FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 0-24683
FLORIDA BANKS, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 58-2364573
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5210 BELFORT ROAD, SUITE 310
JACKSONVILLE, FL
32256
(Address of principal executive offices)
(904) 332-7770
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
- -
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes |_| No |X|
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Title Outstanding
COMMON STOCK, $.01 PAR VALUE 6,784,935 OUTSTANDING AT April 28, 2003
PER SHARE
-1-
Table of Contents
Part I Financial Information
Item 1. Financial Statements ........................................ Page 3
Item 2. Management's discussion and Analysis of Financial
Condition and Results of Operations ......................... Page 13
Item 3. Quantitative and Qualitative Disclosures about
Market Risk ............................................... Page 20
Item 4. Controls and Procedures ..................................... Page 21
Part II Other Information
Item 1. Legal Proceedings ........................................... Page 22
Item 2. Changes in Securities ....................................... Page 22
Item 3. Defaults Upon Senior Securities ............................. Page 22
Item 4. Submission of Matters to a Vote of Security Holders ......... Page 22
Item 5. Other Information ........................................... Page 22
Item 6. Exhibits and Reports on Form 8-K ............................ Page 22
-2-
PART I. Financial Information
Item 1. Financial Statements
FLORIDA BANKS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited)
- --------------------------------------------------------------------------------
March 31, December 31,
ASSETS 2003 2002
CASH AND DUE FROM BANKS $ 29,036,219 $ 26,964,504
FEDERAL FUNDS SOLD AND REPURCHASE AGREEMENTS 62,528,000 62,515,000
------------- -------------
Total cash and cash equivalents 91,564,219 89,479,504
INVESTMENT SECURITIES:
Available for sale, at fair value (cost $47,162,231 and $50,155,158
at March 31, 2003 and December 31, 2002) 47,687,248 50,930,650
Held to maturity, at cost (fair value $0 and $229,475
at March 31, 2003 and December 31, 2002) 227,925
Other investments 3,299,050 2,493,350
------------- -------------
Total investment securities 50,986,298 53,651,925
MORTGAGE LOANS HELD FOR SALE 89,959,868 54,674,248
LOANS:
Commercial real estate 336,271,629 313,120,588
Commercial 173,183,597 166,122,230
Residential mortgage 30,062,883 23,080,140
Consumer 48,313,260 45,859,704
Credit card and other loans 1,953,203 2,791,678
------------- -------------
Total loans 589,784,572 550,974,340
Allowance for loan losses (7,503,368) (7,263,029)
Net deferred loan fees (650,837) (519,271)
------------- -------------
Net loans 581,630,367 543,192,040
PREMISES AND EQUIPMENT, NET 5,500,030 5,466,332
ACCRUED INTEREST RECEIVABLE 2,295,876 2,375,102
DEFERRED INCOME TAXES, NET 3,580,648 3,908,751
DERIVATIVE INSTRUMENTS 2,917,062 2,321,643
OTHER REAL ESTATE OWNED 652,500 652,500
OTHER ASSETS 10,969,827 343,505
------------- -------------
TOTAL ASSETS $ 840,056,695 $ 756,065,550
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS:
Noninterest-bearing demand $ 95,019,075 $ 141,395,150
Interest-bearing demand 55,654,059 52,803,427
Regular savings 72,413,780 66,940,672
Money market accounts 25,107,294 19,210,512
Time $100,000 and over 361,112,204 314,852,717
Other time 87,375,751 69,707,230
------------- -------------
Total deposits 696,682,163 664,909,708
REPURCHASE AGREEMENTS SOLD 51,316,707 4,653,878
OTHER BORROWED FUNDS 14,461,385 9,921,898
ACCRUED INTEREST PAYABLE 2,624,990 2,377,963
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 4,701,395 4,765,136
------------- -------------
Total liabilities 769,786,640 686,628,583
------------- -------------
COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES
OF SUBSIDIARY TRUST 16,503,668 16,473,092
------------- -------------
SHAREHOLDERS' EQUITY:
Series C Preferred Stock, $100.00 par value, 50,000 shares authorized,
50,000 shares issued and outstanding 5,000,000 5,000,000
Common stock, $.01 par value; 30,000,000 shares authorized; 6,784,935 and
6,768,362 shares issued, respectively 67,850 67,684
Additional paid-in capital 52,453,167 52,287,390
Accumulated deficit (deficit of $8,434,037
eliminated upon quasi-reorganization on December 31, 1995) (4,082,083) (4,874,873)
Accumulated other comprehensive income, net of tax 327,453 483,674
------------- -------------
Total shareholders' equity 53,766,387 52,963,875
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 840,056,695 $ 756,065,550
============= =============
See notes to condensed financial statements.
-3-
FLORIDA BANKS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
-------------------------------------------------------------------------------
Three-Month Period Ended
March 31,
------------------------------------
2003 2002
----------- -----------
INTEREST INCOME:
Loans, including fees $ 9,285,628 $ 7,230,160
Investment securities 408,679 575,134
Federal funds sold 104,362 202,859
----------- -----------
Total interest income 9,798,669 8,008,153
----------- -----------
INTEREST EXPENSE:
Deposits 3,734,228 3,485,513
Repurchase agreements 100,892 126,135
Borrowed funds 104,663 117,136
----------- -----------
Total interest expense 3,939,783 3,728,784
----------- -----------
NET INTEREST INCOME 5,858,886 4,279,369
PROVISION FOR LOAN LOSSES 889,039 380,434
----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 4,969,847 3,898,935
----------- -----------
NONINTEREST INCOME:
Service fees 518,445 368,448
Gain on sale of mortgage loans 2,271,626
Mortgage loan processing fees 477,553
Mortgage loan origination fees 181,937 92,436
Other noninterest income 234,248 76,324
----------- -----------
3,683,809 537,208
----------- -----------
NONINTEREST EXPENSES:
Salaries and benefits 5,113,894 2,188,843
Occupancy and equipment 628,804 466,550
Data processing 258,986 196,914
Dividends on preferred security of subsidiary trust 222,076 82,982
Other 1,211,324 697,870
----------- -----------
7,435,084 3,633,159
----------- -----------
INCOME BEFORE PROVISION
FOR INCOME TAXES 1,218,572 802,984
PROVISION FOR INCOME TAXES 425,782 306,662
----------- -----------
NET INCOME $ 792,790 $ 496,322
=========== ===========
PREFERRED STOCK DIVIDENDS (61,644) (120,049)
----------- -----------
NET INCOME APPLICABLE TO COMMON SHARES $ 731,146 $ 376,273
=========== ===========
INCOME PER COMMON SHARE:
Basic $ 0.11 $ 0.07
=========== ===========
Diluted $ 0.11 $ 0.07
=========== ===========
See notes to condensed financial statements.
-4-
FLORIDA BANKS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
- --------------------------------------------------------------------------------
Preferred Stock Common Stock Additional
--------------------- -------------------- Paid-In Accumulated
Shares Par Value Shares Par Value Capital Deficit
BALANCE, JANUARY 1, 2002 102,283 $ 6,955,244 5,677,660 $ 56,777 $44,964,967 $ (6,079,156)
Comprehensive income:
Net Income 1,467,058
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 dividends paid (262,775)
_______ ___________ _________ _________ ___________ ____________
BALANCE, DECEMBER 31, 2002 50,000 5,000,000 6,768,362 67,684 52,287,390 (4,874,873)
Comprehensive income:
Net Income 792,790
Unrealized gain on available for sale
investment securities, net of tax of
$94,254
Comprehensive income
Issuance of common stock to Employee
Stock Purchase Plan 14,842 148 101,816
Expenses of Series C Preferred Stock offering (10,677)
Exercise of stock options and issue of stock
grants 1,731 18 74,638
_______ ___________ _________ _________ ___________ ____________
BALANCE, March 31, 2003 (Unaudited) 50,000 $ 5,000,000 6,784,935 $ 67,850 $52,453,167 $ (4,082,083)
Accumulated
Other
Comprehensive
(loss) income
Net of Tax Total
BALANCE, JANUARY 1, 2002 $ 244,202 $46,142,034
Comprehensive income:
Net Income 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 dividends paid (262,775)
_____________ ______________
BALANCE, DECEMBER 31, 2002 483,674 52,963,875
Comprehensive income:
Net Income 792,790
Unrealized gain on available for sale
investment securities, net of tax of
$94,254 (156,221) (156,221)
Comprehensive income 636,579
Issuance of common stock to Employee
Stock Purchase Plan 101,964
Expenses of Series C Preferred Stock offering (10,677)
Exercise of stock options and issue of stock
grants 74,656
__________ ___________
BALANCE, March 31, 2003 (Unaudited) $ 327,453 $53,766,387
See notes to condensed financial statements.
-5-
FLORIDA BANKS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
- --------------------------------------------------------------------------------
Three-Month Period Ended
March 31,
----------------------------------
OPERATING ACTIVITIES: 2003 2002
----------------------------------
Net income $ 792,790 $ 496,322
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 223,657 206,930
Reinvested dividends on investment securities (30,226) (40,686)
Deferred income tax provision 422,357 294,662
Accretion of discounts on investments, net (286,903) (25,488)
Amortization of premium on loans 21,229 42,223
Provision for loan losses 889,039 380,434
(Gain) loss on foreign currency translation (11,515) 23,594
Loss on derivative instruments 4,148 13,277
Net increase in mortgage loans held for sale (35,285,620)
Decrease (increase) in accrued interest receivable 79,226 (196,816)
Increase (decrease) in accrued interest payable 247,027 (128,132)
Decrease (increase) in other assets (626,322) 41,558
Decrease in other liabilities (63,741) (739,719)
------------ ------------
Net cash provided by operating activities (33,624,854) 368,159
------------ ------------
INVESTING ACTIVITIES:
Proceeds from sales, paydowns and maturities of investment securities:
Available for sale 17,662,829 2,745,158
Held to maturity 227,925
Purchases of investment securities:
Available for sale (14,352,772) (13,140,037)
Other investments (805,700)
Net increase in loans held for investment (39,337,080) (33,436,437)
Purchase of bank owned life insurance (10,000,000)
Proceeds from sale of other real estate owned 242,979
Purchases of premises and equipment (257,355) (119,799)
------------ ------------
Net cash used in investing activities (46,862,153) (43,708,136)
------------ ------------
FINANCING ACTIVITIES:
Net decrease in demand deposits, money market accounts and savings accounts (32,653,157) (9,394,866)
Net increase in time deposits 63,928,008 2,534,269
Increase in repurchase agreements 46,662,829 34,682,234
Increase in borrowed funds 4,539,487 16,516
Proceeds from FHLB advances 3,000,000
Proceeds from exercise of stock options and issuance of stock grants 74,656
Preferred dividends paid (122,718)
Issuance cost of trust preferred securities 30,576 (29,190)
Issuance cost of Series C preferred stock (10,677)
------------ ------------
Net cash provided by financing activities 82,571,722 30,686,245
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,084,715 (12,653,732)
CASH AND CASH EQUIVALENTS:
Beginning of period 89,479,504 73,989,159
------------ ------------
End of period $ 91,564,219 $ 61,335,427
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 3,692,756 $ 12,653,732
NONCASH FINANCING ACTIVITIES:
============ ============
Proceeds from demand deposits used to purchase shares of
common stock under Employee Stock Purchase Plan $ 101,964 $ 86,549
============ ============
See notes to condensed financial statements
-6-
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE THREE-MONTH PERIODS ENDED
MARCH 31, 2003 AND 2002 (UNAUDITED)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
Florida Banks, Inc. (the "Company") was incorporated October 15, 1997 to
become a bank holding company and acquire 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 condensed financial statements have been prepared in accordance with
the rules and regulations of the Securities and Exchange Commission related
to interim financial statements. These unaudited condensed financial
statements do not include all disclosures provided in the annual financial
statements. The condensed financial statements should be read in
conjunction with the financial statements and notes thereto contained in
the Company's Annual Report to Shareholders incorporated by reference into
the Company's Form 10-K for the year ended December 31, 2002. All
adjustments of a normal recurring nature which, in the opinion of
management, are necessary to fairly present the results of the interim
periods have been made. Results of operations for the three- month period
ended March 31, 2003 are not necessarily indicative of the results to be
expected for the full year.
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
2. EARNINGS PER COMMON SHARE
The following is a reconciliation of the denominator used in the
computation of basic and diluted earnings per common share.
Three-Month Period Ended
March 31,
--------------------------------
2003 2002
--------------- ---------------
Weighted average number of common
shares outstanding - Basic 6,782,579 5,692,094
Incremental shares from the assumed
conversion of stock options 111,871 16,497
--------- ---------
Total - Diluted 6,894,450 5,708,591
The incremental shares from the assumed conversion of stock options for the
three-month periods ended March 31, 2003 and 2002 were determined using the
treasury stock method, under which the assumed proceeds were equal to (1)
the amount that the Company would receive upon exercise of the options plus
(2) the amount of tax benefit that would be credited to additional paid-in
capital assuming exercise of the options. The assumed proceeds are used to
purchase outstanding common shares at the Company's average market value
for the period.
-7-
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE THREE-MONTH PERIODS ENDED
MARCH 31, 2003 AND 2002 (UNAUDITED) (Continued)
- --------------------------------------------------------------------------------
3. DERIVATIVE INSTRUMENTS
The Company adopted Statement of Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended,
on January 1, 2001. This statement requires all derivative instruments to
be recorded on the balance sheet at fair value.
The following instruments qualify as derivatives as defined by SFAS No.
133:
March 31, 2003
--------------------------------------
Contract/Notional Fair
Amount Value
Interest rate swap agreements $ 103,500,000 $ 2,908,611
Foreign currency swap agreements $ 2,000,000 $ 8,451
Commitments to fund mortgage loans $ 146,000,000 $ 1,000,000
Interest rate swap agreements at March 31, 2003 consist of eighteen
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 gains of $7,367 during the
three-month period ended March 31, 2003 as a result of changes in the fair
value of the foreign currency agreement and the related translation
adjustment.
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.
4. 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. Non-cumulative dividends accrue at five
percent annually and are payable quarterly in arrears. In the event of any
liquidation, dissolution or winding up of affairs of the Company, 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 March 31, 2003 was $5,061,644.
-8-
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE THREE-MONTH PERIODS ENDED
MARCH 31, 2003 AND 2002 (UNAUDITED) (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 Preferred shares, except the new shares would be
convertible into the Company's common stock at $10.00 per share.
5. RECENT ACCOUNTING PRONOUNCEMENTS
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. Adoption of this Interpretation did not have a material
impact on the Company's consolidated financial position and consolidated
results of operations.
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.
6. TRUST PREFERRED SECURITIES
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 II (the "Trust II"), issued
$4,000,000 in trust preferred securities. The 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 trust
preferred securities pay dividends at an initial rate of 6.02% through
October 22, 2002. The rate then becomes a floating 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. The subordinated debentures are
the sole assets of the Trust II and are eliminated, along with the related
income statement effects, in the Company's consolidated financial
statements.
-9-
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE THREE-MONTH PERIODS ENDED
MARCH 31, 2003 AND 2002 (UNAUDITED) (Continued)
- --------------------------------------------------------------------------------
On June 28, 2002, the Company participated in an additional pooled trust
preferred offering. In connection with the transaction, the Company,
through its subsidiary trust, Florida Banks Capital I (the "Trust I"),
issued $4,000,000 in trust preferred securities. The 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
trust preferred securities pay dividends at an initial rate of 5.48%
through September 30, 2002. 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 30, June 30, September 30 and
December 30 of each year. There is a par call option beginning June 30,
2007. The subordinated debentures are the sole assets of the Trust I and
are eliminated, along with the related income statement effects, in the
Company's consolidated financial statements.
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 trust 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 Statutory
Trust II and are eliminated, along with the related income statement
effects, in the Company's consolidated financial statements.
7. GUARANTEES
The Company issues standby letters of credit to provide credit support for
some creditors in case of default. As of March 31, 2003, the carrying
amount of the liability was $0 and the maximum potential payment was
$10,029,404.
8. SEGMENT REPORTING
Prior to October 1, 2002, the Company had one reporting segment. In
October, 2002, the Company started a mortgage banking division which is
managed as a segment. Accordingly, from October 2002 forward, 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 a network of
mortgage brokers and sells these loans (on a wholesale basis) into the
secondary market.
-10-
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE THREE-MONTH PERIODS ENDED
MARCH 31, 2003 AND 2002 (UNAUDITED) (Continued)
- --------------------------------------------------------------------------------
Information about reportable segments, and reconciliation of such
information to the consolidated financial statements as of and for the
three-month period ended March 31, 2003 follows:
Commercial Mortgage Intersegment Consolidated
Bank Bank Other Eliminations Total
------------------ --------------- --------------- ------------------- -------------------
Net interest income $ 5,426,970 $ 596,153 $ (164,237) $ 5,858,886
Noninterest income 924,975 2,749,180 9,654 3,683,809
Provision for loan losses 889,039 889,039
Noninterest expense 4,018,892 2,368,852 1,047,340 7,435,084
Net income (loss) before taxes 1,444,014 976,481 (1,201,923) 1,218,572
Assets 747,045,603 91,167,106 71,039,877 (69,195,891) $ 840,056,695
Expenditures for additions
to premises and equipment 229,002 28,231 122 257,355
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies found in footnote 1 of the
Company's consolidated financial statements for the years ended December
31, 2000, 2001 and 2002 filed in conjunction with the Company's annual
report on form 10-K for the year ended December 31, 2002. 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.
-11-
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE THREE-MONTH PERIODS ENDED
MARCH 31, 2003 AND 2002 (UNAUDITED) (Continued)
- --------------------------------------------------------------------------------
9. STOCK OPTIONS
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.
Three-Month Period Ended
March 31,
----------------------------
2003 2002
Net income applicable to common shares
As reported $ 731,146 $ 376,273
Total stock-based employee compensation
cost included in the determination of net
income, net of related tax effects 40,235
Total stock-based employee compensation
cost determined under fair value method (39,481) (49,591)
for all awards, net of related tax effects
Pro forma net income applicable
to common shares $ 731,900 $ 326,682
Earnings per share - Basic
As reported $ 0.11 $ 0.07
Pro forma $ 0.11 $ 0.06
Earnings per share - Diluted
As reported $ 0.11 $ 0.07
Pro forma $ 0.11 $ 0.06
-12-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the financial
statements and related notes appearing elsewhere in this Quarterly Report on
Form 10-Q.
Critical Accounting Policies
The preparation of the financial statements, on which this Management's
Discussion and Analysis is bases, requires Management to make estimates, which
impact these financial statements. The most critical of these estimates and
accounting policies relate to the allowance for loan losses, other real estate
owned, and derivative financial instruments. For a more complete discussion of
these and other accounting policies, see Note 1 to the Company's consolidated
financial statements.
Allowance for Loan Losses - The Company carefully monitors the credit quality of
loan portfolios and makes estimates about the amount of credit losses that have
been incurred at each financial statement reporting date. This process
significantly impacts the financial statements and involves complex, subjective
judgments. The allowance is largely determined based upon the market value of
the underlying collateral. Market values of collateral are generally based upon
appraisals obtained from independent appraisers. If market conditions decline,
the allowance for loan losses would be negatively impacted resulting in a
negative impact on the Company's earnings. The allowance for loan losses is a
significant estimate that can and does change based on management's assumptions
about specific borrowers and applicable economic and environmental conditions,
among other factors.
Other Real Estate Owned - The Company obtains real estate through foreclosure.
Such property is 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, 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 recognizes income and expense
related to such derivative instruments as 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.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002
The Company's net income applicable to common shares for the first quarter of
2003 was $731,146, compared to $376,273 for the first quarter of 2002. Basic and
diluted income per common share for the first quarter of 2003 was $.11 compared
to $.07 for the first quarter of 2002. The increase in net income can be
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attributed to increased net interest income, and increased non-interest income,
partially offset by an increase in the provision for loan losses and an increase
in non-interest expenses.
The increase in net interest income of $1,580,000 or 36.9%, to $5.9 million for
the first quarter of 2003 compared to $4.3 million for the first quarter of
2002, consists of an increase in interest income of $1.8 million, or 22.4%, and
an increase in interest expense of $211,000, or 5.7%. The increase in interest
income in the first quarter of 2003 is primarily attributable to an increase of
$2.1 million in interest and fees on loans resulting from the growth in the loan
portfolio, partially offset by decreases in interest income from investments and
federal funds sold. The increase in interest expense resulted primarily from an
increase of $249,000 in interest on deposits, partially offset by decreases in
interest on repurchase agreements and borrowed funds. The increase in interest
expense on deposits is primarily attributable to an increase in deposits,
partially offset by a decrease in market interest rates on deposits. The
decrease in interest expense on repurchase agreements and borrowed funds is
primarily attributable to the decline in market interest rates on these
instruments.
The provision for loan losses charged to operations increased $509,000 to
$889,000 for the first quarter of 2003 from $380,000 in the first quarter of
2002. This increase primarily reflects growth of the overall loan portfolio in
the first quarter of 2003 as compared to the first quarter of 2002. For a more
detailed discussion of the provision for loan losses, see "Allowance for Loan
Losses" in the "Financial Condition" section below.
Non-interest income increased 586.0% or $3.1 million, to $3.7 million for the
three months ended March 31, 2003 from $537,000 for the three months ended March
31, 2002. The increase in non-interest income primarily resulted from gains on
sale of mortgage loans of $2.3 million and mortgage loan processing fees of
$478,000 for the three months ended March 31, 2003, compared to zero for these
categories for the same period in 2002. These income categories relate to the
Bank's wholesale mortgage division, which commenced operation in the fourth
quarter of 2002. Due to the short time that this division has been in operation,
and the substantial portion of its revenue attributable to mortgage refinance
activity, there can be no assurance that the current levels of income will
continue in the future. Service fees on deposits increased $150,000 or 40.7% to
$518,000 for the three months ended March 31, 2003 from $368,000 for the three
months ended March 31, 2002. This increase is primarily attributable to an
increase in deposit accounts. Mortgage loan origination fees increased $90,000
or 97.0% to $182,000 for the three months ended March 31, 2003 from $90,000 for
the three months ended March 31, 2002. This increase is primarily attributable
to increased volume in residential mortgage loans. Other non-interest income
increased $158,000, or 207.0% to $234,000 for the three months ended March 31,
2003 from $176,000 for the three months ended March 31, 2002. The increase in
other non-interest income is primarily attributable to increases in Automated
Clearing House fees, and other non-deposit related service charges.
Non-interest expense increased $3.8 million or 105.0% to $7.4 million for the
three-month period ended March 31, 2003 compared to $3.6 million for the
three-month period ended March 31, 2002. The increase in non-interest expense
resulted primarily from increases in salaries and benefits, dividends on
preferred security of subsidiary trust, and other expenses. Salaries and
benefits expenses increased $2.9 million to $5.1 million for the first quarter
of 2003 compared to $2.2 million for the first quarter of 2002. This increase is
primarily the result of additional staff associated with the overall growth of
the Company's business and with the addition of the wholesale mortgage division
started in the third quarter of 2002. Dividends on preferred securities of
subsidiary trusts increased $139,000 or 167.6% to $222,000 for the first quarter
of 2003, compared to $83,000 for the first quarter of 2002. This increase was
due to an increase in the amount of these securities outstanding. Other expenses
increased $513,000, or 73.6% to $1.2 million for the first quarter of 2003
compared to $698,000 for the first quarter of 2002. This increase is primarily
attributed to the expenses associated with supporting operations related to the
-14-
overall growth of the Company. Specific operational expenses which increased
include communications, recruitment expenses and postage/courier expenses.
A provision for income taxes of $426,000 was recognized for the first quarter of
2003 compared to $307,000 for the same period in 2002. These provisions for
income taxes represent an estimated effective annual tax rate of approximately
35% and 38% respectively.
FINANCIAL CONDITION
Total assets at March 31, 2003 were $840.1 million, an increase of $84.0 million
or 11.1%, from $756.1 million at December 31, 2002. The increase in total assets
primarily resulted from the growth in loans outstanding and mortgage loans held
for sale which were funded by new deposit growth and other borrowed funds. Total
investment securities decreased $2.7 million or 5.0% to $51.0 million at March
31, 2003 as compared to $53.7 million at December 31, 2002. Federal funds sold
remained consistent at $62.5 million at both March 31, 2003 and December 31,
2002.
Loans held for investment increased $38.8 million, or 7.0%, to $589.8 million at
March 31, 2003, from $551.0 million at December 31, 2002. Mortgage loans held
for sale increased $35.3 million or 64.5% to $90.0 million at March 31, 2003
from $54.7 million at December 31, 2002. These increases in loans were funded by
increases in depository accounts, repurchase agreements sold and other
borrowings. The allowance for loan losses increased $240,000 or 3.3% during the
first three months of 2003. The increase resulted from net charge-offs of loans
of $649,000 plus additional provisions of $889,000 during that period. The
allowance for loan losses as a percent of total loans held for investment was
1.27% at March 31, 2003 and 1.32% at December 31, 2002. Management believes that
such allowance for loan losses is sufficient to cover estimated losses in the
Bank's loan portfolio.
Deposits increased $31.8 million, or 4.8%, to $696.7 million at March 31, 2003
from $664.9 million at December 31, 2002. The increase in total deposits
primarily resulted from an increase of $46.3 million or 14.7% in time deposits
$100,000 and over, combined with an increase of $17.7 million or 25.3% in other
time deposits. Time deposits often fluctuate in response to interest rate
changes and can vary rather significantly on a quarterly basis. The increase in
time deposits $100,000 and over resulted primarily from an increase in brokered
deposits. Noninterest-bearing deposits decreased $46.4 million or 32.8%. This is
a result of the transfer of funds into demand deposit accounts which were
previously invested in repurchase agreements sold. This transfer is related to
the customer's intangible tax strategy. These funds flowed back into repurchase
agreements after year-end, as can be seen by comparing the relative balances of
demand deposits and repurchase agreements sold at March 31, 2003 and December
31, 2002. Savings deposits decreased $5.5 million or 8.2%. Money market accounts
increased $5.9 million or 30.7%. Growth in money market accounts are primarily
attributable to continued expansion of the Company's customer base as a result
of ongoing marketing activities.
Repurchase agreements sold increased $46.7 million, or 1,002.7%, to $51.3
million at March 31, 2003 from $4.7 million at December 31, 2002, for reasons
discussed in the previous paragraph, together with continued expansion of the
Company's customer base. Other borrowed funds increased $4.5 million or 45.8% to
$14.5 million at March 31, 2003 from $9.9 million at December 31, 2002. Accrued
interest payable increased $247,000 or 10.4%, to $2.6 million at March 31, 2003
from $2.4 million at December 31, 2002. This increase is due primarily to an
increase in interest-bearing deposits and other interest-bearing liabilities
highlighted herein.
Accounts payable and accrued expenses decreased $64,000 or 1.3% to $4.7 million
at March 31, 2003 from $4.8 million at December 31, 2002.
-15-
Shareholders' equity increased by $803,000 to $53.8 million at March 31, 2003,
from $53.0 million at December 31, 2002. This increase is the result of net
income for the first three months of 2003 of $793,000, combined with the issue
of stock under the Company's Employee Stock Purchase Plan of $102,000, and the
issue of stock related to exercise of options and issue of stock grants of
$75,000. These increases were partially offset by a decrease in other
comprehensive income related to an unrealized gain in the Company's bond
portfolio of $156,000 and the recording of offering expenses of the Series C
Preferred Stock issue to additional paid-in capital of $11,000.
Non-accrual loans were $855,000 at March 31, 2003, a decrease of $680,000 or
79.5%, compared to the balance of $1.5 million at December 31, 2002. These loans
were reclassified under the Bank's policy of transferring loans to non-accrual
status when they become more than 90 days past due on either principal or
interest. The Company believes the specific reserves placed against these loans
are adequate, and payment is being sought from secondary sources, such as the
sale of collateral.
Allowance for Loan Losses
- -------------------------
Management determines the allowance for loan losses by establishing a general
allowance by loan pool determined for groups of smaller, homogenous loans
possessing similar characteristics and non-homogeneous loans that are not
classified. All classified loans are reviewed on an individual basis.
General Allowance
It is difficult for a lending institution the size of the Bank to use migration
analysis or other more sophisticated approaches due to the small size of the
loan portfolio, and the significant changes in the lending strategy and mix of
the loan portfolio from the date of the Merger. For this reason, a reasonable
indicator of the Bank's potential future losses in the non-criticized and
non-specialized pools of loans is the historical performance of the Bank's peer
group on a rolling four-quarter basis. This information is gathered quarterly
from the Uniform Bank Performance Report provided by the Federal Financial
----------------------------------
Institutions Examination Council. As the bank matures, and growth stabilizes, it
is management's intention to replace this peer group methodology with the actual
loss experience of the Bank.
Added to the peer group historical performance are those current conditions that
are probable to impact future loan losses. To account for these current
conditions, management has reviewed various factors to determine the impact on
the current loan portfolio. This methodology involves determining a range for
each current condition adjustment, "lower range to upper range". The "lower
range" represents management's opinion of a higher near term probability. The
"upper range" represents management's opinion of a lower near term probability
that allows management to "shock" the loan portfolio and look at the level of
reserves required should an "upper range" scenario start to unfold. The
following current condition factors were considered in this analysis:
o Changes in lending policies and procedures, including underwriting
standards and collection, charge-off, and recovery practices.
o Changes in national and local economic and business conditions, including
the condition of various market segments.
o Changes in the nature and volume of the portfolio.
o Changes in the experience, ability, and depth of lending management and
staff.
-16-
o Changes in the volume and severity of past due and classified loans; and
the volume of non-accruals, trouble debt restructurings and other loan
modifications.
o The existence and effect of any concentrations of credit, and changes in
the level of such conditions.
o The effect of external factors, such as competition and legal and
regulatory requirements, on the level of estimated credit losses in the
Bank's portfolio.
Specific Allowance
Management believes that given the small number of classified loans, type of
historical loan losses, and the nature of the underlying collateral, creating
specific allowances for classified assets results in the most accurate and
objective allowance. Should the number of these types of assets grow
substantially, other methods may have to be considered.
The method used in setting the specific allowance uses current appraisals as a
starting point, based on the Bank's possible liquidation of the collateral. On
assets other than real estate, which tend to depreciate rapidly, another current
valuation is used. For instance, in the case of commercial loans collateralized
by automobiles, the current NADA wholesale value is used. On collateral such as
over-the-road equipment, trucks or heavy equipment, valuations are sought from
firms or persons knowledgeable in the area, and adjusted for the probable
condition of the collateral. Other collateral such as furniture, fixtures and
equipment, accounts receivable, and inventory, are considered separately with
more emphasis given to the borrower's financial condition and trends rather than
the collateral support. The value of the collateral is then discounted for
estimated selling cost.
Summary
References to "loans" in the following two paragraphs refer to loans held for
investment.
The various methodologies included in this analysis take into consideration the
historic loan losses and specific allowances. In addition, the allowance
incorporates the results of measuring impaired loans as provided by Statement of
Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for
Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosures". These accounting standards
prescribe the measurement methods, income recognition and disclosures related to
impaired loans. Specific allowances totaled $2.0 million at March 31, 2003. The
range for the allowance for loan losses at March 31, 2003, including specific
allowances, was determined to be between $6.0 million or 1.01% of loans (low
range) and $10.0 million or 1.70% of loans (high range).
At March 31, 2003, the Bank's total allowance for loan losses is $7.5 million or
1.27% of loans as compared to $7.3 million or 1.32% of loans at December 31,
2002. Criticized/Classified assets have decreased when measured against loans
outstanding. This is primarily attributable to the charge-off during the first
quarter of certain credits for which specific reserves were established at the
end of 2002. At March 31, 2003, this benchmark was 3.9% of loans outstanding
compared to 4.5% at December 31, 2002. Past due loans have increased to .39% of
loans outstanding at March 31, 2003 compared to .14% at December 31, 2002.
Non-Performing Assets have declined as a percentage of total loans including
other real estate owned to .15% at March 31, 2003 versus .28% at December 31,
2002. Net loan losses for the first three months of 2003 were $649,000 or .11%
of average loans outstanding for the period, compared to $8,000, or .0% of
average loans for the same period in 2002.
-17-
LIQUIDITY
The Company, through its subsidiary, the Bank, has traditionally maintained
levels of liquidity above levels required by regulatory authorities. The Bank's
operational needs, demand for loan disbursements, and savings withdrawals can be
met by loan principal and interest payments received, new deposits, and excess
liquid assets. Significant loan demand, deposit withdrawal, increased
delinquencies and increased real estate acquired in settlement of loans could
alter this condition. Management does not foresee any liquidity problems for the
remainder of 2003.
Liquidity and Sources of Capital
Liquidity is the Company's ability to meet all deposit withdrawals immediately,
while also providing for the credit needs of customers. The March 31, 2003
balance sheet evidences a satisfactory liquidity position as total cash and cash
equivalents amounted to $91.6 million, representing 10.9% of total assets.
Investment securities available for sale amounted to $47.7 million, representing
5.7% of total assets. These securities provide a secondary source of liquidity
since they can be converted into cash in a timely manner. The Company's ability
to maintain and expand its deposit base and borrowing capabilities are also a
source of liquidity. For the three-month period ended March 31, 2003, total
deposits increased from $664.9 million at December 31, 2002 to $696.7 million,
or 4.8%. During this period, repurchase agreements sold increased from $4.7
million to $51.3 million, or 1002.7%, and other borrowed funds increased $4.5
million from $9.9 million to $14.5 million, or 45.8%. There can be no assurance
that the Company will be able to maintain this level of growth. The Company's
management closely monitors and maintains appropriate levels of interest earning
assets and interest bearing liabilities so that maturities of assets are such
that adequate funds are provided to meet customer withdrawals and loan demand.
There are no trends, demands, commitments, events or uncertainties that will
result in, or are reasonably likely to result in, the Company's liquidity
increasing or decreasing in any material way.
The Company's Board and executive officers are committed to maintaining capital
at a level sufficient to protect depositors, provide for reasonable growth, and
fully comply with all regulatory requirements.
In December 2001, April 2002, June 2002, and December 2002, the Company
participated in pooled trust preferred offerings. By issuing trust preferred
securities through its subsidiary trusts, the Company was able to increase its
Tier 1 capital for regulatory purposes without diluting the ownership interests
of its common shareholders. Also, dividends paid on trust preferred securities
are deductible as interest expense for income tax purposes. For the specific
transactions, terms and rates of the Company's trust preferred securities
issues, please refer to footnote 6 of Item 1 above, together with footnote 13 of
the Company's consolidated financial statements for the years ended December 31,
2000, 2001 and 2002 filed in conjunction with the Company's annual report on
form 10-K for the year ended December 31, 2002. At March 31, 2003, the net
proceeds from pooled trust preferred trust offerings included in the calculation
of Tier 1 capital for regulatory purposes is $16.5 million.
The table below illustrates the Bank's regulatory capital ratios at March 31,
2003:
March 31, Regulatory
Bank 2003 Requirement
--------------------- ---------------------
Tier 1 Capital 9.50 % 4.00 %
==== ====
Total risk-based capital ratio 10.55 % 8.00 %
===== ====
Leverage ratio 8.93 % 4.00 %
==== ====
-18-
Neither the Company nor its subsidiaries have historically incurred off-balance
sheet obligations through the use of or investment in off-balance sheet
derivative financial instruments or structured finance or special purpose
entities organized as corporations, partnerships or limited liability companies
or trusts.
CAUTIONARY STATEMENT RELATING TO 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-Q, 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;
-19-
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
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.
Item 3. Qualitative and Quantitative Disclosures About Market Risk
The Company's financial performance is subject to risk from interest rate
fluctuations. This interest rate risk arises due to differences between the
amount of interest-earning assets and the amount of interest-earning liabilities
subject to repricing over a specified period and the amount of change in
individual interest rates. 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 targeted gap ratio guidelines for a
one-year time horizon of between .80 and 1.20 for the Bank. At March 31, 2003,
the Bank had a cumulative gap ratio of approximately 1.04 for the one-year
period ending March 31, 2004. At March 31, 2003, the Company had a cumulative
gap ratio of 1.43 for the three-month time period. Given these gap ratios, over
the next three-month period, rate-sensitive assets will reprice faster than
rate-sensitive liabilities, and for the following nine-month period, rate
sensitive liabilities will reprice faster than rate-sensitive assets.
Varying interest rate environments can create unexpected changes in prepayment
levels of assets and liabilities, which are not reflected in the interest
sensitivity analysis. Prepayments may have significant effects on the Company's
net interest margin. Because of these factors, in a static test, interest
sensitivity gap reports may not provide a complete assessment of the Company's
exposure to changes in interest rates. Accordingly, management also utilizes
computerized interest rate simulation analysis to determine the Company's
interest rate sensitivity. The Company is in an asset 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 simulation results indicate a
relatively low sensitivity to parallel shifts in interest rates. A liability
-20-
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, performed as of March 31, 2003, indicates that a 200 basis point
increase in rates would cause an increase in net interest income of $6.7 million
over the next twelve-month period. Conversely, a 200 basis point decrease in
rates would cause a decrease in net interest income of $1.6 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.
At March 31, 2003, the Company was not engaged in trading activities.
The Company enters into interest rate swap agreements to manage its exposure to
changes in interest rates and to convert the fixed rate on certain brokered
certificates of deposit to a floating rate in order to more closely match
interest rate sensitivity between selected assets and liabilities. The Company
does not use derivative financial instruments for speculative purposes. As is
customary for these types of instruments, the Company does not require
collateral or other security from other parties to these instruments. By their
nature all such instruments involve risk, including the credit risk of
nonperformance by counterparties. However, at March 31, 2003, in management's
opinion there was no significant risk of loss in the event of nonperformance of
the counterparties to these financial instruments.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer
and Chief Financial Officer have reviewed and evaluated the effectiveness of our
disclosure controls and procedures (as defined in Exchange Act Rules
240.13a-14(c) and 15a-14(c)) as of a date within 90 days before the filing date
of this quarterly report. Based on that evaluation, the Chief Executive Officer
and the Chief Financial officer have concluded that our current disclosure
controls and procedures are effective in providing them with material
information required to be disclosed in reports filed by the Company under the
Exchange Act.
Changes In Internal Controls. There have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
internal controls subsequent to the date of this evaluation.
-21-
Part II. Other Information
Item 1. Legal Proceedings
No disclosure required.
Item 2. Changes in Securities
No disclosure required.
Item 3. Defaults Upon Senior Securities
No disclosure required.
Item 4. Submission of Matters to a Vote of Security Holders
No disclosure required.
Item 5. Other Information
No disclosure required.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
99.1 Certifying Statement of the Chief Executive Officer pursuant to
Section 1350 of Title 18 of the United States Code as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
99.2 Certifying Statement of the Chief Financial Officer pursuant to
Section 1350 of Title 18 of the United States Code as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
99.3 Certifying Statement of the Chief Executive Officer pursuant to
Section 1350 of Title 18 of the United States Code as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.4 Certifying Statement of the Chief Financial Officer pursuant to
Section 1350 of Title 18 of the United States Code as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
On January 2, 2003, the Company filed a report on Form 8-K announcing the
sale of $5 million in Series C Preferred Stock to The South Financial Group
in a private placement on December 31, 2002. The Company filed an amendment
to this Form 8-K on January 3, 2003.
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SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Florida Banks, Inc.
Date: May 12, 2003 By: /s/ Charles E. Hughes, Jr.
--------------------------------
Charles E. Hughes, Jr.
President and Chief Executive Officer
Date: May 12, 2003 By: /s/ T. Edwin Stinson, Jr.
--------------------------------
T. Edwin Stinson, Jr.
Chief Financial Officer
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