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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Fiscal Year Ended December 31, 2002
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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
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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
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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]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes No X
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The aggregate market value of the common stock of the registrant held by
nonaffiliates of the registrant (5,903,489 shares) on June 28, 2002 was
approximately $48,703,784, based on the closing price of the registrant's common
stock as reported on the NASDAQ National Market on June 28, 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 February 26, 2003, there were 6,783,603 shares of $.01 par value common
stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
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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 22, 2003 are incorporated by reference in response
to Part III of this Report.
Table of Contents
Part I
Item 1. Business..................................................... Page 3
Item 2. Properties .................................................. Page 16
Item 3. Legal Proceedings ........................................... Page 17
Item 4. Submission of Matters to a Vote of Security Holders ......... Page 17
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters ......................................... Page 18
Item 6. Selected Financial Data ..................................... Page 20
Item 7. Management's discussion and Analysis of Financial
Condition and Results of Operations ......................... Page 22
Item 7A Quantitative and Qualitative Disclosures about
Market Risk ............................................... Page 55
Item 8. Financial Statements and Supplementary Data ................. Page 56
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.......................... Page 56
Part III
Item 10. Directors and Executive Officers of the Registrant .......... Page 56
Item 11. Executive Compensation ...................................... Page 56
Item 12. Security Ownership of Certain Beneficial Owners
and Management ............................................. Page 56
Item 13. Certain Relationships and Related Transactions .............. Page 56
Part IV
Item 14. Controls and Procedures ..................................... Page 56
Item 15. Exhibits, Financial Statements and Reports on Form
8-K ........................................................ Page 57
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, and a loan production office in
West Palm Beach. Future business plans include expansion of the loan production
office in West Palm Beach into a full service community banking office and entry
into the market of Orlando (the "Identified Market"). As opportunities arise,
the Company may also expand into other Florida market areas with demographic
characteristics similar to the Identified Market. Within the Identified Market,
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 Market. Once local management teams are identified, the
Company intends to establish community banking offices in the remaining
Identified Market. 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 Market and possibly other
Florida market areas.
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.
In the fourth quarter of 2002, the Bank started a mortgage banking division
which is managed as a segment. Accordingly, beginning in 2002, the Company has
two reporting segments, the commercial bank and the mortgage bank. For more
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details on segment disclosures, please see Note 21 - Segment Reporting in the
Notes to the Consolidated Financial Statements.
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 Market when 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 community banking office(s)
located within each market operates 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. Certain members of the local boards may
serve as members of the Board of Directors of the Bank. 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
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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
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, Ocala/Marion County and
West Palm Beach 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.
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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
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 Company has established a loan production office in
West Palm Beach. The other market into which the Company presently intends to
expand is Orlando. Management has identified the Orlando and Greater Palm Beach
markets as providing the most favorable opportunities for growth and intends to
establish full-service 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, 2002, the Bank has established an internal
limit for loans of up to $7.4 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
6
measures as advance rate, cash flow, collateral value and other appropriate
credit factors. See "--Operations of the Holding Company--Credit
Administration."
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.
Loans Held for Sale. In the fourth quarter of 2002, the Bank's newly
established wholesale mortgage division commenced operations. This division
originates residential mortgage loans through its network of independent
mortgage brokers, and sells them in the secondary mortgage market. Loans
held for sale at December 31, 2002 consist entirely of these residential
mortgage loans.
Deposits. The Bank offers a broad range of interest-bearing and
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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
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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.
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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
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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
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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
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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
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
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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
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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
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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.
Investment Advisory and Insurance Services. Beginning in 2003, the Company
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plans to offer, through its financial services subsidiary, certain alternative
investment products. These include equities, fixed-income products, equity and
bond mutual funds, unit investment trusts, life insurance policies, and, to the
extent permitted by applicable regulations, fixed and variable annuities. This
program expands the Bank's offering of financial products in response to demand
from customers seeking to satisfy their financial service needs in one place.
Other Products and Services. The Bank intends to evaluate other services,
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such as trust services 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
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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.
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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
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.
9
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
adequate for its business expansion plans. See "Item 7, Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Employees
The Company and the Bank presently employ a combined total of 179 persons
on a full-time basis and 12 persons on a part-time basis. The Company and the
Bank will hire additional persons as needed to support its growth, including
additional tellers and financial service representatives.
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
10
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
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
11
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.
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.
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
12
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.
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
13
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.
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.
Nonbanking Subsidiaries
The Company has the following directly and wholly-owned nonbanking
subsidiaries that are currently active: Florida Banks Statutory Trust I, a
Connecticut business trust, issued $6 million in trust preferred securities in
2001, which are guaranteed by the Company. Florida Banks Capital Trust II, a
Delaware business trust, issued $4 million in trust preferred securities in
2002, which are guaranteed by the Company. Florida Banks Capital Trust I, a
Delaware business trust, issued $4 million in trust preferred securities in
2002, which are guaranteed by the Company. Florida Banks Statutory Trust II, a
Connecticut business trust, issued $3 million in trust preferred securities in
2002, which are guaranteed by the Company.
On February 21, 2003, the Company formed FLBK Foundation, Inc. (the
"Foundation"), a Florida nonprofit corporation, for the purpose of making grants
to tax-exempt charitable organizations. The board of the Foundation will consist
of affiliates of the Company. On March 7, 2003, the Foundation filed for
recognition of exemption under section 501(C)(3) of the Internal Revenue Code.
The Foundation has not yet engaged in any grants or other activities.
14
Availability of Reports and Other Information
Our corporate website is http://www.flbk.com. We make available on this
website, free of charge, access to our Annual Report on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statement on Schedule
14A and amendments to those materials filed or furnished pursuant to Section
13(a) or 15(d) of the Securities and Exchange Act of 1934 as soon as reasonably
practicable after we electronically submit such material to the Securities and
Exchange Commission. In addition, the Commission's website is
http://www.sec.gov. The Commission makes available on its website, free of
charge, reports, proxy and information statements, and other information
regarding issuers, such as us, that file electronically with the Commission.
Information provided on our website or on the Commission's website is not part
of this Annual Report on Form 10-K.
15
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 seven 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.
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.
Palm Beach Gardens Loan Production Office
7108 Airway Drive, Suite 225
Palm Beach Gardens, Florida 33418
Facilities: Leased 1,400 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.
16
Additional information concerning the property owned or leased by the Company
and its subsidiaries is incorporated herein by reference from Note 4 of the
Notes to the Consolidated Financial Statements included in Item 8 of this Form
10-K.
Item 3. Legal Proceedings
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, 2002
to a vote of security holders of the Company.
17
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 sales 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, 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
Fiscal year ended December 31, 2002
First Quarter $8.900 $5.900
Second Quarter 9.640 7.410
Third Quarter 9.000 7.270
Fourth Quarter 8.968 7.580
As of December 31, 2002, there were approximately 224 holders of record of
the Common Stock. Management of the Company believes that there are in excess of
2,800 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 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, 2003, 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, 2003, no shares had been repurchased under the
Rule 10b-18 program.
Equity Compensation Plans
The Company maintains the 1998 Stock Option Plan (the "1998 Plan"), the
Employee Stock Purchase Plan (the "ESPP") and the Amended and Restated Incentive
Compensation Plan (the "Incentive Plan"). Only restricted common stock is
awarded under the Incentive Plan.
The following table gives information about equity awards under the 1998
Plan, the Incentive Plan and the ESPP as of December 31, 2002:
18
Number of Securities
Number of Shares Weighted Average remaining available for
to be issued upon the Exercise Price of future issuance under
Exercise of Outstanding Outstanding Options, Equity Compensation
Plan Category Options, Warrants and Rights Warrants and Rights Plans
- ------------- ---------------------------- ------------------- -----
Equity Compensation Plans 14,842 (1) $6.87 (2) 258,892 (3)
approved by the shareholders
Equity Compensation Plans
not approved by the
shareholders 904,098 (4) $8.68 87,442
--------------------------- ------------------------ ------------------------
TOTALS 918,940 $8.65 346,334
(1) Represents an aggregate of 14,842 common shares issuable upon exercise of
options under the ESPP.
(2) Represents weighted-average exercise price of outstanding options under the
ESPP.
(3) Includes 17,921 common shares and 240,971 common shares remaining available
for issuance under the ESPP and the Incentive Plan, respectively.
(4) Represents the aggregate of common shares issuable upon exercise of options
under the 1998 Plan.
(5) Represents weighted-average exercise price of outstanding options under the
1998 Plan.
(6) Represents common shares remaining available under the 1998 Plan.
Series C Preferred Stock
On December 31, 2002, the Company received $5 million in gross proceeds
from a private placement of 50,000 shares of Series C Preferred Stock at a price
of $100.00 per share to an institutional investor. Series C shares are
non-convertible. Non-cumulative cash dividends accrue at five percent annually
and are payable quarterly in arrears. During the first quarter of 2003, the
institutional investor and the Company intend to consider an exchange of Series
C Preferred shares for shares of a new series of preferred stock, which would be
substantially similar to the Series C Preferred shares, except the new shares
would be convertible into the Company's common stock at $10.00 per share. Any
such change would be subject to necessary regulatory approvals. The sale of the
Series C Preferred Stock was made in reliance on an exemption from registration
under the Securities Act of 1933 provided in Regulation D and Section 4(2)
thereunder. With respect to such reliance, certain inquiries were made by the
Company and certain representations and warranties were received by the investor
to establish that such exemption was available.
19
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
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, 2002, 2001,
2000, 1999 and 1998 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,
--------------------------------------------------
2002 2001 2000 1999 1998
(Dollars in thousands except per share amounts)
Summary Income Statement:
Interest income $ 34,927 $ 31,380 $ 23,766 $ 11,142 $ 5,413
Interest expense 15,584 16,548 13,711 4,696 2,436
----- ----- ----- ----- -----
Net interest income 19,343 14,832 10,055 6,446 2,977
Provision for loan losses 3,026 1,889 1,912 1,610 629
----- ----- ----- ----- -----
Net interest income after
provision for loan losses 16,317 12,943 8,143 4,836 2,348
Noninterest income 4,040 2,048 1,011 583 613
Noninterest expense (1) 18,005 13,693 10,886 8,342 7,903
----- ----- ----- ----- -----
Income (loss) before provision for
income taxes 2,352 1,298 (1,732) (2,923) (7,943)
Provision (benefit) for income taxes 885 490 (652) (1,076) (350)
----- ----- ----- ----- -----
Net income (loss) 1,467 808 (1,080) (1,847) (4,593)
----- ----- ----- ----- -----
Preferred stock dividends 140 250 - - -
----- ----- ----- ----- -----
Net income (loss) applicable to common
shares $ 1,327 $ 558 $ (1,080) $ (1,847) $ (4,593)
1,327 558 (1,080 (1,847 (4,593
Earnings (loss) per common share:
Basic $ 0.21 $ 0.10 $ (0.19) $ (0.32) $ (1.46)
Diluted 0.20 0.10 (0.19) (0.32) (1.46)
(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.
20
At December 31,
---------------------------------------------------------
2002 2001 2000 1999 1998
----- ----- ---- ---- ----
(Dollars in Thousands)
Summary Balance Sheet Data:
Investment securities $ 53,652 $ 38,886 $36,756 28,511 22,242
Loans held for investment, net of deferred loan fees 550,455 401,444 285,526 157,517 67,131
Loans held for sale 54,674 - - - -
Earning assets 721,296 494,987 353,239 205,898 106,022
Total assets 756,066 522,323 372,797 218,163 113,566
Noninterest-bearing deposits 141,395 99,899 41,965 22,036 11,840
Total deposits 664,910 451,249 305,239 159,106 64,621
Other borrowed funds 14,576 14,210 26,035 18,279 5,718
Total shareholders' equity 52,964 46,142 38,556 39,235 42,588
Performance Ratios:
Net interest margin (1) 3.33% 3.62% 3.58% 4.57% 4.28%
Efficiency ratio (2) 77.00 81.12 98.37 118.68 220.18
Return on average assets 0.22 0.13 (0.36) (1.07) (5.42)
Return on average equity 2.79 1.30 (2.83) (3.12) (16.54)
Asset Quality Ratios:
Allowance for loan losses to total loans held for investment 1.32% 1.17% 1.23% 1.18% 1.60%
Non-performing loans to total loans held for investment 0.25 0.36 1.44 1.46 2.80
Net charge-offs to average loans held for investment 0.09 0.21 0.12 0.80 0.09
Capital and Liquidity Ratios:
Total capital to risk-weighted assets 11.92% 12.70% 12.73% 18.19% 63.25%
Tier 1 capital to risk-weighted assets 10.78 11.63 11.58 17.29 61.59
Tier 1 capital to average assets 9.97 10.64 10.28 20.01 36.44
Average loans to average deposits 97.21 99.03 94.90 101.53 81.04
Average equity to average total assets 7.79 9.96 12.80 34.30 32.80
- --------------------------------------------------
(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.
21
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
The Company and its representatives may from time to time make written or oral
statements that are "forward-looking" and provide other than historical
information, including statements contained in the Form 10-K, the Company's
other filings with the Securities and Exchange Commission or in communications
to its shareholders. These statements involve known and unknown risks,
uncertainties and other factors that may cause actual results to be materially
different from any results, levels of activity, performance or achievements
expressed or implied by any forward-looking statement. These factors include,
among other things, the risk factors listed below.
In some case, the Company has identified forward-looking statements by such
words or phrases as "will likely result," "is confident that," "expects,"
"should," "could," "may," "will continue to," "believes," "anticipates,"
"predicts," "forecasts," "estimates," "projects," "potential," "intends" or
similar expressions identifying "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995, including the negative
of those words and phrases. These forward-looking statements are based on
management's current views and assumptions regarding future events, future
business conditions and the outlook for the Company based on currently available
information. These forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
expressed in, or implied by, these statements. The Company wishes to caution
readers not to place undue reliance on any such forward-looking statements,
which speak only as of the date made.
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company is hereby identifying important
factors that could affect the Company's financial performance and could cause
the Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current
statements. Among the factors that could have an impact on the Company's ability
to achieve operating results and growth plan goals are:
o Management's ability to reduce and effectively manage interest rate risk
and the impact of interest rates in general on the volatility of the
Company's net interest income;
o Fluctuations in the value of the Company's investment securities;
o The ability to attract and retain senior management experienced in banking
and financial services;
o The sufficiency of allowances for possible loan losses to absorb the amount
of actual future losses inherent in the existing portfolio of loans;
o The Company's ability to adapt successfully to technological changes to
compete effectively in the marketplace;
o Credit risks and risks from concentrations (by geographic area and by
industry) within the Bank's loan portfolio;
o The effects of competition from other commercial banks, thrifts, mortgage
banking firms, consumer finance companies, credit unions, securities
brokerage firms, insurance companies, money market and other mutual funds
and other financial institutions operating in the Company's market or
elsewhere or providing similar services;
o The failure of assumptions underlying the establishment of reserves for
loan losses and estimations of values of collateral and various financial
assets and liabilities;
o Volatility of rate sensitive deposits;
o Operational risks, including data processing system failures or fraud;
o Asset/liability matching risks and liquidity risks;
o Changes in the economic environment, competition or other factors that may
influence the anticipated growth rate of loans and deposits, the quality of
the loan portfolio and loan and deposit pricing and Company's ability to
successfully pursue acquisition and expansion strategies;
o The impact from liabilities arising from legal or administrative
proceedings the financial condition of the Company;
o Governmental monetary and fiscal policies, as well as legislative and
regulatory changes, that may result in the imposition of costs and
22
constraints on the Company through higher FDIC insurance premiums,
significant fluctuations in market interest rates and operational
limitations;
o Changes in general economic or industry conditions, nationally or in the
communities in which the Bank conducts business;
o Changes in accounting principles, policies or guidelines affecting the
businesses conducted by the Company or its affiliates;
o Acts of war or terrorism; and
o Other economic, competitive, governmental, regulatory and technical factors
affecting the Bank's operations, products, services, and prices.
The Company wishes to caution that the foregoing list of important factors may
not be all-inclusive and specifically declines to undertake any obligation to
publicly update or revise any forward-looking statements that have been made to
reflect events or circumstances after the date of such statements or to reflect
the occurrence of anticipated or unanticipated events.
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, 1998 and later, 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 $1.5 million and net income applicable
to common shareholders of $1.3 million for fiscal 2002, compared to net income
of $808,000 and net income applicable to common shareholders of $558,000 for
fiscal 2001. The Company had no preferred stock issued or outstanding prior to
2001. The Company's net loss for fiscal 2000 was $1.1 million. Basic and diluted
earnings (loss) per common share were $.21, $.10, and ($.19) for the years ended
December 31, 2002, 2001 and 2000. Diluted earnings (loss) per common share were
$.20, $.10, and ($.19) for the years ended December 31, 2002, 2001 and 2000.
Diluted earnings per common share reflects the dilutive effect of outstanding
options.
The increase in the Company's net income in 2002, compared to 2001, 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 $19.3 million in 2002 from $14.8 million in 2001,
an increase of 30.4%. The provision for loan losses increased 60.2% to $3.0
million in 2002, from $1.9 million in 2001. Noninterest income increased 97.2%
to $4.0 million in 2002 from $2.0 million in 2001. Noninterest expense increased
to $18.0 million in 2002 from $13.7 million in 2001, an increase of 31.5%. The
Company recorded a provision for income taxes in 2002 of $885,000, compared to
$490,000 in 2001.
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 1.2% to $1.9 million in 2001, from $1.9 million in 2000.
23
Noninterest income increased 102.5% to $2.0 million in 2001 from $1.0 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 $490,000, compared to a benefit for income taxes of $652,000 in 2000.
Total assets at December 31, 2002 were $756.1 million, an increase of
$233.7 million, or 44.8%, over the prior year. Total loans held for investment
increased 37.1% to $550.9 million at December 31, 2002, from $401.7 million at
December 31, 2001. Total deposits increased $213.7 million, or 47.3%, to $664.9
million at December 31, 2002 from $451.2 million at December 31, 2001.
Shareholders' equity increased to $53.0 million at December 31, 2002 from $46.1
million at December 31, 2001, an increase of 14.8%. These increases were
primarily attributable to the establishment of the wholesale mortgage division
and the Palm Beach Gardens loan production office, 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 the section entitled
"Business" in Part 1, Item 1 above.
The earnings performance of the Company is reflected in the calculations of
net income as a percentage of average total assets ("Return on Average Assets")
and net income 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 2002, the Return
on Average Assets and Return on Average Equity were 0.22% and 2.79%
respectively, compared to 0.13% and 1.30%, respectively, for 2001. The Company's
ratio of total equity to total assets decreased to 7.01% at December 31, 2002
from 8.83% at December 31, 2001, primarily as a result of growth from branch
operations.
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
$401.4 million at December 31, 2001, from $285.5 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 the section entitled "Business" in Part 1,
Item 1 above.
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.
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.
24
Year Ended
December 31, 2002 Income/
Average Balance Expense Yield / Cost
(Dollars in thousands)
ASSETS:
Total loans (1) $484,132 $31,853 6.58%
Investment securities (2) 43,264 2,239 5.18%
Federal funds sold & other investments 53,623 835 1.56%
------ ---
Total earning assets 581,019 34,927 5.96%
Cash and due from banks 20,169
Premises and equipment, net 4,382
Other assets, net 9,750
Allowance for loan losses (5,747)
-------
Total Assets (3) $609,573
========
LIABILITIES:
Interest-bearing liabilities:
Interest-bearing transaction accounts $41,817 710 1.70%
Savings deposits 72,145 1,443 2.00%
Time deposits 317,305 12,469 3.93%
Repurchase agreements sold 37,726 502 1.33%
Other borrowed funds 10,143 460 4.54%
------ ---
Total interest bearing liabilities 479,136 15,584 3.25%
Demand deposits 66,769
Accrued interest and other liabilities 16,180
Shareholders' equity 47,488
------
Total liabilities and shareholders' equity $609,573
========
Net interest income $19,343
=======
Net interest spread 2.71%
Net interest margin 3.33%
Non-interest expense $18,005
Overhead ratio 2.95%
Non-interest income $4,040
Non-interest income ratio 0.66%
(1) - Average loans include nonaccrual loans. At December 31, 2002, $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 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' equity $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.
26
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 $10,886
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.
27
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 2002, 2001 and 2000. Accordingly, no adjustment is
necessary to facilitate comparisons on a taxable equivalent basis.
Net interest income increased 30.4% to $19.3 million in 2002 from $14.8
million in 2001. This increase is attributable to growth in loan volume due to
ongoing branch operations, new loan production office operations, and the new
wholesale mortgage operation. These increases are 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 decreased 29 basis points to
3.33% in 2002 on average earning assets of $581.0 million from 3.62% in 2001 on
average earning assets of $409.8 million. This decrease is primarily due to the
fact that the average yield on earning assets decreased slightly more than the
average rates on interest-bearing liabilities decreased. There was an 170 basis
point decrease in the average yield on earning assets to 5.96% in 2002 from
7.66% in 2001 and a 162 basis point decrease in the average rate paid on
interest-bearing liabilities to 3.25% in 2002 from 4.87% in 2001. The decreased
yield on earning assets was primarily the result of lower market rates on loans
and investment securities, prompted by a decrease in the Prime Rate during
November 2002, from 4.75% to 4.25%, combined with ongoing weakness in other loan
indexes, including LIBOR (London Inter-Bank Offered Rate) and various mortgage
rate indexes. 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 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.
The net interest spread decreased to 2.71% in 2002 from 2.79% in 2001, as
the yield on average earning assets decreased 170 basis points while the cost of
interest-bearing liabilities decreased 162 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 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.
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
28
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
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 2001 and 2002, between
2000 and 2001 and between 1999 and 2000. The effect of a change in average
balance has been determined by applying the average rate in 2001, 2000 and 1999
to the change in average balance from 2000 to 2001 to 2002 and from 1999 to 2000
to 2001, respectively. The effect of change in rate has been determined by
applying the average balance in 2001, 2000 and 1999 to the change in the average
rate from 2000 to 2001 to 2002 and from 1999 to 2000 to 2001, 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 31,2002 December 31,2001 December 31,2000
Compared With Compared With Compared With
December 31,2001 December 31,2000 December 31,1999
---------------------------------------------------------------------------------------------
(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 $ 267 $ (681) $ (414) $ 281 $ (105) $ 176 $ 611 $ 348 $ 959
Federal funds sold 511 (713) (202) 65 (461) (396) 767 192 959
Net loans 11,669 (7,508) 4,161 10,416 (2,797) 7,619 10,596 442 11,038
Repurchase agreements 287 (250) 37 215 215 (333) (333)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total earning assets 12,734 (9,152) 3,582 10,977 (3,363) 7,614 11,641 982 12,623
-------- -------- -------- -------- -------- -------- -------- --------
Interest paid on:
Money-market and interest-
bearing demand deposits 424 (80) 344 147 1 148 104 (21) 83
Savings deposits 650 (1,206) (556) 859 (985) (126) 634 305 939
Time deposits 5,221 (5,300) (79) 4,392 (1,859) 2,533 5,887 1,431 7,318
Repurchase agreements 149 (852) (703) 1,124 (823) 301 108 243 351
Other borrowed funds 133 (68) 65 46 (65) (19) 280 44 324
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total interest-bearing
Liabilities 6,577 (7,506) (929) 6,568 (3,731) 2,837 7,013 2,002 9,015
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net interest income $ 6,157 $ (1,646) $ 4,511 $ 4,409 $ 368 $ 4,777 $ 4,628 $ (1,020) $ 3,608
======== ======== ======== ======== ======== ======== ======== ======== ========
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.
The provision for loan losses charged to operations in 2002 was $3.0
million. The provision for loan losses charged to operations in 2001 was $1.9
million, which was approximately the same amount as 2000. The increase in the
provision from 2001 to 2002 was generally due to the increase in the amount of
loans outstanding. In addition, in December 2002, a provision of approximately
$450,000 was charged to establish a specific reserve for an overdraft related to
one of the Company's Automated Clearing House processors. This overdraft was
29
charged off in the first quarter of 2003. 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 97.3% to $4.0 million in 2002 from $2.0
million in 2001. This change resulted from an increase in the amount of service
fees on deposit accounts, an increase in mortgage loan origination fees, and the
income generated by the wholesale mortgage division, partially offset by a loss
on the sale of investment securities held for sale, a smaller gain on sale of
commercial loans, and lower other noninterest income. Service fees on deposit
accounts increased 40.4% to $1.7 million in 2002 from $1.2 million in 2001 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 loss of
$4,000 in 2002, compared to a gain of $74,000 in 2001. Sale of commercial loans
resulted in a gain of $43,000 in 2002, compared to $104,000 in 2001, a decrease
of 58.8%. Gain on sale of mortgage loans in 2002 totaled $1.1 million. The
wholesale mortgage division commenced operations in the fourth quarter of 2002.
Mortgage loan origination fees increased 242.5% to $805,000 in 2002 compared to
$235,000 in 2001. Other income, which includes various recurring noninterest
income items such as debit card fees, decreased 6.6% to $384,000 in 2002 from
$411,000 in 2001.
Noninterest income increased 102.5% to $2.0 million in 2001 from $1.0
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. Mortgage loan origination fees
increased 320.8% to $235,000 in 2001 from $56,000 in 2000. Other income, which
includes various recurring noninterest income items such as debit card fees,
increased 71.3% to $411,000 in 2001 from $240,000 in 2000.
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
2002 2001 2000 2002-2001 2001-2000
---- ---- ---- --------- ---------
(Dollars in thousands)
Service fees................................ $1,719 $1,224 $705 40.4% 73.5%
Gain on sale of commercial loans............ 43 104 0 (58.8) 100.0
Gain on sale of mortgage loans.............. 1,093 0 0 100.0 N/A
Mortgage loan origination fees.............. 805 235 56 242.5 320.8
(Loss) gain on sale of available for sale
investment securities, net............... (4) 74 10 N/A 649.9
Other....................................... 384 411 240 (6.6) 71.3
--- --- ---
Total................................... $4,040 $2,048 $1,011 97.3% 102.5%
====== ===== =====
Noninterest Expense
Noninterest expense increased 31.5% to $18.0 million in 2002 from $13.7
million in 2001. These increases are primarily attributable to increases in
personnel, occupancy, data processing and other expenses relating to the
establishment of the wholesale mortgage division and the Palm Beach Gardens loan
production office, and increased dividends on preferred securities of the
30
Company's subsidiary trusts, together with increases in personnel and other
expenses related to the overall growth of the Company. Salaries and benefits
increased 26.0% to $11.0 million in 2002 from $8.8 million in 2001. This
increase is primarily attributable increases in the overall number of personnel,
and additional employees related to the wholesale mortgage division. Occupancy
and equipment expense increased 17.9% to $2.1 million in 2002 from $1.8 million
in 2001, primarily as a result of the activities of the wholesale mortgage
division, which began operations in the fourth quarter of 2002. Data processing
expense increased 28.7% to $873,000 in 2002 from $678,000 in 2001, which is
primarily attributable to the growth in loan and deposit transactions and the
addition of new services. Dividends on preferred securities of the Company's
subsidiary trusts increased 4,775.6%, to $633,000 in 2002 from $13,000 in 2001.
This increase was due to an increase in the amount of such securities
outstanding to $16.5 million at December 31, 2002 from $5.8 million at the prior
year-end. Also, the securities outstanding at December 31, 2001 were issued on
December 18, 2001, so only thirteen days' interest accrued with respect to those
securities in 2001. Other operating expenses increased 36.7% to $3.4 million in
2002 from $2.5 million in 2001. This increase is attributable primarily to an
increase of $135,000 in other real estate owned expenses, an increase of
$131,000 in audit, tax and accounting expense, and increase of $90,000 in
communication expense and an increase of $89,000 in Automated Clearing House and
bank service charge expense. These expenses are primarily attributable to
opening of the wholesale mortgage division and an overall increase in the size
and volume of business conducted by the Bank.
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
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.
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
2002 2001 2000 2002-2001 2001-2000
---- ---- ---- --------- ---------
(Dollars in thousands)
Salaries and benefits.................... $11,038 $8,761 $6,813 26.0% 28.6%
Occupancy and equipment.................. 2,106 1,786 1,528 17.9 16.9
Data processing.......................... 873 678 457 28.7 48.4
Dividends on preferred securities of
subsidiary trust............... 633 13 0 4,775.6 100.0
Other.................................... 3,355 2,455 2,088 36.7 17.6
----- ----- ----- ---- ----
Total................................ $18,005 $13,693 $10,886 31.5 % 25.8%
======= ======= =======
Provision for Income Taxes
31
The provision for income taxes was $885,000 for 2002, compared to $490,000
for 2001. The effective tax rate for 2002 and 2001 was 37.6%. The Company paid
no income taxes during 2002 and 2001 due to the availability of net operating
loss carryforwards.
The provision for income taxes was $490,000 for 2001, compared to a benefit
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.
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, 2002, the Company had approximately $4.6 million in net
operating loss carryforwards available to reduce future taxable earnings, which
resulted in net deferred tax assets of $3.9 million. These net operating loss
carryforwards will expire in varying amounts in the years 2006 through 2018
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, 2002 and 2001, 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,
2002 2001 2000
---- ---- ----
(Dollars in thousands)
Deferred tax assets............................. $4,436 $4,365 $4,779
Deferred tax liabilities........................ 527 348 174
Valuation allowance............................. -- -- --
---- ---- ----
Net deferred tax assets......................... $3.909 $4,017 $4,605
====== ====== ======
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
Internal Revenue Code) at the date of acquisition. Based upon the applicable
32
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 $1.5 million and net income applicable
to common shares of $1.3 million in 2002, compared to net income of $808,000 and
net income applicable to common shares of $558,000 in 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 per common share was $.21 for 2002 and $.10
for 2001.
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 $1.1 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.
Return on Average Assets and Return on Average Equity are computed using
Net Income Applicable to Common Shares. Return on Average Assets for 2002
increased 9 basis points to 0.22%, compared to 0.13% in 2001. Return on Average
Assets increased 49 basis points to 0.13% in 2001 from a deficit of (0.36%) in
2000. Return on Average Equity increased 149 basis points to 2.79% in 2002,
compared to 1.30% in 2001. Return on Average Equity increased 413 basis points
to 1.30% in 2001, compared to a deficit of (2.83%) in 2000.
Business Segments
Prior to October 1, 2002, the Company had only one reporting segment. In
October, 2002, the Company started a mortgage banking division which is managed
as a segment. Accordingly, beginning in 2002, the Company has two reporting
segments, the commercial bank and the mortgage bank. For more details on segment
disclosures, please see Note 21 - Segment Reporting in the Notes to the
Consolidated Financial Statements. The lines of business are defined as follows:
Commercial Bank
The commercial bank segment offers a wide array of financial services to
its customers, including short and long-term commercial, consumer and mortgage
loans, interest-bearing and non-interest-bearing deposit accounts, telephone and
internet banking, Automated Clearing House and Electronic Funds Transfer, stored
value cards, and other specialized products and services. The commercial bank
segment accounted for 97.4% of net interest income, 65.6% of noninterest income,
and 76.0% of noninterest expense. As this segment comprises the majority of the
Company's operations, the performance of this segment is described in the
consolidated discussion of financial condition and results of operations above.
Mortgage Bank
The mortgage bank segment originates residential mortgage loans through its
network of mortgage brokers and sells these loans on a wholesale basis into the
secondary mortgage loan market. The mortgage bank segment accounted for 0.8% of
net interest income, 33.5% of noninterest income, and 5.1% on noninterest
expense. The mortgage bank originated approximately $97 million in mortgage
loans during 2002 and sold approximately $44 million in mortgage loans during
this same period. This segment contributed $505,000 to income before income
taxes, excluding any allocation of parent company costs.
Other
This category includes the Company's investment securities portfolio,
capital, derivative instruments, liquidity and funding activities, risk
management, and certain other support activities not currently allocated to the
aforementioned business segments.
33
Information about reportable segments, and reconciliation of such information to
the consolidated financial statements as of and for the year ended December 31,
2002 follows:
Commercial Mortgage Intersegment Consolidated
Bank Bank Other Eliminations Total
--------- -------- -------- ---------- ----------
Net interest income $ 18,840,999 $ 163,800 $ 338,205 $ 19,343,004
Noninterest income 2,684,723 1,355,036 4,039,759
Noninterest expense 13,689,351 911,222 3,404,236 18,004,809
Income (loss) before taxes 4,912,752 505,459 (3,066,032) 2,352,179
Assets 694,561,452 55,234,735 70,290,850 (64,021,487) 756,065,550
Expenditures for additions
to premises and equipment 2,398,326 561,600 8,410 2,968,336
Financial Condition
Earning Assets
Average earning assets increased 41.8% to $581.0 million in 2002 from
$409.8 million in 2001. During 2002, loans, net of deferred loan fees,
represented 83.4% of average earning assets, investment securities comprised
7.4%, and Federal funds sold and other investments comprised 9.2%. In 2001,
loans, net of deferred loan fees, comprised 83.3% of average earning assets,
investment securities comprised 9.5%, and Federal funds sold and other
investments comprised 7.2%. 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 2002, growth in earning assets was funded primarily through an increase
in total deposits due to expanded branch operations, the selling of additional
brokered deposits, and the issuance of trust preferred securities.
Loan Portfolio
The Company's total loans held for investment outstanding increased 37.1%
to $550.5 million as of December 31, 2002 from $401.4 million as of December 31,
2001. Loan growth for 2002 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 $126.0 million, or 35.7%, from
December 31, 2001 to December 31, 2002. Average total loans held for investment
in 2002 were $484.1 million, $66.3 million less than the year-end balance of
$550.5 million due to the increase in loan production for the third and fourth
quarters of 2002. 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 portfolio of loans held for investment 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:
34
As of December 31,
---------------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
% of % of % of % of % of
Balance Total Balance Total Balance Total Balance Total Balance Total
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Type of Loan
Commercial real estate $ 313,120 56.8% $ 210,373 52.4% $158,654 55.6% $ 69,261 43.9% $ 25,326 37.6%
Commercial 166,122 30.2% 142,911 35.6% 102,391 35.8% 68,991 43.8% 33,103 49.2%
Residential mortgage 23,080 4.2% 22,309 5.6% 9,796 3.4% 10,846 6.9% 6,047 9.0%
Consumer 45,860 8.3% 23,158 5.7% 13,036 4.6% 7,246 4.6% 2,021 3.0%
Credit cards and other 2,792 0.5% 2,912 0.7% 1,747 0.6% 1,244 0.8% 796 1.2%
---------------------------------------------------------------------------------------------------------
Total loans 550,974 100.0% 401,663 100.0% 285,624 100.0% 157,588 100.0% 67,293 100.0%
===== ===== ===== ===== =========
Net deferred loan fees (519) (219) (98) (71)
--------- --------- --------- (162)
Loans, net of deferred ---------
fees 550,455 401,444 285,526 157,517
Allowance for loan losses (7,263) (4,692) (3,511) (1,858) 67,131
--------- --------- --------- (1,074)
Net loans held ---------
for investment $ 543,192 $ 396,752 $ 282,015 $ 155,659
========= ========= ========= $ 66,057
=========
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, 2002, commercial real estate
loans represented 56.8% of outstanding loan balances, compared to 52.4% at
December 31, 2001. The increase in commercial real estate loans is a result of
increased emphasis on commercial real estate loans.
Commercial. This category of loans includes loans made to individual,
partnership or corporate borrowers, and obtained for a variety of business
purposes. At December 31, 2002, commercial loans represented 30.2% of
outstanding loan balances, compared to 35.6% at December 31, 2001. 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, 2002,
residential mortgage loans represented 4.2% of outstanding loan balances,
compared to 5.6% at December 31, 2001. The Company does not actively market
residential mortgages and its portfolio primarily consists of loans to the
principals of other commercial relationships.
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, 2002, consumer loans represented
8.3% of outstanding loan balances, compared to 5.7% at December 31, 2001. 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 2002 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 operations of the new loan
production office in Palm Beach Gardens.
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, 2002, credit card and other loans represented 0.5% of outstanding
loan balances as compared to 0.7% at December 31, 2001. 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, 2002.
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
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 internally established or legal
lending limit, were sold to other institutions. As a result of growth, the
35
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 Company had originated the loan.
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 portfolio of loans held for investment within specified intervals as
of December 31, 2002:
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.................................. $43,521 $133,151 $136,448 $313,120
Commercial.............................................. 105,848 51,590 8,684 166,122
Residential mortgage.................................... 2,490 15,854 4,736 23,080
Consumer ............................................... 8,790 36,222 848 45,860
Credit card and other loans............................. 2,792 0 0 2,792
-------- -------- -------- --------
Total.......................................... $163,441 $236,817 $150,716 $550,974
======== ======== ======== ========
The following table presents the maturity distribution as of December
31, 2002 for loans with predetermined fixed interest rates and floating interest
rates by various maturity periods:
Due
Due in 1 Due after 1 to After
Year or Less 5 years 5 years Total
------------ ------- ------- -----
Interest Category (Dollars in thousands)
Predetermined rate $ 65,872 $137,792 $82,185 $285,849
Variable rate 127,413 105,598 32,114 265,125
------- ------- ------ -------
Total.................................... $193,285 $243,390 $114,299 $550,974
======== ======== ======== ========
Asset Quality
At December 31, 2002, $1.5 million of loans were accounted for on a
non-accrual basis as compared to $1.1 million at December 31, 2001. Included in
the non-accrual loans as of December 31, 2002 were $151,000 of SBA guaranteed
loans compared to $681,000 at December 31, 2001. The SBA loans consist of the
remaining balance of liquidated loans pending payment of the SBA guarantee. At
December 31, 2002 and December 31, 2001, no loans past due 90 days or more were
still accruing interest. No SBA loans were past due 90 days at December 31, 2002
or December 31, 2001. At December 31, 2002, loans totaling $3.1 million were
considered troubled debt restructurings, compared to $1.1 million at December
31, 2001. 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%
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
36
December 31, 2002 totaled $1.8 million, including the SBA guaranteed portion of
$1.4 million, compared to an outstanding balance of $2.9 million at December 31,
2001, including the SBA guaranteed portion of $2.2 million. At December 31,
2002, 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 during 2002 and 2001.
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, 2002, 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.
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:
37
Years Ended December 31,
-----------------------------------------------------------------------
2002 2001 2000 1999 1998
(Dollars In Thousands)
Balance at beginning of period $ 4,692 $ 3,511 $ 1,858 $ 1,073 $ 481
Charge-offs:
Commercial real estate 0 (400) (4) 0 (39)
Commercial (435) (362) (388) (819) (16)
Residential mortgage 0 0 0 (5) 0
Consumer (51) (66) 0 (19) 0
Credit cards and other 0 0 (9) (14) (10)
-----------------------------------------------------------------------
Total charge-offs: (486) (828) (401) (857) (65)
-----------------------------------------------------------------------
Recoveries:
Commercial real estate 11 12 18 15 28
Commercial 20 105 74 14 0
Residential mortgage 0 0 50 2 0
Consumer 0 3 0 0 0
Credit cards and other 0 0 0 1 0
-----------------------------------------------------------------------
Total recoveries: 31 120 142 32 28
-- --- --- -- --
Net charge-offs (455) (708) (259) (825) (37)
Provision for loan losses 3,026 1,889 1,912 1,610 629
-----------------------------------------------------------------------
Balance at end of period $ 7,263 $ 4,692 $ 3,511 $ 1,858 $ 1,073
=======================================================================
Net charge-offs as a percentage
of average loans held for investment 0.09% 0.21% 0.12% 0.80% 0.09%
Allowance for loan losses as a
percentage of total loans held
for investment 1.32% 1.17% 1.23% 1.18% 1.60%
Net charge-offs were $455,000, or 0.09% of average loans held for
investment outstanding in 2002 as compared to net charge-offs of $708,000 or
..21% of average loans held for investment outstanding in 2001. The allowance for
loan losses increased 54.8% to $7.3 million or 1.32% of loans held for
investment outstanding at December 31, 2002 from $4.7 million or 1.17% of loans
held for investment outstanding at December 31, 2002. The allowance for loan
losses as a multiple of net loans charged-off was 15.96x for the year ended
December 31, 2002 as compared to 6.62x for the year ended December 31, 2001. The
increase in the provision from 2001 to 2002 was generally due to increases in
the amount of loans held for investment outstanding, together with the mix and
performance of those loans, and a specific increase in the provision for loan
losses of $450,000 related to an overdraft incurred by one of the Company's
Automated Clearing House processors, as further discussed below.
Net charge-offs were $708,000 or .21% of average loans held for investment
outstanding in 2001 as compared to net charge-offs of $259,000 or .12% of
average loans held for investment outstanding in 2000. The allowance for loan
losses increased 33.7% to $4.6 million or 1.17% of loans held for investment
outstanding at December 31, 2001 from $3.5 million or 1.23%of loans held for
investment outstanding at December 31, 2000. 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, 2000. The increase 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.
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 that must be charged off and to assess the
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.
38
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, 2002, the Company held impaired loans as defined by SFAS 114 of
$1.4 million (none of such balance is guaranteed by the SBA) for which specific
allocations of $690,000 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 ($535,000) and $518,000 have been classified as
troubled debt restructurings. 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. Interest income on
such impaired loans during 2002 and 2001 was not significant.
As shown in the table below, management determined that as of December 31,
2002, 56.0% of the allowance for loan losses was related to commercial real
estate loans, 31.0% was related to commercial loans, 4.2% was related to
residential mortgage loans, 8.3% was related to consumer loans, 0.5% to credit
card and other loans and 0.0% was unallocated. As shown in the table below,
management determined that as of December 31, 2001, 52.4% of the allowance for
loan losses was related to commercial real estate loans, 35.6% was related to
commercial loans, 5.6% was related to residential mortgage loans, 5.7% was
related to consumer loans, 0.7% to credit card and other loans and 0.0% was
unallocated. The fluctuations in the allocation of the allowance for loan losses
between 2002 and 2001 is attributed to the establishment of specific allowances
totaling $2.2 million at December 31, 2002, 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,
-------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
% of % of % of % of % of
Total Total Total Total Total
----- ----- ----- ----- -----
Balance loans Balance loans Balance loans Balance Loans Balance loans
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Commercial real estate $4,067 56.0% $2,348 52.4% $1,300 55.6% $636 43.9% $229 37.6%
Commercial 2,252 31.0% 1,814 35.6% 1,775 35.8% 1,027 43.8% 687 49.2%
Residential mortgage 305 4.2% 240 5.6% 317 3.4% 89 6.9% 91 9.0%
Consumer 603 8.3% 261 5.7% 69 4.6% 77 4.6% 16 3.0%
Credit cards and other 36 .5% 29 .7% 50 .6% 29 .8% 47 1.2%
Unallocated 0 0.0% 0 0.0% 0 0.0% 0 0.0% 3 0.0%
-------------------------------------------------------------------------------------------
Total loans $7,263 $4,692 $3,511 $1,858 $1,073
===========================================================================================
In considering the adequacy of the Company's allowance for loan losses,
management has focused on the fact that as of December 31, 2002, 56.0% of
outstanding loans held for investment are in the category of commercial real
estate and 31.0% 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.
Residential mortgage loans constituted 4.2% of outstanding loans held for
investment at December 31, 2002. The majority of the loans in this category
represent residential real estate mortgages where the amount of the original
39
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, 2002, 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.
At December 31, 2002, the allowance for loan losses contained an additional
provision of $450,000 for an overdraft related to one of the Company's Automated
Clearing House (ACH) processors. The Company facilitates ACH transactions for a
variety of processors in its normal course of business. These transactions
involve preauthorized transfers of funds from a purchaser's bank account to a
seller's bank account. In November and December of 2002, one of the company's
processors experienced an extreme number of returns, or refused transactions,
and failed to cover the overdraft these returns caused. This overdraft was
charged off in the first quarter of 2003.
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, 2002, $1.5 million of loans were accounted for on a
nonaccrual basis as compared to $1.1 million at December 31, 2001. The remaining
balance of non-accrual loans guaranteed by the SBA was $151,000 at December 31,
2002 compared to $681,000 at December 31, 2001. At December 31, 2002, nine
loans, with unpaid balances totaling $42,000, were accruing interest and were
contractually past due 90 days or more as to principal and interest payments,
compared to no loans accruing interest and contractually past due 90 days or
more at December 31, 2001. No loans past due 90 days at December 31, 2002 or
December 31, 2001 were guaranteed by the SBA.
At December 31, 2002, loans totaling $3.1 million were considered troubled
debt restructurings. At December 31, 2001, loans totaling $1.1 million were
considered troubled debt restructurings.
At December 31, 2002, the Company held one item categorized as Other Real
Estate Owned, with a carrying value of $653,000, compared to one item of Other
Real Estate Owned at December 31, 2001, with a carrying value of $2.8 million.
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
40
secured or guaranteed by financially responsible third parties and are in the
process of collection generally are not placed on nonaccrual status.
The following table presents components of non-performing assets:
As of December 31,
--------------------------------------------------
2002 2001 2000 1999 1998
(Dollars In Thousands)
----------------------
Non-accrual loans $1,535 $1,090 $1,547 $1,100 $725
Accruing loans past due 90
days or more 0 0 2,555 293 315
Troubled debt restructurings 3,124 1,095 0 0 35
Other real estate owned 653 2,778 0 0 0
Investment Portfolio
Total investment securities increased $14.8 million, or 38.0% to $53.7
million in 2002 from $38.9 million in 2001. At December 31, 2002, investment
securities available for sale totaled $50.9 million compared to $34.0 million at
December 31, 2001. At December 31, 2002, investment securities available for
sale had net unrealized gains of $775,000, comprised of gross unrealized losses
of $11,000 and gross unrealized gains of $786,000. 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. Investment securities held to maturity at December 31, 2002 were
$228,000, compared to $2.9 million at December 31, 2001. The carrying value of
held to maturity securities represents cost. Average investment securities as a
percentage of average earning assets decreased to 7.4% in 2002 from 9.6% in
2001.
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 49.0% to $29.8 million in 2002 from
$20.0 million in 2001, with a resulting net loss on sales of ($4,000) in 2002
and a gain of $74,000 in 2001. 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 20.8% to $2.5 million at December 31,
2002 from $2.1 million at December 31, 2001. Other investments are carried at
cost; as such investments do not have readily determinable fair values.
At December 31, 2002, the investment portfolio included $29.1 million in
CMOs compared to $18.7 million at December 31, 2001. At December 31, 2002, the
investment portfolio included $6.8 million in other mortgage-backed securities
compared to $10.0 million at December 31, 2001.
The following table presents, for the periods indicated, the carrying
amount of the Company's investment securities, including mortgage-backed
securities:
41
As of December 31,
------------------------------------------------------------------------
2002 2001 2000
% of % of % of
Balance total Balance total Balance total
------- ----- ------- ----- ------- -----
Investment Category
Available for sale:
U. S. Treasury and other U.S.
agency obligations $6,775 12.6% $858 2.2% $1,746 4.8%
State & Municipal securities 1,051 2.0 1,348 3.5 1,458 4.0
Mortgage-backed securities 37,913 70.7 28,720 73.8 28,858 78.5
Marketable equity securities 5,192 9.7 3,028 7.8 0 0.0
------------ ------------ ----------
50,931 33,954 32,062
Other investments 2,493 4.6 2,065 5.3 1,266 3.4
Held to maturity:
U. S. Treasury and other U.S.
agency obligations 0 0 1,862 4.8 3,429 9.3
Mortgage-backed securities 228 0.4 1,005 2.6 0 0.0
------------ ------------ ----------
228 2,867 3,429
------------ ------------ ----------
Total $53,652 100.0% $38,886 100.0% $36,757 100.0%
=========================================================================
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, 2002, $37.9 million, or 70.7%, of the investment securities portfolio
consisted of mortgage-backed securities compared to $28.7 million, or 73.8%, of
the investment securities portfolio as of December 31, 2001. During 2003,
projected principal repayments of mortgage-backed securities total approximately
$20.1 million.
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, 2002, investments classified
as held to maturity totaled $228,000 at amortized cost and $229,000 at fair
value. At December 31, 2001, investments classified as held to maturity totaled
$2.9 million at amortized cost and $2.9 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 $41.3 million
and $27.3 million at December 31, 2002 and 2001, 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, 2002 are presented in the following table using
primarily the stated maturities, excluding the effects of prepayments:
42
Weighted
Amount Average
Yield (1)
Available for Sale: (Dollars in thousands)
U.S. Treasury and other U.S. agency obligations:
0 - 1 year...................................................................... $502 5.63%
Over 1 through 5 years.......................................................... 3,108 4.58%
Over 5 years ................................................................... 3,165 5.25%
------
Total........................................................................... 6,775
------
State and municipal:
0-1 year........................................................................ --- N/A
Over 1 through 5 years.......................................................... 304 6.95%
Over 5 years.................................................................... 746 7.32%
------
Total........................................................................... 1,050
------
Mortgage-backed securities:
0-1 year........................................................................ 20,015 3.00%
Over 1 through 5 years.......................................................... 12,680 4.39%
Over 5 years.................................................................... 4,739 5.66%
Over 10 years................................................................... 479 9.18%
------
Total........................................................................... 37,913
------
Total available for sale debt securities.............................. $45,738
=======
Held to maturity:
U.S. Treasury and other U.S. agency obligations:
0 - 1 year...................................................................... $ --- N/A
Over 1 through 5 years.......................................................... --- N/A
Over 5 years ................................................................... --- N/A
------
Total........................................................................... ---
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.......................................................... 228 4.74%
Over 5 years.................................................................... --- N/A
Over 10 years................................................................... --- N/A
Total........................................................................... 228
---
Total held to maturity debt securities................................ $228
====
(1) The Company has not invested in any tax-exempt obligations.
As of December 31, 2002, 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.
Deposits and Short-Term Borrowings
The Company's average deposits increased 45.6%, or $156.0 million, to
$498.0 million during 2002 from $342.0 million during 2001. This growth is
attributed to a 51.6% increase in average noninterest-bearing demand deposits, a
115.1% increase in average interest-bearing transaction account deposits, a
32.1% increase in average savings deposits, a 74.6% increase in average
certificates of deposits of $100,000 or more and a 7.8% decrease in other time
deposits.
43
Average noninterest-bearing demand deposits increased 51.6% to $66.8
million in 2002 from $44.0 million in 2001. As a percentage of average total
deposits, these deposits increased to 13.4% in 2002 from 12.9% in 2001. This
increase is primarily attributable to large business deposits retained by the
Company. The year-end balance of noninterest-bearing demand deposits increased
41.5% to $141.3 million at December 31, 2002 from $99.9 million at December 31,
2001. This increase is primarily due to increases in commercial account
balances.
Average interest-bearing transaction accounts increased 115.1% to $41.8
million in 2002 from $19.4 million in 2001. Average savings deposits increased
32.1% to $72.1 million in 2002, from $54.6 million in 2001. The increase in
average savings deposits is primarily attributable to increased promotion of the
Company's interest-bearing transaction accounts during 2002. The year-end
balance of interest-bearing transaction accounts increased 182.3% to $72.0
million at December 31, 2002 from $25.5 million at December 31, 2001. This
increase is attributable primarily to increases in commercial deposit balances.
Average balances of certificates of deposit of $100,000 or more increased 74.6%
to $235.0 million for 2002 from $134.6 million in 2001. The year-end balance of
certificates of deposit of $100,000 or more increased 62.3% to $314.9 million at
December 31, 2002 from $194.0 million at December 31, 2001. The average balance
for other time deposits decreased 7.8% to $82.3 million for 2002 from $89.3
million in 2001. The year-end balance of other time deposits increased 3.3% to
$69.7 million at December 31, 2002 compared to $67.5 million at December 31,
2001. 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,
----------------------------------------------------------------------------
2002 2001 2000
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ----
(Dollars in Thousands)
Deposit Category
Noninterest-bearing demand $66,769 0% $44,038 0% $27,677 0%
Interest-bearing demand 28,874 1.56% 14,897 1.50% 9,879 1.58%
Money market 12,943 2.00% 4,542 3.12% 1,762 3.58%
Savings 72,145 2.05% 54,602 3.72% 38,101 5.49%
Certificates of deposit of
$100,000 or more 234,983 3.96% 134,576 5.46% 94,035 6.53%
Other time 82,322 3.84% 89,329 5.82% 62,112 6.03%
------------- ---------------- -------------
Total $498,036 2.94% $341,984 4.37% $233,566 5.30%
============= ================ =============
Interest-bearing deposits, including certificates of deposit, will continue
to be a major source of funding for the Company. During 2002, aggregate average
balances of time deposits of $100,000 and over comprised 47.2% of total deposits
compared to 39.4% for the prior year. The average rate on certificates of
deposit of $100,000 or more decreased to 3.96% in 2002, compared to 5.46% in
2001.
The following table indicates amounts outstanding of time certificates of
deposit of $100,000 or more and their respective contractual maturities:
44
December 31,
--------------------------------------------------------------------------
2002 2001 2000
Amount Average Amount Average Amount Average
------ ------ -------
Rate Rate Rate
---- ---- ----
(Dollars in Thousands)
3 months or less $37,465 2.93% $63.356 4.29% $32,205 6.53%
3 - 6 months 83,569 2.00 49,330 4.57 28,231 6.96
6 - 12 months 47,795 3.10 25,649 4.53 27,585 6.80
Over 12 months 146,024 3.86 55,681 4.78 28,803 7.11
------------- ---------------- -------------
Total $314,853 3.26 $194,016 4.37 $116,824 6.84
============= ================ =============
Average short-term borrowings increased 16.3% to $47.9 million in 2002 from
$41.2 million in 2001. 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 increased 3.3% to $1.8 million in 2002 from $1.7 million in
2001. Average Federal Home Loan Bank borrowings increased 38.3% to $8.0 million
in 2002 compared with $5.9 million during 2001. Average repurchase agreements
with customers increased 13.1% to $38.0 million in 2002 from $33.6 million in
2001. 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
increased 3.5% to $4.7 million at December 31, 2002 from $4.5 million at
December 31, 2001.
The following table presents the components of short-term borrowings and
average rates for such borrowing for the years ended December 31, 2002, 2001 and
2000:
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)
2002
- ----
Treasury Tax and Loan Deposits $ 2,808 $ 2,008 1.27% $ 2,422 0.96%
Repurchase Agreements 49,542 37,726 1.33% 4,654 0.93%
Federal Home Loan Bank Borrowings 7,500 8,135 5.33% 7,500 5.53%
------- -------
Total $47,869 $14,576
======= =======
2001
- ----
Treasury Tax and Loan Deposits $ 2,285 $ 1,704 3.61% $ 2,215 2.10%
Repurchase Agreements 44,577 33,568 3.59% 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
======= =======
Capital Resources
Shareholders' Equity
Shareholders' equity increased 14.8% to $53.0 million in 2002 from $46.1
million in 2001. This increase results primarily from proceeds of $5.0 million
from issuance of Series C Preferred Stock, net income for the year of $1.5
million, and an increase in accumulated other comprehensive income to $483,000
at December 31, 2001 from $244,000 at December 31, 2001, representing a change
in the unrealized gain/loss (after tax effect) on available for sale securities.
These increases are partially offset by preferred stock dividends declared in
the amount of $263,000.
45
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 7.79% in 2002 from 9.96% in 2001.
Preferred Stock
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. On April 26, 2002, all 102,383 shares of Series B Preferred Stock
automatically converted into 1,022,830 shares of common stock as a result of the
average closing price of the Company's common stock closing above $8.00 for the
period from March 4, 2002 through April 15, 2003.
On December 31, 2002, the Company issued 50,000 shares of Series C
Preferred Stock for $100.00 per share to a single shareholder through a private
placement. Series C shares are non-convertible. Non-cumulative cash dividends
accrue at five percent annually and are payable quarterly in arrears. The
shareholder and the Company intend to consider an exchange of Series C Preferred
shares for shares of a new series of preferred stock, which would be
substantially similar to the Series C shares, except the new shares would be
convertible into 500,000 shares of the Company's common stock at $10.00 per
share. Any such change would be subject to necessary regulatory approvals.
Trust Preferred Securities
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. The following
paragraphs summarize the Company's trust preferred securities transactions
through December 31, 2002:
On December 18, 2001, the Company participated in pooled trust preferred
offering. In connection with this transaction, the Company, through its
wholly-owned subsidiary trust, Florida Banks Statutory Trust I ("Statutory Trust
I"), issued $6,000,000 in trust preferred securities. Statutory Trust I 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 Statutory Trust I and are
eliminated, along with the related income statement effects, in the Company's
consolidated financial statements. The net proceeds from this pooled trust
preferred offering included in the calculation of Tier 1 capital for regulatory
purposes are approximately $5,819,000 at December 31, 2001 and $5,824,000 at
December 31, 2002.
On April 10, 2002, the Company participated in pooled trust preferred
offering. In connection with this transaction, the Company, through its
wholly-owned subsidiary trust, Florida Banks Capital Trust II ("Capital Trust II
"), issued $4,000,000 in trust preferred securities. Capital Trust II also
issued $124,000 of common securities to the Company and used the total proceeds
to purchase $4,124,000 in 30-year subordinated debentures of the Company. The
preferred securities pay dividends based on 6-month LIBOR plus 3.70%, adjusted
semi-annually after each dividend payment date. Dividend payment dates are April
22 and October 22 of each year. These subordinated debentures are the sole asset
of Capital Trust II and are eliminated, along with the related income statement
effects, in the Company's consolidated financial statements. The net proceeds
from this pooled trust preferred offering included in the calculation of Tier 1
capital for regulatory purposes at December 31, 2002 are approximately
$3,869,000.
On June 28, 2002, the Company participated in pooled trust preferred
offering. In connection with this transaction, the Company, through its
wholly-owned subsidiary trust, Florida Banks Capital Trust I ("Capital Trust
I"), issued $4,000,000 in trust preferred securities. Capital Trust I also
issued $124,000 of common securities to the Company and used the total proceeds
46
to purchase $4,124,000 in 30-year subordinated debentures of the Company. The
preferred securities pay dividends based on 3-month LIBOR plus 3.65%, adjusted
quarterly after each dividend payment date. Dividend payment dates are March 30,
June 30, September 30 and December 30 of each year. These preferred securities
include a par call option beginning June 30, 2007. These subordinated debentures
are the sole asset of Capital Trust I and are eliminated, along with the related
income statement effects, in the Company's consolidated financial statements.
The net proceeds from this pooled trust preferred offering included in the
calculation of Tier 1 capital for regulatory purposes at December 31, 2002 are
approximately $3,869,000.
On December 18, 2002, the Company participated in pooled trust preferred
offering. In connection with this transaction, the Company, through its
wholly-owned subsidiary trust, Florida Banks Statutory Trust II ("Statutory
Trust II"), issued $3,000,000 in trust preferred securities. Statutory Trust II
also issued $93,000 of common securities to the Company and used the total
proceeds to purchase $3,093,000 in 30-year subordinated debentures of the
Company. The preferred securities pay dividends at an initial rate of 4.66%
through March 26, 2003. Thereafter, the rate becomes a floating rate based on
3-month LIBOR plus 3.25%, adjusted quarterly after each dividend payment date.
Dividend payment dates are March 26, June 26, September 26 and December 26 of
each year. These subordinated debentures are the sole asset of Statutory Trust
II and are eliminated, along with the related income statement effects, in the
Company's consolidated financial statements. The net proceeds from this pooled
trust preferred offering included in the calculation of Tier 1 capital for
regulatory purposes at December 31, 2002 are approximately $2,910,000.
Regulatory Capital Calculation
--------------------------------------------------------------------------------------------
200 2001 2000
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Tier 1 Risk Based:
Actual $68,953 10.78% $51,108 11.63% $35,529 11.58%
Minimum required 25,580 4.00% 17,576 4.00% 12,271 4.00%
--------------- --------------- --------------
Excess above minimum $43,373 6.78% $33,532 7.63% $23,258 7.58%
=============== =============== ==============
Total Risk Based:
Actual $76,216 11.92% $55,800 12.70% $39,050 12.73%
Minimum required 51,160 8.00% 35,152 8.00% 24,542 8.00%
--------------- --------------- --------------
Excess above minimum $25,056 3.92% $20,648 4.70% $14,508 4.73%
=============== =============== ==============
Leverage:
Actual $68,953 9.97% $51,108 10.64% $35,529 10.28%
Minimum required 27,655 4.00% 19,216 4.00% 13,828 4.00%
--------------- --------------- --------------
Excess above minimum $41,298 5.97% $31,892 6.64% $21,701 6.28%
=============== =============== ==============
Total Risk Based Assets: $639,498 $439,405 $306,771
Total Average Assets $609,573 $480,403 $345,707
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").
47
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
10.78% in 2002 from 11.63% in 2001. The Company's total risk based capital ratio
decreased to 11.92% in 2002 from 12.70% in 2001. 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 that 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.
Contractual Obligations and Commercial Commitments
The following table presents, as of December 31, 2002, 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:
48
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 $384,560 $201,994 $102,341 $70,345 $9,880
Federal Home Loan Bank advances 7,500 0 0 7,500 0
Trust Preferred Securities 16,473 0 0 0 16,473
Operating leases 3,852 863 1,071 738 1,180
Treasury tax and loan deposits 2,422 2,422 0 0 0
----------------------------------------------------------------
Total contractual obligations $414,807 $205,279 $103,412 $78,583 $27,533
================================================================
The following table presents, as of December 31, 2002, 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 $22,928 $22,928 $0 $0 $0
Lines of credit 207,750 63,074 144,676 0 0
Standby letters of credit 8,793 8,793 0 0 0
-------------------------------------------------------------
Total other commitments $239,471 $94,795 $144,676 $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, 2002. 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.
49
One One Four to One Over Non -
Month to Three Twelve to Five Five Interest
December 31, 2002 or Less Months Months Years Years Sensitive Total
- ----------------- ------- ------ ------ ----- ----- --------- -----
ASSETS (Dollars in Thousands)
Interest Sensitive Assets:
Availble for sale investment
Securities $ 5,268 $ 3,954 $ 16,475 $ 16,445 $ 8,789 $ $ 50,931
Loans held for sale 53,801 0 0 0 0 0 53,801
Held to maturity investment
securities and other investments 0 0 0 228 2,493 0 2,721
Federal funds sold and
repurchase agreements 62,515 0 0 0 0 0 62,515
Loans held for investment
net of deferred fees 224,245 64,625 40,536 137,752 83,297 0 550,455
----------------------------------------------------------------------------------------
Total earning assets $ 345,829 $ 68,579 $ 57,011 $ 154,425 $ 94,579 $ 0 $ 720,423
----------------------------------------------------------------------------------------
LIABILITIES
Interest Sensitive Liabilities:
Interest-bearing demand deposits 52,803 0 0 0 0 0 52,803
Savings deposits 64,927 0 0 0 0 2,014 66,941
Money market deposits 0 0 0 0 0 19,211 19,211
Certificates of deposit of
$100,000 or more 8,725 36,332 158,809 92,742 4,872 0 301,480
Other time deposits 3,467 7,518 24,560 43,538 4,046 0 83,129
Repurchase agreements 0 0 0 0 0 4,654 4,654
Other borrowed funds 9,922 0 0 0 0 0 9,922
----------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 139,844 $ 43,850 $ 183,369 $ 136,280 $ 8,918 $ 25,879 $ 538,140
----------------------------------------------------------------------------------------
Interest sensitivity gap:
Amount $ 205,985 $ 24,729 ($126,358) $ 18,145 $ 85,661 ($ 25,879) $ 182,283
----------------------------------------------------------------------------------------
Cumulative amount 206,484 230,714 104,356 122,501 208,162 182,283 0
Percent of total earning assets 28.59% 3.43% (17.53%) 2.51% 11.89% (3.59%) 25.30%
Cumulative percent of total earning assets 28.59% 32.02% 14.49% 17.00% 28.89% 25.30% 0.00%
Ratio of rate sensitive assets to rate
sensitive liabilities 2.47 x 1.56 x .31 x 1.13 x 10.61x
Cumulative ratio of rate sensitive assets
To rate sensitive liabilities 2.47 x 2.26 x 1.29 x 1.24 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,
2002, the Company had cumulative gap ratios of approximately 2.26 for the three
month time period and 1.29 for the one year period ending December 31, 2002.
Thus, over the next twelve months, rate-sensitive assets will reprice slightly
faster than rate-sensitive liabilities. This is primarily due to the Bank's
receipt near the end of December of approximately $40 million dollars in
brokered deposits, which were temporarily invested in Federal Funds sold. These
deposits were obtained to take advantage of historically low funding costs. It
is anticipated that the bulk of these deposits will be deployed into loans in
the coming months, and the Bank's one-year cumulative gap ratio will again be
within the targeted range. 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.
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
50
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, 2002, indicates that a 200
basis point decrease in rates would cause a decrease in net interest income of
$1.5 million over the next twelve-month period. Conversely, a 200 basis point
increase in rates would cause an increase in net interest income of $1.1 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.
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.
51
The following instruments qualify as derivatives as defined by SFAS No.
133:
December 31, 2002
----------------------------
Contract Fair Weighted Average Weighted Average
Amount Value Paying Rates Receiving Rates
Interest rate swap agreements $ 85,500,000 $ 2,308,044 1.96% 4.88%
Foreign currency swap agreements $ 2,000,000 $ 12,599 3.34% 3.79%
Interest rate swap agreements consist of agreements which qualify for the
fair value method of hedge accounting under the "short-cut method" based on the
guidelines established by SFAS No. 133. At December 31, 2001, the Company had in
place 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. These
participation agreements were unwound during 2002, and accordingly, the Company
recognized a loss of approximately $50,000 during the year ended December 31,
2002, because the fair value of these agreements was reduced to zero.
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 loss of approximately $67,000 during the year
ended December 31, 2002, as a result of changes in the fair value of the foreign
currency agreement. At December 31, 2002, the Company had made and received
certain commitments related to the origination and sale of mortgage loans
through its wholesale mortgage division. The company accounted for these
commitments as derivative instruments where applicable in accordance with
Derivatives Implementation Group Implementation Issue C13, When a Loan
Commitment Is Included in the Scope of Statement No. 133("DIG C13"). The fair
value of these commitments is included in the balance of mortgage loans held for
sale at December 31, 2002. For the year ended December 31, 2002, the company
recognized a gain in connection with the recording of the fair value of these
instruments. For the year ended December 31, 2002, there were no realized gains
or losses on terminated interest rate swaps, with the exception of the loss on
terminated loan participation agreements as discussed above.
At December 31, 2001, the estimated net fair value of the Company's
outstanding interest rate swaps was $241,000, and the fair value of the
Company's outstanding foreign currency swaps was $39,000.
At December 31, 2002, available for sale debt securities with a carrying
value of approximately $36.6 million are scheduled to mature within the next
five years. Of this amount, $20.5 million 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
$53.6 million in 2002, or 9.2% of average earning assets, compared to $29.7
million in 2001, or 7.3% of average earning assets. Federal funds sold and
repurchase agreements totaled $62.5 million at December 31, 2002, or 8.7% of
earning assets, compared to $54.7 million at December 31, 2001, or 11.0% of
earning assets.
At December 31, 2002, loans held for investment with a carrying value of
approximately $400.3 million are scheduled to mature within the next five years.
Of this amount, $163.4 million is scheduled to mature within one year.
The Company's average loan-to-deposit ratio (loans held for investment
divided by total deposits) decreased 41 basis points to 97.2% for 2002 from
99.0% for 2001. The Company's total loan-to-deposit ratio decreased 61 basis
points to 82.9% at December 31, 2002 from 89.0% at December 31, 2001.
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, 2002, the Company had borrowings from the
FHLBA in the amount of $7.5 million.
52
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 2003 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.
Recent Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections. This Statement rescinds SFAS No. 4,
Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that
Statement, SFAS No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements. This Statement also rescinds SFAS No. 44, Accounting for
Intangible Assets of Motor Carriers. This Statement amends SFAS No. 13,
Accounting for Leases, to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings or describe their applicability under changed conditions. The
provisions of this Statement related to the rescission of SFAS No. 4 shall be
applied in fiscal years beginning after May 15, 2002, with early application
encouraged. The provisions in paragraphs 8 and 9(c) of this Statement related to
SFAS No. 13 shall be effective for transactions occurring after May 15, 2002,
with early application encouraged. The Company adopted the Statement effective
January 1, 2003 and it did not have a material impact on the Company's
consolidated financial position and consolidated results of operations.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. This Statement nullifies Emerging Issues Task
Force ("EITF") No. 94-3 and requires that a liability for costs associated with
an exit or disposal activity be recognized only when the liability is incurred.
SFAS No. 146 is effective for exit and disposal activities that are initiated
after December 31, 2002. The Company adopted the Statement effective January 1,
2003 and does not expect it to have a material impact on the Company's
consolidated financial position and consolidated results of operations.
In October, 2002, the FASB issued SFAS No. 147, Acquisitions of Certain
Financial Institutions, which removes acquisitions of financial institutions
from the scope of both SFAS No. 72, Accounting for Certain Acquisitions of
Banking or Thrift Institutions, and Interpretation 9, Applying APB Opinions No.
16 and 17 When a Savings and Loan Association or a Similar Institution Is
Acquired in a Business Combination Accounted for by the Purchase Method, and
requires that those transactions be accounted for in accordance with SFAS No.
141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets, except for transactions between two or more mutual enterprises. In
addition, this Statement amends SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, to include in its scope long-term
customer-relationship intangible assets of financial institutions such as
depositor- and borrower-relationship intangible assets and credit cardholder
intangible assets. Consequently, those intangible assets are subject to the same
undiscounted cash flow recoverability test and impairment loss recognition and
measurement provisions that SFAS No. 144 requires for other long-lived assets
that are held and used. The Company adopted the Statement effective October 1,
2002. Adoption did not have an impact on the Company's consolidated financial
position and consolidated results of operations.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation -Transition and Disclosure. This Statement amends SFAS No. 123,
Accounting for Stock-Based Compensation, and provides alternative methods and
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements in both annual and interim financial statements related
to the methods of accounting for stock-based employee compensation and the
53
effect of the method on reported results. The Statement also prohibits the use
of the prospective method of transition, as outlined in SFAS No. 123, if options
are to be expensed when charging to the fair value based method in fiscal years
beginning after December 15, 2003. The Company adopted the disclosure
requirements of SFAS No. 148 on December 31, 2002.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Guarantees of Indebtedness of Others. This Interpretation addresses the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees. In addition, the
Interpretation clarifies the requirements related to the recognition of a
liability by a guarantor at the inception of a guarantee for the obligations
that the guarantor has undertaken in issuing the guarantee. The Company adopted
the disclosure requirements of FIN 45 for the fiscal year ended December 31,
2002, and the recognition provisions on January 1, 2003.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities. This Interpretation applies to
variable interest entities created after January 31, 2003, and to variable
interest entities in which an enterprise obtains an interest after that date. It
applies in the first fiscal year or interim period beginning after June 15,
2003, to variable interest entities in which an enterprise held a variable
interest that is acquired on or before January 31, 2003. The Company will adopt
the Interpretation as of July 31, 2003, however since it does not have any
variable interests, or situations with majority interests, there will be no
impact on its consolidated financial position and consolidated results of
operations.
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.
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
54
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, 2002, 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 (Pasco 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 had provided interest rate swaps to loan
participants. As a result of these activities the Company recognized a net loss
on derivative instruments of $67,000 for the year ended December 31, 2002
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.
Commitments to Originate Mortgage Loans - The Company enters into
commitments to originate mortgage loans whereby the interest rate on the loans
is determined prior to funding (rate lock commitments). Rate lock commitments on
loans that are intended to be sold are considered to be derivatives and are
therefore, recorded at fair value with changes in fair value recorded in
earnings. The fair value of these commitments is included in mortgage loans held
for sale.
Item 7A.. Quantitative and Qualitative Disclosures About Market Risk
Refer to "Liquidity Management and Interest Rate Sensitivity" in Item 7,
Management's 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
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.
55
Item 8. Financial Statements and Supplementary Data
The following financial statements are filed with this report:
Consolidated Balance Sheets - December 31, 2002 and 2001
Consolidated Statements of Operations - Years ended December 31,
2002, 2001 and 2000
Consolidated Statements of Shareholders' Equity - Years ended
December 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows - Years ended December 31,
2002, 2001 and 2000
Notes to Consolidated Financial Statements
56
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, 2002 and 2001, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 2002. 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 Florida Banks, Inc. and
subsidiaries as of December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Jacksonville, Florida
February 28, 2003
FLORIDA BANKS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 and 2001
- ------------------------------------------------------------------------------------------------------------------------------------
2002 2001
ASSETS
CASH AND CASH EQUIVALENTS:
Cash and due from banks $ 26,964,504 $ 19,332,159
Federal funds sold and repurchase agreements 62,515,000 54,657,000
------------- -------------
Total cash and cash equivalents 89,479,504 73,989,159
INVESTMENT SECURITIES:
Available for sale, at fair value (cost $50,155,158 and
$33,562,507 at December 31, 2002 and 2001) 50,930,650 33,954,045
Held to maturity (fair value $229,475 and $2,934,245
at December 31, 2002 and 2001) 227,925 2,867,163
Other investments 2,493,350 2,064,550
------------- -------------
Total investment securities 53,651,925 38,885,758
MORTGAGE LOANS HELD FOR SALE 54,674,248
LOANS, net of allowance for loan losses of $7,263,029
and $4,692,216 at December 31, 2002 and 2001 543,192,040 396,751,695
PREMISES AND EQUIPMENT, NET 5,466,332 3,361,882
ACCRUED INTEREST RECEIVABLE 2,375,102 1,722,746
DEFERRED INCOME TAXES, NET 3,908,751 4,016,786
DERIVATIVE INSTRUMENTS 2,321,643 279,784
OTHER REAL ESTATE OWNED 652,500 2,777,827
OTHER ASSETS 343,505 537,588
------------- -------------
TOTAL ASSETS $ 756,065,550 $ 522,323,225
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS:
Noninterest-bearing $ 141,395,150 $ 99,899,425
Interest-bearing 523,514,558 351,349,850
------------- -------------
Total deposits 664,909,708 451,249,275
REPURCHASE AGREEMENTS 4,653,878 4,495,547
OTHER BORROWED FUNDS 9,921,898 9,714,692
ACCRUED INTEREST PAYABLE 2,377,963 2,863,882
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 4,765,136 2,038,795
------------- -------------
Total liabilities 686,628,583 470,362,191
------------- -------------
COMPANY OBLIGATED MANDITORILY REDEEMABLE
PREFERRED SECURITIES OF SUBSIDIARY TRUSTS 16,473,092 5,819,000
------------- -------------
COMMITMENTS (NOTE 9)
SHAREHOLDERS' EQUITY:
Series B preferred stock, $68.00 par value, 110,000 shares authorized,
102,283 shares issued and outstanding at December 31, 2001 6,955,244
Series C preferred stock, $100.00 par value, 50,000 shares authorized,
50,000 shares issued and outstanding at December 31, 2002 5,000,000
Common stock, $.01 par value; 30,000,000 shares authorized
6,768,362 and 5,677,660 shares issued, respectively 67,684 56,777
Additional paid-in capital 52,287,390 44,964,967
Accumulated deficit (deficit of $8,134,037
eliminated upon quasi-reorganization on December 31, 1995) (4,874,873) (6,079,156)
Accumulated other comprehensive income, net of tax 483,674 244,202
------------- -------------
Total shareholders' equity 52,963,875 46,142,034
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 756,065,550 $ 522,323,225
============= =============
See notes to consolidated financial statements.
FLORIDA BANKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
- ------------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
------------ ------------ -------------
INTEREST INCOME:
Loans, including fees $ 31,852,739 $ 27,692,486 $ 20,072,894
Investment securities 2,239,454 2,653,164 2,477,179
Federal funds sold 582,723 819,741 1,215,804
Repurchase agreements 252,245 214,787 219
------------ ------------ ------------
Total interest income 34,927,161 31,380,178 23,766,096
------------ ------------ ------------
INTEREST EXPENSE:
Deposits 14,622,492 14,948,191 12,393,304
Repurchase agreements 501,638 1,204,752 903,794
Borrowed funds 460,027 395,131 413,938
------------ ------------ ------------
Total interest expense 15,584,157 16,548,074 13,711,036
------------ ------------ ------------
NET INTEREST INCOME 19,343,004 14,832,104 10,055,060
PROVISION FOR LOAN LOSSES 3,025,775 1,889,079 1,912,380
------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 16,317,229 12,943,025 8,142,680
------------ ------------ ------------
NONINTEREST INCOME:
Service fees 1,718,888 1,224,020 705,584
Gain on sale of mortgage loans 1,092,911
Gain on sale of commercial loans 42,888 104,151
Mortgage loan origination fees 805,264 234,810 55,807
(Loss) gain on sale of available for sale investment securities (3,967) 73,976 9,864
Other noninterest income 383,775 411,046 239,928
------------ ------------ ------------
4,039,759 2,048,003 1,011,183
------------ ------------ ------------
NONINTEREST EXPENSES:
Salaries and benefits 11,037,925 8,761,416 6,813,011
Occupancy and equipment 2,105,683 1,785,996 1,527,775
Data processing 872,630 677,963 456,972
Dividends on preferred security of subsidiary trust 633,580 12,995
Other 3,354,991 2,454,819 2,087,962
------------ ------------ ------------
18,004,809 13,693,189 10,885,720
------------ ------------ ------------
INCOME (LOSS) BEFORE PROVISION (BENEFIT)
FOR INCOME TAXES 2,352,179 1,297,839 (1,731,857)
PROVISION (BENEFIT) FOR INCOME TAXES 885,121 489,400 (651,704)
------------ ------------ ------------
NET INCOME (LOSS) 1,467,058 808,439 (1,080,153)
PREFERRED STOCK DIVIDENDS (140,058) (250,091)
------------ ------------ ------------
NET INCOME (LOSS) APPLICABLE TO COMMON SHARES $ 1,327,000 $ 558,348 $ (1,080,153)
============ ============ ============
EARNINGS (LOSS) PER COMMON SHARE:
Basic $ 0.21 $ 0.10 $ (0.19)
============ ============ ============
Diluted $ 0.20 $ 0.10 $ (0.19)
============ ============ ============
See notes to consolidated financial statements.
FLORIDA BANKS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Preferred Stock Common Stock Additional
--------------------- ------------------- Paid-In
Shares Par Value Shares Par Value Capital
BALANCE, JANUARY 1, 2000 5,718,656 $57,187 $45,526,443
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 and retirement of common stock (106,000) (1,060) (646,932)
------- ---------- --------- ------- -----------
BALANCE, DECEMBER 31, 2000 5,688,651 56,887 45,245,904
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 paid
Purchase and retirement of common stock (61,100) (611) (358,750)
------- ---------- --------- ------- -----------
BALANCE, DECEMBER 31, 2001 102,283 6,955,244 5,677,660 56,777 44,964,967
Comprehensive income:
Net income
Unrealized gain on available for sale
investment securities, net of tax
of $144,482
Comprehensive income
Conversion of Series B preferred stock
into common stock (102,283) (6,955,244) 1,022,830 10,228 6,945,016
Exercise of stock options 7,063 71 46,401
Issuance of common stock under
employee stock purchase plan 41,133 411 210,359
Issuance of restricted stock 19,676 197 120,647
Issuance of Series C preferred stock, net 50,000 5,000,000
Series B preferred stock dividend paid
------- ---------- --------- ------- -----------
BALANCE, DECEMBER 31, 2002 50,000 $5,000,000 6,768,362 $67,684 $52,287,390
Accumulated
Other
Comprehensive
Accumulated Income (Loss),
Deficit Net of Tax Total
BALANCE, JANUARY 1, 2000 $(5,680,069) $(668,706) $39,234,855
Comprehensive loss:
Net loss (1,080,153) (1,080,153)
Unrealized gain on available for sale
investment securities, net of tax
of $411,821 682,576 682,576
-----------
Comprehensive loss (397,577)
Issuance of common stock under employee
stock purchase plan 367,153
Purchase and retirement of common stock (647,992)
----------- --------- -----------
BALANCE, DECEMBER 31, 2000 (6,760,222) 13,870 38,556,439
Comprehensive income:
Net income 808,439 808,439
Unrealized gain on available for sale
investment securities, net of tax
of $138,968 230,332 230,332
-----------
Comprehensive income 1,038,771
Issuance of common stock under
employee stock purchase plan 227,088
Issuance of Series B preferred stock, net 6,806,470
Series B preferred stock cash dividend paid (127,373) (127,373)
Purchase and retirement of common stock (359,361)
----------- --------- -----------
BALANCE, DECEMBER 31, 2001 (6,079,156) 244,202 46,142,034
Comprehensive income:
Net income 1,467,058 1,467,058
Unrealized gain on available for sale
investment securities, net of tax
of $144,482 239,472 239,472
-----------
Comprehensive income 1,706,530
Conversion of Series B preferred stock
into common stock
Exercise of stock options 46,472
Issuance of common stock under
employee stock purchase plan 210,770
Issuance of restricted stock 120,844
Issuance of Series C preferred stock, net 5,000,000
Series B preferred stock dividend paid (262,775) (262,775)
----------- --------- -----------
BALANCE, DECEMBER 31, 2002 $(4,874,873) $ 483,674 $52,963,875
=========== ========= ===========
See notes to consolidated financial statements.
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
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
statements of operations.
Loans Held for Investment - Loans held for investment 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.
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (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 loan 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.
Mortgage Loans Held for Sale - Mortgage loans held for sale are
residential mortgage loans originated by the Company which management
either intends to sell at some point in the future or which are committed
to be sold to various institutions under agreements obtained at the time
the Company extends commitments to borrowers. Mortgage loans held for sale
are reported at the lower of cost or estimated fair value, determined on
an aggregate basis.
Commitments to Originate Mortgage Loans - The Company enters into
commitments to originate mortgage loans whereby the interest rate on the
loans is determined prior to funding (rate lock commitments). Rate lock
commitments on loans that are intended to be sold are considered to be
derivatives and are therefore, recorded at fair value with changes in fair
value recorded in earnings. The fair value of these commitments is
included in mortgage loans held for sale.
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
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (Continued)
- --------------------------------------------------------------------------------
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
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") No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended by SFAS No. 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, 2002 and 2001 is
summarized as follows:
2002 2001
Average balance during the year $ 37,725,667 $ 33,568,040
Average interest rate during the year 1.33% 3.59%
Maximum month-end balance during the year $ 49,542,093 $ 44,576,894
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (Continued)
- --------------------------------------------------------------------------------
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.
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. The potential common shares are determined
using the treasury stock method for outstanding stock options and the
if-converted method for preferred stock..
Recent Accounting Pronouncements - In April 2002, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections. This Statement rescinds SFAS No. 4, Reporting Gains
and Losses from Extinguishment of Debt, and an amendment of that
Statement, SFAS No. 64, Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements. This Statement also rescinds SFAS No. 44,
Accounting for Intangible Assets of Motor Carriers. This Statement amends
SFAS No. 13, Accounting for Leases, to eliminate an inconsistency between
the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that
are similar to sale-leaseback transactions. This Statement also amends
other existing authoritative pronouncements to make various technical
corrections, clarify meanings or describe their applicability under
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (Continued)
- --------------------------------------------------------------------------------
changed conditions. The provisions of this Statement related to the
rescission of SFAS No. 4 shall be applied in fiscal years beginning after
May 15, 2002, with early application encouraged. The provisions in
paragraphs 8 and 9(c) of this Statement related to SFAS No. 13 shall be
effective for transactions occurring after May 15, 2002, with early
application encouraged. The Company adopted the Statement effective
January 1, 2003 and it did not have a material impact on the Company's
consolidated financial position and consolidated results of operations.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This Statement nullifies
Emerging Issues Task Force ("EITF") No. 94-3 and requires that a liability
for costs associated with an exit or disposal activity be recognized only
when the liability is incurred. SFAS No. 146 is effective for exit and
disposal activities that are initiated after December 31, 2002. The
Company adopted the Statement effective January 1, 2003 and does not
expect it to have a material impact on the Company's consolidated
financial position and consolidated results of operations.
In October, 2002, the FASB issued SFAS No. 147, Acquisitions of Certain
Financial Institutions, which removes acquisitions of financial
institutions from the scope of both SFAS No. 72, Accounting for Certain
Acquisitions of Banking or Thrift Institutions, and Interpretation 9,
Applying APB Opinions No. 16 and 17 When a Savings and Loan Association or
a Similar Institution Is Acquired in a Business Combination Accounted for
by the Purchase Method, and requires that those transactions be accounted
for in accordance with SFAS No. 141, Business Combinations, and SFAS No.
142, Goodwill and Other Intangible Assets, except for transactions between
two or more mutual enterprises. In addition, this Statement amends SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
to include in its scope long-term customer-relationship intangible assets
of financial institutions such as depositor- and borrower-relationship
intangible assets and credit cardholder intangible assets. Consequently,
those intangible assets are subject to the same undiscounted cash flow
recoverability test and impairment loss recognition and measurement
provisions that SFAS No. 144 requires for other long-lived assets that are
held and used. The Company adopted the Statement effective October 1,
2002. Adoption did not have an impact on the Company's consolidated
financial position and consolidated results of operations.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation -Transition and Disclosure. This Statement amends SFAS No.
123, Accounting for Stock-Based Compensation, and provides alternative
methods and transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition,
this Statement amends the disclosure requirements in both annual and
interim financial statements related to the methods of accounting for
stock-based employee compensation and the effect of the method on reported
results. The Statement also prohibits the use of the prospective method of
transition, as outlined in SFAS No. 123, if options are to be expensed
when charging to the fair value based method in fiscal years beginning
after December 15, 2003. The Company adopted the disclosure requirements
of SFAS No. 148 on December 31, 2002.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Guarantees of Indebtedness of Others. This Interpretation
addresses the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under guarantees. In
addition, the Interpretation clarifies the requirements related to the
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (Continued)
- --------------------------------------------------------------------------------
recognition of a liability by a guarantor at the inception of a guarantee
for the obligations that the guarantor has undertaken in issuing the
guarantee. The Company adopted the disclosure requirements of FIN 45 for
the fiscal year ended December 31, 2002, and the recognition provisions on
January 1, 2003.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities. This Interpretation applies
to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest
after that date. It applies in the first fiscal year or interim period
beginning after June 15, 2003, to variable interest entities in which an
enterprise held a variable interest that is acquired on or before January
31, 2003. The Company will adopt the Interpretation as of July 31, 2003,
however since it does not have any variable interests, or situations with
majority interests, there will be no impact on its consolidated financial
position and consolidated results of operations.
Reclassifications - Certain reclassifications have been made to the 2001
and 2000 consolidated financial statements to conform with the
presentation adopted in 2002.
2. INVESTMENT SECURITIES
The amortized cost and estimated fair value of available for sale and held
to maturity investment securities as of December 31, 2002 and 2001 are as
follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 2002
Available for sale:
U.S. Treasury securities and
other U.S. agency obligations $ 6,721,835 $ 52,718 $ 6,774,553
----------- ----------- ----------- -----------
State and municipal 990,000 60,527 1,050,527
Mortgage-backed securities 37,263,079 660,553 $ (10,571) 37,913,061
----------- ----------- ----------- -----------
Total debt securities 44,974,914 773,798 (10,571) 45,738,141
Mutual funds 5,180,244 12,265 5,192,509
----------- ----------- ----------- -----------
Total securities available $50,155,158 $ 786,063 $ (10,571) $50,930,650
=========== =========== =========== ===========
for sale
Held to maturity:
Mortgage-backed securities $ 227,925 $ 1,550 $ $ 229,475
=========== =========== =========== ===========
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (Continued)
- --------------------------------------------------------------------------------
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 funds 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
=========== =========== =========== ===========
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
estimated fair value of debt securities, at December 31, 2002, by
contractual maturity, are shown below:
Available for Sale Held to Maturity
------------------------------ -------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
Due before one year $ 500,000 $ 502,350
Due after one year through five years 3,354,225 3,411,635
Due after five years through ten years 3,587,610 3,635,060
Due after ten years 270,000 276,035
----------- ----------- ----------- -----------
7,711,835 7,825,080
Mortgage-backed securities 37,263,079 37,913,061 $ 227,925 $ 229,475
----------- ----------- ----------- -----------
Total $44,974,914 $45,738,141 $ 227,925 $ 229,475
=========== =========== =========== ===========
Investment securities with a carrying value of $41,259,412 and $27,335,655
were pledged as security for certain borrowed funds and public deposits
held by the Company at December 31, 2002 and 2001, respectively.
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (Continued)
- --------------------------------------------------------------------------------
3. LOANS
Loans at December 31, are summarized as follows:
2002 2001
Commercial real estate $ 313,120,588 $ 210,373,284
Commercial 166,122,230 142,910,691
Residential mortgage 23,080,140 22,308,820
Consumer 45,859,704 23,158,053
Credit card and other loans 2,791,678 2,911,884
------------- -------------
Total loans 550,974,340 401,662,732
Allowance for loan losses (7,263,029) (4,692,216)
Net deferred loan fees (519,271) (218,821)
------------- -------------
Net loans $ 543,192,040 $ 396,751,695
============= =============
Changes in the allowance for loan losses are summarized as follows:
2002 2001
Balance, beginning of year $ 4,692,216 $ 3,510,677
Provision for loan losses 3,025,775 1,889,079
Charge-offs (485,950) (827,784)
Recoveries 30,988 120,244
----------- -----------
Balance, end of year $ 7,263,029 $ 4,692,216
=========== ===========
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 $1,535,000 and $1,090,000 of which
approximately $151,000 and $681,000 is guaranteed by the Small Business
Administration ("SBA") at December 31, 2002 and 2001, respectively. The
effects of carrying nonaccrual loans during 2002, 2001, and 2000 resulted
in a reduction of interest income of approximately $67,000, $147,000, and
$151,000, respectively.
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (Continued)
- --------------------------------------------------------------------------------
The following is a summary of information pertaining to impaired loans:
December 31,
2002 2001
---------- ----------
(approximately)
Impaired loans with a valuation allowance $1,415,000 $1,184,000
Impaired loans without a valuation allowance
---------- ----------
Total impaired loans $1,415,000 $1,184,000
========== ==========
Valuation allowance related to impaired loans $ 690,000 $ 295,000
Years ended December 31,
2002 2001 2000
---------- ---------- ----------
(approximately)
Average investment in impaired loans $1,300,000 $1,065,000 $3,230,000
========== ========== ==========
The interest income recognized on impaired loans for the years ended
December 31, 2002, 2001 and 2000 was not significant.
No additional funds are committed to be advanced in connection with
impaired loans.
At December 31, 2002 and 2001, restructured loans amounted to
approximately $3,124,000 and $1,095,000, respectively. There were no
restructured loans at December 31, 2000. No additional funds are committed
to be advanced in connection with restructured loans.
4. PREMISES AND EQUIPMENT
Major classifications of these assets are as follows:
2002 2001
Land $ 2,009,387 $ 95,000
Buildings 660,315 660,315
Leasehold improvements 1,014,555 956,465
Furniture, fixtures and equipment 4,736,652 3,756,657
----------- -----------
8,420,909 5,468,437
Accumulated depreciation and
amortization (2,954,577) (2,106,555)
----------- -----------
$ 5,466,332 $ 3,361,882
=========== ===========
Depreciation and amortization amounted to $863,886, $756,426 and $647,891
for the years ended December 31, 2002, 2001 and 2000, respectively.
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (Continued)
- --------------------------------------------------------------------------------
5. DERIVATIVE INSTRUMENTS
The following instruments qualify as derivatives as defined by SFAS No.
133:
December 31, 2002
-------------------------------
Contract/National Fair
Amount Value
Interest rate swap agreements $85,500,000 $ 2,308,044
Foreign currency swap agreements 2,000,000 12,599
Commitments to fund mortgage loans 49,733,296 356,210
Interest rate swap agreements consist of numerous agreements which
effectively convert the interest rate on certain certificates of deposit
from a fixed rate to a variable rate to more closely match the interest
rate sensitivity of the Company's assets and liabilities. The Company has
designated and assessed the derivatives as highly effective fair value
hedges, as defined by SFAS No. 133. 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 loss of approximately $67,000 and a gain of approximately
$6,000 for the years ended December 31, 2002 and 2001, respectively, as a
result of changes in the fair value of the foreign currency agreement.
The Company has adopted the provisions of the Derivatives Implementation
Group, Implementation Issue C13, When a Loan Commitment is Included in the
Scope of Statement No. 133 ("DIG C13"). DIG C13 requires that loan
commitments that relate to the origination or acquisition of mortgage
loans that will be held for resale must be accounted for as derivative
instruments in accordance with SFAS No. 133. The fair value of commitments
to fund mortgage loans is included in mortgage loans held for sale.
6. INCOME TAXES
The components of the provision (benefit) for income tax expenses for the
years ended December 31, 2002, 2001 and 2000 are as follows:
2002 2001 2000
Current tax expense $ 921,568 $ 40,000
Deferred tax (benefit) provision (36,447) 449,400 $(651,704)
--------- --------- ---------
$ 885,121 $ 489,400 $(651,704)
========= ========= =========
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (Continued)
- --------------------------------------------------------------------------------
Income taxes for the years ended December 31, 2002, 2001 and 2000, differ
from the amount computed by applying the federal statutory corporate rate
to earnings before income taxes as summarized below:
2002 2001 2000
Provision (benefit) based on Federal income
tax rate $ 799,741 $ 441,265 $(588,831)
State income taxes net of Federal benefit 85,384 49,731 (66,362)
Other (4) (1,596) 3,489
--------- --------- ---------
$ 885,121 $ 489,400 $(651,704)
========= ========= =========
The components of net deferred income taxes at December 31, 2002 and 2001
are as follows:
2002 2001
Deferred income tax assets:
Net operating loss carryforwards $1,728,963 $2,672,891
Allowance for loan losses 2,473,645 1,477,424
Loan fees 195,402 84,549
AMT credits 52,530
Cash to accrual adjustment 37,586 77,950
Other 183
---------- ----------
4,435,779 4,365,344
---------- ----------
Deferred income tax liabilities:
Accumulated depreciation 150,108 116,121
Unrealized gain on investment securities 291,818 147,335
Other 85,102 85,102
---------- ----------
527,028 348,558
---------- ----------
Deferred income tax assets, net $3,908,751 $4,016,786
========== ==========
At December 31, 2002 and 2001, the Company had tax net operating loss
carryforwards of approximately $4,595,000 and $7,098,000, respectively.
Such carryforwards expire as follows: $321,000 in 2006, $1,919,000 in
2007, $1,620,000 in 2008, $92,000 in 2009, and $643,000 in 2018. A change
in ownership on August 4, 1998, as defined in section 382 of the Internal
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, 2002 and 2001, the Company 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, 2002 and
2001.
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (Continued)
- --------------------------------------------------------------------------------
7. DEPOSITS
Interest-bearing deposits at December 31, 2002 and 2001 are summarized as
follows:
2002 2001
Interest-bearing demand $ 52,803,427 $ 19,164,133
Regular savings 66,940,672 64,338,080
Money market accounts 19,210,512 6,342,009
Time $100,000 and over 314,852,717 194,016,109
Other time 69,707,230 67,489,519
------------ ------------
$523,514,558 $351,349,850
============ ============
At December 31, 2002, the scheduled maturities of time deposits are as
follows:
2003 $201,993,812
2004 51,372,387
2005 50,969,043
2006 8,940,130
2007 61,404,779
Thereafter 9,879,796
------------
Total $384,559,947
============
8. OTHER BORROWED FUNDS
Other borrowed funds at December 31, 2002 and 2001 are summarized as
follows:
2002 2001
Treasury tax and loan deposits $2,421,898 $2,214,692
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 2,500,000
---------- ----------
$9,921,898 $9,714,692
========== ==========
Treasury tax and loan deposits are generally repaid within one to 120 days
from the transaction date.
The Federal Home Loan Bank of Atlanta has the option to convert the
$2,500,000 advance outstanding at December 31, 2002 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.
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (Continued)
- --------------------------------------------------------------------------------
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 $91,776,000 at December 31, 2002.
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 2002, 2001 and 2000 was approximately
$852,000, $705,000 and $659,000, respectively. Rental income for 2002,
2001 and 2000 was approximately $27,000, $45,000 and $55,000,
respectively. 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, 2002.
Payments for Revenue Under
Operating Leases Subleases
2003 $ 862,931 $ 22,650
2004 661,117
2005 410,271
2006 420,609
2007 316,953
Later years 1,179,717
---------- ----------
$3,851,598 $ 22,650
========== ==========
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, 2002 and 2001 was approximately
$8,946,000 and $2,750,000, 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.
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (Continued)
- --------------------------------------------------------------------------------
10. SHAREHOLDERS' EQUITY
Series B 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.
On April 16, 2002, all 102,283 shares of Series B preferred stock
automatically converted into 1,022,830 shares of common stock as a result
of the average closing price of the Company's common stock exceeding $8.00
for the period from March 4, 2002 through April 15, 2002.
Series C Preferred Stock
On December 31, 2002, the Company issued 50,000 shares of Series C
preferred stock for $100.00 per share through a private placement. The
Series C preferred stock is not convertible or redeemable except as a
result of a change in control.
Dividends - Non-cumulative cash dividends accrue at five percent annually
and are payable quarterly in arrears.
Liquidation Preference - In the event of any liquidation, dissolution or
winding up of affairs of the Company, the holders of Series C preferred
stock at the time shall receive $100.00 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, 2002 was $5,000,000.
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (Continued)
- --------------------------------------------------------------------------------
The Company and shareholder have agreed that they will cooperate in filing
an application with the Board of Governors of the Federal Reserve System
seeking approval for an exchange of the Series C preferred shares for
shares of a new series of preferred stock, which would be substantially
similar to the Series C shares, except the new shares would be convertible
into the Company's common stock at $10.00 per share.
Warrants
In 1998, in connection with the sale of common stock, warrants to purchase
80,800 shares of common stock at $10.00 per share were issued to
accredited foreign investors. 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.
Incentive Stock
During 2001, the Company's Board of Directors approved the Amended and
Restated Incentive Compensation Plan (the "Incentive Plan") for all
full-time senior officers and other officers and employees so designated
by the Chief Executive Officer. The amendments to this Plan permit the
issuance of common stock to officers and employees as incentive awards.
Previously, the incentive awards were paid in cash. The Company has
reserved 300,000 shares of common stock for issuance pursuant to the
Incentive Plan. Upon attainment of the required goals, the officer would
be awarded shares in the Company based on a pre-established vesting
schedule, currently a three-year period beginning one year after the grant
date. In January 2002, the Company awarded 59,029 shares under the
Incentive Plan at a weighted average grant price of $6.14 based upon the
closing share price on the date of grant. Compensation expense included in
earnings for 2002 is approximately $121,000.
Stock Options
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 1,000,000
shares of common stock are reserved for issuance pursuant to the 1998
Plan. During 2002, 2001 and 2000, the Company granted 94,900, 62,650 and
277,900 options, respectively, at various exercise prices based on the
fair value of the stock at the time of grant.
Pursuant to the disclosure requirements of SFAS No. 148, the following
table provides an expanded reconciliation for all periods presented that
adds back to reported net income the recorded expense under Accounting
Principles Board Opinion ("APB") No. 25, net of related income tax
effects, deducts the total fair value expense under SFAS No. 123, net of
related income tax effects and shows the reported and pro forma earnings
per share amounts.
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (Continued)
- --------------------------------------------------------------------------------
2002 2001 2000
Net income (loss) applicable to common shares
As reported $ 1,327,000 $ 558,348 $ (1,080,153)
Total stock-based employee compensation
cost included in the determination of net
income, net of related tax effects 75,370
Total stock-based employee compensation
cost determined under fair value method
for all awards, net of related tax effects (219,434) (243,347) (281,435)
------------- ----------- -------------
Pro forma net income (loss) applicable
to common shares $ 1,182,936 $ 315,001 $ (1,361,588)
============= =========== =============
Earnings (loss) per share - Basic
As reported $ 0.21 $ 0.10 $ (0.19)
Pro forma 0.18 0.06 (0.24)
Earnings (loss) per share - Dilutive
As reported $ 0.20 $ 0.10 $ (0.19)
Pro forma 0.18 0.06 (0.24)
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 2002, 2001 and
2000, respectively: dividend yield of 0%, expected volatility of 32.08%,
32.27% and 32.64%, risk-free interest rate of 3.48%, 4.57% and 6.44%, and
an expected life of 3 years.
A summary of the status of fixed stock option grants under the Company's
stock-based compensation plans as of December 31, 2002, 2001 and 2000, and
changes during the years ending on those dates is presented below:
2002 2001 2000
Weighted Average Weighted Average Weighted Average
Options Exercise Price Options Exercise Price Options Exercise Price
Outstanding -
Beginning of year 850,348 $ 8.63 816,948 $ 8.76 561,848 $ 10.00
Granted 94,900 7.93 62,650 6.52 277,900 6.37
Cancelled (34,087) 9.09 (29,250) 7.73 (22,800) 10.00
Exercised (7,063) 6.58
-------- -------- --------
Outstanding -
End of year 904,098 $ 8.68 850,348 $ 8.63 816,948 $ 8.76
======== ======== ========
Options exercisable
at year end 730,833 $ 8.84 652,291 $ 9.04 465,206 $ 9.39
Weighted average fair
value of options
granted during the year $ 2.07 $ 1.80 $ 1.94
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (Continued)
- --------------------------------------------------------------------------------
The following table summarizes information related to stock options
outstanding at December 31, 2002:
Weighted Weighted Weighted
Average Average Average
Exercise Options Remaining Exercise Options Exercise
Price Outstanding Life Price Exercisable Price
------------- --------------- --------------- ------------- --------------- -------------
$5.25 - 6.75 337,700 7.57 $ 6.75 234,790 $ 6.40
$7.98 - 10.00 566,398 6.10 $ 9.84 496,093 $ 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, 2002, the Bank's retained earnings available for the
payment of dividends was approximately $3,472,000. Accordingly,
approximately $58,113,000 of the Company's equity in the net assets of the
Bank was restricted at December 31, 2002. Funds available for loans or
advances by the Bank to the Company amounted to approximately $5,771,000.
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, 2002, financial instruments having credit risk in excess
of that reported in the balance sheet totaled approximately $193,443,000.
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 "Statutory Trust
I"), issued $6,000,000 in trust preferred securities. The Statutory Trust
I 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 paid dividends at an initial rate
of 5.60% through March 17, 2002. The rate then became 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
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (Continued)
- --------------------------------------------------------------------------------
and December 18 of each year. There is a par call option beginning
December 18, 2006.
On April 10, 2002, the Company participated in a pooled trust preferred
offering. In connection with the transaction, the Company, through its
subsidiary trust, Florida Banks Capital Trust II (the "Capital Trust II"),
issued $4,000,000 in trust preferred securities. The Capital Trust II also
issued $124,000 of common securities to the Company and used the total
proceeds to purchase $4,124,000 in 30-year subordinated debentures of the
Company. The preferred securities pay dividends at an annual rate based on
6-month LIBOR plus 3.70% adjusted semi-annually after each dividend
payment date. Dividend payment dates are April 22 and October 22 of each
year. There is a par call option beginning April 22, 2007.
On June 28, 2002, the Company participated in a pooled trust preferred
offering. In connection with the transaction, the Company, through its
subsidiary trust, Florida Banks Capital Trust I (the "Capital Trust I"),
issued $4,000,000 in trust preferred securities. The Capital Trust I also
issued $124,000 of common securities to the Company and used the total
proceeds to purchase $4,124,000 in 30-year subordinated debentures of the
Company. The preferred securities pay dividends at an annual rate based on
3-month LIBOR plus 3.65% adjusted quarterly after each dividend payment
date. Dividend payment dates are March 30, June 30, September 30 and
January 30 of each year. There is a par call option beginning June 30,
2007.
On December 19, 2002, the Company participated in a pooled trust preferred
offering. In connection with the transaction, the company, through its
subsidiary trust, Florida Banks Statutory Trust II (the "Statutory Trust
II"), issued $3,000,000 in trust preferred securities. The Statutory Trust
II also issued $93,000 of common securities to the Company and used the
total proceeds to purchase $3,093,000 in 30-year subordinated debentures
of the Company. The preferred securities pay dividends at an initial rate
of 4.66% through March 25, 2003. The rate then becomes a floating rate
based on 3-month LIBOR plus 3.75%, adjusted quarterly after each dividend
payment date. Dividend payment dates are March 26, June 26, September 26
and December 26 of each year. There is a par call option beginning
December 26, 2007.
The subordinated debentures are the sole assets of the Subsidiary Trusts
and are eliminated, along with the related income effects, in the
Company's consolidated financial statements.
14. SUPPLEMENTAL STATEMENTS OF CASH FLOWS INFORMATION
Supplemental disclosure of cash flow information:
2002 2001 2000
Cash paid during the year for interest
on deposits and borrowed funds $15,630,556 $15,890,571 $12,121,206
Cash paid for income taxes, net of refunds $ 275,000
Supplemental schedule of noncash investing and financing activities:
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (Continued)
- --------------------------------------------------------------------------------
2002 2001 2000
Proceeds from demand deposits used to
purchase shares of common stock under
the employee stock purchase plan $ 210,770 $ 227,088 $ 367,153
Loans transferred to real estate owned $ 652,500 $2,867,827 $ 846,000
Increase in fair market value of derivative
instruments used to hedge interest rate
exposure on time deposits $2,085,117 $ 17,776
15. CONDENSED FINANCIAL INFORMATION OF FLORIDA BANKS, INC. (PARENT ONLY)
The following represents the parent only condensed balance sheets as of
December 31, 2002 and 2001 and the related condensed statements of
operations and cash flows for the years ending December 31, 2002, 2001 and
2000.
Condensed Balance Sheets 2002 2001
Assets
Cash and repurchase agreements $ 1,951,961 $ 1,315,647
Available for sale investment securities, at
fair value (cost $3,292,213 and $6,204,759, respectively) 3,418,212 6,386,271
Premises and equipment, net 170,091 221,220
Accrued interest receivable 21,591 38,903
Deferred income taxes, net 2,555,217 1,105,521
Prepaid and other assets 52,301 225,578
Investment in bank subsidiary 61,585,111 43,931,579
Investment in other subsidiaries 536,366 195,366
------------ ------------
Total Assets $ 70,290,850 $ 53,420,085
============ ============
Liabilities and Shareholders' Equity
Subordinated debentures payable to subsidiary trust $ 17,000,092 $ 6,005,000
Repurchase agreements 1,000,000
Due to Florida Bank, N.A 92,318
Accounts payable and accrued expenses 326,883 180,733
Shareholders' Equity
Preferred stock 5,000,000 6,955,244
Common stock 70,706 59,799
Additional paid-in capital 54,150,565 46,828,142
Treasury stock (1,866,197) (1,866,197)
Accumulated deficit (4,874,873) (6,079,156)
Accumulated other comprehensive income,
net of tax 483,674 244,202
------------ ------------
Total Liabilities and Shareholders' Equity $ 70,290,850 $ 53,420,085
============ ============
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (Continued)
- --------------------------------------------------------------------------------
Condensed Statements of Operations 2002 2001 2000
Interest income on loans, including fees $ 496 $ 18,719 $ 434,389
Interest income on investment securities 318,230 666,051 847,440
Other interest income 34,811 80,748 241,941
Other income 436,948 27
------------ ------------ ------------
Total income 353,537 1,202,466 1,523,797
------------ ------------ ------------
Equity in undistributed income (loss) of bank subsidiary 3,379,437 1,654,552 (539,611)
Equity in undistributed loss of subsidiary (152) (155) (479)
Expenses (3,419,569) (2,557,156) (2,389,988)
Income tax benefit 1,153,805 508,732 326,128
------------ ------------ ------------
Net income (loss) $ 1,467,058 $ 808,439 $ (1,080,153)
============ ============ ============
Condensed Statements of Cash Flows 2002 2001 2000
Operating activities:
Net income (loss) $ 1,467,058 $ 808,439 $ (1,080,153)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Equity in undistributed (income) loss of
Florida Bank, N.A (3,379,437) (1,654,552) 539,611
Equity in loss of Florida Bank Financial Services, Inc. 152 155 479
Depreciation and amortization 62,618 65,353 60,177
Restricted stock grants 120,844
Deferred income tax benefit (1,428,806) (548,731) (326,128)
Loss on disposal of premises and equipment 1,597
Transfer from affiliate, net (3,079)
Gain on sale of investment securities (73,988) (5,174)
Accretion of discounts on investments, net (15,466) (16,687) (20,957)
Accretion of debt issuance costs 70,445
(Benefit) provision for loan losses (10,000) (64,411)
Amortization of loan premiums 1,225 45,685
Decrease in accrued interest receivable 17,312 41,150 32,451
(Decrease) increase in due to Florida Bank, N.A (92,318) 92,318 32,941
Decrease (increase) in prepaid and other assets 173,277 (92,775) (88,899)
Increase (decrease) in accounts payable and
accrued expenses 145,998 98,253 (241,388)
------------ ------------ ------------
Net cash used in operating activities (2,861,402) (1,289,840) (1,114,169)
------------ ------------ ------------
Investing activities:
Purchase of premises and equipment (8,410) (62,353) (35,650)
Proceeds from sales, paydowns and maturities
of investment securities 2,928,012 5,865,516 5,264,240
Purchase of investment securities (7,441,787)
Net decrease in loans 1,073,535 6,657,377
Purchase of common stock of Florida Bank
Statutory Trust I (341,000) (186,000)
Purchase of common stock of Florida Bank
Financial Services, Inc. (10,000)
Capital contributed to Florida Bank, N.A (14,000,000) (9,500,000) (12,300,000)
------------ ------------ ------------
Net cash used in investing activities (11,421,398) (2,809,302) (7,865,820)
------------ ------------ ------------
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (Continued)
- --------------------------------------------------------------------------------
2002 2001 2000
Financing activities:
(Decrease) increase in repurchase agreements $ (1,000,000) $ (9,143,000) $ 4,085,000
Payment of debt issuance costs (196,353)
Proceeds from issuance of common stock, net 210,770 227,088 367,153
Proceeds from the issuance of preferred stock, net 5,000,000 6,806,470
Proceeds from the issuance of subordinated debt, net 11,121,000 6,005,000
Preferred dividends paid (262,775) (127,373)
Net proceeds from the exercise of stock options 46,472
Purchase of treasury stock (359,361) (647,992)
------------ ------------ ------------
Net cash provided by financing activities 14,919,114 3,408,824 3,804,161
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 636,314 (690,318) (5,175,828)
Cash and cash equivalents at beginning of year 1,315,647 2,005,965 7,181,793
------------ ------------ ------------
Cash and cash equivalents at end of year $ 1,951,961 $ 1,315,647 $ 2,005,965
============ ============ ============
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, 2002,
that the Bank meets all capital adequacy requirements to which it is
subject.
As of December 31, 2002 and 2001, 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 Bank's actual capital amounts and ratios are also presented in the
following table.
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (Continued)
- --------------------------------------------------------------------------------
To be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------- -------------------------- ----------------------------
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 2002:
Total capital
(to risk-weighted assets)
Florida Banks, Inc. $ 76,216,000 11.92% > $ 51,160,000 > 8.00% N/A N/A
- -
Florida Bank, N.A. 68,443,000 10.75 > 50,920,000 > 8.00 > $ 63,650,000 > 10.00%
- - - -
Tier I capital
(to risk-weighted assets)
Florida Banks, Inc. 68,953,000 10.78 > 25,580,000 > 4.00 N/A N/A
- -
Florida Bank, N.A. 61,180,000 9.6 > 25,460,000 > 4.00 > 38,190,000 > 6.00
- - - -
Tier I capital
(to average assets)
Florida Banks, Inc. 68,953,000 9.9 > 27,655,000 > 4.00 N/A N/A
- -
Florida Bank, N.A. 61,180,000 8.9 > 27,280,000 > 4.00 > 34,100,000 > 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, 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 Banks, N.A. 43,271,000 9.17 > 18,883,000 > 4.00 > 23,604,000 > 5.00
- - - -
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (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 No. 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.
Mortgage Loans Held for Sale - Fair values of mortgage loans held for sale
are based on commitments on hand from investors or prevailing market
prices.
Loans Held for Investment - 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.
Company Obligated Manditorily Redeemable Preferred Securities of
Subsidiary Trusts - The fair value of the Company's trust preferred
securities approximates the estimated fair value as such liabilities
reprice frequently based on a quoted market rate of interest.
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (Continued)
- --------------------------------------------------------------------------------
A comparison of the carrying amount to the fair values of the Company's
significant financial instruments as of December 31, 2002 and 2001 is as
follows:
2002 2001
--------------------------- ---------------------------
Carrying Fair Carrying Fair
(Amounts in Thousands) Amount Value Amount Value
Financial assets:
Cash and cash equivalents $ 89,480 $ 89,480 $ 73,989 $ 73,989
Available for sale investment securities 50,931 50,931 33,954 33,954
Held to maturity investment securities 228 229 2,867 2,934
Other investments 2,493 2,493 2,065 2,065
Mortgage loans held for sale 54,674 54,674
Loans held for investment 550,974 551,469 401,663 427,211
Derivative instruments 2,322 2,322 280 280
Financial liabilities:
Deposits $664,910 $667,897 $451,249 $453,684
Repurchase agreements 4,654 4,654 4,496 4,496
Other borrowed funds 9,922 8,831 9,715 9,273
Company obligated manditorily
redeemable preferred securities
of subsidiary trusts 16,473 16,473 5,819 5,819
Off-balance sheet credit related
financial instruments:
Commitments to extend credit $193,443 $193,443 $162,683 $162,683
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.
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (Continued)
- --------------------------------------------------------------------------------
19. EARNINGS PER COMMON SHARE
Earnings per common share have been computed based on the following.
2002 2001 2000
----------- ----------- -----------
Net income (loss) $ 1,467,058 $ 808,439 $(1,080,153)
Less preferred stock dividends (140,058) (250,091)
----------- ----------- -----------
Net income (loss) applicable to common stock $ 1,327,000 $ 558,348 $(1,080,153)
=========== =========== ===========
Weighted average number of common
shares outstanding - Basic 6,442,022 5,703,524 5,681,290
Incremental shares from the assumed
conversion of stock options 89,597 2,738 583
----------- ----------- -----------
Total - Diluted 6,531,619 5,706,262 5,681,873
=========== =========== ===========
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. GUARANTEES
The Company issues standby letters of credit to provide credit support for
some creditors in case of default. As of December 31, 2002, the carrying
amount of the liability was $0 and the maximum potential payment was
$8,792,836.
Effective January 1, 2003, and in compliance with the FASB Interpretation
No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, the Company
adopted the recognition requirements for guarantees entered into after
December 31, 2002. The Company does not anticipate a material impact on
its operations from this accounting standard.
21. SEGMENT REPORTING
Prior to October 1, 2002, the Company had one reporting segment. However,
in October 2002, the Company started a mortgage banking division which is
managed as a segment. Accordingly, during 2002 the Company has two
reporting segments, the commercial bank and the mortgage bank. The
commercial bank segment provides its commercial customers such products as
working capital loans, equipment loans and leases, commercial real estate
loans and other business related products and services. This segment also
offers mortgage loans to principals of its commercial customers. The
mortgage bank segment originates mortgage loans through its network of
mortgage brokers and sells these loans (on a wholesale basis) into the
secondary market.
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (Continued)
- ----------------------------------------------------------------------
Information about reportable segments, and reconciliation of such
information to the consolidated financial statements as of and for the
year ended December 31, 2002 follows:
Commercial Mortgage Intersegment Consolidated
Bank Bank Other Eliminations Total
------------ ------------ ------------ ------------ ------------
Net interest income $ 18,943,155 $ 61,645 $ 338,204 $ 19,343,004
Noninterest income 2,684,723 1,355,036 4,039,759
Noninterest expense 13,689,351 911,222 3,404,236 18,004,809
Net income (loss) before taxes 4,912,752 505,459 (3,066,032) 2,352,179
Assets 694,561,452 55,234,735 70,290,850 (64,021,487) $756,065,550
Expenditures for additions
to premises and equipment 2,398,326 561,600 8,410 2,968,336
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on profit or loss from operations before income taxes.
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
segment appeals to different markets and accordingly requires different
technology and marketing strategies.
The Company derives a majority of its revenues from interest income and
gain on sale of mortgage loans and the chief operating decision maker
relies primarily on net income before taxes to assess the performance of
the segments and make decisions about resources to be allocated to the
segments. Therefore, the segments are reported above using net income
before taxes. The Company does not allocate income taxes to the segments.
The Company does not have operating segments other than those reported.
Parent Company financial information is included in the other category
above and is deemed to represent an overhead function rather than an
operating segment.
The Company does not have a single external customer from which it derives
10 percent or more of its revenues and operates in one geographical area.
22. 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 $144,000, $136,000 and
$110,092 to the Plan in 2002, 2001 and 2000, respectively.
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (Continued)
- --------------------------------------------------------------------------------
23. 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 41,000, 50,000 and 76,000 for
the years ended December 31, 2002, 2001 and 2000, respectively.
24. 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 $2,364,000 and $1,274,000 at December 31,
2002 and 2001.
Deposits from related parties held by the Company at December 31, 2002 and
2001 were approximately $3,772,000 and $489,000, respectively.
On September 9. 2002, Florida Bank, N.A. purchased a parcel of land for
the purpose of future construction of a corporate headquarters and the
Jacksonville banking office. A director of the Company was among the
eleven sellers of the property. The purchase price was $905,084, which did
not exceed an independent appraisal of the property which was conducted
prior to the purchase.
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (Continued)
- --------------------------------------------------------------------------------
25. SUMMARIZED QUARTERLY DATA (UNAUDITED)
Following is a summary of the quarterly results of operations for the
years ended December 31, 2002 and 2001:
Fiscal Quarter
---------------------------------------------------------------
First Second Third Fourth Total
$ In Thousands Except Per Share Amounts
2002
Interest income $ 8,008 $ 8,676 $ 9,067 $ 9,176 $ 34,927
Interest expense 3,729 3,688 4,126 4,041 15,584
-------- -------- -------- -------- --------
Net interest income 4,279 4,988 4,941 5,135 19,343
Provision for loan losses 380 1,028 699 919 (1) 3,026
-------- -------- -------- -------- --------
Net interest income after provision
for loan losses 3,899 3,960 4,242 4,216 16,317
Noninterest income 537 569 755 2,179 4,040
Noninterest expense 3,633 4,270 4,578 5,524 18,005
-------- -------- -------- -------- --------
Income before income taxes 803 259 419 871 2,352
Income tax expense 307 97 153 328 885
-------- -------- -------- -------- --------
Net income 496 162 266 543 1,467
Preferred stock dividends (120) (20) (140)
-------- -------- -------- -------- --------
Net income applicable to
common shares $ 376 $ 142 $ 266 $ 543 $ 1,327
======== ======== ======== ======== ========
Basic income per share $ 0.07 $ 0.02 $ 0.04 $ 0.08 $ 0.21
Diluted income per share $ 0.07 $ 0.02 $ 0.04 $ 0.08 $ 0.20
----------
(1) Includes an additional provision for loan losses of approximately $530,000
related to the specific reserve established against a customer's
uncollected ACH account.
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (Concluded)
- --------------------------------------------------------------------------------
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
* * * * * *
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There has been no occurrence requiring a response to this Item.
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 22, 2003 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 2003 Annual Meeting of Shareholders scheduled to be held May
22, 2003 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 2003 Annual Meeting of
Shareholders scheduled to be held May 22, 2003 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 2003 Annual Meeting of Shareholders scheduled to be held May
22, 2003 is incorporated herein by reference.
PART IV
Item 14. Controls and Procedures
In order to ensure that the information the Company must disclose in its
filings with the Securities and Exchange Commission is recorded, processed,
summarized and reported on a timely basis, the Company has formalized its
disclosure controls and procedures. The Company's principal executive officer
and principal financial officer have reviewed and evaluated the effectiveness of
the Company's disclosure controls and procedures, as defined in Exchange Act
Rules 13a-14(c) and 15d-14(c), as of a date within 90 days prior to the filing
date of this report (the "Evaluation Date"). Based on such evaluation, such
officers have concluded that, as of the Evaluation Date, the Company's
disclosure controls and procedures were effective in timely alerting them to
material information relating to the Company (and its consolidated subsidiaries)
57
required to be included in the Company's periodic SEC filings. Since the
Evaluation Date, there have not been any significant changes in the internal
controls of the Company, or in other factors that could significantly affect
these controls subsequent to the Evaluation Date.
Item 15. 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, 2002 and 2001
Consolidated Statements of Operations - Years ended December 31, 2002,
2001 and 2000
Consolidated Statements of Shareholders' Equity - Years ended December
31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows - Years ended December 31, 2002,
2001 and 2000
Notes to Consolidated Financial Statements
2. Exhibits.
--------
3.1 Articles of Incorporation of the Company, as amended(1)
3.1.1 Second Amended and Restated Articles of Incorporation of the
Company(1)
3.1.2 Amendment to Second Amended and Restated Articles of Incorporation of
the Company(2)
3.1.3 Articles of Amendment to Second and Amended and Restated Articles of
Incorporation of the Company(3)
3.2 Amended and Restated By-Laws of the Company(1)
4.1 Specimen Common Stock Certificate of the Company(1)
4.2 See Exhibits 3.1.1 and 3.2 for provisions of the Articles of
Incorporation and By-Laws of the Company defining rights of the
holders of the Company's Common Stock(1)
4.3 Indenture, dated December 18, 2001, between the Company and State
Street Bank and Trust Company of Connecticut, National Association(4)
4.4 Amended and Restated Declaration of Trust, dated December 18, 2001, by
and among State Street Bank and Trust Company of Connecticut, National
Association, the Company and the administrators named therein(4)
4.5 Indenture, dated as of April 10, 2002, between the Company and
Wilmington Trust Company, as trustee(5)
4.6 The Amended and Restated Declaration of Trust, dated as of April 10,
2002, among the Company, as sponsor, the Administrator(s) named
therein and Wilmington Trust Company, as Delaware Trustee and
Institutional Trustee, and the holders from time to time of undivided
beneficial interests in the assets of Florida Banks Capital Trust
II(5)
58
4.7 Indenture, dated as of June 27, 2002, between the Company and Wells
Fargo Delaware Trust Company, as trustee(5)
4.8 The Amended and Restated Trust Agreement dated as of June 27, 2002
among the Company, as depositor, the Administrative Trustees named
therein and Wells Fargo Bank, N.A., as property trustee, Wells Fargo
Delaware Trust Company, as resident trustee, and the holders from time
to time of undivided beneficial interests in the assets of Florida
Banks Capital Trust II(5)
4.8 Indenture, dated December 19, 2002, between the Company and State
Street Bank and Trust Company of Connecticut, National Association(7)
4.9 Amended and Restated Declaration of Trust, dated December 19, 2002, by
and among State Street Bank and Trust Company of Connecticut, National
Association, the Company and the administrators named therein(7)
10.1 Form of Employment Agreement between the Company and Charles E.
Hughes, Jr. (1)
10.2 The Company's 1998 Stock Option Plan(1)
10.2.1 Form of Incentive Stock Option Agreement(1)
10.2.2 Form of Non-qualified Stock Option Agreement(1)
10.3 The Company's Amended and Restated Incentive Compensation Plan(6)
10.4 Form of Employment Agreement between the Company and T. Edwin Stinson,
Jr., Don D. Roberts and Richard B. Kensler(1)
10.5 Placement Agreement, dated December 4, 2001, between the Company,
First Tennessee Capital Markets and Keefe, Bruyette & Woods, Inc. (4)
10.6 Subscription Agreement, dated December 18, 2001, between the Company,
Florida Banks Statutory Trust I and Preferred Term Securities IV, Ltd.
(4)
10.7 Guarantee Agreement, dated December 18, 2001, by and between the
Company and State Street Bank and Trust Company of Connecticut(4)
10.8 Placement Agreement, dated as of March 26, 2002, between the Company
and Florida Banks Capital Trust II and Salomon Smith Barney Inc. (5)
10.9 Debenture Subscription Agreement, dated as of April 10, 2002, between
the Company and Florida Banks Capital Trust II(5)
10.10 Capital Securities Subscription Agreement, dated March 26, 2002, among
the Company, Florida Banks Capital Trust II and MM Community Funding
III, Ltd. (5)
10.11 Common Securities Subscription Agreement, dated April 10, 2002,
between the Company and Florida Banks Capital Trust II(5)
10.12 Guarantee Agreement, dated as of April 10, 2002, between the Company
and Wilmington Trust Company, as trustee(5)
10.13 Subscription Agreement, dated as of June 27, 2002, between the
Company, Florida Banks Capital Trust II and Bear, Stearns & Co. (5)
59
10.14 Placement Agreement, dated as of June 27, 2002, between the Company
and Florida Banks Capital Trust II and SAMCO Capital Markets, a
division of Service Asset Management Company(5)
10.15 Trust Preferred Securities Guarantee Agreement, dated as of June 27,
2002, between the Company and Wells Fargo, as trustee(5)
10.16 Placement Agreement, dated December 11, 2002, between the Company,
Florida Banks Statutory Trust II, FTN Financial Capital Markets and
Keefe, Bruyette & Woods, Inc. (7)
10.17 Subscription Agreement, dated December 19, 2002, between the Company,
Florida Banks Statutory Trust II and Preferred Term Securities VIII,
Ltd. (7)
10.18 Guarantee Agreement, dated December 19, 2002, by and between the
Company and State Street Bank and Trust Company of Connecticut(7)
10.19 Subscription Agreement for Series C Preferred Stock, dated December
31, 2002(3)
21.1 Subsidiaries of the Registrant(7)
23.1 Consent of Deloitte & Touche LLP(7)
- ----------
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1, previously filed by the Company (Registration Statement No.
333-50867).
(2) Incorporated by reference to Exhibit to the Registration Statement on Form
S-3, previously filed by the Company (Registration Statement No.
333-67372).
(3) Incorporated by reference to the Form 8-K dated January 2, 2003, previously
filed by the Company.
(4) Incorporated by references to the Form 10-Q for the quarter ended March 31,
2002, previously filed by the Company.
(5) Incorporated by reference to the Form 10-Q for quarter ended June 30, 2002,
previously filed by the Company.
(6) Incorporated by reference to Exhibit 10.1 to the Registration Statement on
Form S-8, previously filed by the Company (Registration Statement No.
333-70442).
(7) Filed herewith.
60
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 25, 2003.
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 25, 2003
- --------------------------------------- Officer and Director (Principal
Charles E. Hughes, Jr. Executive Officer)
/s/ T. Edwin Stinson, Jr. Chief Financial Officer, March 25, 2003
- --------------------------------------- Secretary, Treasurer and
T. Edwin Stinson, Jr. Director (Principal Financial
and Accounting Officer)
/s/ M.G. Sanchez Chairman of the Board March 25, 2003
- ---------------------------------------
M. G. Sanchez
/s/ T. Stephen Johnson Vice-Chairman of the Board March 25, 2003
- ---------------------------------------
T. Stephen Johnson
/s/ Clay M. Biddinger Director March 25, 2003
- ---------------------------------------
Clay M. Biddinger
/s/ P. Bruce Culpepper Director March 25, 2003
- ---------------------------------------
P. Bruce Culpepper
/s/ Dr. Adam F. Herbert, Jr. Director March 25, 2003
- ---------------------------------------
Dr. Adam F. Herbert, Jr.
/s/ W. Andrew Krusen, Jr. Director March 25, 2003
- ---------------------------------------
W. Andrew Krusen, Jr.
/s/ Nancy E. LaFoy Director March 25, 2003
- ---------------------------------------
Nancy E. LaFoy
/s/ Wilford C. Lyon, Jr. Director March 25, 2003
- ---------------------------------------
Wilford C. Lyon, Jr.
/s/ David McIntosh Director March 25, 2003
- ---------------------------------------
David McIntosh
61
Certification by the Chief Executive Officer pursuant to Sarbanes-Oxley Section
302(a):
I, Charles E. Hughes, Jr., certify that:
1. I have reviewed this annual report on Form 10-K of Florida Banks,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and b) any fraud, whether or not
material, that involves management or other employees who have a
significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 25, 2003 By: /s/ Charles E. Hughes, Jr.
------------------------------
Charles E. Hughes, Jr.
President and Chief Executive Officer
62
Certification by the Chief Financial Officer pursuant to Sarbanes-Oxley Section
302(a):
I, T. Edwin Stinson, Jr., certify that:
1. I have reviewed this annual report on Form 10-K of Florida Banks,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 25, 2003 By: /s/ T. Edwin Stinson, Jr.
-------------------------------
T. Edwin Stinson, Jr.
Chief Financial Officer
63
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------ ----------------------
4.8 Indenture, dated December 19, 2002, between the Company and State
Street Bank and Trust Company of Connecticut, National Association
4.9 Amended and Restated Declaration of Trust, dated December 19, 2002, by
and among State Street Bank and Trust Company of Connecticut, National
Association, the Company and the administrators named therein
10.16 Placement Agreement, dated December 11, 2002, between the Company,
Florida Banks Statutory Trust II, FTN Financial Capital Markets and
Keefe, Bruyette & Woods, Inc.
10.17 Subscription Agreement, dated December 19, 2002, between the Company,
Florida Banks Statutory Trust II and Preferred Term Securities VIII,
Ltd.
10.18 Guarantee Agreement, dated December 19, 2002, by and between the
Company and State Street Bank and Trust Company of Connecticut
21.1 Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche, LLP
64