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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 September 30, 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 6,814,628 OUTSTANDING AT OCTOBER 23, 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 14
Item 3. Qualitative and Quantitative Disclosures about
Market Risk ............................................... Page 23
Item 4. Controls and Procedures...................................... Page 24
Part II Other Information
Item 1. Legal Proceedings............................................ Page 25
Item 2. Changes in Securities........................................ Page 25
Item 3. Defaults Upon Senior Securities.............................. Page 25
Item 4. Submission of Matters to a Vote of Security Holders.......... Page 25
Item 5. Other Information............................................ Page 25
Item 6. Exhibits and Reports on Form 8-K............................. Page 25
Signatures ........................................................... Page 27
Exhibits ............................................................ Page 28
-2-
PART I. Financial Information, Item 1. Financial Statements
FLORIDA BANKS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
September 30, December 31,
ASSETS 2003 2002
CASH AND DUE FROM BANKS $ 118,456,915 $ 26,964,504
FEDERAL FUNDS SOLD AND REPURCHASE AGREEMENTS 47,485,000 62,515,000
------------- -------------
Total cash and cash equivalents 165,941,915 89,479,504
INVESTMENT SECURITIES:
Available for sale, at fair value (cost $45,727,698 and $50,155,158
at September 30, 2003 and December 31, 2002) 42,358,807 50,930,650
Held to maturity, at cost (fair value $0 and $229,475
at September 30, 2003 and December 31, 2002) 227,925
Other investments 3,304,050 2,493,350
------------- -------------
Total investment securities 45,662,857 53,651,925
MORTGAGE LOANS HELD FOR SALE 71,182,230 54,674,248
LOANS:
Commercial real estate 415,558,472 313,120,588
Commercial 162,614,539 166,122,230
Residential mortgage 33,143,631 23,080,140
Consumer 51,029,440 45,859,704
Credit card and other loans 2,248,192 2,791,678
------------- -------------
Total loans 664,594,274 550,974,340
Allowance for loan losses (8,587,417) (7,263,029)
Net deferred loan fees (710,077) (519,271)
------------- -------------
Net loans 655,296,780 543,192,040
PREMISES AND EQUIPMENT, NET 4,921,669 5,466,332
ACCRUED INTEREST RECEIVABLE 2,396,520 2,375,102
DEFERRED INCOME TAXES, NET 4,232,535 3,908,751
DERIVATIVE INSTRUMENTS 1,777,685 2,321,643
OTHER REAL ESTATE OWNED 652,500 652,500
OTHER ASSETS 13,014,116 343,505
------------- -------------
TOTAL ASSETS $ 965,078,807 $ 756,065,550
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS:
Noninterest-bearing demand $ 100,602,517 $ 141,395,150
Interest-bearing demand 83,795,480 52,803,427
Regular savings 83,706,296 66,940,672
Money market accounts 29,140,737 19,210,512
Time $100,000 and over 422,955,846 314,852,717
Other time 91,429,118 69,707,230
------------- -------------
Total deposits 811,629,994 664,909,708
REPURCHASE AGREEMENTS SOLD 43,513,648 4,653,878
OTHER BORROWED FUNDS 19,919,686 9,921,898
ACCRUED INTEREST PAYABLE 2,858,417 2,377,963
MANDATORY MORTGAGE FORWARD DELIVERY CONTRACTS 1,072,391
TRUST PREFERRED SECURITIES 20,000,000
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 9,683,856 4,765,136
------------- -------------
Total liabilities 908,677,992 686,628,583
------------- -------------
COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUST 16,473,092
SHAREHOLDERS' EQUITY:
Series C Preferred Stock, $100.00 par value, 50,000 shares authorized, 50,000 5,000,000 5,000,000
shares issued and outstanding
Common stock, $.01 par value; 30,000,000 shares authorized;
6,814,628 and 6,768,362 shares issued, respectively 68,147 67,684
Additional paid-in capital 52,874,202 52,287,390
Accumulated deficit (deficit of $8,134,037
eliminated upon quasi-reorganization on December 31, 1995) (1,663,028) (4,874,873)
Accumulated other comprehensive income, net of tax 121,494 483,674
------------- -------------
Total shareholders' equity 56,400,815 52,963,875
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 965,078,807 $ 756,065,550
============= =============
See notes to condensed financial statements
-3-
FLORIDA BANKS, INC.
CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
- -----------------------------------------------------------------------------------------------------------------------------------
Three-Month Period Ended Nine-Month Period Ended
September 30, September 30,
--------------------------- --------------------------
2003 2002 2003 2002
----------- ----------- ----------- ----------
INTEREST INCOME:
Loans, including fees $10,753,474 $ 8,208,741 $30,772,718 $23,386,476
Investment securities 300,696 570,382 1,018,185 1,716,879
Federal funds sold 160,348 287,774 383,008 647,361
----------- ----------- ----------- -----------
Total interest income 11,214,518 9,066,897 32,173,911 25,750,713
----------- ----------- ----------- -----------
INTEREST EXPENSE:
Deposits 3,907,489 3,899,450 11,548,058 10,839,723
Repurchase agreements 106,382 128,367 292,620 379,825
Interest on Trust Preferred Securities 245,612 245,612
Borrowed Funds 186,023 98,299 460,937 323,402
----------- ----------- ----------- -----------
Total interest expense 4,424,470 4,126,116 12,547,227 11,542,950
----------- ----------- ----------- -----------
NET INTEREST INCOME 6,790,048 4,940,781 19,626,684 14,207,763
PROVISION FOR LOAN LOSSES 599,433 699,286 2,452,158 2,107,236
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 6,190,615 4,241,495 17,174,526 12,100,527
----------- ----------- ----------- -----------
NONINTEREST INCOME:
Service fees 621,412 431,390 1,738,148 1,200,908
Gain on sale of mortgage loans 1,626,442 6,966,677
Mortgage loan processing fees 441,418 1,777,049
Mortgage loan origination fees 330,686 150,445 853,712 322,577
Gain on sale of commercial loans 42,888 42,888
Other noninterest income 308,471 130,366 844,682 294,471
----------- ----------- ----------- -----------
Total noninterest income 3,328,429 755,089 12,180,268 1,860,844
----------- ----------- ----------- -----------
NONINTEREST EXPENSE:
Salaries and benefits 5,069,423 2,799,217 16,573,806 7,510,262
Occupancy and equipment 699,905 532,467 1,981,662 1,505,757
Data processing 288,184 224,260 825,418 621,456
Dividends on preferred securities of subsidiary trusts 205,126 425,835 428,866
Other 1,633,397 817,120 4,460,959 2,414,724
----------- ----------- ----------- -----------
Total noninterest expense 7,690,909 4,578,190 24,267,680 12,481,065
----------- ----------- ----------- -----------
INCOME BEFORE PROVISION
FOR INCOME TAXES 1,828,135 418,394 5,087,114 1,480,306
PROVISION FOR INCOME TAXES 654,973 152,950 1,751,981 557,039
----------- ----------- ----------- -----------
NET INCOME 1,173,162 265,444 3,335,133 923,267
----------- ----------- ----------- -----------
PREFERRED STOCK DIVIDENDS 63,014 186,987 140,058
----------- ----------- ----------- -----------
NET INCOME APPLICABLE TO COMMON SHARES $ 1,110,148 $ 265,444 $ 3,148,146 $ 783,209
=========== =========== =========== ===========
INCOME PER COMMON SHARE:
Basic $ 0.16 $ 0.04 $ 0.46 $ 0.12
=========== =========== =========== ===========
Diluted $ 0.16 $ 0.04 $ 0.45 $ 0.12
=========== =========== =========== ===========
See notes to condensed financial statements.
-4-
FLORIDA BANKS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
Preferred Stock Common Stock Additional
------------------------------------------------------------- Paid-In
Shares Par Value Shares Par Value Capital
BALANCE, JANUARY 1, 2002 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 dividends paid
________ __________ _________ _________ ___________
BALANCE, DECEMBER 31, 2002 50,000 5,000,000 6,768,362 67,684 52,287,390
Comprehensive income:
Net income
Unrealized loss on available for sale
investment securities,
net of tax of $218,516
Comprehensive income
Issuance of common stock under Employee
Stock Purchase Plan 30,935 309 222,835
Exercise of stock warrants 12,800 128 127,872
Series C Preferred Stock offering costs (10,677)
Exercise of stock options and
issue of stock grants 2,531 26 246,782
Series C Preferred Stock dividends paid
________ __________ _________ _________ ___________
BALANCE, September 30, 2003 (Unaudited) 50,000 $5,000,000 6,814,628 $ 68,147 $52,874,202
Accumulated
Other
Comprehensive
Accumulated (loss) income
Deficit Net of Tax Total
BALANCE, JANUARY 1, 2002 $(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 dividends paid (262,775) (262,775)
___________ _____________ ______________
BALANCE, DECEMBER 31, 2002 (4,874,873) 483,674 52,963,875
Comprehensive income:
Net income 3,335,133 3,335,133
Unrealized loss on available for sale
investment securities,
net of tax of $218,516 (362,180) (362,180)
Comprehensive income 2,972,953
Issuance of common stock under Employee
Stock Purchase Plan 223,144
Exercise of stock warrants 128,000
Series C Preferred Stock offering costs (10,677)
Exercise of stock options and
issue of stock grants 246,808
Series C Preferred Stock dividends paid (123,288) (123,288)
___________ _____________ ______________
BALANCE, September 30, 2003 (Unaudited) $(1,663,028) $ 121,494 $ 56,400,815
=========== ============= ==============
See notes to condensed financial statements.
-5-
FLORIDA BANKS, INC. CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
Nine-Month Period Ended
September 30,
-----------------------------------
OPERATING ACTIVITIES: 2003 2002
----------------------------------
Net income $ 3,335,133 $ 923,267
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization 655,150 579,343
Reinvested dividends on investment securities (90,301) (116,826)
Deferred income tax provision (benefit) (105,268) 537,751
Accretion of premium on investments, net (689,170) (37,177)
Amortization of premium on loans 67,945 95,356
Loss on sale of available for sale investment securities 3,967
Provision for loan losses 2,452,158 2,107,236
Loss on foreign currency translation 124,139 41,675
Gain on derivative instruments (86,120) (43,056)
Increase in mortgage loans held for sale (16,507,982)
Increase in accrued interest receivable (21,418) (631,637)
Decrease (increase) in accrued interest payable 480,454 (297,601)
(Increase) decrease in other assets (635,231) 40,488
Increase in other liabilities 4,918,720 1,053,929
------------- -------------
Net cash (used in) provided by operating activities (6,101,791) 4,256,715
------------- -------------
INVESTING ACTIVITIES:
Proceeds from sales, paydowns and maturities of investment securities:
Available for sale 28,861,721 16,271,660
Held to maturity 227,925 2,360,879
Purchases of investment securities:
Available for sale (20,091,102) (28,528,240)
Other investments (810,700) (188,800)
Net increase in loans held for investment (114,524,353) (113,968,736)
Increase in bank owned life insurance (10,333,757)
Proceeds from sale of other real estate owned 242,979
Proceeds from sale of premises and equipment 1,089,326
Purchases of premises and equipment (1,200,453) (2,629,460)
------------- -------------
Net cash used in investing activities (116,781,393) (126,439,718)
------------- -------------
FINANCING ACTIVITIES:
Net decrease in demand deposits, money market accounts and savings accounts 16,895,269 20,754,787
Net increase in time deposits 129,825,017 88,726,347
Increase in repurchase agreements 38,859,770 37,603,204
Increase (decrease) in borrowed funds 9,597,788 (2,405,911)
Proceeds from FHLB advances 400,000 3,000,000
Preferred stock offering costs (10,677)
Proceeds from exercise of stock options and issuance of stock grants 246,808 115,643
Preferred dividends paid (123,288) (262,775)
Proceeds from exercise of stock warrants 128,000
Proceeds from issuance of trust preferred securities, net 3,526,908 7,718,016
------------- -------------
Net cash provided by financing activities 199,345,595 155,249,311
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 76,462,411 33,066,308
CASH AND CASH EQUIVALENTS:
Beginning of period 89,479,504 73,989,159
------------- -------------
End of period $ 165,941,915 $ 107,055,467
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 12,066,773 $ 11,840,551
============= =============
Cash paid for income taxes $ 2,043,449 $
============= =============
NONCASH FINANCING ACTIVITIES:
Proceeds from demand deposits used to purchase shares of
common stock under Employee Stock Purchase Plan $ 223,144 $ 210,771
============= =============
See notes to condensed financial statements.
-6-
FLORIDA BANKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 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 consolidated 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 consolidated financial statements do not include all disclosures
provided in the annual financial statements. The condensed consolidated
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 and nine-month periods ended September 30, 2003
are not necessarily indicative of the results to be expected for the full
year. The condensed 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 Nine-Month Period Ended
September 30, September 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
--------------- --------------- -------------- --------------
Weighted average number of common
shares outstanding - Basic 6,812,029 6,751,156 6,793,479 6,335,832
Incremental shares from the assumed
conversion of stock options 256,823 97,729 201,625 85,233
--------- --------- --------- ---------
Total - Diluted 7,068,852 6,848,885 6,995,104 6,421,065
========= ========= ========= =========
The incremental shares from the assumed conversion of stock options for the
three and nine-month periods ended September 30, 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 2003 AND 2002 (UNAUDITED) (Continued)
- --------------------------------------------------------------------------------
3. DERIVATIVE INSTRUMENTS
The following instruments qualify as derivatives as defined by Statement
of Accounting Standards No. 133 ("SFAS No. 133"), Accounting for
Derivative Instruments and Hedging Activities, as amended:
September 30, 2003
-----------------------------------
Contract/Notional Fair
Amount Value
Interest rate swap agreements $ 148,500,000 $ 1,889,225
Foreign currency swap agreements $ 2,000,000 $ (111,540)
Commitments to fund mortgage loans $ 58,748,408 $ 334,918
Interest rate swap agreements at September 30, 2003 consist of twenty-one
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 that 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 $1,422 and a gain of $8,660,
respectively, during the three- and nine-month periods ended September 30,
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 to a single shareholder 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
September 30, 2003 was $5,061,643.
-8-
FLORIDA BANKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 2003 AND 2002 (UNAUDITED) (Continued)
- --------------------------------------------------------------------------------
Subject to regulatory approval, the Company intends to exchange all of the
Series C preferred stock for shares of Series D preferred stock, which
will be substantially similar to the Series C preferred stock, except the
Series D preferred stock will be immediately converted into 500,000 shares
of the Company's common stock at $10.00 per share. The preferred
shareholder intends to formally apply for the necessary regulatory
approvals for this exchange.
5. RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the Financial Accounting Standards Board ("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 FIN
45 did not have a material impact on the Company's consolidated financial
position, results of operations or cash flows.
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. FIN 46 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 adopted FIN 46 as of July 31, 2003. Adoption of FIN
46 did not have a material impact on the Company's consolidated financial
position, results of operations or cash flows.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities (SFAS 149). SFAS 149 amends
and clarifies the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. In addition, the statement clarifies when a contract is a
derivative and when a derivative contains a financing component that
warrants special reporting in the statement of cash flows. SFAS 149 is
generally effective prospectively for contracts entered into or modified,
and hedging relationships designated, after June 30, 2003. The Company
adopted SFAS 149 effective July 1, 2003. Adoption of SFAS 149 did not have
a material impact on the Company's consolidated financial position,
results of operations or cash flows.
-9-
FLORIDA BANKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 2003 AND 2002 (UNAUDITED) (Continued)
- --------------------------------------------------------------------------------
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity
(SFAS 150). SFAS 150 establishes standards for how an issuer classifies
and measures certain financial instruments with characteristics of both
liabilities and equity, and imposes certain additional disclosure
requirements. The provisions of SFAS 150 are generally effective for
financial instruments entered into or modified after May 31, 2003.
Additionally, the Company must apply the provisions of SFAS 150 to all
financial instruments on July 1, 2003. Upon the adoption of SFAS 150, the
company's obligated mandatorily redeemable preferred securities of
subsidiary trusts have been reclassified from mezzanine equity to debt.
The dividends related to these securities after July 1, 2003 are reflected
as interest expense on a prospective basis. At September 30, 2003, the
Company had $20.0 million outstanding as company obligated mandatorily
redeemable preferred securities of subsidiary trusts. The Company paid
dividends related to those instruments of approximately $246 thousand
(classified as interest expense) and $671 thousand (six months classified
as noninterest expense and three months classified as interest expense)
for the three- and nine-month periods ended September 30, 2003,
respectively.
6. GUARANTEES
The Company issues standby letters of credit to provide credit support for
some creditors in case of default. As of September 30, 2003, the carrying
amount of the liability was $10,544 and the maximum potential payment was
$10,477,317.
7. 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 third
party mortgage brokers and sells these loans (on a wholesale basis) into
the secondary market.
-10-
FLORIDA BANKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 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 September 30, 2003 follows:
Commercial Mortgage Intersegment Consolidated
Bank Bank Other Eliminations Total
---------------- ------------------ ----------------- ------------------ ----------------
Net interest income $ 5,904,673 $ 1,168,988 $ (283,613) $ 6,790,048
Noninterest income 1,231,200 2,067,860 29,369 3,328,429
Provision for loan losses 599,433 599,433
Noninterest expense 4,415,916 2,539,801 735,192 7,690,909
Income (loss) before taxes 2,120,524 697,047 (989,436) 1,828,135
Assets 884,565,054 72,847,211 85,077,735 (77,863,584) $964,626,416
Expenditures for additions
to premises and equipment 209,904 84,134 84,184 378,222
Information about reportable segments, and reconciliation of such
information to the consolidated financial statements as of and for the
nine-month period ended September 30, 2003 follows:
Commercial Mortgage Intersegment Consolidated
Bank Bank Other Eliminations Total
-------------- ------------- -------------- ---------------- ---------------
Net interest income $ 16,859,541 $ 2,957,577 $ (190,434) $ 19,626,684
Noninterest income 3,379,543 8,743,726 56,999 12,180,268
Provision for loan losses 2,452,158 2,452,158
Noninterest expense 12,886,749 8,276,138 3,104,793 24,267,680
Income (loss) before taxes 4,900,177 3,425,165 (3,238,228) 5,087,114
Assets 884,565,054 73,919,602 84,457,735 (77,863,584) $965,078,807
Expenditures for additions
to premises and equipment 667,234 378,085 155,134 $ 1,200,453
-11-
FLORIDA BANKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 2003 AND 2002 (UNAUDITED) (Continued)
- --------------------------------------------------------------------------------
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies found in Note 1 of the
Company's consolidated financial statements for the years ended December
31, 2002, 2001 and 2000 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 in
the table 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.
8. 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 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.
-12-
FLORIDA BANKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 2003 AND 2002 (UNAUDITED) (Continued)
- --------------------------------------------------------------------------------
Three-Month Period Ended Nine-Month Period Ended
September 30, September 30,
------------------------------ ------------------------------
2003 2002 2003 2002
Net income applicable to common shares
As reported $ 1,110,148 $ 265,444 $ 3,148,146 $ 783,209
Total stock-based employee compensation
cost included in the determination of net
income, net of related tax effects 57,425 18,843 144,537 56,528
Total stock-based employee compensation
cost determined under fair value method
for all awards, net of related tax effects (44,770) (53,363) (133,089) (160,088)
----------- ----------- ----------- -----------
Pro forma net income applicable
to common shares $ 1,122,803 $ 230,924 $ 3,159,594 $ 679,649
=========== =========== =========== ===========
Earnings per share - Basic
As reported $ 0.16 $ 0.04 $ 0.46 $ 0.12
Pro forma $ 0.16 $ 0.03 $ 0.47 $ 0.11
Earnings per share - Diluted
As reported $ 0.16 $ 0.04 $ 0.45 $ 0.12
Pro forma $ 0.16 $ 0.03 $ 0.45 $ 0.11
Shares used for computation
Basic 6,812,029 6,751,156 6,793,479 6,335,832
Diluted 7,068,852 6,848,885 6,995,104 6,421,065
9. SUBSEQUENT EVENT
On October 2, 2003, the Company announced it was postponing the planned
public offering of its common stock for which it filed a registration
statement with the Securities and Exchange Commission on July 16, 2003.
However, the Company will evaluate its capital plans during the remainder
of 2003 and early in 2004 and may raise additional capital during this
time period.
-13-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the condensed
consolidated financial statements and related notes appearing in Part 1, Item 1
of this Quarterly Report on Form 10-Q.
Critical Accounting Policies
The preparation of the condensed consolidated financial statements, on which
this Management's Discussion and Analysis is based, requires Management to make
estimates, which impact these condensed consolidated 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 for December 31, 2002, 2001
and 2000, and the years then ended, filed in conjunction with the Company's
Annual Report on Form 10-K for the year ended December 31, 2002.
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.
-14-
RESULTS OF OPERATIONS
Three Months Ended September 30, 2003 Compared to Three Months Ended
September 30, 2002
The Company's net income applicable to common shares for the third quarter of
2003 was $1.1 million, compared to $265 thousand for the third quarter of 2002.
Basic and diluted income per common share for the third quarter of 2003 was $.16
compared to $.04 for the third quarter of 2002. The increase in net income can
be attributed to increased net interest income, and increased non-interest
income, partially offset by an increase in non-interest expenses.
The increase in net interest income of $1.9 million or 37.4%, to $6.8 million
for the third quarter of 2003 compared to $4.9 million for the third quarter of
2002, consists of an increase in interest income of $2.1 million, or 23.7%, and
an increase in interest expense of $298 thousand, or 7.2%. The increase in
interest income in the third quarter of 2003 is primarily attributable to an
increase of $2.5 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 $246 thousand in interest on trust preferred
securities, an increase of $88 thousand in borrowed funds, and an increase of $8
thousand in interest on deposits, partially offset by a decrease in interest on
repurchase agreements. The increase in interest expense on deposits and borrowed
funds is primarily attributable to an increase in these liabilities, partially
offset by a decrease in market interest rates. The increase in interest on trust
preferred securities results primarily from the reclassification of this expense
as interest expense under SFAS 150 (see Note 5 to the "Notes to Consolidated
Condensed Financial Statements: contained in Part 1 Item 1). The decrease in
interest expense on repurchase agreements is primarily attributable to the
decline in market interest rates on these instruments.
The provision for loan losses charged to operations decreased $100 thousand to
$599 thousand for the third quarter of 2003 from $699 thousand in the third
quarter of 2002. This decrease primarily reflects a slowing in the growth of the
portfolio of loans held for investment in the third quarter of 2003 as compared
to the third 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 340.8% or $2.6 million, to $3.3 million for the
three months ended September 30, 2003 from $755 thousand for the three months
ended September 30, 2002. The increase in non-interest income primarily resulted
from gains on sale of mortgage loans of $1.6 million and mortgage loan
processing fees of $441 thousand for the third quarter, compared to zero for
these categories for the same period in 2002. These income categories relate to
the wholesale mortgage division of Florida Bank, N.A., (the "Bank"), which
commenced operations 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 $190 thousand or 44.1% to $621 thousand for the three months ended
September 30, 2003 from $431 thousand for the three months ended September 30,
2002. This increase is primarily attributable to an increase in deposit
accounts. Mortgage loan origination fees attributable to the commercial bank
increased $180 thousand or 119.8% to $331 thousand for the three months ended
September 30, 2003 from $150 thousand for the three months ended September 30,
2002. This increase is primarily attributable to increased volume in residential
mortgage loans. Gain on sale of commercial loans for the three months ended
September 30, 2003 was zero, compared to $43 thousand for the same period in
2002. The gain resulted from the sale of a commercial loan in the third quarter
of 2002. Other non-interest income increased $178 thousand, or 136.6% to $308
thousand for the three months ended September 30, 2003 from $130 thousand for
the same period in 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.
-15-
Non-interest expense increased $3.1 million or 68.0% to $7.7 million for the
three months ended September 30, 2003 compared to $4.6 million for the three
months ended September 30, 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 $2.3 million to $5.1 million for the third quarter of 2003 compared to
$2.8 million for the third 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 staff for the wholesale mortgage division, who
were hired beginning in the third quarter of 2002. Dividends on preferred
securities of subsidiary trusts are zero for the third quarter of 2003, compared
to $205 thousand for the third quarter of 2002, because this item is now
classified as interest expense. Other expenses increased $816 thousand, or 99.9%
to $1.6 million for the third quarter of 2003 compared to $817 thousand for the
third quarter of 2002. This increase is primarily attributed to the expenses
associated with supporting operations related to the overall growth of the
Company. Specific operational expenses which increased include communications,
loan expenses and postage/courier expenses.
A provision for income taxes of $655 thousand was recognized for the third
quarter of 2003 compared to $153 thousand for the same period in 2002. These
provisions for income taxes represent an estimated effective annual tax rate of
approximately 31% and 37% respectively. The decrease in the effective tax rate
results from a tax credit obtained from a charitable contribution the Company
made in the second quarter of 2003, reducing the Company's year-to-date tax
rate, which effectively reduced the tax rate for the second and third quarters
of 2003.
Nine Months Ended September 30, 2003 Compared to Nine Months Ended
September 30, 2002
The Company's net income applicable to common shares for the nine months ended
September 30, 2003 was $3.1 million, compared to $783 thousand for the same
period in 2002. Basic and diluted income per common share for the first nine
months of 2003 was $.46 and $.45, respectively, compared to $.12 and $.12,
respectively, for the first nine months of 2002. The increase in net income can
be 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 $5.4 million or 38.1%, to $19.6 million
for the first nine months of 2003 compared to $14.2 million for the first nine
months of 2002, consists of an increase in interest income of $6.4 million, or
24.9%, partially offset by an increase in interest expense of $1.0 million, or
8.7%. The increase in interest income in the first nine months of 2003 is
primarily attributable to an increase of $7.4 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 $708
thousand in interest on deposits, a $246 thousand increase in interest on trust
preferred securities, and a $138 thousand increase in interest on repurchase
agreements, partially offset by a decrease in interest on 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 increase in interest on trust preferred securities results
primarily from the reclassification of this expense as interest expense under
SFAS 150 (see Note 5 to the "Notes to Consolidated Condensed Financial
Statements: contained in Part 1 Item 1 ). The increase in interest expense on
borrowed funds results from an increase in the balances of these liabilities,
partially offset by a decline in interest rates. The decrease in interest
expense on repurchase agreements is primarily attributable to the decline in
market interest rates on these instruments.
The provision for loan losses charged to operations increased $345 thousand to
$2.5 million for the nine months ended September 30, 2003 from $2.1 million for
the same period in 2002. This increase primarily reflects growth of the overall
-16-
loan portfolio in the first nine months of 2003 as compared to the first nine
months of 2002. For a more detailed discussion of the provision for loan losses,
see "Allowance for Loan Losses" in the "Financial Condition" section below.
Noninterest income increased 554.6% or $10.3 million, to $12.2 million for the
nine months ended September 30, 2003 from $1.9 million for the nine months ended
September 30, 2002. The increase in noninterest income primarily resulted from
gains on sale of mortgage loans of $7.0 million and mortgage loan processing
fees of $1.8 million for the nine months ended September 30, 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 $537 thousand or
44.7% to $1.7 million for the nine months ended September 30, 2003 from $1.2
million for the nine months ended September 30, 2002. This increase is primarily
attributable to an increase in deposit accounts. Mortgage loan origination fees
attributable to the commercial bank increased $531 thousand or 164.7% to $854
thousand for the nine months ended September 30, 2003 from $323 thousand for the
nine months ended September 30, 2002. This increase is primarily attributable to
increased volume in residential mortgage loans. Gain on sale of commercial loans
for the nine months ended September 30, 2003 was zero, compared to $43 thousand
for the same period in 2002. This results from the sale of a commercial loan in
the third quarter of 2002. Other non-interest income increased $550 thousand, or
186.8% to $845 thousand for the nine months ended September 30, 2003 from $294
thousand for the nine months ended September 30, 2002. The increase in other
noninterest income is primarily attributable to increases in Automated Clearing
House fees, and other non-deposit related service charges.
Noninterest expense increased $11.8 million or 94.4% to $24.3 million for the
nine months ended September 30, 2003 compared to $12.5 million for the nine
months ended September 30, 2002. The increase in noninterest expense resulted
primarily from increases in salaries and benefits and other expenses. Salaries
and benefits expenses increased $9.1 million to $16.6 million for the first nine
months of 2003 compared to $7.5 million for the first nine months 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 staff of the
wholesale mortgage division who were hired beginning in the third quarter of
2002. Other expenses increased $2.1 million, or 84.7% to $4.5 million for the
first nine months of 2003 compared to $2.4 million for the first nine months of
2002. This increase is primarily attributed to the expenses associated with
supporting operations related to the overall growth of the Company. Specific
operational expenses which increased include communications, recruitment
expenses and postage/courier expenses.
A provision for income taxes of $1.8 million was recognized for the first nine
months of 2003 compared to $557 thousand for the same period in 2002. These
provisions for income taxes represent an estimated effective annual tax rate of
approximately 34% and 38% respectively. The decrease in the effective tax rate
results from a tax credit obtained from a charitable contribution the Company
made in the second quarter of 2003.
FINANCIAL CONDITION
Total assets at September 30, 2003 were $965.1 million, an increase of $209.0
million or 27.6%, from $756.1 million at December 31, 2002. The increase in
total assets primarily resulted from the growth in loans outstanding, mortgage
loans held for sale, and cash and due from banks which were funded by new
deposit growth and other borrowed funds. Total investment securities decreased
$8.0 million or 14.9% to $45.7 million at September 30, 2003 as compared to
-17-
$53.7 million at December 31, 2002. Federal funds sold and repurchase agreements
decreased $15.0 million or 24.0% to $47.5 million at September 30, 2003 from
$62.5 million at December 31, 2002.
Loans held for investment increased $116.6 million, or 32.7%, to $664.6 million
at September 30, 2003, from $551.0 million at December 31, 2002. Mortgage loans
held for sale increased $16.5 million or 30.2% to $71.2 million at September 30,
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 $1.3 million or 18.2% during
the first nine months of 2003. The increase resulted from net charge-offs of
loans of $1.1 million plus additional provisions of $2.5 million during that
period. The allowance for loan losses as a percent of total loans held for
investment was 1.29% at September 30, 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. For further information, see
"Allowance for Loan Losses" below.
-------------------------
Deposits increased $146.7 million, or 22.1%, to $811.6 million at September 30,
2003 from $664.9 million at December 31, 2002. The increase in total deposits
primarily resulted from an increase of $108.1 million or 34.3% in time deposits
$100,000 and over, combined with an increase of $21.7 million or 31.2% 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 $40.8 million or 28.9%. This
decrease was a result of the transfer of funds into demand deposit accounts
which were previously invested in repurchase agreements sold. This transfer was
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 September 30, 2003
and December 31, 2002. Interest-bearing demand deposits increased $31.0 million
or 58.7%. Savings deposits increased $16.8 million or 25.1%. Money market
accounts increased $9.9 million or 51.7%. Growth in deposit accounts, other than
brokered time deposits, are primarily attributable to continued expansion of the
Company's customer base as a result of ongoing marketing activities.
Repurchase agreements sold increased $38.9 million, or 835.0%, to $43.5 million
at September 30, 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 $10.0 million or 100.8%
to $19.9 million at September 30, 2003 from $9.9 million at December 31, 2002.
Accrued interest payable increased $480 thousand, or 20.2%, to $2.9 million at
September 30, 2003 from $2.4 million at December 31, 2002. This increase was due
primarily to an increase in interest-bearing deposits and other interest-bearing
liabilities highlighted herein.
Accounts payable and accrued expenses increased $4.9 million or 103.2% to $9.7
million at September 30, 2003 from $4.8 million at December 31, 2002. This
increase was primarily attributable to accrued commissions and incentives
related to the mortgage banking division. Mandatory mortgage forward delivery
contracts were $1.1 million at September 30, 2003, compared to zero at December
31, 2002. This liability results from forward commitments imbedded in the
mortgage loans held for sale. Trust preferred securities were $20.0 million at
September 30, 2003, resulting from the reclassification of company obligated
manditorily redeemable preferred securities of subsidiary trust from mezzanine
financing to a liability, together with a new trust preferred issue in the
second quarter of 2003. See Notes 5 and 6 to the "Notes to Consolidated
Condensed Financial Statements: contained in Part 1 Item 1.
Shareholders' equity increased by $3.4 million to $56.4 million at September 30,
2003, from $53.0 million at December 31, 2002. This increase is the result of
net income for the first nine months of 2003 of $3.3 million, combined with the
issue of stock under the Company's Employee Stock Purchase Plan of $223
thousand, and the issue of stock related to exercise of warrants and options and
the issue of stock grants of $375 thousand. These increases were partially
offset by a decrease in other comprehensive income related to an unrealized loss
-18-
in the Company's bond portfolio of $362 thousand, the payment of dividends on
the Series C Preferred Stock of $123 thousand, and the recording of offering
expenses of the Series C Preferred Stock issue to additional paid-in capital of
$11 thousand.
Non-accrual loans were $617 thousand at September 30, 2003, a decrease of $918
thousand or 59.8%, 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.
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.
-19-
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
"Loans" in the following two paragraphs refers 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 $1.9 million at September 30, 2003.
The range for the allowance for loan losses at September 30, 2003, including
specific allowances, was determined to be between $7.4 million or 1.11% of loans
(low range) and $11.7 million or 1.76% of loans (high range).
At September 30, 2003, the Bank's total allowance for loan losses was $8.6
million or 1.29% 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 September 30, 2003, this benchmark
(Criticized/Classified) was 3.67% of loans outstanding compared to 4.5% at
December 31, 2002. Past due loans have increased to .66% of loans outstanding at
September 30, 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 .19% at September 30, 2003 versus .78% at December 31, 2002. Net loan losses
for the first nine months of 2003 were $1.1 million or .19% of average loans
outstanding for the period, compared to $415 thousand, or .09% of average loans
for the same period in 2002.
-20-
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 September 30, 2003
balance sheet evidences a satisfactory liquidity position as total cash and cash
equivalents amounted to $165.9 million, representing 17.2% of total assets.
Investment securities available for sale amounted to $42.4 million, representing
4.4% 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 nine-month period ended September 30, 2003, total
deposits increased from $664.9 million at December 31, 2002 to $811.6 million,
or 22.1%. During this period, repurchase agreements sold increased from $4.7
million to $43.5 million, or 835.0%, and other borrowed funds increased from
$9.9 million to $19.9 million, or 100.8%. 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. Management
believes 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 of Directors 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, December 2002, and June 2003, 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. 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, 2002, 2001
and 2000 filed in conjunction with the Company's Annual Report on Form 10-K for
the year ended December 31, 2002. At September 30, 2003, the net proceeds from
pooled trust preferred trust offerings included in the calculation of the
Company's consolidated Tier 1 capital for regulatory purposes is $19.1 million.
The table below illustrates the Bank's regulatory capital ratios at September
30, 2003:
Minimum
September 30, Regulatory
Bank 2003 Requirement
-------------------- --------------------
Tier 1 Capital 10.08% 4.00%
Total risk-based capital ratio 11.20% 8.00%
Leverage ratio 8.32% 4.00%
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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.
Recently Issued Accounting Pronouncements
- -----------------------------------------
Refer to Note 5 of the Consolidated Condensed Financial Statements for further
discussion of new accounting standards and their impact on earning beginning in
2003.
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 this Quarterly Report on 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;
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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 The limited operating history of our wholesale residential mortgage banking
division;
o Risks associated with the operation of our wholesale residential mortgage
banking division;
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 September 30,
2003, the Bank had a cumulative gap ratio of approximately 0.95 for the one-year
period ending September 30, 2004, and a cumulative gap ratio of 1.80 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
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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
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 September 30, 2003, indicates that a 200 basis point
increase in rates would cause an increase in net interest income of $3.9 million
over the next twelve-month period. Conversely, a 200 basis point decrease in
rates would cause a decrease in net interest income of $1.8 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 September 30, 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 September 30, 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
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 Chief Executive Officer and Chief
Financial Officer have reviewed and evaluated the effectiveness of the Company's
disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e), as of September 30, 2003. Based on such evaluation, such officers
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have concluded that, as of September 30, 2003, the Company's disclosure controls
and procedures were effective in timely alerting them to material information
relating to the Company's (and the Company's consolidated subsidiaries) required
to be included in the Company's periodic SEC filings. There has been no change
in the Company's internal control over financial reporting during the quarter
ended September 30, 2003 that has materially affected, or is reasonably likely
to materially affect, the Company's internal control over financial reporting.
While management believes the Company's disclosure controls and procedures
and the Company's internal control over financial reporting are adequate, no
system of controls can prevent all error and all fraud. A control system, no
matter how well designed and operated, can provide only reasonable, not
absolute, assurance that the controls system's objectives will be met. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within the Company have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple error or mistake.
Controls can also be circumvented by the individual acts of some persons, by
collusion of two or more people or by management override of the controls. The
design of any system of controls is based in part upon certain assumptions about
the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions. Over time, controls may become inadequate because of changes in
conditions or deterioration in the degree of compliance with its policies or
procedures. Because of the inherent limitations in a cost-effect control system,
misstatements due to error or fraud may occur and not be detected.
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.
31.1 Certification of Chief Executive Officer Pursuant to Rule
13a-15(e) and 15d-15(e), as Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
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31.2 Certification of Chief Financial Officer Pursuant to Rule
13a-15(e) and 15d-15(e), as Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
On July 16, 2003, the Company filed a report on Form 8-K (furnishing
information under Items 7 and 12) to release financial results for the
quarter ended June 30, 2003 and announce conference call information.
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SIGNATURES
----------
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: November 13, 2003 By: /s/ Charles E. Hughes, Jr.
-------------------------
Charles E. Hughes, Jr.
President and Chief Executive Officer
Date: November 13, 2003 By: /s/ T. Edwin Stinson, Jr.
-------------------------
T. Edwin Stinson, Jr.
Chief Financial Officer
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Exhibits.
31.1 Certification of Chief Executive Officer Pursuant to Rule
13a-15(e) and 15d-15(e), as Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to Rule
13a-15(e) and 15d-15(e), as Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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