------------------------------------------------------------------
Condensed Statements of Operations 2001 2000 1999
Interest income on loans, including fees $ 18,719 $ 434,389 $ 385,755
Interest income on investment securities 666,051 847,440 293,273
Other interest income 80,748 241,941 651,788
Other income 436,948 27 42
---------- ------------ ------------
Total income 1,202,466 1,523,797 1,330,858
---------- ------------ ------------
Equity in undistributed income (loss) of bank subsidiary 1,654,552 (539,611) (1,289,184)
Equity in undistributed loss of subsidiary (155) (479)
Expenses (2,557,156) (2,389,988) (2,063,983)
Income tax benefit 508,732 326,128 175,149
---------- ------------ ------------
Net income (loss) $ 808,439 $ (1,080,153) $ (1,847,160)
========== ============ ============
Condensed Statements of Cash Flows 2001 2000 1999
Operating activities:
Net income (loss) $ 808,439 $ (1,080,153) $ (1,847,160)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Equity in undistributed (income) loss of
Florida Bank, N.A. (1,654,552) 539,611 1,289,184
Equity in loss of Florida Bank Financial Services, Inc. 155 479
Depreciation and amortization 65,353 60,177 37,289
Deferred income tax benefit (548,731) (326,128) (175,149)
Loss on disposal of premises and equipment 1,597
Gain on sale of investment securities (73,988) (5,174) (42,250)
(Accretion) amortization of discounts/premiums
on investments, net (16,687) (20,957) 47,338
(Benefit) provision for loan losses (10,000) (64,411) 74,411
Amortization of loan premiums 1,225 45,685 3,043
Decrease (increase) in accrued interest receivable 41,150 32,451 (84,574)
Decrease in due from Florida Bank, N.A. 898
Increase in due to Florida Bank, N.A. 92,318 32,941 11,470
Increase in prepaid and other assets (92,775) (88,899) (43,904)
Increase (decrease) in accounts payable and
accrued expenses 98,253 (241,388) (2,355)
---------- ------------ ------------
Net cash used in operating activities (1,289,840) (1,114,169) (731,759)
---------- ------------ ------------
Investing activities:
Purchase of premises and equipment (62,353) (35,650) (250,822)
Proceeds from sales, paydowns and maturities
of investment securities 5,865,516 5,264,240 4,929,200
Purchase of investment securities (7,441,787) (8,837,534)
Net decrease (increase) in loans 1,073,535 6,657,377 (1,854,824)
Purchase of common stock of Florida Bank
Statutory Trust I (186,000)
Purchase of common stock of Florida Bank
Financial Services, Inc. (10,000)
Capital contributed to Florida Bank, N.A. (9,500,000) (12,300,000) (4,000,000)
---------- ------------ ------------
Net cash used in financing activities (2,809,302) (7,865,820) (10,013,980)
---------- ------------ ------------
(Continued)
77
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Continued)
- --------------------------------------------------------------------------------
2001 2000 1999
Financing activities:
(Decrease) increase in repurchase agreements $ (9,143,000) $ 4,085,000 $ 6,058,000
Proceeds from issuance of common stock, net 227,088 367,153
Proceeds from the issuance of preferred stock, net 6,806,470
Proceeds from the issuance of subordinated debt, net 6,005,000
Preferred dividends paid (127,373)
Net proceeds from the exercise of stock options 10,000
Purchase of treasury stock (359,361) (647,992) (858,844)
Net cash provided by financing activities 3,408,824 3,804,161 5,209,156
Net decrease in cash and cash equivalents (690,318) (5,175,828) (5,536,583)
Cash and cash equivalents at beginning of period 2,005,965 7,181,793 12,718,376
Cash and cash equivalents at end of period $ 1,315,647 $ 2,005,965 $ 7,181,793
(Concluded)
16. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could
have a direct material effect on the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations)
to risk-weighted assets (as defined), and of Tier I capital (as defined)
to average assets (as defined). Management believes, as of December 31,
2001, that the Bank meets all capital adequacy requirements to which it is
subject.
As of December 31, 2001 and 2000, notifications from the Office of the
Comptroller of the Currency categorized the Bank as well capitalized under
the regulatory framework for prompt corrective action. To be categorized
as adequately or well capitalized the Bank must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in
the table. There are no conditions or events since that notification that
management believes have changed the institution's category. The Company's
and
78
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Continued)
- --------------------------------------------------------------------------------
Bank's actual capital amounts and ratios are also presented in the
following table.
To be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 2001:
Total capital
(to risk-weighted assets)
Florida Banks, Inc. $ 55,800,000 12.70 % > $ 35,152,000 > 8.00 % N/A N/A
Florida Bank, N.A. 47,963,000 11.00> 34,897,000 > 8.00 > $ 43,622,000 > 10.00 %
Tier I capital
(to risk-weighted assets)
Florida Banks, Inc. 51,108,000 11.63> 17,576,000 > 4.00 N/A N/A
Florida Bank, N.A. 43,271,000 9.9> 17,449,000 > 4.00 > 26,173,000 > 6.00
Tier I capital
(to average assets)
Florida Banks, Inc. 51,108,000 10.64> 19,216,000 > 4.00 N/A N/A
Florida Bank, N.A. 43,271,000 9.1> 18,883,000 > 4.00 > 23,604,000 > 5.00
To be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 2000:
Total capital
(to risk-weighted assets)
Florida Banks, Inc. $ 39,050,000 12.73% > $ 24,542,000 > 8.00% N/A N/A
Florida Bank, N.A. 33,791,000 11.52 > 23,464,000 > 8.00 > $ 29,330,000 > 10.00 %
Tier I capital
(to risk-weighted assets)
Florida Banks, Inc. 35,529,000 11.58 > 12,271,000 > 4.00 N/A N/A
Florida Bank, N.A. 30,290,000 10.33 > 11,732,000 > 4.00 > 17,598,000 > 6.00
Tier I capital
(to average assets)
Florida Banks, Inc. 35,529,000 10.28 > 13,828,000 > 4.00 N/A N/A
Florida Bank, N.A. 30,290,000 9.2 > 13,112,000 > 4.00 > 16,390,000 > 5.00
79
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Continued)
- --------------------------------------------------------------------------------
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating financial instrument fair values:
General Comment - The financial statements include various estimated fair
value information as required by SFAS No. 107, Disclosures about Fair
Value of Financial Instruments. Such information, which pertains to the
Company's financial instruments is based on the requirements set forth in
SFAS 107 and does not purport to represent the aggregate net fair value of
the Company. Furthermore, the fair value estimates are based on various
assumptions, methodologies and subjective considerations, which vary
widely among different financial institutions and which are subject to
change.
Cash and Cash Equivalents - Cash and due from banks, federal funds sold
and repurchase agreements are repriced on a short-term basis; as such, the
carrying value closely approximates fair value.
Investment Securities - Fair values for available for sale and held to
maturity securities are based on quoted market prices, if available. If
quoted market prices are not available, fair values are based on quoted
market prices of comparable instruments.
Other Investment Securities - Fair value of the Bank's investment in
Federal Reserve Bank stock and Federal Home Loan Bank stock is based on
its redemption value, which is its cost of $100 per share.
Loans - For variable rate loans that reprice frequently, the carrying
amount is a reasonable estimate of fair value. The fair value of other
types of loans is estimated by discounting the future cash flows using the
current rates at which similar loans would be made to borrowers with
similar credit ratings for the same remaining maturities.
Derivative Instruments - Fair values of derivative instruments are based
on quoted market prices, if available. If quoted market prices are not
available, fair values are determined based on a cash flow model using
market assumptions.
Deposits - The fair value of demand deposits, savings deposits and certain
money market deposits is the amount payable on demand at the reporting
date. The fair value of fixed rate certificates of deposit is estimated
using a discounted cash flow calculation that applies interest rates
currently being offered to a schedule of aggregated expected monthly time
deposit maturities.
Repurchase Agreements - The carrying amounts of repurchase agreements
approximates the estimated fair value of such liabilities due to the short
maturities of such instruments.
Other Borrowed Funds - For treasury tax and loan deposits, the carrying
amount approximates the estimated fair value of such liabilities due to
the short maturities of such instruments. The fair value of the Federal
Home Loan Bank advances are based on quoted market prices.
80
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Continued)
- --------------------------------------------------------------------------------
A comparison of the carrying amount to the fair values of the Company's
significant financial instruments as of December 31, 2001 and 2000 is as
follows:
2001 2000
------------------------------ ------------------------------
Carrying Fair Carrying Fair
(Amounts in Thousands) Amount Value Amount Value
Financial assets:
Cash and cash equivalents $ 73,989 $ 73,989 $ 43,688 $ 43,688
Available for sale investment securities 33,954 33,954 32,062 32,062
Held to maturity investment securities 2,867 2,934 3,429 3,487
Other investments 2,065 2,065 1,266 1,266
Loans 401,663 427,211 285,624 271,268
Derivative instruments 280 280
Financial liabilities:
Deposits $ 451,249 $ 453,684 $ 305,239 $ 305,382
Repurchase agreements 4,496 4,496 18,812 18,812
Other borrowed funds 9,715 9,273 7,223 7,013
Off-balance sheet credit related financial instruments:
Commitment to extend credit $ 162,683 $ 162,683 $ 109,118 $ 109,118
18. QUASI-REORGANIZATION
Effective December 31, 1995, the Bank completed a quasi-reorganization of
its capital accounts. A quasi-reorganization is an accounting procedure
provided for under current banking regulations that allows a bank to
restructure its capital accounts to remove a deficit in undivided profits
without undergoing a legal reorganization. A quasi-reorganization allows a
bank that has previously suffered losses and subsequently corrected its
problems to restate its records as if it had been reorganized. A
quasi-reorganization is subject to regulatory approval and is contingent
upon compliance with certain legal and accounting requirements of the
banking regulations. The Bank's quasi-organization was authorized by the
Office of the Comptroller of the Currency upon final approval of the Bank's
shareholders which was granted November 15, 1995.
As a result of the quasi-reorganization, the Bank charged against
additional paid-in capital its accumulated deficit through December 31,
1995 of $8,134,037.
81
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Continued)
- --------------------------------------------------------------------------------
19. EARNINGS PER COMMON SHARE
Earnings per common share have been computed based on the following.
2001 2000 1999
----------------- ------------------ ------------------
Net income (loss) $ 808,439 $ (1,080,153) $ (1,847,160)
Less preferred stock dividends (250,091)
-------------
Net income (loss) applicable to common stock $ 558,348 $ (1,080,153) $ (1,847,160)
============= =============== ===============
Weighted average number of common
shares outstanding - Basic 5,703,524 5,681,290 5,829,937
Incremental shares from the assumed
conversion of stock options 2,738 583
------------- --------------- ---------------
Total - Diluted 5,706,262 5,681,873 5,829,937
============= =============== ===============
The incremental shares from the assumed conversion of stock options were
determined using the treasury stock method under which the assumed proceeds
were equal to (1) the amount that the Company would receive upon the
exercise of the options plus (2) the amount of the tax benefit that would
be credited to additional paid-in capital assuming exercise of the options.
The convertible preferred stock was determined to be anti-dilutive and is
therefore excluded from the computation of diluted earnings per share.
20. BENEFIT PLAN
The Company has a 401(k) defined contribution benefit plan (the "Plan")
which covers substantially all of its employees. The Company matches 50% of
employee contributions to the Plan, up to 6% of all participating employees
compensation. The Company contributed $136,000, $110,092 and $63,055 to the
Plan in 2001, 2000 and 1999, respectively.
21. EMPLOYEE STOCK PURCHASE PLAN
On January 22, 1999, the Board of Directors of the Company adopted the
Employee Stock Purchase Plan (the "Plan"). The Plan was approved by the
Company's shareholders at the Company's 1999 Annual Meeting of Shareholders
on April 23, 1999. The Plan provides for the sale of not more than 200,000
shares of common stock to eligible employees of the Company pursuant to one
or more offerings under the Plan. The purchase price for shares purchased
pursuant to the Plan is the lesser of (a) 85% of the fair market value of
the common stock on the grant date, or if no shares were traded on that
day, on the last day prior thereto on which shares were traded, or (b) an
amount equal to 85% of the fair market value of the common stock on the
exercise date, or if no shares were traded on that day, on the last day
prior thereto on which shares were traded. Shares purchased by employees
were approximately 93,000 and 76,000 for the years ended December 31, 2001
and 2000, respectively. For the year ended December 31, 1999, there were no
purchases of common stock pursuant to the Plan.
82
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Continued)
- --------------------------------------------------------------------------------
22. RELATED PARTY TRANSACTIONS
The Company lends to shareholders, directors, officers, and their related
business interests on substantially the same terms as loans to other
individuals and businesses of comparable credit worthiness. Such loans
outstanding were approximately $1,274,000 and $1,222,000 at December 31,
2001 and 2000. During the year ended December 31, 2001, such shareholders,
directors, officers and their related business interest borrowed
approximately $1,657,000 from the Company and repaid approximately
$1,605,000.
Deposits from related parties held by the Company at December 31, 2001 and
2000 were approximately $489,000 and $872,000, respectively.
23. SUMMARIZED QUARTERLY DATA (UNAUDITED)
Following is a summary of the quarterly results of operations for the years
ended December 31, 2001 and 2000:
Fiscal Quarter
--------------------------------------------------
First Second Third Fourth Total
$ In Thousands Except Per Share Amounts
2001
Interest income $ 7,757 $ 7,538 $ 8,022 $ 8,063 $ 31,380
Interest expense 4,434 4,198 4,072 3,844 16,548
------ ------ ------ ------ ------
Net interest income 3,323 3,340 3,950 4,219 14,832
Provision for loan losses 239 384 820 446 1,889
---- ---- ---- ---- -----
Net interest income after provision
for loan losses 3,084 2,956 3,130 3,773 12,943
Noninterest income 319 403 591 735 2,048
Noninterest expense 3,307 3,257 3,367 3,763 13,694
------ ------ ------ ------ ------
Income before income taxes 96 102 354 745 1,297
Income tax expense 35 39 134 281 489
--- --- ---- ---- ---
Net income 61 63 220 464 808
Preferred stock dividends 127 123 250
---- ---- ---
Net income applicable to
common shares $ 61 $ 63 $ 93 $ 341 $ 558
===== ===== ===== ====== =====
Basic income per share $ 0.01 $ 0.01 $ 0.02 $ 0.06 $ 0.10
Diluted income per share $ 0.01 $ 0.01 $ 0.02 $ 0.06 $ 0.10
83
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Concluded)
- --------------------------------------------------------------------------------
Fiscal Quarter
--------------------------------------------------
First Second Third Fourth Total
$ In Thousands Except Per Share Amounts
2000
Interest income $ 4,480 $ 5,836 $ 6,351 $ 7,099 $ 23,766
Interest expense 2,375 3,292 3,849 4,195 13,711
------ ------ ------ ------ ------
Net interest income 2,105 2,544 2,502 2,904 10,055
Provision for loan losses 370 339 877 326 1,912
---- ---- ---- ---- -----
Net interest income after provision
for loan losses 1,735 2,205 1,625 2,578 8,143
Noninterest income 151 202 252 406 1,011
Noninterest expense 2,562 2,791 2,639 2,894 10,886
------ ------ ------ ------ ------
Loss before income taxes (676) (384) (762) 90 (1,732)
Benefit for income taxes (259) (139) (287) (33) (652)
------ ------ ------ ----- -----
Net loss $ (417) $ (245) $ (475) $ 57 $ (1,080)
======== ======== ======== ===== =========
Basic loss per share $ (0.07) $ (0.04) $ (0.08) $ 0.01 $ (0.19)
Diluted loss per share $ (0.07) $ (0.04) $ (0.08) $ 0.01 $ (0.19)
* * * * * *
84
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------- ------------------------------------------------------------------
Financial Disclosure.
---------------------
There has been no occurrence requiring a response to this Item.
85
PART III
Item 10. Directors and Executive Officers of the Registrant.
- -------- ---------------------------------------------------
The information relating to directors and executive officers of the Company
contained in the Company's definitive proxy statement to be delivered to
shareholders in connection with the 2002 Annual Meeting of Shareholders
scheduled to be held May 31, 2002 is incorporated herein by reference.
Item 11. Executive Compensation.
- -------- -----------------------
The information relating to executive compensation contained in the Company's
definitive proxy statement to be delivered to shareholders in connection with
the 2002 Annual Meeting of Shareholders scheduled to be held May 31, 2002 is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- -------- ---------------------------------------------------------------
The information relating to security ownership of certain beneficial owners and
management contained in the Company's definitive proxy statement to be delivered
to shareholders in connection with the 2002 Annual Meeting of Shareholders
scheduled to be held May 31, 2002 is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
- -------- -----------------------------------------------
The information relating to related party transactions contained in the
registrant's definitive proxy statement to be delivered to shareholders in
connection with the 2002 Annual Meeting of Shareholders scheduled to be held May
31, 2002 is incorporated herein by reference.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
- -------- ----------------------------------------------------------------
(a) 1. Financial Statements. The following financial statements and
accountants' reports have been filed as Item 8 in Part II of this Report:
Report of Independent Public Accountants
Consolidated Balance Sheets - December 31, 2001 and 2000
Consolidated Statements of Operations - Years ended December 31, 2001, 2000
and 1999
Consolidated Statements of Shareholders' Equity - Years ended December 31,
2001, 2000 and 1999
Consolidated Statements of Cash Flows - Years ended December 31, 2001, 2000
and 1999
Notes to Consolidated Financial Statements
2. Exhibits.
---------
Exhibit
Number Description of Exhibits
------ -----------------------
*3.1 - Articles of Incorporation of the Company, as amended
*3.1.1 - Second Amended and Restated Articles of Incorporation
*3.1.2 - Amendment to Second Amended and Restated Articles of
Incorporation
*3.2.1 - Amended and Restated By-Laws of the Company
*4.1 - Specimen Common Stock Certificate
86
*4.2 - See Exhibits 3.1.1 and 3.2.1 for provisions of the
Articles of Incorporation and By-Laws of the Company
defining rights of the holders of the Company's Common
Stock
*10.1 - Form of Employment Agreement between the Company and
Charles E. Hughes, Jr.
*10.2 - The Company's 1998 Stock Option Plan
*10.2.1 - Form of Incentive Stock Option Agreement
*10.2.2 - Form of Non-qualified Stock Option Agreement
*10.3 - Form of Employment Agreement between the Company and T.
Edwin Stinson, Jr., Don D. Roberts and Richard B. Kensler
**21.1 - Subsidiaries of the Registrant
**23.1 - Consent of Deloitte & Touche LLP
(b) Reports on Form 8-K.
* Incorporated by reference to the Company's Registration Statement on Form S-1,
Commission File No. 333-5087
** Filed herewith
87
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, in the City of Jacksonville, State
of Florida on March 22, 2002.
FLORIDA BANKS, INC.
By: /s/ Charles E. Hughes, Jr.
---------------------
Charles E. Hughes, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Charles E. Hughes, Jr. President, Chief Executive March 22, 2002
- --------------------------
Charles E. Hughes, Jr. Officer and Director (Principal
Executive Officer)
/s/ T. Edwin Stinson, Jr. Chief Financial Officer, March 22, 2002
- -------------------------
T. Edwin Stinson, Jr. Secretary, Treasurer and
Director (Principal Financial
and Accounting Officer)
/s/ M.G. Sanchez Chairman of the Board March 22, 2002
- ----------------
M. G. Sanchez
/s/ T. Stephen Johnson Vice-Chairman of the Board March 22, 2002
- ----------------------
T. Stephen Johnson
/s/ Clay M. Biddinger Director March 22, 2002
- ---------------------
Clay M. Biddinger
/s/ P. Bruce Culpepper Director March 22, 2002
- ----------------------
P. Bruce Culpepper
/s/ J. Malcolm Jones, Jr. Director March 22, 2002
- -------------------------
J. Malcolm Jones, Jr.
/s/ W. Andrew Krusen, Jr. Director March 22, 2002
- -------------------------
W. Andrew Krusen, Jr.
/s/ Nancy E. LaFoy Director March 22, 2002
- ------------------
Nancy E. LaFoy
March 22, 2002
/s/ Wilford C. Lyon, Jr. Director
- ------------------------
Wilford C. Lyon, Jr.
/s/ David McIntosh Director March 22, 2002
- ------------------
David McIntosh
88
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------ ----------------------
21.1 Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche
LLP